Share Application money received by a company in the past

[Rajagopal]

Dear Friends,

Many private companies in Chennai who had shown Share Application Money in their Balance Sheet as on 31.03.2013, have received letters signed by the Regional Director saying that the Share Application Money is a Deposit under the new Act and asking to show cause why prosecution should not be launched against the Company and the Directors. On the face of it, this is ridiculous, since there was no specific provision governing the Share App. Moneys until  01.04.14, when the CA 2013 came into effect. I am really baffled how the Sh. App. Money accepted under CA 1956 can be retrospectively termed as Deposit under CA 2013. If at all, MCA can come up with a directive that such moneys shall be repaid within certain period. I really do not understand this. By the same logic, MCA may say that the borrowings from the Relatives of the Directors and the Shareholders, done under CA 1956, are Deposits under CA 2013 and seek to launch prosecution. 

Request the members to share their experience and views.      

[Anurag Sharma]

As per the new Companies Act 2013, Share Application money received should be allotted within a period of 60 days and if not so allotted to be repaid within next 15 days and any book entry would not be considered as having repaid the amount.

One view could be that since 60 days from the date of receipt has already elapsed, these share application money would constitute "deposits" as on 01-04-2014. ROC is expected to take this view. Hence the notices are being received on the presumption that share application money is still in the books as such on 01-04-2014. 

Second view could be that 60 days from the date of new Act coming in force should be considered giving companies time upto 30th May 2014 to either allot the shares or refund such share application money. After 75 days i.e. 15th June 2014 such application money would also be considered as "Deposits". 

Some smart professionals had advised their clients before the commencement of new  Act to either allot these shares by 31st March 2014 or treat them as current liabilities to be repaid soon.

Once these share application money becomes "Deposits" under the new Act, DPT-4 is required to be filed with ROC. The Act has allowed time upto 31st March 2015 to repay deposits as on 01-04-2014. And this has to be actually repaid and not adjusted through book entries.

In my opinion, if share application money was received from a company and was converted into loan before the commencement of new Act, such amount will not be considered as "Deposits" as it would become "Inter Corporate Loan".

Same is the case with Loans and advances received from Shareholders and Directors' relatives. They would become "Deposits" from day 1 i.e. from 01-04-2014. 

However, a proposal is pending before the Parliament to allow deposits upto 25% of paid up share capital + reserves or 100% of Paid up share capital whichever is higher from Directors' relatives and shareholders. 

Regards,

CA. Anurag Sharma

Kolkata

M: 9831581824

[Anurag Sharma]

Continuing from my previous post, in respect of letters received from RD, one can reply that under the Companies Act, 1956 no time limit was prescribed for private companies to allot the shares or refund the money; as such there is no violation till 31st March 2014. After that they would have to inform how they intend repaying the amount by 31st March 2015 since the new Companies Act allows such application money to be treated as "Deposits" and allows time till 31st March 2015 to repay it. In my opinion, there is no violation of any Act (1956 or 2013) and no prosecution  is called for. Any reply made to RD/ROC should correspond to that mentioned in DPT-4 - how they intend to repay such deposits.

Regards,

CA. Anurag Sharma

Kolkata

M: 9831581824

On Friday, September 12, 2014 10:48:04 PM UTC+5:30, Rajagopal wrote:

[Rajagopal]

Thank you, Mr.Sharma, I really appreciate your detailed response. The question here is how the RD can issue any letter on mere presumption. The Share Application Moneys were as on 31.03.2013 and as you have rightly said there was no provision governing these under CA 1956. In my view, if at all, the obligation to allot or refund is applicable only to those moneys received on or after 01.04.2014. They were not deposits under CA 1956 and they are deposits only if accepted and kept beyond 60days  on or after 01.04.2014. Even if a rigid interpretation says that they become deposits on 01.04.2014, such moneys are governed by Section 74(1)(b) of CA 2013. Since Share Application moneys have no due date, they are supposed to be refunded by 31.03.2015. Therefore. any prosecution threat can arise only if such moneys are still outstanding as on 31.03.2015, not even 31.03.2014.   

In my view, the term Deposit, wherever used in CA 2013, must only refer to those moneys covered by the definition of Deposits in that Act. The moneys allowed to be accepted under the previous Act and not considered as Deposits under CA 1956, should not be vitiated by the provisions of the new law. The filing of DPT 4 and disclosing these amounts as Deposits, fly in the face of this equitable reasoning. The new Act cannot retrospectively govern the lawful action taken under the previous law. While saying this,  I am aware that MCA may not subscribe to this view. Instead of fighting this issue, the easy way is to just capitulate. Many private companies have taken crores of rupees from the relatives of Directors and their shareholders. Expecting them to repay the amounts within one year is ridiculous. One can never do business this way.