Madurai Rural Development Benefit Fund (India) Limited

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Facts of the Case

The Securities and Exchange Board of India (SEBI) conducted a preliminary inquiry into the issuance of equity Shares by Madurai Rural Development Benefit Fund (India) Limited and Madurai Rural Development Transformation India Limited, so as to ascertain the possible non-compliance with the public norms stipulated[1]. However, prior to the inquiry, SEBI passed an ad interim ex parte[2] against Madurai Rural Development Benefit Fund (India) Limited(MRDF), Madurai Rural Development Transformation India Limited (MRDT) and their promoters and Directors[3]with the following directives which restrained MRDF and MRDT from mobilizing funds through the issue of equity shares, debentures, preference shares or through the issuance of any kind of security to the public and/ or to invite subscription or deposit, in any manner whatsoever, either directly or indirectly, till further directions.

The interim order stipulated that the companies and their promoters are prohibited from issuing prospectus or any offer document or issue advertisement for soliciting money from the public. They also shall not dispose of any of the properties or alienate the company’s assets or their own assets.

The order further restrained them from accessing the securities market and diverting any funds raised from the public through allotment of shares or in custody of the company without the prior permission of SEBI. The interim order stipulated that they co-operate with SEBI in providing any document in their possession as well as a full inventory of all their assets and properties and details of equity shares and other securities issued by it within 21 days from when the order was received.[4]

The interim Order also called the noticees to show causes as to why appropriate actions under the appropriate legislations should not be taken against them.

In response, the noticees filed letter dated November 5, 2014 and December 10, 2014positioning that there has been no default in repaying investors whom they collected investments from. Madurai Rural Development Benefit also mentioned that they were not aware of the provisions of the SEBI Act and the extent of compliances which was required of them.  According to their perspective, though Madurai Rural Development Benefit is not a mutual Benefit/ Nidhi company which is notified under the Act[5], it has to be treated at par with recognized Mutual Benefit/ Nidhi Company, as it is registered with the objectives of a Benefit Fund Company, and is on the path to fulfilling the criteria of net owned fund and number of members. The notices further claimed that MRDF was a special company, with which a consolidated order against MRDF and MRDT cannot be passed.They also claimed that in respect to them issuing equity shares to the public, they only intended to bring in friends and relatives and that they never violated the compliance rules.

Hence, MRDF has requested that they be exonerated from all charges in the interim order, as they have not violated the provisions of the MCA. They further requested that SEBI drop the coercive proceedings against the companies and its directors.

On the issue of whether or not MRDF was considered as a Nidhi/ Mutual benefit company by virtue of the Companies Act 2013 and the Nidhi Rules 2014, such position was held not to be relevant for the purpose of issuances of equity shares. Hence, MRDF is not to be treated the same as with other public limited companies, and is not exempt from the public issue norms stipulated under the companies Act 1956 and the SEBI Act.

On the question on whether SEBI has the jurisdiction in the issuance of equity shares which the notices clamored against since MRDF was a potential Nidhi company, it was held amongst othersby the Securities and Exchange Board that SEBI has the jurisdiction over the issuance of equity shares by MRDF since the number of allottees exceeded forty nine in number.[6]


Issues for Court’s Determination and Analysis

  • Whether a company and directors of the company are within rights to issue advertisement for soliciting money from the public for the issuance of securities?
  • Whether unintentional noncompliance by the company and Directors warrants an interim order.
  • Whether it was within the purview of the Securities and Exchange board to restrain them from engaging with the public for a specified period.

Issuance of Equity Shares

First thing to note when it comes to equity shares is that they can also be issued to the general public. However for this to happen, it is no gainsaying that there are rules to be followedparticularly spelt out in guiding legislations.

Procedures for issuing shares;

  • Issue of prospectus – this is a way of inviting the public to subscribe to shares of the company
  • Receiving applications- this happens after the prospectus have been issued. It allows the potential investors fill an application form with the required application money.
  • Allotment of shares- Here, once the subscription has been achieved, then shares can be allotted. Note that the allotment is done on Pro rata basis[7].

The Provision of The SEBI Act and Scope of Compliance

The Securities and Exchange Act tries to protect the interest of investors in shares and their securities. The Board having been appointed by the Central Government are vested with the power to exercise and perform all activities within their purview.[8] Hence, it is not farfetched that the Securities and Exchange Board are vested with the power of regulating transfers of shares, businesses in security markets amongst others.

According to section 11 (1);

“Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of the investors in securities and to promote the development of, and to regulate the securities market, by such means as it thinks fit”

The Act also gives the Board the power to not just undertake inspection on any documents or records of a public company or a listed public company which intends to get its securities listed on any recognized stock exchange but also allows the Board to prohibit any company from issuing prospectus, any offer document or advertisement soliciting money from the public for the issue of securities[9].

