The Ministry of Corporate Affairs (MCA) has taken stringent action against Dhiomics Analytics Solutions Private Limited, imposing penalties for violations related to loan conversion and rights issue provisions under the Companies Act 2013. This order, issued under Section 454 of the Companies Act, sheds light on the consequences of regulatory non-compliance.
Detailed Analysis
Dhiomics Analytics Solutions Private Limited, incorporated in 2017, was brought under the jurisdiction of the Registrar of Companies, Karnataka, with its registered office situated in Bangalore. The company voluntarily submitted an application on March 20, 2023, citing non-compliance with Section 62(3) of the Act. This application, filed by the company and its promoter-directors, acknowledged specific violations related to the conversion of a loan into equity.
The company had received a loan of Rs. 17,00,000 from its founder-directors, Mr. Prabhat Agarwal and Mr. Nilesh Gupta, for working capital purposes. This loan was subsequently converted into equity, with 70,001 shares (35,001 each for the directors) being allotted on November 29, 2017, adjusting Rs. 7,00,010 from the loan amount. However, the company erroneously recorded this allotment as a rights issue under Section 62(1)(a) instead of correctly categorizing it as a conversion of a loan into equity under Section 62(3). The error was discovered when the company filed Form PAS-3 for the allotment.
During the hearing, the company’s authorized representative emphasized that the default was not intentional but occurred inadvertently and without any malafide intention.
Section 62(3) of the Act stipulates that the increase in subscribed capital caused by the exercise of an option attached to debentures or loans should have terms approved by a special resolution before their issuance. In this case, as the company did not receive prior approval from shareholders by special resolution, Section 62(3) does not apply.
Under Section 62(1)(a) of the Act, a company can increase its subscribed capital by offering further shares to existing equity shareholders. Additionally, Section 62(1)(c) permits the issuance of shares to any persons, with special resolution approval, either for cash or for consideration other than cash, subject to certain conditions. The company should have followed the procedures set out in Section 42 of the Act, involving a private placement of securities. However, the company incorrectly categorized the issuance as a rights issue and failed to comply with Section 42’s procedural requirements.
Penalties for violations fall under Section 450 of the Act, which imposes monetary penalties for non-compliance. For continuing contraventions, additional penalties may be levied.
Notably, Dhiomics Analytics Solutions Private Limited is categorized as a small company, and Section 446B of the Act is applicable. It allows for a reduced penalty, not exceeding half of the specified amount.
Conclusion
This order from the MCA serves as a reminder of the critical importance of regulatory compliance for businesses. The penalties imposed on the company and its directors underscore the need for meticulous adherence to statutory obligations, even in cases of inadvertent or minor violations.
Companies should be proactive in addressing non-compliance issues, and directors and officers should be aware of their responsibilities and the potential consequences of regulatory breaches. The penalties levied in this case should be paid within 90 days from the date of the order, and the necessary documentation must be submitted to demonstrate compliance. Failure to comply could lead to further legal actions.
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Registrar of Companies, Karnataka
Kendriya Sadan, 2nd Floor, ‘E’ Wing,
Koramangala. Bengaluru -560 034
Phone: 080 25537449/25633105
E-mail ID: roc. bangalore@ mca.gov.in
File No. ROC(B)/Adj.Ord.454-62(3)/Dhiomics/Co.No.102947/2023 Date: 08.09.2023
ORDER OF ADJUDICATION OF PENALTY UNDER SECTION 454 OF THE COMPANIES ACT 2013 READ WITH RULE 3 OF THE COMPANIES (ADJUDICATION OF PENALITES) RULES. 2014 FOR VIOLATION OF PROVISIONS OF SECTION 62(1)(c) AND SECTION 42 OF THE COMPANIES ACT2013 READ WITH RULES FRAMED THEREIN BY DHIOMICS ANALYTICS SOLUTIONS PRIVATE LIMITED
Ministry of Corporate Affairs vide its Gazette Notification No. A-42011/112/2014-Ad.II dated 24.03.2015 has appointed the undersigned as Adjudicating Officer in exercise of the powers conferred by Section 454 of the Companies Act, 2013 (hereinafter referred to as Act) read with Companies (Adjudication of Penalties) Rules, 2014 for adjudging penalties under the provisions of the Companies Act 2013.
