Company violated public issue norms by issuing preference shares to over 49 persons, must refund money with 15% interest

SEBI found that a company violated public issue norms by issuing Redeemable Preference Shares to more than 49 persons across multiple monthly allotments during 2009-2012, circumventing Companies Act provisions. The company failed to comply with sections 56, 60, and 73 of Companies Act 1956/2013 and SEBI regulations. SEBI ordered the company and six directors to jointly refund all collected money with 15% compound interest, restricted market access for four years post-refund completion, and prohibited directors from securities market dealings. The company must publish refund notices in national and local newspapers and provide asset inventories.

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Issues Involved:
1. Alleged fund mobilizing activity by the Company through the issuance of Redeemable Preference Shares (RPS).
2. Violation of public issue norms under the Companies Act, 1956 and SEBI regulations.
3. Non-compliance with SEBI (Disclosure and Investor Protection) Guidelines, 2000 and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
4. Liability of the Company and its directors for the violations and repayment to investors.
5. Directions for refund and restraint measures imposed by SEBI.

Issue-wise Detailed Analysis:

1. Alleged Fund Mobilizing Activity:
SEBI observed that the Company was engaged in fund mobilizing activity from the public by issuing RPS, allegedly violating sections 56, 60 read with section 2(36), 73 of the Companies Act, 1956, and SEBI guidelines. The interim order restrained the Company and its directors from further fund mobilization and accessing the securities market.

2. Violation of Public Issue Norms:
The Company issued RPS to more than 49 persons, making it a public issue under section 67(3) of the Companies Act, 1956. The Company failed to comply with the mandatory provisions of sections 56, 60, and 73 of the Companies Act, 1956, which require issuing a prospectus, registering it with the RoC, and listing the securities on a recognized stock exchange. The Supreme Court's Sahara case was referenced to emphasize that any offer to more than 49 persons constitutes a public issue.

3. Non-compliance with SEBI Guidelines and Regulations:
The Company did not follow the SEBI (Disclosure and Investor Protection) Guidelines, 2000, and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. Specific clauses of the DIP Guidelines, such as filing offer documents, application for listing, issuing securities in dematerialized form, and others, were violated. The Company did not deny these allegations and failed to provide any material to suggest compliance.

4. Liability of the Company and its Directors:
The liability for non-compliance with sections 56, 60, and 73 of the Companies Act, 1956, extends to the Company and its directors. The liability to repay investors is a continuing obligation, and directors during the period of violation are responsible, irrespective of their current status. The directors listed in the interim order were found liable for the violations and responsible for making refunds to investors.

5. Directions for Refund and Restraint Measures:
SEBI directed the Company and its directors to refund the money collected through RPS with 15% interest per annum. The repayments must be made in cash through Bank Demand Draft or Pay Order. The Company was permitted to sell its assets solely for making refunds and required to deposit the proceeds in an Escrow Account. Public notices detailing refund modalities were mandated. The Company and its directors were restrained from accessing the capital market and dealing in securities for four years post-refund completion. Non-compliance would lead to recovery actions, adjudication proceedings, and potential criminal cases.

Conclusion:
The Company and its directors were found to have violated public issue norms and SEBI regulations, resulting in directives for refunds and market restraints. The order emphasized the continuing liability of directors for investor repayments and outlined stringent measures to ensure compliance and protect investor interests.

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