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ESOP Compliance in India: Companies Act 2013, Administration

Posted on 25 Sep, 202625 Sep, 2026 by Treelife

Most Indian founders treat an employee stock option plan as an HR decision: draft a scheme, get a lawyer to glance at it, issue letters, move on. It is not. An ESOP is a regulated equity instrument under the Companies Act, 2013, with its own board and shareholder approval sequence, its own statutory registers, and its own annual disclosure obligations that run for as long as the scheme is alive, not just at launch. For unlisted private companies this sits under Section 62(1)(b) and Rule 12. For listed companies, the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 add a second, heavier layer. Get either wrong and the cost shows up later, at a funding round, a secretarial audit, or an IPO due diligence review, as a cap table defect an investor’s counsel will not let pass. This guide covers that statutory and administrative layer end to end: approval, filings, registers, disclosures and penalties.

What law governs ESOP compliance for a private company in India

An unlisted private or public company issuing ESOPs is governed by Section 62(1)(b) of the Companies Act, 2013, read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Private companies get an MCA exemption allowing scheme approval by ordinary resolution instead of a special resolution. Listed companies must additionally comply with the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, which impose a Compensation Committee, stock exchange disclosures, and fair value accounting under Ind AS 102.

The statutory foundation: which law applies to your company

Section 2(37) of the Companies Act, 2013 defines an employee stock option as the right given to a director, officer or employee of a company, or of its holding or subsidiary company, to purchase or subscribe to shares at a predetermined price at a future date. Section 62(1)(b) is the enabling provision: it authorises a company with share capital to issue shares to employees under a scheme of employee stock options, subject to a special resolution and other conditions. Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 supplies the procedural detail, eligibility, disclosure and record-keeping conditions that turn the enabling provision into a workable scheme.

One terminology point that trips up first-time founders: the Companies Act calls the instrument an Employee Stock Option Scheme (ESOS). The industry universally says ESOP. Both terms refer to the same thing, and this article uses ESOP throughout.

Which framework applies to your company

Company type	Governing law	Approval threshold
Private limited (unlisted)	Section 62(1)(b) + Rule 12	Ordinary resolution, under the MCA’s private company exemption notification
Public limited (unlisted)	Section 62(1)(b) + Rule 12	Special resolution (75 percent majority), fuller explanatory statement
Listed company	Section 62(1)(b) + Rule 12 + SEBI (SBEB and SE) Regulations, 2021	Special resolution, plus a mandatory Compensation Committee and stock exchange disclosures
DPIIT-recognised startup	Section 62(1)(b) + Rule 12, with startup relaxations	Ordinary or special resolution as per company type, with promoter and 10 percent shareholder eligibility relaxed for 10 years from incorporation

The practical consequence: a private company can run a materially simpler approval process than a public or listed one, but the ongoing filing, register and disclosure obligations under Rule 12 apply regardless of company type. Simplicity at approval stage is not an exemption from administration afterward.

Everything in this article assumes the direct route, where the company allots shares to employees itself, which is how most private companies start. Companies running or considering an employee benefit trust structure instead carry an additional layer, a special resolution under Section 67(3)(b), Rule 16 of the same Rules, and the trust’s own filings, covered separately in Treelife’s guide to the direct route versus the trust route for ESOPs in India.

Who can and cannot receive ESOPs under Rule 12

Granting options to a person Rule 12 excludes creates a structural defect in the grant, not a paperwork gap, and it is one that cannot be fixed after the fact by amending the letter. Eligibility has to be checked before the first grant letter goes out, not discovered during due diligence.

Who Rule 12 permits and excludes

Category	Eligible	Detail
Permanent employees, in India or abroad	Yes	All permanent employees on payroll qualify, regardless of work location
Directors, excluding independent directors	Yes	Whole-time and part-time directors both qualify
Employees of a holding or subsidiary company	Yes	Must be explicitly named in the scheme document
Independent directors	No	Explicitly excluded under Rule 12 and, for listed companies, under the SEBI SBEB Regulations
Promoters and promoter group members	No	Standard restriction, other than the DPIIT startup exception below
Directors holding more than 10 percent equity, directly, through relatives, or through a body corporate	No	Standard restriction, other than the DPIIT startup exception
Contract or temporary staff	No	Must be permanent employees

For a DPIIT-recognised startup with Inter-Ministerial Board certification, the promoter and 10 percent shareholder restrictions do not apply for 10 years from the date of incorporation. This is a material advantage that early-stage companies routinely overlook: a founder who is technically a promoter, and who holds a meaningful stake, can still receive ESOPs under this exception, which matters when a co-founder’s original equity is thin relative to the risk they are carrying.

How is an ESOP scheme approved under the Companies Act

Approval runs through a fixed sequence: board approval, a shareholder resolution, and filing both with the Registrar of Companies. Skipping a step, or trying to shortcut the board stage with a circular resolution, is one of the more common ways companies end up with an unenforceable scheme.

Before anything else, check the Articles of Association actually authorise ESOP issuance. If they do not, that has to be amended first through an extraordinary general meeting.

The approval sequence

Step	Action	Timeline	Document generated
1	Draft the ESOP scheme: eligibility, pool size, vesting, exercise price, exercise period, lapse conditions	Before the board meeting	ESOP scheme document
2	Issue board meeting notice to all directors	Minimum 7 days before the meeting	Board meeting notice
3	Hold the board meeting and approve the scheme. Cannot be done by circular resolution	Board meeting date	Board resolution
4	File Form MGT-14 with the Registrar of Companies for the board resolution	Within 30 days of the board meeting	Form MGT-14
5	Issue the general meeting notice with the explanatory statement	Minimum 21 days before the meeting	EGM or AGM notice
6	Hold the general meeting and pass the resolution: ordinary for private companies, special for public and listed companies	General meeting date	Ordinary or special resolution
7	File Form MGT-14 for the shareholder resolution	Within 30 days of the general meeting	Form MGT-14
8	Issue signed grant letters to eligible employees	After scheme approval	Grant letters

Rule 12 prescribes what the explanatory statement accompanying the general meeting notice must disclose. Missing any of these is a procedural defect that surfaces at the worst possible moment, an investor’s legal review. The explanatory statement must state: the total number of options to be granted; the class of eligible employees; the appraisal process used to determine eligibility; the minimum one-year vesting period; the maximum exercise period after vesting; the exercise price or the formula for it; any lock-in period on shares issued after exercise; the maximum options grantable to a single employee and in aggregate; the valuation method; a statement of compliance with applicable accounting standards; and the impact on diluted earnings per share if all outstanding options were exercised.

The grant letter itself is the primary evidence of what was agreed if an employee later disputes their terms. It must be signed by both the company’s authorised signatory and the employee, and it should state the number of options granted, the exercise price, the vesting schedule, and the exercise window, stored in both physical and digital form.

Ongoing filings and registers every company must maintain

Approval of the scheme is the beginning, not the end. From the first grant onward, ESOP administration is a live, recurring obligation, not a task you revisit once a year when the Board’s Report is due.

Ongoing filing and register obligations

Filing or register	Purpose	Deadline	Penalty for default
Form PAS-3, return of allotment	Notifies the Registrar of shares allotted on exercise	Within 30 days of each allotment	Up to ₹1,000 per day of default, capped at ₹25,000, plus officer liability
Form MGT-14, resolution filing	Filed for board and shareholder resolutions at setup and for every scheme amendment	Within 30 days of the resolution	₹500 per day of default
SH-6 register, register of employee stock options	Primary evidence of ESOP administration: grants, vesting, exercise, forfeiture, lapse	Updated after every event	No standalone penalty, but a missing register is treated as a red flag in due diligence
Form MGT-7, annual return	Discloses ESOP details as part of the company’s annual return	Within 60 days of the AGM	₹50,000 to ₹5,00,000 depending on the extent of default

The filing companies most often let slip is PAS-3, not MGT-14. Most companies remember to file MGT-14 at scheme setup because a lawyer or company secretary is already in the room for that event. PAS-3 has to be filed every single time shares are allotted after an exercise window, and if a company runs annual exercise cycles without a standing calendar trigger for this filing, the gap compounds silently across several years until due diligence surfaces it in one go.

The SH-6 register deserves the same discipline. Investors treat it as the primary documentary evidence that a company’s ESOP scheme has actually been administered, not merely approved on paper. A scheme with a clean board resolution and grant letters but no updated SH-6 register still reads, to a diligence team, as an administration failure.

Companies that reach this stage without a dedicated function usually bring in the kind of ESOP administration services India teams offer, running the SH-6 register, the PAS-3 filing calendar and grant-letter documentation as one continuous process rather than a scramble before each audit.

Annual disclosures the Board’s Report must carry

Every financial year, Rule 12 requires the Board’s Report to disclose ESOP activity in specific, itemised form. A generic line stating that the company has an ESOP scheme does not satisfy the requirement, and secretarial auditors flag its absence as a compliance gap that creates director liability, not a drafting style choice.

What the Board’s Report must state, item by item

Disclosure item	What to report
Options granted	Total options granted during the financial year
Options vested	Total options that vested during the year
Options exercised	Total options exercised during the year
Shares arising from exercise	Equity shares actually allotted on exercise
Options lapsed	Options forfeited or cancelled, with the reason: resignation, performance, or scheme terms
Exercise price	The price at which options were granted
Variation of terms	Any change to scheme terms during the year (a change adverse to employees needs fresh shareholder approval)
Money realised from exercise	Total cash received by the company on exercise
Options in force at year-end	Outstanding options balance as at the financial year-end
Employee-wise detail	Named disclosure for key managerial personnel, senior management, and relatives of directors who received options
Employees holding 1 percent or more of share capital	Identified separately where options granted exceed 1 percent of issued share capital in a year
Diluted EPS	Earnings per share computed as if all outstanding options were exercised

This table is not a summary template, it is the disclosure itself. Building it from a live SH-6 register through the year, rather than reconstructing it from memory when the Board’s Report is due, is what separates a clean secretarial audit from a scramble.

Additional compliance for listed companies under SEBI SBEB Regulations

A listed company operates under a materially heavier compliance load than an unlisted one. The SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 layer requirements on top of the Companies Act framework, not in place of it.

What SEBI adds beyond the Companies Act

SEBI requirement	Applies to	Key document or filing
Compensation Committee	Every listed company with an ESOP scheme	Board resolution constituting the committee, plus its charter
Special resolution with SEBI-prescribed disclosures	Every listed company	Special resolution and an explanatory statement carrying SEBI’s specific disclosure items
Stock exchange periodic disclosures	Every listed company	Quarterly and annual disclosures under SEBI’s LODR framework and SBEB Regulations
Fair value accounting under Ind AS 102	Every listed company and Ind AS preparer	Actuarial or Black-Scholes valuation report at each grant date
Trust deed and trustee details	Companies administering ESOPs through a trust route	Trust deed, trustee appointment, annual trust accounts
Annual compliance certificate	Every listed company	Certificate signed by the compliance officer and company secretary

In its June 2025 board meeting, the Securities and Exchange Board of India extended the ESOP benefit to employees of unlisted subsidiaries of listed companies (SEBI board meeting, June 2025), a change that lets a listed parent’s group extend equity to employees sitting in unlisted operating entities. Groups with this structure should check their scheme documents specifically confirm eligibility for subsidiary employees and that disclosure obligations are met at the listed entity level.

Two further amendments in the second half of 2025 change the compliance picture for listed and pre-IPO companies. The SEBI (SBEB and SE) (Amendment) Regulations, 2025, notified 8 September 2025, inserted Regulation 9A, which lets a person who received ESOP grants as an employee, and who is only later identified as a promoter in the draft red herring prospectus at least a year after those grants, retain and exercise those pre-existing grants on their original terms. The SEBI (SBEB and SE) (Second Amendment) Regulations, 2025, effective 30 days after gazette publication in December 2025, replaced merchant bankers with independent registered valuers under Regulation 34 for all fresh valuations, with merchant bankers permitted only a nine-month window to complete assignments already in progress. Any listed company commissioning a valuation after that window should confirm its valuer is a registered valuer under Section 247 of the Companies Act, 2013, not a merchant banker, or the valuation itself becomes the compliance gap.

