[Opinion] RD reduces penalty on Company for private placement norm violation

 ​    [2023] 148 taxmann.com 307 (Article) … Continue reading “[Opinion] RD reduces penalty on Company for private placement norm violation”
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[2023] 148 taxmann.com 307 (Article)

1. Background of the case

This is a typical case pertaining to violation committed by the company while offering its securities via private placement. The company had filed e-form PAS-3 for allotment of securities with the Registrar of Companies and the Registrar of Companies called for certain additional documents before approving the e-form PAS-3. The company did not provide the details and hence the Registrar of Companies marked it as defective based on the available documents at his end. Upon enquiry, it turned out that the company while calling for the board meeting, the board meeting agenda never contained about the business to be transacted on private placement instead the agenda spelled out only allotment of shares straightaway. The shares were allotted by the company to M/s. Wellness Noni Limited. The Registrar of Companies proceeded with issuing of show cause notice, had a personal hearing with the company and came to a conclusion that the company did not follow the procedure as laid down for private placement and the company committed violation of the provisions of the Companies Act, 2013. Accordingly, the company and its directors were penalized a hefty amount of Rs. 36 lacs as penalty.

Against the adjudication order of the Registrar of Companies of Chennai an appeal was filed by the company challenging the penalty of Rs. 36 lakhs levied, before the Regional Director (Southern Region) Ministry of Corporate Affairs, Chennai. Upon hearing the appeal, the Regional Director took a lenient view, after considering the submission made in front of him and slashed the penalty amount from Rs. 36 lakh to Rs. 2 lakh and we shall go through details of this case.

2. Details of the Company

M/s Herb Nutra Lab Private Limited is a company incorporated on 15th December 2017 under the provisions of the Companies Act, 2013 having its registered office at No.1, Mayana Salai, and Uthiramerur Taluka. Kilakkadi Village, Kancheepuram in the state of Tamil Nadu. The company comes under the jurisdiction of the Registrar of Companies, Tamil Nadu and the office of the Registrar is situated at Chennai. The company is having three directors on board. The company is involved in the manufacturing activities of food products and beverages, processing and preserving of fruit, vegetables and edible nuts etc.

3. Default committed by the company

The company made allotment of shares worth of Rs. 9,00,000/- to M/s. Wellness Noni Limited through private placement offer pursuant to section 42 read with section 62 of the Companies Act 2013. After the allotment done by the company, the company filed the return of allotment in e-form PAS-3 with the Registrar of Companies on 16th January 2020.

The Registrar of Companies while verifying the PAS-3 before approval noticed that the form did not contain the attachment of minutes of general meeting for the approval of allotment of 90,000 shares by private placement. The company also did not furnish documents sought by the Registrar of Companies for his further examination and hence the Registrar of Companies invalidated the e-form PAS-3 and marked it as defective based on available documents.

Upon further examination, the Registrar of Companies came to know that the board meeting agenda issued by the company only spoke about the allotment of shares with no mention of private placement to M/s. Wellness Noni Limited.

Thereafter, during the personal hearing, one of the director confirmed that no extra ordinary general meeting was conducted for allotment of 90,000 shares through private placement to M/s. Wellness Noni Limited. The director also confirmed at the time of personal hearing that the consent of one of the other director was also not obtained.

In view of the above facts, the Registrar had come to an conclusion that the issuance of shares to M/s. Wellncss Noni Limited was not in accordance with the provisions of section 42 of the Companies Act, 2013 and the company and the directors were liable for penal action under section 42( l0) of the Companies Act, 2013. Accordingly, the Registrar of Companies passed the adjudication order and the order details are as below.

4. Order of the Registrar of Companies

The Registrar of Companies/Adjudicating Officer of Chennai, Tamil Nadu passed an adjudication order dated 5th September 2022 under section 454(3) of the Companies Act 2013, for default in compliance with the requirements of section 42 read with section 62 of the Companies Act 2013, by M/s. Herb Nutra Lab Private Limited.

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