Allotment of Shares in India: Complete ROC Filing and PAS-3 Compliance Guide

Every time a private limited company in India issues shares, whether to a seed investor, a Series A fund, or an ESOP pool, it triggers a sequence of statutory filings that must be completed in a specific order within tight timelines. Get the sequence wrong, file the wrong form under the wrong section, or miss a deadline by even a few weeks, and you face penalties under Section 39(5) or Section 42(9) of the Companies Act, 2013, restrictions on deploying the very capital you just raised, and compliance flags that surface in the next round’s due diligence. This guide maps the full compliance chain for allotment of shares in India: ROC forms, PAS-3 mechanics, MGT-14 obligations, share certificates, Rule 9B demat, FC-GPR for foreign investor rounds, and the FLA return that most founders forget exists.

What does allotment of shares mean legally, and why does it matter for compliance?

Allotment of shares is the formal act by which a company creates new shares from its authorised but unissued share capital and assigns them to a specific person. Under Section 2(55) of the Companies Act, 2013, the allottee becomes a member of the company from the date of allotment. This is legally distinct from the transfer of existing shares between parties . Transfer triggers Form SH-4 and stamp duty on the instrument, not PAS-3.

The distinction matters because allotment generates statutory obligations at multiple levels simultaneously. The company must update its internal records, file a return with the Registrar of Companies (ROC) under the Ministry of Corporate Affairs (MCA), issue share certificates, pay stamp duty on those certificates, and, if any allottee is a person resident outside India, report the allotment to the Reserve Bank of India (RBI) within a separate deadline that runs in parallel with the MCA timeline.

For founders, the compliance risk concentrates at two specific points. First, the period between receiving application money and completing allotment: there is a hard statutory outer limit of 60 days under Section 42(6). Second, the period between allotment and filing Form PAS-3: the deadline is either 15 days (private placement rounds) or 30 days (everything else), and ROC adjudication orders from 2025 and 2026 confirm that even 35 to 46-day delays result in formal penalties on the company and its directors personally.

A critical operational point: under Section 42(8), as amended effective 07 August 2018, the application money in your escrow account cannot move to your operating account until PAS-3 is filed. PAS-3 is therefore a cash-flow bottleneck, not a post-closing formality.

How a typical startup funding round is classified: preferential allotment and private placement

Understanding which section governs your round determines which forms you file and in which sequence.

Most startup funding rounds, where a new investor subscribes to fresh equity shares or Compulsorily Convertible Preference Shares (CCPS), involve a preferential allotment under Section 62(1)(c) of the Companies Act, 2013, read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014. Rule 13(1) explicitly requires a preferential allotment to comply with the private placement conditions under Section 42. The two provisions operate together: Section 62(1)(c) governs the type of securities and the shareholder approval requirement, while Section 42 governs the offer mechanics, investor cap, separate bank account, and PAS-3 timeline.

The practical implication is that a standard equity round requires compliance under both sections. Specifically:

• A shareholders’ special resolution (75% majority) is required under Section 62(1)(c)
• The board must record the names of identified persons before the offer is made (Rule 14(2))
• The number of offerees per security type per financial year cannot exceed 200, excluding Qualified Institutional Buyers and ESOP employees (Rule 14(2))
• A PAS-4 offer letter must be issued to each identified investor within 30 days of recording their names
• Application money must sit in a dedicated separate bank account
• Allotment must happen within 60 days of receiving application money
• PAS-3 must be filed within 15 days of allotment

One exception: when a company offers shares only to existing members (a top-up to existing cap table investors, for example), the proviso to Rule 13(1) exempts the transaction from the PAS-4 requirement. The PAS-3 deadline also reverts to 30 days in that scenario.

What is Form PAS-3 and what does it contain?

Form PAS-3 is the Return of Allotment, an electronic form filed on the MCA portal to formally notify the ROC that the company has allotted securities. Under Section 39(4) read with Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, every company having a share capital that allots securities must file this return within the prescribed period.