2. The company, Dhiomics Analytics Solutions Private limited (hereinafter referred to as Company) was incorporated on 16.05.2017 and is registered under the jurisdiction of Registrar of Companies, Karnataka with its registered office presently situated at No. 430, BRG 27th Main Road, Sector 1, 1 and 2nd Floor, HSR Layout, Bangalore 560102, Karnataka.
3. The company has filed a suo-motu application on 20.03.2023 citing default /violation of section 62(3) of the Act. This application has been filed by the company and its promoters-cum-directors. It has been submitted in the application that the company was non-compliant in certain requirements with respect to conversion of loan into equity. The company had received a loan of Rs, 17,00,000 from its founder-directors and shareholders, Mr. Prabhat Agarwal and Mr. Nilesh Gupta, for working capital purposes, each contributing Rs. 8,50,000. Subsequently, the company undertook allotment of 70,001 shares i.e. 35,001 equity shares of Rs. 10 each to Mr. Prabhat Agarwal and 35,000 equity shares of Rs. 10 each to Mr. Nilesh Gupta on 29.11.2017, the consideration of which, aggregating to a total of Rs. 7,00,010 was adjusted towards the repayment of loan by way of conversion of the relevant portion of the loan into consideration for 70,001 equity shares of the company. Further, it has been submitted that in the resolution passed by the board of the company, the aforesaid allotment was erroneously recorded as rights issues under section 62(1)(a) of the Act instead of conversion of loan into equity under section 62(3) of the Act. Subsequently, in relation to the allotment, the company has filed form PAS-3 (Return of Allotment) vide SRN G81250276. It has been submitted that the applicant company, without any mala fide intention, was non-compliant with the requirement of getting the terms of the loan approved by the shareholders by a special resolution before raising of the loan.
4. Pursuant to the adjudication application filed by the company, Notice of hearing was sent on 16.05.2023 and physical hearing was held on 24.05.2023 It was attended by Mr. Krishna Kumar Bhat practicing company secretary and authorised representative. During the hearing, the authorised representative made his submissions as mentioned in the application stating that the default was not wilful and has occurred inadvertently and without any malafide intention.
5. As per section 62(3) of the Act nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company, provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting. As the company did not get the terms of the loan approved by the shareholders by a special resolution before raising of the loan in the first place, contrary to the pleadings and submissions of the company and promoter-cum-directors, this subsection is not applicable in the instant case at hand.
6. As per section 62(1)(a) of the Act, where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit to the paid-up share capital on those shares by sending a letter of offer subject to certain prescribed conditions. Further, as per section 62(1)(c) of the Companies Act, 2013, where at any time a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed. Further, as per Rule 13(1) of Companies (Share Capital and Debentures) Rule, 2014, for the purpose of clause (c) of sub- section (1) of section 62, if authorized by a special resolution passed in a general meeting, shares may be issued by any company in any manner whatsoever including by way of a preferential offer, to any persons whether or not those persons includes the persons referred to in clause (a) or clause (b) of sub-section (1) of section 62 and such issue on preferential basis should also comply with conditions laid down in section 42 of the Act.
7. As per section 42 of the Companies Act, 2013, a company may, subject to the provisions of this section, make a private placement of securities which shall be made only to a select group of persons who have been identified by the Board, whose number shall not exceed 200 in a financial year subject to such conditions as may be prescribed, which are provided for in Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014. Also, the monies received for this purpose shall be kept in a separate bank account in a scheduled bank and not utilised for any purpose other than allotment or repayment where the company is unable to allot securities.
