Share Application Money Cannot Precede PAS-4 Under Private Placement Rules

Brief: A company making a private placement must issue the offer-cum-application letter in Form PAS-4 to identified investors before receiving their applications and subscription money. Rule 14(8) also requires the relevant resolution to be filed with the Registrar before PAS-4 is issued. Money received earlier cannot be regularised merely by describing it as “share application money” in the accounts. The article explains the statutory sequence, the possible penalty and deposit implications, relevant ROC adjudication orders, and the practical steps where money has already been received.

Can a Company Accept Share Application Money Before Issuing the Private Placement Offer Letter (PAS-4)?

1. Short Summary

In many private companies, an investor sends the money first and the paperwork follows later. The promoter says, “The shares will be issued anyway, so why wait?” Under Section 42 of the Companies Act, 2013, this order of events is wrong. A private placement—an issue of securities to a selected group of persons rather than the public—must follow a prescribed sequence. The company obtains the applicable approvals and files the relevant resolution with the Registrar of Companies (ROC). It then sends the private placement offer-cum-application letter in Form PAS-4 to each identified investor. The investor applies using that document and pays the subscription money through a permitted banking channel. Receipt of money before PAS-4 is issued creates a Section 42 compliance risk, and ROCs have imposed penalties for private placement defaults.

2. Short Answer

No. A company should not accept share application money for a private placement before issuing PAS-4 to the identified investor. Section 42(4) requires that investor to apply using the private placement offer and application issued by the company, along with the subscription money. PAS-4 is the prescribed offer-cum-application letter. Further, Rule 14(8) requires the relevant resolution to be filed with the ROC before PAS-4 is issued. Premature receipt of money can attract Section 42(10), depending on the facts. The exclusion for share application money under the Deposit Rules may also be unavailable if the money was not received pursuant to an offer made in accordance with the Act.

3. Applicable Legal Provisions

• Section 42(2): A private placement is made to persons identified by the Board, subject to the prescribed limits and conditions.
• Section 42(3): The company must issue the private placement offer and application in the prescribed form and manner to identified persons.
• Section 42(4): An identified person willing to subscribe must apply using the offer and application issued to that person, along with subscription money paid through a permitted banking channel and not in cash. The proviso restricts use of the money until allotment and filing of the return of allotment.
• Section 42(6): Securities must ordinarily be allotted within 60 days of receiving application money. If they are not allotted, the money must be repaid within the next 15 days, failing which interest at 12% per annum applies from the expiry of the 60th day. Money received on application must be kept in a separate bank account in a scheduled bank.
• Sections 42(8) and 42(10): The return of allotment must be filed within 15 days of allotment. A contravening offer or acceptance of money can attract the penalty and refund consequences specified in Section 42(10).
• Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: Prescribes approval requirements, the serially numbered and individually addressed PAS-4, the record in PAS-5, and filing of the relevant resolution before PAS-4 is issued.
• Rule 2(1)(c)(vii) of the Companies (Acceptance of Deposits) Rules, 2014: Excludes amounts received towards subscription to securities, including share application money pending allotment, where received pursuant to an offer made in accordance with the Act and subject to the conditions in that clause. The draft’s reference to Rule 2(1)(c)(x) has been corrected.

4. Relevant Extracts

Section 42(4) requires an identified person willing to subscribe to apply using the private placement offer and application issued to that person, along with subscription money paid by cheque, demand draft or another banking channel, and not in cash.

Rule 14(8) requires the company to issue the private placement offer-cum-application letter only after the relevant special resolution or Board resolution has been filed with the Registry.

Rule 2(1)(c)(vii) of the Deposit Rules concerns amounts received pursuant to an offer made in accordance with the Act towards subscription to securities, including share application money pending allotment. Its allotment and refund conditions must also be satisfied.

5. Legal Position

The correct order of steps

Why the offer must precede the money

The author’s view is that a company cannot accept subscription money before making the private placement offer. Section 42(4) supports that sequence: the investor applies using the private placement offer and application issued to that investor and pays the subscription money along with the application. PAS-4 combines the offer and application in one document. Before it is issued, the investor cannot complete the prescribed application process. An informal investment understanding or a later PAS-4 does not by itself cure an earlier receipt.

Filing the resolution before PAS-4

Rule 14(8) refers to the resolution being filed with the Registry before the offer-cum-application letter is issued; it does not say that the ROC must first approve that filing. For an ordinary private placement of equity shares, the members’ special resolution is filed in Form MGT-14 under Section 117. Although private companies have an exemption concerning the filing of certain Board resolutions under Section 179(3), that does not dispense with filing a special resolution required for the private placement. The particular approvals should nevertheless be checked against the security being offered and Rule 14’s applicable exceptions.

Why early receipt creates two compliance questions

Private placement: Section 42(10) addresses a company that makes an offer or accepts money in contravention of Section 42. Its application to a particular receipt depends on the transaction documents and facts. In the NV Autospares adjudication, the ROC found several Section 42 defaults, including receipt recorded as share application money without issuing PAS-4.

Deposits: The Deposit Rules’ exclusion applies to subscription money received pursuant to an offer made in accordance with the Act, subject to its other conditions. Money received before a compliant offer may therefore fail to qualify for that particular exclusion. Whether it is a regulated deposit must be assessed separately after considering the identity of the payer, the true nature of the transaction and any other applicable exclusion. It should not automatically be called a deposit in every case.

Changing the accounting label does not cure the sequence

Calling the receipt an “advance against shares” or “share application money pending allotment” does not establish compliance with Section 42. The company should reconcile the dates of its approvals, ROC filings, PAS-4 dispatch, investor application and bank receipt with its accounting records.

6. Exemptions and Relaxations

There is no general permission for a private company, small company or start-up to receive private placement subscription money before the prescribed offer and application process. The precise approval requirement can vary by the type of security: Rule 14 provides a relaxation for specified non-convertible debenture offers. Section 446B may reduce applicable penalties for eligible One Person Companies, small companies, start-up companies and Producer Companies; it does not authorise premature receipt of subscription money.

7. Adjudication Orders

ROC Mumbai, In re NV Autospares Pvt. Ltd. (1 May 2023): The company’s financial statements recorded substantial share application money for FY 2018-19 and FY 2019-20. Among several findings, the ROC noted that the company had not issued PAS-4, had not completed the required approval process, and had neither allotted shares nor refunded the money within the prescribed period. It imposed penalties under Section 42(10) and directed refund with interest. The order concerns multiple defaults and should not be described as a decision on timing alone.

ROC Mumbai, In re Capchem Electricals Ltd. (order dated 24 December 2025): In one of the transactions examined, PAS-4 was issued on 30 January 2024 while the relevant MGT-14 was filed on 8 March 2024. The order addressed private placement compliance, including the sequence of these steps. It illustrates the risk of treating filing of the resolution as a formality that can follow dispatch of PAS-4.

ROC Chennai, In re Sweet Karam Coffee India Pvt. Ltd. (5 March 2026): The company circulated PAS-4 before filing the special resolution in MGT-14. The ROC treated this as a breach of Rule 14(8) and imposed penalties under Section 450. The orders show that the penalty provision applied to a Rule 14(8) default has differed across adjudications; the facts and the precise finding in each order matter.

8. Practical Interpretation

• Instruct the investor: Tell the proposed investor not to remit subscription money until the company sends the individually addressed PAS-4 and the investor completes the application.
• Prepare the bank account: Arrange the separate account in a scheduled bank before receiving application money and retain a clear transaction trail.
• File before dispatch: Keep evidence of the relevant resolution’s filing and the subsequent date and mode of PAS-4 dispatch.
• If money has already arrived: Preserve the bank and correspondence records, identify the payer and the legal character of the receipt, and obtain transaction-specific advice. Where it was intended as premature subscription money, refunding it to the originating account and restarting the process correctly is generally the prudent course. A later offer letter should not be assumed to validate the original receipt retrospectively.
• Review the default separately: A refund does not automatically erase a completed contravention. Consider whether a voluntary adjudication application under Section 454 is appropriate on the facts.

9. Example

PQR Pvt. Ltd. agrees on 1 June to issue equity shares worth ₹50 lakh to an investor. The investor transfers ₹50 lakh on 3 June. The members pass the required special resolution on 20 June, MGT-14 is filed on 25 June, and PAS-4 is sent on 26 June. The payment on 3 June preceded the prescribed offer and application process. Issuing PAS-4 on 26 June does not, by itself, make the earlier receipt compliant. The proper sequence was to complete the approvals and filing, issue PAS-4, receive the investor’s application and subscription money, and then allot and file PAS-3 within the statutory timelines.

10. Conclusion

The investor should apply and pay only after receiving the company’s compliant private placement offer-cum-application letter. The company must first complete the relevant approval and ROC filing requirements, and then issue PAS-4. Accepting money earlier creates a Section 42 compliance risk and requires a separate examination under the Deposit Rules.

So the author of the article opines that a company cannot accept share application money for a private placement before issuing PAS-4 to the identified investor. The offer and prescribed application process must precede the subscription payment.

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Author: CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES, Company Secretary in Practice, Delhi. Email: [email protected].

Disclaimer: This article is based on the applicable provisions and information available when it was prepared. Readers should check the current law and obtain professional advice for their specific facts. The author does not accept responsibility for reliance on this general discussion.