Share Application Money

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Querist : Anonymous

Querist : Anonymous (Querist)

07 January 2011 Can share application money can be used pending allotment?

CA Sanat Pyne

CA Sanat Pyne (Expert)
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07 January 2011 In my opinion, the practice of keeping share application money pending allotment for long time is not accordance with the law, for the following reasons:

1. The transaction relating to allotment of shares is also covered by the provisions of Contract Act, which inter-alia provides that an offer when accepted becomes an agreement and if consideration is involved it becomes a contract. In case of a listed company, procedure involved is :
- issue is made by issuing prospectus ("invitation to offer")
- application is made by applicant ("offer") alongwith application money ("consideration")
- allotment is made by the Board ("acceptance")

The offer has to be accepted within a reasonable time. What is a reasonable time will depend upon the facts and circumstances of the case. However, years together cannot in any case be deemed to be a reasonable period for acceptance of the offer. As per Sec.6 of Contract Act, the person who has made the offer is not bound by the acceptance if the same is given after unreasonable period.

2. Application for shares is addressed to the Board of Directors of the company. The board has to meet at least once in each quarter. The Board has to take a decision whether to accept the application or reject the same. The application cannot be kept pending for long without any decision.

3. In case of a private company the application will normally be made with the implied consent of the Board when the funds are required. Any layman from the public will not apply for shares of any private company. Then why the Board is keeping the application pending without allotment? It is seen in some cases that share application money is accepted beyond the authorised capital of the company to avoid ROC fees and stamp duty, which is again not legal.

4. Share application money kept pending for long time has been treated by ROC as deposit in some cases and booked cases against the company for violating provisions of Companies (Acceptance of Deposits) Rules.

5. Applicant of the shares will get no return for the money invested by him. He wil neither get interest nor dividend. His ITO can take objection for blockage of funds and can make addition for notional interest. Bankers are also not comfortable with share application money since it can be withdrawn at any time before allotment.

6. In case of share application money recd from non-residents, RBI has recently amended the rules providing for a time limit of 6 months within which shares have to be allotted, failing which share application money will have to be refunded