The Sahara case has led to certain amendments being made to the Unlisted Public Companies (Preferential Allotment) Rules, 2003 (the “Rules”). While the Sahara case itself has seen itself being argued and debated across various judicial fora over the last couple of years, the Government of India has tried to close some of the potential loop-holes through these amendments.
Firstly, the definition of “preferential allotment” under Rule 3(1) of the Rules has been amended. Earlier, the definition of “preferential allotment” included the issue of shares on preferential basis and/or through private placement made by a company and issue of shares to the promoters and their relatives either in public issue or otherwise. This definition has now been amended to mean allotment of shares or any other instrument convertible into shares including hybrid instruments convertible into shares on preferential basis made pursuant to Section 81(1A) of the Companies Act, 1956 (the “Act”). Further, allotment of shares shall not be made to more than 49 persons as per the first proviso to Section 67(3) of the Act. These amendments are clearly inspired by the Sahara case, as (a) there was an issue of Optionally Fully Convertible Debentures in that case, which was adjudged by the judiciary to be ‘hybrid instruments’, and (b) the SEBI order in the Sahara case held that allotment of such debentures to more than 49 persons ‘on private placement’ basis would be considered a public issue.
Secondly, Rule 4 (Special Resolution) of the Rules has been amended in light of the new definition of “preferential allotment”. Earlier the said Rule 4 stated that no issue of shares on a preferential basis can be made by a company unless authorized by its articles of association and unless a special resolution is passed by the members in a general meeting authorizing the board of directors to make such issue. The amended Rule 4 also encompasses issue of any other instrument convertible into shares including hybrids convertible into shares on a preferential basis.
Finally, a new Rule 8 (Invitation and allotment of securities) has now been incorporated, which sets out a number of conditions which will now apply to preferential allotments. A few key conditions are:
(a) Any offer or invitation not in compliance with section 81(1A) read with Section 67(3) of the Act, will be treated as a public offer and the provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992, will have to be complied with.
(b) No company offering securities will release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer [It is pertinent to note that Sahara, through its marketing agents, advertised its issue leading to around 6.3 million subscribers for the debentures].