Penalty for Share Sale - Planify Capital and Mayasheel

Penalty for Share Sale - Planify Capital and Mayasheel . In the dynamic world of capital markets, regulations for companies in issuing shares are the cornerstone for maintaining transparency, integrity, and fairness in business operations. The Companies Act, 2013 contains detailed provisions on issuing securities which must be adhered to, by both public and private companies. In this article, we discuss a recent case-law where a penalty worth over 2 crores was imposed on the company and its High-Net worth promoters and directors, for misuse and breach of provisions of private placement of shares.  
Issuing shares on Private Placement  - The Process and Regulatory Aspects 
Private placement means an offer or invitation to subscribe to an issue of securities which is made to a select group of persons by a company. This is different from a public offer in which applications are solicited from the public at large.
Under Chapter III of the Companies Act, 2013, that deals with prospectus and allotment of securities, specifically the Section 42 deals with issues of shares on private placement basis. This section is operational from the year 2014, and more recently, was modified in the year 2018.
Basics of Private Placement of Shares

Offered only to a select group - A company is allowed to make private placement of securities on the condition that it is made only to a select group of persons who are identified by the board.

Maximum 200 investors - The maximum number of persons shall not exceed 200 and the company cannot issue more than two private placements in a year. However, this excludes qualified institutional buyers and employees of the companies being offered securities under ESOP.

Recording names and other details of investors - A company making private placement should issue a private placement, offer an application in a form and manner prescribed. The names and addresses of such identified persons to whom the private placement offer is made shall be recorded.

Renunciation - There is no right of renunciation in case of a private placement offer.

Subscription money via banks - Every identified person willing to subscribe to such a private placement issue should apply for private placement along with subscription money, which may be paid only by check or demand, draft or banking channel and not cash.

Return of Allotment - A company is required to make the allotment and file a return of allotment with the registrar, without which no company is allowed to utilize the money raised through private placement. This return of allotment has to be filed with the registrar within 15 days from the date of allotment along with full names, addresses and details of the security issued.

No fresh offer until previous offer completed - No fresh offer or invitation shall be made unless the allotment with respect to previous private placement offers have been either completed, withdrawn or abandoned by the company.

Allotment within 60 days - The company must allot its security within 60 days from the receipt of application money for private placement of securities. In case the company is unable to allot the securities, it shall repay the application money to subscribers within 15 days from the expiry of the above mentioned 60 days. In case of failure to do so, the company is liable to repay the money at an interest of 12% per annum after the expiry of the 60th day.

Money to be kept in a separate bank account - The companies required to keep the money on application under this section in a separate bank account in a scheduled bank and cannot utilize it for any purpose, other than for adjustment against the allotment or for repayment of money in case of failure to allot securities.

Ban on releasing reports in media - A company is barred from releasing public advertisements or utilizing media marketing channels to inform the public about issue of shares via private placement.

Penalty for breach - If a company defaults in filing such return of allotment, the company along with its promoters and directors will be liable to pay a penalty of 1000 per day for every day the default continues, subject to a maximum of 25 lac rupees.

If a company accepts money in contravention of this section, the company along with its promoters and directors will be liable to a penalty which may be equal to the amount raised via private placement or 2 crores, whichever is lower. Further the company must refund all money with interest at 12% per annum to the subscribers within a period of 30 days of the order, imposing such penalty.

The case of Mayasheel Retail Limited and Planify Capital - Breach of conditions for private placement of shares 
A recent order issued in April, 2024, by the Ministry of Corporate affairs, where a penalty of 2.89 crores was imposed on Mayasheel Retail India Limited for violations related to the private placement of shares, cast light on the interpretation of private placement under the Companies Act, 2013. 
Brief Facts

Mayasheel Retail India Limited, a registered company operational in India, in New Delhi, operated under the brand name “Bazar India”.

On the basis of the notification, it was disclosed that Mayasheel Retail used a website or platform called Planify, for raising funds by selling its shares.

