Section 40 of the Companies Act, 2013: Securities to Be Dealt with in Stock Exchanges
Section 40 regulates a company's public offer where the securities are proposed to be dealt with on a recognised stock exchange. It requires advance application to a recognised stock exchange, disclosure of the exchange in the prospectus, safeguarding of public application money and compliance with the statutory consequences of default.
What does Section 40 require?
Before making a public offer, the company must apply to one or more recognised stock exchanges and obtain permission for the securities to be dealt with on the relevant exchange or exchanges. If the prospectus states that such an application has been made, it must identify the stock exchange or exchanges concerned.
Section 40 - provision explained sub-section by sub-section
Section 40(1): Permission from recognised stock exchange
Every company making a public offer must, before the offer is made, apply to one or more recognised stock exchanges and obtain permission for the securities to be dealt with there.
Section 40(2): Disclosure in prospectus
Where the prospectus states that the application required by sub-section (1) has been made, the prospectus must also state the name or names of the stock exchange or exchanges on which the securities are to be dealt with.
Section 40(3): Separate bank account for application money
Money received from the public on applications for securities must be kept in a separate account with a scheduled bank. It may be used for adjustment against allotment after the securities are permitted to be dealt with on the exchange specified in the prospectus, or for repayment to applicants within the period specified by SEBI where the company cannot allot the securities.
Section 40(4): Waiver is void
An applicant cannot validly be required to waive compliance with Section 40. A condition seeking to bind an applicant to such a waiver is void.
Section 40(5): Consequence of default
For non-compliance with Section 40, the company is punishable with a fine of not less than Rs. 5 lakh and up to Rs. 50 lakh. Every officer of the company who is in default is punishable with a fine of not less than Rs. 50,000 and up to Rs. 3 lakh.
Section 40(6): Commission for subscription
A company may pay commission to a person in connection with subscription to its securities, subject to the prescribed conditions. The detailed conditions should be read with the applicable Companies (Prospectus and Allotment of Securities) Rules, 2014 and other securities-law requirements, where applicable.
Meaning of important expressions
Public offer: For the Companies Act framework, the expression should be read with Section 23 and the applicable provisions governing public offers and prospectuses.
Recognised stock exchange: The expression refers to a stock exchange recognised under the applicable securities law framework. Section 40 requires permission from such exchange before the public offer is made.
Scheduled bank: Section 40(3) requires application monies to be kept in a separate account in a scheduled bank so that the money is protected and used only for the statutory purposes.
Practical compliance points
A company proposing a public offer should coordinate the stock-exchange application, prospectus disclosures and banking arrangements before opening the offer. Application money should remain segregated and should not be diverted to general corporate use. If allotment cannot be completed, repayment must follow the applicable SEBI timeline and regulatory requirements.
Amendment to punishment under Section 40(5)
The Companies (Amendment) Act, 2020 removed the words providing imprisonment of up to one year for an officer in default. It also removed the words referring to "or with both" after the monetary fine. These amendments took effect on 21 December 2020. Accordingly, older copies of Section 40 that still reproduce the imprisonment language should not be treated as the current text.
Related provisions
Section 40 forms part of the Companies Act provisions dealing with prospectuses and allotment of securities. For context, readers may also refer to Section 23 - public offer and private placement, Section 26 - matters to be stated in prospectus, Section 29 - public offer in dematerialised form and Section 39 - allotment of securities.
This article is intended as a general legal reference. Companies making a securities issue should verify the current Companies Act, applicable rules, SEBI regulations, notifications and stock-exchange requirements relevant to the particular issue.