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Introduction:

1.  Every company needs capital to carry on its business. The capital can be owner’s equity or debt capital. It can be a mix of these two. The instruments issued by a company may be either equity capital or preference capital or debenture, etc. A company may raise funds through any of these instruments but the company has to comply with the relevant provisions of law in regard to the raising of funds. [1]A private company is prohibited from inviting the public to subscribe for its shares or debentures and hence, a private company cannot approach the market for its capital requirements. [2]A public company can raise capital and it may get its shares listed in the stock exchanges. The stock exchanges provide a platform for the trading of securities and on being listed, the securities become marketable and tradeable. The securities become liquid.

2.    The scheme of the Companies Act, 1956 (Act) provides two options to a public company for raising capital. The first option is that a public company can raise capital in the market by making offer of its shares through ‘public offer’ and get its shares listed. The second option is that the public company will not approach the public for subscription of its securities but will raise capital through ‘private placement’. Public offer is defined to be offer of shares or debentures to the public. A public offer or invitation includes an offer or invitation to any section of the public. The term private placement is not explicitly defined under the Act and any offer which is not a public offer is considered to be a private placement.

Jurisdiction

3.  Public offer mandates a company to comply with sections 55 to 58, 59 to 81, 108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207. Securities and Exchange Board of India (SEBI) has the exclusive jurisdiction regarding the administration of these sections in respect of listed public companies and other public companies which intend to get their securities listed. Issue and allotment of securities by a public company other than through a ‘public offer’ is administered by the Central Government through the Registrar of Companies.

Public Issue/Offer

4.  A public company which intends to make a ‘public offer’ of its shares has to issue a ‘prospectus’ which should contain the information mentioned in section 56 read with Schedule II to the Act. The prospectus has to be delivered to the Registrar for registration before being circulated. A company which does not issue a prospectus may file Information Memorandum with the Registrar as stipulated in section 60(B). Section 73 mandates that the public company offering shares to the public for subscription shall apply for listing with any of the recognized stock exchanges. Misstatements in prospectus attract civil and criminal liability interms of sections 62 and 63 of the Act. The company issuing securities has to comply with the SEBI guidelines also.

Private Placement

5.   There are many public companies which do not raise capital through public issues because they consider that their funds requirement is not huge and secondly the cost of raising funds through public issue is prohibitive. Such companies raise funds through private placements i.e. friends and relatives of the promoters contribute to the capital / securities of the company. Themodus operandi adopted by such companies is that these companies pass a special resolution under section 81(1A) of the Act stating that the company is permitted to offer shares to persons other than but including the existing shareholders and the resolution specifies the number of shares, the premium, if any, and also other relevant details. The Ministry of Corporate Affairs vide Notification No. GSR-922(E) dated 4.12.2003 promulgated the Unlisted Public Companies (Preferential Allotment)Rules, 2003 (Rules) which stipulate certain disclosure requirements in the explanatory statement annexed to the notice convening the general meeting of the company. Though this contains several information to be provided, what is pertinent here is that it provides for disclosure of the proposed time within which the allotment shall be completed and as per Rule 4, this shall not exceed 12 months. Normally, these companies mention such period as 12 months and file Form 23 for registering the special resolution u/s 81(1A). The company thereafter receives cheques from the friends and relatives of the promoters along with an application form and shares are allotted and Form 2s in this regard are filed with the concerned Registrar of Companies.

6.  Recently, such companies were issued notices under section 234 by the Registrar of Companies calling for information regarding the various allotments that took place since inception of the company, the number of shares allotted, number of allottees, premium if any and the compliance of section 67(3). Thereafter, invariably show cause notices are being issued to such companies alleging non-compliance/violation of section 67(3) read with section 73 of the Companies Act, 1956. There is presumption by Government that any allotment of shares to 50 persons or more in a year triggers section 67(3) and hence section 73 on the basis of the judgment of the Apex Court in Sahara’s Case[3].

Sahara Ratio

7.I  In Sahara’s case, the following facts were fundamental for the judgment delivered.

a. Sahara issued securities through friends, associates, group companies, workers/employees and other inpiduals associated/affiliated or connected in any manner with Sahara group of companies.

b. There was a network of around 2900 branch offices, 10 lac agents and other people involved in fund raising.

c. Sahara circulated Information Memorandum along with application forms to various persons.

d. Sahara had approximately 3 crores of investors and a collection of Rs. 24,000/- crores.

e. SEBI received private complaint alleging violation of various statutory requirements by Sahara group companies.

