SAT UPHELD ORAL UNDERSTANDING TO ISSUE RIGHT SHARES AGAINST UNSECURED LOANS BY PROMOTERS

The SAT (Securities Appellate Tribunal) upheld  that unsecured loans advanced by a promoter group could be adjusted against allotment of shares to them in the rights issue. 

The SAT tribunal thus annulled the restriction placed on SRM Energy Ltd by SEBI (Securities and Exchange Board of India) .The company wanted to mobilize funds for a power project and therefore came out with a rights issue. According to the company, there was an oral understanding between it and the promoter, Spice Energy (SEPL), at the time of providing funds that if and when it came out with a rights issue, the unsecured loans would be adjusted against the share price. “Such payment by adjustment in the books of account is a well recognized mode by all accounting standards and we find no fault with this mode being adopted,” the judgment said. 

“All that SEPL has done is that it received shares in the rights issue and made payment by adjustment of the unsecured loans which were payable on demand. In the strict sense of the term, it is not a conversion of a loan into equity.” 

The tribunal therefore set aside SEBI’s order demanding SRM not to adjust the unsecured loans advanced by the promoter towards the price of the shares allotted in the rights issue. 

Important change in Schedule VI of Companies Act, 1956

Earlier Schedule VI stands changed by the new schedule. It is now mandatory for companies to prepare the financial statement/or statement forming part thereof as per the format prescribed in schedule VI. Any addition,deletion and modification as prescribed by the Schedule VI which modifies any compliance requirements in the companies act including Accounting Standards will be modified according. 

But any disclosure requirement specified by Accounting Standards and Companies Act,1956 in addition to the information provided in the financial statement shall be provided by way of  notes or additional statements unless required to be disclosed in the financial statement. 

Notes to accounts shall contain information in addition to that presented in the Financial Statements and shall provide where required

(a) narrative descriptions or disaggregations of items recognized in those statements and 

(b) information about items that do not qualify for recognition in those statements. 

Each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross-referenced to any related information in the notes to accounts. In preparing the Financial Statements including the notes to accounts, a balance shall be maintained between providing excessive detail that may not assist users of financial statements and not providing important information as a result of too much aggregation.
Section 211 of the Companies Act 1956. The notification reads as under:

General Exemption under Section 211

Section 211 of the Companies Act, 1956 requires that the balance sheet and profit and loss account of a company shall be in the form set out in Part I of Schedule VI or in such other form as may be approved by the Central Government either generally or in any particular case.


The Central Government has, by notification, issued a general exemption whereby the categories of companies in column (2) of the Table below will be exempted from the disclosures given in column 3:-


Serial Number of  Class of Companies Exemptions from para(s) of Part-II  of Schedule VI.

1. Companies producing Defence Equipments para 3(i)(a), 3(ii(a), 3(ii)(d), 4-C,  including Space Research; 4-D (a) to (e) except (d).

2. Export Oriented company para 3(i)(a) 3(ii)(a), 3(ii)(b), 3(ii)(d).  (whose export is more than 20% of the turnover);

3. Shipping companies (Including Airlines); para 4-D (a) to (e) except (d).

4. Hotel companies (including Restaurants); para 3(i)(a) and 3(ii)(d)

5. Manufacturing companies/ para 3(i)(a) and 3(ii)(a).  multi-product companies;

6. Trading companies; para 3(i)(a) and 3(ii)(b).

SEBI Vs SAHARA GROUP

Background:

Sahara Housing Investment Corporation and Sahara India Real Estate Corporation planned to raise Rs 20,000 crores each through the issue of OFCDs (Optionally Fully Convertible Debentures). It issued a draft Red Herring Prospectus.  The above companies have stated that they do not have any intention to list the OFCDs in any stock exchanges in India or in foreign countries. Issuer informed that since the company do not wish to get its securities listed on stock exchanges and since it is an unlisted one, the jurisdiction to deal with the issues will vest with the Central Government in pursuant to section 55 A  ( c ) of the Act.Section 55 A of the companies Act describes the powers of  Securities and Exchange Board of India.

Issues Involved

The main issue in this case whether SEBI is authorised to initiate any action against the company  and if so , whether they should have been issued in pursuant to an offering document filed with SEBI. In  case of issue ,transfer of securities  and non-payment of dividend shall in case of

a)    In case of listed public companies;

b)   In case of public companies which aim to get their securities listed on any recognised stock exchange of India;

c)    In any other case , be administered by the Central Government ( MCA).

