## Maintaining a Separate Bank Account for Application Money — Section 40(3)
### Why this rule exists
When a company invites the public to subscribe to its securities, investors part with their money before they know whether they will actually be allotted any shares. To prevent the company from dipping into this money for its own working-capital needs (and then being unable to refund applicants if allotment fails), the Act ring-fences these funds.
### The core rule
All application money received in a public issue must be:
1. Deposited in a separate bank account maintained with a scheduled bank, and
2. Used only for one of two specific purposes:
- Adjustment against allotment — when securities are actually allotted, the money in the account becomes the consideration for those securities; or
- Repayment — if the company is unable to allot (e.g., minimum subscription not reached), the money is refunded from this account.
Any other use — even temporarily — is a violation.
### Penalty for breach
| Defaulter | Penalty |
|---|---|
| Company | Fine of ₹ 5 lakhs to ₹ 50 lakhs |
| Officer in default | Fine of ₹ 50,000 to ₹ 3 lakhs |
### Memory hook
Think of the separate bank account as a trust account. The money belongs to the applicants until either (a) shares are allotted to them, or (b) it is returned. The company is only a custodian.