Earlier, under the old Companies Act 1956 regime, many companies registered under the old Companies Act accepted share application money under private placement and utilized the same for the operating business purpose even without allotment of shares to the applicant. Schedule VI of the Old Companies Act 1956 provided the method to treat the same in the Financial Statement of the Company.
Now, Section 42 of the New Companies Act, 2013 barring over the said practice. W.e.f April 2014, Companies receiving Share Application money under private placement have to allot the shares against the Share Application money received within Sixty days. If the shares are not allotted within sixty days, the whole application money received is required to be refunded within fifteen days from the date of completion of sixty days. If the company fails to reimburse the application money received within the said sixty days period, it shall be liable to reimburse that money with interest @ 12% p.a. from the expiry of the sixtieth day.
Another key point to be noted is that the company will have to open a separate bank account for receiving share application money and will not be able to utilize the share application money for any purpose unless shares are allotted to the applicant.
Penalty: In case a company contravenes the provisions of section 42 of Companies Act, 2013, the company, its promoters, and directors shall be liable for a penalty which may up to the money involved in the offer or invitation or Rs. Two crores, whichever is higher form these two. The company shall also refund all amounts received from the subscribers within Thirty days of the penalty order.
Further as per Companies Rules, 2014, if the shares for which application money was received cannot be allotted within 60 days from the date of reception of the application money and such application money is not payback to the subscribers within 15 days from the date of completion of 60 days, such amount shall be treated as a deposit under Companies (Acceptance of Deposit) Rules, 2014. Any reconciliation of the amount for any other purpose will not be treated as a refund.
Foreign direct investment (FDI): In case the company receives foreign direct investment (FDI), earlier as per Foreign Exchange Management Act Regulations, the shares were needed to be allotted within 180 days. However, now the time limit has been changed in harmony with the Companies Act 2013 and reduced to sixty days of inward remittance
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