1.14 Query:

Interpretation of advance as distinguished from share

application money pending allotment.

1. A public limited listed company recently entered the capital market to part finance its project. It had collected monies from the investing public under the “Promoters’ Quota”. These amounts had been correctly classified in the balance sheet as share application money pending allotment, whereas in the prospectus under the head “capital structure” these had been classified as “….non-refundable, interest free advance to be adjusted towards equity shares to be allotted…...” Except for a share application form, no other documents had been obtained by the company in respect of the said applications. There is no clause/condition in the share application form categorising these amounts as advance or as a loan to be compulsorily converted into equity at the time of allotment nor any undertaking obtained from the applicants not to withdraw their applications.

2. In the above context, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a)   Can share application money pending allotment be categorised as non-refundable interest free unsecured advance to be adjusted towards equity shares to be allotted? Can these terms be used interchangeably? Further, in the absence of any undertaking from the applicants regarding non-withdrawal of the application till allotment, can these amounts be treated as non-refundable?

(b)   If the answer to (a) above is in the negative, then, in the absence of any loan/advance document, does this amount to misrepresentation in the offer document?

                                                                     Opinion                                       October 10, 1995

1.The Committee notes para 8.14 of Statement on Auditing Practices, issued by the Institute of Chartered Accountants of India, as reproduced below:

                        “Application Moneys and Calls Received in Advance

8.14     Schedule VI of the Companies Act, 1956 does not specifically provide for these. However, as share application moneys and calls received in advance are, subject to two exceptions, to be transferred, in due course to share capital, they should be shown in the balance sheet under a separate heading, between “Share Capital” and “Reserves & Surplus”.  The two exceptions are in respect of (a) invalid or revoked applications (b) excess application moneys received due to over subscription. In these cases, the amounts involved may be shown as part of Current Liabilities.”

2. The Committee also notes that section 69(5) of the Companies Act, 1956, provides that:

“(5)  If the conditions aforesaid have not been complied with on the expiry of one hundred and twenty days after the first issue of the prospectus, all moneys received from applicants for shares shall be forthwith repaid to them without interest; and if any such money is not so repaid within one hundred and thirty days after the issue of the prospectus, the directors of the company shall be jointly and severally liable to repay that money with interest at the rate of six per cent per annum from the expiry of the one hundred and thirtieth day.”

3.The Committee is of the view that ‘share application money pending allotment’ is different from ‘non-refundable interest free unsecured advance’. Share application money has to be refunded to the shareholders if they are not/cannot be allotted shares of the company.

4.  Based on the above, the Committee is of the following opinion in respect of issues raised by the querist in para 2 of the query:

(a) No. In the facts and circumstances of the case since the money was towards share application, the same cannot becategorised as non-refundable interest free unsecured advance to be adjusted towards equity shares to be allotted. The heads ‘share application money pending allotment’ and ‘interest free non-refundable advance’ cannot be used interchangeably. The share application money pending allotment should be categorised as reproduced in para 8.14 of the Statement as stated in para 1 above. The absence of any undertaking from applicants regarding withdrawal/non-withdrawal of the application till allotment is not relevant.

(b)   Please refer to (a) above.

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