In this article, Khalid Khan pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the exit route available to companies who have deemed public issues.

The development of company law in India has undergone pragmatic changes evidencing the shift in corporate-centric approach to investor friendly cum fair practices-centric approach. The lacunas existing in the law always give chances to the companies in carrying out the malpractices. Owing to the malpractices and hidden illegal agendas there was an urgent need of government attention. Hence, we can see the number of new laws being passed in order to bring regulation, transparency and healthy development of Indian market. Similarly, one of the recent developments has been in terms of the public offer of securities.

A public company may issue securities[1] through prospectus[2], private placement[3] or rights/bonus issue[4] whereas a private company[5] by way of only private placement[6] or rights/bonus issue[7].  The issue of securities through prospectus which is made to public is known as the ‘Public Offer’[8] whereas private placements can only be made to the persons whose names are already recorded by the company before inviting the subscribers to subscribe to the securities and no advertisement to public at large is permissible. The private companies cannot use any distribution channel or media to advertise its securities for public issue in any manner whatsoever.

The private companies are prohibited from issuing its shares to the public and therefore cannot raise capital through public offer.[9]And the public companies who are issuing securities to public are mandatorily required to fulfil certain listing obligations i.e. listing the shares and debentures on any recognized stock exchange and disclosure requirements to public.

As per the Companies Act, 1956[10] any offer which is made to more than forty-nine persons shall be considered as a public offer and not private placement.Thus, the companies offering securities via private placement to less than fifty allottees would be within the purview of law but the companies issuing to more than forty-nine allottees would be considered as a public issue. This provision was inserted via the Companies Amendment Act, 2000 to prevent companies from issuing securities to public under the disguise of private placement. As per law there is a bar on the private and unlisted public companies[11] to issue securities to more than forty-nine persons. Thus, in any case, an offer made by companies to more than forty-nine persons would constitute a public offer automatically i.e. deemed public offer.

This limit of forty-nine persons was increased to two hundred persons after passing of the Companies Act, 2013[12].Therefore, any company which offers securities to more than 200 persons (excluding certain class of subscribers), that offer shall be considered as a public offer (deemed public offer).

A number of companies were found making offer of securities without complying with the relevant provisions of the Companies Act and SEBI guidelines. The companies invite subscription from public more than the threshold limit prescribed by law. Many complaints were received by SEBI against the companies violating the law related to the offer of securities. Therefore, SEBI vide its circular dated December 31, 2015 notified all the recognized stock exchanges that the companies offering the securities-shares and debentures-before 1st April 2014 to more than 49 persons to 200 persons (deemed public offer) are offered an exit route.

Therefore, the offer of securities before April 1^st April 2014 to more than forty-nine persons and less than two hundred persons and the offer of offering securities after April 1^stApril 2014 to more than two hundred persons would be deemed public offer and hence the transgressing companies shall be liable to penal action.

SEBI provided an exit opportunity to the companies facing penalisation which issued securities before 1^st April 2014 to more than forty-nine persons and less than two hundred persons. The exit route which the companies are provided is that they may avoid penal action by the following ways:

1. If the companies give the option to investors to surrender the securities; and
2. refund the amount at a price not less than the amount of subscription money paid along with 15% interest per annum thereon or such higher return as promised to the investors.It is pertinent to note that the term used is “amount of subscription money”. So, it appears that if the holder of the security on the date of the refund is a subsequent transferee from the original subscriber, the base refund amount is to be the original subscription price and not the price at which the security was transferred to the current holder. This position seems to be reasonable.[13]

The Circular has also provided the procedure (‘‘Refund procedure’’) to be followed by the companies. It is explained below:

1. The process for the surrender of securities and refund has be supported by a proof of dispatch either through Registered or Speed Post by India Post or if any other mode is used then the proof of delivery of letters;
2. The refund shall only be made through proper banking channels via crossed account payee cheque/crossed demand draft or via internet banking channels in order to facilitate documentary evidence of the transactions.
3. The amount already paid to the allottees can be adjusted by the companies as interests/dividends or from the amount refund payable to them.
4. In case the securities have been transferred by the original allottees then the amount shall be refunded to the current alloottees of that security.

Additionally, the Securities and Exchange Board mandated a certification requirement for the companies. After complying with the above requirements, the companies shall obtain a certificate to the effect that the company has complied with the obligations of the refund. This certificate has to obtained from a practicing Chartered Accounted. The certificate must clearly mention that every document has been verified including but not limited to, proof of dispatch of surrender of securities, responses and complaints from the investors, bank statements of the company.

In the end SEBI had instructed to bring this notice to the knowledge of the listed entities and thereby require them to publish the same on their websites.

There are a number of companies which came into the clutches of law. As on as on January 10, 2017SEBI took out a list via press release in 2017 naming 256[14] companies for issuance of securities to larger number of public as against the prescribed limit of private placement. Some of them were Kunnamkulam Paper Mills Ltd Kerala, Sahara India Real Estate Corporation Ltd Uttar Pradesh, Sahara Housing Investment Corporation Ltd, Prayas Projects India Limited.

