Issuance of Equity Shares on Private Placement Basis in Accordance with Section 42 of the Companies Act, 2013

Issuance of Equity Shares on Private Placement Basis in Accordance with Section 42 of the Companies Act, 2013. ROC penalty for violation of Section 42 of the Companies Act, 2013
Private placement of shares is a highly regulated domain under India’s Companies Act, 2013. Provisions ensure that when companies raise capital by inviting select groups of investors, the entire process is transparent, the money trail is unambiguous, and investors’ interests are safeguarded. A key element of these safeguards is the requirement that application money from investors must be received and kept exclusively in a designated bank account. Any deviation from these mandates invokes substantial penalties. This case brief presents the recent adjudication by the Registrar of Companies, Chennai, against Dashboard Account Aggregation Services Private Limited and its directors, analysing the violation of Section 42(10) of the Companies Act, 2013 and the resulting penalty order.
Factual Background
Dashboard Account Aggregation Services Private Limited (“the Company”) is registered with CIN U74999TN2021PTC144889 and operates as a licensed non-banking financial company (NBFC) in Chennai, Tamil Nadu. The principal directors involved are Mr. Venkatesh Krishnamoorti (DIN 09246848) and Mr. Vijayan Rajasekar (DIN 09246849).
In 2021, during an Extraordinary General Meeting held on 20 August, the company resolved to issue equity shares on a private placement basis in compliance with Section 42 of the Companies Act, 2013. The total intended capital raise amounted to Rs. 3,00,00,000. A critical part of the process required all investor contributions to be credited into a designated share application bank account prior to allotment.
However, when the company received Rs. 2,15,10,000 out of the intended Rs. 3 crore, these funds were deposited into a primary (non-designated) company account due to unforeseen delays by the bank in opening the requisite share application account. The urgency driving this move was the need to expedite filing for an RBI application for the NBFC-AA licence, occurring in parallel during the Covid-19 pandemic, which complicated banking formalities. Company management has consistently maintained in submissions that this failure was unintentional and caused solely by external logistical factors, not by design or neglect.
Once the designated share application account was activated, the entire amount was promptly transferred into it. The company ensured the funds were not utilised until the regulatory milestone of allotment and filing of the Return of Allotment (in e-form PAS-3), which occurred within 15 days as mandated. All shares were allotted within 60 days of receipt of the application money, complying with other timing aspects of Section 42.
Seeking to self-report and resolve the lapse, the company and its directors made a suo-moto application under Section 454 for adjudication of the irregularity and also sought leniency in penalty determination under Section 446B, since the company qualified as a small company at the time of the violation. Notices for e-adjudication were duly issued, and the directors, assisted by a practising company secretary, explained the entire chronology of events at the scheduled hearing.
Legal Issues
The adjudication revolved around several statutory and administrative questions:

Whether Dashboard Account Aggregation Services Private Limited has contravened the provisions of Section 42(6) of the Companies Act, 2013 by failing to deposit the entire share application monies received from identified investors into a separate designated bank account maintained in a scheduled bank prior to the allotment of securities.

Whether, upon establishing the violation of Section 42(6) of the Companies Act, 2013 by Dashboard Account Aggregation Services Private Limited, the company and its officers are liable for penalties under Section 42(10) of the Act; and further, whether such penalties may be mitigated under Section 446B considering that the company qualifies as a small company and had voluntarily reported and rectified the default.

Whether the promoters and directors of Dashboard Account Aggregation Services Private Limited are individually liable for penalty or refund in respect of the violation of Section 42(6) of the Companies Act, 2013, concerning the non-deposit of share application monies into the designated bank account prior to allotment.

What remedial and compliance directions were imposed by the Registrar of Companies (ROC), in addition to the monetary penalty, upon Dashboard Account Aggregation Services Private Limited for violation of Section 42(6) of the Companies Act, 2013?

Legal Framework
Section 42(6)- Section 42(6) of the Companies Act, 2013 mandates that all application money for shares under private placement must be received via cheque, demand draft, or other banking channel, and credited exclusively to a separate bank account in a scheduled bank. The law prohibits utilisation of such funds (other than for adjustment on allotment or for refund in case of failure to allot shares) until the regulatory return is filed and allotment finalised.
Section 42(10)- Section 42(10) states that, upon any contravention, the company, its promoters, and its directors shall be jointly liable to a penalty which may extend up to the amount raised or two crore rupees, whichever is less. Additionally, the company is required to refund all such monies with prescribed interest to the subscribers within thirty days of the order imposing the penalty.
Section 446B- Section 446B offers the possibility of reduced penalties for small companies and start-ups, but only at the ROC’s discretion, especially if the breach was without intent to deceive or defraud and all other procedures were faithfully followed.
Summary of Proceedings and Findings
After a careful review of submissions, including the detailed explanations from the directors and the record of regulatory compliance on all other points, the adjudicating authority established:

The company indeed raised part of the private placement funds in a non-designated bank account, in clear technical breach of Section 42(6). This was acknowledged by both the company and its management in their suo-moto application as well as during the hearing.

