Violation of Companies Act

HDB Financial Services’ IPO: Regulatory Watch for Violation of Companies Act

Background

• Incident in 2008
  • HDB Financial Services may have broken the Companies Act 17 years ago by providing free shares to more than 50 workers in HDFC Bank, its parent company, by private placement.
  • The Sebi has found 12 million shares were given preferentially allotted to 410 employees in January 2008.
• Violation of Public Issue Provisions:
  • For issuing shares with more than 50 investors, it is a public issue under the Companies Act which requires Sebi clearance.

Bonus Issue

A bonus issue is when a company gives free shares to its existing shareholders. This is done by capitalizing on the company’s accumulated reserves from previous years’ profits. 

Explanation 

• A bonus issue is a way for a company to distribute shares to its shareholders without charging them.
• The shares are issued from the company’s free reserve or share premium account.
• The number of shares issued is based on the number of shares each shareholder held on a record date.

SEBI and bonus issues 

• SEBI regulates the issuance of securities by companies.
• Companies must follow certain rules and regulations when issuing securities.
• SEBI also regulates the pricing of securities issued by companies.

Regulatory Actions and Legal Consequence

• Reference to Ministry of Corporate Affairs (MCA)
  • Sebi plans to refer the case to the Union Ministry of Corporate Affairs (MCA) to check if the issuance amounts to a violation of the Companies Act.
  • If it is a breach, HDB Financial Services could face penalties or be temporarily barred from the market.
• Possible IPO Impact
  • The violation could impact HDB Financial’s $1.5 billion IPO. The company may have to pay a penalty or amend its IPO application to get clearance.
• Legal Interpretation
  • The issuance may be classified as a public or preferential issue. If it were an Employee Stock Option Plan, no Sebi approval would have been required.

Source: Mint