Exit Route For Companies Who Have Made Deemed Public Issues

[The
following guest post is contributed by Amitabh Robin Singh, who is an Associate
at DSK Legal]
The Securities and Exchange
Board of India (“SEBI”) has recently
issued a circular
(“Circular”) which has allowed companies
which have made deemed public offers (allotment of securities to more than 49
persons under the Companies Act, 1956) to escape penal action if the securities
have not been allotted to more than 200 persons in a financial year (the
threshold for deemed public issues under the Companies Act, 2013). This has
been done considering that the threshold for a deemed public offer has increased
from not more than 49 persons to not more than 200 persons with the enactment of
the Companies Act, 2013.
The Circular applies to companies
that have made deemed public issues prior to April 1, 2014, which is the date on
which the relevant section (Section 42) and rule (Rule 14 of the Companies
(Prospectus and Allotment of Securities) Rules, 2014) of the Companies Act,
2013 were brought into force.
Generally companies who make a
deemed public offer without complying with the provisions of the then in force
Companies Act and extant SEBI guidelines are barred along with their promoters
and/or directors by SEBI from accessing the securities market for a particular period
of time which is stipulated in the relevant order against the company.
Pursuant to the Circular, an
erring company can avoid penal action by giving the holder of the security (if
the security has been transferred since allotment, then to the
transferee-current holder) an option to surrender the securities at a price not
less than the subscription amount plus 15% interest or any such higher return
which was promised to the investors.
It is pertinent to note that
the term used is “amount of subscription money”. So it appears that if the
holder of the security on the date of the refund is a subsequent transferee
from the original subscriber, the base refund amount is to be the original
subscription price and not the price at which the security was transferred to
the current holder. This position seems to be reasonable.
An interesting point to examine
here is the catchment area of the Circular. How many companies, which have made
deemed public issues prior to April 1, 2014, will be able to benefit from the Circular
and avoid penal action?
Upon perusing the last five
orders passed (chronologically) in relation to deemed public issues being Amazon
Agro Products Limited
, Vaibhav
Pariwar India Projects Limited
, Bharatiya
Real Estate Development Limited
, Mondal
Construction Company Limited
and SEBA
Real Estate Limited
, it can be seen that none of these cases will fall
within the purview of the Circular. This is due to the fact that none of the abovementioned
companies had allotted securities to between 50 and 200 persons in all of the
relevant years in which the concerned security was allotted. The number
exceeded 200 in all of the abovementioned cases.
To see an order which would
have come under the purview of the Circular, one has to go back to Prayas
Projects India Limited
, dated December 29, 2015, in which the
securities were issued to not more than 200 persons in all of the concerned
financial years in which the security was allotted. In this case the securities
were allotted to 107 and 47 subscribers in the respective financial years.
From the date of the passing of
the Prayas Projects order till date
more than ten other orders have been passed on the matter of deemed public
issues all of which would not have been benefited by the Circular due to the
allottees being more than 200 in number, so it can be seen that cases to which
the Circular will give benefit to in the future may not be very commonplace.
The Circular goes on to lay
down the procedure for implementing the refund stating that the process which
the company undertakes to effect the mandated refund needs to be evidenced by
proof of dispatch of the refund. Also, the refund is required to be made
through cheques, demand drafts or Internet banking channels to enable the trail
of the money to be clearly traced.
The company is also required to
submit a certificate from a practicing chartered accountant to certify
compliance with the refund process which states that the chartered account has
verified all documents relating to the refund such as proof of dispatch of
letters and the company’s bank statements, etc.
In conclusion, despite the fact
that a good number of companies that have made deemed public issues will not
benefit from the Circular, it does not seem to be the intention of SEBI to give
such companies an escape from penal action which have mobilized funds from a
larger amount of people going beyond the increased threshold ushered in by the
Companies Act, 2013. Hence, companies and promoters/and or directors who have
made comparatively smaller deemed public issues can avoid being barred from the
securities market and continue their involvement in the market.
– Amitabh Robin Singh

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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