Adjudicating Order for Violation of Section 42(7) of the Companies Act, 2013 relating to Public Advertisement in process of Private Placement of Securities
Contributed By: Yogesh Kukreja
Email ids: yogesh@simplybiz.in
Reference to Section 42 of the Companies Act, 2013 (‘Act’)
Section 42(2) of the Act: Meaning of private placement:
A private placement shall be made only to a selected group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed two hundred in aggregate in a financial year (excluding the qualified institutional buyers and employees of the Company being offered securities under a scheme of Employees Stock Option).
Section 42(7) of the Act: Restriction on public advertisement:
No Company issuing securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue.
Section 42(10) of the Act: Penalty for violation:
Subject to sub-section (11), if a Company makes an offer or accepts monies in contravention of this section, the Company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the Company shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty.
Section 446B of the Act: Lesser penalties for One Person Companies or Small Companies:
Notwithstanding anything contained in this Act, if penalty is payable for non-compliance of any of the provisions of this Act by a One Person Company, Small Company, Start-up Company or Producer Company, or by any of its officers in default, or any other person in respect of such Company, then such Company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a Company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.
Facts of the case
On the basis of the information which came to the notice by Registrar, it was seen that the subject Company had issued its Compulsorily Convertible Debentures (herein after referred as “CCDs”) using the website https://www.tykeinvest.com (herein after referred as “Tyke”).
On the website of Tyke, it was noted that the subject Company collected the investment under the brand name “DECIWOOD” and the campaign for raising fund closed on 25th July 2021. Other details as enlisted on the website of Tyke are as follows:
Total number of Subscribers | 28 |
Average per Subscriber | Rs. 51786 |
Percentage Raised | 145.00 % |
Type of Instrument | CCD |
The above-mentioned information was cross-verified with the e-form PAS-3 filed with ROC which revealed the following information:
Number of Securities allotted | 1,25,000 CCDs |
Total nominal amount | Rs 12,50,000/- |
Date of Board Approval | 10th July 2021 |
Date of Shareholders approval | 2nd August 2021 |
Date of Circulation of Private placement offer | 2nd August 2021 |
Date of Allotment | 10th August 2021 |
Thus, a prima facie case was made out that the subject Company had violated Section 42(7) of the Act so a Show Cause Notice dated 27th December 2022 was issued to the subject Company and its officers to furnish the reasons as why penalty mentioned in sub-section (10) of Section 42 of the Act should not be imposed.
The subject Company submitted its reply vide letter dated 11th January 2023, but it was not satisfactory as the Company did not provide any response for observations mentioned in the show cause notice.
Also, it is interesting to note that the details of the banking transactions enclosed by the Company suggest that the money in the virtual escrow account of the Company was received from the investors on different dates ranging from 15.07.2021 to 28.07.2021 in the virtual escrow account, whereas the approval of the members in the EGM was received only on 02.08.2021.
Further, as per request made by the subject Company, a hearing was scheduled on 14th Feb 2023.
Following are key highlights of the hearing: –
“Issue I. Sh. Singh was asked to explain about how the Company got to know about the TYKE platform and how the compliance of section 42 of the Companies Act, 2013 was ensured?
Reply of Sh. Satinder Singh-
- Sh. Singh submits that both the Companies came to know about TYKE through online start up community events.
- The Companies have only availed the value-added services (VAS) which is provided by the Tyke platform.
- Merely availing of the value-added services from TYKE platform will not amount to issue of public advertisements and Company has complied section 42(7) while issuing of CCDs.
Issue II. Sh. Singh was asked as to how did the Company utilize the TYKE platform to raise CCDs?
Reply of Sh. Satinder Singh-
Company connected with persons who showed the interest in their business on TYKE. The Company availed the services of the TYKE and entered into the agreement with TYKE. CCDs were issued to the investors identified by Board. Value added services like facilitation of opening of an ESCROW bank account to keep the funds and verification of their KYCs. TYKE charged a fee on entering into an agreement and fix percentage upon completion of CCDs. The exact amount is not known to Sh. Singh.
Issue III. Sh. Singh was asked about oversubscription of CCDs in respect of both the Companies.
Reply of Sh. Satinder Singh-
He knew that TYKE platform showed that the issue of CCDs was oversubscribed but Sh. Singh was not having the details of over subscription of CCDs.
Issue IV. Sh. Singh was asked about the total number of members available on the TYKE community platform and the number of members of the TYKE platform who showed interest in the CCDs issued by both the Companies.
Reply of Sh. Satinder Singh-
Sh. Singh is neither aware about the number of members on the TYKE Platform nor having details of number of members on the TYKE platform who showed interest in the CCDs issued by Companies and Anbronica Technologies Private Limited.”
Further, opportunity of being heard given to Tyke Technologies Private Limited and one authorised representative was presented on the hearing date but the replies given by him were not satisfactory.
In this present case, the website of Tyke has been clearly used by the Company as a media/marketing/distribution channel/agent to inform the public at large about the issue of CCDs.
Conclusion:
Company and its promoters/directors had violated the provision of section 42(7). Hence the below mentioned penalty was imposed by the concern Registrar.
Penalty Imposed by Registrar of Companies on Company and Officers in Default
ROC Impose the penalty on the Company and its officers in default under section 42 (10) of the Act r/w Section 446B, for violation of section 42 (7) of the Companies Act, 2013 which are as follows: –
Violation | Penalty imposed on company/directors | Period of default | Calculation of penalty amount as per Section 446B | Total penalty imposed u/s 42 of the Companies Act, 2013 |
Section 42(7) | On company | FY 2021-22 | Rs 2,00,000/- | Rs 2,00,000/- |
On Director 1 | FY 2021-22 | Rs 1,00,000/- | Rs 1,00,000/- | |
On Director 2 | FY 2021-22 | Rs 1,00,000/- | Rs 1,00,000/- |
Refer the order passed-https://www.mca.gov.in/content/mca/global/en/data-and-reports/rd-roc-info/roc-adjudication-orders.html
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