Recently, the Registrar of Companies in Hyderabad imposed a penalty of INR 2,00,00,000/- (Two Crore only) on a company and its officer for their actions. In addition to the penalty, the company has been directed to refund all funds received in violation of section 42 of the Companies Act, along with interest. The penalty was imposed because the company failed to maintain the funds received for the preferential issue in a separate bank account, which is a violation of Section 42(6) of the Companies Act, 2013. Moreover, the company mistakenly utilized the funds before the shares were allotted, thereby contravening Section 42(4) of the Act.
The company voluntarily applied for compounding and requested leniency. They argued that the maximum penalty under the Act is indicated by the phrase “which may extend to” in section 42(10), and that it applies collectively to the company, its promoters, and directors, rather than individually. However, the Registrar of Companies clarified that the penalty imposed by the adjudicating officer cannot be less than the minimum penalty prescribed by the Act. The adjudicating officer lacks the authority to reduce the penalty based on arguments or waive the requirement of refunding the money.
It is important to note that the minimum penalty prescribed under the Act is calculated based on the allotments made during the same financial year, treating them as a single offense. Consequently, the Registrar of Companies, Hyderabad has imposed a penalty of INR 2,00,00,000/- on the company and its officer in default, and has instructed the company to refund all funds accepted in violation of section 42 of the Act, along with interest.
Relevant Provision of Section 42 of the Companies Act, 2013
Section 42 of the Companies Act refers to the provision related to the issue of shares on a preferential basis by a company. This section outlines the rules and regulations that govern the process of issuing shares to a select group of individuals or entities, often referred to as “preferential allotment” or “private placement.”
Some key points covered under Section 42 of the Companies Act may include:
1. Restrictions on preferential allotment: The section specifies the conditions and restrictions under which a company can issue shares on a preferential basis. These restrictions are aimed at ensuring fairness, transparency, and compliance with applicable laws.
2. Approval requirements: The section defines the necessary approvals required for making a preferential allotment. It typically includes obtaining shareholder approval through a special resolution and complying with any other regulatory requirements imposed by the company’s jurisdiction.
3. Pricing guidelines: Section 42 provides guidelines on the pricing of shares issued on a preferential basis. It specifies that the price cannot be lower than the price determined by a registered valuer.
4. Utilization of funds: The section may require the company to utilize the funds received through the preferential issue for the purposes stated in the offer letter and in accordance with the applicable laws.
5. Compliance with other provisions: Section 42 may also refer to compliance with other provisions of the Companies Act or any other relevant regulations that are applicable to the issuance of shares on a preferential basis.
Penalty for Violation of Sec 42 of the Companies Act 2013
The penalty for violation of Section 42 of the Companies Act, 2013 can vary depending on the specific circumstances and severity of the violation. However, the Act does provide for certain penalties that may be imposed for non-compliance with the provisions of Section 42.
As per Section 42(8) of the Companies Act, if a company makes any default in complying with the requirements of preferential allotment as specified in Section 42, the company, its promoters, and directors who are in default shall be liable to a penalty, which may extend to the amount raised through the preferential allotment.
In other words, the penalty for violation of Section 42 can be up to the total amount of funds raised through the preferential allotment. The exact penalty amount is subject to the discretion of the adjudicating authority, which is typically the Registrar of Companies or any other authority appointed by the government.
It’s important to note that the penalty imposed may also depend on other factors such as the intention of the violation, the extent of non-compliance, and any mitigating or aggravating circumstances.
PETITION NO. ADJ. 42/ OF 2023
IN THE MATTER OF SECTION — 42 OF COMPANIES ACT 2013
AND IN THE MATTER OF M/S. PAYSWIFF TECHNOLOGIES PRIVATE LIMITED
A Company incorporated under the Companies Act, 2013, CIN: U74900TG2013PTC089686, having its Registered office situated at 2-48/5/6, Vaishnavi’s Cynosure, 10th floor Opp. RTTC, Telecom Nagar Extn, Gachibowli, Hyderabad, Rangareddi – 500032, Telangana, India.
