Private Placement Compliance: Regional Director Sets Aside Penalty for Separate Bank Account Issue

Background of the Dispute

This matter concerns an appeal filed before the Regional Director, Hyderabad under Section 454 of the Companies Act, 2013, challenging a penalty imposed by the Registrar of Companies, Hyderabad under Section 42(10) relating to private placement provisions.

The core allegation was that the company had allegedly failed to comply with the requirement of maintaining share application money in a separate bank account during a private placement of shares. The adjudicating authority (AO) had levied penalty on the company and its officers in default.

On appeal, the Regional Director examined whether there was any real breach of Section 42(6) and Section 42(10) in relation to the handling of funds received through private placement, and whether mere filing of Form GNL-2 could be treated as admission of default.

Parties to the Appeal

The appeal was filed in e-Form ADJ with SRN AC3143407 dated 23-04-2026. The matter was registered as Appeal Order ID: PO/ADJ/05-2026/HYD/000228 and decided on 04-05-2026 by the Office of the Regional Director, Hyderabad.

The appellants were:

  1. DIGILOGIC SYSTEMS LIMITED
  2. MADHUSUDHAN VARMA JETTY
  3. RADHIKA VARMA JETTY
  4. JETTY SHASHANK VARMA

The respondent was:

  • Registrar of Companies, Hyderabad

The appeal was preferred under Section 454 read with Rules 4 and 5 of the Companies (Adjudication of Penalties) Rules, 2014 challenging the adjudication order dated 22-04-2026 passed under Section 42(10) of the Companies Act, 2013.

Factual Matrix Presented by the Company

Separate Bank Account for Private Placement Proceeds

The company submitted that:

  • A board resolution had been duly passed authorising that the amount received from the private placement issue would be credited into a separate designated bank account.
  • The company maintained two bank accounts:
    • One account used regularly for day-to-day business operations; and
    • Another account, opened earlier, maintained specifically to meet statutory and compliance-related requirements.
  • The share application money received pursuant to the private placement was credited only into the designated compliance-linked account.
  • From the date of receipt of funds up to the date of allotment of shares, no other banking transaction, other than those relating to the issue, took place in that designated account.
  • Once the shares were duly allotted in accordance with Section 42, the funds were subsequently transferred from the designated account to the operational bank account and thereafter used solely for the business activities of the company.

By placing on record the relevant bank account statements, the company sought to demonstrate that:

  1. The funds were never mixed with general operational receipts prior to allotment; and
  2. The treatment of the funds was consistent with the requirement that application money under private placement be kept in a separate bank account until allotment or refund.

Filing of Form GNL-2 and Alleged Admission of Default

The Adjudicating Officer had relied heavily on the fact that the company had voluntarily filed Form GNL-2, and from that, inferred that:

  • The company had suo motu approached the ROC,
  • And therefore, it could not later resile from its stand or claim that there was no violation of Section 42.

In response, the Managing Director clarified before the Regional Director that: