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Introduction
It was a compulsion for a company to be registered in a public stock market if certain criteria were fulfilled, under the Companies Act, 1956.[1] If shares of a company are publicly available for people to buy, if shares are issued to more than 49 people, barring some exceptions, they must be listed in the public stock. In case of failure to do so, the company has the duty to return the money that has been collected through shares and securities, be it debentures, hybrid shares irredeemable preference shares. Similar provisions are still prevalent. The definition of “securities” in Section-2(h) is an inclusive one and not an exhaustive one.[2] This means that the section covers securities as commonly understood and includes all its types.
If the company fails to even apply for such public stock market at the Office of Registrar of Companies, such acts are said to be fraudulent. Further, a shareholder and a potential shareholder to a company must be provided with information regarding the shares, the company, and its activities. The shareholder has the right to know the contracts entered into by the company. This provides information on assets and liabilities and the share capital of the company.”Prospectus” means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate as provided by Section-2 (36) of the Companies Act, 1956 of India.[3]
The above-mentioned case[4] was put forward before the Securities Exchange Board of India (hereinafter ‘SEBI’) as under Section-11, 11(4), 11A and 11B of the Securities Exchange Board Act, 1992,[5] (hereinafter, ‘ the SEIB Act’) which provides for jurisdictional power of SEBI in case of violation of the Act by Companies and its directors. The case involves Waris Agrotech (India) Limited (hereinafter ‘the Company’) and its Directors and an interim order against them, dated December 1, 2014, as forwarded by SEBI. The board has dealt with public issuance of shares under Section-73 and contents to be provided under a prospectus of a company and its registration, under Section 56.
Facts of the Case
The company was incorporated on November 16, 2006.SEBI initiated an inquiry against the company after it had received a complaint on December 19, 2013, which alleged that the company had been mobilizing funds from the public in an illegal manner and therefore had violated its obligation under the SEBI Act and SEBI’s Disclosure and Investor Protection Guideline, 2000 (hereinafter ‘the DIP Guideline’). The company had issued Redeemable Preference Shares (hereinafter ‘RPS’) to 39 and 436 people on March 31st, 2008, and March 31st, 2009, respectively. The company had allotted 1800 preference shares both the times, at the rate of Rs. 1000 per share.
The interim order of the court had provided as follows:
- The company shall not be involved, directly or indirectly in the mobilization of funds from investors in any form of securities or shares in the future.[6] Further, in the same manner, all the default directors of the company (three present directors and one past director) ) are prohibited from advertising, issuing a prospectus, and documents of any kind for fund collection.
- The mentioned directors shall not be involved in buying, selling, and dealing with the securities market and are further prevented from accessing the market itself.
- The company along with the default directors are to provide a full inventory of their assets and properties. This shall be done within 21 days of the notice.
- The company and its default directors are prevented from disposing and alienating any of their assets without permission from SEBI. They are also prevented from diverting the funds raised.
The interim order dated December 1, 2014, had also provided that a request can be made by the directors for a personal hearing with regards to the interim order. The copy of the interim order was sent via letter on December 1st, 2014, to the directors but the said letters were not delivered. Later, the notification was published in a newspaper, namely, Ananda Bazar Patrika. On April 14th, 2015, it was notified that the alleged directors would have the final opportunity to be heard on April 22nd, 2015.
Issues in the Case
- Did the company provide offers of the RPS?
- Was there a violation of Section 60, 56 (1), 56 (3), 73 (1) (2), and (3) of the Companies Act, 1956?
- Who were to be made liable for the violation of the abovementioned sections?[7]
Contentions in the Case
Since neither the company nor the directors took the opportunity provided and present themselves for the hearing, no contention was put forward by the company and its directors. Since there were no contentions from the directors and the company, the board analyzed the case as per the facts of the case.
Decision in the Case
With the power and authority vested on Mr. Prashant Saran, a fulltime member of SEBI, by Section 11, 11 A, 11 B and 19 of the SEBI Act, 1992, the following was decided:
- The company and its four directors shall refund the collected money till the date of the decision, with an interest rate of 15% per annum, compounded half-yearly.
- They are permitted to sell the company’s assets as to make deposits in an escrow account, made for the purpose of refund.
- Modalities of refunds and names, addresses, and contact shall be circulated within 15 days of this order coming into effect.
- Report of Completion shall be presented within three months by the company and the directors.
- In case of failure to fulfill the requirements, SEBI can recover the amount through Section 28 A of the SEBI Act which provides for recovery of amount by SEBI, initiate legal proceedings, approach the police for registry of civil/criminal case, initiate proceedings for winding up of the company.
- The Company and its directors are restricted from accessing the securities market or collect funds as advised by the interim order.
Analysis
Section 55 A of the company’s act provided that SEBI had jurisdiction to enquire, investigate and adjudicate cases concerned with issue and transfer of shares along with its non-payment.[8] Further, SEBI could exercise its jurisdiction as under Section 11, 11A, and 11B of the SEBI Act[9] and Regulation 107 of SEBI’s Issue of Capital and Disclosure Requirement Regulations, 2009.[10] The present SEBI’s Issue of Capital and Disclosure Requirement Regulations, 2009 came into force on August 26th, 2009 i.e. before the issues in the present case took place. Therefore, SEBI’s Disclosure and Investor Protection Guidelines, 2000 were referred to. The board referred to the landmark judgment of Sahara Real Estate Corporation Limited and Others v. Securities Exchange Board of India and Another, to pass its decision.[11]
The board accessed the balance sheet of March 31st, 2008, and 2009. The share capital was found to be Rs. 18 Lakhs on 31st of March of 2008 and 2009. The company had failed to mention that it had redeemed the preference shares of March 31st, 2008 before the allotment for the year 2009 was done. Such acts were to be filed through a form before the registrar of companies, which is mandatory as under Section 95 of the Companies Act.[12]Additional issuance of 1800 shares were also not mentioned in the balance sheet of March 31st, 2009. The company had, in total, collected Rs. 36 Lakhs through PRS.The board concluded that it was the Company that had provided the offer of RPS as the facts straightforward provide.
Section 67 (3) (a) of the Companies Act provide that offer of shares and securities shall not be considered as a public offer if it is calculated that such shares and securities couldn’t be accessed by people, for subscription, other than to whom such offers have been made. Further, the sub-section that followed provided that such shares are not to be considered public if such shares are of domestic concern for the persons making and receiving the shares. It is again further provided that along with the fulfillment of Section 67 (3), an additional condition must also be fulfilled i.e. the offer of shares must be made to less than 50 people. In other words, to not be a public offer, and to avoid registration in a stock market, the offers must be made to less than 50 people along with the fulfillment of clause (a) and (b) of Section 67 (3).
In the present case, on March 31st, 2008, allotment of the shares was made to 39 people. Here, one of the criteria had been fulfilled as the number of people is well within the limit of 50 people. Nevertheless, it was concluded that the offers/allotment was a public issue as the preference shares were not found to be allocated to “known associated persons”, as required by Section-67 (3). Further, the second allotment of shares on March 31st, 2009, fails to fulfill both the requirement mentioned. It was allocated to 436 people, which is well over the set limit of 50. Therefore, the issuance was a public issue.[13]
For shares and debentures of such nature, the company should apply to the Registrar of Companies and get permits thereafter, and list themselves on the public stock market. The company had failed to comply with the requirement as set by the provision. Further, an additional requirement for companies is that they keep the amounts raised in a separate bank account. The company has failed to comply with the provision and additionally, has failed to repay the amount, in case of rejection by the Registrar of Companies from being registered in a public stock or in case of not seeking registry at all.[14] The Company and its directors didn’t act as required by the interim order and failed to repay the people from whom RPS was collected.
The company was also found to have violated several Guidelines such as :
filing of the offer document, issue of securities in dematerialized form, means of finance,[15] promoters contribution,[16] due diligence certificate,[17] list of promoters group,[18] content of offer documents,[19], etc.
So as to answer the question of liability and the person bearing it, the board referred to Section 73 (2) of the Companies Act, which provided that when permission is not granted by the Registrar of Companies or not sought by a company from the Registrar of Companies, with regards to being incorporated in public stock, the company shall repay the investors without any interest, within eight days. In the failure of doing so, the company and the directors in default shall repay with interest which is not less than four percent and not more than fifteen percent either. Such a percentage is to be determined according to the period of delay.
Again, the problem of determining who a defaulting director is, arose. There were four directors and two of them were still present then. One of the remaining two had left in 2009 but was present during all these happening of the company. The remaining one became a director only after the allocation of shares was done within both the years. The boards made all four of the directors liable for the repayment considering the delay already caused. The new director was made liable since she had failed to report the activities going on that violated the provisions of the Companies Act and the guidelines of the DIP Guidelines. The remaining directors were directly involved and had failed to provide the required information within 21 days as required by the interim order even after it was published in the said magazine.
It has already been provided by the Sahara Case[20] that fulfillment of Section 67 (3) would ipso facto make the shares a public issue. It was also proved that Section 67 (3) reigns over Section 73. Section 73 provided that a company’s shares shall be registered at Public Stock Market if it is interested in doing so. The court in Sahara case said that such “interest” cannot defeat the fact that Section 67 (3) has been fulfilled. Therefore, simply, if the number of investors (shareholders) is more than 50 or if the shares are not of private concern, Section 67 (3) is fulfilled and that Section 73’s use of the word “interest” would have no effect on it. Further, it was also said by the Supreme Court in the same case that “interest” is signified by the company’s activities and here, the company’s share was not of private concern and has also involved more than 50 people (in the issuance of 2009) which signified “interest”. Therefore, the company in the present case had a duty to be registered.
Conclusion
Therefore, even before this decision it was a well – established fact that fulfillment of criteria of Section-67 invites duty upon the company to be registered in the public stock market. The present case had simply put a light on an already established fact that such registration is a compulsion and that prospectus should mention all required information. Waris Agrotech had failed to notify their activity of redeeming the shares of 2008 and the addition of 1800 shares in the Balance Sheet of 2009, which shows a fault in their part. One peculiar analysis in the present case is that even if the number of people who have bought the shares is less than 50, it can still be a public issue and liable to be registered in a public stock market based on the fact that the shares were not strictly a private issue. The present Companies Act of 2013 doesn’t expressly mention hybrid securities. Therefore, this judgment is still relevant when a dispute arises based on such kinds of securities. When it comes to number limitation for a company to have its shares as a private issue, the limitation has been increased to 200 people.[21] Nevertheless, if the issuance is seen to be available for the public to buy, despite the number not reaching 200 people, the shares are deemed to be public, therefore attracting the obligation to listen in public stock.
References:
[1] Companies Act, section 67 (3), 73 (1956).
[2] Shantilal Mehta v. Central Bureau of Investigation (2009) INSC 1421 (India).
[3] Companies Act §2 (36), 73 (1956).
[4] WarisAgrotech (India) Limited and its Directors (2015) SCC Online SEBI 11 (India).
[5] SEBI Act §11, 11A, 11B (1992).
[6] Order Passed by SEBI Against Entities for Illegal Fund Mobilization, https://www.sebi.gov.in/media/press-releases/jan-2017/caution-to-the-investors_34109.html
[7] WarisAgrotech (India) Limited and its Directors(2015) SCC Online SEBI 11 ⁋ 6.1 (India).
[8]Sundaram Pillai and Ors. v. V.R. Pattabiram & Ors 1985 AIR 582 (India).
[9] SEBI Act §11, 11A, 11B (1992).
[10] ICDR Regulation 107 (2009).
[11] Sahara Real Estate Corporation Limited and Others v. Securities Exchange Board of India and Another (2012) 110 CLA 476 (SC) (India).
[12] Companies Act §95(1956).
[13] Turbo Infotech and Industries Limited and Another v. SEBI(2005) 3 CompLJ 305 SAT (India).
[14] Companies Act, section 73 (2) (2013).
[15]Securities and Exchange Board of India, Disclosure and Investor Protection Guidelines, Clause 2.8. (2000).
[16]Securities and Exchange Board of India, Disclosure and Investor Protection Guidelines, Clause 4.1 (2000).
[17]Securities and Exchange Board of India, Disclosure and Investor Protection Guidelines, Clause 5.3.3 (2000).
[18]Securities and Exchange Board of India, Disclosure and Investor Protection Guidelines, Clause 5.3.6 (2000).
[19]Securities and Exchange Board of India, Disclosure and Investor Protection Guidelines, Clause 6.1 – 6.15 (2000).
[20]Sahara Real Estate Corporation Limited and Others v. Securities Exchange Board of India and Another (2012) 110 CLA 476 (SC) (India).
[21] Companies Act §2 (68) (1956).
