From non-descript companies that bagged coal blocks to shell companies related to BJP president Nitin Gadkari's business interests, the use of 'share application money' is emerging as a convenient way for promoters to channel equity investments into their companies to guise questionable, perhaps illegal, financial practices.


Share application money represents an investment that has come in to a company without corresponding shares being issued to investors, and can thus be reversed. Several promoter investments in companies in the news in recent times all had share application money that was a large multiple of their equity capital. 

A company in which Gadkari was a director had only a few lakh of rupees as share capital, but almost Rs 40 crore as share application money. Two coal block winners, Field Mining and Ispat Limited and Veerangana Steel, showed a similar pattern. 

Three accounting experts ET spoke to say, under normal circumstances, shares are issued within four to eight weeks, and the share application money is converted into equity capital. 

However, they add, if the amount is large and conversion lingers, as is the case with coal-blocks and Gadkarirelated entities, it can be a red flag. 

Use And Abuse 

A chartered accountant with a leading accounting firm who did not want to be named says that promoters continuously use share application money for four purposes: illegal (channelling black money into a company and legitimising it), contentious (moving funds between multiple entities to shake off a money trail), ingenious (paying lower taxes) and strategic (keeping its options open). "The fact that share application money was larger than issued capital means the intention was never to convert into shares, but to route money," he says. 

The investment by Anil Ambani controlled Reliance Infrastructure in Delhi Airport Metro Express Private Limited ( DAMEPL) — the entity in which Reliance owns 95% — seems to be an exercise in the promoter keeping its options open. In March 2010, of DAMEPL's share capital of Rs 467 crore, only Rs 1 lakh was fully paid-up capital. The remaining Rs 466.99 crore was 'share application money'. Sometime in2010-11, Reliance Infrastructure converted this entire amount into debt. 

The company declined a comment. 

Terming share application as a "quasi-loan," Jamil Khatri, global head of accounting advisory services, KPMG, says: "The advantage is that it enhances a company's net worth without being converted into share capital and money can be taken back." 

Take Chintamani Agrotech Private Limited, a firm in which Gadkari was a director for about 10 years till August 2011. This company aborted its initial plan to build sugar and power plants, and has never generated any revenues from operations. As on March 2011, it had a paid-up capital of Rs 0.53 crore and application money of Rs 39.6 crore. The share application money figure was Rs 33.8 crore in March 2010 and Rs 21 crore in March 2009. 

Nagpur-based businessman Manish Mehta, whose family has a 98% stake in Chintamani, did not respond to an email query on the disproportionate, and continuous, level of share application money in the company. (Economic Times)