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Public Offer Made by Unlisted Companies- A review of the latest case law

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Introduction:

The Supreme Court of India (the “Supreme Court”) recently in the case of Sahara India Real Estate Corporation Limited & Ors. Vs. SEBI and the Kerala High Court (the “High Court”) in the case of Kunamkulam Paper Mills Ltd. & Ors vs. Securities and Exchange Board of India & Others delivered judgments with respect to offers made by the unlisted public companies to subscribe to their shares and debentures.

In both these cases, the Courts parallely reached the conclusion that the offer made by an unlisted public company to subscribe to its shares and debentures shall be construed as a public offer if such offer is made to more than 50 persons and that the SecuSEBIrities and Exchange Board of India (“SEBI”) shall have the jurisdiction over such public offer made by the unlisted public company.

Relevant provisions:

Section 67 of the Companies Act, 1956 (the “Act”) deals with the offers made by a company to subscribe to its shares and debentures. As per proviso to Section 67 (3) of the Act, if the offer to subscribe shares or debentures has been given to more than 50 persons then such offer shall be construed as public offer. Further section 55A of the Act states that the provisions of the Act relating to issue and transfer of securities are to be regulated by the SEBI for listed public companies or the public companies that intend to list their securities on any recognized stock exchange and in all other cases such issues shall be regulated by the Central Government. Thus private companies and unlisted public which do not intend to list their securities on recognized stock exchange are not administered by SEBI and only the Central Government has the regulatory power over such companies. The number of members of private company is limited to 50 which means that private companies cannot issue its securities to more than 50 persons. Further private companies are prohibited from giving any invitation to the public to subscribe for any shares or debentures of the company.

In case of an unlisted public company there is no bar on the number of members and such companies may have more than 50 members. However, there is bar on unlisted public companies from inviting public for subscribing to its securities. The Unlisted Public Companies (Preferential Allotment) Rules, 2000 prohibit an unlisted public company from inviting more than 49 persons from subscribing to its shares and debentures. Further as per the proviso to Section 67(3) of the Act as stated above, offering shares and debentures to more than 50 persons would be construed as a public offering.

Thus any offer made by an unlisted public company to subscribe to its shares to more than 50 persons shall be construed as a public offer. SEBI does not have jurisdiction on the issue of shares and debentures by an unlisted public company if the offer is limited to 50 persons. However, if the offer is given to 50 or more persons than such offer becomes a public offer and thus SEBI obtains jurisdiction over such allotment under theSEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“SEBI ICDR Regulations, 2009) (and earlier under the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (“SEBI DIP Guidelines, 2000”) which was replaced by the SEBI ICDR Regulations in 2009)and in light of Section 55A such of issuance of shares and debentures comes under the purview of SEBI.

Analysis of the judgments of the Supreme Court of India and the Kerala High Court:

1. Sahara India Real Estate Corporation Limited & Ors. Vs. SEBI :

Two unlisted public companies of the Sahara group (“Sahara Companies”) offered their Optional Fully Convertible Debentures (“OFCDs”) to approximate thirty million people through 2900 branches and circa Rs. 20000 Crores were received by the Sahara Companies for such allotment of securities. Sahara Companies contended that offer was a private placement of its securities to friends, relatives etc. SEBI contended that the offer was made to more than 50 persons and thus in light of Section 67(3) this offer was deemed to be public offer and as per the SEBI DIP Guidelines, 2000, SEBI had the jurisdiction over such offer. The Supreme Court dealt with several question its judgment including, inter alia, the question that whether the offer to subscribe to OFCDs of Sahara Companies was public offer and whether SEBI had jurisdiction over such offer. The Supreme Court after examining the provisions of the Act and the nature of offer and the issue of securities by Sahara Companies, held that Section 67(3) specifically stated that when any security is offered to more than 50 persons then it will be deemed to be a public offer and therefore SEBI will have jurisdiction in the matter and the Sahara Companies will have to comply with the various provisions of the legal framework for a public issue.

2. Kunamkulam Paper Mills Ltd. & Ors Vs. Securities and Exchange Board of India & Others:

In this case, the Kerala High Court (“High Court”) also gave a similar judgment as given by the Supreme Court in the Sahara Case. However, since the High Court delivered the judgment much before the judgment pronounced by the Supreme Court in the Sahara Case the High Court did not refer to the Supreme Court’s judgment in the Sahara case and gave a parallel judgment. In this case an unlisted company made a rights offer in which it allotted shares to 163 persons, which included persons who were not existing shareholders of the company. The existing shareholders had the right to renounce their shares in favour of persons who were not shareholders of the company. The question before the High Court was that whether the offer to subscribe to the rights offer of the company wherein shares were also subscribed by persons other than the existing shareholders because the existing shareholders renounced their shares was deemed to be a public offer as per the Section 67 (3) of the Act. The High Court analysed the Section 81 (c) of the Act in light of the Section 67(3) of the Act. Section 81 (c) gives right to the existing shareholders to renounce their shares in favour of persons who are not existing shareholders of the company. The High Court held that when the shares are offered to more than 50 persons who have the right to renounce their shares under the rights offering then in light of the Section 67(3), the offer becomes a public order. The High Court further held that by reading Section 55 with the SEBI DIP Guidelines, 2000 SEBI had jurisdiction over such shares offered by the company. Conclusion: The unlisted public companies have the benefit of having more than 50 shareholders and are not required to be under the constant purview of SEBI unless they are listed. However, several unlisted public companies have taken advantage of this position by offering their securities to a large number of people without complying with several of the SEBI guidelines and thereby defeating the true intention behind the relevant statutes. However, in light of the aforementioned judgments of the Supreme Court of India and Kerala High Court, it can be said that all the unlisted public companies who offer their securities to large number of people are making a public offer and thus SEBI has the jurisdiction over such public offer made by the unlisted public companies.

Souvik Bhadra [souvik.bhadra@pxvlaw.com]

Darshan Soni [darshan.soni@pxvlaw.com]

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1 Comment

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