SEBI ordered refund of Money in case of allotment of Equity Shares to more than 49 investors in a financial year

Parties

1. Rising Agrotech Limited (herein after referred to as 'RAL’)
Promoters and Directors

2. Siddharth Kayal

3. Sushovan Roy

4. Bikas Bhandary

5. Santosh Kumar Dwivedi

6. Dipan Kumar Sen

7. Binay Kumar Shaw

8. Lina Kayal,

9. Awdhesh Kumar Singh

10. Amresh Pandey

The above parties shall hereinafter referred to as ‘Noticees’

Issues

1. Whether the offer and issuance of equity shares by RAL to 530 investors during the financial year 2010-11 and 930 investors during the financial year 2011-12 was a public issue?
2. Why direction to refund the money collected through the issue of equity shares to the public along with interest and other appropriate directions be not passed against the Noticees?

Contravention - provisions of sections 56, 60 and 73 of the Companies Act, 1956 and Regulation 4 (2) (d), 5, 6, 7, 25 and 26 36 ,37, 46, 47 57 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations).

Facts of the Case

• RAL was incorporated on 13 July, 2010 ROC, Kolkata. Noticee Nos. 2-10 were/are the Directors of the Company. As per the return of allotment (E-Form 2), the Company had raised an amount of Rs. 108.09 lakh from 1460 investors during the Financial Year 2010-11 and 2011-12 as follows

Financial Year	No. of Shares allotted	Number of Investors
2010-2011	4,73,283	530
2011-2012	7,80,750	1,180

• An interim order was served on all the Noticees refraining the Noticees from mobilizing the funds from the public, to which all Directors replied except Mr. Siddhartha Kayal.
• 
  
• Following were the replies received from each of the Director:

• Dipan Kumar Sen- Not involved in any activity of the Company other than looking after agricultural projects of the Company.
• Bikash Bhandary – Appointed to fill in the casual vacancy created by the resignation of Lina Kayal.
• Santosh Dwivedi – Resigned from the position of Director and not involved in any activity of the Company.
• Awadesh Kumar Singh – Same as Santosh Dwivedi
• Amaresh Pandey - Same as Santosh Dwivedi
• Binay Shaw - Same as Santosh Dwivedi
• Lina Kaya – Not involved in the activity of the Company other than opening of Bank Account
• Sushovan Roy – Never participated in the activity of the Company    
• An opportunity of being heard was granted to which no one appeared. However, Awadhesh Kumar Singh, Bikash Bhandary, Binay Shaw, Amaresh Pandey and Santosh Kumar Dwivedi requested an opportunity of hearing at Kolkata. It was submitted that Awadhesh Kumar Singh, Binay Shaw, Amaresh Pandey and Santosh Kumar Dwivedi joined the Company at the instance of Siddharth Kayal who was known to them. However, as there was no clear picture on how the Company would be functioning they resigned in August 2010. Letters of resignation by the aforesaid Director and received by the Company were furnished. Since the Company did not get the ROC records updated regarding the resignations, they again submitted their resignation in November 2010 which was filed with ROC on   7 December 2010. It was also stated that they have not attended any Board Meeting or participated in any activity of the Company. 

