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    Allotment of Shares before receipt of share subscription money

    Posted By : ARUN GANDHI / Published on : 26-Jul-2022 05:07 AM / View : 2755 / Comment : 3

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    Dear All,

    A company has been incorporated but the subscribers to the
    company has not paid subscription money. Whether it is necessary
    for the company to issue share certificates within two months with or
    without the receipt of share subscription money as per the provisions
    in the Companies Act, 2013?
    Read more on : subscription money share receipt shares before allotment

    • Hi Arun!

      As per Section 56 (4) (a) the Companies Act, 2013, a Company shall issue Share Certificates to the subscribers of Memorandum within 2 months from the date of Incorporation. But it is to be ensured that Share subscription money is received before issuing share certificates.

      Therefore, share certificates should be issued only after the receipt of money.

      Hence, it can be concluded that it is not necessary to issue share certificates where subscription money has not been received. 


      27-07-2022 / 05:00:27 AM
    •  Shares defined as a legal document that is issued to show proof of any ownership in a business. [Black Law Dictionary 9th edition page no. 1500.] Therefore, in the context of a company, it can be said that a share certificate means a document issued by the company to its member which is an evidence of ownership of shares. 

      As per section 46(1) of the Act, a certificate, issued under the common seal, if any, of the company or signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary specifying the shares held by any person, shall be prima facie evidence of the title of the person to such shares.

      Note: Common Seal if applicable only because Effective from 29th May 2015, i.e. on or after the commencement of the Companies (Amendment) Act, 2015, the requirement of affixing common seal on the certificate of share is made optional for companies which do not have a common seal as per their articles.  

      As per rule 5 of the Companies (Share Capital and Debentures) Rules, 2014, every company having share capital,  share certificate can only be issued in pursuance of a resolution passed by the Board i.e. under the express authority of the Board for issue of share certificate and on surrender to the company of the letter of allotment or fractional coupons of requisite value, save in cases of issues against letters of acceptance or of renunciation, or in cases of issue of bonus shares, however, in case the letter of allotment is lost or destroyed, the Board may impose such reasonable terms, if any, as to seek supporting evidence and indemnity and the payment of out-of-pocket expenses incurred by the company in investigating evidence, as it may think fit. 

      Once the issue of share certificate has been authorised by the Board, authority to the directors of the company to sign the same in terms of sub rule 3 of rule 5 of the Companies (Share Capital and Debentures) Rules, 2014, can be given either by the Board or by the committee of the Board. 

      Rule 5(2) of the Companies (Share Capital and Debentures) Rules, 2014 share certificate is required to be in Form SH-1. The rule prescribed that such format should be in Form SH-1 or as near thereto.  

      As per my understanding, In case of Subscription money not received board can assume on the basis of first promter that money is deemed to be received any issue the share within stipulated timeline.

      who is "MEMBER"?

      The subscribers of the memorandum of a company shall be deemed to have agreed to become members of a company, and on its registration, shall be entered as members in its register of members.
      From the above, we can say that subscribers to memorandum are the members of the Company from the date of its incorporation and the shares subscribed by them are deemed to have been allotted on the date of its incorporation. Then share certificates have to be issued within 3 months from the date of incorporation.

      Note: Share Certificate issued by the Company has to be stamped as per the respective State Stamp Act and Stamp Rules. Stamp Duty on Share Certificate varies state to state. Nonpayment of stamp duty on share certificates shall invalidate the share certificates as such.

      As per Section 56(4) of the Companies Act, 2013 contains the provisions related to time limits for the Issue of the Share certificates of all securities allotted, transferred or transmitted.

      1. In case of subscribers to memorandum Within 2 months from the date of incorporation
      2. In case of allotment of shares Within 2 months from the date of allotment
      3. In case of transfer or transmission of securities Within 1 month from the date of receipt by the company of the instrument of transfer or intimation of transmission
      4. In case of allotment of debentures Within 6 months from the date of allotment



      27-07-2022 / 06:51:39 AM
    • Actually the word “Paid-up” is defined itself in CA. So, to understand whether the "Paid-up" means the money actually received in the company's account, we have to see that definition.

      As per Section 2(64) of the Act, 2013 :

      //“Paid up Share Capital” or “share capital Paid-up”  means such aggregate amount of money credited as paid-up as is equivalent:-

      -  to the amount received as paid-up in respect of shares issued,

      - and also includes any amount credited as paid-up in respect of shares of the company,

      but does not include any other amount received in respect of such shares, by whatever name called. //

      So, this definition of paid-up share capital can be divided into two parts:

      -        First,  aggregate amount received and credited as paid-up in respect of shares issued; so here paid up amount has been received.


      -        Second, any amount credited as paid-up in respect of shares of the company, so here paid up share capital means ‘any amount credit as paid up.’ Hence the company can credit the subscription money still not received  as paid up in the Balance Sheet of the company and which is still receivable. (Here debts from the subscriber will be shown as assets to be recoverable in the Balance sheet.)

      So, the word “Paid-up” words in SH-1, includes both “the actual amount received” or “the amount still recoverable from subscribers of MoA”.

      26-09-2022 / 07:37:09 AM
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