Minimum Subscription in Company Law

Starting a business is an exciting journey, but it involves more than just registering your company. One of the most important things is to make sure that the business has enough money to run smoothly. Without sufficient funds, even the best business idea can struggle to take off. Minimum Subscription is the minimum amount of money a company needs to raise from investors before it can start operating its business. For a company to begin operating, it needs money for things like paying employees, purchasing equipment, securing office space, and handling day-to-day expenses. This rule benefits both the business and its investors. For the business, it makes sure that there is enough capital to run operations smoothly and take on the challenges that come with starting up. For investors, it offers protection by making sure the business is financially stable enough to succeed in its early stages.

In this blog, we will discuss Minimum Subscriptions, why they are important, their legal implications, and how they affect the practical side of running a business so you can better understand how they support the longevity and success of your venture.

What is Minimum Subscription in Company Law?

In simple terms, a minimum subscription is the minimum amount of shares a company must sell to the public before it can proceed with its business operations. This rule is relevant when a company raises capital through the issuance of shares, such as through an Initial Public Offering (IPO) or a public offering.

In India, Section 39 of the Companies Act 2013 governs the provisions of minimum subscription. This section’s main objective is to ensure that a company does not proceed with its operations or its initial fundraising unless it has secured enough capital.

Section 39(1) of the Companies Act 2013 says that:

• A company cannot issue securities to the public unless it receives enough applications to meet the minimum subscription amount stated in its prospectus, i.e., before a company allot its shares to the public, the public must subscribe to at least 90% of the issued shares.
• If the company issues shares under a prospectus, the subscription must be completed within 30 days from the date of issue of the prospectus.
• The amount to be paid when applying for securities must be at least 5% of the total value of the security. The percentage can be changed by the Securities Exchange Board of India (SEBI).

Time Frame for Subscription:

Companies must complete the subscription process within 30 days or another period as set by the SEBI from the opening of the subscription period. If the required amount is not subscribed within this period, the offer becomes invalid.

Refunds:

If a company fails to meet the minimum subscription requirement, it must refund the money to investors who subscribed to it within 15 days from the date the subscription period ends.

Penalty:

If a company or its officers fail to comply with the requirements of Section 39 of the Companies Act, they are liable to pay the penalty of ₹1,000 for each day of the default or ₹1 lakh (whichever is lower)

Application to Public Companies:

These provisions primarily apply to public companies. Private companies that do not offer shares to the general public are not subjected to the exact minimum subscription requirements.

Why is Minimum Subscription Important?

The minimum subscription is important for the following reasons:

• Ensure Financial Stability within the Company: The Minimum Subscription guarantees that a company has enough funds before it starts operating its business. Suppose the company fails to raise the necessary prescribed amount. In that case, it can face cash flow problems in the future, such as difficulty paying its bills, providing salaries to its employees, or covering other operational costs.
• Protect Investors: The Minimum Subscription requirement protects investors. It ensures that a company cannot sell shares to people unless it has enough capital and interest in the business to back it up. In other words, the company has to prove that there’s enough demand and financial support before investors put their money in.
• Compliance with Regulations: Compliance with the minimum subscription is an essential legal requirement under Section 39 of the Companies Act, 2013, which ensures the orderly functioning of the company’s financial structure. Non-compliance can result in penalties, and the company may be instructed to refund the amount to the investors along with an interest of 15% p.a.
• Prevents Misuse of Funds: Without the minimum subscription requirement, companies can collect funds from investors without having a clear financial plan or operational foundation. This rule protects the companies from misusing funds or launching operations with insufficient capital.

Types of Companies and Minimum Subscription

• Public Companies: When a public company offers shares to the public, it must ensure that the minimum subscription condition is met. The company’s prospectus outlines the terms of the offer, including the total number of shares to be issued, the price, and the subscription period. Before proceeding, public companies must ensure that at least 90% of the offered shares are subscribed.
• Private Companies: Private companies are generally not required to meet the minimum subscription threshold because they mainly raise capital privately (through specific investors or venture capital). However, they are still governed by other provisions regarding capital and share allotments.

How Does Minimum Subscription Affect the IPO Process?

An Initial Public Offering (IPO) is a popular method for companies to raise capital. In an IPO, a company offers its shares to the public for the first time.

Step 1: The company prepares a prospectus and files it with the Securities and Exchange Board of India (SEBI) to announce the IPO.

Step 2: The subscription period begins, and investors are invited to buy shares in the company. The company sets a particular price and outlines the number of shares to be offered.

Step 3: The company must secure at least 90% of the offered shares to proceed with the issuance of shares and allotments.

Step 4: If the required minimum subscription is not met, the company cannot proceed with the share issuance. It must refund the money to all the investors within a prescribed period.

What Happens If the Minimum Subscription Is Not Met?

• Refund the Money: If the company does not achieve the required minimum subscription, the money collected from investors must be refunded within 15 days of the subscription period’s closure. The company will also have to cancel the allotment and declare the offer void.
• Reputational Loss: A failed subscription can significantly damage the credibility and reputation of the company in the market. Investors may take the company as weak, non-trustworthy, or unworthy of investment, leading to a loss of trust in the company’s future offerings.
• Inability to Proceed with Business: Minimum subscription is a mandatory requirement under the Companies Act, 2103. The company shall be unable to start its business operations or utilise the funds raised through the offer until it meets the minimum subscription requirement.

Steps for Companies to Ensure Minimum Subscription is Met Properly

To increase the chances of meeting the minimum subscription target, companies can take a few practical steps, some of which are mentioned below:

• Market Research: Before starting an IPO or public offering, the companies need to conduct deep market research. Understanding investor appetite, demand, and market conditions is crucial for setting a realistic subscription target.
• Effective Marketing: Companies should actively promote the offering through various channels. Engaging with investment bankers, creating awareness through digital platforms, and educating potential investors about the company’s value proposition can all help boost subscription levels.
• Engaging an Underwriter: Companies often work with underwriters (usually financial institutions or banks) who guarantee a certain amount of subscriptions. This arrangement can ensure that the company meets the minimum subscription requirement and minimises the risk of an unsuccessful offering.

Conclusion

The minimum subscription requirement in company law in India is an essential tool designed to protect both the investors and the company itself. It ensures that businesses are adequately funded before starting operations, preventing financial mismanagement and offering investors a certain degree of security. By adhering to these requirements, companies can build trust with their investors, comply with legal frameworks, and increase their chances of long-term success.

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FAQs

1. What is the minimum subscription amount required for a company to proceed with an IPO?

According to Section 39 of the Companies Act 2013, at least 90% of the offered shares must be subscribed before the company can proceed with the share allotment.

2. What happens if the minimum subscription is not met?

If the minimum subscription requirement is not met, the company must refund the amount received from investors within 15 days of the subscription period’s closure. Otherwise, the offer will be considered invalid.

3. Does the minimum subscription rule apply to private companies?

No, private companies are typically not subject to the minimum subscription rule, as they do not offer shares to the public. However, private companies still need to comply with other legal requirements under the Companies Act.

4. How long does a company have to refund investors if the minimum subscription is not met?

If the minimum subscription is not met, a company must refund the money to investors within 15 days of the subscription period’s closure.

5. Can a company reissue its offer if the minimum subscription is not met?

Yes, a company can reissue its offer after making necessary adjustments, such as changing the offering price or structuring the deal differently. Still, it must ensure the subscription meets the legal requirements.