Punishment for Personation for Acquisition of Securities (Section 38)
## Punishment for Personation for Acquisition of Securities (Section 38)
### Purpose
To prevent allotment of shares in fictitious names and curb fraudulent manipulation of share applications.
### Section 38(1) — Offences punishable u/s 447
A person shall be liable for punishment under Section 447 (punishment for fraud) if he:
(a) Makes or abets the making of an application in a fictitious name to a company for acquiring or subscribing for its securities; or
(b) Makes or abets the making of multiple applications in different names, or in different combinations of his name/surname, for acquiring or subscribing for its securities; or
(c) Otherwise induces, directly or indirectly, a company to allot or register any transfer of securities to him or to any other person in a fictitious name.
### Section 38(2) — Mandatory disclosure in prospectus
Every company issuing a prospectus must prominently reproduce the provisions of sub-section (1) in:
The prospectus, and
Every form of application for securities.
### Section 38(3) — Power of Court (Disgorgement)
Where a person is convicted under this section, the court may order:
Disgorgement of any gain made by such person, and
Seizure and disposal of securities found in his possession.
### Section 38(4) — Credit to IEPF
Amounts received through disgorgement or disposal of securities under sub-section (3) shall be credited to the Investor Education and Protection Fund (IEPF).
### Important Note on Liability
A person who gets shares allotted in a fictitious name still becomes liable as a shareholder. Where a person carried on business under an assumed name and took shares in that name, the trustee in bankruptcy could not avoid liability in respect of those shares.
Worked example
### Example 1
Example 1 (Multiple Applications): Mr. Ravi Kumar submits applications under names 'R. Kumar', 'Ravi K.', 'Kumar R.' and 'Ravi Kumar' to obtain larger allotment in an IPO. He has committed an offence under Section 38(1)(b) and is liable for punishment under Section 447 (fraud).
### Example 2
Example 2 (Fictitious name): A company allots shares to 'Mr. Phantom'—a non-existent person—on application by Mr. X. Mr. X is liable under Section 38(1)(a). Additionally, on conviction, the Court may order disgorgement of gains and seizure of those securities; proceeds go to the IEPF.
⚠️ Common exam mistakes
Thinking that only the applicant is liable — those who 'abet' the making of fictitious/multiple applications are equally liable.
Forgetting that liability as a shareholder still attaches even though the name used is fictitious or assumed.
Overlooking the mandatory requirement to reproduce Section 38(1) in the prospectus AND every application form.
Confusing the destination of disgorged amount — it goes to the IEPF, not back to the company.
Bare-Act text Section 38 · The Companies Act, 2013 · click to expand
Section 38(1): Any person who — (a) makes or abets making of an application in a fictitious name to a company for acquiring, or subscribing for, its securities; or (b) makes or abets making of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities; or (c) otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious name, shall be liable for action under section 447. (2) The provisions of sub-section (1) shall be prominently reproduced in every prospectus issued by a company and in every form of application for securities. (3) Where a person has been convicted under this section, the Court may also order disgorgement of gain, if any, made by, and seizure and disposal of the securities in possession of, such person. (4) The amount received through disgorgement or disposal of securities under sub-section (3) shall be credited to the Investor Education and Protection Fund.