[Opinion] Consequences of Continuous Private Placement Offers Without Closing Previous Offers – A Case Study

Prof R Balakrishnan – [2024] 167 taxmann.com 761 (Article)

1. A brief about this case

This is a case relating to making continuous private placement offers without completing or closing the previous offers by a company named M/s Richesm Healthcare Limited situated at Noida, As per the provisions sub-section (5) of section 42 of the Companies Act 2013, no fresh offer or invitation for private placement shall be made unless the allotments for any previous offer have been completed or the offer has been withdrawn or abandoned. M/s Richesm Healthcare Limited violated this provision by making successive private placement offers without closing the previous ones by making continuous offers for private placement in two of the occasions without closing the earlier offers.

The Registrar of Companies / Adjudication Officer initiated action on this matter after the company suo moto filed the adjudication application for the offence committed by them. The company and its directors were penalized Rs. 10 lacs for the violation committed by them. It is an interesting case, and we shall go through it in detail so that the intricacies involved in the case are fully understood.

2. Relevant provisions of the Companies Act 2013 pertaining to this case

The relevant provision on the matter of the issue of shares on a private placement basis is spelled out in sub-section (5) of section 42 of the Companies Act 2013 pertaining to this case. Sub-section (5) of section 42 of the Companies Act 2013 states that no fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company. Further, the proviso to this section reads that provided that, subject to the maximum number of identified persons under sub-section (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.

3. Penal provisions for default committed (if any) by the company

The penal provisions are also spelled out in the same section 42. sub-section (10) of section 42 of the Companies Act 2013, which says that subject to sub-section (11) if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and its directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty.

4. Consequences of any default

To understand the impact of non-compliance / default committed, if any, by a company while making the private placement, the regulator would initiate penal proceedings, which would result in heavy penalties on the company and its promoters and directors. To understand the impact better, we go through a decided case law on this matter on 27th June 2024 by the Registrar of Companies of Kanpur, Uttar Pradesh, in the matter of M/s Richesm Healthcare Limited.

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