Whether the unsecured loans advanced by the promoter group could be adjusted against allotment of shares ?

SRM Energy Limited, Mumbai vs (1) Securities and Exchange Board of India, Mumbai; (2) Arihant Capital Markets Limited, Mumbai

Brief Facts:-

The appellant was incorporated as a public limited company in the year 1985 under the name and style of Hitkari Fibers Limited.  Its shares are listed on the Bombay Stock Exchange. Spice Energy Pvt. Ltd (for short SEPL) is another company incorporated under the Companies Act, 1956 and promoted by the Rastogi family of Delhi which owns more than 80 per cent shares in this company. SEPL (promoter) took over appellant company and after taking over the company decided to discontinue with its then existing business – SEPL, the promoter of the appellant stepped in with its funds in the interest of the appellant company and its shareholders and kept lending its own funds from time to time as and when required by the appellant for implementing the power project – With a view to mobilize further funds for the power project, the appellant company came out with a rights issue and decided to issue shares on rights basis to its shareholders – Since SEPL, the promoter of the appellant, was holding 71.19 per cent shares on the date of the rights issue, its entitlement in that issue worked out to 4,19,25,000 shares – SEPL authorised the appellant company to adjust the unsecured loans hitherto provided to the appellant towards its entitlement in the proposed rights issue making it clear that if there was any short fall, the same would be subscribed by the promoter (SEPL) – Appellant company filed with the Securities and Exchange Board of India (Board) a draft letter of offer for the rights issue which was to be sent to the shareholders – Direction was issued by the Board requiring the appellant not to adjust the unsecured loans advanced by the promoter towards the price of the shares allotted in the rights issue. Hence the appeal was filed.

Decision:-

Appeal Allowed.

Reason:-

Appellant contended that there was no provision in any law nor in the Regulations which prohibited the adjustment of unsecured loans against the price to be paid for the shares allotted in rights issue – It was further contended that only such loans could be converted into equity which satisfy all the conditions of s. 81(3) of the Companies Act including those in the proviso thereto and the loans which did not satisfy all these conditions were not convertible at all – Held, s. 81(3) make it clear that cases which fall under this provision shall not be governed by ss. 81(1) and section 81(1A) – S. 81(3) carves out yet another category/exception for a preferential allotment to which s. 81(1) and 81(1A) shall not apply – S. 81(3) would apply where a company had raised loans or issued debentures and those loans/debentures have a stipulation attached thereto that the lender would be entitled to exercise an option to convert those loans/debentures into shares or subscribe to the shares of the company – In the instant case, unsecured loans of SEPL, the promoter of the appellant did not meet the requirements of s. 81(3) of the Companies Act – Hence, s. 81(3) was not applicable – Impugned communication in so far as it directed the appellant not to adjust the unsecured loans of the promoters against allotment of shares in the rights issue.

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