Non-Receipt of Subscription Money in Separate Bank Account

Non-Receipt of Subscription Money in Separate Bank Account. In this article we will take you through the mandatory provisions under Section 42 of the Companies Act, 2013 which governs the process of private placement. It refers to the issuance of securities to a select group of investors rather than through a public offering. This provision mandates strict compliance requiremSents, including the necessity for companies to receive share application money in a separate bank account with a scheduled bank. Failure to comply these requirements can attract penalties under Section 42(10) and may result in penalties for both the company and officer in defaults. Therefore, it is essential to adhere to these provisions to avoid any legal consequences.Top of Form
Applicable Provisions
As per Section 42(6) read with Section 454(3) of the Companies Act, 2013 mandate that companies receiving share application money must deposit the funds into a separate bank account in a scheduled bank.
Facts of the Case
Tatva Chintan Pharma Chem Limited, along with its directors and officers, was found in violation of Section 42(6) as they deposited share application money into the company’s general bank account instead of a separate scheduled bank account. The company voluntarily approached the Registrar of Companies (ROC), Ahmedabad, for adjudication of the default.
Upon review, the ROC found that:

The violation was acknowledged by the company in its Suo Moto application.

The company, during the process of filing for an Initial Public Offering (IPO), was flagged for non-compliance with Section 42(6) by an agency.

The company attempted to withdraw the adjudication application but was not allowed to do so.

Penalty Imposed by Registrar of Companies on Company and Officers in Default
After considering the fact and circumstances of the case and submission made by their authorised representative Mr. Parag Jhaveri on the behalf of the company, ROC imposed a penalty on company and its director as per the table below for violation of said section by passing the adjudication order.

Violation of Section

Penalty Imposed on the company

Penalty as per section 42 of the Act

Non -Compliance; Receive share application money in general bank account instead of a separate scheduled bank account

Company

1 Cr

CFO

20 lakhs

Director 1

20 lakhs

Director 2

20 lakhs

Director 3

20 lakhs

Reduction in Penalty on Appeal
The company and its officers filed an appeal under Section 454(5) before the Regional Director, North-Western Region, Ahmedabad. The appeal was primarily based on the following arguments:

The violation did not result in any loss to investors.
The non-compliance was unintentional and occurred due to procedural oversight.
CFO and Company Secretary were not part of the company at the time of non-compliance.

Upon review, the Regional Director reduced the penalties as follows:

Tatva Chintan Pharma Chem Limited (Company): Rs. 10 Lakhs
Each Director (3 in total): Rs. 2 Lakhs each
Penalty on CFO & CS: Set aside

Exemption to Startup/Small Company/OPC Under Section 446B:
Under Section 446B of the Companies Act, 2013, startups, small companies, and One Person Companies (OPCs) are eligible for a reduced penalty in case of non-compliance. However, in this case, Tatva Chintan Pharma Chem Limited did not qualify as a startup, small company, or OPC, and therefore, no exemption was granted under this provision.
Conclusion
This case highlights the importance of strict adherence to statutory provisions under the Companies Act, 2013. While the appellate authority provided some relief by reducing the penalties, companies must ensure compliance to avoid unnecessary legal and financial consequences. The ruling also reinforces the importance of due diligence during IPO processes and corporate filings.
Download Adjudication MCA Order

In this article we will take you through the mandatory provisions under Section 42 of the Companies Act, 2013 which governs the process of private placement. It refers to the issuance of securities to a select group of investors rather than through a public offering. This provision mandates strict compliance requiremSents, including the necessity for companies to receive share application money in a separate bank account with a scheduled bank. Failure to comply these requirements can attract penalties under Section 42(10) and may result in penalties for both the company and officer in defaults. Therefore, it is essential to adhere to these provisions to avoid any legal consequences.Top of Form

Applicable Provisions

As per Section 42(6) read with Section 454(3) of the Companies Act, 2013 mandate that companies receiving share application money must deposit the funds into a separate bank account in a scheduled bank.

Facts of the Case

Tatva Chintan Pharma Chem Limited, along with its directors and officers, was found in violation of Section 42(6) as they deposited share application money into the company’s general bank account instead of a separate scheduled bank account. The company voluntarily approached the Registrar of Companies (ROC), Ahmedabad, for adjudication of the default.

Upon review, the ROC found that:

The violation was acknowledged by the company in its Suo Moto application.
The company, during the process of filing for an Initial Public Offering (IPO), was flagged for non-compliance with Section 42(6) by an agency.
The company attempted to withdraw the adjudication application but was not allowed to do so.

Penalty Imposed by Registrar of Companies on Company and Officers in Default

After considering the fact and circumstances of the case and submission made by their authorised representative Mr. Parag Jhaveri on the behalf of the company, ROC imposed a penalty on company and its director as per the table below for violation of said section by passing the adjudication order.

Violation of Section	Penalty Imposed on the company	Penalty as per section 42 of the Act
Non -Compliance; Receive share application money in general bank account instead of a separate scheduled bank account	Company	1 Cr
	CFO	20 lakhs
	Director 1	20 lakhs
	Director 2	20 lakhs
	Director 3	20 lakhs
	CS	20 lakhs

Reduction in Penalty on Appeal

The company and its officers filed an appeal under Section 454(5) before the Regional Director, North-Western Region, Ahmedabad. The appeal was primarily based on the following arguments:

The violation did not result in any loss to investors.
The non-compliance was unintentional and occurred due to procedural oversight.
CFO and Company Secretary were not part of the company at the time of non-compliance.

Upon review, the Regional Director reduced the penalties as follows:

Tatva Chintan Pharma Chem Limited (Company): Rs. 10 Lakhs
Each Director (3 in total): Rs. 2 Lakhs each
Penalty on CFO & CS: Set aside

Exemption to Startup/Small Company/OPC Under Section 446B:

Under Section 446B of the Companies Act, 2013, startups, small companies, and One Person Companies (OPCs) are eligible for a reduced penalty in case of non-compliance. However, in this case, Tatva Chintan Pharma Chem Limited did not qualify as a startup, small company, or OPC, and therefore, no exemption was granted under this provision.

Conclusion

This case highlights the importance of strict adherence to statutory provisions under the Companies Act, 2013. While the appellate authority provided some relief by reducing the penalties, companies must ensure compliance to avoid unnecessary legal and financial consequences. The ruling also reinforces the importance of due diligence during IPO processes and corporate filings.