Planify is a fin-tech startup focused on building Indian private companies, by offering stocks that are unlisted, to investors (Angel, Accredited Investors, Venture Capitalists, Alternate Investment Funds etc).

According to the Ministry, it raised an amount of 40 crores by issuing shares to 1806 subscribers. The Ministry also took notice of several videos and media reports in newspapers about the public announcement of Bazar India raising money worth 25 crores on Planify Platform.

Contentions of the Company 
The company, Mayasheel alleged that it made private placement/preferential allotment of 10,00,000 equity shares (worth 5.48 crores)  to Planify Capital Limited by way of a Special Resolution, and thereafter after receipt of the subscription amount of 50.48 per share, the company submitted e-form PAS 3, for the allotments so made.  The company also denied receiving the funding mentioned in newspaper articles.  It was also stated that the transaction with Planify to further sell shares were actually secondary market transactions. 
As per the contentions of the company, the shares were offered to Planify to act as a platform, which may further invite potential investors to subscribe to shares of the company. 
Decision in the Adjudication 
Initially, it appeared that the company utilized Planify for private placement of its shares. However, later it emerged that the shares were issued to plan with an intention of using the platform for selling shares to people at large.
Penal provisions involved in the case

Offering shares in excess of maximum limit of 200 persons- Pursuant to Section 42(2) of the Act r/w Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, a company making private placement offer shall not make it to not more than 200 persons in aggregate in a financial year. While it is observed that the subject company issued securities to 1806 subscribers and has violated the said provisions.

Releasing public advertisements that are barred in case of private placement - Pursuant to Section 42(7) of the Act, no company issuing securities under section 42 shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue. Use of  Planify platform for raising securities, putting pitch information, raising money from general public through platform amounts to issuance of public advertisements or utilization of media, marketing or distribution channels or agents to inform the public at large about such an issue.

Failure to file form PAS-3 - Pursuant to Section 42(8) of the Act, a company making private placement shall file with the Registrar a return of allotment in form PAS-3 including a complete list of all allottees, with their full names, addresses, number of securities allotted within 30 days as prescribed under rule 12 Companies (Registration Offices and Fees) Rules, 2014. It is observed that while the subject company has issued Securities to 1806 subscribers, form PAS-3 has not been filed for the said issuance.

Real purpose was to evade norms and issue shares to public - Enquiry into the transaction between Planify and Mayasheel Retail reveals that the real purpose of selling the shares to Planify was only to find potential investors for the subject company by evading norms, and to issue shares to public at large. Thus the transaction of issue of shares to Planify was a mere smokescreen, and violative of Section 42(7) of the Companies Act , 2013. 
Creation of secret distribution channels is prohibited - Public issue of shares in the context of secondary markets is dealt with under Section 58 of the Companies Act which provides free transfer and enforceability of securities contracts with a public company. In this case, the private placement of Shares to Planify was done solely to find potential buyers for securities through the Planify Platform. This creation of a secret distribution channel is prohibited under section 42(7). 
It was also realized that Planify sold these shares and raised money for itself, and not for the subject company, to the tune of valuation of 25 crores, and also misled the public into believing that this money was being raised on behalf of Mayasheel Retail for its operations. 
Determination of Penalties 
As per Section 42 of the Companies Act, 2013, no company issuing securities would release any public advertisements or utilize any media, marketing, distribution channel for informing the public about such private placement of shares. Under this section, a maximum penalty of 2 crores can be imposed. While 5.048 crores were raised in contravention, the highest possible penalty of 2 crores was imposed. 
Factors considered in determining penalty under this provision 
While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely:-

Size of the company

Nature of business carried on by the company;

Injury to public interest;

Nature of the default;

Repetition of the default;

The amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; and

The amount of loss caused to an investor or group of investors or creditors as a result of the default.

Thus, an additional penalty of one-half of the profits of the company for the Financial Year 2022-23 was imposed, to the tune of 48.15 lacs on the Company, and each of its 5 promoters/directors, making a total of 2.88 crores in penalty. 
The decision to choose private placement of shares for funding has both short and long term impacts and compliance requirements on behalf of the business. Failure to comply with these can result in litigation and penal proceedings against the company and its promoters and directors. Consult with our qualified company secretaries, funding professionals and lawyers at Compliance Calendar to get the best advice on issue of shares for your business.