The basis of the Judgement

• In terms of the first proviso to section 67(3) states that an offer of shares or debentures made to fifty persons or more would constitute an offer to the public. The company issued and allotted equity shares to 530 investors during the financial year 2010-11 and 930 investors during the financial year 2011-12 and the total amount mobilized by the company by allotment of equity shares was Rs.108.09 lakh. The number of investors to whom equity shares were allotted in each allotment during the financial year 2010-11 and 2011-12 is in excess of 49. Thus, the offer and allotment of equity shares by RAL on different occasions was a public issue.
• It was obligatory on the part of RAL to list such securities on at least one stock exchange in compliance with the provisions of `section 73. In the absence of any such application to the stock exchange for seeking listing permission, the noticees are required to repay with interest all money received from the applicants pursuant to section 73 (1) and 73 (2). No material or record is available to indicate that RAL has made any such application seeking listing permission. There is also the violation of ICDR regulations as the public issue is ought to be made in compliance with ICDR Regulations.
• Further, the amount is to be refunded within 8 days in case of any delay in refund beyond eight days, the company and every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate being not less than four per cent and not more than fifteen per cent, as may be prescribed, having regard to the length of the period of delay in making the repayment of such money.
• As no steps have been taken by the company and its directors to make refund despite the interim order, the officer is of the view that refund is to be affected with interest at the rate of 15% per annum. Accordingly, Noticee nos. 1, 2 and 5-10 (directors at the time of issue and allotment) are jointly and severally liable to refund the principal amount along with 15% interest per annum calculated from the date of deposit with the company till the date of refund.
• Noticee Nos. 5,7, 9, 10 have stated that they resigned from the Company in August 2010 i.e. before the allotment of shares to the public on 16 November 2010. Further, it was observed that the subsequent resignation letters which were filed by the Company with ROC, doesn’t make a reference of the earlier resignation claimed to have been given by these Directors and hence the arguments made by these Directors were not taken to be credible.
• It was noted that Noticee Nos. 3 & 4 were present Directors of the Company, they were not the Directors of the Company when the equity shares of the Company were issued and allotted.

Order

After considering the facts and circumstance of the case following orders were issued by adjudicating officer:

• Rising Agrotech Ltd. and its directors at the time of issue and allotment shall forthwith refund the money to the investors, with an interest of 15% per annum (the interest is calculated from the date when the repayments became due till the date of actual payment.
• The refund shall be made through banking channels.
• Within three months of completion of refund as directed above, the Noticees shall file a certificate of such completion with SEBI from two independent Chartered Accountants after proper verification of the details of such refunds from records including bank accounts of the Noticees and after being satisfied that the refund has actually been made
• Till the refund, as directed above, is completed and for a period of four years from the date of completion of the refund, Rising Agrotech Ltd. and its directors at the time of issue and allotment are hereby–

(a) restrained from accessing the securities market;
(b) prohibited from buying, selling or otherwise dealing in securities in any manner whatsoever, directly or indirectly; and
(c) restrained from associating themselves, with any listed public company or any public company which intends to raise money from the public.

• The present directors are directed not to, directly or indirectly, access the securities market and are further restrained and prohibited from buying, selling or otherwise dealing in the securities market, directly or indirectly in whatsoever manner for a period of three months from the date of this Order. They are also restrained from associating themselves with any listed public company and any public company which intends to raise money from the public, or any intermediary registered with SEBI for a period of three months from the date of this order.

Reporting FDI to Reserve Bank of India since inception till date in FIRMS

All are aware that as per the RBI/2017-18/194 A.P (DIR Series) Circular No.30 dated 7 June 2018, Indian Entities are required to input their existing Foreign Investment including Indirect Foreign Investment in FIRMS by 20 July 2018.

Everyone can identify Direct Foreign Investment by looking at their shareholder's list and the other KYC Details.

The questions which can come into one’s mind are:-

Which entities are covered in “Indian Entities”?

As per Master Direction on FDI updated as of 4 January 2018,

Indian Entity:-

2.11 ‘Indian entity’ is an Indian company or an LLP.

What is the “Indirect Foreign Investment”?

As per Master Direction on FDI updated as of 4 January 2018, 

Indirect Foreign Investment:-

9.1.15 ‘Indirect Foreign Investment’ is downstream investment received by an Indian entity from:

·       another Indian entity (IE) which has received foreign investment and which is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India;

or

·       an investment vehicle whose sponsor or manager or investment manager is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India

"The critical aspect will be determining “owned or controlled by persons resident outside India”. 

What if the Indian Entity has not reported FDI to RBI when it was received?

Entities shall provide data with respect to all foreign investments received, irrespective of the fact that the regulatory reporting to the Reserve Bank of India for the same has been made or not and whether the same has been acknowledged or not.

