Can Share Application money be more than Authorized Share Capital ?

The company’s share capital should never exceed the Authorized Share capital. But we have to understand the difference between Share Application Money & Share Capital.

Share Capital, is the result of shares already allotted. But Share Application money is the money received from the public or directors in case of private company, for which share allotment is pending. Now the issue that arises is

1. Can a company have Share Capital more than Authorized share capital – The answer as we all know is “No”. No company can have its Issued, paid-up and subscribed capital more than its Authorizes Share Capital.

2. Can a company have Share Application money more than its Authorized Share Capital – There is a controversy in this particular case. We may say how can a company invite share application money, when it has no Authorized share capital limit. As per some experts, they say the share application money cannot be more than Authorized Share Capital and some say it can.

Let us for the time being understand till what period the share application money can be kept by the company.

The provisions of sec.69(4) of the companies act, would come into picture which says. all the moneys received from applicant for shares shall be deposited and be kept deposited in a schedule bank, subject to specified conditions. However, these provisions do not apply to a private company. Therefore there is no time limit to retain the said money. But  indirectly. Sec.205C read with Investor Education and Protection Fund rules, states that application money received by companies

-for allotment of securities
-due for refund and interest accrued on it or
-not claimed for a period of 7 years from the date they become due for payment should be transferred to the said fund.

This provision is applicable to all companies. The question of the date of refund or payment will arise only when the company mentions those dates in any of its application at the time of receipt of funds or thereafter. In case, the company does not mention those dates, then the Private Company can take advantage of the same and retain the share application money for unlimited period.

Since, we have understood about the time period for which the Share Application money can be retained, let us know whether this share application money can be more than the Authorized Share Capital

As per the companies act, 1956 there is no restriction on the quantum. But in practice, the companies retain the share application money over and above the Authorized share capital limit. Shareholders, who are aware of their legal rights may force the company to make allotment of shares or to refund their money. It is at this point of time, the question of oppression and mismanagement has come into the picture. As a result of which to protect the public, the Registrar of Companies empowered by Section 614 of the Companies Act, 1956 may direct the Companies to make allotment of shares or to refund the amount.

Though no restriction is imposed by the Companies Act, 1956 a judgment in the case of ITO Vs.Nandi Promoters (P) Ltd, pronounced has made it clear that, a company cannot have Share Application money more than the Authorized Share Capital.

Wherein, the A.O. found that :
– the authorized share capital of the company was Rs.1 lakh only
– the share capital of the company has not been increased till passing of the assessment order
– the shareholders were also aware that they company did not intend any increase in share capital, and in fact no application for increase has been filed

Under these circumstances, how can the company receive money under the cover of share application money.

Finally, after several hearing, tribunal has allowed the appeal of revenue and concluded with the following facts:

The assesses company has declared that the amount has been received towards share application money from one of its directors which was more than the authorized capital. The assessee has not taken into consideration the provisions of company law for increasing the authorized capital. A procedure has been prescribed under the companies act and other applicable laws for increasing the authorized capital. Ignoring the same, one cannot declare that any cash received is the money received towards share application money.

Hence, no company can receive any money more than its Authorized Share Capital under the Cover of Share Application Money.

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