In the dynamic world of capital markets, regulations for companies in issuing shares are the cornerstone for maintaining transparency, integrity, and fairness in business operations. The Companies Act, 2013 contains detailed provisions on issuing securities which must be adhered to, by both public and private companies. In this article, we discuss a recent case-law where a penalty worth over 2 crores was imposed on the company and its High-Net worth promoters and directors, for misuse and breach of provisions of private placement of shares.

Issuing shares on Private Placement - The Process and Regulatory Aspects

Private placement means an offer or invitation to subscribe to an issue of securities which is made to a select group of persons by a company. This is different from a public offer in which applications are solicited from the public at large.

Under Chapter III of the Companies Act, 2013, that deals with prospectus and allotment of securities, specifically the Section 42 deals with issues of shares on private placement basis. This section is operational from the year 2014, and more recently, was modified in the year 2018.

Basics of Private Placement of Shares

Offered only to a select group - A company is allowed to make private placement of securities on the condition that it is made only to a select group of persons who are identified by the board.
Maximum 200 investors - The maximum number of persons shall not exceed 200 and the company cannot issue more than two private placements in a year. However, this excludes qualified institutional buyers and employees of the companies being offered securities under ESOP.
Recording names and other details of investors - A company making private placement should issue a private placement, offer an application in a form and manner prescribed. The names and addresses of such identified persons to whom the private placement offer is made shall be recorded.
Renunciation - There is no right of renunciation in case of a private placement offer.
Subscription money via banks - Every identified person willing to subscribe to such a private placement issue should apply for private placement along with subscription money, which may be paid only by check or demand, draft or banking channel and not cash.
Return of Allotment - A company is required to make the allotment and file a return of allotment with the registrar, without which no company is allowed to utilize the money raised through private placement. This return of allotment has to be filed with the registrar within 15 days from the date of allotment along with full names, addresses and details of the security issued.
No fresh offer until previous offer completed - No fresh offer or invitation shall be made unless the allotment with respect to previous private placement offers have been either completed, withdrawn or abandoned by the company.
Allotment within 60 days - The company must allot its security within 60 days from the receipt of application money for private placement of securities. In case the company is unable to allot the securities, it shall repay the application money to subscribers within 15 days from the expiry of the above mentioned 60 days. In case of failure to do so, the company is liable to repay the money at an interest of 12% per annum after the expiry of the 60th day.
Money to be kept in a separate bank account - The companies required to keep the money on application under this section in a separate bank account in a scheduled bank and cannot utilize it for any purpose, other than for adjustment against the allotment or for repayment of money in case of failure to allot securities.
Ban on releasing reports in media - A company is barred from releasing public advertisements or utilizing media marketing channels to inform the public about issue of shares via private placement.
Penalty for breach - If a company defaults in filing such return of allotment, the company along with its promoters and directors will be liable to pay a penalty of 1000 per day for every day the default continues, subject to a maximum of 25 lac rupees.
If a company accepts money in contravention of this section, the company along with its promoters and directors will be liable to a penalty which may be equal to the amount raised via private placement or 2 crores, whichever is lower. Further the company must refund all money with interest at 12% per annum to the subscribers within a period of 30 days of the order, imposing such penalty.

The case of Mayasheel Retail Limited and Planify Capital - Breach of conditions for private placement of shares

A recent order issued in April, 2024, by the Ministry of Corporate affairs, where a penalty of 2.89 crores was imposed on Mayasheel Retail India Limited for violations related to the private placement of shares, cast light on the interpretation of private placement under the Companies Act, 2013.