For a company heading toward an IPO, this compliance picture becomes urgent well before the draft red herring prospectus stage. SEBI’s ICDR Regulations require the ESOP scheme to already be compliant with the SBEB Regulations before the DRHP is filed, and IPO due diligence teams review the entire ESOP history in detail, every grant, every exercise event, every SH-6 entry, every PAS-3 filing, and every Board’s Report disclosure back to the scheme’s inception. A gap discovered at this stage, missing SH-6 entries, an undisclosed grant, an incorrect share capital figure, causes delays that cannot be resolved quickly. The compliance audit belongs 18 to 24 months before the planned filing, not six months before it.

How are ESOPs taxed in India, and what changed on 1 April 2026

ESOP taxation in India falls at two separate events, exercise and sale, and both create obligations for the employer as well as the employee. There is no tax event at grant or at vesting.

Tax treatment across the ESOP lifecycle

Event	Tax treatment	Employer obligation	Employee obligation
Grant	No tax event	None	None
Vesting	No tax event	None	None
Exercise, unlisted shares	Spread (FMV minus exercise price) taxed as a perquisite, at slab rate	Deduct TDS on the perquisite value, report in Form 16 and Form 24Q	Declare perquisite income in the ITR
Exercise, listed shares	Spread taxed as a perquisite, based on the market price on the exercise date	Deduct TDS, report in Form 16	Declare in the ITR
Sale, short-term (unlisted, under 24 months)	Capital gains at slab rate	None	Declare in ITR Schedule CG
Sale, long-term (unlisted, over 24 months)	Long-term capital gains at 12.5 percent, without indexation	None	Declare in ITR Schedule CG
DPIIT startup deferral	Perquisite tax deferred to the earliest of 48 months from the end of the assessment year of allotment, sale of the shares, or cessation of employment	TDS deferred to the triggering event	Tax payable only at the triggering event

For unlisted shares, the fair market value used to compute the perquisite is not a number the company can pick. It has to come from a merchant banker’s valuation, consistent with Rule 11UA of the Income Tax Rules, and the same valuation discipline sits behind the Ind AS 102 accounting entry discussed further below.

The Income Tax Act, 2025 received presidential assent on 21 August 2025 and took effect from 1 April 2026, replacing the Income Tax Act, 1961 as India’s direct tax statute, without changing the substantive ESOP rules, rates or thresholds. For ESOP grants exercised before 1 April 2026, the 1961 Act’s numbering continues to govern. For exercises from FY 2026-27 onward: perquisite computation continues to sit within Section 17, now at section 17(1)(d); TDS on salary, including the ESOP perquisite, moves from the erstwhile section 192 to a consolidated section 392; and the Section 80-IAC startup tax holiday that underpins the DPIIT deferral moves to section 140. Cite the 2025 Act section for any transaction executed on or after 1 April 2026, and the 1961 Act section for anything executed before that date.

The most valuable relief in this table is the DPIIT deferral. It exists because employees at pre-IPO startups otherwise face a perquisite tax bill on shares they cannot yet sell to fund it, and the deferral removes that cash trap by pushing the tax point to the earliest of sale, cessation of employment, or 48 months from the end of the assessment year of allotment. Employers at DPIIT-recognised startups should communicate this clearly at grant, since it changes an employee’s exercise decision.

A large share of what a company calls ESOP compliance services India firms provide sits precisely at this exercise-and-TDS boundary: getting the FMV valuation, the perquisite computation, and the Form 24Q reporting right at the moment employees actually exercise, not reconstructed months later when a tax notice arrives.

What changes for RSUs and SARs under the Corporate Laws (Amendment) Bill, 2026

Until now, only the ESOP itself sat inside the Companies Act’s statutory framework. Restricted stock units (RSUs) and stock appreciation rights (SARs), both common in later-stage and multinational-linked structures, existed purely on contract, with no direct statutory backing under Section 62(1)(b).

The Corporate Laws (Amendment) Bill, 2026, introduced in the Lok Sabha on 23 March 2026, changes this. Clause 28 of the Bill expands Section 62(1)(b) to formally recognise RSUs and SARs alongside ESOPs, giving companies a clear statutory route to grant these instruments rather than relying solely on contractual arrangements that created ambiguity for legal and finance teams. This is particularly relevant for Indian subsidiaries of multinational companies, and for late-stage or pre-IPO companies that have already been issuing RSUs informally and now gain a defined legal basis for doing so.

As this is a Bill rather than a notified amendment, companies granting RSUs or SARs today should keep two things separate: continue treating these instruments under existing contractual and tax practice until the amendment is notified, and build the scheme documentation now so it converts cleanly to the statutory route once Clause 28 takes effect. Waiting for notification before starting the documentation work is the more expensive path.

Accounting treatment: Ind AS 102 and the ICAI guidance note

ESOP expense recognition is not optional, and a company that has been treating options as an off-balance-sheet perk is carrying a material financial statement error that surfaces at the worst time, during an audit or a fundraise.

Which accounting standard applies

Framework	Applies to	Requirement
Ind AS 102, share-based payment	Listed companies and large unlisted companies preparing Ind AS financials	Options measured at fair value on the grant date using the Black-Scholes or a binomial model, expense recognised over the vesting period
ICAI Guidance Note on ESOP	Companies on Indian GAAP	Intrinsic value method permitted: FMV at grant date minus exercise price, expense spread over the vesting period
Disclosure requirement, all companies	Any company with an ESOP scheme	Companies using the intrinsic value method must disclose what the expense would have been under the fair value method

The grant-date valuation that drives this expense has to come from an independent actuary or registered valuer, not an internal estimate. Once fixed, the expense is spread across the vesting period and charged to the profit and loss account each year, which means it moves reported EBITDA and profitability figures that investors and lenders rely on directly. Getting the entry booked is a Companies Act and accounting standards question; whether the resulting EBITDA add-back actually survives an investor’s quality-of-earnings review is a separate, more detailed question, covered in Treelife’s guide to ESOP due diligence in India.

