Introduction.
Out of multiple methods of fund raising available to the companies, one easy and effective method for short term fund raising is through deposits. As per section 2 clause 31[i] and rule 2 sub-rule (1) clause [ii]c) of companies (Acceptance of Deposits) rules 2014 (‘CADR 2014’), deposits refer to any receipt of money other than that received under the exclusion clauses attached to rule 2(1)(c) of CADR 2014.
One such mode of receipt covered under this exclusion clause is, receipt of share application money. sub-clause [iii](vii) of rule 2(1)(c) excludes the share application money received by the company from being treated as deposits subject to certain conditions. In this article, we shall try to comprehend these conditions and assess the situations in which the share application money shall be treated as deposits.
What is share application money.
section 42 prescribes the process for allotment of securities. As per sub-section (4) of section 42, ones the offer for allotment of shares is given by the company to prospective allotee, he is required to accept the offer by depositing the money value of shares with the company. thereafter, the company allots the shares to such allotee against such money received from him.
during the period between, deposit of money by prospective shareholder and actual allotment of shares by company, the money lies in the books of the company and such money is called share application money. This amount is shown in the balance sheet separately bellow paid up capital, with a heading “share application money pending allotment”.
After the shares are allotted against such money, it becomes part of paid up share capital and is added in to paid up capital in the balance sheet. It is the period during which this money is shown as share application money, it may be treated as deposit under section 73 if exclusion conditions are not fulfilled.
Pre-requisite for exempting share application money from purview of deposit
Sub-clause (vii) of rule 2(1)(c) of CADR 2014 excludes the share application money from the purview of deposits. However, the said sub-clause exempts the share application money from deposits subject to certain conditions elaborated as under,
- The money should be accepted for allotment of securities as per the provisions of the Act.
- The money should be appropriated against only that securities for which application was made.
- The money should be appropriated against allotment of securities only and for no other purpose.
- The securities should be allotted within 60 days from receipt of money or if no allotment is made within 60 days, then money should be returned within 15 days from end of 60 days.
We will now see each pre-requisite in detail:
These pre-requisites can be explained as under.
- Money should be accepted for allotment of securities as per the provisions of the Act.
For the share application money to be exempted from being considered as deposits, it is necessary that the money should have been accepted as per the provisions of the Act relating to allotment of shares. for example, the money should have been received pursuant to offer letter sent by the company or by virtue of any agreement between company and allotee for allotment of shares. it is necessary that the money should have been accepted for allotment of shares only. If it is originally accepted in the form of loan etc. then it cannot be exempted from being considered as deposit under sub-clause (vii).
- This view is supported by a NCLAT order in the matter of [iv]M/s. Murlidhar Vincom Pvt. ltd. v/s M/s. Skoda (India) Pvt. Ltd. In this case, the Murlidhar Vincom (appellant), had given some money to Skoda (India) (respondent company) which was not returned by the company. The appellant filed a petition for CIRP and argued that, the share application money was not refunded by the Company, it should be treated as deposit and hence should be considered as financial debt under section 5(8) of IBC. After considering all the relevant documents, the Hon’able National Company Law Appellate Tribunal held that,
- “Rule 2 of CADR Rules envisages that only if any amount is received pursuant to any private placement offer made in accordance with the provisions of the Act and no shares are allotted qua that amount, only then the sum becomes a deposit. When no proof of any private placement offer made in accordance with the provisions of the Act has been placed on record by the Appellant, the CADR Rules cannot be held to be applicable.”
- The money should be appropriated against only that securities for which application was made.
- The language of sub-clause ()vii clearly states that, the money received as share application money should be appropriated against that security only for which the money was paid by the applicant. For example, if money was received for allotment of equity shares, then the same has to be allotted. If preference shares are allotted in place of equity shares, then money will not be deemed to have been appropriated against securities which were applied for, and as a result, will be treated as deposits.
(c) The money should be appropriated against allotment of securities only and for no other purpose.
