Allotting Shares After a Public Offer? Minimum Subscription, Listing Permission and Refunds Under Sections 39–40

A company that offers shares to the public through a prospectus follows a stricter track than one that raises money from a handful of chosen investors. Sections 39 and 40 of the Companies Act, 2013 set the public-offer endgame: no allotment without the minimum subscription actually received, a floor on application money, stock exchange permission before the offer, application money kept in a separate bank account, and waiver clauses voided by statute. A founder planning a public issue should read both sections before the prospectus goes out.

The Act calls an offer "to public through prospectus" a "public offer", and says the term "includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus" (Explanation to s.23, Companies Act 2013). By contrast, a private placement (s.42) can be made only to a select group of identified persons whose number "shall not exceed fifty or such higher number as may be prescribed", with certain exclusions (s.42(2)). This article covers the public-offer sections only.

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Minimum subscription first: no money in, no shares out

"No allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other instrument" (s.39(1), Companies Act 2013).

That is two preconditions to any allotment. The prospectus-stated minimum must be subscribed, and the application sums for that minimum must actually have been paid and received. Promises and post-dated intentions do not count.

"The amount payable on application on every security shall not be less than five per cent. of the nominal amount of the security or such other percentage or amount, as may be specified by the Securities and Exchange Board by making regulations in this behalf" (s.39(2)). In other words, a five per cent floor per security, which SEBI can change by regulation.

If the minimum is missed, the money goes back

"If the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, or such other period as may be specified by the Securities and Exchange Board, the amount received under sub-section (1) shall be returned within such time and manner as may be prescribed" (s.39(3)).

The Prospectus and Allotment of Securities Rules, 2014 supply the prescribed time and manner. Under rule 11(1), the application money "shall be repaid within a period of fifteen days from the closure of the issue". If it is not, "the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of fifteen per cent per annum" (rule 11(1), Companies (Prospectus and Allotment of Securities) Rules, 2014). Rule 11(2) adds that the money to be refunded "shall be credited only to the bank account from which the subscription was remitted".

Any SEBI-specified period or refund timeline for a particular type of issue is set in SEBI's own regulations, which this article does not cover. Check the current SEBI rules for your issue type.

Every allotment files a return

"Whenever a company having a share capital makes any allotment of securities, it shall file with the Registrar a return of allotment in such manner as may be prescribed" (s.39(4)). This applies to every allotment by a company with share capital, not only public offers. Rule 12(1) of the 2014 Rules says the company shall, "within thirty days thereafter, file with the Registrar a return of allotment in Form PAS-3", along with the prescribed fee (rule 12(1), Companies (Prospectus and Allotment of Securities) Rules, 2014).

For a default under s.39(3) (refund) or s.39(4) (return), "the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less" (s.39(5)). The penalty runs per default, per day, up to a cap of one lakh rupees, on the company and the officer in default alike.

Listing permission before the offer

"Every company making public offer shall, before making such offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges" (s.40(1)). Permission comes first and the offer second.

"Where a prospectus states that an application under sub-section (1) has been made, such prospectus shall also state the name or names of the stock exchange in which the securities shall be dealt with" (s.40(2)). The prospectus therefore names the exchange or exchanges, so that investors subscribe knowing where their securities will trade.

Application money stays in a separate account

"All monies received on application from the public for subscription to the securities shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—(a) for adjustment against allotment of securities where the securities have been permitted to be dealt with in the stock exchange or stock exchanges specified in the prospectus; or (b) for the repayment of monies within the time specified by the Securities and Exchange Board, received from applicants in pursuance of the prospectus, where the company is for any other reason unable to allot securities" (s.40(3)).

There are only two exits for this money. One is adjustment against allotment once the securities are permitted to be dealt with on the named exchange. The other is repayment, within the time SEBI specifies, where the company cannot allot. Using the account to pay running costs before allotment is outside both exits.

Waivers are void; commission is allowed within conditions

"Any condition purporting to require or bind any applicant for securities to waive compliance with any of the requirements of this section shall be void" (s.40(4)). Prospectus fine print cannot contract out of listing permission, the separate account or the refund protections in s.40.

"A company may pay commission to any person in connection with the subscription to its securities subject to such conditions as may be prescribed" (s.40(6)). Commission is lawful, but only within the prescribed conditions.

Penalty for breaching section 40

"If a default is made in complying with the provisions of this section, the company shall be punishable with a fine which shall not be less than five lakh rupees but which may extend to fifty lakh rupees", and every officer in default "shall be punishable ... with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees" (s.40(5)). The text of s.40(5) as it stood earlier included imprisonment for officers; that wording was omitted by Act 29 of 2020 with effect from 21 December 2020, so the officer penalty on the current text is a fine.

Note that s.40(5) speaks of default "in complying with the provisions of this section", meaning s.40. The per-day penalty in s.39(5) covers defaults under s.39(3) and s.39(4). Do not assume either penalty covers a breach of s.39(1) without checking the Act and a professional.

A worked illustration

Suppose a prospectus is issued on the 1st stating a minimum amount. During the offer, application money flows into the separate scheduled-bank account. Day-to-day spending continues from the company's operating accounts, never from this one.

At the end of the thirty days from issue (or SEBI's period), one of two things has happened.

Minimum subscribed and sums received. The company, with exchange permission already in hand, may allot, adjust the separate-account money against allotment, and file the s.39(4) return in Form PAS-3 within thirty days of allotment.

Minimum not subscribed. There is no allotment. Every rupee received is returned, under rule 11, within fifteen days from closure of the issue, to the bank account it came from. Missing that timeline attracts both the directors' liability to repay with interest at fifteen per cent per annum and the s.39(5) per-day penalty. A missed PAS-3 filing attracts the s.39(5) penalty as well.

What to do now

• Next step: Before issuing a prospectus, confirm the stated minimum amount, the application money per security (not below five per cent of nominal unless SEBI specifies otherwise), exchange permission, and a separate scheduled-bank account (ss.39(1), 39(2), 40(1), 40(3), Companies Act 2013).
• Deadlines: Refund within fifteen days from closure of the issue if the minimum is not subscribed (rule 11(1)); file Form PAS-3 within thirty days of every allotment (rule 12(1)).
• Consequence of missing them: A penalty of one thousand rupees per day up to one lakh rupees for refund or return defaults (s.39(5)); a company fine of five to fifty lakh rupees and an officer fine of fifty thousand to three lakh rupees for a default under s.40 (s.40(5)).

Have a CA review your facts before you act or file.

FAQ

When can a public-offer allotment happen?
Only after "the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application … have been paid to and received", with at least five per cent of nominal per security payable on application unless SEBI specifies otherwise (ss.39(1), 39(2)).

What if the minimum subscription fails?
The amount received must be returned in the prescribed time and manner (s.39(3)). Under rule 11, that means within fifteen days from closure of the issue, to the account it came from, failing which the directors in default are liable to repay with interest at fifteen per cent per annum.

Must the company approach an exchange before offering?
Yes. It must apply to "one or more recognised stock exchange or exchanges and obtain permission" before making the offer, and the prospectus must name the exchange (ss.40(1), 40(2)).

Where does application money sit meanwhile?
In "a separate bank account in a scheduled bank", usable only for adjustment against allotment or for repayment (s.40(3)).

Can applicants waive these protections?
No. A condition requiring an applicant to waive compliance with s.40 "shall be void" (s.40(4)).

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See Also

• Debentures Under Section 71: Conversion, DRR, Trustees and Holder Remedies
• Buying back your own shares (s.68): the 25% ceiling, the board-vs-members route, and the solvency paper trail
• GST registration for a new company: who must register, by when, and how