What ESOP compliance services India providers actually cover

Most companies discover the gap between having a scheme and running one properly only when a funding round or audit forces the question. ESOP compliance services India providers are typically engaged to close exactly that gap: taking the scheme from board and shareholder approval through the MGT-14 filings, the Rule 12 explanatory statement disclosures, and the annual Board’s Report item-by-item disclosure, so the paperwork behind every grant, vesting and lapse event stands up to a secretarial audit or an investor’s legal review without last-minute reconstruction.

This is distinct from a one-time scheme drafting exercise. A compliance engagement runs on the same calendar as the scheme itself: it tracks resolution filing deadlines, flags an explanatory statement that is missing a required disclosure item, and prepares the Board’s Report ESOP table each year from the underlying records rather than from memory.

What ESOP administration services India providers actually cover

Where compliance work is about the filings and disclosures, ESOP administration services India providers cover the operational layer underneath them: keeping the SH-6 register updated after every grant, vesting, exercise and forfeiture; filing Form PAS-3 within 30 days of each allotment; issuing and tracking signed grant letters; and calculating the perquisite value and TDS at each exercise event.

This is the layer that most commonly lapses, not because companies do not know the rules, but because nobody owns the calendar trigger once the person who set up the scheme moves on to other things. Companies that hand this administration to a dedicated function typically do so once the option pool crosses a few dozen active grantees, or ahead of a funding round where the SH-6 register will be the first document an investor’s counsel asks for.

Common mistakes that cost companies time and money

Granting options before shareholder approval. Options issued before the scheme clears shareholder approval are legally unenforceable, and this is typically discovered during investor due diligence, causing deal delays and forced restructuring. Do not grant until the scheme is approved; if it has already happened, this needs fresh shareholder approval and, in some cases, regulatory direction to cure.

Not maintaining the SH-6 register. Investors ask for the SH-6 register as primary evidence of ESOP administration. A missing or stale register is an immediate red flag, not a minor gap. Reconstruct it from grant letters and exercise records where it has lapsed, then keep it live from every subsequent event.

Missing the PAS-3 filing after allotment. This is the single most commonly missed filing, and it attracts penalties of up to ₹25,000 at the company level plus officer liability, alongside adverse secretarial audit observations. File the delayed return with applicable late fees, and set a calendar trigger tied to every exercise event going forward.

Approving the scheme by circular resolution. ESOP scheme approval requires a formal board meeting; a circular resolution is invalid for this purpose and creates a procedural defect in every option granted under it. Convene a proper board meeting and document it clearly in the minutes.

Ignoring FEMA obligations on cross-border ESOPs. Indian employees receiving options from a foreign parent, in Singapore, the Cayman Islands, or Delaware for instance, are acquiring foreign securities, which triggers RBI reporting obligations and an annual Schedule FA disclosure in the employee’s ITR. This rarely surfaces at grant; it surfaces at an income tax assessment or when the employee sells and cannot explain the gain.

These are the statutory and administrative mistakes. Where the ESOP fair value expense itself was never booked, or an EBITDA add-back cannot be traced to the ledger, that is a distinct financial due diligence failure mode, covered in Treelife’s guide to ESOP due diligence in India.

Frequently asked questions

Q: Is an ordinary resolution enough to approve an ESOP scheme, or is a special resolution required?

A: Private limited companies benefit from an MCA exemption allowing approval by ordinary resolution. Public limited and listed companies must pass a special resolution requiring 75 percent approval, with a fuller explanatory statement under Rule 12.

Q: Can a private company issue ESOPs without amending its Articles of Association?

A: Only if the Articles already authorise share issuance to employees under an option scheme. If they do not, the Articles must be amended through an extraordinary general meeting before the scheme is approved.

Q: What is the minimum vesting period for an ESOP in India?

A: Rule 12 fixes a minimum vesting period of one year from the date of grant. Companies may choose a longer period, but not shorter.

Q: How does ESOP compliance work for a DPIIT-recognised startup differently from a standard private company?

A: DPIIT-recognised startups with Inter-Ministerial Board certification get two relaxations for 10 years from incorporation: promoters and directors holding more than 10 percent equity become eligible for ESOPs, and eligible employees get a tax deferral on the exercise perquisite (to the earliest of 48 months from the end of the assessment year of allotment, sale, or cessation of employment).

Q: How long does it typically take to complete the ESOP approval process end to end?

A: From drafting the scheme to issuing signed grant letters, the process typically runs four to eight weeks, driven mainly by the 7-day board notice period, the 21-day general meeting notice period, and internal sign-off cycles.

Q: What documents does a company need to have in place before the first ESOP grant?

A: The approved ESOP scheme document, the board resolution, the shareholder resolution, Form MGT-14 acknowledgements for both, and a signed grant letter for each employee, alongside the opening entry in the SH-6 register.

Q: Do foreign employees or Indian employees of a foreign parent company need separate ESOP compliance?

A: Yes. Indian employees receiving options from a foreign parent are acquiring foreign securities under FEMA and must report the holding in Schedule FA of their ITR annually; the granting structure itself must also be documented and reported under the applicable RBI framework.

Q: Can a family member of a director receive ESOP options?

A: Relatives of directors are not automatically excluded, but Rule 12 requires their grants to be separately disclosed by name in the Board’s Report, alongside options granted to key managerial personnel and senior management.

Q: Can a co-founder who is also a promoter receive ESOPs?

A: Not under the standard Companies Act restriction on promoters, unless the company is a DPIIT-recognised startup within its first 10 years of incorporation, in which case this restriction does not apply.

Q: What happens to unexercised options if the ESOP deal or company transaction falls through?

A: Unvested options typically lapse per the scheme’s own terms; vested but unexercised options generally survive unless the scheme states otherwise, so the scheme document’s lapse and change-of-control clauses need to be checked before assuming an outcome.

