Legal nature of the bank account in public offerings

The previous year’s public offering trend suggests that it was the year where the average size of the capital raised by a company was the highest. And given the number of disinvestments lined up in 2010, this year is not going to be any different. Consequently, the monetary size of the bank account, which contains the money submitted by the subscribers of the shares and holds it till the company fulfills its statutory obligations, will be very big. Hence it becomes imperative to analyse the legal nature of the bank account and the parties involved to understand how the money can be handled.

The English court in Ballantyne v. Nanwa Gold Mines Ltd., [1955] 3 All ER 210, held that money deposited by the subscribers and maintained in the bank account are not part of the general assets of the issuer company or the bank. They are in the nature of a trust property. The Bombay High Court in Reserve Bank of India v. Bank of Credit and Commerce, 1992 (3) Bom CR 81 approved the foregoing English decision and went on to add that by virtue of sections 73 of the Companies Act, a statutory trust is created whether in the hands of the issuer company or the banks.

From the foregoing, one can conclude the subscribers will be deemed to be the beneficiary of the trust and applying the principles of trust law, any benefit that accrues out of the trust property viz. the bank account will be used for the benefit of the beneficiaries. Since the escrow amount does not form part of the general assets of the company or the bank, the creditors of the company or the banks cannot lay a claim on it in the event that the company or the escrow banks go into liquidation before the public offering is completed. The company and the banks will be acting in a fiduciary capacity when handling the money. One can also conclude that the trust would continue to exist until there is compliance with the statutory provisions such as making of the allotment of the shares to the subscribers and obtaining the permission from the stock exchange for the listing of the shares.