Summary: The Companies Act, 2013 does not expressly prohibit a newly incorporated company from receiving initial share subscription money in cash from subscribers to its memorandum. Under Section 10A(1)(a), every subscriber must pay the value of shares agreed to be taken, and a director must file Form INC-20A declaring receipt of the subscription money within 180 days of incorporation. The author explains that the prohibition on cash payments under Section 42 and Rule 14(3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 applies to private placements rather than the initial subscription to the memorandum. Accordingly, the author considers cash payment permissible, although the interpretation is not presented as judicially settled. Cash receipts must nevertheless comply with Section 269ST of the Income-tax Act, 1961, which restricts receipts of ₹2 lakh or more in specified circumstances. Section 271DA provides for a penalty equivalent to the amount received in contravention of that provision. The article also highlights practical difficulties in filing Form INC-20A, which ordinarily requires banking particulars and evidence of payment. Companies accepting cash should maintain subscriber-wise receipts, contemporaneous cash book entries and appropriate supporting documentation. Depositing the money into the company’s bank account is recommended as a safer compliance measure. The discussion also covers the 180-day filing requirement, consequences of non-compliance, relevant statutory provisions and an illustration involving two subscribers contributing ₹50,000 each.
- Can the Initial Subscription Money of a Company Be Received in Cash from the Subscribers to the Memorandum?
- Overview of Cash Payment of Initial Share Subscription Money
- Is Cash Payment of Initial Share Subscription Money Legally Permitted?
- Applicable Legal Provisions
- Relevant Extracts (Simplified)
- Legal Position
- Practical Interpretation
- Example
- Conclusion
Can the Initial Subscription Money of a Company Be Received in Cash from the Subscribers to the Memorandum?
Overview of Cash Payment of Initial Share Subscription Money
When a company is newly incorporated, the persons who signed its memorandum (the subscribers) promise to take a fixed number of shares and must pay for them. Many professionals ask whether this first payment can be taken in cash. The Companies Act, 2013 does not ban cash for this first payment. But the company must later prove to the Registrar that the money came in, and income tax law limits cash receipts. So the real task is to accept cash safely, not only to decide whether it is allowed.
Is Cash Payment of Initial Share Subscription Money Legally Permitted?
The initial subscription money can be received in cash. The Companies Act, 2013 has no rule that bars it, and the cash ban found in the private placement rules does not cover the first subscribers. The author opines that it is permitted. Two cautions apply. First, income tax law bars receiving ₹2 lakh or more in cash from one person. Second, a director must declare in Form INC-20A within 180 days that every subscriber has paid, so proper proof must be kept. Depositing the cash in the company’s bank account is the safest course.
Applicable Legal Provisions
| Provision | What it does |
|---|---|
| Section 10A(1)(a) and Rule 23A, Companies (Incorporation) Rules, 2014 | A company with share capital cannot start business or borrow until a director files a declaration (Form INC-20A) that every subscriber has paid for the shares he agreed to take. |
| Section 10A(1)(b) and Section 12(2) | The company must also have filed verification of its registered office. |
| Section 10A(2) and (3) | Penalty for default; and the Registrar may begin strike-off if no declaration is filed within 180 days and no business is carried on. |
| Section 42 and Rule 14(3), Prospectus and Allotment Rules, 2014 | In a private placement, money must come by cheque, demand draft or banking channel, not cash. |
| Section 62(1)(a) | Rights issue. It does not state any bar on cash. |
| Section 269ST and Section 271DA, Income-tax Act, 1961 | Bars receipt of ₹2 lakh or more in cash; penalty equals the cash received. |
Relevant Extracts (Simplified)
- Section 10A(1)(a): the director declares that every subscriber to the memorandum has paid for the shares he agreed to take. The section does not say how the payment must be made.
- Rule 14(3): money for securities issued by private placement must be paid by cheque, demand draft or other banking channel, and not by cash.
- Section 269ST: nobody may receive ₹2 lakh or more in a day from one person, for one transaction, or for one event, except through an account payee cheque, bank draft or bank electronic transfer.
Legal Position
Under the Companies Act. Section 10A asks only that the subscribers “have paid”. It is silent on cash. The cash ban sits in Section 42 and Rule 14(3), which apply when a company makes a private placement offer. Initial subscribers sign the memorandum; they are not responding to a private placement offer, so the ban does not reach them. A rights issue under Section 62(1)(a) also has no stated cash bar. When the law does not prohibit something, it can be treated as allowed. The author opines that cash is a valid mode for the initial subscription money. No court or tribunal ruling directly on this point was found, so the position is not judicially settled, and some professionals prefer the bank route only.
The filing hurdle. Form INC-20A asks for the bank (with IFSC) in which the subscription money was received, and the usual proof is the bank statement. This is a matter of evidence, not a legal bar, but it is why cash must be handled with care. The next article in this series deals with the attachment.
Income tax. The exclusion in Section 269ST for loans and deposits does not help, because paying for shares is neither. The author opines that a company should not take ₹2 lakh or more in cash from any one subscriber in a day. The penalty falls on the receiver, which is the company, and equals the cash received. The Income-tax Act, 2025 now applies from 1 April 2026, so the matching provision and penalty section should be verified.
Practical Interpretation
1. Issue a receipt to each subscriber and enter the cash in the company’s cash book on the same day.
2. Keep each subscriber’s cash below ₹2 lakh.
3. File Form INC-20A within 180 days of incorporation. Late or missed filing attracts the Section 10A(2) penalty (₹50,000 on the company, and ₹1,000 a day on each officer in default up to ₹1 lakh). Please verify these figures against the current Act.
Example
Mr. A and Mr. B sign the memorandum of a new private company for 5,000 shares each of ₹10 (₹50,000 each). Each hands over ₹50,000 in cash. The company issues receipts, records the cash, and deposits ₹1,00,000 in its new bank account. Section 269ST is not breached as each amount is below ₹2 lakh, and the bank statement supports Form INC-20A.
Conclusion
The author opines that the subscription money of the subscribers to the memorandum can be received in cash, because neither the Companies Act, 2013 nor Section 10A bars it, and the cash ban in Section 42 and Rule 14(3) covers private placement only. The author further opines that the cash should stay below ₹2 lakh per subscriber and, for safety, be deposited in the company’s bank account.
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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected]).
