Utilization of share application money recd. by pvt. lltd co

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

10 September 2013 Dear Experts,

Please suggest whether a pvt. ltd. company cn use Share application money for day to day office expenses before any allottment made??

Is there ny restrictions to do so by Pvt Ltd. Company, Detais are given hereunder for your reference:-

Co Incorp Date:- June-10 2013
Auth Capital-50 Crore
Issued Capital-200000
Application Money recd-5 Crores
Salries & Other expenses - 2.45 Crores.

Please advise experts opinion...

Thanks
Abhishek Bansal

CA Pallav Singhania

CA Pallav Singhania (Expert)
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10 September 2013 Till such time allotment is made the contract of contribution to share capital is not complete.

The application money is therefore is only a liability.

As regards its utility before allotment, in the case of private placement by the private company, if there is any specific term restraining the company to utilise (either put as a condition of person applying for privately or a term agreed to by the company), then the company runs the risk of being challenged, if the term is violated. If no such restriction is there, then the action of the company may tantamount to allotment under the general Law of Contract.

The company then may not be able to refuse allotment.
But the applicant has the right to demand refund before allotment because as far as he is concerned, he can withdraw the offer before he is communicated with the acceptance.

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Querist : Anonymous

Querist : Anonymous (Querist)

10 September 2013 Thanks Aryan for your reply but my concern is whether that Application money can be utilize for any purpose i.e. routine business expendiures?? is there any restriction in using such appliction money in meeting routine business expenses before any allotmment made???

Pleae reply ASAP since it;s a critical in nature to know the norms...

Thanks in Advance for all the supports.

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Ankur Garg

Ankur Garg (Expert)
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10 September 2013 There were some Major Amendment regarding Share Application Money through MCA Notification dated December 14, 2011. Ministry of Corporate Affairs has vide its notification dated 14.12.2011, amended the Unlisted Public Companies (Preferential Allotment) Rules, 2003. There are quite a few changes in the above rules through the above said notification.

As per my understanding this amendment is a major amendment introduced in the recent past and impact of this amendment is quite big so it should be taken note off. Through this change the following areas are regulated regarding Share Application Money:

1. Time Limit within which Allotment of security should be done against the receipt of application money.

2. Time Limit within which Application money should be refunded in case of failure to allot security within 60 days of receipt of application money.

3. Penal provisions i.e. charging of interest on application money @ 12% p.a., in case fail to repay the same within prescribed time limit.

4. Restriction on use of application money.

Please find below the relevant and highlighted clause regarding amendment in Share Application Money provisions:

Rule 8 of Unlisted Public Companies (Preferential Allotment) Rules, 2003, regarding Invitation and allotment of securities.-

(1) No fresh offer or invitation shall be made unless the allotment with respect to any offer or invitation made earlier have been completed in terms of sub-section (9) of section 60B of the Companies Act, 1956.
(2) Any offer or invitation not in compliance with sub-section (1A) of Section 81 read with sub-section (3) of section 67 of the said Act, shall be treated as a public offer and the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be complied with.

(3) All monies payable on subscription of securities shall be paid through cheque or demand draft or other banking channels but not by cash.

(4) Any allotment of securities shall be completed within sixty days from the receipt of application money and in case the company is not able to allot the securities within the period of sixty days, it shall repay the application money within fifteen days thereafter, failing which it will be required to be re-paid with interest at the rate of twelve percent per annum:

Provided that t he monies received on such application shall be kept in a separate bank account and shall not be utilised for any purpose other than—

(i) for adjustment against allotment of securities; or

(ii) for the repayment of monies where the company is unable to allot securities.

(5) No company offering securities shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.

Ankur Garg

Ankur Garg (Expert)
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10 September 2013 POSITION AFTER THE ABOVE AMENDMENT

But after the above said amendment allotment of securities shall be completed within sixty days [60 days] from the receipt of share application money.

In case company fails to allot securities against the share application money within the period of 60 days, it shall repay the application money within 15 days thereafter without interest.

However if company fail to repay the un-utilised share application money within the prescribed time limit of 15 days [fixed for repayment of un-utilised Application money], it will be required to be re-paid with interest at the rate of 12% per annum.

POSITION IN PRIVATE COMPANY

One more notable thing in case of a Private Company is that above Rules are not applicable to a Private Company. Hence position in case of a Private Company shall remain same as it was applicable to a Public company before the above mentioned amendment.

GOOD SECRETARIAL and ACCOUNTING PRACTICE

Share application money is not a part of share capital because it is only application money and is not share capital. It becomes share capital only on allotment of security. In view of this, share application money pending allotment should be treated as current liability in books of accounts and should be disclosed as a current liability and not as a part of share capital.

As per my understanding of good secretarial practice, receipt of Share Application Money should be acknowledged in the board meeting through a board resolution.

It is very much advisable to collect the share application form from the proposed allottee for your record and future reference. You may download the sample share application from the below mentioned link from where I had downloaded the same long way back:

SHARE APPLICATION FORM

https://www.caclubindia.com/forum/download-corporate-law-professional-files-70021.asp

Hope you find the above information useful. Please share your opinion.

Thanks

CA Pallav Singhania

CA Pallav Singhania (Expert)
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10 September 2013 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..

CA Pallav Singhania

CA Pallav Singhania (Expert)
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Querist : Anonymous

Querist : Anonymous (Querist)

10 September 2013 Thanks experts for your valuable Inputs.
It means we can not utilise the Application Money for routine normal Business expenses until the allotment made against such Application Money Isn't It??

Please advise..

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CA Pallav Singhania

CA Pallav Singhania (Expert)
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10 September 2013 hmm...as per rules I Guess...

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Querist : Anonymous

Querist : Anonymous (Querist)

10 September 2013 But whatwill be the consequences if we've
already utilize the Application money to meet routine business expenses ti the extent of Rs. 4.85 crores against Application money of Rs. 8 Crores received without any allottment made???

Querist : Anonymous

Querist : Anonymous (Querist)

CA Pallav Singhania

CA Pallav Singhania (Expert)
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10 September 2013 Whether the Statutory Auditor of your company has make objections on it since the amount is significant or substantial.

Now you have the two options:

Either to refund it immediately since u have spend it other than for that it was taken

Or to allot shares to him either at premium or at par, as the case may be.

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Querist : Anonymous

Querist : Anonymous (Querist)

10 September 2013 Please tell be the compliance part in our case as [er details given hereunder:-

Application Mpney Reced. (Foreign Investors) during Incorporation (May) till July month-Rs 8 Crore

Normal Business Expenses met-Rs. 4.75 Crores (Approx)

Share allotted-Rs. 7 Crore on 08/Sept'13

Will it be allowed??

CA Pallav Singhania

CA Pallav Singhania (Expert)
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10 September 2013 I don't think so,

Wait for other experts views as well...

Querist : Anonymous

Querist : Anonymous (Querist)

10 September 2013 Dear Experts

May i Have your kind opinions to resolve this critical issue.

Thanks

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Querist : Anonymous

Querist : Anonymous (Querist)

11 September 2013 Please share your views..Thanks

CA Pallav Singhania

CA Pallav Singhania (Expert)
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11 September 2013 If amount received before incorporation that's pre incorporation, and company haven't rectify or accepted the the contact then the liability of such case wholly on the promoters...