All remaining formal requirements were fulfilled: shares were allotted within the permitted time, the records were kept, and filings (PAS-3) made on time. Importantly, the funds were only used following allotment and statutory filings.

The Directors explained that the cause was bona fide and due to circumstances beyond management’s control, aggravated by the pandemic and the pressing nature of the RBI licensing deadline.

Despite the explanations, the law stipulates strict compliance with Section 42(6), especially as private placement is meant to ring-fence investor money until all compliance steps are complete. The ROC, while considering the voluntary and honest reporting, concluded that the default was established and the penalty must be imposed accordingly.
Penalty and Compliance Directions
Based on the facts and in accordance with Section 42(10), the ROC imposed a penalty of Rs. 2,00,00,000 (two crore rupees) on Dashboard Account Aggregation Services Private Limited, being the lesser of the amount raised through the private placement or two crores, and the statutory maximum for such violation. No penalty was imposed on the directors, Mr. Venkatesh Krishnamoorti and Mr. Vijayan Rajasekar, as they had not misappropriated the funds nor was there any evidence of mala fide conduct.
The order also compelled the company to strictly adhere to rectification directions, pay the penalty within ninety days, and to use only company funds not shareholder, director or promoter monies unrelated to the private placement in settling the penalty. Payment is to be made via the MCA e-Adjudication portal, with proof of payment (challan or SRN) uploaded to confirm compliance.
The company retains a right to appeal to the Regional Director, Chennai, within sixty days, using Form ADJ and providing a certified copy of the order to substantiate the grounds for challenge. Failure to pay within the time frame risks additional penal action under Section 454(8).
Final Note of the Article
The ROC Chennai’s order against Dashboard Account Aggregation Services Private Limited is a noteworthy instance of regulatory strictness and the philosophy underpinning the Companies Act’s compliance mandate. The order makes clear that even technical or procedurally unintentional lapses in handling investor funds will attract significant penalties. It also demonstrates that the “spirit of the law” safeguarding investor money and maintaining absolute transparency remains paramount for all capital-raising activity.
For practitioners, this case is a reminder of the necessity to prepare thoroughly for any private placement, including ensuring designated bank accounts are operational before subscription monies are collected. Directors and compliance professionals must recognise that while voluntary disclosures and good faith actions are valued, they do not exempt the company from financial consequences if the statute is breached.
Ultimately, the Companies Act’s private placement regime is predicated on unwavering integrity and procedural precision a standard that all companies, regardless of size or circumstance, must strive to uphold. 
Download MCA Adjudication Order

ROC penalty for violation of Section 42 of the Companies Act, 2013

Private placement of shares is a highly regulated domain under India’s Companies Act, 2013. Provisions ensure that when companies raise capital by inviting select groups of investors, the entire process is transparent, the money trail is unambiguous, and investors’ interests are safeguarded. A key element of these safeguards is the requirement that application money from investors must be received and kept exclusively in a designated bank account. Any deviation from these mandates invokes substantial penalties. This case brief presents the recent adjudication by the Registrar of Companies, Chennai, against Dashboard Account Aggregation Services Private Limited and its directors, analysing the violation of Section 42(10) of the Companies Act, 2013 and the resulting penalty order.

Factual Background

Dashboard Account Aggregation Services Private Limited (“the Company”) is registered with CIN U74999TN2021PTC144889 and operates as a licensed non-banking financial company (NBFC) in Chennai, Tamil Nadu. The principal directors involved are Mr. Venkatesh Krishnamoorti (DIN 09246848) and Mr. Vijayan Rajasekar (DIN 09246849).

In 2021, during an Extraordinary General Meeting held on 20 August, the company resolved to issue equity shares on a private placement basis in compliance with Section 42 of the Companies Act, 2013. The total intended capital raise amounted to Rs. 3,00,00,000. A critical part of the process required all investor contributions to be credited into a designated share application bank account prior to allotment.

However, when the company received Rs. 2,15,10,000 out of the intended Rs. 3 crore, these funds were deposited into a primary (non-designated) company account due to unforeseen delays by the bank in opening the requisite share application account. The urgency driving this move was the need to expedite filing for an RBI application for the NBFC-AA licence, occurring in parallel during the Covid-19 pandemic, which complicated banking formalities. Company management has consistently maintained in submissions that this failure was unintentional and caused solely by external logistical factors, not by design or neglect.

Once the designated share application account was activated, the entire amount was promptly transferred into it. The company ensured the funds were not utilised until the regulatory milestone of allotment and filing of the Return of Allotment (in e-form PAS-3), which occurred within 15 days as mandated. All shares were allotted within 60 days of receipt of the application money, complying with other timing aspects of Section 42.

