BBA L.L.B. (Hons.

) / Fifth Semester- 2022

COMPANY LAW ICA

Topic: STUDY OF DEEMED PUBLIC OFFER AND PRIVATE

PLACEMENT: CANNING INDUSTRIES COCHIN LTD. V. SEBI.

Submitted To: Prof. Richa Kashyap

Submitted by: Anoushka Sud (F003)

Sap Id: 81022019327

INDEX
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SERIAL NO. TABLE OF CONTENTS PAGE
NUMBER
1. INTRODUCTION 3
2. FACTS 4
3. OBSERVATIONS OF SEBI 5
4. OBSERVATIONS OF SAT 5
5. PRIVATE PLACEMENT 6
6. INTERPRETING ‘SELECT GROUP OF 7
PERSONS’ UNDER SECTION 42 OF THE
ACT
7. PUBLIC OFFER 8
8. DEEMED PUBLIC OFFER 9
9. ANALYSIS OF SAT ORDER 10
10. CONCLUSION 12

INTRODUCTION

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Companies can satisfy their short- and long-term financial needs, avoid dilution of their
ownership, reduce the cost of borrowing capital, and accomplish a variety of other objectives by
employing a variety of approaches to finance their operations. A wide variety of securities,
including equity shares, non-convertible debentures, non-convertible preference shares, and so
on, as well as hybrid securities including convertible debentures, convertible preference shares,
share warrants, and so on, may be issued depending on the requirements of the issuer.
Corporations have access to a variety of financing alternatives, as defined by the Companies Act,
2013, sometimes known as the "Act." These options allow companies to issue a variety of
securities. In every instance in which a security is issued, the issuer is obligated to comply with a
variety of laws, including those that are established by the Act. 

“ In order for a company to be granted permission to raise capital through the issuance of
convertible debentures, the provisions of section 71 of the Companies Act, when read in
conjunction with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, are
obligatory and must be adhered to. In addition, Rule 18 of the Companies (Share Capital and
Debentures) Rules, 2014 must also be followed. However, there is a question that needs to be
addressed regarding whether or not compliance with the provisions set forth in Section 62 and
Section 42 of the Act, as well as the related guidelines for the subsequent issue of shares, and the
requirements for private placement, also applies to the issuance of convertible debentures. This is
a question that needs to be answered because there is a question that needs to be answered
regarding whether or not conformance with the provisions set forth in Section 62 and Section 42
of the Act is required. ”

“ The Companies (Amendment) Act of 2017 completely repealed Section 42 of the Act, which
was responsible for regulating the distribution of shares through the use of private placements.
1
Despite the fact that a different term was used, the essential idea remained the same: the offer
and sale of securities to a limited number of investors, sometimes known as a “select group of
individuals.” In the matter of Canning Industries Cochin Ltd. V. SEBI, the Honorable Securities
Appellate Tribunal (also known as “SAT”) issued its interpretation of the regulations on January
28, 2020. These rules apply to the private placement of securities. 2
In view of the

1
Amendment effective from August 7, 2018.
2
Appeal No. 115 of 2019, January 28, 2020.

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aforementioned, the purpose of this paper is to make an attempt to conduct an objective analysis
of the primary legal issues that are at play in the context of the SAT ruling. ”

FACTS OF THE CASE

An unlisted public limited company called Canning Industries Cochin Ltd. Made an offer to
issue unsecured fully convertible debentures (also known as “FCDs”) to its 1929 shareholders at
the rate of 100 FCDs. The offer stipulated that the shareholders had no right to renounce the offer
to any other person, and that the debentures would be required to be converted into shares upon
maturity, which would occur after 5 years. 

3
In spite of this, only 335 shareholders out of 1929’s total stockholders actually subscribed.
Concerning the public offering of shares, an unsatisfied shareholder filed a complaint with the
Securities and Exchange Board of India (SEBI) and the National Firm Law Tribunal (NCLT),
alleging that the company had violated the provisions of the Act. 

The argument that was presented by SEBI was that because the offer of FCDs was extended to
more than 200 individuals, the offer in question should be regarded as a deemed public offer in
accordance with section 42 of the Act and Rule 14(2)(b) of the Companies (Prospectus and
Allotment of Securities) Rules, 2014. As a consequence of this, it was necessary to comply with
the terms of section 40 of the Act as well as the SEBI ICDR Regulations. 

