WHETHER ISSUANCE OF NON-CONVERTIBLE DEBENTURES (NCDS) BY AMFL—OSTENSIBLY VIA PRIVATE PLACEMENT—ACTUALLY AMOUNTED TO A “DEEMED PUBLIC ISSUE”, THEREBY TRIGGERING STRICTER SEBI’S COMPLIANCE REQUIREMENTS.

 WHETHER ISSUANCE OF NON-CONVERTIBLE DEBENTURES (NCDS) BY AMFL—OSTENSIBLY VIA PRIVATE PLACEMENT—ACTUALLY AMOUNTED TO A “DEEMED PUBLIC ISSUE”, THEREBY TRIGGERING STRICTER SEBI’S COMPLIANCE REQUIREMENTS.

SEBI CONSIDERS ISSUANCE OF NON-CONVERTIBLE DEBENTURES (NCDS) AS A ‘DEEMED PUBLIC ISSUE’ BY ASIRVAD MICRO FINANCE LIMITED (AMFL)

SEBI VS ASIRVAD MICRO FINANCE LIMITED (AMFL)

SEBI REVIEW

SEBI reviewed the issuance of NCDs by AMFL to Karvy Capital Limited (KCL) under two tranches in May and June 2019.

ALLOTTED THE NCDS TO KCL AS A SINGLE INVESTOR

According to the findings, AMFL had initially allotted the NCDs to KCL as a single investor under a private placement. However, based on material on record, SEBI noted that before listing, the number of NCD holders had increased to 739, as reflected in the beneficiary position (BENPOS) data dated June 3, 2019

KEY FINDINGS IN SEBI VS AMFL

SEBI observed that AMFL:

·      Structured issuance of NCDs across multiple tranches

·      Allotted securities to more than 200 persons

·      Effectively bypassed public issue norms while claiming private placement

SEBI CONCLUDED:

This fragmentation strategy cannot be used to avoid regulatory thresholds.

WHY IT BECAME A “DEEMED PUBLIC ISSUE”

A private placement loses its character when:

·      Investor count exceeds 200

·      Offer resembles a public solicitation

·      Issuance lacks selectivity and exclusivity

IN AMFL’S CASE:

The scale and distribution pattern indicated a public fundraising exercise.

Therefore, SEBI treated it as a public issue in substance.

COMPLIANCE VIOLATIONS IDENTIFIED

Because the issue was treated as a public issue, AMFL was required—but failed—to comply with:

·      Filing of prospectus

·      Obtaining credit rating

·      Appointment of debenture trustee

·      Listing on a recognized stock exchange

·      Adhering to disclosure norms under SEBI regulations

REGULATORY CONSEQUENCES

SEBI typically imposes:

·      Monetary penalties

·      Directions to refund investors

·      Market access restrictions

·      Enforcement actions against directors/promoters

PRACTICAL TAKEAWAYS

1. SUBSTANCE OVER FORM

Labeling an issue as “private placement” does not protect you if the economic reality is public fundraising.

2. STRICT 200-PERSON RULE

The 200 investor cap is absolute (excluding QIBs and employees under ESOP in certain cases).

3. TRANCHE STRUCTURING -COMPLIANCE STRATEGY

Splitting issues across tranches to avoid thresholds is regulatory arbitrage—and SEBI will pierce it.

4. DEBT INSTRUMENTS ARE NOT EXEMPT

Even though NCDs are not equity, they are fully regulated securities.

CONCLUDING REMARKS

·      SEBI fined AMFL Rs 1 lakh for violating public issue norms.

·      AMFL's NCDs to 739 holders, breaching placement rules

·      SEBI blamed AMFL for non-compliance, rejecting its claims.

# YOUR COMPLIANCE PARTNER R V SECKAR, FCS, LLB 79047 19295,