In an order dated 28 January 2020, SAT has held that the offer of Fully Convertible Debentures (FCDs) to existing members of a company and subsequent allotment is not a private placement of securities under section 42 of the Companies Act (the “Áct”) as an offer of securities to the company’s shareholders cannot be termed as an offer to a ‘select group of persons’. The expression ‘select group of persons’ is not a technical expression but has to be understood in its ordinary popular sense, namely ‘an offer made privately such as to friends and relatives or a selected set of customers distinguished from approaching the general public or to a section of the public by advertisement, circular or prospectus addressed to the public.’ Thus, the restriction of subscription of shares to 200 persons or more is not applicable in the instant case as it is not a private placement.
Such an offer, in SAT’s view, would fall under section 62(3) of the Companies Act which is an exception to Section 62 (Further issue of capital) 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, provided the terms of issue of such debentures is approved by a special resolution.
Accordingly, the Tribunal set aside the order of the WTM which held the offer of FCDs to be in violation of the private placement provisions under section 42 r/w Rule 14(2)(b) of the Securities Rules as (i) the offer was made to more than 200 persons; (ii) the FCDs were covered under the expression ‘ shares and securities’ as per explanation to Rule 13 of the Debenture Rules which mandates compliance of conditions stipulated under section 42 of the Companies Act 2013 ; and (iii) the issue of FCDs on a preferential basis to existing members would be covered under these provisions.
In the instant case, Canning Industries Cochin Ltd., an unlisted public company, passed a special resolution under sections 62(3) and 71 of the Act to issue 1,92,900 unsecured FCDs to its 1,929 shareholders, with a condition that there exists no right to renounce the offer to any other person. However, only 335 shareholders subscribed to the offering. Consequently, one shareholder filed complaints before SEBI and the NCLT alleging that the company had made a public issue of securities without complying with the applicable provisions of the Act. Thereafter, SEBI undertook an enquiry and on 18 March 2019, a whole time member of SEBI passed an order which held that the offer of FCDs made by the company is a ‘deemed public issue’ under section 42(4) of the Companies Act read with rule 14(2)(b) of the Rules, as the offer was made to more than 200 shareholders and, thus, directed the company to comply with prescribed provisions of ‘public issue’ in the Act.
Aggrieved by the order of SEBI, the company contended before SAT that the issuance of FCDs was a neither rights issue (as the issue was not made on a proportionate basis), nor was it private placement, and that the issue falls under section 62(3) of the Act, which has not been considered by SEBI.
SAT appreciated the provisions of section 42 and 62 of the Act and noted that a perusal of Section 62(1)(a) indicates that a Company having a share capital at any time proposes to increase its subscribed capital by issue of further shares then such shares shall be offered to persons who on the date of the offer are holders of equity shares of the Company in proportion to the paid up share capital of those shares. Section 62(1)(b) provides for issuance of shares to employees under a scheme of employee stock option and Section 62(1)(c) provides for issuance of shares by a special resolution to those persons which may include persons referred to in clause (a) or (b). Thus, under Section 62 of the Act a company is under an obligation, when it proposes to issue further capital, to offer such capital to its own shareholders. However, 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. In regard to debenture stocks or loans which are convertible into shares, the restrictions contemplated under Section 62 will not apply. However other conditions contemplated under Rule 18 of the Debenture Rules are required to be complied with.
The Tribunal noted that the Company had passed a special resolution under section 62(3) read with section 71 in respect of the issuance of the FCDs, with the condition that the shareholders will have no right to renounce the offer in favour of any person and that the FCDs would be mandatorily converted into shares upon maturity. Thus, the provision of Section 62(3) had been duly complied with by the Company and was fully applicable. Further, there was nothing to indicate that the conditions mentioned in Rule 18 of the Debenture Rules were not complied with.
The Tribunal held that the WTM had failed to notice this provision (section 62(3)). 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 Act related to public offer are not applicable.
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