Confused by minimum subscription? This explainer simplifies the Companies Act rule, ensuring a legal & successful startup.
Overview
Imagine launching a company and raising funds from the public. The concept of minimum subscription ensures a critical safeguard for both investors and the company itself. Here’s a breakdown of this important concept:
- Raising Capital, Meeting a Threshold: Minimum subscription refers to the lowest amount of capital a company must raise from public investors when issuing shares or debt.
- Success and Failure: If the company successfully reaches this minimum threshold, they can keep the funds collected and move forward. However, if they fall short of the minimum subscription, they are legally obligated to refund all the money to investors.
- Protecting Investor Confidence: This regulation exists to protect investors. A poor public response to an offering could erode trust in the entire system. By requiring a minimum subscription, the Companies Act ensures a viable level of investor interest before a company can access public funds.
The current minimum subscription threshold in India is set at 90% of the total capital offered. This means a company must raise at least 90% of the funds they are seeking from the public, or they must return all the money collected.
This regulation applies to both equity and debt offerings, ensuring a level playing field for different types of public fundraising.
Understanding minimum subscription is crucial for any company considering raising capital from the public. It helps to manage expectations, ensures investor protection, and promotes a healthy public funding ecosystem.
What is it?
- A minimum percentage of the offered capital (usually 90%) that a company must raise through public subscription before going ahead with the issue.
- Applies to both debt and equity offerings.
Why does it exist?
- Protects investors: If the public loses confidence in a company due to poor subscription, it could harm the broader market.
- Ensures financial viability: A company needs sufficient capital to function and fulfill its promises to investors.
What happens if the minimum subscription is not met?
- The issue is cancelled.
- All subscription money is refunded to investors.
Where to find it?
Specific provisions vary by jurisdiction, but typically found in relevant sections of the Companies Act. You need to learn everything about company act before making company registration in india.
Acceptance of Application Deposit
When you invest in a company through a public offering, you’re essentially making a promise. The application deposit serves as a way to solidify your interest and ensure responsible use of the collected funds. Here’s a breakdown of how it works:
- Skin in the Game: The application deposit is a non-refundable amount you pay, typically more than 5% of the share value. This shows your initial commitment and discourages casual applications.
- Going Digital: To prevent fraud and ensure proper tracking, companies cannot accept cash deposits. Instead, they should collect cheques or demand drafts, ensuring they aren’t post-dated (meaning they can’t be cashed before a specific date).
- Safeguarding Your Money: The application deposit goes into a separate bank account, strictly used for the purposes outlined in the company’s prospectus. This ensures the funds are used for the company’s growth, not to cover everyday expenses or short-term debts.
- Minimum Threshold with Flexibility: The 90% minimum subscription rule applies to the number of applications sold, not just the total deposit amount. This means even if some cheques bounce, the company can still meet the minimum threshold by excluding those applications.
- Transparency and Choice: The prospectus may mention a lower minimum subscription, but this isn’t valid. The 90% rule is the minimum legal requirement. However, a company can choose a higher minimum threshold in the prospectus, demonstrating a stronger commitment to securing a larger investment pool.
Refund of Application Deposit
If a company fails to reach the minimum subscription target, disappointment for investors is quickly followed by a question: what happens to my application deposit? Here’s what you need to know about getting your money back:
- Your Money, Guaranteed: The law is clear – companies must refund your application deposit in full (100%) if they don’t meet the minimum subscription threshold. This protects you from losing your initial investment.
- Taking Action: If a refund isn’t forthcoming, you have the right to sue the company within three years of the issue closing date. Don’t hesitate to seek legal recourse if necessary.
- Time Limits: Companies have a 120-day window from the issue opening date to collect the minimum subscription. There’s also a separate 30-day window from the prospectus issue date for them to reach the target. However, they can still allot securities even after these deadlines, as long as they’ve met the minimum subscription by then.
- Refunds with Interest: If a company fails to refund your deposit within 15 days of closing the issue, they’re legally obligated to pay you interest on the amount. This interest accrues at a rate of 15% per annum. The company directors are personally liable for ensuring this interest payment.
- Refunds Made Easy: The refunded amount should be deposited directly into your bank account, eliminating any unnecessary delays or complications.
- Consequences of Non-Compliance: If a company fails to comply with these refund regulations, they and their responsible officers could face a daily fine of ₹1,000. This penalty can add up quickly, with a maximum limit of ₹1 lakh to prevent excessive financial burden.
Filing Requirements
The Registrar of Companies (RoC) should receive the filing of Form PAS 3 within thirty days from the date of allotment whenever the company makes any allotment of securities. The person submitting the form must be authorised by a resolution passed by the board of directors, and the form should include the corresponding board resolution number. The fees payable with the form depend on the company’s paid-up capital. For companies with a capital of less than one lakh rupees, the payable fees amount to two hundred rupees. Companies with a capital of more than one lakh but less than one crore rupees are subject to fees ranging from three hundred to five hundred rupees. If the company’s capital exceeds one crore rupees, the payable fees should be six hundred rupees. You can also make the private limited company registration through our online portal.
Documents (based on Indian Companies Act):
- Form PAS-4: Return of Deposits.
- Form GNL-2: General Information.
- Form SH-7: Shareholding Pattern.
- Board Resolution: Approving refund of deposits.
- Bank Statement: Evidencing deposit refund.
FAQs
What is the significance of the minimum subscription under the Companies Act?
The minimum subscription requirement protects both investors and companies. It ensures that a company raising capital from the public has a baseline level of interest and commitment before proceeding with the issue. This reduces the risk of a poorly received offering, which could erode investor confidence in the market and hinder the company's financial viability.
How is the minimum subscription amount determined for a company's share capital?
Typically, the minimum subscription is set at a fixed percentage of the total share capital being issued, often around 90%. This means that the company must raise at least this percentage of the offered capital through public subscriptions before the issue can go ahead.
Are there any legal consequences for not meeting the minimum subscription requirement outlined in the Companies Act?
Yes, failure to meet the minimum subscription has legal consequences. If the target is not achieved within the specified timeframe, the company must cancel the issue and refund all the application deposits collected from investors. Additionally, there may be penalties imposed for non-compliance.
Can the minimum subscription amount be altered or waived during the incorporation process?
No, the minimum subscription requirement is a mandatory provision stipulated by the Companies Act and cannot be unilaterally altered or waived by the company. However, certain exemptions may apply depending on the type of company or specific regulatory guidelines.
How does the minimum subscription concept impact shareholders and the overall capital structure of a company?
Meeting the minimum subscription ensures that the company receives sufficient initial funding to operate effectively. This benefits shareholders by fostering company growth and potentially increasing the value of their investments. Conversely, failure to meet the minimum could lead to delays, reputational damage, and potentially an unstable capital structure, negatively impacting all stakeholders.
