Capital Subscription

When This Stage Arises. Capital Subscription is the stage at which a public company that wishes to raise funds from the general public invites the public to apply for its shares or debentures, by issuing a prospectus. A private company, being legally barred from inviting the public to subscribe for its securities, never passes through this stage at all — it raises its initial capital privately, from its own members, promoters and their personal contacts.

Role of the Prospectus, in Brief. The prospectus is the formal document through which a public company makes this invitation, and it must honestly disclose detailed information about the company — its objects, its management, its capital structure, the terms of the offer, and its financial position — so that a prospective investor can make an informed decision. The prospectus itself, and the different forms it can take (abridged, red herring, shelf and deemed prospectus), are studied in depth in the next chapter; this chapter is concerned only with where Capital Subscription fits into the overall sequence of forming a company.

Minimum Subscription. Section 39 of the Companies Act, 2013 provides that no allotment of shares can be made on a public company's first offer unless the amount stated in the prospectus as the minimum subscription has actually been subscribed, and the application money on it received. This safeguard exists to make sure a company begins its operations only with a genuinely adequate base of capital, rather than an inadequate or uncertain one. If the minimum subscription is not received within the period stated in the prospectus, the company cannot allot any shares on that issue at all — it must refund the entire application money received, within the time limit fixed by the rules; a delay in refunding makes the amount repayable with interest. …