The form captures:

• CIN and name of the company
• Date of the board resolution approving allotment
• Type of securities allotted (equity shares, CCPS, debentures, other convertible instruments)
• Number of securities allotted and face value
• Total consideration received (or nature of non-cash consideration)
• Class of share and whether issued at par or premium
• Capital structure before and after allotment

Mandatory attachments:

• Certified true copy of the board resolution approving allotment
• List of allottees: name, address, PAN, email ID, class of security, date of allotment, number of securities, and consideration per security. For private placements, the list must include PAN and email. A separate list is required for each allotment event
• Copy of the shareholders’ special resolution, where required
• Form PAS-5 (complete record of private placement offers and acceptances), mandatory for private placements under Section 42
• Valuation certificate from an IBBI-registered valuer (for preferential allotments to new investors) or from a SEBI-registered merchant banker or practising chartered accountant (for FC-GPR-linked allotments to foreign investors)

A defective PAS-3, missing attachments, wrong security count, mismatch with board resolution dates: is treated as a substantive violation, not a clerical error. Recent ROC adjudication orders (Mumbai, January 2026) confirm that incorrect PAS-3 filings attract the same penalty as non-filing.

The two PAS-3 timelines: 30 days vs 15 days

Table: PAS-3 deadline by allotment type

Allotment type	Governing provision	PAS-3 deadline from allotment date
Private placement to new investor (Section 42)	Section 42(8), Rule 14	15 days
Preferential allotment to new investors via private placement (Section 62(1)(c) + Section 42)	Section 42(8)	15 days
Rights issue to existing shareholders (Section 62(1)(a))	Section 39(4)	30 days
Bonus issue (Section 63)	Section 39(4)	30 days
Preferential allotment exclusively to existing members	Section 39(4)	30 days
ESOP exercise allotment	Section 39(4)	30 days
Conversion of debentures or convertible instruments	Section 39(4)	30 days

The 15-day timeline catches most founders off-guard because it applies to essentially every fresh funding round involving a new investor. An ROC Chennai adjudication order dated March 2026 imposed penalties on a company that filed PAS-3 for a private placement 46 days after allotment, more than three times the statutory deadline. The company’s submission that the default was inadvertent was acknowledged but did not eliminate the penalty. A separate ROC Chennai order from the same period imposed penalties for a 35-day delay on a rights issue (governed by the 30-day rule under Section 39).

MGT-14: the ROC filing most startup teams miss after a funding round

Form MGT-14 is a resolution filing form. Under Section 117(1) of the Companies Act, 2013, companies must file certain resolutions and agreements with the ROC within 30 days of passing them. For a funding round, two MGT-14 filings are required, and both are mandatory for private companies, despite a general exemption that often confuses founders.

MGT-14 for the shareholders’ special resolution: Under Section 117(3)(a), special resolutions passed at a general meeting must be filed in Form MGT-14 with the ROC within 30 days. This applies to all companies, including private companies. For a private placement or preferential allotment, the special resolution passed at the EGM must be filed via MGT-14.

MGT-14 for the board resolution in a private placement context: Private companies are generally exempt from filing board resolutions passed under Section 179(3) via MGT-14, per the GSR 464(E) notification dated 05 June 2015. However, Rule 14(8) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 creates a specific carve-out: the private placement offer letter (PAS-4) can only be issued after the relevant board resolution has been filed with the registry. This means a private company must also file MGT-14 for the board resolution approving the private placement, even though the general Section 179(3) exemption would otherwise apply.

In practice, a private company closing a private placement funding round must file two MGT-14 forms:

1. MGT-14 for the shareholders’ special resolution, within 30 days of passing it at the EGM
2. MGT-14 for the board resolution identifying the investors and approving the private placement offer, before PAS-4 can be issued to investors

Table: Key ROC forms in a funding round and their deadlines

Form	Purpose	Deadline
SH-7	Increase authorised share capital	Within 30 days of shareholders’ resolution
MGT-14 (board resolution)	File board resolution for private placement	Before issuing PAS-4 to investors
MGT-14 (special resolution)	File EGM special resolution for allotment	Within 30 days of passing resolution
PAS-3	Return of allotment	15 days (private placement) / 30 days (other) from allotment
SH-1 (share certificate)	Issue share certificates to allottees	Within 2 months of allotment
FC-GPR (via AD bank, RBI FIRMS)	Report allotment to foreign investor	Within 30 days of allotment

Complete filing sequence for a private placement funding round

The sequence below applies to a standard round where a new investor subscribes to equity shares or CCPS in a private company. Each step must be completed in order.

