Introduction
Share application money pending allotment represents funds received by a company from investors for the subscription of shares, which are yet to be allotted. This item appears under the equity and liabilities section of the balance sheet. Proper auditing of this item is crucial to ensure compliance with regulatory requirements and accurate financial reporting. This guide outlines the statutory audit procedures for share application money pending allotment, addressing common queries and potential areas of confusion.
Understanding Share Application Money Pending Allotment
What is Share Application Money Pending Allotment?
Share application money pending allotment is the amount received from applicants for shares that have not yet been formally allotted by the company. This occurs during the process of raising capital when applications exceed the shares available, or when the company is still processing the allotment of shares.
Legal Framework Governing Share Application Money Pending Allotment in India
Key Regulations
The regulatory framework governing share application money pending allotment is detailed and ensures that companies adhere to stringent guidelines for transparency, accountability, and legal compliance. Here’s an in-depth overview of the key regulations:
Companies Act, 2013
The Companies Act, 2013, is the cornerstone legislation for corporate governance in India. Several sections within this Act specifically address the handling of share application money.
1. Section 42 – Private Placement:
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- Procedure for Private Placement: This section outlines the detailed procedure for issuing securities, including shares, through private placement. It mandates that the company must make an offer or invitation to subscribe for securities to a select group of persons not exceeding fifty or such higher number as may be prescribed, excluding qualified institutional buyers and employees under a scheme of employees’ stock option.
- Offer Letter and Subscription: The company must issue a private placement offer letter (PAS-4) to potential investors and must maintain a complete record of such offers in Form PAS-5.
- Allotment Timeline: The company must allot securities within sixty days from the receipt of the application money. If it fails to do so, it must refund the money to the subscribers within fifteen days from the expiry of sixty days. If the company fails to refund the application money within the specified period, it is liable to repay that money with interest at the rate of twelve percent per annum from the expiry of the sixtieth day.
2. Section 62 – Further Issue of Share Capital:
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- Rights Issue: This section allows companies to offer new shares to existing shareholders in proportion to their current holdings. The procedure for rights issues must comply with the detailed requirements under this section, including the timeline for acceptance and the method of offer.
- Preferential Allotment: The section also permits preferential allotment of shares, which requires a special resolution to be passed in the general meeting of the shareholders. The offer must comply with all the conditions specified under the Act, ensuring fairness and transparency.
3. Section 39 – Allotment of Securities by Company:
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- Minimum Subscription: The company must receive the minimum subscription amount specified in the prospectus before proceeding with the allotment of shares. If the minimum subscription is not received, all application money must be refunded to the applicants.
- Return of Allotment: The company is required to file a return of allotment with the Registrar of Companies (RoC) in Form PAS-3 within thirty days of the allotment of shares, ensuring that the issuance is recorded officially.
4. Schedule III – Financial Statement Presentation:
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- Disclosure Requirements: Schedule III of the Companies Act, 2013, provides the format for financial statements and requires specific disclosures related to share application money pending allotment. This includes the amount received, the number of shares applied for, the status of allotment, and any refunds made.
SEBI Regulations
The Securities and Exchange Board of India (SEBI) plays a critical role in regulating the capital markets and ensuring investor protection. SEBI regulations are particularly relevant for listed companies.
- SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR):
- Eligibility and Conditions: SEBI ICDR regulations set out detailed eligibility criteria for companies issuing shares and the conditions they must fulfill. This includes minimum public shareholding norms, pricing guidelines, and disclosures related to the issue of shares.
- Disclosure Requirements: SEBI mandates extensive disclosures regarding the issue of shares, including the terms and conditions of the offer, the purpose of the issue, the identity of the allottees, and their relationship with the company. These disclosures are essential to ensure transparency and protect investor interests.
- Application Money Handling: SEBI ICDR regulations also provide guidelines on the handling of application money. It requires that the funds be kept in a separate bank account until the shares are allotted. This ensures that the money is not used by the company for any other purposes until the allotment process is completed.
- Refund Policy: If the shares are not allotted within the specified timeline, SEBI mandates that the application money must be refunded to the applicants. This is to protect the investors’ interests and ensure that their funds are not unduly held by the company.
Accounting Standards
The Institute of Chartered Accountants of India (ICAI) prescribes accounting standards that companies must follow while preparing their financial statements. These standards ensure consistency, transparency, and accuracy in financial reporting.
- AS 18/Ind AS 32 – Financial Instruments: Presentation:
- Classification and Measurement: These standards provide guidelines on the classification and measurement of financial instruments, including share application money. They require companies to distinguish between equity and liability components and to account for the fair value of instruments at the time of receipt.
- Disclosure Requirements: Companies must disclose detailed information about share application money, including the amount received, the number of shares applied for, the status of allotment, and any conditions attached to the application.
- Ind AS 1 – Presentation of Financial Statements:
- Presentation Guidelines: Ind AS 1 sets out the overall requirements for the presentation of financial statements, guidelines for their structure, and minimum requirements for their content. This standard ensures that financial statements provide a true and fair view of the financial position and performance of the company.
- Disclosures: Ind AS 1 requires companies to provide disclosures that help users understand the nature and implications of the transactions related to share application money pending allotment. This includes details about the terms of the issue, the timeline for allotment, and the refund policy.
Ministry of Corporate Affairs (MCA) Guidelines
The Ministry of Corporate Affairs (MCA) issues guidelines and notifications to provide additional clarity on the application of the Companies Act and other related regulations.
- Circulars and Notifications:
- Clarifications and Amendments: The MCA regularly issues circulars and notifications to clarify the provisions of the Companies Act and related rules. These may include specific instructions on the handling of share application money, ensuring that companies remain compliant with the evolving regulatory framework.
