Once allotment has made u/s 67(3) it is a private placement

ZENITH HIGHRISE INFRACON LTD., MR. KATYAL BANERJEE (APPELLANT) VS. SEBI (RESPONDENT) 
SECURITY APPELLATE TRIBUNAL

HELD THAT

Once allotment is made to less than fifty allottees by way of private allotment the first proviso to Section 67(3) clearly makes it a private issue and not a public issue.

BRIEF FACTS

1.  The appellant company raised its capital in the financial year 2012-2013 by allotment of Redeemable Preferential Shares ("RPS") of Rs. 100 each through private placement, that is, to friends and relatives of the members/ directors and.

2.  Raised an amount of Rs. 43,04,000 from 47 allottees. 

3.  A list of the allottees was filed before the Registrar of Companies (ROC). 

4.  Three allottees made complaints to SEBI in respect of issue of RPS(Redeemable Preference Shares) with regard to non-inclusion of their names in the list submitted before the RoC. 

5.  On enquiry of the SEBI, it was observed that the company had raised an amount of Rs. 43,04,000 from 52 allottees whereas the RoC record showed allotment of RPS to 49 persons. 

6.  Based on this discrepancy SEBI found that the RPS was made to 50 persons in violation of Section 67(3) of the Companies Act, 1956 and consequently the WTM( Whole Time Member) directed the company and its directors to refund the monies collected through RPS along with interest at the rate of 15% per annum and further restrained the directors from associating them with any listed company which would operate from the date of completion of refund to the investors. 

7. The appellants being aggrieved by the order of the WTD of SEBI have filed the appeal. 

8. The appeal is allowed on the finding that no evidence has come forward to show that the company had made a public offer other than these 49 persons. 

9.  Once allotment is made to less than fifty allottees by way of private allotment the first proviso to Section 67(3) clearly makes it a private issue and not a public issue. 

10. Consequently, there is no violation of the provisions of the Companies Act, 2013. Thus, the order of the WTM cannot be sustained and is quashed. The appeals are allowed.

SECTION 67- Construction of references to offering shares or debentures to the public, etc.

(3) No offer or invitation shall be treated as made to the public by virtue of sub- section (1) or sub- section (2), as the case may be, if the offer or invitation can properly be regarded, in all the circumstances-

(a) as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for sub- scription or purchase by persons other than those receiving the offer or invitation; or
(b) otherwise as being a domestic concern of the persons making and receiving the offer or invitation.

PRIVATE PLACEMENT

Section 42 of the Companies Act, 2013 (‘Act’) provides that a company can make a private placement to a select group of persons. Private placement by companies means offering its securities or inviting to subscribe its securities for a select group of persons other than by way of a public issue through a private placement offer letter.

Private placement of securities can be made only to select persons or identified persons (as identified by the board of the company). A company making a private placement cannot offer its securities through any public advertisements or utilise any marketing, media, or distribution agents or channels to inform the public about such an offer. 

If the offer is advertised or marketed, it will be considered a public offer and not a private placement by the company.

The company can make a private placement of its securities after approval of shareholders of the company for the proposed offer or invitation to subscribe to securities by passing a Special Resolution for every offer or invitation. 

The select persons to whom the company can make a private placement should not exceed fifty persons or such a higher number prescribed by the Rules in a financial year. The limit of fifty persons excludes the qualified institutional buyers and employees of the company who are offered securities in the financial year under a scheme of employee’s stock option as per Section 62 of the Act.

The Rules state that the offer or invitation of private placement should not be more than two hundred persons in the aggregate financial year. The limit of two hundred persons will exclude the qualified institutional buyers and employees of the company offered securities in the financial year under a scheme of employee’s stock option as per Section 62 of the Act.