Step 1: Verify authorised share capital

Confirm that your authorised share capital covers the new shares being issued. If it does not, file Form SH-7 with the ROC within 30 days of passing the shareholders’ resolution for the increase, attaching the altered Memorandum of Association. SH-7 must be filed and approved before the allotment board meeting. Founders who check this after signing binding documents routinely delay closings by two to three weeks.

Step 2: Obtain a valuation report

For a preferential allotment under Section 62(1)(c), a valuation from an IBBI-registered valuer is required to set the issue price. The valuation must be done before the board resolution and special resolution are passed, because the explanatory statement to the EGM notice must include the basis on which the price is determined. For FC-GPR purposes, the valuation certificate must not be older than 90 days from the date of allotment.

Step 3: Pass and file the board resolution, then file MGT-14

The board passes a resolution identifying the investors, approving the offer price and terms, and authorising issuance of PAS-4. File MGT-14 for this board resolution before issuing PAS-4 to any investor. The offer cannot legally be made until this filing is done.

Step 4: Convene EGM and pass shareholders’ special resolution

The special resolution requires at least 75% of votes cast. The explanatory statement must include the objects of the issue, total number and type of securities, the price and basis of pricing, and the names of proposed allottees. File MGT-14 for this special resolution within 30 days of passing it.

Step 5: Issue PAS-4 to identified investors

Send the private placement offer cum application letter in Form PAS-4 to each named investor within 30 days of the board recording their names. PAS-4 must be serially numbered, personally addressed, and sent only by registered post, speed post, or electronic means. It must not be circulated publicly or via any advertising channel; doing so converts the offer into a deemed public offer.

Step 6: Collect application money in a separate bank account

Funds must arrive by cheque, demand draft, or banking channel, not cash. The dedicated bank account should have no other entries except receipt of application money and, once PAS-3 is filed, the transfer of those funds to the operating account.

Step 7: Hold allotment board meeting

Pass a board resolution specifically approving the allotment. Shares must be allotted within 60 days of receiving application money. If allotment does not happen within 60 days, the money must be refunded within the next 15 days. Failure to refund on time makes the company liable for interest at 12% per annum and treats the funds as a public deposit.

Step 8: File Form PAS-3 within 15 days

File electronically on the MCA portal, attaching the board resolution, allottee list (with PAN and email), PAS-5, special resolution copy, and valuation certificate. PAS-3 must be filed before application money is moved to the operating account.

Step 9: Issue share certificates or arrange demat credit

Under Section 56(4), share certificates must be delivered within 2 months of allotment. For companies subject to Rule 9B (see section below), physical certificates cannot be issued. Shares must be credited to allottees’ demat accounts. Stamp duty on certificates must be paid within 30 days of issue.

Step 10: Update the Register of Members (MGT-1)

Record all new allottees, share count, allotment date, and consideration paid. Maintain the register at the registered office.

Step 11: File FC-GPR with the RBI (if any allottee is a foreign investor)

Within 30 days of allotment, file Form FC-GPR through the company’s AD Category-I bank on the FIRMS portal. This step runs in parallel with PAS-3, not after it. Details below.

Step 12: File FLA return annually (if any outstanding foreign investment)

Once the company has any outstanding foreign investment on its books, an annual FLA return must be filed with the RBI by 15 July every year. Details below.

Mandatory demat under Rule 9B: what changes for your allotment process

Rule 9B was inserted into the Companies (Prospectus and Allotment of Securities) Rules, 2014 by an MCA notification dated 27 October 2023. It mandates that private companies that are not small companies must hold and issue all securities only in dematerialised form. The MCA extended the compliance deadline to 30 June 2025 via a notification issued 12 February 2025.

