The New Companies Act would give market regulator Securities and Exchange Board of India (Sebi) an undisputed jurisdiction over all offers made to 50 or more persons irrespective of the name they are called by or any other conditions attached to such offers. The Companies Bill, 2012 has already been passed in the Lok Sabha and is awaiting passage in the upper house.
According to the new provisions, if a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to 50 or such higher number as may be prescribed, the same shall be deemed to be an “offer to the public” and shall accordingly be governed by the provisions provided in this regard by Sebi.
Though the earlier legal position of the law on issues of securities made to over 50 persons was held to be the same, there was no express provision that covered the differences between a private placement and a public offer. There were also instances where companies argued that Sebi’s powers are limited to the offers by listed companies.
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But the new provisions clearly state that, “whether the payment for the securities has been received or not or whether the Company intends to list its securities or not on any recognised stock exchange in or outside India,” once the number of investors exceed the prescribed number they will be deemed to be public offers and regulated accordingly. The clear definition of ‘private placement’, which does not fall under Sebi has also helped reduce the ambiguity in the area.
“Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with,” the Bill said under the chapter dealing with private placements.
Usage of the term ‘securities’ in place of the term ‘shares’ has also ensured that all different forms of paper, such as debentures, bonds and convertibles, are covered by the new law. Further, there is also clarity on the gap between two private placements. For example, earlier companies could make several private placements by calling for consecutive board meetings. But now the law clearly says such placements can be made only once in a financial year. It has also provided that allotments should be made within 60 days to avoid misuse of application money.
“The provisions governing public offer and private placement under the proposed law are likely to curb all malpractices prevalent due to earlier provisions and also to streamline functioning of regulatory authorities being Sebi and MCA regarding the same,” said Delhi-based legal firm, Corporate Professionals, in a note.
“While the number of person for making private placement was restricted to 49 at one go, however, there being no provision to limit the number of Board meetings in such respect paved the way for manipulations. Companies started calling several meetings and making allotments to 49 allotees in each such meeting, thus manipulating the provision of law,” the note added. “All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash,” it said.
Recently, the Supreme Court had upheld the jurisdiction of Sebi over a “placement” of optionally fully convertible debentures by two Sahara group firms to over 29 million investors.
