In a move to pre-empt repeat of l'affaire Sahara, in which two Sahara group companies had issued Optionally Fully Convertible Debentures (OFCD) to millions of investors despite not conforming to the listing norms, the Ministry of Corporates Affairs has tightened the norms contained in unlisted public companies (preferential allotment) Rules, 2003.

Accordingly, hereafter no equity or quasi-equity or hybrid instruments such as convertible debentures can be issued without complying with the stringent norms prescribed.

They include restricting the issue and allotment to not more than 49 persons, special resolution at a general body meeting in favour of such allotment in terms of a specific provision to that effect in the articles of association and mandatory payment for these instruments by cheque or demand draft by investors.

In view of these amendments made apparently out of abundant caution, unlisted public companies would be falling foul of the law if they were to issue OFCDs, for example, to more than 49 persons or if they were to do so without the requisite special resolution.

They would be guilty of violating the public issue norms of the SEBI.

The amendments in a way read the riot act to unlisted public companies – do not breach the lakshman rekha of 49 – so as to retain the non-public character, which norm incidentally is already applicable for public companies so that they do not blithely issue shares under the cover of private placement to thousands of investors, thereby making a mockery of the term private placement.

(The author is a Delhi-based chartered accountant)

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