Table: Rule 9B applicability by company type

Category	Demat mandatory?	Note
Private company, paid-up capital above ₹4 crore OR turnover above ₹40 crore	Yes	18 months from closure of the relevant financial year
Small company (paid-up capital not exceeding ₹4 crore AND turnover not exceeding ₹40 crore)	No	Small company threshold assessed at end of last financial year
Holding company of a private company	Yes	Holding/subsidiary override applies regardless of size
Subsidiary of a private company	Yes	No exemption available under Rule 9B (unlike Rule 9A for public companies)
Section 8 company	Yes	Not eligible for small company treatment
Government private company	No	Exempt

Once a company is subject to Rule 9B, it cannot issue physical share certificates for any new allotment. Shares must be credited directly to allottees’ demat accounts with NSDL or CDSL. This requires the company to have an ISIN from a depository, a Registrar and Transfer Agent (RTA) appointed, and demat accounts set up for all current and new shareholders. Any new allotment made in physical form after the compliance date is void.

The small company threshold is assessed based on the audited financial statements for the last financial year, not on a real-time basis. A startup that crosses the ₹4 crore paid-up capital mark in a funding round must reassess its small company status at the end of that financial year. Once crossed, the 18-month clock starts from the closure of that year, so a company crossing the threshold on 31 March 2025 would need to be demat-compliant by 30 September 2026.

The penalty for non-compliance is ₹10,000, plus ₹1,000 per day until compliance, up to ₹2,00,000. Non-compliant companies also cannot issue further securities, including bonus shares and ESOPs, until the demat requirement is met.

FC-GPR: FEMA filing for foreign investor rounds

When any allottee is a person resident outside India, the allotment triggers a separate reporting obligation under the Foreign Exchange Management Act, 1999 (FEMA) and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. The company must file Form FC-GPR (Foreign Currency: Gross Provisional Return) through its Authorised Dealer (AD) Category-I bank on the FIRMS portal.

Timeline: 30 days from the date of allotment, irrespective of when the funds arrived.

Documents required:

• Foreign Inward Remittance Certificate (FIRC) and KYC from the AD bank that received the remittance
• Valuation certificate, not older than 90 days from the date of allotment
• Board resolution approving the subscription and allotment, dates must match the transaction documents precisely
• Share subscription agreement
• Mandatory declarations from the company and investor
• SWIFT copy or bank remittance advice

The most common cause of FC-GPR rejection is a mismatch between the FIRC, valuation certificate, and board resolution: investor name, allotment date, share count, or consideration amount. The AD bank does not treat such mismatches as clerical. A rejection forces the company to restart the 30-day window from the corrected filing date, which can push it into a late submission.

FC-GPR is also required for bonus shares and rights issue shares allotted to existing non-resident shareholders. It is not only triggered by primary subscription allotments.

Penalty for late FC-GPR filing: ₹5,000 or 1% of the total investment amount up to ₹5 lakh per failure. If the delay exceeds six months, the penalty doubles. Delays beyond three years require a compounding application to the RBI under FEMA.

FLA return: the annual FEMA obligation most founders do not track

Once a company has received any foreign investment, even from a single NRI angel at the seed round, it acquires an annual reporting obligation with the RBI that persists for every subsequent financial year as long as the foreign investment remains on the balance sheet.

The Foreign Liabilities and Assets (FLA) return must be filed by 15 July every year, reporting the position of foreign liabilities and assets as on 31 March of the same financial year. It is filed through the FLAIR portal (Foreign Liabilities and Assets Information Reporting). If audited accounts are not ready by 15 July, the return must be filed using provisional figures by the deadline and revised with audited figures by 30 September.

The obligation does not require a fresh foreign investment event in the current year. A company that received FDI four years ago and has had no new foreign investors since must still file FLA every year as long as that prior investment remains on its books.

