[Vinita Nair is a Partner at Vinod Kothari & Company, and can be reached at [email protected]]
One of the major concerns arising from enforcement of Companies (Amendment) Act, 2017 is to ensure compliance of provisions of the substituted section 42. One of the clauses of section 42 restricts utilization of monies received from subscribers of a privately placed issue of securities unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8). This post critically analyses the aforesaid restriction, its consequences and the need to amend the same.
The Ministry of Corporate Affairs (MCA) on 15 February 2018 issued draft private placement rules that will be soon rolled out as Companies (Prospectus and Allotment of Securities) (Amendment) Rules, 2018 (see discussion here). Currently, the draft rules are open for public comments.
Relevant provision in Companies (Amendment) Act, 2017
Section 42: Issue of shares on private placement basis.
(4) Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash:
Provided that a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub- section (8).
(8) A company making any allotment of securities under this section, shall file with the Registrar a return of allotment within fifteen days from the date of the allotment in such manner as may be prescribed, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.
Relevant extract from the Report Company Law Committee (February 2016)
3.9 The Committee also felt that since the requirement for filing of PPOL and list/details of proposed offerees (i.e. PAS-5) with Registry within 30 days of circulation of PPOL is being dispensed with, companies should be required to file return of allotment (PAS-3) within the prescribed timeline, and should be liable for penalties under Section 42 in case of non-compliance. Further, it could be provided in the Act/Rules that companies would not be allowed to utilise the monies raised through private placement unless such return of allotment is filed. The underlying objective is to ensure that private placement process is completed within a finite period of 90 days.
Effect of the amendment
The said amendment seems to be of a retrograde nature since it will have a significant adverse impact on companies undertaking issue of securities on private placement basis. The Ministry has failed to appreciate the fact that fund raising is a business requirement and filing of a return with the Registrar is a post-facto requirement.
Companies, especially those in financial sector raising funds by ways of issue of non-convertible debentures on private placement basis, are required to sweep the funds out of the bank account instantly on allotment of securities for business requirements. Retaining the money in the separate bank account until a return of allotment is filed with the Registrar will result in irreparable business or opportunity loss.
The rationale provided by the Committee above was to ensure the underlying objective is met, i.e., the private placement process is completed within a finite period of 90 days. This is very much in contradiction with the recommendation made in the immediately preceding line, i.e. “Further, it could be provided in the Act/Rules that companies would not be allowed to utilise the monies raised through private placement unless such return of allotment is filed.” The recommendation seems to have been made in a very casual manner using the words ‘could be’ instead of ‘should be’ used in other parts of the Report.
A company may not avail of term loan or rights issue or public issue frequently; however, fund-raising by way on a private placement basis is a very frequent exercise depending on the resource requirement of the said company. It is pertinent to point out that there is no such corresponding requirement to not utilize the term loan until the charge is filed with the Registrar or not utilize proceeds of public issue or rights issue until return of allotment is filed. Therefore, there seems to be absolute lack of justification for incorporating such a restriction.
Failure to file e-Form PAS-3
The Committee and the Ministry have failed to consider that a company may not be able to file a return of allotment for any of simplest reasons specified hereunder:
(a) Non-availability of the Digital Signature (DSC) of the concerned officer;
(b) Non-availability of the practicing professional certifying the eForm;
(c) MCA site being unavailable due to technical issues;
(d) Temporary non-availability of the e-form from the MCA portal due to some technical glitch.
Unless v/s Until
The provisions use ‘unless’ and not ‘until’. The expression ‘unless’ is used when one intends to state a precondition i.e. ‘if-not’. If we replace ‘if-not’ in existing provision, the sub-section reads as under:
‘Provided that a company shall not utilise monies raised through private placement if allotment is made and the return of allotment is not filed with the Registrar in accordance with sub- section (8).’
Sub-section (8) provides 15 days’ time from the date of allotment to file return of allotment. So, it is logical to interpret that company is not eligible to utilise monies raised through private placement if PAS-3 is not filed within 15 days from the date of allotment. Filing beyond 15 days will anyway make company liable for penalty provided under sub-section (9).
The expression ‘until’, on the contrary, means up to a particular time or before a specified time. If the idea was to postpone utilization till the filing is done, the word would have been ‘until’ or ‘unless and until’.
A few provisions under the Companies Act, 2013 where ‘until’ is used are set out below:
Section 13 (10):
(10) No alteration made under this section shall have any effect until it has been registered in accordance with the provisions of this section.
A few provisions under the Act where ‘unless and until’ is used provided hereunder:
Section 48 (2):
(2) Where the holders of not less than ten per cent. of the issued shares of a class did not consent to such variation or vote in favour of the special resolution for the variation, they may apply to the Tribunal to have the variation cancelled, and where any such application is made, the variation shall not have effect unless and until it is confirmed by the Tribunal.
Instruction given under Table of Fees (pursuant to rule 12 of the Companies (Registration of Offices and Fees) Rules, 2014)
(4) Where a fee payable to the Registrar is paid through bank drafts as, aforesaid it shall not be deemed to have been paid unless and until the relevant drafts are cashed and the amount credited.
While it may seem a mere issue of semantics, this is however certainly an opportunity cost for companies. In view of the penal provisions under section 42, no company would intend to risk non-compliance with the same. There is certainly scope for amending the condition by appropriately wording sub-rule (7) of rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014.
The rules may specify that the condition under proviso to sub-section (4) of section 42 shall be deemed to be satisfied if the return of allotment is filed within the time prescribed in sub-section (8) of section 42, failing which the company and its officers shall be liable for action under sub-section (9) of Section 42.
– Vinita Nair
 If a company defaults in filing the return of allotment within the period prescribed under sub-section (8), the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.