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

The Tribunal ruled in favor of the Company, finding that the issuance of Fully Convertible Debentures (FCDs) to existing shareholders did not constitute a public issue. It held that the Company complied with the Companies Act and SEBI regulations, including passing a special resolution and appointing a trustee. The Tribunal quashed the orders issued by SEBI's Whole Time Member, stating that the Company was not obligated to adhere to provisions concerning public issues. The appeal was allowed, and all directions from SEBI were set aside.

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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.

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