FC-GPR and FLA are distinct obligations. FC-GPR is event-based, triggered by each new allotment to a foreign investor. FLA is position-based, triggered by the existence of outstanding foreign investment on the balance sheet at year-end. A company that filed FC-GPR correctly for a round in October 2024 still needs to file FLA by 15 July 2025 to report the position as on 31 March 2025.

The penalty for late or missed FLA filing is a flat Late Submission Fee of ₹7,500 per return under the FEMA LSF framework. It is relatively low, but a missed FLA return creates a gap in the company’s RBI records that can delay the next FC-GPR processing and surfaces in due diligence.

Can the company use application money before PAS-3 is filed?

No. Section 42(8) of the Companies Act, 2013 prohibits a company from utilising the application money held in the separate bank account until two conditions are both met: allotment is complete and Form PAS-3 has been filed with the ROC. This applies regardless of whether PAS-3 is filed on time or late, the funds remain locked until the filing is done.

The 60-day allotment clock runs from the date of receipt of application money. The refund obligation begins on day 61 if allotment has not occurred. If refund does not happen by day 75 (15 days after the 60-day window), interest accrues at 12% per annum from day 61, and the funds are treated as a public deposit under the Companies (Acceptance of Deposits) Rules, 2014. For a non-NBFC startup, receiving a public deposit is a violation of Section 73, with separate penalty exposure.

The ROC has imposed penalties of ₹2 crore on companies that failed to either allot within 60 days or refund within 75 days (ROC order in a case involving FY 2018-19 and FY 2019-20 defaults under Section 42(10)). This is not a technical risk, it is actively enforced.

What is the deemed public offer risk?

If a private placement violates certain conditions under Section 42, it is treated as a public offer rather than a private placement. The consequences are severe: all allotments made pursuant to the offer become voidable, and the company and its promoters are liable under Section 42(10) for the higher of the amount raised or ₹2 crore, plus any interest or loss caused to the investors.

The three most common triggers for a deemed public offer are:

Exceeding the 200-investor cap. The cap applies per security type per financial year, separately for equity, preference shares, and debentures. A company that offers equity shares to 150 investors in one round and then tops up with 80 more investors for the same security class in the same FY has exceeded the cap.

Public advertisement or solicitation. Any public announcement of the offer, a social media post, a press release, attendance at a public investor event where the offer is described, converts the private placement into a deemed public offer. PAS-4 must be issued only to named identified persons by registered post, speed post, or electronic mail.

Issuing PAS-4 before MGT-14 is filed. Under Rule 14(8), the offer letter cannot be sent until the relevant board resolution has been filed with the ROC via MGT-14. Sending PAS-4 before filing MGT-14 is a procedural violation that, if challenged, could be characterised as a defective private placement.

Common mistakes that cost founders time and money

Mistake 1: Missing the authorised capital check before signing the term sheet

SH-7 requires a shareholders’ resolution and MCA processing time. Founders who discover the authorised capital shortfall after signing binding documents typically lose two to three weeks to filing, waiting, and reconvening a board meeting. Check authorised capital before the term sheet goes final.

Mistake 2: Treating every PAS-3 as a 30-day filing

For any private placement round involving a new investor, the deadline is 15 days from allotment. The ROC Chennai order of March 2026 imposed penalties on a company that filed 46 days after allotment, three times the legal deadline. The company’s inadvertence argument did not eliminate liability.

Mistake 3: Skipping MGT-14 entirely

A private company closing a funding round must file two MGT-14 forms, one for the board resolution (before PAS-4 is issued) and one for the special resolution (within 30 days of the EGM). Both are routinely skipped by founders who assume MGT-14 applies only to public companies. Missed MGT-14 filings are a standard due diligence finding in Series B and later rounds.

Mistake 4: Filing incorrect or incomplete PAS-3

The ROC Mumbai adjudication order of January 2026 imposed ₹4 lakh in penalties on a small company (₹2 lakh on the company, ₹1 lakh each on two directors, to be paid from personal funds) for a PAS-3 that had incorrect security counts, missing attachments, and a mismatch between the allotment and disclosure figures. The ROC held these were substantive violations, not clerical errors.

