Confused by minimum subscription? This explainer simplifies the Companies Act rule, ensuring a legal & successful startup.
Minimum subscription, a Companies Act mandate, demands companies to raise a specified capital amount during issuance. Successful procurement permits capital retention; failure prompts a refund of the application deposit as per Section 39. Government of India notes inadequate public response risks investor confidence, justifying halting capital issues to align with investor expectations. Section 39 prevents allotment if minimum subscription is unmet, applying to both debt and equity securities. A 90% ceiling limit, set by the GoI, mandates companies to collect at least 90% of offered capital; failure requires a full refund.
Overview
The Companies Act – Minimum Subscription is a legal requirement in some jurisdictions that ensures companies raising capital from the public obtain a minimum amount of investment before they can proceed. It basically acts as a safety net for both investors and the company itself.
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.
Acceptance of Application Deposit
To secure investors’ interest in a company’s securities before allotment.Typically a percentage of the total issue price.
- Investors apply for securities and submit the deposit.
- Company accepts deposits in a designated bank account.
- Separate records maintained for application deposits.
- Company can’t utilise deposits for business operations until allotment.
Refund of Application Deposit
Circumstances:
- Minimum subscription not achieved within 60 days of issue opening.
- Company decides not to proceed with the issue.
- Applicants withdraw their application before allotment.
Process:
- Company must refund deposits within 15 days of the specified event.
- Interest may be payable on delayed refunds.
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.
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.
FAQ
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.
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