Q: Do investors or acquirers check ESOP compliance during a funding round or acquisition?

A: Yes, and closely. Due diligence teams typically request the SH-6 register, every PAS-3 filing, board and shareholder resolutions, and Board’s Report disclosures going back to the scheme’s inception; gaps here are a common source of deal delay.

Q: What happens if an employee resigns before their options fully vest?

A: Unvested options lapse on resignation as per Rule 12 and the scheme terms. Vested options must typically be exercised within a window set by the scheme, commonly 30 to 90 days after resignation, after which they too lapse.

Q: Are RSUs and SARs legal to issue in India today, before the Corporate Laws (Amendment) Bill, 2026 is notified?

A: Yes, companies already issue RSUs and SARs under contractual arrangements. The 2026 Bill gives them explicit statutory recognition under Section 62(1)(b) once notified; it does not create the instruments for the first time.

Q: Is ESOP expense recognition in the profit and loss account mandatory for private companies?

A: Yes for Ind AS preparers, under Ind AS 102. Companies on Indian GAAP may use the intrinsic value method under the ICAI guidance note, but must still disclose what the expense would have been under the fair value method.

Regulatory references:

Section 2(37) and Section 62(1)(b), Companies Act, 2013
Rule 12, including Rule 12(9), Companies (Share Capital and Debentures) Rules, 2014
Section 67(3)(b) and Rule 16, Companies (Share Capital and Debentures) Rules, 2014 (trust route funding, referenced for contrast)
SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021
SEBI (SBEB and SE) (Amendment) Regulations, 2025, Regulation 9A, notified 8 September 2025
SEBI (SBEB and SE) (Second Amendment) Regulations, 2025, Regulation 34, effective December 2025

Bonus Issue of Shares under Section 63: Conditions, Reserves

Posted on 17 Sep, 202617 Sep, 2026 by Treelife

A bonus issue converts a company’s accumulated reserves into paid-up share capital and hands the additional shares to existing shareholders in proportion to their holding, without asking them to pay a rupee. Section 63 of the Companies Act, 2013 is the only provision that governs this for Indian companies, and it is narrower than most boards expect: it fixes exactly which reserves qualify, bars a company from using a bonus issue to dodge a dividend, and locks in a resolution and filing sequence that leaves very little room to improvise. Get the reserves test wrong and the statutory auditor will not certify the issue. Get the filing sequence wrong and the penalty clock under Section 39 and Section 117 starts running the same day. This article works through both, along with the additional layer that applies once a company is listed.

What is the deadline to file PAS-3 and MGT-14 for a bonus issue of shares?

Form MGT-14 for the special resolution authorising the bonus issue must be filed within 30 days of the resolution being passed (Section 117(1), Companies Act, 2013). Form PAS-3, the return of allotment, must be filed within 30 days of the actual allotment (Section 39(4)). Missing either attracts a penalty of ₹1,000 per day of default, capped at ₹1 lakh under Section 39(5), and a parallel penalty under Section 117(2) for the MGT-14 delay.

What is a bonus issue of shares under company law?

A bonus issue is a capitalisation of reserves, not a fresh source of capital. The company does not receive any consideration; it simply reclassifies an amount sitting in free reserves, the securities premium account or the capital redemption reserve as paid-up equity share capital, and issues new shares of the same class to existing members in the ratio approved by the board, commonly expressed as 1:1, 1:2 or 2:1. Total shareholder wealth in the company does not change on the day of the bonus issue. What changes is the number of shares outstanding, the paid-up capital on the balance sheet, and, for a listed company, market liquidity and the optics of a growing capital base.

Founders reach for a bonus issue mainly for two reasons: to bring the paid-up capital of a subsidiary or holding structure in line with net worth ahead of a fundraise or restructuring, and to reward existing shareholders without disturbing cash flow when the company would rather retain cash than pay a dividend. Neither reason changes the statutory test. Section 63 applies identically whether the bonus issue is a housekeeping step inside a group structure or a shareholder-facing event ahead of an IPO.

What are the Section 63 conditions for issuing bonus shares?

A company cannot decide to issue bonus shares and simply pass a resolution. Section 63(2) sets six cumulative conditions, and the company fails the section if even one is not met on the date the board recommends the issue.

Authorisation in the articles. The articles of association must permit capitalisation of reserves and issue of bonus shares. If they do not, the articles must be altered under Section 14 before the board can recommend a bonus issue, which itself needs a special resolution and, for a private company, no further government approval.
Recommendation by the board, authorisation by members. The board recommends the bonus issue; the members must then authorise it in a general meeting. Unlike a rights issue under Section 62, this is not solely a board matter even for a company whose articles already permit it, because Section 63(2)(a) requires member authorisation “on the recommendation of the Board.”
No default on fixed deposits or debt securities. The company must not be in default on payment of interest or principal in respect of a fixed deposit or debt security issued by it. A single missed interest payment on an outstanding NCD, even if since cured, needs board-level comfort before the bonus resolution is placed.
No default on statutory dues to employees. The company must not have defaulted on payment of statutory dues to employees, specifically provident fund, gratuity and bonus (the statutory bonus under the Payment of Bonus Act, unrelated to the bonus share issue itself). A pending EPFO show-cause notice is a real blocker here, not a formality.
Partly paid-up shares must be fully paid up. Section 63(2)(e) bars a bonus issue while any existing shares remain partly paid. Companies that issued partly paid shares years earlier and never called up the balance need to close that out first.
Compliance with prescribed conditions. Section 63(2)(f) is the residual clause pulling in Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014, which adds that a board recommendation once announced cannot subsequently be withdrawn, and that where the articles require member approval for capitalisation, the bonus issue must be implemented within two months of the board meeting that recommended it.

Section 63(3) adds a standalone rule that sits outside the six conditions: bonus shares cannot be issued in lieu of a dividend. A board cannot resolve to skip a declared or expected dividend and issue bonus shares instead; the two are treated as separate corporate actions under the Act (Section 63(3), Companies Act, 2013).