1. Whereas M/s. PAYSWIFF TECHNOLOGIES PRIVATE LIMITED (hereinafter referred as ‘Company’) is registered in the State of Telangana vide CIN No: U74900TG2013PTC089686 on 27.08.2013, having its registered office address at 2-48/5/6, Vaishnavi’s Cynosure, 10th floor Opp. RTTC, Telecom Nagar Extn, Gachibowli, Hyderabad, Rangareddi – 500032, Telangana, India, has filed a S1.10 moto compounding application along with its officer in default u/s 42 (10) for compounding of violation of section 42 (6) rlw section 454 of the Companies Act, 2013 (the Act) seeking necessary orders.
2. Whereas the company has stated in its application that the –
a. The company had allotted the following equity shares in the FY 2019-20, on Preferential basis.
b. The company has submitted an application under section 454 of the Companies Act, 2013 for adjudicating for the following offence committed under section 42 of the Act- Pursuant to the provisions of 42(6) of the Companies Act, 2013, the monies received on application under this section shall be kept in a separate bank account in a Scheduled bank, however, the company failed to keep the monies received for the preferential issue in a separate bank account, resulting in contravention of the provisions of 42(6) of the Companies Act, 2013. Pursuant to the provisions of 42(4) of the Companies Act, 2013, a company shall not utilize monies raised through preferential issue unless allotment is made and the return of allotment is filed with the Registrar, however, the company has erroneously utilized the funds before allotment of shares, for the purpose of carrying on its business operations.
3. The applicant company has submitted that the contravention was done inadvertently and without malafide intention of the company and directors and prayed to pass an order for adjudicating the offence committed u/s 42(4) and 42(6) of the Companies Act, 2013.
4. Whereas Section 42 (10) of the Companies Act, 2013 contemplates the following: “Subject to sub-section (11), 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, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty..”
5. The Authorized representative has pleaded that the violation was due to lack of knowledge and not purposeful. No public interest is involved in the violation and any instruction to refund the money now would result in legal issues and the ongoing merger process and hence requested for a lenient view. It is further represented that the penalty provided under the Act is the maximum penalty as the words “which may extend to” is used in section 42(10) of the Act. It is also pleaded that other adjudicating authorities have levied only lesser penalties for such offences. It is also pleaded that the company has made suo-moto application and not on the basis of any complaint and hence minimum penalty may be levied. The Authorized Representative has produced three adjudication orders issued for various ROCs and stated that section 42(10) provides for a maximum penalty of Rs. 2 Crores for the company and its promoters and directors and not separately for each of them. As per the application there were 6 directors during the period of offence who are responsible for compliance with section 42 of the Act.
6. Considering the application and arguments and supporting documents provided by the company and its authorized representative and request for a lenient view, it is observed that as per Rule 3(12) of the Companies (Adjudication of Penalties) Rules, 2014 the adjudicating officer shall have due regard to the size of the company, nature of business, injury to public interest, nature of default, repetition of default quantifiable disproportionate gain and loss caused to investors or creditors as a result of the default but further provided that in no case the penalty imposed by the adjudicating officer shall be less than the minimum penalty prescribed under the Act. Under section 42(10) of the Act the company, its promoters and directors shall be liable to a penalty which may extent to the amount raised through private placement or two crore rupees whichever is lower, and the company shall also refund all monies with interest @ 12% to subscribers within a period of 30 days from the date of adjudication order. In view of the above, the adjudicating officer has no discretion to reduce the penalty on the grounds mentioned by the applicants or to waive the requirement of refund of money and the Act provide for appeal to get any such relief on orders issued by the adjudicating authorities. However, the allotments made during the same financial year is considered as single offence to calculate the minimum penalty prescribed under the Act.
7. I have gone through the following adjudication orders issued by other ROCs namely ROC, Gujarat, ROC, Mumbai, ROC, Bangalore and found that since the Act does not provide for penalty for each person the adjudication officer, they have limited the total penalty within Rs. 2 Crores and divided among the company and its directors
8. After considering the submissions made in the application and by the Authorized Representative, and the facts of the case it is proved beyond doubt that the company and its directors have defaulted in complying the provisions under Section 42(4) and 42(6) of the Act. In this regard, the company and its 6 directors during the relevant time are liable to pay the following penalty which shall be met from their own sources.