According to section 67(3) of the Companies Act ,

·         No invitation or offer shall be construed to be made to the public if the invitation or offer  is not made to public but made to those persons to whom it has been sent .

·         It could be regarded as a domestic concern of the individual receiving or making the invitation or the offer.

SEBI’s Perception to issue the Said OFCDs”

SEBI argued that modus operandi followed by the Sahara group was nothing but an indirect way of offering shares to public without adhering norms , without disclosing vital information , risk associated and not tailored to safeguard the investor’s interest.

SEBI argued that if the Companies like Sahara Group is allowed to raise capital from public by way of private placement , then it would be tantamount to ridicule to the whole gamut of capital market structure and all conventional mechanisms to safeguard investor’s interest.

SEBI issued a show cause notice to Sahara Groups why action should not be initiated against them which might include demanding the group to refund the money already received from investors.

Decision of the Allahabad High Court:

Allahabad High Court issued as stay against the decision of SEBI preventing Sahara Group to issue OFCDs

ü  The OFCDs issued does not fall under the SEBIs purview as the Sahara Group is neither a listed company nor any intention to get it listed with SEBI.

ü  MCA is already aware of the issue

ü  Allahabad High Court viewed the SEBIs order is in infringement of fundamentals of natural justice and SEBIs sweeping order has really injured the civil rights and SEBI should not have passed such an order which is against the principles of natural justice.

DECISION OF THE SUPREME COURT :

The Supreme Court of India also seconded the view of the Allahabad High Court in this issue.  It observed SEBI is having every right to ask details from Sahara Group on how OFCDs were being raised . Supreme Court also refused to stay the Sahara Group’s ongoing fund-mopping exercise.

Supreme Court also observed SEBI has the right to gather datas about investors details from Sahara Groups and also directed Allahabad High Court to dispose off the case expeditiously .

Supreme Court further observed that if it all , the investors make to decision to invest in the OFCDs offered by Sahara Group , then they would do the same at their own risk.

Supreme Court also directed the SEBI to issue a public advertisement warning the public the inherent risk associated in investing in such OFCDs .

Learning Lessons From Sahara Group OFCDs Case:

1.     A private limited company or a public limited unlisted company can issue OFCDs as a private placement to less than 50 investors which have no intention to get it listed.

2.    While offering OFCDs to the investors under private placement , the company should file an “Red Herring Prospectus “ with the Registrar of Companies concerned.

3.    Thus , private limited companies or public unlisted companies can go to the public and collect funds by following the strategy pursued by SAHARA without listing or observing the strict guidelines issued by SEBI for collecting funds from public.

CAN PARTLY PAID-UP SHARES BE TRANSFERRED ?

Yes . Partly-paid up shares can be transferred .

In such cases , Where the application is made by the transferor and relates to partly paid-up shares, the company has to give due notice of the amount due on shares/debentures to the transferee and the transferee shall raise objection, if any within two weeks from the date of receipt of the said notice.

Where the application is made by the transferor and relates to partly paid shares, the transfer shall not be registered, unless the company gives notice of the application to the transferee and the transferee makes no objection to the transfer within two weeks from the receipt of the notice. The notice to the transferee shall be deemed to have been duly given if it is dispatched by prepaid registered post to the transferee at the address given in the instrument of transfer, and shall be deemed to have been duly delivered at the time at which it would have been delivered in the ordinary course of post.

Please note that the transferee may be asked to pay the balance amount in the partly-paid-up share of the company.

Whether a Minor can be a Signatory to the Memorandum of Association of a Company ?

In case if during a incorporation of a private limited company, if only two signatories are there to the Memorandum of Association and if one is a minor, then it will not be valid as in such situation, a minor who is a signatory to the memorandum of Association of the company will become director automatically by the operation of law if no other name is mentioned in the Articles of Association of such company

Even otherwise , a minor cannot be a signatory to the memorandum of association of a company. Since, signatory to the memorandum of association will automatically become the first directors of the company, in such scenario, a minor cannot be a signatory to the memorandum of association of a company.

Generally , a minor cannot enter into contract hence cannot be the subscribers to MOA. Subscribers to MOA means the person promises to take the shares in proposed company. In this situation Minor cannot promise.

