Private placement money: locked until PAS-3 is filed, not until it arrives

Summary

Money received on a private placement under section 42 of the Companies Act, 2013 cannot be used until the shares are allotted and the return of allotment in PAS-3 is filed, and PAS-3 is due within 15 days of allotment. Before the money even arrives the offer letter must wait for the special resolution to be filed in MGT-14, and the Registrars have been penalising exactly these slips, in writing, since 2025.

The situation

A start-up closes its first angel round. The investors transfer ₹1.5 crore in the second week of the month, the board allots the shares a few days later, and the founders, who have been waiting three months for this money, pay the vendor bills that afternoon. PAS-3 goes in "when the CS gets to it".

Every step of that is ordinary, and one of them is a contravention of section 42 carrying a penalty up to the amount raised or ₹2 crore, whichever is lower, on the company and on each promoter and director. On 14 October 2025 ROC Delhi imposed ₹4,00,000 on Hexafun Private Limited and two of its directors for four slips of this kind, after the start-up discount had already been applied; a separate order of 29 September 2025 imposed ₹76,500 for a PAS-3 filed 51 days late.

The rule

The chain, in the order the law requires it, for a private placement of shares or convertibles:

The lock. The proviso to s.42(4) is short: a company shall not utilise the monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar. Both conditions. Money sitting in the separate account after allotment but before PAS-3 is still locked, and s.42(6) says what that account may be used for: adjustment against allotment, or repayment.

The penalties.

Late PAS-3 and MGT-14 also carry the MCA additional fee, a multiple of the normal fee rising from 2× after 15 days to 12× beyond 180 days (Registration Offices and Fees Rules, as amended by G.S.R. 12(E) of 11 January 2022).

Where people go wrong

"The money is in, so we can use it." The lock runs from the day the money lands to the day PAS-3 is filed, not to the day of allotment. A company that allots on the 10th and files PAS-3 on the 24th has fourteen days in which every rupee spent is a s.42(10) exposure. That was Hexafun's fourth finding.

Issuing the offer letter the day the shareholders vote. Rule 14(8), inserted in August 2018, says the offer letter may be issued only after the relevant resolution has been filed with the Registrar. The confusion usually comes from G.S.R. 464(E) of 5 June 2015, which excuses a private company from filing its s.179(3) board resolutions. It does not excuse the special resolution a private placement needs. A PAS-4 dated before the MGT-14 filing date is a contravention on its face.

Paying into the operating account. The separate account under s.42(6) is not a formality, and subscription money mixed into the current account is Hexafun's third finding.

Counting investors instead of offerees. The 200-person cap in s.42(2) counts persons offered in the financial year, per kind of security, not persons allotted, excluding QIBs and ESOP employees. A wide "let's see who bites" circulation can breach it with a round of twelve.

Assuming the halving is automatic. Section 446B needs the company to be a DPIIT-recognised start-up or a small company (₹10 crore paid-up and ₹100 crore turnover since 1 December 2025). Many second-round companies are neither.

Using a rights issue or a note without noticing the difference. A rights issue under s.62(1)(a) carries none of this machinery: no PAS-4, no separate account, no lock, and PAS-3 within 30 days under s.39(4). A convertible note of ₹25 lakh or more in a single tranche to a DPIIT start-up, convertible or repayable within ten years, is outside the deposit rules under Rule 2(1)(c)(xvii) of the Acceptance of Deposits Rules and outside s.42 until conversion. Miss one of those conditions and it is a deposit.

The tranche question. Where money arrives in several instalments, which receipt starts the 60 days is not settled in the rule. The cautious reading takes the first receipt.

What to do

1. Put the dates in order before anyone is emailed a term sheet: special resolution, MGT-14 filing, PAS-5, PAS-4, money, allotment, PAS-3. Nothing on that list may be earlier than the item above it.
2. Open the separate bank account before the special resolution, and give investors only its details.
3. Allot within the 60 days, and diarise the PAS-3 date as allotment plus 15 days on the day you allot.
4. Tell the founders, in writing, that the money cannot be spent until the PAS-3 acknowledgement is in hand.
5. If the round has already slipped, list every defect before approaching the Registrar; the penalties are per provision and per person, and the order will count them that way.

The tool

I built a round clock because the same question kept arriving the day after a round closed: "can we use the money now?" The honest answer depends on six dates, and a deadline calendar gets it wrong, because the worst failures here are sequence failures, not late filings. You enter how the round was done, when the money came in, when you allotted, whether PAS-3 is filed and how much was raised; it lays out the dated chain, turns each step green, amber or red, says in one sentence whether the money is locked and what unlocks it, and shows the s.42(9) accrual and the s.42(10) exposure with the s.446B reduction applied where the company qualifies. It reproduces both Hexafun figures to the rupee. It does not draft or file PAS-3, PAS-4 or MGT-14, it does not handle FEMA reporting for foreign investors, it tracks one round at a time, and it shows the statutory maximum an adjudicating officer starts from, not a prediction of the order. Nothing you type leaves your browser.

Open the round clock page

Sources

1. Companies Act, 2013, s.42 (text) — https://ca2013.com/offer-or-invitation-for-subscription-of-securities-on-private-placement/
2. Companies (Prospectus and Allotment of Securities) Rules, 2014, Rule 14 — https://ca2013.com/rule-14-companies-prospectus-and-allotment-of-securities-rules2014/
3. Companies Act, 2013, s.117 — https://ca2013.com/resolutions-and-agreements-to-be-filed/
4. Companies Act, 2013, s.62 — https://ca2013.com/further-issue-of-share-capital/
5. Companies (Share Capital and Debentures) Rules, 2014, Rule 13 — https://ca2013.com/rule-13-companies-share-capital-and-debentures-rules-2014/
6. Companies Act, 2013, s.446B — https://ibclaw.in/section-446b-of-the-companies-act-2013-lesser-penalties-for-certain-companies/
7. Companies (Registration Offices and Fees) Rules, 2014, Rule 12 and Annexure — https://ca2013.com/rule-12-companies-registration-offices-and-fees-rules-2014/
8. Companies (Acceptance of Deposits) Rules, 2014, Rule 2(1)(c) — https://ca2013.com/rule/rule-21c-companies-acceptance-of-deposits-rules2014/
9. TaxGuru — ROC Delhi order against Hexafun on delayed PAS-3 (PO/ADJ/09-2025/DL/00697, 29 September 2025) — https://taxguru.in/company-law/roc-delhi-penalizes-hexafun-u-s-429delayed-pas-3-filing.html
10. Studycafe — ROC Delhi order against Hexafun under s.42(10) (PO/ADJ/10-2025/DL/00771, 14 October 2025) — https://studycafe.in/roc-delhi-penalises-company-and-its-directors-for-violating-private-placement-rules-396742.html
11. Taxmann — case study on Rule 14(8) — https://www.taxmann.com/post/blog/case-study-consequences-of-issuing-offer-for-private-placement-before-filing-the-resolution-with-the-rocs/
12. MMJC — survey of ROC penalty orders on private placement — https://mmjc.in/rocs-vigilance-on-private-placement-provisions-imposing-penalties-on-non-compliant-companies/