Mistake 5: Not running FC-GPR in parallel with PAS-3

FC-GPR has a 30-day deadline from allotment and runs through the AD bank, which has its own review process. Treating FC-GPR as something done after PAS-3 is complete routinely results in the AD bank submitting the form on day 28 or 29, and any document query means a technical late filing. Brief the AD bank before funds arrive.

Mistake 6: Forgetting the FLA return after the first foreign investor round

Once any foreign investment is on the books, FLA is due every 15 July. A missed FLA return does not announce itself with a penalty notice . It sits quietly as a gap in the company’s RBI records until it surfaces in Series B or pre-IPO due diligence as an open FEMA compliance issue.

Mistake 7: Ignoring Rule 9B demat compliance after crossing the threshold

A company that raises a round and crosses ₹4 crore paid-up capital must begin the demat process within 18 months of the close of that financial year. Until demat compliance is complete, the company cannot make further allotments, including ESOP exercises, without violating Rule 9B.

Does Section 446B reduce penalties for early-stage startups?

Section 446B of the Companies Act, 2013 provides that where a penalty is payable by a company that qualifies as a small company under Section 2(85), the penalty shall not exceed one-half of the specified penalty amount.

The small company definition for Section 446B purposes uses the same threshold: paid-up share capital not exceeding ₹4 crore and turnover not exceeding ₹40 crore, based on the last audited financial statements. Most seed-stage and early Series A companies qualify.

The ROC Mumbai order of January 2026 (incorrect PAS-3 in a private placement) confirmed that Section 446B applies even where the violation is a substantive compliance failure rather than a technical one. The company received the reduced penalty of ₹2 lakh (against the standard ₹4 lakh) because it was a small company. However, the directors were still personally liable for ₹1 lakh each, Section 446B does not cap individual officer penalties below the standard rate in all cases; the order required directors to pay from personal funds.

The practical takeaway: Section 446B will reduce the company-level penalty for most early-stage startups. It does not eliminate it, and it does not protect directors from personal liability.

Treelife practitioner note

In the allotment engagements we have run at Treelife, the most persistent failure mode is not ignorance of the law: it is a mismatch between the commercial closing timeline and the statutory compliance calendar.

The sequence problem looks like this: a founder and investor sign term sheets, funds arrive on a Friday, and the founding team schedules an allotment board meeting for Monday. By Monday, it becomes clear that (a) authorised capital is insufficient and SH-7 was never filed, (b) the shareholders’ special resolution at the EGM was passed but MGT-14 was not filed, which means PAS-4 has not been legally issued, (c) the company’s demat infrastructure has not been set up, and (d) the AD bank has not been briefed on FC-GPR. The 60-day clock on the application money is already running.

The FEMA layer adds a third parallel track. FC-GPR must go through the AD bank within 30 days of allotment. AD banks routinely return filings for document inconsistencies: a valuation certificate date that does not match the board resolution, an investor name discrepancy between the FIRC and the subscription agreement. On several mandates, we have seen the AD bank return a filing on day 27 or 28, leaving one to two business days to correct and refile.

What prevents all of this: a pre-signing compliance audit that checks authorised capital, small company status, existing demat setup, MGT-14 sequencing, and AD bank readiness before the term sheet is executed. Treelife structures every funding mandate around a pre-closing checklist that maps each statutory deadline to an actual calendar date, not just a day count.

Case study

Situation: Seed-stage B2B SaaS company, Bengaluru, raising ₹3 crore from two angel investors, one of whom was an NRI.

Challenge: The company’s authorised share capital was ₹10 lakh, insufficient for the proposed allotment. The NRI investor triggered FC-GPR. Demat infrastructure was not in place, and the team was unaware of the MGT-14 obligation for the private placement board resolution.

What Treelife did: Ran a pre-signing audit and identified the authorised capital gap, the MGT-14 sequencing requirement, and the FC-GPR obligation before term sheet execution. Filed SH-7, structured the two MGT-14 filings correctly, set up demat accounts and ISIN allocation, and ran PAS-3 and FC-GPR on parallel tracks with a shared closing calendar.

