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Crowdsourcing funds faces stiff penal actions

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

(last updated November 21, 2024)

– 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 startups from either private equity investors, reaching very often to retail investors too. Popular TV shows spotlighting investments in start-ups have turned fundraising entrepreneurs into celebrities, further fueling this trend. In such an environment, it is notable to find that crowdsourcing funds by a startups is said to breach the law and is attracting huge penalties.

It is essential to consider several provisions of the Companies Act, 2013 (‘CA 2013’ or ‘Act’) dealing with public issuances and private placement, along with recent orders by the RoC and SEBI. These authorities, through detailed reasoning, have imposed significant penalties for violation, highlighting that offering privately placed securities to the public—especially through online platforms—is being done in striking contravention to Act, SEBI Act as well the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’).

This article delves into the regulatory framework for private placements, instances of non-compliance, and the legal challenges highlighted by the RoC Delhi’s order as well as a recent ex-parte interim order passed by SEBI. It also explores how start-ups with innovative ideas but limited financial history can navigate these rules to raise funds without affecting enterprise and innovation.

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Introducing common offer document disclosures for Private Placement and Public Issue

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SEBI (Issue and Listing of NCS) (Second Amendment) Regulations, 2023

– Palak Jaiswani | corplaw@vinodkothari.com

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Crowdfunding platforms – risks and concerns in the Indian context

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Timothy Lopes, Manager

finserv@vinodkothari.com

Introduction

Crowdfunding as a concept has been in the limelight for quite some time now. Globally there are several crowdfunding platforms that exist. These crowdfunding platforms essentially allow almost anybody to raise funds for any cause, ideas or business ventures. Interestingly, the first online crowdfunding platform was launched back in 2001[1].

However, with the advent of online crowdfunding platforms also comes the inherent risks associated with it. Through this article, the author aims to highlight the inherent risks associated with crowdfunding along with the legal permissibility and restraints in India.

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SEBI rationalizes issuances on Electronic Book Platform – Limits | Bidding Process | Anchor Investor | Basis of Allotment

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– Kaushal Shah, Executive & Lovish Jain, Executive | corplaw@vinodkothari.com

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Also read our articles on the topic here

Checklist for issuance of listed debt securities on private placement basis

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Non-convertible debentures issued on private placement basis are one of the most practiced ways of raising finance by the companies in India. Considering the notification of SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, effective from 16th August, 2021, the companies may be under a perplexity of how to comply with the requirements of the newly notified regulations. We have summarised the procedure into a checklist below for reference.

Checklist for issuance of  listed and unsecured NCDs on Private Placement Basis
Serial No.Particulars Relevant provisions Remarks
Eligibility conditions:
A. Eligibility requirements under the Companies Act, 2013:
1. Offer can be made to a maximum of 200 persons
2. No advertisement can be made in the newspapers
3. The Company shall not make a fresh offer or invitation unless the allotment with respect to any offer or invitation made earlier have been completed, or withdrawn or abandoned by the Company.
B. Eligibility requirements under SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021
No issuer shall make an issue of non-convertible securities if as on the date of filing of draft offer document or offer document:
(a) the issuer, any of its promoters, promoter group or directors are debarred from accessing the securities market or dealing in securities by the Board;
(b) any of the promoters or directors of the issuer is a promoter or director of another company which is debarred from accessing the securities market or dealing in securities by the Board;
(c) any of its promoters or directors is a fugitive economic offender; or
(d) any fine or penalties levied by the Board /Stock Exchanges is pending to be paid by the issuer at the time of filing the offer document:
1Convening of a Board Meeting:
i. To consider and approve issue of debentures including the terms and conditions of issue for the entire FY ;
ii. To authorise the Board Borrowing Committee/ other relevant committee [Optional] for the following:
a. Appointment of RTA and execute tripartite agreement [Reg 9]
b. Appointment of Credit Rating Agency and obtain Credit Rating. [Reg 10]
c. Opening of Separate Bank Account with Schedule Bank [Proviso to Section 42(6)].
d. To identify group of persons to whom Debentures are proposed to be issued [Section 42(2)]
e. To approve Private Placement offer letter
f.Appointment of Depository [Reg 7]
g. For allotment of NCDs
h. other matters relevant to the issue of NCDs
i.To appoint a debenture trustee before the issue of letter of offer for subscription of the debentures [Reg 8]
j. To obtain in-principle approval from stock exchanges [Reg 6]		Section 179(3) of CA
Section 42, 71 & SS-1
2Approval of shareholdersSec. 71, 42, Rule 14(1) of Companies (PAS) Rules,2014, Rule 18 of SHA Rulesnot required if blanket approval already taken and issue is within the limit as per  second proviso to Rule 2 of Companies (Prospectus and Allotment of Securities) Rules, 2016
3Filing of MGT-14 Rule 14(1) of Companies (PAS) Rules, 2014Within 30 days of passing of the Board Resolution/ Shareholders resolution
4a. Preparation and finalisation of Disclosure Document;
b. Preparation and finalisation of DTD, DTA/ Debenture Subscription Agreement.
5Obtain consent from TrusteeBefore issue of offer document
6To convene Board Borrowing Committee/ other relevant committee meeting for the following:                                                                                                                         a. Approval of draft offer document/ Disclosure Document/ Information Memorandum, Debenture Trust Deed, Debenture Trustee Agreement,Application Form
b. Identification of RTA
c. Approval of List of proposed Allotees
d. Approval for opening of Escrow Account (if already opened then noting of the same)
e. All other matter as delgated by the Board as mentioned in Point 1 above.		Section 42(3) of CA with Rule 14 (3) of Companies (Prospectus and allotment of Securities) Rules, 2014In terms of Rule 18(1)(c) & (5) of the Companies (Share Capital and Debentures) Rules, 2014 [Section 71(5)], the debenture trustee shall be appointed and DTD shal be executed at any time within 60 days of allotment of debentures. Accordingly, this may be done after the allotment of NCDs also.
7Creation of debenture redemption reserveSection 71(4) read with Rule 18 (7)(b)(iv)(B)The value of debenture redemption reserve shall be 10% of the value of outstanding debentures.

