Companies Act, 2013--Issue of FCDs

Applicability of Section 62 on Issue of FCDs to Existing Holders with an Option Attached to Exercise

Pragya Lalwani

Learned author in light of Canning Industries Cochin Ltd. v. SEBI 2020 TaxPub (CL) 0688 (SAT-Mum) analyses the ruling given by SEBI and SAT as to whether the issue of FCDs by the company would be considered as Deemed Public Offer, Private Placement or otherwise.

1. Facts of the case

Canning Industries Cochin Limited, an unlisted company sought to raise a sum. In that regard, the company had passed a special resolution under section 62(3) of Companies Act read with section 71 in respect of issuance of Fully Convertible debentures(FCDs) to its 1929 shareholders with no right to renounce the offer to any other person and such debentures would be mandatorily converted into shares upon maturity. On receipt of complaints, Whole Time Member (WTM), SEBI after inquiry held that offer of the FCDs made by the company was to more than 200 persons, therefore, the same was deemed to be a public issue under section 42(4) of the Companies Act read with rule 14(2)(b) of Companies (Prospectus and Allotment of Securities) Rules, 2014. Further that, the company failed to comply with requirement of ICDR Regulations, 2009 with regard to the allotment of FCDs. Therefore, the WTM passed order under sections 11 and 11B of SEBI Act, wherein the company was directed to cancel the FCDs and refund the money along with interest. The company filed an appeal against the order on the ground that section 42 of the Companies Act was not applicable in the case and the issue of the share capital was under section 62(3) of the Companies Act, which had not been considered.