8. The company ought to have issued shares for consideration other than cash under section 62(1)(c) of the Act on preferential basis by complying with the conditions laid down in section 42 of the Act since the company did not get the terms of the loan approved by the shareholders by a special resolution before raising of the loan.
9. However, the company has issued shares in lieu of loan wrongly under section 62(1)(a) as rights issue which is only meant for issue of shares (equity or preference) to the holders of equity shares in proportion to the paid-up share capital by sending a letter of offer. Further, it is seen that the company has failed to comply with the procedural requirements laid down in section 42 of the Act read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules. 2014. Thus, the company has violated provisions of section 62(1)(c) of the Act by not following the appropriate method of issuing shares for a consideration other than cash, rendering the company and directors liable for action under section 450 of the Act and has violated provisions of section 42 of the Act for not following the procedure as mentioned above rendering the company, promoters and directors liable for action under section 42(10) of the Act.
10. As per the provisions of section 450 of the Act, if a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder or any condition, limitation or restriction subject to which any approval, sanction. consent confirmation, recognition, direction or exemption In relation to any matter has been accorded given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person. Further, as per provisions of section 42(10) of the Act, if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and 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.
11. It is seen from the records that the subject company is a small company and the provisions for imposing lesser penalty as per section 446B of the Act shall be applicable in this case. As per the provisions of section 446B of the Ad, notwithstanding anything contained in this Act, if penalty is payable for non-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.
12. Therefore, having considered the facts and circumstances of the case and the submissions made by the company, promoters and directors through their authorised representatives, in view of the above said violations of section 62(1)(c) and section 42 of the Act, and in exercise of the powers vested under section 454(3)(a) of the Act, I do here by impose penalty under section 450 read with section 446B of the Act and under section 42(10) read with section 446B of the Act on the company, promoters and directors who were in default of the offence committed in a manner as tabulated herein:
A. Penalty imposed under section 450 read with section 446B of the Act for violation of section 62(1)(c) of the Act:
| S. No. | Particulars of noticee | Calculation of penalty | Penalty levied as per section 446B |
| i. | Company | Rs. 10,000 | Rs. 5,000 |
| ii. | Mr. Prabhat Agarwal, Director | Rs. 10,000 | Rs. 5,000 |
| iii. | Mr. Nilesh Gupta, Director | Rs. 10,000 | Rs. 5,000 |
B. Penalty imposed under section 42(10) read with section 446B of the Act for violation of section 42 of the Act
|
S. No. |
Particulars of noticee | Amount raised | Penalty as per section 42(10) | Penalty as per section 4468 | Penalty levied |
| i. | Company | Rs. 7,00,010 | Rs. 7,00.010 | Rs. 3,50,005 | Rs. 2,00.000 |
| ii. | Mr. Prabhat Agartal, Promoter-cum-Director | Rs. 75,002.50 | |||
| iii. | Mr. Nilesh Gupta, Promoter-cum-Director | Rs. 75,002.50 |
13. The company and its promoters / directors / key managerial personnel who are in default are hereby directed to pay the penalty amount as tabulated above, within 90 days from the date of receipt of this Order and Me Form INC-28 attaching a copy of the Order and payment challans. In case of directors, such penalty amount is required to be paid out of their own funds. The noticee shall pay the said amount of penalty online by using the website www.mca.gov.in (Miscellaneous head) specifying the details of this Order and the name of the noticee who is paying the penalty.
14. Appeal, if any, against this Order may be filed with the Regional Director (South East Region), Hyderabad within a period of 60 days from the date of receipt of this Order in Form ADJ setting forth the grounds of appeal and shall be accompanied by a certified copy of this Order.
15. Your attention is also invited to section 454(8) of the Companies Act, 2013 in case of non-compliance of this Order wherein necessary penal action will be initiated under section 454(8)(i) and 454(8) (ii) of the Companies Act 2013 against the company and directors key managerial personnel who are in default without further notice in the matter.
(Sanjay Sood)
Registrar of Companies, Karnataka
and Adjudicating Officer
