Personation for Acquisition of Securities (Section 38)
# Punishment for Personation for Acquisition of Securities [Section 38]
Purpose: To prevent the allotment of shares in fictitious names — a practice used to evade allotment limits, defraud the public, or manipulate ownership.
---
## 1. The Offence
A person commits an offence under Section 38 and is liable under Section 447 if they:
(a) Make or abet the making of an application in a fictitious name for acquiring/subscribing to securities;
(b) Make or abet multiple applications in different names or combinations of names; OR
(c) Induce a company to allot or register securities in a fictitious name.
---
## 2. Company's Obligation
Every company issuing a prospectus shall prominently reproduce the provisions of Section 38(1) in:
The prospectus, AND
All application forms for securities.
This ensures applicants are clearly warned.
---
## 3. Court's Powers on Conviction
If convicted under Section 38, the court may order:
Disgorgement of any gain made by the convicted person.
Seizure and disposal of securities found in the person's possession.
---
## 4. Use of Proceeds
Amounts received from disgorgement OR disposal of seized securities are credited to the Investor Education and Protection Fund (IEPF).
---
## Summary Flow
```
Fictitious application → Conviction under S. 447
↓
Court orders disgorgement & seizure
↓
Proceeds → IEPF (Investor Fund)
```
Worked example
### Example 1
Example 1: Mr X applies for shares in the IPO of ABC Ltd in 50 different fictitious names to corner the maximum allotment.
Answer: This violates Section 38(1)(a) and (b). Mr X is liable under Section 447. The court may order disgorgement of any profits made and seizure of the shares. The seized shares' proceeds will go to the IEPF.
### Example 2
Example 2: ABC Ltd issues a prospectus but fails to reproduce Section 38 warning in its application forms.
Answer: The company has violated its obligation under Section 38(2). While Section 38(2) itself does not prescribe a specific penalty, this is a non-compliance with the Act and exposes officers in default to general penalty provisions.
### Example 3
Example 3: An investigation reveals that 200 shares of XYZ Ltd held by 'John Doe' (fictitious) actually belong to a person who was already allotted maximum shares.
Answer: The court can order seizure of the 200 shares, dispose them, and credit the proceeds to the IEPF. The person who induced the fictitious allotment is liable under Section 447.
⚠️ Common exam mistakes
Confusing Section 38 (fictitious names) with Section 39 (minimum subscription) — they cover different defaults.
Forgetting that the company's obligation is to REPRODUCE Section 38 in BOTH the prospectus AND application forms — not just one.
Thinking the seized proceeds go back to the company — they go to the IEPF.
Missing that 'abetting' is also an offence — not just the principal applicant.
Bare-Act text Section 38 · Companies Act, 2013 · click to expand
Section 38 — Punishment for personation for acquisition, etc., of securities: (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.