Companies Act – Minimum Subscription

Minimum subscription refers to the minimum amount which a company should raise at the time of issuing capital. The requirement for minimum subscription applies to all companies which raise funds from the public. The company may successfully procure the amount of minimum subscription. In such circumstances, the company is allowed to retain the capital, which has been collected from the investors. Alternatively, the company may not be able to obtain the minimum subscription successfully. Hence, according to the Companies Act, there is an inadequacy in the minimum subscription. In such cases, the company should refund the application deposit. The provisions relating to minimum subscription are available in Section 39 of the Companies Act.

The GoI observed that when public companies opted for the issue of capital, the public response may be inadequate. On account of the poor public response, the confidence of the investors in the regulatory mechanism may diminish. Hence, in keeping with the expectations of the investors, the issue of capital should be halted. Cancellation of the issue should be performed in case the public does not avail the minimum subscription. The objective of Section 39 is to introduce a prohibition on the allotment of securities. As per the section, the allotment should be prohibited when the minimum subscription requirement is not fulfilled.

The provisions relating to minimum subscription should be applied whether a company makes an issue of debt or equity securities. The requirement for minimum subscription is determined through a ceiling limit. At present, the Government of India (GoI) has fixed the ceiling limit as ninety per cent. The ceiling limit should be applied to the total capital issued by the company. The company should collect at least ninety per cent of the capital offered to the public. In case the value accumulated amounts to less than ninety per cent of the capital issued, the entire amount should be refunded. The value accumulated refers to the amount of capital raised through an issue.

Acceptance of Application Deposit

The application deposit payable on security should be more than five per cent of the nominal value. Also, the company should not collect the application deposit by cash. The company may receive cheques or demand drafts for the payment of the application deposit. In such cases, the company should ensure that the cheques or demand drafts received are not post-dated instruments.
The funds collected by the company through an application deposit should be maintained in a separate bank account. The funds should be used only for the purposes mentioned in the prospectus. A company is not allowed to make use of capital funds towards the settlement of short term credit obligations or revenue expenditures. The company may be having working capital needs which require immediate disbursement of funds. In such cases, the company should ensure that capital funds are not deployed towards the disbursement. Thus, funds deposited by the investors should only be used to purchase separately distinguishable assets.
The application deposit may be less than the face value of the capital issued. In such cases, the ceiling limit of ninety per cent should be applied to the number of applications sold. Cheques submitted to the company for paying the application deposit may not be successfully cleared. In such cases, the ceiling limit should be calculated after excluding the value of cheques which are not cleared. The ceiling limit should be applied after the defaulting subscribers have been excluded. A defaulting subscriber is a person who has paid the application deposit but has not made any subsequent contribution towards the capital.
The company may make a statement concerning minimum subscription in the prospectus. The statement may indicate a lower ceiling limit than ninety per cent. In such cases, the statement will not be valid. Hence, the ceiling limit of ninety per cent will continue to apply to the company. Alternatively, the company may indicate a ceiling limit which is higher than ninety per cent. In such cases, the company is bound by the higher ceiling limit.

Refund of Application Deposit

A company can commence allotment of securities only after the targeted minimum subscription is fulfilled. There may be a failure on the part of the company to reach the targeted minimum subscription. In such circumstances, the liability to make a refund will arise for the company. The Act requires that in case of a failure to reach the minimum subscription, the application deposit should be refunded to the extent of one hundred per cent. In case the company fails to refund the application deposit, the affected person may file a suit against the company. The maximum time limit for filing a lawsuit is three years.
The time limit allowed for the collection of the minimum subscription is one hundred and twenty days. The time period should be calculated from the date of opening of the issue. Also, the minimum subscription should be collected within thirty days from the date of issue of the prospectus. The time limits mentioned are applicable only for receipt of the minimum subscription. Hence, allotment of securities can be made even after completion of the time limit.
In case the minimum subscription is not reached, the application deposit should be refunded. The refund should be made within fifteen days from the date of closure of the issue. In case there is a delay beyond fifteen days, the applicants should be repaid with interest at the rate of fifteen per cent per annum. The directors of the company should also bear the liability to meet the interest obligation. The refund should be made directly to the bank account of the applicant.
In case there is any default in complying with the above provisions, the company and the defaulting officers should pay a fine of one thousand rupees per day. The penalty will be calculated for the number of days for which the company has committed the default. However, the maximum amount of fine payable cannot exceed one lakh rupees.

Filing Requirements

When the company makes any allotment of securities, Form PAS 3 should be filed with the Registrar of Companies (RoC). The time limit for filing Form PAS 3 should be thirty days from the date of allotment. The person submitting the form should have been authorised by a resolution passed by the board of directors. The corresponding board resolution number should be entered in the form.
The fees payable with the form depends on the paid-up capital of the company. For companies having a capital of less than one lakh rupees, the fees payable should be two hundred rupees. In the case of companies whose capital is more than one lakh but less than one crore rupees, the fees payable ranges from three hundred to five hundred rupees. If the capital of the company is greater than one crore rupees, the fees payable should be six hundred rupees.
The form should be authenticated by a practising Chartered Accountant (CA) or Company Secretary (CS). The CA or CS should affix the digital signature to the form. The purpose of the authentication is to communicate that the form contains correct information about the allotment of securities.
The following enclosures should be attached with Form PAS 3 as Portable Document Format (PDF) files:
- A list of allottees which mentions the name, age, address, occupation and number of securities allotted, duly certified by the board of directors by passing a resolution
- In case the securities are allotted for non-cash consideration, a copy of the sale contract works contract or intellectual property services contract
- A report from a registered valuer ascertaining that the consideration for the contract has been calculated as per a genuine methodology
- In case the contract has been implemented based on an oral agreement, a statement of particulars of the contract executed on a non-judicial stamp paper of a value of three hundred rupees
The format for Form PAS 3 is given below for reference: