Unraveling Section 42 Violations: A Case Study of Corporate Missteps and Compliance Challenges

Background Of The Case: 

The MCA’s investigation into the subject company revealed that the company was issuing securities in an open forum using its Planify platform and disseminating pitch information akin to advertisements or media channels (Weblink of YouTube video https://vvww.planifyin/research-report/plan ify/). Subsequently the Subject Company failed to file the FORM PAS-3 promptly. There was a noted discrepancy in the valuation report, which used figures from “Planify Enterprises Private Ltd” (Hereinafter referred as PEPL) instead of the subject company.  

Subject Company, in response, clarified/stated that:  

• It has issued and allotted all their shares to only one allottee i.e. to PEPL and has not issued the securities in the open forum. 
• The referenced YouTube video was an informational interview about the Company, where the Chairman discussed the Company’s fund-raising system and its role in assisting entrepreneurs with business growth. There was no intention to advertise or promote the private placement in this video. 
• The registered valuer is responsible for the valuation report details.  

Legal Issue Involved: 

The issue at hand is whether the subject company’s actions amount to a violation of Section 42 of the Companies Act. The key questions are whether the use of the Planify platform and the informational YouTube video represent an improper public offer and if the failure to promptly file FORM PAS-3 breaches regulatory requirements.

Applicable Provisions Rovisions Of The Companies ACT, 2013:

Section 42 of the Companies Act, 2013 governs the private placement of securities, allowing companies to offer securities to a select group of identified persons, not exceeding two hundred in a financial year, excluding qualified institutional buyers and employees under stock option schemes. The primary intent is to regulate private offers, ensuring they are not treated as public offerings, which involves strict compliance with procedural requirements such as filing Form PAS-3 and adhering to a 60-day allotment deadline upon receiving application money. Violations can lead to severe penalties, including financial fines and mandatory refund of subscription monies with interest. 

Analysis:

Based on the records available in the office and the submission made by parties,NCLT observed that an amount of Rs 3,89,53,017 was raised by the Subject Company through the Planify platforms by selling its 4,53,530 shares to PEPL and subsequently those were offered to 76 investors, this is an indirect Public offering made by the Subject Company. Thus, the transaction is violative of section 42(7). Better understood through the following chart. 

In the present case, the penalty is leviable under section 42(10) of the Act. As far as returning the money to the subscribers under section 42(6) is concerned, clause (b) of proviso section 42(6) clearly provides that such an eventuality would arise if the company were unable to allot the securities. In the present case, since the securities have been allotted, the issue of returning the monies to the subscribers does not arise.

Implications And Lessons For Corporate Compliance:

• Understand Private Placement: Ensure a clear understanding of what constitutes a private placement under Section 42. It involves offering securities to a limited number of identified investors, avoiding public offerings which have stricter regulatory requirements.
• Platform Usage: MCA and SEBI have increased their vigilance and scrutiny on usage of these platforms for fund raising and are treating them as public offer if even indirectly funds are being raised through these platforms. Thus, either these platforms have to be avoided or care must be exercised to use them diligently in a manner that does not directly or indirectly promote or advertise the securities to larger set of audience.
• Information Dissemination: Be cautious about how information about the fundraising process is shared. Avoid disseminating information that could be construed as promoting or soliciting public investment, as this could violate Section 42.
• Valuation Accuracy: Ensure that valuation reports are accurate and reflect the true value of the securities issued. Avoid discrepancies or inaccuracies that could lead to compliance issues or legal challenges.
• Compliance Obligations: Strictly adhere to procedural requirements such as filing FORM PAS-3 promptly after receiving application money and ensuring timely allotment of securities within the specified timelines.

Adhering to these guidelines helps startups navigate fundraising while safeguarding against legal risks under Section 42 of the Companies Act, 2013.