Share Allotment before Receipt of Application Money Violates S 42: MCA Imposes ₹2.89 Lakh Penalty on Company and Directors [Read Order]

The Ministry of Corporate Affairs (MCA) has imposed penalties on a company and its directors for Section 42(10) of the Companies Act, 2013, relating to private placement of securities

The MCA received a suo-motu Adjudication Application filed by the Directors of Capchem Electricals Limited namely, Mr Shrikishan Chunnilal Shrirangam, Mr. Rajan Pratapsingh Thakur, Mr. Ramchandra Vitthal Satre, and Mrs. Nisha Vishwas Gujar under section 454 of the act for default under rule 14(1), 14(6) and 14(8) of the companies (prospectus and allotment of securities) rules, 2014 (hereinafter referred to as the rules).

In this regard, certain clarification was sought from the Applicants and a reply to which was received. After examination of the reply, it has been found that the default was committed under Section 42 of the Act, read with Rule 14(1) and 14(8) of the Rules and is punishable under Section 42(10) of the Act.

Whereas Rule 14(1) and 14(8) of the Rules read as follows:(1) For sub-section (2) and sub-section (3) of section 42, a company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a special resolution for each of the offers or Invitations

Whereas, as per the filings available on the MCA portal and as per the submission made by the Applicants in the suo motu Adjudication Application, it is observed that:

i.Board of Directors during the board meeting and Shareholders during the Extraordinary General meeting approved the issue and offer of 1,00,000/- Equity Shares of Rs.

10/- each at premium of Rs. 26.15/- aggregating to Rs.36,15,000/-. The Applicant Company filed E-form MGT-14 vide SRN AA6285936 on 02.12.2023 along with a certified copy of the resolution passed in the Meeting of members. However, it was observed that the Company has not attached notice of the meeting and explanatory statement with the same in contravention of Rule 14(1) of the Rules;

ii. The Applicant Company issued Private Placement Offer cum Application Letter

in PAS-4 on 01.12.2023, and E-form MGT-14 was filed vide SRN AA6285936 on 02.12.2023. Thus, the Applicant Company circulated a Private Placement Offer letter before filing the relevant resolution with the Registrar in contravention of Rule 14(8) of the Rules.

iii. The Applicant Company made allotment of Equity shares on 01.12.2023. However, the Company received allotment money. Thus, the Applicant Company has allotted shares before receipt of the Application money in contravention of Section 42 of the Act. Whereas the prescription of Rule 14 of the Rules is under Section 42 of the Companies Act, 2013.

Accordingly, noticees are liable for default under Section 42 read with Rule 14, punishable under Section 42(10) of the Act.

The Noticees requested an E- hearing. Acceding to the request, an opportunity to be heard was granted to them. During the e-hearing, attended by a practising company secretary on behalf of the noticees, the defaults were admitted. After which, a show-cause notice was issued, and the applicants filed a response.

Section 42(10) provides that contraventions may attract penalties up to the amount raised or ₹2 crore, whichever is lower, and mandates the refund of monies with interest. According to which the company and its directors were imposed with a penalty of 2,89,200.

The order directs the company and its directors to pay the penalty within 90 days via the MCA’s e-Adjudication portal, with payments to be made from personal sources of the directors. Appeals may be filed before the Regional Director, Mumbai, within 60 days of receipt of the order. Non-payment within the prescribed period will attract further penal consequences under Section 454(8).

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