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TMI Blog2020 (4) TMI 315X X X X Extracts X X X X X X X X Extracts X X X X ..... which was a term, namely, a condition that the issuance of the debentures cannot be renounced in favour of any other person - provision of section 62(3) was duly complied with by the Company and was fully applicable. Further, there is nothing to indicate that the conditions mentioned in Rule 18 were not complied with. In fact the WTM has failed to notice this provision. Once this provision is applicable which is an exception to the issuance of share capital under section 62 the same is not a public offer and, therefore, the provisions of part I of Chapter III of the Companies Act are not applicable. Accordingly, the provisions of section 40 which are required to be complied with in case of a public issue is not required to be followed as in the instant case we find that the issuance of FCDs by the Company was not a public issue and the Company was not mandated to comply with the requirement of public issue under Part I of Chapter 3 of the Companies Act. Company had passed a special resolution under section 62(3) read with section 71 in respect of issuance of FCDs. The prospectus and the explanatory statement clearly state that the only members holding equity shares were elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Exchange Board of India (hereinafter referred to as 'SEBI') issuing various directions under section 11, 11(4), 11A, 11B and 19 of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'SEBI Act'). The directions so issued are extracted hereunder:- a. CAICO shall cancel the FCDs as mentioned in paragraph 46 of this order, and forthwith refund the money collected till date through the issuance of FCDs including the application money collected from investors, pending allotment of securities, if any, with an interest of 12% per annum from the date of collection of funds to the investors till the date of actual payment. No such interest shall be paid to Mr. Chiriankandath Palu Jose and Mr. Vadakken Raphael. b. The repayments and interest payments to investors shall be effected only through Bank Demand Draft or Pay Order both of which should be crossed as Non-Transferable . c. CAICO and its present directors viz., Mr. Chiriankandath Palu Jose, Mr. Paul Thalokaren Timothy, Mr. Mazhuvancheriparambath Kuriakose Aelias, Mr. Chiriyankandath George Joy, Mr. Jessy Pavoo, and Mr. Paul Ovungal Raphael (on behalf of the Company) are directe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g such other provisions contained in securities laws. h. CAICO is directed not to, directly or indirectly, access the securities market, by issuing prospectus, offer document or advertisement soliciting money from the public and are further restrained and prohibited from buying, selling or otherwise dealing in the securities market, directly or indirectly in whatsoever manner, from the date of this Order, till the expiry of 4 (four) years from the date of completion of refunds to investors as directed above. i. Mr. Chiriankandath Palu Jose, Mr. Parappilly Varunny Davis, Mr. Paul Thalokaren Timothy, Mr. Mazhuvancheriparambath Kuriakose Aelias, Mr. Chiriyankandath George Joy, Mr. Jessy Pavoo, Mr. Vadakken Raphael, Mr. Paul Ovungal Raphael and Mr. Ovungal Pyloth Rappai are directed not to, directly or indirectly, access the securities market, by issuing prospectus, offer document or advertisement soliciting money from the public and are further restrained and prohibited from buying, selling or otherwise dealing in the securities market, directly or indirectly in whatsoever manner, from the date of this Order, till the completion of refunds to investors as directed above. The abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advertisements, sales promotion of this project and for working capital requirements. By this resolution, the Company sought to raise ₹ 25,000/- from each shareholder totaling ₹ 4,82,25,000. However, the subscription raised through these FCDs was only ₹ 2,83,50,000/- from 335 members. 3. The said proposal was questioned by one disgruntled shareholder who filed an application before the Company Law Board. No interim order was passed on the ground that there was no urgency. This shareholder, namely, Niraj Paul took this matter up by filing an appeal, being Company Appeal no.7 of 2015, which was dismissed by the High Court of Kerala by a judgment dated 8.10.2015. 4. Certain complaints were received by SEBI including ROC in respect of these FCDs. SEBI undertook an enquiry to ascertain whether the Company had made any public issue of securities without complying with the provisions of the Companies Act, 2013. Pursuant to the enquiry, SEBI passed an ex-parte interim order dated 9th August, 2017 observing that the offer of FCDs by the Company and subsequent allotment were deemed public issue of securities under section 42 of the Companies Act, 2013 read with Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more of the stock exchanges and that the prospectus was required to state the name of such stock exchange as per section 40(1) and (2) of the Companies Act. Further, the Company failed to get the money so received from the public through subscription in the escrow account as per section 40(3) of the Companies Act. The Company further failed to comply with the requirement of ICDR Regulations with regard to the allotment of FCDs. 6. We have heard Shri Mr. Srikant Mohan, Practising Company Secretary for the Appellant and Mr. Fredun DeVitre, Senior Advocate assisted by Mr. Mihir Mody and Mr. Shehaab Roshan, Advocates for the Respondent. 7. The contention of the appellant is, that section 42 of the Companies Act is not applicable in the instant case and that the issue of the share capital is under section 62(3) of the Companies Act which has not been considered. 8. On the other hand, the contention of the learned senior counsel for SEBI is, that since the offer of FCDs was for more than 200 persons the said offer is a deemed public offer and therefore part one of the Chapter 1 of the Companies Act is required to be followed. 