Share Application Money

Hello,

Companies Act is silent about the treatment of share application money.

In case the Company has accepted the Share Application Money you may do one simple thing. You may record the above transaction i.e. receipt of share application money and assurance given to proposed allottee in the board meeting minutes.

In other words simple noting of such receipt in the board minutes would be enough. No need to take any kind of approval from any concerned authorities.

Regarding time limit to convert such share application money into capital the law is silent. However as per practice (Based on FEMA rules for foreign money) allot share with 6 months of the receipt of application money.

Further collect the share application form from the proposed allottee for your record. You may download the sample share application from the link mentioned below:

/share_files/files_display.asp?files_id=11908

Regards

Agree wid Ankur Sir...

There is no time limit prescibed under Companies Act, 1956... only the word "WITHIN REASONABLE TIME" is used..

Please also note that :-

Indian Co-operative Navigation & Trading Co. Ltd. v Padamsey Premji (1934) 4 Comp Cas 110 (Bom)

An allotment should be made within a reasonable time and an applicant is not bound to accept an allotment after the lapse of a reasonable time. A delay of one year is unreasonable.

Companies Act is silent about the treatment of share application money.

but in my opinion, such money is not a realised money for the company, i.e. this money is not legally available to the company before allotment.. Schedule VI of the companies act also says that this money (if allotment is pending) should be shown under current liabilities head.. so the same amount cannot be used for distribution of dividend..

views of other member also be solicitated..

but there is also an opinion which i have seen somewhere...

To receive application:

After reading the prospectus if the public is satisfied then they can apply to the company for purchase of its shares on a printed prescribed form. Each application form along with application money must be deposited by the public in a schedule bank and get a receipt for the same. The  company cannot withdraw this money from the bank till the procedure of allotment has been completed (in case of first allotment, this amount cannot be withdrawn until the certificate to commence business is obtained and the amount of minimum subscripttion has been received). The amount payable on application for share shall not be less than 5% of the nominal amount of share.

Section 73(3)

All moneys received as aforesaid shall be kept in a separate bank account maintained with a Scheduled Bank until the permission has been granted, or where an appeal has been preferred against the refusal to grant such permission, until the disposal of the appeal, and the money standing in such separate account shall, where the permission has not been applied for as aforesaid or has not been granted, be repaid within the time and in the manner specified in subsection (2), and if default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine, which may extend to five thousand rupees.

Section 73 (3A)

Moneys standing to the credit of the separate bank account referred to in sub-section (3) shall not be utilised for any purpose other than the following purposes, namely :-

  
(a) adjustment against allotment of shares, where the shares have been permitted to be dealt in on the stock exchanger or each stock exchange specified in the prospectus; or

    
(b) repayment of moneys received from applicants in pursuance of the prospectus, where shares have not been permitted to be dealt in on the stock exchanger or each stock exchange specified in the prospectus, as the case may be, or, where the company is for any other reason unable to make the allotment of share.

So share application money cannot be utilised before completion of allotment proceeding..

Ankur sir and adarsh,

Thanks for the valuable information...

But then if the money is not for a public issue, but suppose is by private placement, there is no restriction anywhere?

Its to be utilised as per the company's wish?

Originally posted by : Ordinarily resident Evil
	Ankur sir and adarsh, Thanks for the valuable information... But then if the money is not for a public issue, but suppose is by private placement, there is no restriction anywhere? Its to be utilised as per the company's wish?

Dear ORE..

Companies Act is silent about the treatment of share application money in case of private placement.

but in my opinion, such money is not a realised money for the company, i.e. this money is not legally available to the company before allotment.. Schedule VI of the companies act also says that this money (if allotment is pending) should be shown under current liabilities head.. so the same amount cannot be used for distribution of dividend... I think the money shud not be used before allotment completion,coz it may be treated as unsecured loan..

Agree with Adarsh to a certain extent.

But on the practical front this money is very much available to the company as nobody can trace this money. Reason being there is no such requirement to open some escrow account for the same application money.

Practically use of this money depends on the terms of subscripttion agreement between the prospective investor and issuer company.

Best Regards

Originally posted by : Ankur Garg
	Agree with Adarsh to a certain extent. But on the practical front this money is very much available to the company as nobody can trace this money. Reason being there is no such requirement to open some escrow account for the same application money. Practically use of this money depends on the terms of subscriptttion agreement between the prospective investor and issuer company. Best Regards

Ankur ji,

I agree wid u.. on practical front, the money can be used but please check the following query raised by ROC Gwalior on allotment of shares...

Company is asked to provide the detail of seperate bank account in which application money is kept...

So, the previous practice may create problem in near future...

ABC LImited (public)   received, over a period from 11 January 2007 to 3 April 2008 a sum of Rs. 3 crores (US$ 900000) as share application money from three shareholdrers and Directors, Mr. A, Mr. B and Mr.C, in equal proportion. All the shareholders had the permission to invest in equity shares of ABC Limited vide RBI letter dated_____. Advance reporting of the receipt of this money was inadvertently not done.

No shares were allotted to the these three shareholders against this shareapplication money and the money has been accounted as “Share application money” in the Company’s books since. 

Meanwhile, on 10 April 2010, Mr. C, shareholder and remitter resigned and sold all his shares to Mr.C 

Ques:
The Company wants to approach RBI in order to seek permission to convert the share application money to ECB and passed a resolution to this effect in a board meeting.

Mr. C has since resigned as director and does not hold any shares of ABC Limited. The ECB, if allowed to be created, must not incude this name as a lender and his share of money needs to be transferred to shareholder Mr.B

Please reply whether the above is possible as per FEMA, Company law and Income Tax point of view .