What are the Consequences of Non-Reporting of FDI to RBI in FIRMS?

Indian entities will not be able to receive foreign investment (including indirect foreign investment) and will be treated as non-compliant with Foreign Exchange Management Act, 1999 (FEMA) and regulations made thereunder and liable for action as laid in FEMA or the regulations made thereunder.

What is the Penalty for contravention under FEMA? 

Penalties – (prescribed under Sec.13)

Up to thrice the sum involved in such contravention where such amount is quantifiable OR 

up to two lakh rupees where the amount is not quantifiable AND

where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues. 

Significant Beneficial Ownership Disclosure-who needs to comply?

Introduction: 

Section 90 of Companies Act, 2013 (the Act) is amended by the Companies (Amendment) Act, 2017 as the “Register of significant beneficial owners in a company”. The amended section and rules made thereunder are effective from 13^th June, 2018.

Pursuant to the provisions of this section, individuals who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India holding beneficial interest of not less than 10% shares of a company or right to exercise or the actual exercising of significant influence or control, are required to give declaration to the Company specifying the nature of interest (referred as “significant beneficial owner”). Once the declaration is received by the Company from significant beneficial owner, the Company is required to file return a return of significant beneficial owners of the company with Registrar of Companies.

Which individuals are required to give declaration?

Every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India who fulfills either of the following conditions are required to give declaration u/s 90(1) of the Act

·         holding beneficial interest of not less than 10%  shares of a company OR

·         having rights to exercise of significant influence or control OR

·         actual exercising of significant influence or control

Let’s understand the meaning of these terms:

Definition of Beneficial Interest:

Beneficial Interest is defined u/s 89(10) of the Act as: “Beneficial Interest” in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—

·         exercise or cause to be exercised any or all of the rights attached to such share; or 

·         receive or participate in any dividend or other distribution in respect of such share

Definition of Control:

Control is defined u/s 2(27) of the Act as "control" shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Definition of Significant Influence:

Significant influence is not defined in the Act. However, explanation is provided in the definition of associate company u/s 2(6) of the Act for the purpose of that clause. It states that the expression "significant influence" means control of at least twenty per cent (20%) of total voting power, or control of or participation in business decisions under an agreement  

Concluding Remarks:

It is imperative to note that the definition of beneficial interest and control are inclusive definitions. Unless the individual who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India fits in either of the criteria viz.,  

·         holding beneficial interest of not less than 10%  shares of a company OR

·         having rights to exercise of significant influence or control OR

·         actual exercising of significant influence or control

are not required to give declaration u/s 90(1) of the Act. If the individual fits in either of criteria as mentioned above, whether the individual is significant beneficial owner or not is subjective in nature.   

FIRMS Application

Reserve Bank of India (RBI) vide notification dated June 27, 2018 have introduced an online application i.e., FIRMS (Foreign Investment Reporting and Management System), which would provide the data for the Single Master Form (SMF)

Glimpse of the FIRMS application is as under:

·                               1^st Phase

 In the first phase, the Entity Master is required to be created with RBI wherein Entities are required to provide data with respect to all foreign investments received from incorporation onwards (including transfer from resident to nonresident and vice versa), irrespective of the fact that the regulatory reporting to the RBI for the same has been made or not and whether the same has been acknowledged or not. Due date for providing details to RBI for Entity Master is July 12, 2018.

Indian entities not complying with these instructions will not be able to receive foreign investment (including indirect foreign investment) and will be treated as non-compliant with Foreign Exchange Management Act, 1999 (FEMA)

                2^nd Phase-

In the second phase, Form SMF would be introduced which would be available from August 1 2018. Form SMF would consist of 9 reports namely FC-GPR, FC-TRS, LLP-I, LLP-II, ESOP, DRR, CN, Form DI (reporting of indirect foreign investment), Form InVi (inflows in investment vehicles).