Seeking to self-report and resolve the lapse, the company and its directors made a suo-moto application under Section 454 for adjudication of the irregularity and also sought leniency in penalty determination under Section 446B, since the company qualified as a small company at the time of the violation. Notices for e-adjudication were duly issued, and the directors, assisted by a practising company secretary, explained the entire chronology of events at the scheduled hearing.

Legal Issues

The adjudication revolved around several statutory and administrative questions:

Whether Dashboard Account Aggregation Services Private Limited has contravened the provisions of Section 42(6) of the Companies Act, 2013 by failing to deposit the entire share application monies received from identified investors into a separate designated bank account maintained in a scheduled bank prior to the allotment of securities.
Whether, upon establishing the violation of Section 42(6) of the Companies Act, 2013 by Dashboard Account Aggregation Services Private Limited, the company and its officers are liable for penalties under Section 42(10) of the Act; and further, whether such penalties may be mitigated under Section 446B considering that the company qualifies as a small company and had voluntarily reported and rectified the default.
Whether the promoters and directors of Dashboard Account Aggregation Services Private Limited are individually liable for penalty or refund in respect of the violation of Section 42(6) of the Companies Act, 2013, concerning the non-deposit of share application monies into the designated bank account prior to allotment.
What remedial and compliance directions were imposed by the Registrar of Companies (ROC), in addition to the monetary penalty, upon Dashboard Account Aggregation Services Private Limited for violation of Section 42(6) of the Companies Act, 2013?

Legal Framework

Section 42(6)- Section 42(6) of the Companies Act, 2013 mandates that all application money for shares under private placement must be received via cheque, demand draft, or other banking channel, and credited exclusively to a separate bank account in a scheduled bank. The law prohibits utilisation of such funds (other than for adjustment on allotment or for refund in case of failure to allot shares) until the regulatory return is filed and allotment finalised.

Section 42(10)- Section 42(10) states that, upon any contravention, the company, its promoters, and its directors shall be jointly liable to a penalty which may extend up to the amount raised or two crore rupees, whichever is less. Additionally, the company is required to refund all such monies with prescribed interest to the subscribers within thirty days of the order imposing the penalty.

Section 446B- Section 446B offers the possibility of reduced penalties for small companies and start-ups, but only at the ROC’s discretion, especially if the breach was without intent to deceive or defraud and all other procedures were faithfully followed.

Summary of Proceedings and Findings

After a careful review of submissions, including the detailed explanations from the directors and the record of regulatory compliance on all other points, the adjudicating authority established:

The company indeed raised part of the private placement funds in a non-designated bank account, in clear technical breach of Section 42(6). This was acknowledged by both the company and its management in their suo-moto application as well as during the hearing.
All remaining formal requirements were fulfilled: shares were allotted within the permitted time, the records were kept, and filings (PAS-3) made on time. Importantly, the funds were only used following allotment and statutory filings.
The Directors explained that the cause was bona fide and due to circumstances beyond management’s control, aggravated by the pandemic and the pressing nature of the RBI licensing deadline.

Penalty and Compliance Directions

Based on the facts and in accordance with Section 42(10), the ROC imposed a penalty of Rs. 2,00,00,000 (two crore rupees) on Dashboard Account Aggregation Services Private Limited, being the lesser of the amount raised through the private placement or two crores, and the statutory maximum for such violation. No penalty was imposed on the directors, Mr. Venkatesh Krishnamoorti and Mr. Vijayan Rajasekar, as they had not misappropriated the funds nor was there any evidence of mala fide conduct.

The order also compelled the company to strictly adhere to rectification directions, pay the penalty within ninety days, and to use only company funds not shareholder, director or promoter monies unrelated to the private placement in settling the penalty. Payment is to be made via the MCA e-Adjudication portal, with proof of payment (challan or SRN) uploaded to confirm compliance.

The company retains a right to appeal to the Regional Director, Chennai, within sixty days, using Form ADJ and providing a certified copy of the order to substantiate the grounds for challenge. Failure to pay within the time frame risks additional penal action under Section 454(8).

Final Note of the Article

The ROC Chennai’s order against Dashboard Account Aggregation Services Private Limited is a noteworthy instance of regulatory strictness and the philosophy underpinning the Companies Act’s compliance mandate. The order makes clear that even technical or procedurally unintentional lapses in handling investor funds will attract significant penalties. It also demonstrates that the “spirit of the law” safeguarding investor money and maintaining absolute transparency remains paramount for all capital-raising activity.

For practitioners, this case is a reminder of the necessity to prepare thoroughly for any private placement, including ensuring designated bank accounts are operational before subscription monies are collected. Directors and compliance professionals must recognise that while voluntary disclosures and good faith actions are valued, they do not exempt the company from financial consequences if the statute is breached.

Ultimately, the Companies Act’s private placement regime is predicated on unwavering integrity and procedural precision a standard that all companies, regardless of size or circumstance, must strive to uphold.