2017 (4) TMI 1500 - AT - SEBI

Securities to more than 49 persons - public issue and the provisions of Section 56 not followed - no private placement - HELD THAT - In the instant matter the appellant have violated these provisions and their argument that they have issued the NCDs in multiple tranches and no tranche has exceeded 49 people has no meaning. Similarly, the appellant has also violated provisions relating to redemption reserve as provided under Section 117C of the Companies Act, 1956. The argument that the appellant had engaged IDBI Trustee as custodian for the issue absolves them from the charge of violation has no merit. In fact, the IDBI Trustee in its letter dated November 27, 2014 confirmed that though the appellant had taken their consent for acting as the trustee for the NCD issue aggregating an amount of ₹ 10 crore the appellant had issued the same in tranches without even any intimation to them. It was also stated by the IDBI Trusteeship that the appellant has defaulted on various other compliances particularly with respect to timely payment of quarterly interest and furnishing periodical information and reports and no responsible officer of the appellant was available in the company to ensure the compliances. Present appeal is squarely covered by the order of the Hon'ble Supreme Court in the Sahara 2012 (9) TMI 559 - SUPREME COURT matter and undoubtedly the appellant went for a public issue in a truncated manner. Given this the finding in the impugned order that the appellant company failed to comply with the provisions relating to public issue such as issue of prospectus, listing, provision of redemption reserve in terms of sections 56, 60, 73 and 117C of the Companies Act, 1956 as well as provisions of the ILDS Regulations while issuing the NCDs cannot be faulted.

Summary

Issues:
Violation of provisions of Companies Act, 1956 and SEBI regulations regarding issuance of Non-Convertible Debentures (NCDs), Jurisdiction of SEBI in private placement matters, Compliance with public issue regulations, Applicability of Sahara judgment on SEBI's jurisdiction.

Analysis:
The appeal was filed against an order by the Whole Time Member of SEBI, which found the appellant company and its directors in violation of Companies Act, 1956 and SEBI regulations related to the issuance of NCDs. The order required the company to refund the collected money from NCDs and imposed a 4-year restraint from dealing in the securities market post-refund. The appellant argued that the NCD issue was a private placement to less than 50 persons at a time, thus outside SEBI's jurisdiction. They claimed RoC and NCLT had jurisdiction, as declared by RoC. The appellant also highlighted the trusteeship of IDBI Trustee and ratings from Brickworks Rating India Pvt. Ltd., indicating a genuine purpose behind the issuance for starting a TV channel.

The impugned order held that the appellant violated various sections of the Companies Act, 1956 by issuing securities to more than 49 persons, constituting a public issue. It was emphasized that any issue to "50 persons or more" falls under public issue, requiring compliance with Section 56 of the Companies Act and ILDS Regulations. The appellant's argument of issuing NCDs in multiple tranches, each under 49 people, was disregarded. Violations of provisions related to redemption reserve under Section 117C of the Companies Act were also noted. The engagement of IDBI Trustee did not absolve the appellant of violations, as confirmed by IDBI Trustee's letter citing defaults in compliance and lack of responsible officers ensuring adherence.

The appellant's claim of SEBI lacking jurisdiction was refuted, citing Section 55A of the Companies Act, 1956, empowering SEBI to administer provisions concerning securities' issue and transfer. The order referenced the Sahara judgment, clarifying SEBI's jurisdiction over public companies issuing shares or debentures to fifty or more individuals. The appeal was dismissed, aligning with the Sahara judgment's interpretation that any share or debenture issue beyond 49 persons constitutes a public issue, necessitating compliance with relevant SEBI Act, Companies Act, and ILDS Regulations provisions.

In conclusion, the appellant's failure to comply with public issue regulations, including the issuance of prospectus, listing, and provision of redemption reserve, as outlined in the Companies Act, 1956 and ILDS Regulations, led to the dismissal of the appeal without costs. The judgment reaffirmed SEBI's jurisdiction over public issues and the necessity of adherence to regulatory requirements in such matters.