Once allotment is made to less than fifty allottees by way of private allotment the first proviso to Section 67(3) clearly makes it a private issue and not a public issue

The Securities Appellate Tribunal ruled that if a company allots shares privately to fewer than fifty individuals, it is considered a private issue, not a public one, according to the first proviso of Section 67(3) of the Companies Act. This decision overturned SEBI's finding of a violation, as the company had indeed made private placements to less than fifty allottees, thus not contravening the Act.

ZENITH HIGHRISE INFRACON LTD., MR. KATYAL BANERJEE (APPELLANT) VS. SEBI (RESPONDENT)
SECURITIES APPELLATE TRIBUNAL
DATED 25.02.2020

HELD THAT

Once allotment is made to less than fifty allottees by way of private allotment the first proviso to Section 67(3) clearly makes it a private issue and not a public issue.

APPLICABLE PROVISIONS

SECTION 67. RESTRICTIONS ON PURCHASE BY COMPANY OR GIVING OF LOANS BY IT FOR PURCHASE OF ITS SHARES

(1) No company limited by shares or by guarantee and having a share capital shall have power to buy its own shares unless the consequent reduction of share capital is effected under the provisions of this Act.

(2) No public company shall give, whether directly or indirectly and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of, or in connection with, a purchase or subscription made or to be made, by any person of or for any shares in the company or in its holding company .

(3) Nothing in sub-section (2) shall apply to—

(a) the lending of money by a banking company in the ordinary course of its business.

(b) the provision by a company of money in accordance with any scheme approved by company through special resolution and in accordance with such requirements as may be prescribed, for the purchase of, or subscription for, fully paid-up shares in the company or its holding company, if the purchase of, or the subscription for, the shares held by trustees for the benefit of the employees or such shares held by the employee of the company;

(c) the giving of loans by a company to persons in the employment of the company other than its directors or key managerial personnel , for an amount not exceeding their salary or wages for a period of six months with a view to enabling them to purchase or subscribe for fully paid-up shares in the company or its holding company to be held by them by way of beneficial ownership:

Provided that disclosures in respect of voting rights not exercised directly by the employees in respect of shares to which the scheme relates shall be made in the Board’s report in such manner as may be prescribed.

(4) Nothing in this section shall affect the right of a company to redeem any preference shares issued by it under this Act or under any previous company law.

(5) If a company contravenes the provisions of this section, it shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

SECTION 67(3) IN THE COMPANIES ACT, 1956

(3) No offer or invitation shall be treated as made to the public by virtue of sub- section (1) or sub- section (2), as the case may be, if the offer or invitation can properly be regarded, in all the circumstances-

(a) as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for sub- scription or purchase by persons other than those receiving the offer or invitation; or

(b) otherwise as being a domestic concern of the persons making and receiving the offer or invitation.

BRIEF FACTS

1. The appellant company raised its capital in the financial year 2012-2013 by allotment of Redeemable Preferential Shares (“RPS”) of Rs. 100 each through private placement, that is, to friends and relatives of the members/ directors and raised an amount of Rs. 43,04,000 from 47 allottees.

2. A list of the allottees was filed before the Registrar of Companies (ROC).

3. Three allottees made complaints to SEBI in respect of issue of RPS with regard to non-inclusion of their names in the list submitted before the RoC.

4. On enquiry of the SEBI, it was observed that the company had raised an amount of Rs. 43,04,000 from 52 allottees whereas the RoC record showed allotment of RPS to 49 persons.

5. Based on this discrepancy SEBI found that the RPS was made to 50 persons in violation of Section 67(3) of the Companies Act, 1956 and consequently the WTM directed the company and its directors to refund the monies collected through RPS along with interest at the rate of 15% per annum and further restrained the directors from associating them with any listed company which would operate from the date of completion of refund to the investors.

6. The appellants being aggrieved by the order of the WTD of SEBI have filed the appeal.

7. The appeal is allowed on the finding that no evidence has come forward to show that the company had made a public offer other than these 49 persons. Once allotment is made to less than fifty allottees by way of private allotment the first proviso to Section 67(3) clearly makes it a private issue and not a public issue.

8. Consequently, there is no violation of the provisions of the Companies Act, 2013. Thus, the order of the WTM cannot be sustained and is quashed. The appeals are allowed.