Tag Archive for: Section 42

Nuanced structuring, conduit investor or platform advertising punished with crores of penalties

– Pammy Jaiswal, Partner | pammy@vinodkothari.com

Background

Use of digital platforms for tapping the early stage or ongoing funding  is being seen more often than before, and quite obviously so, in a networked world where crowdsourcing and crowd placing of almost everything is the  norm^[1]. Several well-known platforms have been showcasing the immense potential to raise funds for start ups from either private equity investors, reaching very often to retail investors too. Some TV shows that showcase investing in start-ups have become the talk of the town; people who raised funding through these shows are seen as celebrities. In such an environment, if one opens the rulebook to say  that crowdsourcing of funds  by a company is a breach of the law and attracts huge penalties, one may be seen with disdain. However, one needs to note the provisions of sec. 42 (7) of the CA 2013, and five recent penalty orders of the RoC Delhi which, with detailed reasoning, has imposed stiff penalties running into crores for breach of these provisions.

This article explains what is the code of rules for private placements, what are the situations where this code may be breached, in what circumstances the RoC Delhi’s order found the practices legally untenable, etc. However, the author cannot close the article without discussing how start-ups with no past history or a balance sheet to present, but with a promising business plan, can still reach out to a group of people other than friends and families, because holding a different view will be to kill enterprise and innovation.