# Section 40 - Securities to be Dealt with in Recognised Stock Exchange

## Core Rule

Every company making a public offer of securities must, before making the offer, apply to one or more Recognised Stock Exchanges (RSE) and obtain permission for the securities to be dealt with on such exchange(s).

## Mandatory Disclosures in Prospectus

A prospectus issued for a public offer must state:

1. That application has been made to the RSE, and

2. The name of such RSE(s) where the securities will be listed.

## Application Money Handling

All money received on application must be kept in a separate bank account maintained with a scheduled bank.
This money can be used only for two purposes:
Adjustment against allotment of securities (where allotment is made), or
Repayment of monies received from applicants where the company is unable to allot securities.

## Consequences of Default

If the company fails to comply with Section 40, the company and every officer in default shall be punishable as prescribed under the Act.

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# Underwriting Commission (Section 40(6))

A company may pay underwriting commission to any person for subscribing or procuring subscription (whether absolute or conditional) to its securities, subject to the following conditions:

Condition	Requirement
Authorisation	Articles of Association (AOA) must authorise payment of commission
Source	Commission paid out of proceeds of the issue or profits of the company or both
Rate - Shares	Rate as per AOA, subject to maximum of 5% of the price at which shares are issued
Rate - Debentures	Rate as per AOA, subject to maximum of 2.5% of the price at which debentures are issued
Disclosure	Name of underwriter and rate of commission must be disclosed in the prospectus
Filing	A copy of the underwriting contract must be delivered to the Registrar of Companies (ROC)

## Important Restriction

No commission shall be paid on securities that are not offered to the public for subscription (e.g., on the portion taken up by promoters or those held back).

Worked example

### Example 1

Example 1 - Rate calculation: ABC Ltd makes a public issue of 1,00,000 equity shares at ₹100 each (Face value ₹10 + Premium ₹90). The AOA authorises underwriting commission of 6%. What is the maximum commission payable?

Solution: Although AOA permits 6%, the statutory ceiling for shares is 5% of issue price. Hence, commission shall not exceed lower of (AOA rate, 5%) = 5%.

Max. commission = 1,00,000 × ₹100 × 5% = ₹5,00,000.

### Example 2

Example 2 - Debenture commission: XYZ Ltd issues debentures worth ₹50 lakh. AOA authorises 3% commission to underwriters. What is the maximum commission?

Solution: Statutory cap for debentures = 2.5%. Lower of AOA rate (3%) and 2.5% = 2.5%.

Max. commission = ₹50,00,000 × 2.5% = ₹1,25,000.

### Example 3

Example 3 - Application money: PQR Ltd received ₹10 crore as application money. Due to oversubscription, it could allot to only some applicants. Where must the application money be kept and how can the balance be used?

Solution: The money must be kept in a separate bank account with a scheduled bank. It can be used only for: (a) adjustment against allotment to successful applicants, and (b) refund to unsuccessful applicants. No other use is permitted.

⚠️ Common exam mistakes

Confusing the underwriting commission ceilings - remember: Shares = 5%, Debentures = 2.5% (not vice versa).
Forgetting that AOA authorisation is mandatory - even if statutory ceiling permits, commission CANNOT be paid if AOA is silent or prohibits it.
Applying underwriting commission to securities NOT offered to public (e.g., promoter portion) - commission is payable only on portion actually underwritten and offered to public.
Believing application money can be used for general company purposes - it can only be used for allotment adjustment or refund.
Forgetting the requirement to file the underwriting contract with ROC.
Thinking application to stock exchange is post-issue - it must be made BEFORE making the public offer.

Bare-Act text Section 40 read with Rule 13 of Companies (Prospectus and Allotment of Securities) Rules, 2014 · Companies Act, 2013 · click to expand

Section 40(1): Every company making public offer shall, before making such offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges. Section 40(3): All monies received on application from the public for subscription to the securities shall be kept in a separate bank account maintained with a Scheduled Bank and shall not be utilised for any purpose other than - (a) for adjustment against allotment of securities where the securities have been permitted to be dealt with in the stock exchange or stock exchanges; (b) for the repayment of monies received from the applicants in pursuance of the prospectus, where the company is for any other reason unable to allot securities. Section 40(6): A company may pay commission to any person in connection with the subscription or procurement of subscription to its securities, subject to such conditions as may be prescribed.

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Section 40 - Securities to be Dealt with in Stock Exchange & Underwriting Commission

Worked example

⚠️ Common exam mistakes