# Securities to be Dealt with in Stock Exchanges [Section 40]

## 1. Mandatory Application to Stock Exchange

Before making a public offer, a company shall:

Apply to one or more recognised stock exchanges
Obtain permission for the securities to be listed and traded

## 2. Disclosure in Prospectus

The prospectus shall state the name(s) of the stock exchange(s) where the securities will be listed and traded.

## 3. Separate Bank Account Requirement

All application monies received shall be:

Kept in a separate bank account with a scheduled bank
Used only for:
Adjustment against allotment (if securities are listed on the named exchanges), OR
Repayment if the company cannot allot

## 4. Waiver Conditions are Void

Any condition trying to make applicants waive compliance with Section 40 is void.

## 5. Penalty for Default

Person	Penalty
Company	₹5 lakh to ₹50 lakh
Officer in default	₹50,000 to ₹3 lakh

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## 6. Payment of Underwriting Commission [Section 40(6)]

### Permissibility

Commission may be paid to persons in connection with subscription to securities, subject to conditions.

### Conditions

#### (a) Authorisation

Must be authorised by the company's AOA.

#### (b) Source

Out of issue proceeds, OR
Out of company's profits, OR
Both.

#### (c) Rate of Commission

Type of Security	Maximum Commission
Shares	5% of issue price (or AOA limit, whichever is lower)
Debentures	2.5% of issue price (or AOA limit, whichever is lower)

#### (d) Disclosure in Prospectus

Must disclose:

Name of underwriters
Rate and amount of commission
Number of securities to be underwritten/subscribed by each underwriter

#### (e) No Commission for Non-Public Securities

No commission is payable to underwriters for securities not offered to the public.

#### (f) Filing with ROC

A copy of the commission contract must be filed with the ROC at the time of filing the prospectus.

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## Quick Summary Card

```

Public Offer Compliance Checklist (Sec 40):

✓ Stock exchange application BEFORE public offer

✓ Name exchange(s) in prospectus

✓ Separate bank account (scheduled bank)

✓ Use funds only for allotment/refund

✓ Underwriting commission: max 5% (shares) / 2.5% (debentures)

✓ File commission contract with ROC

```

Worked example

### Example 1

Example 1: ABC Ltd issues an IPO without applying to any stock exchange and starts allotting shares.

Answer: Violation of Section 40(1). Allotment is irregular. Company penalty: ₹5L to ₹50L. Officer in default: ₹50,000 to ₹3L.

### Example 2

Example 2: XYZ Ltd issues shares at ₹100 per share. AOA permits commission up to 4% on shares. Company pays underwriter 5%.

Answer: Maximum permissible is the LOWER of (a) 5% of issue price = ₹5, and (b) AOA limit of 4% = ₹4. So maximum is ₹4 per share. Paying 5% (₹5) violates Section 40(6).

### Example 3

Example 3: A company issues debentures at ₹1,000 each. AOA permits 3% commission. The company pays 2.5%.

Answer: Maximum is the LOWER of 2.5% (statutory) and 3% (AOA) = 2.5% = ₹25 per debenture. 2.5% paid is within limits. Compliant.

### Example 4

Example 4: A company keeps IPO application monies in its main current account along with operational funds.

Answer: Violation of Section 40(3). Funds MUST be in a separate bank account with a scheduled bank, used only for allotment adjustment or refund.

⚠️ Common exam mistakes

Using 'higher of' instead of 'lower of' when comparing AOA limit vs statutory cap on commission.
Confusing the share commission limit (5%) with the debenture commission limit (2.5%) — they are different.
Forgetting to file the commission contract with the ROC at the time of prospectus filing.
Mixing application money with general funds — it MUST be in a separate scheduled bank account.
Trying to enforce a waiver clause — any such condition is statutorily void.

Bare-Act text Section 40 · Companies Act, 2013 · click to expand

Section 40 — Securities to be dealt with in stock exchanges: (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. (2) Where a prospectus states that an application has been made for permission for the securities offered thereby to be dealt with in one or more stock exchanges, the prospectus shall state the name or names of the stock exchange. (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. (5) If a default is made in complying with the provisions of this section, the company shall be punishable with a fine which shall not be less than five lakh rupees but which may extend to fifty lakh rupees and every officer of the company who is in default shall be punishable with a fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees. (6) A company may pay commission to any person in connection with the subscription to its securities subject to such conditions as may be prescribed.

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Securities to be Dealt with in Stock Exchanges (Section 40) & Underwriting Commission

Worked example

⚠️ Common exam mistakes