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CA Intermediate · Corporate and Other Laws · Prospectus and Allotment of Securities

Orchid Foods Ltd, an unlisted public company, allotted shares to 50 identified persons by private placement. The company received the application money from Mr. Rao by cash in a manner not through a banking channel. What is the legal position regarding the money received for private placement?

Receiving private placement subscription money in cash is invalid. The Act requires payment through banking channels such as cheque, demand draft or electronic transfer from the subscriber's own bank account, so the amount of cash or timing of the allotment letter makes no difference.

  1. AValid, since cash is legal tender up to any amount
  2. BValid, provided the amount is below ₹20,000
  3. CInvalid, because the money must be received through banking channels and not in cashCorrect
  4. DValid, if the allotment letter is issued within 60 days

Explanation

For private placement, the Act requires that subscription money be paid only through cheque, demand draft or other banking channels, not in cash. The money must also come from the bank account of the person subscribing. Hence cash receipt is not permissible irrespective of the amount.

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