The company argued that Section 42 of the Companies Act does not apply to the situation at
hand and that the issue of share capital is governed by Section 62(3) of the Companies Act,
2013, which has not been taken into consideration. This argument was rejected. 

3
Id.

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OBSERVATIONS OF SEBI

The Securities and Exchange Board of India (SEBI), in its Order dated March 18, 2019, said that
the offer that was made to all 335 individuals is a “deemed public issue,” and as a result, it
violates Section 42(1) of the Act. Additionally, it was highlighted that the Company had not
complied with the pertinent rules linked to the IPO. In addition to this, the firm did not submit an
application to any of the stock markets in order to become listed on any of them. 

OBSERVATIONS OF SAT

The corporation filed an appeal with the SAT, which determined that section 42 will not be
relevant to the offer of FCDs since it does not constitute a “private placement” of securities.
According to what was found by SAT, the term “private placement” refers to an offer made by a
corporation to sell securities to a “limited group of individuals.” 4Despite the fact that the term
“select group of persons” is not defined in the Act, it does apply to a certain number of
individuals, with the overall number of such individuals being capped at 200 in the fiscal year. 

It was pointed out that the offer of such FCDs should not be deemed an offer to a “limited group
of individuals” because it was made to 1929 shareholders. This was in light of the fact that the
offer was made. SAT made the observation that “the expression’select group of persons’ is not a
technical expression but has to be understood in its ordinary popular sense,” which is defined as
“an offer made privately such as to friends and relatives or a selected set of customers
distinguished from approaching the general public or to a section of the public by advertisement,
circular or prospectus addressed to the public.” The Shareholder Advisory Team also made the
observation that the restriction of the subscription of shares to two hundred or more individuals
is invalid in the current scenario since it is not a “private placement.” 5As a result, Section 42 of
the Securities Rules, when read in conjunction with Rule 14(2)(b) of the Securities Rules, does
not apply to the present circumstance. SAT further mentioned that as this is not a case of the
issuing of shares or securities on a preferential basis, section 62(1)(c) of the Act would not apply,
as it is not a situation in which preferential issuance of shares or securities is taking place. 
4
Selvam, M., Babu, M. M., & Vanitha, S. (2011). Private Placement: A Silent Revolution in the Indian Debt Market. SMART
Journal of Business Management Studies, 1(1), 57-64.
5
 SECURITIES CONTRACTS (REGULATION) ACT, 1956 [42 OF 1956]
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PRIVATE PLACEMENT

The practise of generating capital through the sale of securities to a person or a small number of
investors in a setting that is not open to the general public is known as private placement. This is
a frequent way of fund-raising. It is not required to be registered with the Securities and
Exchange Commission since it does not pertain to a public concern (SEC). 

6
When compared to initial public offerings (IPOs), private placements provide a number of
advantages to small businesses. It is an efficient and low-cost method of raising funds. Private
placements require no assistance from brokers or underwriters, therefore the time commitment
involved in completing one of these transactions is substantially lower. Additionally, private
finance may be the sole source of cash that is available to high-risk initiatives or start-up
businesses. 

Regulation of private placements is handled by Section 42 of the Act, which, when combined
with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, can be
found in the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Any offer or invitation to subscribe to or issue securities to a select group of persons by a

company (other than by way of a public offer) through a private placement offer-cum-application
that satisfies the conditions specified in this section is referred to as a "private placement," and it
falls under the purview of the "private placement" category. Only when every one of these
requirements is satisfied can there be a "private placement."

The offer or invitation that is made as part of a private placement cannot be extended to more
than a total of 200 people in a single fiscal year, with the exception of the offer that is made to
Qualified Institutional Buyers and the offer that is made to employees as part of an employees
stock option. This limitation applies to all of the different types of securities, including equity
shares, preference shares, and debentures. 

6
Ashta, D. (2018). A critical comparative analysis of the emerging and maturing regulatory frameworks: Crowdfunding in India,
USA, UK. Journal of Innovation Economics Management, 26(2), 113-136.