9. The penalty as indicated above shall be paid by the above persons (out of their own resources) and file e-Form INC-28, within 30 days from the date of issue of this order with the office of RoC, Hyderabad with copies of challan in proof of payment made.
10. The company is hereby directed to refund all the monies accepted in contravention of section 42 of the Act with interest as specified in section 42(6) of the Act to the shareholders within a period of 30 days from the date of issue of this order.
11. In this regard your attention is also drawn to the provisions of Section 454(5) and (6) which contemplates that: “(5) Any person aggrieved by an order made by the adjudicating officer under sub-section (3) may prefer an appeal to the Regional Director having jurisdiction in the matter. (6) Every appeal under sub-section (5) shall be filed within sixty days from the date on which the copy of the order made by the adjudicating officer is received by the aggrieved person and shall be in such form, manner and be accompanied by such fees as may be prescribed.”
12. In this regard your attention is also drawn to the provisions of Section 454(8) (i) and (ii) of the Companies Act, 2013 which read as follows: (i) Where company fails to comply with the order made under sub-section (3) or sub-section (7), as the case may be, within a period of ninety days from the date of the receipt of the copy of the order, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees, but which may extend to five lakh rupees. (ii) Where an officer of a company or any other person who is in default fails to comply with the order made under sub-section (3) or sub-section (7), as the case may be within a period of ninety days from the date of the receipt of the copy of the order, such officer shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.
Issued under my hand and seal on this the 15th of May 2023.
(JOSEKUTTY V.E)
REGISTRAR OF COMPANIES, HYDERABAD.
To,
1. ROCH/U74900TG2013PTC089686/TELANGANA/42 OF 2013/2023
M/s. PAYSWIFF TECHNOLOGIES PRIVATE LIMITED
2-48/5/6, Vaishnavi’s Cynosure, 10th floor,
Opp. RTTC, Telecom Nagar Extn, Gachibowli,
Hyderabad, Rangareddi – 500032, Telangana, India.
2. ROCH/U74900TG2013PTC089686/TELANGANA/42 OF 201312023
PRABHURAM RADHAKRISHNAN (Managing Director)
6-3-856/a, 3rd Floor,SM Colony, Greenlands, Hyderabad – 500016, Telangana, India.
3. ROCH/U74900TG2013PTC089686/TELANGANA/42 OF 2013/2023
Mr. ABHAY DESHPANDE RAOSAHEB (Director)
Villa No. 73, keerthi Richmond Villas, Suncity, Bandlaguda, Hyderabad-500086, Telangana, India.
4. ROCH/U74900TG2013PTC089686/TELANGANA/42 OF 2013/2023
Mr. ANIL BHARADWAJ VEDAM (Director)
F-2 Second Floor, Plotno 6, Road no. 12,
Ap Press, Photographers Cly, Banjarahills,
Nr Lotus, Pondhyderabad-500034, Telangana, India.
5. ROCH/U74900TG2013PTC089686/TELANGANA/42 OF 2013/2023
Mr. MITESH MAJITHIA (Director) 3-4-377/A,
B Flat no 301,3rd floor, P Residency,
Lingampally, Kachiguda, Hyderabad-500027, Telangana, India.
6. ROCH/U74900TG2013PTC089686/TELANGANA/42 OF 2013/2023
Mr. PRITI MAULIK SHAH (Director) 3 1204,
Vasant Aradhana Tower, mahavir Nagar, Kandivali West, Mumbai-400067, Maharashtra, India.
7. ROCH/U74900TG2013PTC089686/TELANGANA/42 OF 2013/2023
Mr. RAVI KIRAN PEDARLA (Director) Flat no 401,1,
H. No. 8-2-293-82/F2/B4, Film nagar,
phase no 2 near ABN Office, Hyderabad-500033, Telangana, India.