Is board approval enough, or does a bonus issue always need a shareholder resolution?

Board approval alone is not enough. Section 63(2)(a) requires the bonus issue to be authorised in the general meeting on the board’s recommendation, so an ordinary or special resolution of the members, depending on what the articles prescribe, is mandatory in every case, including for wholly owned subsidiaries issuing bonus shares to a single parent shareholder.

The reserves test: which reserves can actually fund a bonus issue?

This is where most rejected bonus issues fail, because the balance sheet can show a healthy reserves figure that is nonetheless the wrong kind of reserve. Section 63(1) permits a bonus issue to be funded from only three sources, and the proviso to Section 63(1) closes off a fourth that companies commonly try to use.

Table: sources permitted and barred for a bonus issue under Section 63

Source	Eligible for bonus issue	Condition attached
Free reserves	Yes	Must be reserves genuinely available for distribution, built from real profits, not a notional or contingent reserve
Securities premium account	Yes	For a listed company, only the portion realised in cash under SEBI ICDR Regulations, 2018; for an unlisted company, the account balance regardless of the mode of realisation
Capital redemption reserve account	Yes	Must itself have been created out of genuine profits at the time shares were redeemed or bought back
Revaluation reserve	No	Barred outright by the proviso to Section 63(1); an upward revaluation of land, building or other fixed assets can never be capitalised into bonus shares
Reserves not classified as free reserves (e.g., statutory reserves under other laws, contingent reserves)	No	Fails the “free reserves” test even if shown as a reserve in the balance sheet

The practical test an auditor applies before signing the certificate is narrower than “does the reserve exist.” It is: was this reserve created out of real, realised profit, and is it free of any restriction, contractual or statutory, on distribution. A reserve created by writing up the value of land the company owns, however conservative the valuation, fails this test even if the company genuinely believes the asset is worth more. A securities premium account funded by a share swap or a non-cash consideration passes the test for an unlisted company but fails it for a listed company, because SEBI’s Chapter XI framework tightens the same test at the point of listing.

Once a company lists, Regulation 293 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 layers an additional filter on top of Section 63: the bonus issue must be made only out of free reserves, the securities premium account or the capital redemption reserve account, and these must be “built out of the genuine profits or securities premium collected in cash,” with revaluation reserves barred exactly as under Section 63(1). For a listed company this means the securities premium test is stricter than for a private company, since only the cash-realised portion of the account counts, and any premium recognised on a non-cash transaction, a slump sale consideration settled in shares, or a merger accounted for under the pooling method, has to be carved out before the reserves test is run.

Two further conditions from the SEBI framework matter once a company has convertible instruments outstanding. First, any Fully Convertible Debenture (FCD) or Partly Convertible Debenture (PCD) holder is entitled to a proportionate reservation of bonus shares against the convertible portion of their instrument, issuable on conversion at the same terms as the bonus issue to equity holders. Second, if the articles require shareholder approval for capitalisation of reserves, the bonus issue must be implemented within two months of the board meeting recommending it, the same two-month window Rule 14 sets for all companies, listed or not.

How does the board and shareholder approval process run for a bonus issue?

The sequence below is the one that works cleanly in practice and keeps every filing inside its statutory window.

Confirm articles and authorised capital. Check that the articles authorise capitalisation of reserves, and that authorised share capital is sufficient to absorb the new shares. If either falls short, the amendment or increase has to be pushed through first, since Section 63(2)(a) and basic capital maintenance rules both depend on it.
Board meeting: recommend the bonus issue. The board considers the reserves position, confirms none of the six Section 63(2) conditions is breached, fixes the bonus ratio and record date, and recommends the issue to members. Once announced, this recommendation cannot be withdrawn (Rule 14, Companies (Share Capital and Debentures) Rules, 2014).
General meeting: members authorise the issue. Members pass the resolution the articles require, ordinary or special. For a listed company this is also the point at which the SEBI ICDR conditions on FCD/PCD reservation are built into the resolution.
File Form MGT-14. Within 30 days of the resolution (board or member, whichever triggers the filing under Section 117), file MGT-14 with the ROC. For a bonus issue this SRN also becomes a mandatory field when the return of allotment is filed.
Allot the shares and update records. Allotment must be within two months of the board meeting where the articles require member approval for capitalisation. Update the register of members and, for dematerialised shares, coordinate with the depositories for credit.
File Form PAS-3. Within 30 days of allotment (Section 39(4)), file the return of allotment with the certified list of allottees and the board and shareholder resolutions attached. No registered valuer’s report is needed since bonus shares are not issued for consideration other than cash.
Issue share certificates. Within two months of allotment for a physical-share company; for demat shares, credit happens through the depository corporate action instead of a physical certificate.

Table: filing obligations that fall out of a bonus issue

Form	Trigger	Deadline	Governing provision	Penalty for delay
MGT-14	Special/ordinary resolution recommending or authorising the bonus issue	30 days from the resolution	Section 117(1), Companies Act, 2013	Company and officer in default liable under Section 117(2)
PAS-3	Allotment of bonus shares	30 days from allotment	Section 39(4), Companies Act, 2013	₹1,000 per day of default, capped at ₹1 lakh (Section 39(5))
MGT-1 / register update	Allotment	Ongoing, updated at allotment	Section 88, Companies Act, 2013	Penalty for failure to maintain registers under Section 88
FC-GPR	Bonus shares allotted to a resident outside India, in proportion to existing foreign holding	30 days from allotment	FEMA (Non-Debt Instruments) Rules, 2019, RBI Master Direction on reporting	Compounding by RBI for delayed reporting

A bonus issue is not treated as a foreign investment for FDI approval purposes since no fresh consideration flows in, but where existing foreign shareholders receive their proportionate bonus shares, the allotment still has to be reported to the RBI through Form FC-GPR within the same 30-day window that applies to any equity allotment involving a person resident outside India.

What additional conditions apply to a bonus issue by a listed company?

Chapter XI of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, Regulations 293 to 295, sits on top of Section 63 for listed companies and adds process, not a different reserves test in substance, only a stricter cash-realisation filter on the securities premium account as described above.