9. In order to appreciate the submission of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be required to be complied with. (5) All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash. (6) A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day: Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than- (a) for adjustment agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 of the Securities Rules prescribes the procedure for subscription of securities on private placement. The said provision is extracted as under:- 14. Private Placement.- (1) (a) For the purposes of sub-section (1) of section 42, a company may make an offer or invitation to subscribe to securities through issue of a private placement offer letter in Form PAS-4. (b) A private placement offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons in accordance with sub-section (7) of section 42: Provided that no person other than the person so addressed in the application form shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid. (2) A company shall not make a private placement of its securities unless - (a) the proposed offer of securities or invitation to subscribe securities has been previously approved by the shareholders of the company, by a Special Resolution, for each o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) Rules, 2014 and where the company is listed, with the Securities and Exchange Board within a period of thirty days of circulation of the private placement offer letter. Explanation.-For the purpose of this rule, it is hereby clarified that the date of private placement offer letter shall be deemed to be the date of circulation of private placement offer letter. (4) A return of allotment of securities under section 42 shall be filed with the Registrar within thirty days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all security holders containing- (i) the full name, address, Permanent Account Number and E-mail ID of such security holder; (ii) the class of security held; (iii) the date of allotment of security; (iv) the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash. (5) The provisions of clauses (b) and (c) of sub-rule (2) shall not be applicable to- (a) non-banking financial companies which are registered with the Reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o existing equity shareholders. It also provides for issuance of shares to employees under employees stock option scheme and issue of shares on preferential basis. For facility, section 62 of the Companies Act, 2013 is extracted hereunder:- 62. Further issue of share capital (1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered- (a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:- (i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined; (ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table to the company, it may, within sixty days from the date of communication of such order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fit. (5) In determining the terms and conditions of conversion under sub-section (4), the Government shall have due regard to the financial position of the company, the terms of issue of debentures or loans, as the case may be, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary. (6) Where the Government has, by an order made under sub-section (4), directed that any debenture or loan or any part thereof shall be converted into shares in a company and where no appeal has been preferred to the Tribunal under sub-section (4) or where such appeal has been dismissed, the memorandum of such company shall, where such order has the effect of increasing the authorised share capital of the company, stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into. 15. If a company havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed. For allotment of preferential shares under section 62(1)(c), Rule 13 of the Debenture Rules is to be followed. Such increase of the share capital is through the provisions of section 62(1)(a), (b) and (c) read with relevant Rules provided for such purposes. Section 62(3) is an exception to section 62 and excludes increase in the subscribed capital of the Company pursuant to an option attached to the debenture issued by the Company for conversion of such debentures into shares of the Company on the condition that the terms of issue of such debentures has been approved by members by means of a special resolution. The provisions of section 62 would not apply in relation to convertible debentures into shares of the Company if the following condition is satisfied, namely, that the terms of issue of debentures has been approved by the Company by a special resolution. It may be noted here that under section 62 of the Companies Act, a Company is under an obligation, when it proposes to issue further capital, to offer such capital to its own shareholders. In regard to debenture stocks or loans which are convertible into shares, the restrictions contemplated under section 62 will not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rule 13 of the Debenture Rules and 14(2)(b) of the Securities Rules. The WTM went to the extent of quoting these Section and Rules in extenso but failed to quote or even look into the provisions of section 62(3), 71 and Rule 18 of the Debenture Rules. Had any effort been made to consider these provisions, there would be no doubt that a different conclusion would have been arrived at instead of brushing aside with the observation the trigger for action in the present case in offer of FCDs itself and not of exercising an option to convert a debenture into shares of the Company . Clearly, the WTM has not understood the import of the exception clause, namely Section 62(3). We find that the WTM was more enamoured with the restriction of 200 persons contemplated in Section 42 and Rule 14(2)(b) of the Securities Rules and revolved its order around these provisions. 25. In this regard, section 71(5) of the Companies Act is extracted hereunder:- (5) No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or mor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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