Without bypassing the provision of the Companies Act 1956, this goes to show how extensive the Board powers are.

Making recourse to the case at hand, what exactly does a Nidhi /Mutual benefit Society mean?

By virtue of the Companies Act 1956[10], Nidhi/Mutual Benefit Society means a company, which the Central government may by notification in the official gazette, declare to be a Nidhi or mutual benefit society. Having said that, MRDF had not been notified to be a Nidhi or mutual benefit society by the central government, having failed to comply with both the Companies Act and the SEBI Act.

The SEBI Act was very vehement and clear in providing stipulations in equity sharing.  Subscribing to a Latin maxim, ignorantiajuris non excusatest, meaning ignorance of the Law does not excuse, comes to play here. Having said that, the submission of the notices positing that they were not aware of the compliance rules in the SEBI Act and the Company Act is not bound to hold water.

On the issue of refund/repayment of subscription money with interests ordered by SEBI to the allottees, it does not have to be necessary, it is a mandatory consequence for non-compliance.Section 28A(1) of the SEBI ACT 1992[11] provides;

“If a person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any direction of the board for refund of monies or fails to comply with a direction of disgorgement order issued under section 11B or fails to pay any fees due to the board, the recovery officer may draw up under his signature a statement in the specified form specifying the amount due from the person(such statement being hereafter in this chapter referred to as certificate) and shall proceed to recover from such person the amount specified in the certificate by one or more of the following modes………..”

The question that comes to bear is whether the allotment of shares to more than 50 persons is a violation of the SEBI Act in itself or just a contributive factor.

 Having established that equity shares can be issued to the general public, by virtue of the Companies Act which is framed for the purpose of guiding issuance of equity shares, it is obligatory that all benefit company complies with not just a clause in the provision but all. However, the provision of allotment to the public is crucial and violation of such warrants consequences. To buttress this further, it was held in Neesa Technologies Ltd V SEBI[12], that issuance of equity shares to fifty persons and more is a public issue which must be complied with the concerned legislations[13].

Also Read  The Growth and Development of Indian Economy from 1950-2020. 

Position of other Legislations

The Companies Act 1956 makes recourse to the Securities and Exchange Board of India where it provides in Section 67(3A) thus;

“Notwithstanding anything contained in sub section (3), the Securities and Exchange Board of India shall, in consultation with the Reserve Bank of India, by notification in the official gazette, specify the guidelines in respect of offer or invitation made to the public by a public financial institution specified under Section 4A or non-banking financial company referred to in clause (f) of section 45-1 of the reserve Bank of India Act, 1934 (2 of 1934)”

With the need to have a simplified law that could allow for more flexibility and ease the stringent process of performing business transactions in India, the Companies Act 2013 was enacted. Although, the provisions of the Companies Act 1956 is still in force, the Companies Act 2013 and the Nidhi rules serves as a succor where it affirms in clause 2 of the rules that it is applicable for existing registered Nidhi benefit fund companies and also for those that have not applied for recognition[14].

Also read Difference Between a Limited Company and a Private Limited Company


In one of the noticees’ response[15], Madurai Rural Development Benefit had requested that the Securities and Exchange Board of India regularize the company’s activities and give them the opportunity to run in accordance with the law. Whilst it is posited that the law is the law which no excuses no ignorance, the law should also be able to accommodate the reprieve of a party rather than subjecting such party to gruesome consequences for non-compliance because the legislation says so.

[1] Under the provisions of the Companies Act 1956, Companies Act 2013 and other applicable laws including the SEBI regulations/ guidelines

[2] This is also referred to as an Interim Order dated October 27, 2014.

[3] Also referred to as “the Noticees”

[4] Note that for the purpose of this discourse, MRDF would be examined separately from MRDT. However, MRDT and MRDF are group companies having common managing Director, common Directors and Common Promoters. Hence, the reason for being discussed together.

[5] Section 620A of the Companies Act 1956 [Act No. 1 of 1956]

[6] In reaching this position, recourse was made to Sahara India Real Estate Corporations Limited &Ors V SEBI &Anor (2013) 1SCC 1, where it was  said that SEBI has the jurisdiction and power over matters relating to transfer of securities and non-payment of dividend by public companies, which have issued securities to 50 persons or more.

[7] This means that the sharing would be done in proportion.

[8] Section 4(2) of the Securities and Exchange Act.

[9] Section11(2A), 11A(1)b

[10]Particularly section 620A which would be discussed below

[11] As amended by the Securities Laws (Amendment) Act, 2014.

[12]2017 SCC online SAT 187

[13] Section 56 of the Companies Act and ILDA regulations

[14] Under Section 620A of Companies Act 1956

[15] Clause O of the noticees’ response