FCD/PCD reservation. Convertible debenture holders must be reserved proportionate bonus shares, issuable at conversion on the same terms as the bonus issue.
Record date and depository timeline. Documents for credit of bonus shares must reach the depositories by 12 noon on the next working day after the record date, which is treated as the deemed date of allotment. Trading in the bonus shares begins on the second working day after the record date (T+2).
Statutory certification. A certificate from the statutory auditor, or a practising chartered accountant or company secretary, confirming compliance with the SEBI ICDR bonus issue conditions has to be obtained before the stock exchange grants final listing and trading approval.
Demat-only allotment. Bonus shares to a listed company’s shareholders can only be allotted in dematerialised form.
Website disclosure. The bonus issue and its terms have to be disclosed on the company’s website under Regulation 46 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

For an unlisted company preparing for an eventual listing, the practical takeaway is to run every bonus issue as if the ICDR cash-realisation test already applied to the securities premium account. It avoids a position, three or four years later, where a pre-IPO reserves history has to be reconstructed to prove that premium credited on a share swap or slump sale was genuinely cash, because by then the paper trail is thin and the merchant banker will ask for it during due diligence.

How are bonus shares taxed in the hands of shareholders?

The company itself has no tax event on a bonus issue since it is only a book entry moving reserves to paid-up capital, but the shareholder side has two rules worth knowing before the record date is fixed.

Cost of acquisition is nil. Under Section 55(2)(aa)(iiia) of the Income Tax Act, 1961, the cost of acquisition of a bonus share allotted without payment, on the basis of an existing holding, is taken to be nil for the purpose of computing capital gains under Sections 48 and 49. A shareholder who later sells the bonus shares pays capital gains tax on the full sale consideration, with no cost to deduct against it, though the benefit of long-term treatment and, for pre-2001 allotments, an option to substitute fair market value as on 1 April 2001, can still apply.

Holding period runs from the date of allotment, not from the date the original shares were acquired. Bonus shares are treated as a fresh asset for holding-period purposes. A shareholder who has held the original shares for years but received the bonus shares two months ago is short-term on the bonus shares alone, taxed under Section 111A for listed equity or at slab rates for unlisted shares, until the twelve or twenty-four month threshold (listed and unlisted respectively) is crossed from the allotment date.

Bonus stripping is restricted under Section 94(8). This anti-avoidance provision denies a shareholder the tax benefit of buying shares shortly before a bonus record date, receiving the bonus shares, and then selling the original shares at a loss created purely by the price drop that follows a bonus issue. Where an investor acquires shares within three months before the record date and sells the original shares within nine months after it, any loss on that sale is ignored for tax purposes and is instead added to the cost of acquisition of the retained bonus shares. The Finance Act, 2022 widened Section 94(8) to cover all securities, not only mutual fund units, with effect from 1 April 2023, so the restriction now applies squarely to listed equity bonus issues.

What is the cost of acquisition of bonus shares for capital gains purposes?

The cost of acquisition of bonus shares is nil under Section 55(2)(aa)(iiia) of the Income Tax Act, 1961, so the entire sale consideration on a later transfer is treated as capital gain. The holding period for classifying that gain as long-term or short-term runs from the date the bonus shares were allotted, not from the date the shareholder acquired the original shares.

What are the stamp duty and accounting treatment for a bonus issue?

Accounting entry. A bonus issue is recorded by debiting free reserves, the securities premium account or the capital redemption reserve account, and crediting share capital for the face value of the new shares issued. There is no cash movement and no impact on the profit and loss account; the transaction only reclassifies amounts within the equity section of the balance sheet, so total shareholders’ equity is unchanged even as paid-up capital rises.

Stamp duty. Stamp duty on the issue of share certificates applies at a uniform rate of 0.005% of the market value of the shares issued, under the amended Indian Stamp Act, 1899 framework effective 1 July 2020, collected through the depository for demat shares or paid directly for physical certificates. Because the amended Section 21 read with Section 2(16B) bases the duty on market value rather than on consideration actually paid, practitioner views differ on whether a bonus issue, which involves no consideration, is captured at all or falls within the same market-value base as any other allotment; companies should confirm the position with their stamp duty advisor state by state before treating a bonus issue as exempt.

Common mistakes that cost founders time and money

Treating a revaluation reserve as usable. Boards sometimes see a large reserve created after a fixed asset revaluation and assume it strengthens the case for a bonus issue. Section 63(1)’s proviso bars this outright, and an auditor who certifies a bonus issue funded even partly from a revaluation reserve is exposing themselves to professional liability. The fix is to run the reserves schedule past the auditor before the board meeting, not after.

Filing PAS-3 without the MGT-14 SRN. The PAS-3 e-form makes the MGT-14 SRN a mandatory field for a bonus issue regardless of the 30-day window, since the resolution filing is expected to have already happened. Companies that sequence this backward, filing PAS-3 before MGT-14 clears, end up with a rejected or incomplete return that has to be refiled, burning days off an already tight 30-day clock.

Missing the two-month implementation window. Rule 14 requires implementation within two months of the board meeting where the articles need member approval for capitalisation. Companies that treat the general meeting as the only real deadline and let allotment slip past two months from the board meeting are technically outside the rule, even if the shareholder resolution itself was passed well within time.

Assuming a bonus issue needs no FEMA reporting. Because no money changes hands, companies frequently skip Form FC-GPR for the portion of the bonus issue going to non-resident shareholders. The allotment is still a fresh issue of equity instruments to a person resident outside India and needs reporting within 30 days under the FEMA (Non-Debt Instruments) Rules, 2019, even at nil consideration.

Not checking statutory dues defaults at the group level. A default on provident fund or gratuity dues by a subsidiary or a group entity does not, by itself, block the parent’s own bonus issue. But where the same board, cash pool or PF trust is shared across group entities, an unresolved default anywhere in that chain is worth flagging to the board before the recommendation is minuted, since it is the kind of fact a due diligence exercise later surfaces and questions retroactively.