In the light of the above facts, the Apex Court delivered its judgment, the substance of which is as under;

a. Section 67(3) is an exception to section 67(1) and 67(2). As a result of proviso to section 67(3), if an offer of shares or debentures is made to 50 or more persons, it would deemed to be a public issue even if the requirements of section 67(3)(a) or section 67(3)(b) are met.

b. Optionally / fully convertible debentures are also securities and covered by section 67.

c. SEBI has the jurisdiction in respect of such issues because these securities fell within the purview of section 55A of the Act.

d. The argument that the Rules were amended only in 2011 restricting the number of investors to 49 in the definition of ‘preferential allotment’ and hence, offers made prior to that date were in order, was turned down by the Apex Court stating that the Rules are subordinate legislation and they cannot supersede the express provision i.e. section 67(3).

e. Non-provision of information demanded by SEBI amounted to avoidance and hence, the issue was a public issue.

Interpretation of Section 67

8. Though Sahara’s case was considered to be within the jurisdiction of SEBI and offer by Sahara to 50 or more persons was considered to be a public offer, the same ratio was arrived at on the basis of facts enumerated in para 7 supra. It cannot apply invariably to each and every allotment of shares to 50 persons or more in a year by any unlisted public company. Section 67(1) provides that any offer of shares or debentures to any section of the public or clients of the issuer shall be deemed to be an offer to the public. In the same way, section 67(2) provides that any invitation to subscribe for the shares or debentures to any section of the public or clients of the issuer shall be deemed to be an offer to the public. It is immaterial whether the issuer selects such offeree [Section 67(1)] or the invitee [Section 67(2)] as a member or debenture holder of the issuer or not. The provisions of Section 67(1) and 67(2) are subject to the provisions contained in section 67(3). To put it differently, section 67(3) carves out an exception to the principle mentioned in section 67(1) and (2) that an offer or invitation to a section of the public or clients is a public issue. Section 67(3) provides that an offer or invitation is not treated as public offer if any one of the following conditions is satisfied:

a.  if the offer or invitation can be regarded as not being calculated to result directly or indirectly in the shares or debentures becoming available for subscription or purchase by persons other than those receiving such offer or invitation; or

b.  if the offer or invitation can be regarded otherwise as being domestic concern of the persons making or receiving the offer or invitation.

The Companies (Amendment) Act, 2000 with effect from 13.12.2000 inserted first proviso to section 67(3) which reads as under:

Provided that nothing contained in this sub-section shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to 50 persons or more.

The Ministry of Corporate Affairs on 4.12.2003 promulgated Unlisted Public Companies (Preferential Allotment) Rules, 2003 providing for certain disclosures to be made in the explanatory statement issued pursuant to section 173(2) of the Act. These Rules were amended on 14.12.2011 providing that in ‘preferential allotment’, offer shall not be made to 50 persons or more.

9.  On account of the amendment by the insertion of the first proviso to section 67(3), there is a wrong notion that any allotment of shares by any unlisted public company to 50 or more persons in a financial year between 2000 to 2013is in violation of section 67(3) and section 73. The main thrust in section 67 for the determination of the question as to whether there is a public offer or not, is offer or invitation. When there is an offer or invitation to subscribe for the shares, section 67 is triggered. There are three important ingredients in section 67 to treat a private placement as a public offer.

·  There has to be an offer or invitation.

·  Such offer/invitation has to be made by the company.

·  It has to be made to 50 or more persons.

If any one of these three conditions is not satisfied, such ‘private placement’cannot be regarded as‘publicoffer’ by way of deeming fiction under the first proviso to section 67(3). When there is no offer or invitation, section 67 is not at all attracted and much less section 67(3) and 73.

10. [4]“Prospectus" is defined to mean 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.[5]"Advertisement" is said to include notices, brochures, pamphlets, show cards, catalogues, hoardings, placards, posters, insertions in newspaper, cover pages of offer documents, pictures and films in any print media or electronic media, radio, television programme. [6]"Initial Public Offer" is defined to mean an offer of specified securities by an unlisted issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holders of such securities in an unlisted issuer. [7]"Offer Document" means a red herring prospectus, prospectus or shelf prospectus and information memorandum in terms of section 60A of the Companies Act, 1956 in case of a public issue and letter of offer in case of a rights issue. [8]"Preferential Issue" means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis and does not include an offer of specified securities made through a public issue, rights issue, bonus issue, employee stock option scheme, employee stock purchase scheme or qualified institutions placement or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities. [9]"Public Issue" means an initial public offer or further public offer. [10]"Further Public Offer" means an offer of specified securities by a listed issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holders of such securities in a listed issuer.

11. All the definitions such as prospectus, advertisement, etc indicated above refer to a written communication from the company in order to treat the same as an ‘offer’. In other words, if there is no written or visual communication by or on behalf of the company, there cannot be any offer or invitation and the provisions of section 67 have no application under such circumstances. It is true that the offer or invitation by a company has to be in writing because a company being a juristic person cannot communicate verbally and the same has to be only through written communication. In the cases of such unlisted companies where there were no written communications, there was no document or written communication to offer the shares or to invite the public to subscribe the shares of the company. In the absence of any such written document, section 67 has no applicability.

Offer not defined

12. There is still ambiguity as to whether multiple offers of securities by an unlisted company at various intervals of time, with each offer being made to less than 49 persons but in the aggregate exceed 49 persons could qualify as a public issue or not. The Apex Court has not interpreted as to what constitutes an ‘offer’.

External Action

13. The Supreme Court in the said judgment relied on intention of Sahara to determine whether the issue of securities was a public issue or not. The Supreme Court observed that the “acta exterior indicant interior secrata” (external action reveals inner secret) applies with all force in Sahara’s case.The Court observed that the intention of Sahara was known by its action of offering shares to more than 50 persons and hence was liable to get its shares listed. In the case of such unlisted companies where there were no offers, there was no action of offering shares at all to the public and hence, the action of such companies does not justify an inference of  intention being drawn as was done in Sahara case by the apex court.

Difference between Offer and Allotment

14. As explained in para no. 5 above, the small unlisted public companies never issued any offer or invitation to attract section 67. Since these companies have not made any offer or invitation, there cannot be any deeming fiction as mentioned in section 67(3). Allotment of shares to 50 persons or more is a different issue. We have to now understand what is offer or invitation to subscribe for shares and what is allotment. The term ‘offer’ has not been defined under the Companies Act, 1956. The prospectus is an invitation for an offer to the public for the subscription or purchase of any securities. When the invitation is accepted, the offer is made to the company. When an offer is made through an application, the company allots the shares, which is acceptance of the offer. Once the shares are allotted, contracts are concluded. Since these unlisted companies have not issued any prospectus,there was no invitation to the public to subscribe for the shares of the company. The application form along with the money by the persons was the offer to the company to purchase the shares in the company and the allotment of the shares signifies the acceptance of the offer by such persons. To attract section 67, the offer must be from the company whereas in these cases the offer is from the persons/investors. Allotment of shares does not convey offer or invitation to make an offer. Allotment conveys acceptance of the offer. When persons/investors make such offers for shares to the company and the company accepts the offer, the company can never be said to be making an offer or inviting the persons to subscribe for the shares.

Jurisdiction of SEBI

15. The Apex Court in Sahara’s case while interpreting section 55A accepted that SEBI is the appropriate authority for the implementation of section 67(3) read with the section 73 of the Act. This jurisdiction of SEBI has been followed in all cases by SEBI including the latest case Inre M/s SGI Research and Analysis Limited (2013). If the contention that the private placement made by such unlisted companies is deemed to be a public issue by virtue of section 67(3)is accepted by the Government, SEBI has to initiate prosecution in respect of such companies.

Limitation

16. Sections 67 and 73 of the Act, per se, do not provide for any penalty for non-compliance. In the absence of specific penalty provided in the relevant sections, section 629A is applicable which provides for a fine which may extend to Rs. 5,000/-. Besides,section 624 provides that every offence against this Act shall be a criminal offence and non-cognizable offence. Since contravention of any of the provisions of the Act is a criminal offence, Code of Criminal Procedure, 1973 is applicable. Section 468(2) of the Code of Criminal Procedure provides that the period of limitation shall be 6 months if the offence is punishable with fine only. As per section 629A,non-compliance of section 67(3) or 73 are punishable with fine only. Hence, prosecution will be barred by limitation against allotment of shares made and Form 2 filed before 6 months or more.

Conclusion

17. The law laid down by the Supreme Court in Sahara cannot be mechanically applied to all unlisted public companies which have allotted shares to 50 persons or more between 2000 and 2013 without considering the factual settings in Sahara vis-à-vis  other companies. While interpreting a provision, the court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to abuse, it is for the legislature to amend, to modify or repeal it, if deemed necessary. The legislative casus omissus cannot be supplied by judicial interpretative process.

[1] Section 3(1)(iii) of the Companies Act, 1956

[2] Section 73 of the Companies Act, 1956

[3]Sahara India Real Estate Corporation Ltd &Ors Vs. SEBI &Anr - MANU/SC/0702/2012

[4] Section 2(36) of the Companies Act, 1956

[5] Section 2(a) of SEBI (ICDR) Regulations, 2009

[6] Section 2(p) of SEBI (ICDR) Regulations, 2009

[7] Section 2(x) of SEBI (ICDR) Regulations, 2009

[8] Section 2(z) of SEBI (ICDR) Regulations, 2009

[9] Section 2(zc) of SEBI (ICDR) Regulations, 2009

[10] Section 2(n) of SEBI (ICDR) Regulations, 2009

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