You Cannot Touch the Money Until You File

Most share allotments in a private limited company are private placements under Section 42, and the process has hard rules that founders routinely break without realising. Application money goes into a separate bank account with a scheduled bank. Shares must be allotted within 60 days of receiving it. The return of allotment in Form PAS-3 follows within 15 days of allotment. And until the shares are allotted and the return is filed, the money in that account cannot be used for anything else.

Before you allot: the headroom check

Issuing shares beyond your authorised capital requires increasing it first, which may require amending the articles first. See our article on increasing authorised share capital.

Check this before you issue the offer letter, not after the money arrives.

The private placement sequence

  1. Board resolution approving the offer and the draft offer letter

  2. Shareholder approval by special resolution, filed in MGT-14 within 30 days of passing

  3. Valuation by a registered valuer, where the pricing rules require it

  4. Offer letter in Form PAS-4, issued only to identified persons, with the record maintained in PAS-5. The offer may be made to no more than 200 persons in a financial year for each class of security, excluding qualified institutional buyers and employees receiving securities under an ESOP

  5. Money received through banking channels into a separate bank account, from each investor’s own account

  6. Allotment within 60 days of receiving the application money. If you do not allot in time, the money must be refunded within 15 days of that period expiring, after which interest runs

  7. File PAS-3, the return of allotment, within 15 days of allotment

  8. Issue share certificates, update the register of members, and update the cap table so all three agree

The rule founders break

The application money sits in the separate account and may be used only for adjustment against the allotment or for refund.

In practice a founder sees the funds land, has salaries due, and moves the money. The Act does not accommodate that.

Plan cash so the gap between receipt and PAS-3 does not need bridging from that account.

The deadlines in one place

Step

Deadline

MGT-14 after the special resolution

30 days from the resolution

Allot the securities

60 days from receiving application money

Refund if not allotted

15 days after the 60 days expire, with interest thereafter

PAS-3, private placement

15 days from allotment

FC-GPR, if the investor is non-resident

30 days from allotment

PAS-3 and FC-GPR are separate obligations to separate regulators. Filing one does not satisfy the other, and a foreign-funded round needs both.

Other routes

Rights issue under Section 62(1)(a), offering shares to existing shareholders in proportion to their holdings, with its own notice and acceptance period.

ESOP under Section 62(1)(b).

Preferential allotment to specific persons under Section 62(1)(c), which in a private company usually runs through the private placement machinery.

Bonus issue, from reserves, with no money coming in.

Each has its own resolutions and filings. The private placement route is the one most startups use.

What investors check afterwards

The cap table against the register of members against the ROC filings. All three should say the same thing. Where they do not, it surfaces in the next round’s diligence, and reconstructing it is slower than doing it correctly.

How Northrop LLP helps

Northrop LLP runs the allotment: resolutions, PAS-4 and PAS-5, the separate account discipline, PAS-3, share certificates, and FC-GPR where the money is foreign.