Frequently asked questions

Q: Can a private company issue bonus shares without shareholder approval?

A: No. Section 63(2)(a) requires the bonus issue to be authorised in a general meeting on the board’s recommendation, so member approval is mandatory for every company regardless of size or shareholding pattern.

Q: Can bonus shares be issued out of the general reserve?

A: Yes, provided the general reserve is a free reserve built out of genuine, realised profits and is not subject to a statutory or contractual restriction on distribution; a general reserve inflated by a revaluation credit is not eligible.

Q: What is the difference between a rights issue and a bonus issue under the Companies Act?

A: A rights issue under Section 62 raises fresh capital from existing shareholders who pay for the new shares; a bonus issue under Section 63 capitalises existing reserves and requires no payment from shareholders.

Q: Can a company issue bonus shares if it has defaulted on a loan from a bank?

A: Section 63(2)(c) only bars default on fixed deposits or debt securities and Section 63(2)(d) bars default on specific statutory employee dues; a plain bank loan default is not listed as a Section 63 condition, though loan covenants often independently restrict capital actions and should be checked separately.

Q: Does a bonus issue require RBI reporting for foreign shareholders?

A: Yes. Bonus shares allotted to a person resident outside India in proportion to their existing holding still require Form FC-GPR filing within 30 days of allotment under the FEMA (Non-Debt Instruments) Rules, 2019, even though no consideration is paid.

Q: How long does a bonus issue take from board recommendation to allotment?

A: A straightforward bonus issue with no reserves complications typically runs 30 to 45 days from board recommendation to allotment, driven mainly by the notice period for the general meeting and the two-month cap under Rule 14; complications in tracing the securities premium history can extend this further.

Q: Can bonus shares be issued to only some shareholders and not others?

A: No. A bonus issue must be made proportionately to all shareholders of the relevant class as on the record date; selectively excluding shareholders would convert it into a preferential allotment, attracting the Section 62(1)(c) and pricing framework instead.

Q: What happens if partly paid-up shares exist in the company?

A: Section 63(2)(e) bars a bonus issue until all partly paid-up shares are made fully paid, so the company must first call up and collect the unpaid balance before proceeding.

Q: Is a valuation report required for a bonus issue?

A: No. Since bonus shares are allotted for no consideration other than the capitalisation of reserves, PAS-3 does not require a registered valuer’s report, unlike a preferential allotment or a private placement priced above face value.

Q: What penalty applies for late filing of PAS-3 for a bonus issue?

A: A penalty of ₹1,000 for each day of default, capped at ₹1 lakh, applies to the company and every officer in default under Section 39(5) of the Companies Act, 2013.

Q: Can a company use securities premium received in a foreign currency for a bonus issue?

A: For an unlisted company, yes, provided it is a genuine premium credited to the account; for a listed company, only the portion realised in cash qualifies under Regulation 293 of the SEBI ICDR Regulations, 2018, so premium settled through a non-cash instrument would need to be excluded from the reserves test.

Q: Does a wholly owned subsidiary need a general meeting to issue bonus shares to its sole parent shareholder?

A: Yes. Section 63(2)(a) does not carve out an exception for a single-shareholder company, so the parent, acting as the sole member, still has to pass the resolution authorising the bonus issue at a general meeting or through a valid resolution in lieu of a meeting where permitted.

Q: Can an NBFC or a company with RBI registration issue bonus shares without RBI approval?

A: A bonus issue itself is not a regulatory approval event under RBI’s NBFC framework since no fresh capital or change in shareholding pattern occurs, though the company should confirm no RBI-imposed restriction on capital actions applies to it specifically, particularly where it operates under a supervisory action.

Q: What is the deadline to issue share certificates after a bonus allotment?

A: Two months from the date of allotment for shares held in physical form; for dematerialised holdings, credit through the depository takes the place of a physical certificate and typically completes within a few working days of the corporate action being processed.

Q: Does a shareholder pay tax at the time bonus shares are received?

A: No. Capitalisation of reserves through a bonus issue is not treated as income or a gratuitous receipt in the shareholder’s hands, since it is a reallocation of the company’s existing reserves rather than a fresh transfer of value; tax arises only on a later sale of the bonus shares, computed with a nil cost of acquisition.

Q: Can bonus stripping still be used to book a tax loss on shares?

A: Not effectively since 1 April 2023. Section 94(8) of the Income Tax Act, 1961, as widened by the Finance Act, 2022, disallows a loss on original shares sold within nine months of a bonus record date if those shares were bought within three months before it, and instead carries the disallowed loss forward as the cost of the retained bonus shares.

Bonus issue and other capital restructuring steps are easier to sequence correctly when the reserves history is already documented cleanly. If your team is preparing for a related capital action, our guide on allotment of shares in India and PAS-3 compliance walks through the filing calendar for rights issues, ESOP exercises and preferential allotments alongside bonus shares.

Regulatory references:

Section 63, Companies Act, 2013 (conditions for issue of bonus shares)
Section 63(3), Companies Act, 2013 (bar on bonus issue in lieu of dividend)
Section 14, Companies Act, 2013 (alteration of articles)
Section 39(4) and 39(5), Companies Act, 2013 (return of allotment and penalty)
Section 117(1) and 117(2), Companies Act, 2013 (filing of resolutions)
Section 88, Companies Act, 2013 (register of members)
Rule 14, Companies (Share Capital and Debentures) Rules, 2014

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

Posted on 12 Jun, 202612 Jun, 2026 by Treelife

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:

MGT-14 for the shareholders’ special resolution, within 30 days of passing it at the EGM
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:

Startup

Investor

Going Global

Startup

Investor

Going Global

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Frequently asked questions

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Common mistakes that cost founders time and money

Frequently asked questions

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

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

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

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

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

Complete filing sequence for a private placement funding round

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

FC-GPR: FEMA filing for foreign investor rounds

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

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

What is the deemed public offer risk?

Common mistakes that cost founders time and money

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

Treelife practitioner note

Case study

FAQ on Allotment of Shares for Startups in India

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