DRR shall not be required in case of NBFCs [Rule 18 (7) (iv)(A) of Deposit Rules

8Creation of recovery expense fundReg 11 read with SEBI Circular https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/oct-2020/1603361431987.pdf#page=1&zoom=page-width,-16,792deposit an amount equal to 0.01% of the issue size with designated stock exchange upto  a maximum of Rs. 25 lakhs.
9Obtain credit ratingReg 10
10Agreement with depository for dematerialisationReg 7
11Private placement offer-cum-application shall be sent to the identified investorsSec. 42 of CA 13
12Maintain a complete record of persons to whom the Private Placement offer letter is sent in form PAS-5.Rule 14(4) of PAS Rules
13Receipt of application moneySection 42 of CA
14Filing of Master Creation form with NSDL/CDSL -for demat issuance
15Filing of listing application with stock exchanges and debenture trustees –
(a) Placement Memorandum;
(b) Memorandum of Association and Articles of Association;
(c) Copy of the requisite board/ committee resolutions authorizing the borrowing and list of authorised signatories for the allotment of securities;
(d) Copy of last three years Annual Reports;
(e) Statement containing particulars of, dates of, and parties to all material contracts and agreements;
(f) An undertaking from the issuer stating that the necessary documents for creation of the charge, wherever applicable, including the Trust Deed has been executed within the time frame prescribed in the relevant regulations/Act/rules etc. and the same would be uploaded on the website of the designated stock exchange, where such securities have been proposed to be listed;
(g) In case of debt securities, an undertaking that permission / consent from the prior creditor for a second or pari passu charge being created, wherever applicable, in favour of the debenture trustee to the proposed issue has been obtained; and
(h) Any other particulars or documents that the recognized stock exchange may call for as it deems fit:		Reg 44
16Allotment of NCDs after holding a meeting of Borrowing Committee/ other relevant committeeSection 42 of CA
17Filing of PAS-3 with ROCSection 42(8) read with Rule 14(6) of Companies Prospectus and allotment of securities) Rules, 2014
18Payment of fees to stock exchangesReg 13(2)at the time of listing

This is a general checklist for companies desiring to list its debt securities. For NBFCs and HFCs, the requirements may differ depending upon their specifically applicable regulations.

Further, you may read our article on the NCS Regulations here.

A comparison of the NCS Regulations from erstwhile ILDS Regulations can be accessed here.

A presentation on the various structures of debt securities can be viewed here – https://vinodkothari.com/2021/09/structuring-of-debt-instruments/

Comparison and Mapping of Rule 14 of PAS Rules dealing with Private Placement

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