Outcome: Allotment completed on day 18 after funds received. PAS-3 filed on day 14. FC-GPR filed on day 22. No penalty. Investor received demat-credited shares within 45 days of allotment. Subsequent Series A due diligence found clean MCA and RBI records, the compliance output directly shortened the Series A legal review by two weeks.

FAQ on Allotment of Shares for Startups in India

Q: What is the deadline to file PAS-3 after share allotment in India?
A: 15 days from the date of allotment for private placements under Section 42(8) of the Companies Act, 2013, this applies to most startup funding rounds involving new investors. For all other allotments (rights issue, bonus, ESOP exercise, conversion), the deadline is 30 days under Section 39(4).

Q: Is Form MGT-14 required after a funding round?
A: Yes, typically two MGT-14 filings are required. The first is for the board resolution identifying investors and approving the private placement (must be filed before PAS-4 is issued to investors). The second is for the shareholders’ special resolution passed at the EGM (must be filed within 30 days). Private companies are not exempt from these two specific MGT-14 filings despite the general Section 179(3) board resolution exemption.

Q: Can the company use the investment money before PAS-3 is filed?
A: No. Section 42(8) prohibits the company from using funds in the separate application money account until PAS-3 is filed with the ROC. The restriction applies even if PAS-3 is filed late.

Q: What is the penalty for late PAS-3 filing?
A: Under Section 39(5), the penalty is ₹1,000 per day of default up to a maximum of ₹1 lakh for non-private-placement allotments. Under Section 42(9), for private placement defaults, the penalty is ₹2,000 per day or ₹1 lakh, whichever is less. Small companies receive a 50% reduction under Section 446B. In all cases, both the company and officers in default are liable; ROC orders confirm directors are directed to pay their share from personal funds.

Q: What happens if the company does not allot shares within 60 days of receiving application money?
A: The company must refund the full amount within 15 days of the 60-day expiry. If it fails, it is liable to pay interest at 12% per annum from the 61st day, and the funds are treated as a public deposit under the Companies (Acceptance of Deposits) Rules, 2014, a further violation for a non-NBFC startup.

Q: What is FC-GPR and when is it required?
A: Form FC-GPR is the RBI reporting form under FEMA for any fresh allotment of capital instruments to a person resident outside India. It must be filed within 30 days of allotment through the company’s AD Category-I bank on the FIRMS portal. It is required for NRI investors and for bonus or rights shares allotted to existing non-resident shareholders. It is a separate obligation from PAS-3.

Q: What is the FLA return and when does it apply?
A: The Foreign Liabilities and Assets return is a mandatory annual filing with the RBI for any Indian entity that has outstanding FDI or has made overseas investment. It is filed on the FLAIR portal by 15 July every year, reporting the position as on 31 March. It is not triggered by a fresh transaction, it is triggered by the existence of prior foreign investment on the balance sheet. A startup that received angel funding from a foreign investor two years ago must file FLA every year until that investment is exited.

Q: Is mandatory demat under Rule 9B applicable to all startups?
A: No. Rule 9B exempts small companies, paid-up capital not exceeding ₹4 crore and turnover not exceeding ₹40 crore, per the last audited financial statements. Holding companies, subsidiary companies, and Section 8 companies are not eligible for the small company exemption. Companies that were not small companies as of 31 March 2023 had a compliance deadline of 30 June 2025. Companies crossing the threshold in a later year have 18 months from the closure of that financial year.

Q: What forms other than PAS-3 are required in a private placement funding round?
A: A complete compliance map for a private placement round includes SH-7 (if authorised capital increase is required), MGT-14 for board resolution (before PAS-4 is issued), MGT-14 for special resolution (within 30 days of EGM), PAS-4 (offer letter issued to investors), PAS-3 (return of allotment, filed within 15 days), SH-1 or demat credit (within 2 months of allotment), and FC-GPR via FIRMS portal (within 30 days of allotment, if any foreign investor). Additionally, the company updates its Register of Members (MGT-1).