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INTERPRETING ‘SELECT GROUP OF PERSONS’ UNDER SECTION 42 OF THE
ACT

The Companies Act of 1956 does not include a definition for the phrase “private placement.” On
the other hand, the idea of a “domestic concern” is elaborated upon in paragraph one of section
67. The definition of what shall count as an invitation to the general public is specified in Section
67.

“ In addition, the Honorable Punjab-Haryana High Court, in the case of Rattan Singh v. Moga
Transport Co. 2; AIR 1959 P H 196, made the observation that in Nash v. Lynde, 1929 A. C.
158, Viscount Sumner said on page 169 that “The ‘public,’ in the definition Section 285, is of
course a generic phrase.” There is no specific requirement placed on the numbers. It is possible
to use any number between two and infinite; possibly even one, if the individual is meant to be
the beginning of a sequence of subscribers, but he eliminates the need for future processes by
personally subscribing to the entire thing. The important thing is that the offer is structured in
such a way that it is available to everyone who brings his money and applies in the proper form.
This is true regardless of whether or not the prospectus was directed to him on behalf of the
Company. ”

An offer that is made by directors to a small group of their associates, family members, or clients
by sending them a copy of the prospectus that is marked “not for publication” is not going to be
deemed an offer to the general public. In order for the requirements of the legislation related to
prospectuses to be triggered, the prospectus must first be distributed to the general public. The
fact that the prospectus has been distributed to the general public is another relevant
consideration. 

As a result, the term “public” refers to any subset of the public, regardless of how that subset was
chosen. Even an offer made to a “restricted class of persons” must be considered an offer made
to the whole public. It was determined in the case of Re South of England Natural Gas and
Petroleum Co. Ltd. (1911) 1 Ch. 573 that the distribution of 3,000 copies of a prospectus to the
members of certain gas companies constituted an offer to the general public. This was due to the
fact that individuals other than those receiving the offer could also accept it. 

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However, when stocks are offered to existing shareholders, this constitutes an offer to issue
securities to a “limited group of individuals,” as contrast to a public offering, which allows
anybody to register for the securities. When an offer is restricted to only those who have been
invited to participate, this is known as a private placement. On the other hand, when an offer is
open to anyone and everyone without any restrictions, this is known as a public offer. In other
words, private placements are more exclusive than public offers. 

In this particular instance, the invitation was extended to a small, select group of people;
however, the total number of people who accepted the offer was greater than the allotted quota of
1929, and as a result, the Securities and Exchange Board of India (SEBI) legitimately treated it
as a public offering. 

PUBLIC OFFER

According to Section 23 of the Companies Act of 2013, a public issue is a method of soliciting
financial support from members of the general public in order to finance the organization’s long-
term goals. It refers to the process of making shares available to the general public for purchase
through the use of prospectuses. A company in India can become listed on a recognised stock
exchange if it first issues its securities to the general public and then sells those securities to
individual investors. 

7
Initial Public Offerings (IPOs) and Further Public Offerings (FPOs) are the two ways that
investors can purchase securities (FPO). An initial public offering (IPO) is the process by which
an unlisted issuer makes its securities available to the general public. Following the company’s
listing, shares are traded freely on open markets. On the other hand, an FPO is the term used to
describe the process by which a listed company sells securities to the general public in order to
obtain extra capital. 

It is necessary to comply with a number of rules and regulations in order to conduct a public
issue. These include the SEBI (Issuance of capital and disclosure requirement) regulation, 2009
and the SEBI (Listing obligations and Disclosure Requirements), Regulations 2015, both of
7
Bhargava, A., Bhat, R., Tiwari, N., & Student, B. L. S. L. L. B. (2017). Crowdfunding an emerging concept in
India. International Journal of Legal Developments and Allied Issues, 3.

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which were enacted in accordance with section 24 of the act of 2013. In addition, the SEBI
possesses the authority to govern the issuance and transfer of securities by listed and unlisted
companies. When compared to private placements, publicly traded securities are subject to a
greater number of regulations and a higher level of scrutiny. 

