CONTRADICTIONS BETWEEN COMPANIES ACT AND FEMA FOR THE NUMBER OF DAYS WITHIN WHICH ALLOTTMENT OF SHARES HAVE TO BE MADE

CONTRADICTIONS BETWEEN COMPANIES ACT AND FEMA FOR THE NUMBER OF DAYS WITHIN WHICH ALLOTTMENT OF SHARES HAVE TO BE MADE

Time Limit for allotment of securities under the Companies Act, 2013:

Under the new Companies Act, Sections 62 & 42 and Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 deals with issue of shares on preferential basis. Rule 13 prescribes that any such issue on preferential basis has to comply with conditions laid down in section 42 of the Companies Act, 2013. Section 42(6) further provides that-

“(6) A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day:

Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.

Further, as per Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 amended the erstwhile Rules of 2003. The 2011 Rules provided that allotment of securities should be completed within 60 days from the receipt of application money. If not so allotted, the company should repay application money within 15 days thereafter, failing which it should be repaid along with an interest at 12% p.a. However, please note that these Rules applied only to unlisted public companies, and no such conditions were prescribed for private companies back then.

However, under FEMA , Provisions Relating to Issue/ Transfer of Shares  as per Annexure 3 of Consolidated FDI Policy issued by the Department of Industrial Policy and Promotion with effect (Effective from June 07, 2016) says that

1. The capital instruments should be issued within 180 days from the date of receipt of the inward remittance received through normal banking channels including escrow account opened and maintained for the purpose or by debit to the NRE/FCNR (B) account of the non-resident investor. In case, the capital instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be. Non-compliance with the above provision would be reckoned as a contravention under FEMA and would attract penal provisions. In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the RBI, on the merits of the case.

Thus, there is a contradiction between Companies Act 2013 and Ministry of Commerce and Industry of India as regards to number of days within which shares have to be allotted.

·        As per Companies Act , Shares have to be issued within 60 days , if not shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of12%.

·        As per FEMA , shares can be allotted within 180 days of receipt of money . 

The contradictory provisions relating to number of days within which a company has to allot shares has created a lot of confusion and misunderstanding among professionals.

It is to be noted that RBI vide its press release dated 4th February 2016 stated that  is proposed  for Changes in Timeframe for Issue of Shares and Reporting of FDI; Invites Comments from Stakeholders, it is yet to be modified or altered.
Pl click the following link :https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=36158

Will the Government of India through the Ministry of Commerce and Industry will amend the Industrial policy issued in June 2016 by making amendment as “shares have to be allotted within 60 days of receipt of inward remittance by the non-resident investor.

This will go long way to remove the confusions and misunderstandings as regards to number of days within which the shares have to be allotted.