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2020 (4) TMI 315 - AT - SEBIPrivate placement of securities - Allotment of Unsecured Fully Convertible Debentures (FCDs) in excess of 500 members - increase in the subscribed capital of the Company - section 71(5) - issuance of FCDs by the Company was public issue OR not? - WTM directed to cancel the FCDs and forthwith refund the money collected till date through the issuance of FCDs including the application money collected from investors,restriction to the number of shareholders to whom the debentures would be issued - appointment of trustees - HELD THAT:- Shareholders in their 68th Annual General Meeting held on 28th September, 2015 passed a special resolution to allot and issue 1,92,900 Fully Convertible Debentures of ₹ 250/- with the condition that the shareholders will have no right to renounce the offer in favour of any person and that these debentures would be mandatorily converted into shares upon maturity. Thus, we find from the resolution that the increase in the subscribed capital of the Company was caused by the exercise of an option 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 eligible for allotment. It is clear that the offer of FCDs was made to the existing shareholders of the Company. Consequently, the Company was not required to ensure compliance with the limit of allottees as applicable in the case of private placement of securities. WTM was enamoured with the provisions of Section 42 and 62(1)(2) and fortified her findings by referring 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. No offer can be made to its members exceeding 500 for the subscription of its debentures unless the Company, before such offer or issue has appointed a trustee. Thus, the restriction is that debentures could be issued to only 500 persons if there is no trustee appointed by the Company. However the restriction of 500 persons is done away if a trustee was appointed by the Company. In the instant case, it is an admitted fact that a trustee was appointed. Thus there was no restriction to the number of shareholders to whom the debentures would be issued. In the light of the aforesaid, the impugned order passed by the Whole Time Member cannot be sustained.
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