If the share application money received for allotment of shares, is appropriated for some other purpose, then such money is neither appropriated against the shares, nor is it deemed to have been returned as per clause (b) of explanation appended to sub-clause (vii) of rule 2(1)(c) of CADR 2014, and hence will be liable to be treated as deposits.
- The securities should be allotted within 60 days from receipt of money or if no allotment is made within 60 days, then money should be returned within 15 days from end of 60 days.
- This condition provides a timeline for allotment of securities, that is, it specifies that for how long, money may be treated as share application money and exempted from being considered as deposit.
- As per this time line, share application money is exempt from being treated as deposit for the period of 60 days from the date of receipt of money. If the shares are not allotted and share application money is not added to share capital within 60 days, from its receipt, then it has to be returned within 15 days from end of 60 days to the concerned allotee. And if the money is not even returned in said time then it will be treated as deposit. If the money was received for private placement of securities under section 42, then the rate of interest on such deposit is also prescribed by section 42(6) at 12%.
- For example, if share application money is received on 1st April 2025, then allotment has to be made till 30th May 2025 and the money will not be treated as deposit for this period of 1st April to 30 May. However, if the allotment is not made before 30th May, then the money will have to be returned within 15 days from the end of 60 days, that is on or before 14th June. If the money is not returned till this time, that is till 14th June in our case, then such money will not be covered under sub-clause (vii) of rule 2(1) (c) of CADR rules 2014 and hence will be treated as deposits and the company will also have to pay interest on such deposit.
- Coverage under other exclusion clauses.
- The definition of deposit under rule 2(1)(c) has total 14 clauses which exempt the money received from being considered as deposits, and if the money received fits in any one of these clauses, then such amount is exempt from being considered as deposit. For example, a company has received money from another company against issue of unsecured debentures. Now this money cannot be exempt under sub-clause [v](ix) as it exempts only the secured debentures, but it can be exempted under sub-clause [vi](vi) which exempts any money received from other company.
- However, it must be noted that this situation cannot be used for wrongfully exempting the amounts from the purview of deposits. For example, if a company has received money as advance for supply of goods from other company and has accounted for the same as advance received. But such advance remains unappropriated for period exceeding 365 days and therefore has to be treated as deposit under clause [vii](xii). Now the company cannot exempt the said money from being deposit by virtue of sub-clause (vi), as the money was already accounted for as advance and now changing its own stand would result in to misuse of exemptions provided by law.
Conclusion.
- This analysis highlights that, for share application money to be exempt from being considered as deposit, it has to be accepted as per the procedure of allotment of securities prescribed in the Act and the money has to be returned within time if for any reason, the allotment could not be made in time. Also the money should be appropriated against the securities applied for and for no other purpose. It would be inappropriate for the company to exempt the share application money from being deposit under any other sub-clause other then sub-clause (vii)
[i] “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India;
[ii] (c) “deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include –
[iii] (vii) any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for;
Explanation.- For the purposes of this sub-clause, it is hereby clarified that –
(a) Without prejudice to any other liability or action, if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit under these rules.
1[Provided that unless otherwise required under the Companies Act, 1956 (1 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or rules or regulations made thereunder to allot any share, stock, bond, or debenture within a specified period, if a company receives any amount by way of subscriptions to any shares, stock, bonds or debentures before the 1st April,2014 and disclosed in the balance sheet for the financial year ending on or before the 3lst March,2014 against which the allotment is pending on the 3lst March,2015, the company shall, by the 1st June 2015, either return such amounts to the persons from whom these were received or allot shares, stock, bonds or debentures or comply with these rules]
(b) any adjustment of the amount for any other purpose shall not be treated as refund.
[iv] Murlidhar Vincom Private Limited vs M/S Skoda (India) Pvt. Ltd on 26 November, 2024 Company Appeal (AT) (Insolvency) No. 1334 of 2024
[v] (ix) any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within 6[Ten years]:
Provided that if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer;
[vi] [vi] (vi) any amount received by a company from any other company;
[vii] (xii) any amount received in the course of, or for the purposes of, the business of the company,-
(a) as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance
The article is wriiten by Ms. Rutuja U and is published in Taxmann. The link is: