Can a Company Use Private Placement Money Before Filing PAS-3?

Brief: The article examines when a company may use money received through a private placement. Under the proviso to Section 42(4) of the Companies Act, 2013, allotment alone is insufficient: the company must also file the return of allotment in Form PAS-3 with the Registrar before utilising the proceeds. Until then, application money must remain in a separate bank account and be used only for adjustment against allotment or repayment where securities cannot be allotted. The article explains how these restrictions apply to expenses, loan repayments, transfers to an operating account and other transactions. It also discusses ROC adjudication orders involving Hexafun, Capchem Electricals, Innoctive Technologies and Bon Fresh Foods, the separate penalty for delayed PAS-3 filing, and practical steps for preventing or addressing a default.

Can a Company Use Private Placement Money Before Filing PAS-3? Meaning of Utilisation under Section 42

1. Short Summary

Once the investor has paid, the company is usually in a hurry to use the money. Salaries are due, a supplier is waiting, or a loan has to be repaid. Section 42 of the Companies Act, 2013 does not allow this until two things have happened: the shares or other securities have been allotted, and the return of allotment in Form PAS-3 has been filed with the Registrar of Companies (ROC). Until then, the application money must remain in the separate bank account, subject to the permitted uses in Section 42(6). ROCs in Delhi, Mumbai, Pune and Chennai have penalised companies for using money before filing PAS-3.

2. Short Answer

No. Under the proviso to Section 42(4), a company cannot use private placement money unless allotment is made and PAS-3 is filed with the ROC. Section 42(6) adds that application money in the separate bank account can be used only for adjusting it against allotment or for repaying it where the company is unable to allot securities. Paying expenses, repaying loans, giving advances or moving the money to the company’s regular account before PAS-3 is filed can amount to impermissible utilisation. The ROC orders discussed below have addressed early use under Section 42(10).

3. Applicable Legal Provisions

• Proviso to Section 42(4): No use of money raised through private placement until allotment is made and the return of allotment is filed.
• Section 42(6): Allotment within 60 days of receiving application money; money to be kept in a separate bank account in a scheduled bank and used only for adjustment against allotment or repayment where the company is unable to allot securities. If allotment is not made within 60 days, the subsection also prescribes repayment and interest consequences.
• Section 42(8): PAS-3 to be filed within 15 days of allotment.
• Section 42(9): Penalty of ₹1,000 per day for delay in filing the return of allotment, subject to a maximum of ₹25 lakh.
• Section 42(10): Penalty for an offer or acceptance of money in contravention of Section 42, subject to Section 42(11), along with the statutory refund requirement.
• Rule 14(6), Companies (Prospectus and Allotment of Securities) Rules, 2014: Filing of PAS-3 with the prescribed particulars and list of allottees.
• Section 446B: Reduced penalties for eligible One Person Companies, small companies, start-up companies and Producer Companies.

4. Relevant Extracts

Proviso to Section 42(4): “Provided that a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8).”

Section 42(6), relevant part: “… monies received on application under this section 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; or (b) for the repayment of monies where the company is unable to allot securities.”

5. Legal Position

Two conditions, not one

Many people believe that the money can be used once the shares are allotted. That is only half the rule. The proviso to Section 42(4) joins two conditions with the word “and”. The securities must be allotted, and PAS-3 must be filed. Until both are done, the proceeds cannot be used for the company’s business.

What does “filed” mean?

The law says the return must be “filed”, not “approved”. The company should ensure that PAS-3 has been successfully submitted on the MCA portal with the applicable fee and retain the SRN, payment challan and filing acknowledgement. It need not treat mere preparation of the form as filing. If the submission is rejected or marked defective, its filing status should be resolved before the company relies on it to use the money.

What counts as “utilisation”?

The Act does not define the word for this purpose. In its ordinary sense, it covers putting the money to use. The table below shows common situations. The treatment of incidental bank debits and deposit arrangements requires assessment of their particular facts.

Is it only a procedural lapse?

Companies have argued before the ROC that early use of the money is a small, procedural default. In the Capchem order discussed below, the ROC rejected the noticees’ argument for applying the smaller general penalty under Section 450. It held that Section 42 and the rules made under it must be read together and imposed a penalty under Section 42(10) for the defaults considered in that order. Putting the money back later does not undo the earlier transaction, although corrective action may be relevant when the default is adjudicated.

What about the penalty for late PAS-3?

Delay in filing PAS-3 is a separate default under Section 42(9). If a company files PAS-3 late and uses the money before filing it, both the filing delay and the early use may be examined. The separate Hexafun order concerning delayed PAS-3 filing illustrates the distinction.

6. Exemptions / Relaxations

The cited orders do not identify any exemption from the proviso to Section 42(4) for start-ups or small companies. Section 446B reduces the applicable penalty for eligible One Person Companies, small companies, start-up companies and Producer Companies, as seen in the Pune and Chennai orders below. It does not permit early use of the money.

7. Adjudication Orders

ROC Delhi, In re Hexafun Private Limited, Order No. PO/ADJ/10-2025/DL/00772

The company allotted compulsorily convertible debentures on 19 December 2023 but filed PAS-3 only on 23 February 2024, using the funds in between. It had also issued PAS-4 before filing the relevant resolution with the Registry. The ROC treated these as breaches of Section 42 and imposed penalties under Section 42(10), read with Section 446B.

ROC Mumbai, In re Capchem Electricals Limited, Order No. PO/ADJ/12-2025/MB/01283 dated 24 December 2025

The company used application money before filing PAS-3 and had issued PAS-4 before filing the relevant resolution with the Registry. The ROC rejected the noticees’ plea that the defaults should be dealt with under Section 450. It imposed a collective penalty of ₹24,58,200 under Section 42(10), apportioned between the company and the relevant directors. That amount covered the defaults considered together in the order; it was not stated as a penalty solely for early utilisation.

ROC Pune, In re Innoctive Technologies Private Limited, order dated 8 May 2026

The company used funds from 8 February 2022, while PAS-3 was filed only on 6 April 2022. Being a qualifying start-up, it received the benefit of the reduced penalty provisions under Section 446B.

ROC Chennai, In re Bon Fresh Foods Private Limited, Order No. PO/ADJ/01-2026/CN/01372 dated 21 January 2026

The ROC recorded that the company used debenture application money before filing PAS-3. The order also considered a separate defect concerning the identification of proposed subscribers. The ROC imposed a penalty under Section 42(10), reduced under Section 446B in view of the company’s recognised start-up status.

8. Practical Interpretation

• Protect the separate account. Instruct the bank and the finance team that no business payment should be made from the account before allotment and PAS-3 filing. Statutory refunds to investors must remain possible.
• Move fast after allotment. Prepare PAS-3 in advance so that it can be filed promptly, rather than waiting until the end of the 15-day limit.
• Transfer only after filing. Move the proceeds to the operating account only after confirming successful PAS-3 filing. Keep the SRN, challan, acknowledgement and transfer date on record.
• Plan cash needs. If the company needs money urgently, arrange another lawful funding source instead of using the private placement proceeds early.
• If money was used early, preserve the records and assess corrective filings and a suo motu application for adjudication under Section 454. Re-depositing the money should not be treated as erasing the default.

9. Example

LMN Private Limited receives ₹1 crore in its separate bank account on 5 August and allots shares on 10 August. On 12 August it pays ₹20 lakh to a vendor from this account. PAS-3 is filed on 20 August. The payment on 12 August was made after allotment but before PAS-3 filing, so it breaches the proviso to Section 42(4), even though PAS-3 was filed within 15 days of allotment. Had the company filed PAS-3 on 11 August and then used the money, this particular default would have been avoided.

10. Conclusion

In simple words, money raised through a private placement remains subject to the separate-account restrictions until the securities are allotted and PAS-3 is filed with the ROC. Using even part of the proceeds for business purposes before both steps are complete can breach Section 42. Putting the money back later does not undo the earlier use, and penalties may affect the company and the relevant directors.

So the author of the article opines that a company cannot use private placement money for expenses, repayment of loans, advances or transfer to its operating account until allotment is made and PAS-3 is filed with the ROC. Before that, application money should be restricted to adjustment against allotment and repayment where securities cannot be allotted, as permitted by Section 42(6).

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES, Company Secretary in Practice, Delhi. He can be contacted at [email protected].