SAT Holds Unlisted Company's Allotment To 284 Investors Across Multiple Offers Was Deemed Public Issue

The Securities Appellate Tribunal (SAT) on Friday upheld SEBI's finding that Aakruti Nimriti Limited, an unlisted public company, illegally raised Rs. 29.83 crore from 284 persons in 2007 by structuring multiple share offers to avoid public issue norms under Section 67 of the Companies Act, 1956.

However, it modified SEBI's refund directions, restricting repayment only to those investors who wish to exit and reducing the interest rate to 6% per annum.

A coram of Presiding Officer Justice P.S. Dinesh Kumar, Technical Members Meera Swarup and Dr. Dheeraj Bhatnagar partly allowed the appeals filed by the company, its promoters and directors, restricting the refund obligation only to those investors who wish to exit, with interest reduced to 6% per annum.

Aakruti Nimriti Limited, engaged in the real estate business, had made seven public offers of equity shares between April and December 2007, raising Rs. 29.83 crore from 284 persons. In 2018, SEBI issued a show cause notice alleging that the allotments amounted to a public issue requiring compliance with the Companies Act, 1956 and SEBI (Disclosure and Investor Protection) Guidelines.

After adjudication, SEBI directed the company and certain promoters to refund to the investors the amounts collected with 15% interest, among other directions. The order was challenged before the SAT.

Before the tribunal, the company contended that under Section 67(3) of the Companies Act, 1956, an offer would be treated as public only if made to 50 or more persons at a time. Since no single allotment exceeded that limit, there was no violation. It further argued that under the Companies Act, 2013, the threshold stands increased to 200 persons and, as it presently has only 196 shareholders, the benefit of the 2013 Act ought to be extended to it.

Rejecting the contention, the tribunal held that the applicable law was Section 67 of the Companies Act, 1956. It observed that while offers made to fewer than 50 persons may not constitute a public offer, the company had issued seven offer letters in 2007 and ultimately allotted shares to 284 persons in aggregate. Even under the 2013 Act, the ceiling is 200 persons in a financial year.

“In our view, the pith and substance of Section 67(3) was to ensure that companies do not collect money from public without following the statutory requirements,” it noted.

On the plea of delay, the tribunal noted that SEBI received the complaint in 2017 and issued the show cause notice in 2018. Observing that SEBI, as a regulator, is duty bound to protect investors' interests, the tribunal held that the plea of delay was untenable.

The tribunal further recorded that the company had 194 shareholders, of whom 179 were promoters, directors, relatives and friends who did not wish to exit. While SEBI had directed refund of the entire amount with 15% interest, the company contended that compliance would drive the company into liquidation.

Rejecting this apprehension as “misconceived,” the tribunal modified the direction and restricted the refund only to those shareholders who desire to exit.

Accordingly, the tribunal partly allowed the appeals, directing that refunds be made only to those investors who seek to exit, with interest at 6% per annum. The company was also directed to file affidavits before SEBI from shareholders who do not wish to exit.

For Appellants: Senior Advocate P.N Modi, Advocates Kalpana Desai, Suresh Jambhale and Mihir Nakrani

For Respondent: Advocates Bhushan Shah, Akash Jain and Abhishek Nair