2020 (4) TMI 315 - AT - SEBI

Tribunal rules FCD issuance to existing shareholders not a public issue, Company complies with regulations

Canning Industries Cochin Ltd. Versus Securities and Exchange Board of India, Mumbai

The Tribunal ruled in favor of the Company, finding that the issuance of Fully Convertible Debentures (FCDs) to existing shareholders did not constitute a ... Private 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. Issues Involved:1. Applicability of Section 42 of the Companies Act, 2013.2. Compliance with Section 62 of the Companies Act, 2013.3. Legality of the issuance of Fully Convertible Debentures (FCDs) by the Company.4. Compliance with SEBI regulations and the Companies Act.5. Determination of whether the offer of FCDs constitutes a public issue.Detailed Analysis:1. Applicability of Section 42 of the Companies Act, 2013:The core issue was whether the issuance of FCDs by the Company fell under the purview of Section 42 of the Companies Act, 2013, which governs private placements. Section 42 stipulates that a company may make a private placement offer to a select group of persons, not exceeding 200 in a financial year. The Tribunal found that Section 42 and Rule 14(2)(b) of the Securities Rules were not applicable to the Company's offer of FCDs, as it was not a private placement. The offer was made exclusively to existing shareholders, which does not constitute a 'select group of persons' as defined under the Act.2. Compliance with Section 62 of the Companies Act, 2013:Section 62 deals with the issuance of further shares to existing shareholders. The Tribunal emphasized that Section 62(3) was applicable in this case, which allows for the increase of subscribed capital through the conversion of debentures into shares, provided that the terms of such debentures are approved by a special resolution. The Company had complied with this by passing a special resolution in its 68th Annual General Meeting.3. Legality of the Issuance of Fully Convertible Debentures (FCDs):The Tribunal examined whether the issuance of FCDs was a public issue, which would necessitate compliance with various provisions of the Companies Act and SEBI regulations. The Tribunal concluded that the issuance of FCDs by the Company was not a public issue as it was made to existing shareholders and not to the general public. Consequently, the provisions of Section 40, which are applicable to public issues, were not required to be followed.4. Compliance with SEBI Regulations and the Companies Act:The Tribunal noted that the Whole Time Member (WTM) of SEBI had erred in applying Section 42 and Rule 14(2)(b) of the Securities Rules without considering Section 62(3) and Rule 18 of the Debenture Rules. The Tribunal highlighted that the WTM failed to recognize that Section 62(3) is an exception to the other provisions of Section 62 and that the Company had duly complied with the necessary conditions, including the appointment of a trustee as required under Section 71(5).5. Determination of Whether the Offer of FCDs Constitutes a Public Issue:The Tribunal held that the offer of FCDs did not constitute a public issue. The issuance was made exclusively to existing shareholders, and the Company had complied with the necessary legal provisions, including passing a special resolution and appointing a trustee. Therefore, the restrictions and requirements applicable to public issues were not relevant in this case.Conclusion:The Tribunal quashed the impugned order and the interim order issued by the Whole Time Member of SEBI. It concluded that the Company had complied with the relevant provisions of the Companies Act and SEBI regulations. The appeal was allowed, and all directions issued by the WTM were set aside. The Tribunal emphasized that the Company was not required to comply with the provisions applicable to public issues, as the issuance of FCDs was not a public offer.