Section 38 of the Companies Act, 2013: Punishment for Personation for Acquisition of Securities
Section 38 of the Companies Act, 2013 deals with applications for, acquisition of, subscription to, allotment of, or transfer of securities involving a fictitious name or multiple applications made in different names or combinations of a person's name or surname. A contravention attracts action under Section 447, which contains the punishment for fraud.
What does Section 38 prohibit?
The provision targets personation and deceptive applications connected with company securities. In practical terms, it covers a person who makes, or helps another person make, a fictitious application; makes multiple applications using different names or different combinations of a name or surname; or directly or indirectly induces a company to allot securities, or register a transfer of securities, in a fictitious name.
Text and effect of Section 38
Section 38(1). Any person who -
(a) makes or abets making of an application in a fictitious name to a company for acquiring, or subscribing for, its securities; or
(b) makes or abets making of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities; or
(c) otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious name,
shall be liable for action under section 447.
Section 38(2). The provisions of sub-section (1) must be prominently reproduced in every prospectus issued by a company and in every form of application for securities.
Section 38(3). Where a person is convicted under Section 38, the Court may also order disgorgement of any gain made by that person and seizure and disposal of securities in that person's possession.
Section 38(4). Amounts received through disgorgement or disposal of securities under sub-section (3) are credited to the Investor Education and Protection Fund.
What is the punishment under Section 447?
Section 38 does not prescribe a separate fixed sentence. Instead, a person falling within Section 38(1) is liable for action under Section 447 of the Companies Act, 2013. Section 447 is the general provision dealing with punishment for fraud. The precise punishment depends on the amount involved and whether public interest is involved. The provision also defines "fraud", "wrongful gain" and "wrongful loss".
For the current statutory wording and applicable monetary thresholds, the official Companies Act text should be checked before relying on the provision in a proceeding.
Disgorgement, seizure and the Investor Education and Protection Fund
Conviction can have consequences beyond the punishment under Section 447. Under Section 38(3), the Court may order disgorgement of gains and seizure and disposal of securities held by the convicted person. Under Section 38(4), money realised through disgorgement or disposal is credited to the Investor Education and Protection Fund (IEPF). The IEPF is constituted under Section 125 of the Companies Act, 2013 and is administered through the statutory IEPF framework.
Key compliance points
Companies issuing a prospectus or an application form for securities should ensure that the prohibition in Section 38(1) is prominently reproduced as required by Section 38(2). Applicants should avoid fictitious identities, duplicate applications under different names, and any arrangement intended to procure allotment or registration of transfer in a fictitious name.
Related Companies Act provisions
Section 38 forms part of the statutory framework governing offer and issue of securities. For connected provisions, see Section 37 - action by affected persons, Section 39 - allotment of securities, and Section 40 - securities to be dealt with on stock exchanges.