The Companies Act, 1956 generally not define the minimum age limit for becoming a director of the company. A minor is not competent to contract. Under section 184 of the Indian Contract Act, 1872, a person who is not the age of majority can not become an agent. In consequence a minor cannot be appointed to an office of director of a company.

For appointment of a Managerial person he should be one who has completed the age of 25 years and has not attained the age of 70 years.

As per Part I of Schedule XIII is as under, for appointment of MD or WTD , minimum age is fixed as the age of 25 years and has not attained the age of 70 years.

Exception: A special resolution is required for the appointment of a managerial person if he

(i)    Has attained the age of 70 years; or

(ii) Has not completed the age of 25 years, but has attained the age of majority (i.e. 18 years).

Form 32 - there is an instruction that appointee as a director should be of more than 18 age.

Thus, a minor cannot be a subscriber to a memorandum  of any company as he lacks capacity to contract and subscription to memorandum is a contract to subscribe a particular amount of shares and a minor cannot do that under existing laws.

In view of the above , a minor cannot be signatory to the memorandum of association of a company.

THE STAMP PAPERS DO NOT HAVE ANY EXPIRY PERIOD

Citation: Thiruvengada Pillai Vs Navaneethammal and Anr.

Brief: According to a recent Supreme Court judgement dated 19/02/2008 in the case of Thiruvengada Pillai Vs Navaneethammal and Anr,     

Judgment:According to a recent Supreme Court judgment dated 19/02/2008 in the case of Thiruvengada Pillai Vs Navaneethammal and Anr, the stamp papers do not have any expiry period. Relevant extract from SC Judgment is reproduced herein below:

 "The Indian Stamp Act, 1899 nowhere prescribes any expiry date for use of a stamp paper. Section 54 merely provides that a person possessing a stamp paper for which he has no immediate use (which is not spoiled or rendered unfit or useless), can seek refund of the value thereof by surrendering such stamp paper to the Collector provided it was purchased within the period of six months next preceding the date on which it was so surrendered. 

The stipulation of the period of six months prescribed in section 54 is only for the purpose of seeking refund of the value of the unused stamp paper, and not for use of the stamp paper. Section 54 does not require the person who has purchased a stamp paper, to use it within six months.

 Therefore, there is no impediment for a stamp paper purchased more than six months prior to the proposed date of execution, being used for a document

Whether the Whole Time Director can be held personally liable for the defualts done by him or if he is the known party to the defaults?

The whole -time directors are like the employees of the company and if they commit any violations , they will be held responsible.

If you are talking about the violations under the Companies Act, unless otherwise is proved the WTD being officer in default will be personally liable for all violations.

Each section of the Companies Act defining the liability, provides for the persons who would be personally liable for the violations.

 WTD is the officer in default under Section 5(g) of the companies Act, 1956 and for any willful default he will be personally liable and corporate veil can be lifted to see who is behind the scene.

he whole -time directors are like the employees of the company and if they commit any violations , they will be held responsible.

For instance , Section 372A of the Companies Act, Sub-section 1 of Section 372A stipulates that no company can acquire shares in any other “body corporate” through “subscription purchase or otherwise” for an amount exceeding 60 per cent of the acquiring company’s share capital and free reserves or 100 per cent of its free reserves, whichever is higher, as loans, guarantees and investments.

If company wants to invest more than the above limit , it would require shareholder authorization through a special resolution passed in a general meeting. The law also states that such a resolution has to be passed only through a postal ballot and with advance intimation to the RoC.

For instance , Satyam Board under Mr.Raju chairmanship ,approved a proposal to invest Rs 7,920 crore in the Maytas firms ( a subsidiary of Satyam group) whereas under section 372 A, it can invest only to the maximum level of Rs 2,136.37 crores without shareholders approval. Without Shareholders approval , Satyam invested Rs 7920 crores in Maytas.

Satyam board at that time consisted ts like prominent personalities as former cabinet secretary T R Prasad, Harvard Business School’s Krishna Paleppu, designer of the Pentium chip Vinod Dham etc.

Please note that Violating Section 372A would make the officers-in-default (which include the managing director, company secretary and whole time director) liable for punishment, which includes a fine of Rs 50,000 or imprisonment up to two years.

Thus , whole-time directors can be held liable for the violation or infringement of section 372A .