2018 (6) TMI 951 - AT - Companies Law

Contravention of FEMA Regulations - excess shares allotted - Securities premium amount has been determined wrongly short and consequently paid up capital have been allocated of more amount than required - Held that - This case deals where the CCDs have been converted into shares at a wrong share premium. The money has already been received by the company and the allocation of the same between paid up share capital and securities premium has to be done. It is noted that security premium account for all practical purposes is to be treated as if security premium account were the paid up share capital of the company as per Section 52 of the Companies Act, 1956. Securities premium amount has been determined wrongly short and consequently paid up capital have been allocated of more amount than required. Therefore, change in composition between the security premium account and paid up share capital will not amount to reduction in capital as both the components are treated as paid up capital. Further a reading of Section 100 of the Companies Act, 1956 shows that this case is not covered under any of sub-clauses (a), (b) and (c) of Clause (1). As the appellant has opted to unwind the excess shares allotted, therefore, this will make a case of rectification of wrongful calculation of share capital and securities premium and not reduction of share capital because the security premium account is also to be treated as paid up share capital. This is a case where security premium amount will be increased and equal amount of paid up capital will be decreased and there will be no change in the overall amount allocated to paid up share capital and security premium account. The appellant shall take steps and cancel the excess shares 219658 allotted to 1st respondent and the total amount received for issuing CCDs will be utilised for issuing 209761 shares of ₹ 10/- each at a premium of ₹ 54.22 as on 6.8.2013. The amount of premium will be transferred to security premium account in the books of accounts. The balance sheets filed after 6.8.2013 will be refiled duly certified by a chartered accountant. For this process the company will comply with all other legal formalities as per law and Companies Act, 2013. This order will not come in the way of RBI for taking any action for contravention of FEMA Regulations against the appellant company.

Summary

Issues involved:
Violation of FEMA regulations in issuance of shares, rectification of register of members, dismissal of company petition under Section 59 of the Companies Act, 2013.

Violation of FEMA regulations in issuance of shares:
The appellant company issued Compulsory Convertible Debentures (CCDs) to a non-resident individual at a lower value than the fair market value of the shares, contravening FEMA regulations. The Reserve Bank of India advised the company to unwind the excess shares allotted or bring in additional funds equivalent to the shares allotted. The company sought no objection from the shareholder for rectification of the register by cancelling the excess shares. The company submitted a compounding application for contravening FEMA regulations. The Tribunal observed that the company failed to follow its Memorandum and Articles of Association, relevant provisions of the Companies Act, 2013, and FEMA regulations. The Tribunal held that the petition was not maintainable and dismissed it, suggesting that appropriate action be initiated against the company for violation of regulations.

Rectification of register of members:
The appellant sought rectification of the register of members to cancel the excess shares allotted, which was considered by the Tribunal. The appellant argued that rectification was merely an accounting entry and did not amount to a reduction of capital under Section 66 of the Companies Act. The appellant filed an affidavit-cum-undertaking to comply with necessary legal formalities for cancelling the excess shares. The Tribunal analyzed the provisions of the Companies Act related to reduction of share capital and application of premiums received on the issue of shares. The Tribunal ordered the cancellation of the excess shares allotted, utilization of the total amount received for issuing new shares at the correct premium, and transfer of the premium to the security premium account.

Dismissal of company petition under Section 59 of the Companies Act, 2013:
The appellant challenged the Tribunal's order dismissing the company petition under Section 59 of the Companies Act. The appellant contended that the company could seek rectification of its register of members. The appellant argued that the company had followed the prescribed procedures under its Articles, Memorandum of Association, Companies Act, and FEMA. The Tribunal considered the provisions of the Companies Act related to reduction of share capital and securities premium account. The Tribunal directed the appellant to cancel the excess shares allotted, issue new shares at the correct premium, and comply with legal formalities under the Companies Act. The appeal was disposed of with no order as to costs.