Earlier, under old Companies Act regime, many companies accepted share application money under private placement and utilized the same for the business purpose even without allotment of shares. Only Schedule VI of the Old Companies Act provided the manner to treat the same in the Balance Sheet of the Company.
Now, Section 42 of the Companies Act, 2013 puts prohibition over the said practice. W.e.f 01-April 2014, Companies accepting Share Application money under private placement have to allot the securities against the Share Application money received within 60 days. If the securities are not allotted within a period of 60 days, the whole application money is required to be refunded within 15 days from the date of completion of 60 days. If the company fails to repay the application money within the said 60 days period, it shall be liable to repay that money with interest @ 12% p.a. from the expiry of the 60th day.
Another important point to be noted is that the Company will have to open separate bank a/c to receive share application money and will not be able to utilize the share application money unless shares are allotted.
Penalty: In case a company contravenes the provisions of section 42, the company, its promoters and directors shall be liable to pay a penalty which may extend to the amount involved in the offer or invitation or Rs. 2 crore, whichever is higher. The company shall also refund all amounts collected to the subscribers within a period of 30 days of the penalty order.
Further as per Companies (Acceptance of Deposit) Rules, 2014, if the securities for which application money was received cannot be allotted within sixty days from the date of receipt of the application money and such application money 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. Any adjustment of the amount for any other purpose shall not be treated as refund.
FDI: In case the company receives FDI, earlier as per FEMA Regulations, the shares were required to be allotted within 180 days. However, now the time limit has been altered in consonance with the Companies Act 2013 and reduced to 60 days of inward remittance.