Section 40: stock-exchange permission, separate account and commission

Introduction

Section 40 protects public-issue money. The application to the exchange comes before the offer, the prospectus must name the exchange, and application money is ring-fenced.

The Companies (Amendment) Act, 2020 removed imprisonment for officers in default under sub-section (5) with effect from 21 December 2020. The fines remain. A company may pay commission in connection with subscription, subject to prescribed conditions.

Key takeaways

Apply to the stock exchange first

Every company making a public offer must, before the offer, apply to one or more recognised stock exchanges and obtain permission for the securities to be dealt with there. If the prospectus states that an application has been made, it must also name the exchange or exchanges.

• India Code — consolidated Companies Act, 2013, section 40
• Gazette — S.O. 2754(E), 12 September 2013 (commencement)
• Gazette — S.O. 902(E), 26 March 2014 (commencement from 1 April 2014)
• Gazette — Companies (Amendment) Act, 2020 (29 of 2020)
• Gazette — S.O. 4646(E), 21 December 2020 (2020 Amendment Act commencement)

Keep application money separate

All application money received from the public must be kept in a separate bank account in a scheduled bank. It may be used only for adjustment against allotment where the securities have been permitted on the specified exchange. Otherwise it is used to repay applicants within the time specified by SEBI where the company cannot allot for any other reason. Any condition requiring an applicant to waive these requirements is void.

Penalty after the 2020 amendment

On default, the company is punishable with a fine of not less than five lakh rupees and up to fifty lakh rupees. Every officer in default is punishable with a fine of not less than fifty thousand rupees and up to three lakh rupees. Section 7 of the Companies (Amendment) Act, 2020 omitted the earlier option of imprisonment of up to one year and the words "or with both". S.O. 4646(E) brought that change into force on 21 December 2020.

Commission and commencement

Sub-section (6) allows a company to pay commission to any person in connection with subscription to its securities, subject to prescribed conditions. Section 40 came into force on 12 September 2013 under S.O. 2754(E), except sub-section (6), which came into force on 1 April 2014 under S.O. 902(E).

Practical preparation

Obtain in-principle exchange permission before launching the offer. Name the exchange in the prospectus. Open a separate scheduled-bank account for application money. Restrict its use to allotment or refund. Check the prescribed conditions before paying any commission.

Practical checklist

Glossary

Recognised stock exchange

A stock exchange recognised under securities law, to which the company applies for permission to deal in the securities.

Scheduled bank

The class of bank in which section 40(3) requires the separate application-money account to be kept.

Frequently asked questions