Private Limited Companies cannot accept share application money in cash

Many private limited companies receive  share application money in cash. Such companies deposit the cash or cheques they receive for share application in the same account of the company and use the money for their business even without allotting the shares.

Sec 42 of the Companies Act, 2013:

Sec 42 of the Companies Act, 2013 which is supposed to be made effective on and from 1^st April, 2014 aims to prohibit the said acts of the companies.

As per the provisions of this section, even private limited companies will not be allowed to receive share application money in cash. They will require opening a separate bank account for receiving share application cheques and will not be able to use that money till they allot the shares. 

If a Company makes an offer which amounts to 50% or more, the offer shall be considered as an offer to the public and shall be governed accordingly.

Private placement of securities:

Section 42 of the Act has introduced new provisions relating to private placement of securities. The earlier provisions of the Companies Act, 1956 does not specifically provide anything on this issue. According to the new provisions companies making private placement will require to allot the securities within 60 days.  This will ensure more transparency and accountability of the companies.

A company can make an offer of securities through private placement. It gives the conditions by which an invitation is to be made. But this is not applicable to their employees. All amounts received for subscription of securities under this section should be through cheque or demand draft or by other means of banking but not by cash.

What is a “private placement”?

A “private placement” is an offer of securities or invitation to subscribe securities made to a particular group of persons by any company but not through a public offer by means of issuing a private placement offer letter fulfilling the essentials specified in this section.

No new offer or invitation can be made till the allotments relating to any offer or invitation made earlier is completed or has been withdrawn by the company.

Penalty for violating the provisions:

If a company makes an offer or accepts any amount in contravention of this new provision, the company as well as its directors shall be liable to pay a penalty extending to the amount involved in the offer or invitation or two crore rupees, whichever is more. The company shall also be liable to refund the money received to subscribers within 30 days of the order imposing the penalty on the company.

Can a company give any guarantee or give security for any loan taken to a group of companies?

Many private limited companies have related group of companies and they transfer money to the other company when they require doing so.

According to Section 185 of the Companies Act, 2013, companies cannot give any guarantee or provide any security for any loan given by them. Again companies cannot advance loan to its directors or to persons in whom its directors are interested.

Penalty for violating this provision:

If a company advances any loan or any guarantee or security in contravention of the new provisions, the company shall be liable to fine ranging from Rs.5, 00,000/- to Rs.25, 00,000/- and the director or the person to whom the loan is advanced or guarantee or security is provided, shall be punishable with imprisonment extending to six months or with fine ranging from Rs.5, 00,000/- to Rs.25, 00,000/- , or with both.