Q: What is the deemed public offer risk and what triggers it?
A: If a private placement violates Section 42 conditions, it is treated as a public offer. The consequences are potential voidance of allotments and penalties of the higher of the amount raised or ₹2 crore under Section 42(10). The most common triggers are: exceeding 200 offerees per security type per financial year, issuing any public advertisement or social media announcement about the offer, and issuing PAS-4 before the board resolution has been filed via MGT-14.

Q: Does Section 446B reduce penalties for early-stage startups?
A: Yes, for the company-level penalty, the company pays half the standard penalty if it qualifies as a small company under Section 2(85). ROC orders from 2026 confirm this applies even to substantive violations, not only technical ones. However, director-level personal liability is not always halved, and ROC orders have directed directors to pay from personal funds. Section 446B does not eliminate liability.

Q: What documents must be attached to Form PAS-3 for a private placement?
A: Mandatory attachments are: certified true copy of the board resolution approving allotment; list of allottees with name, address, PAN, email, class of security, date of allotment, number of securities, and consideration; copy of the shareholders’ special resolution; Form PAS-5 (record of private placement offers and acceptances); and a valuation certificate where applicable. Missing attachments or mismatches with underlying documents are treated as substantive violations under Section 42.

Q: Does a company secretary need to sign PAS-3?
A: PAS-3 must be digitally signed by a director. For companies required to have a whole-time company secretary (generally companies with paid-up capital of ₹10 crore or above), the CS must also sign. Most early-stage startups do not meet this threshold but should engage a practising company secretary to certify the filing, given the penalty exposure for incorrect filings.

Q: Is PAS-3 required for ESOP allotments?
A: Yes. Every allotment of shares on exercise of ESOP options is an allotment of securities. PAS-3 must be filed under Section 39(4) within 30 days. ESOP allotments do not fall under Section 42, so the 15-day timeline does not apply, but the 30-day deadline and attachment requirements apply in full.

Regulatory references:

• Companies Act, 2013: Section 39(4): return of allotment; Section 39(5): penalty
• Companies Act, 2013: Section 42: private placement; Section 42(6): 60-day allotment timeline; Section 42(8): restriction on use of application money until PAS-3 filed; Section 42(9): penalty for default; Section 42(10): deemed public offer penalty
• Companies Act, 2013: Section 56(4): share certificate delivery timeline (2 months for allotment)
• Companies Act, 2013: Section 62(1)(c): preferential allotment
• Companies Act, 2013: Section 117(1) and Section 117(3): MGT-14 obligation
• Companies Act, 2013: Section 2(55): definition of member; Section 2(85): definition of small company; Section 446B: reduced penalty for small companies
• Companies (Prospectus and Allotment of Securities) Rules, 2014: Rule 12: PAS-3 requirements; Rule 13: preferential allotment conditions; Rule 14: private placement procedure including Rule 14(2) (200-person cap), Rule 14(3) (PAS-4 timeline), Rule 14(8) (MGT-14 before PAS-4)
• Companies (Prospectus and Allotment of Securities) Rules, 2014: Rule 9B: mandatory demat for private companies (inserted by MCA notification 27 October 2023)
• Companies (Share Capital and Debentures) Rules, 2014: Rule 13: preferential allotment conditions
• Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018, amendment to Section 42 effective 07 August 2018 (restriction on use of application money until PAS-3 filed)
• MCA notification dated 12 February 2025: extension of Rule 9B compliance deadline to 30 June 2025
• Foreign Exchange Management Act, 1999 and Foreign Exchange Management (Non-Debt Instruments) Rules, 2019: FC-GPR obligation
• A.P. (DIR Series) Circular No. 45 dated 15 March 2011: FLA return obligation
• Indian Stamp Act, 1899 and applicable State Stamp Acts: stamp duty on share certificates within 30 days of issue
• GSR 464(E) notification dated 05 June 2015: general private company exemption from Section 179(3) MGT-14 filing

External sources:

• Ministry of Corporate Affairs
• Reserve Bank of India: FIRMS Portal
• Securities and Exchange Board of India
• Startup India (DPIIT)