Brief Facts

Mayasheel Retail India Limited, a registered company operational in India, in New Delhi, operated under the brand name “Bazar India”.
On the basis of the notification, it was disclosed that Mayasheel Retail used a website or platform called Planify, for raising funds by selling its shares.
Planify is a fin-tech startup focused on building Indian private companies, by offering stocks that are unlisted, to investors (Angel, Accredited Investors, Venture Capitalists, Alternate Investment Funds etc).
According to the Ministry, it raised an amount of 40 crores by issuing shares to 1806 subscribers. The Ministry also took notice of several videos and media reports in newspapers about the public announcement of Bazar India raising money worth 25 crores on Planify Platform.

Contentions of the Company

The company, Mayasheel alleged that it made private placement/preferential allotment of 10,00,000 equity shares (worth 5.48 crores) to Planify Capital Limited by way of a Special Resolution, and thereafter after receipt of the subscription amount of 50.48 per share, the company submitted e-form PAS 3, for the allotments so made. The company also denied receiving the funding mentioned in newspaper articles. It was also stated that the transaction with Planify to further sell shares were actually secondary market transactions.

As per the contentions of the company, the shares were offered to Planify to act as a platform, which may further invite potential investors to subscribe to shares of the company.

Decision in the Adjudication

Initially, it appeared that the company utilized Planify for private placement of its shares. However, later it emerged that the shares were issued to plan with an intention of using the platform for selling shares to people at large.

Penal provisions involved in the case

Offering shares in excess of maximum limit of 200 persons- Pursuant to Section 42(2) of the Act r/w Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, a company making private placement offer shall not make it to not more than 200 persons in aggregate in a financial year. While it is observed that the subject company issued securities to 1806 subscribers and has violated the said provisions.
Releasing public advertisements that are barred in case of private placement - Pursuant to Section 42(7) of the Act, no company issuing securities under section 42 shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue. Use of Planify platform for raising securities, putting pitch information, raising money from general public through platform amounts to issuance of public advertisements or utilization of media, marketing or distribution channels or agents to inform the public at large about such an issue.
Failure to file form PAS-3 - Pursuant to Section 42(8) of the Act, a company making private placement shall file with the Registrar a return of allotment in form PAS-3 including a complete list of all allottees, with their full names, addresses, number of securities allotted within 30 days as prescribed under rule 12 Companies (Registration Offices and Fees) Rules, 2014. It is observed that while the subject company has issued Securities to 1806 subscribers, form PAS-3 has not been filed for the said issuance.

Real purpose was to evade norms and issue shares to public - Enquiry into the transaction between Planify and Mayasheel Retail reveals that the real purpose of selling the shares to Planify was only to find potential investors for the subject company by evading norms, and to issue shares to public at large. Thus the transaction of issue of shares to Planify was a mere smokescreen, and violative of Section 42(7) of the Companies Act , 2013.

Creation of secret distribution channels is prohibited - Public issue of shares in the context of secondary markets is dealt with under Section 58 of the Companies Act which provides free transfer and enforceability of securities contracts with a public company. In this case, the private placement of Shares to Planify was done solely to find potential buyers for securities through the Planify Platform. This creation of a secret distribution channel is prohibited under section 42(7).

It was also realized that Planify sold these shares and raised money for itself, and not for the subject company, to the tune of valuation of 25 crores, and also misled the public into believing that this money was being raised on behalf of Mayasheel Retail for its operations.

Determination of Penalties

As per Section 42 of the Companies Act, 2013, no company issuing securities would release any public advertisements or utilize any media, marketing, distribution channel for informing the public about such private placement of shares. Under this section, a maximum penalty of 2 crores can be imposed. While 5.048 crores were raised in contravention, the highest possible penalty of 2 crores was imposed.

Factors considered in determining penalty under this provision

While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely:-

Size of the company
Nature of business carried on by the company;
Injury to public interest;
Nature of the default;
Repetition of the default;
The amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; and
The amount of loss caused to an investor or group of investors or creditors as a result of the default.

The decision to choose private placement of shares for funding has both short and long term impacts and compliance requirements on behalf of the business. Failure to comply with these can result in litigation and penal proceedings against the company and its promoters and directors. Consult with our qualified company secretaries, funding professionals and lawyers at Compliance Calendar to get the best advice on issue of shares for your business.