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Section 40: Securities to be dealt with in stock exchanges

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Section 39 All 470 Sections of Companies Act Section 41
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Company Sec 2(20) Director Sec 2(34) Tribunal Sec 2(90)

Legal Commentary & Landmark Judgments: Section 40

Section 40 of the Companies Act, 2013 enforces the mandatory statutory obligation of every company making a public offer to secure listing permissions from recognized stock exchanges, deposit all application monies into an insulated escrow bank account, and regulate underwriting commissions.

  • Mandatory Stock Exchange Application Prior to Public Offer: Every company making a public offer must, prior to issuing the prospectus, make an application to one or more recognized stock exchanges and obtain in-principle permission for the securities to be dealt with, explicitly naming each such stock exchange in the prospectus.
  • Statutory Trust Architecture of Application Monies: All monies received on application from the public must be deposited and maintained in a separate bank account in a scheduled bank; these funds can only be utilized for adjustment against allotment of securities or for repayment where the company is unable to allot securities for any reason, and cannot be diverted to general operational accounts.
  • Voidness of Waiver Clauses and Underwriting Limits: Any condition purporting to require or bind an applicant for securities to waive compliance with any requirement of Section 40 is void ab initio; underwriting commissions are strictly restricted to 5% of the issue price for shares and 2.5% for debentures or the ceiling specified in the articles, whichever is less.
Key Landmark Precedents:
  • Raymond Synthetics Ltd. v. Union of India, (1992) 2 SCC 507: The Supreme Court held that application money collected from the public in response to a prospectus remains impressed with a statutory trust in the separate bank account until allotment and receipt of permission to trade from all designated stock exchanges; the company holds the funds purely as a fiduciary.
  • SEBI v. Sahara India Real Estate Corporation Ltd., (2013) 1 SCC 1: Affirmed that the obligation to make an application to recognized stock exchanges under Section 40 (formerly Section 73 of the 1956 Act) is a mandatory public law protection triggered automatically once an offer crosses the private placement threshold, and non-compliance vitiates the entire fund-raising exercise.
  • Rishabh Agro-Industries Ltd. v. P.N.B. Capital Services Ltd., (2000) 5 SCC 515: Reiterated that statutory escrow accounts for public issues are ring-fenced from company liabilities and cannot be attached by execution creditors or treated as free corporate assets until statutory listing permissions are completely obtained.
Courtroom Practice & Strategic Litigation Guidance:

In insolvency and liquidation proceedings under the IBC or winding-up actions under Section 271, application monies standing in separate scheduled bank accounts under Section 40(3) must be excluded from the liquidation estate. Plead that these monies constitute trust funds held under statutory bailment, ensuring their return to unpaid public applicants ahead of secured or operational financial creditors.

Section 39 All 470 Sections of Companies Act Section 41