- Compliance Requirements: MCA guidelines often provide detailed procedures for compliance with statutory requirements, including the filing of returns, maintenance of records, and disclosure obligations.
Objectives of Auditing Share Application Money Pending Allotment
- Accuracy and Completeness: Ensuring all transactions related to share application money are accurately recorded and reported.
- Compliance: Verifying adherence to relevant statutory requirements and accounting standards.
- Disclosure: Assessing the adequacy of disclosures in the financial statements.
Audit Procedures for Share Application Money Pending Allotment
1. Verification of Authorization and Documentation
Audit Steps:
- Review Board Resolutions: Examine board resolutions authorizing the issue of shares and the receipt of share application money.
- Inspect Offer Documents: Check the prospectus or offer documents to ensure compliance with the terms of the share issue.
- Verify Compliance: Ensure the issuance complies with Sections 42 and 62 of the Companies Act, 2013, and SEBI ICDR Regulations.
Common Queries and Confusions:
- Query: Is a special resolution required for accepting share application money?
- Clarification: Yes, a special resolution is typically required for private placements and preferential allotments.
2. Examination of Money Received
Audit Steps:
- Verify Bank Statements: Cross-check the amounts received as share application money with bank statements.
- Reconcile Amounts: Ensure the amounts recorded in the books match the amounts deposited in the bank.
- Check Application Registers: Verify entries in the application registers against the money received.
Common Queries and Confusions:
- Query: How should excess application money be handled?
- Clarification: Excess application money must be refunded within a stipulated period as per Section 39 of the Companies Act, 2013.
3. Accounting Treatment and Compliance
Audit Steps:
- Check Ledger Entries: Verify that the share application money received is correctly recorded under the appropriate account.
- Review Accounting Policies: Ensure that the accounting policies adopted are consistent with AS 18/Ind AS 32.
- Examine Compliance with Standards: Ensure compliance with relevant accounting standards regarding the classification and disclosure of financial instruments.
Common Queries and Confusions:
- Query: How should share application money pending allotment be classified in the balance sheet?
- Clarification: It should be classified as a separate line item under equity and liabilities until allotment.
4. Allotment and Refund Process
Audit Steps:
- Verify Allotment Terms: Check that the allotment of shares complies with the terms and conditions outlined during the issue.
- Review Refund Policies: Ensure that the company’s policies regarding the refund of excess application money are clearly defined and followed.
Common Queries and Confusions:
- Query: What happens if the shares are not allotted within the stipulated time?
- Clarification: The company must refund the share application money if shares are not allotted within the stipulated time frame as per Section 39 of the Companies Act, 2013.
5. Disclosure in Financial Statements
Audit Steps:
- Review Notes to Accounts: Ensure adequate disclosure of the terms, conditions, and status of share application money.
- Check Compliance with SEBI and MCA Guidelines: Ensure that disclosures meet the regulatory requirements of SEBI and the Ministry of Corporate Affairs.
Common Queries and Confusions:
- Query: What specific disclosures are required for share application money pending allotment?
- Clarification: Disclosures should include the amount received, the number of shares applied for, the status of allotment, and any refunds made.
Practical Case Studies and Examples
Case Study 1: XYZ Ltd. Receives Share Application Money
Scenario: XYZ Ltd. invited applications for 50,000 shares at ₹10 each, receiving applications for 70,000 shares, leading to excess application money.
Audit Steps:
- Authorization Verification:
- Reviewed board resolution and shareholder approval for the share issue.
- Verified compliance with the Companies Act, 2013, and SEBI ICDR Regulations.
- Money Received:
- Cross-checked bank statements for ₹7,00,000 received.
- Reconciled amounts with the application register.
- Accounting Treatment:
- Ensured ₹7,00,000 was correctly recorded under “Share Application Money Pending Allotment.”
- Verified compliance with AS 18/Ind AS 32.
- Allotment and Refund:
- Verified that shares were allotted to applicants for 50,000 shares and excess money was refunded to applicants for 20,000 shares.
- Ensured refunds were processed within the stipulated time.
- Disclosure:
- Verified adequate disclosures in the notes to accounts, including the amount received, shares applied for, allotment status, and refunds made.
Case Study 2: ABC Ltd. Handles Delayed Allotment
Scenario: ABC Ltd. received share application money but faced delays in the allotment process due to regulatory approvals.
Audit Steps:
- Review Allotment Terms:
- Checked the terms of the share issue and the reasons for the delay in allotment.
- Ensured the delay was communicated to applicants.
- Refund Process:
- Verified the company’s policy for handling delays and ensuring applicants were informed about potential refunds.
- Ensured that any refunds due to delays were processed within the regulatory time frame.
- Accounting Adjustment:
- Ensured the share application money remained correctly recorded under “Share Application Money Pending Allotment” until the issue was resolved.
- Disclosure:
- Verified disclosure of the delay and its reasons in the financial statements, ensuring transparency with shareholders and regulatory bodies.
Conclusion:
Auditing share application money pending allotment involves a thorough examination of authorization, receipt, accounting treatment, allotment, refund processes, and disclosures. By following the structured audit steps outlined and addressing common queries and confusions, auditors can ensure accurate reporting and compliance with Indian laws. Incorporating practical case studies enhances understanding and provides real-world context, making the audit process more comprehensive and informative.
Author
CA Sourabh Kothari (C.A., B.Com)
He is currently working as Partner – Risk and Transaction advisory with a renowned firm in Jaipur having experience in Internal Audit, IFC Audit, Business consultancy, Due Diligence and Management consultancy.
E-mail: Sourabh.kothari@jainshrimal.in | LinkedIn: Sourabh Kothari
