Refund of Application Monies: A Critical Aspect of Corporate Governance
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Koustubh Athavale
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AI Summary
- Section 42 of the Companies Act, 2013 governs the receipt and refund of application monies for private placement and preferential allotment of shares.
- Application money must be received only through cheque, demand draft, or other banking channels, and cash receipts are not permitted.
- Companies must keep application monies in a separate bank account and cannot utilise the funds until shares are allotted or the money is refunded.
- Allotment of securities must be completed within 60 days from the date of receipt of the application money.
- If allotment is not made within 60 days, the company must refund the application money within 15 days from the expiry of that 60-day period.
- Delayed refunds beyond the prescribed 15-day window attract interest at 12 per cent per annum, payable from the expiry of the 60th day.
- Non-compliance with Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 can render the private placement offer void and treated as a public offer.
- Penalties for non-compliance under Section 42(10) extend to the company, its promoters, and directors, who may be liable for an amount equal to the funds involved or up to two crore rupees, whichever is lower, along with refund of monies with interest.
- Companies should treat timely allotment or refund of application monies as a core corporate governance obligation to avoid regulatory action and protect investor interests.
The Companies Act, 2013 (the “Act”), has introduced significant changes to the rules governing application monies received by companies through private placement and preferential allotment of shares, aiming at enhanced transparency, protection of investor interests, and ensuring timely utilization of funds.
This article outlines the key provisions and implications of non-compliance regarding the refund of
application monies under the Act.
About the Author
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Koustubh Athavale
Senior Associate | Legal | koustubh.a@treelife.in
Provides expertise in commercial contracts, dispute resolution, and data privacy. Leverages extensive experience in the startup ecosystem to deliver tailored legal solutions for diverse business needs.
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