share application money
This query is : Resolved
04 July 2010
All experts are requested to put light on this matter:
Generally many Pvt. Ltd. company receives share application money from other companies ,firms, individuals.
This money remains same for say 2-4 years without any change.Neither this is repaid or converted into shares.
Please tell me what is the MAIN REASON for these transaction. whether for Interest free loan or otherwise.
Please tell me what COMPANY LAW SAY ON THIS MATTER.
Generally many Pvt. Ltd. company receives share application money from other companies ,firms, individuals.
This money remains same for say 2-4 years without any change.Neither this is repaid or converted into shares.
Please tell me what is the MAIN REASON for these transaction. whether for Interest free loan or otherwise.
Please tell me what COMPANY LAW SAY ON THIS MATTER.
Ashok Malhotra
(Expert)
04 July 2010
Dear Vipin,
Such credits are normally given by close friends and family members or by the key promoters themselves and they have complete control on the comapny.
Actually, credit balance in Share Application A/C for a long period does serve very limited purpose.
1. To show higher profitability and EPS.
2. Promoters can withdraw the credits from the company whenever they desire at a very short notice without much of eyebrows raising.
3. At the same while availing working capital facilities from a bank it can treated as long-term finance and the firm can show better current ratio. Moreover, MPBL from the bank is improved. A sesible banker may insist upon a non-withdrawal undertaking from the promoters
I hope I have covered briefly the possible reasons
CA Ashok K Malhotra, FCA
Such credits are normally given by close friends and family members or by the key promoters themselves and they have complete control on the comapny.
Actually, credit balance in Share Application A/C for a long period does serve very limited purpose.
1. To show higher profitability and EPS.
2. Promoters can withdraw the credits from the company whenever they desire at a very short notice without much of eyebrows raising.
3. At the same while availing working capital facilities from a bank it can treated as long-term finance and the firm can show better current ratio. Moreover, MPBL from the bank is improved. A sesible banker may insist upon a non-withdrawal undertaking from the promoters
I hope I have covered briefly the possible reasons
CA Ashok K Malhotra, FCA
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