Company Cannot Utilise Private Placement Funds Before Filing Return of Allotment in E- Form PAS-3: MCA [Read Notification]
A company shall not utilize monies raised through private placement unless allotment is made and return of allotment is filed with the Registrar. However, the Company has acted in contravention of the law as the Company utilized the funds raised through private placement before filing the return of allotment in e-Form PAS-3.
The Ministry of Corporate Affairs ( MCA ) has ruled that a company cannot utilise funds raised through private placement until the return of allotment is filed in e-Form PAS-3, issuing a penalty order for a company for multiple violations of Section 42 of the Companies Act, 2013.
The inspection in the Company, Hexafun Private Limited revealed that the company had circulated its private placement offer letter (Form PAS-4) even before filing the required MGT-14 for the special resolution, utilised subscription money before filing PAS-3, and failed to keep the funds in a separate bank account as mandated by law.
According to the documents submitted, the subscription money was received on 11 December 2023, and allotment was made the next day, but the company proceeded to use these funds before filing PAS-3 on 8 January 2024.
The ROC said that Section 42(4) unequivocally barred utilisation of private placement proceeds until both allotment is completed and the return of allotment is filed with the Registrar.
Additionally, the PAS-4 offer letter issued by the company was not specifically addressed to the identified investors, which the ROC held to be a breach of Rule 14(3) governing private placement procedures.
The company also failed to deposit the application money in a separate scheduled bank account, violating Section 42(6).
In its reply, the company admitted the lapses and stated that the violations were inadvertent and not motivated by any mala fide intent. It also submitted that one director, Ms. Manali Shailesh Sanghvi, should not be penalised as she was appointed only in March 2024, after the default period.
The ROC accepted that she was not responsible and excluded her from penalty. The company also pointed out that it qualified as a small/startup company at the time of default, instigating the ROC to apply reduced penalties under Section 446B.
However, the adjudicating officer noted that despite the mitigating submissions, the violations were clearly established and attracted statutory liability under Section 42(10), which prescribes penalties extending up to the amount raised through private placement.
Consequently, the ROC imposed a penalty of ₹2,00,000 on Hexafun Private Limited and ₹1,00,000 each on the two directors in default Mr. Harshit Singhal and Ms. Aakansha Singhal.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