In 2012, the Supreme Court of India ordered the Sahara Group and its subsidiaries Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) to refund around ₹ 17,400 crore to their investors within 3 months from the date of the order with an interest of 15% because both the companies were unlisted and had offered securities for public subscription under the garb of private placement to more than fifty persons.[15] One of the landmark orders before the before the Securities And Exchange Board of India was the order against the Prayas projects India limited (PPIL).[16]

On receipt of a Show cause notice dated 5th October, 2013 against PPIL by the Office of the Sub–Divisional, Magistrate, West Tripura for the non-payment of amounts to the Secured Redeemable Non– Convertible Debenture (NCD)[17] holders, the Securities and Exchange Board of India ordered PPIL to furnish the relevant documents and details of the debenture holders. SEBI analyzed the documents and the list of allotees and observed that in 2011 PPIL had issued securities under the name of private placement. But these securities have been issued to 154 allottees thereby exceeding the limit of private placement of forty-nine persons. PPIL received around ₹ 86.32 Lakhs during the two financial years. Therefore SEBI found that the offer of Non-Convertible Debentures[18] by PPIL was a public offer under the pretext of private placement. SEBI in its order reiterated the Sahara case and mentioning how the offer of securities to more than fifty persons would attract the first proviso to Section 67(3) of the Companies Act, 1956. Therefore SEBI barred PPIL from issuance of any further securities till further orders.

Similar order was passed against M/s Lokmangal Agro Industries Limited[19] in 2016. Lokmangal agro had issued equity shares to 3626 holders and mobilized around ₹ 72.52 crores in 2011 under the garb of private placement. Therefore SEBI passed the orders against the company barring them from further issuance of securities imposing penalties on it.

In Prayas Projects India limited the number of allotees fall between 50 to 200 whereas in the case of Lokmangal Agro Limited it is way beyond the threshold limited. Therefore only Prayas Projects India Limited could be benefitted by the SEBI circular facilitating an exit route to companies.

Therefore if a company whether listed or unlisted or intends to lists or not list its securities offers the securities in the market and the number of allottees falls above the prescribed threshold limit then that allotment shall be deemed to be a public offer. Therefore much has been achieved to fill the gaps in the law and most importantly the interest of the investors has been into consideration. This law has been an eye opener for the investors who were lured by the companies issuing securities without complying with the relevant provisions of law. By providing an exit option the investors have been facilitated with the free option to stay invested or not. But not many companies have benefitted from he exit route as it attracts less number of companies because most of the companies have allotted securities to more than 200 persons. It is hoped this was certainly not the intention behind the law.

References

[1] The companies Act,2013(Act 1 of 1956), s. 23(1).

[2] The companies Act,2013(Act 1 of 1956), s. 23(1)(a).

[3] The companies Act,2013(Act 1 of 1956), s. 23(1)(b).

[4] The companies Act,2013(Act 1 of 1956), s. 23(1)(c).

[5] The companies Act,2013(Act 1 of 1956), s. 23(2).

[6] The companies Act,2013(Act 1 of 1956), s. 23(2)(a).

[7] The companies Act,2013(Act 1 of 1956), s. 23(1)(b).

[8] V.K. Bhalla, Fundamentals of Investment Management 175 (S. Chand & Co. Pvt. Ltd, New Delhi, 3^rd edn., 2013).

[9] Section 42 the Companies Act, 2013.

[10] The Companies Act, 1956 (Act 1 of 1956).

[11] In case of an unlisted public company there is no bar on the number of members and such companies may have more than 50 members. However, there is bar on unlisted public companies from inviting public for subscribing to its securities. The Unlisted Public Companies (Preferential Allotment) Rules, 2000 prohibit an unlisted public company from inviting more than 49 persons from subscribing to its shares and debentures.

[12] The Companies Act, 2013 (Act no. 18 of 2013).

[13]Amit Robin Singh, ‘Exit Routes for companies who have made deemed public offer’ available at: http://indiacorplaw.blogspot.com/2016/01/exit-route-for-companies-who-have-made.html (Last visited on June 24, 2017).

[14]SEBI Press Release available at: http://www.sebi.gov.in/media/press-releases/jan-2017/caution-to-the-investors_34109.html (Last visited on June 24, 2017).

[15]The first proviso to Section 67(3) was inserted by the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000, which clearly indicates, nothing contained in Sub-section (3) of Section 67 shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more. Resultantly, if an offer of securities is made to fifty or more persons, it would be deemed to be a public issue, even if it is of domestic concern or proved that the shares or debentures are not available for subscription or purchase by persons other than those received the offer or invitation. It may, therefore, indicate, subject to what has been stated above, in India that any share or debenture issue beyond forty nine persons, would be a public issue attracting all the relevant provisions of the SEBI Act, regulations framed thereunder, the Companies Act, pertaining to the public issue.

[16] SEBI order available at:  http://www.sebi.gov.in/sebi_data/attachdocs/1451387390365.pdf  (Last visited on June 24, 2017).

[17] Listing of Secured Debenture available at: http://www.indiainfoline.com/article/companies-circulars-bse/listing-of-secured-redeemable-non-convertible-debentures-of-manappuram-finance-limited-114081203455_1.htm l(Last visited on June 24, 2017).

[18] From the brochure circulated by PPIL for the Offer of NCDs, it was observed that the invitation for subscription to the Offer of NCDs extended to “Individual, Trust, Financial Institution, Bank, Mutual Fund, Karta of HUF, Firm and Body Corporate”. Such a generalized category of investor(s) cannot be said to satisfy the condition of specificity as required under Section 67(3) of the Companies Act, 1956.

[19]SEBI order available at:   http://www.sebi.gov.in/sebi_data/attachdocs/1470047410344.pdf (Last visited on June 26, 2017).

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