On March 1, MCA – RoC Delhi imposed penalties on two startups (refer Order 1 and Order 2) which had raised funds via private placement of Compulsorily Convertible Debentures (CCDs) on a popular fintech platform in violation of Companies Act, 2013. The key rules violated by these startups are:
Sec. 42(7) which states that no company issuing securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue.
Sec. 42(3) which requires the company to adhere to the limit of 200 persons not just with respect to the number of persons who ultimately subscribe to the securities of the company, but also the said number, i.e. 200, cannot be exceeded at the time of making an offer or invitation to offer of the securities of the company.
Now will these startups appeal against RoC order or refund the money raised (along with interest @ 12% p.a.)?
On related note, as per Today ET article, more concerning fact is that retail investors are investing into startups via unregulated CSOP, a form of cash settled stock appreciation rights and which don’t sit on Cap table at all. And founders are accounting these funds as revenue.