DEEMED PUBLIC OFFER

In spite of the fact that it is crystal clear that there is a difference between a private placement
and a public offer, if securities are offered to more than the predetermined limit of 200 people in
a single fiscal year, they are considered to be a public offer and are subject to the regulations that
are applicable to public issues. This deeming provision was specified in clear language within
explanation III of section 42 (3), which can be produced as follows: 

“Explanation III.—If a company, listed or unlisted, makes an offer to allot or invites

subscription, or allots, or enters into an agreement to allot securities to more than the prescribed
number of persons, regardless of whether the payment for the securities has been received or not
or whether the company intends to list its securities or not on any recognised stock exchange in
India or outside India, the same shall be deemed to be an offer to the public and shall
accordingly be governed by the provisions.”8

When one considers the language that has been presented thus far, it becomes abundantly clear
that the legislative body did not harbour any doubts about whether or not to regard the planned
private placement as an offer made to the general public in the event that the limit on the number
of individuals who were offered the opportunity to participate in the transaction exceeded the
specified limit of 200. 

 ANALYSIS OF SAT ORDER:

8
Section 42(3), companies act

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  If we disregard the fact that this is a matter that is considered to be of public concern: As
was mentioned earlier, SAT made the observation that such an issue does not qualify as
either a rights issue, a public issue, or a private placement. When deciding whether the
issuance of FCDs to current shareholders would be considered a deemed public issue in
accordance with section 42 of the Act, the SAT disregarded a number of significant legal
provisions as well as relevant decisions made by the Supreme Court of India. This was
done in spite of the fact that these decisions were relevant. 
 Section 42 of the Act, when read in conjunction with rule 14(2)(b) of the Rules, makes it
clear that in order for an allotment of securities to be considered a “public offer” and to
be subject to the regulations that are applicable to public issues, the allotment must be
made available to more than the prescribed limit of 200 individuals during the course of a
single fiscal year. In addition, the Supreme Court of India said in the case of Sahara India
Real Estate Corporation v. SEBI that an invitation that is extended to fifty people or more
is considered to have been extended “to the public” when the number of recipients
exceeds fifty (under the mandate of section 67 of the Companies Act). It was pointed out
that a transaction ceases to be considered a private placement if an offer to subscribe is
distributed to more than the specified number of individuals. 
 The exclusion of the issued FCDs by the business to 335 shareholders from the purview
of section 42 of the Act is an express violation of the present legal restrictions on
‘deemed public issue,’ which the SAT has therefore committed. 
 Taking into account the provisions of subsection 62(3): The provisions of section 62 need
to be adhered to in order for a company to be permitted to increase the amount of its
already-subscribed capital through the issuance of additional shares. Rights issues,
preferential allotments, and employee stock options are the three methods that are
provided for the purpose of raising capital for the firm under Section 62(1)(a), (b), and
(c), respectively.
 However, the Supreme Court of Appeal (SAT) has decided to take a completely different
stance in this specific instance. Specifically, the SAT has decided to treat section 62(3) of
the Act, which deals with the conversion of debentures or loans into equity, as an
independent method of fund-raising rather than treating it as part of the previously
mentioned modes of fund-raising. 

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“ In any event, it is important to keep in mind that subsection 62(3) merely contemplates a method
of excluding companies from the criteria prescribed in subsection 62(1) at the stage of
conversion; it does not extend autonomy to companies from regulatory compliances at the time
of the initial issuance of securities. This is an important point to keep in mind because it is
relevant. ”

CONCLUSION

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Despite the fact that the said offer of FCDs has the characteristics of a public issue, the Tribunal
ruled that it is governed by the provisions of Section i62(3) of the Act read with provisions
related to debentures. This provision is not a part of the fundamental provision relating to the
issue of securities that is found in Section 23 of the Act. 

“ After going over the various tenets of fund raising in light of the SAT decision, it is abundantly
clear that the position taken by SAT is completely at odds with the fundamental comprehension
of the provisions of sections 62 and 42 of the Act. This is the conclusion that can be drawn from
the discussion. The stakeholders are going to be completely confused as a result of the restrictive
reading that the Tribunal chose to adopt. Although the SAT has made a significant contribution
to the discussion by determining that the offer is exempt from regulation under subsection 62(3),
it appears that the tribunal has overlooked the deeming provision contained in subsection 42,
which gives the offer at hand the appearance of a public offering. To determine whether or
whether this matter will be brought before SAT or a High Court in the future to locate the
missing border will be a fascinating development. ”

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