BGI Ltd. came out with an Initial Public Offering (IPO) during the period of 11th July, 2019 to 14th July, 2019. In the prospectus the company had disclosed nine objects of the IPO on which total expenses were estimated

CS Professional · Forensic Audit · PYQS · June 2021
BGI Ltd. came out with an Initial Public Offering (IPO) during the period of 11th July, 2019 to 14th July, 2019. In the prospectus the company had disclosed nine objects of the IPO on which total expenses were estimated at ₹ 55.53 crore. After the collection of the IPO money and allotment of shares, the company informed the Stock Exchange on 14th November, 2019 that the IPO proceedings had been utilized as per the object of the issue. The SEBI, however found that the said funds were not utilized as mentioned in the prospectus and carried out the detailed investigations. The SEBI investigating official submitted the report of details of the amount raised and utilised which as as under: Category To be utilised as per the prospectus Utilized as per the company Utilized as per the investigating official of the SEBI 1. Setting up its owned corporate office at Noida 3.960 0.410 0.410 2. Relocation of branch office at Mumbai 5.936 4.024 1.524 3. Up-gradation of Digital post production studio 13.655 9.389 0.000 4. Investment in IT division 8.392 3.910 0.4000 5. Expansion of R & D Technology 6.567 4.321 0.035 6. Repayment of bank borrowing 2.697 2.931 2.931 7. Working capital requirement 5.050 4.9106 2.396 8. General Corporate expenditure 6.500 2.115 0.855 9. Meeting the issue expenditure 2.774 2.690 2.690 Total 55.53 34.70 11.241 The investigating official further observed various irregularities as detailed below: (i) Wrong disclosure regarding the vendor's details and non-disclosures of new vendors and payment. (ii) Non-disclosure of purchase of office space at Kolkata and respective payments made to the sellers in this regard. (iii) Wrong disclosure regarding purchase order placed for the equipment. (iv) Investments in contradiction with prospectus. (v) Diversion of funds to promoters and promoter related entities. (vi) Diversion of IPO proceeds to traders. It was alleged that an amount of ₹ 10.53 crore of the IPO proceeds had reached two groups immediately after the receipt of the same by company either directly or indirectly which was used by these two groups in trading of the script of the company on the listing day itself. (vii) Failure by Audit Committee - The Audit Committee of the company failed to notice this fund diversion. It did not record anything in its minutes of the meeting and did not make any recommendations to the company. Based on the above facts, assess whether mentioning of wrong information/ hiding of material information in the prospectus is an offence under the Companies Act, 2013 and what are the penal consequences of such act?

Answer & Explanation:

Criminal Liability Section 34 of the Companies Act, 2013 states that where a prospectus, issued, circulated or distributed under this Chapter, includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorizes the issue of such prospectus shall be liable under section 447. Provided that nothing in this section shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary. Civil Liability Section 35 of the Companies Act, 2013 states that: Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who- (a) is a director of the company at the time of the issue of the prospectus; has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time; (b) is a promoter of the company; has authorised the issue of the prospectus; and is an expert referred to in sub-section (5) of section 26, shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage. Punishment for Fraud Section 447 of the Companies Act, 2013 states that "Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud involving an amount of at least ₹ 10 lakh or one percent of the turnover of the company, whichever is lower] shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years." Provided further that where the fraud involves an amount less than [₹ 10 lakh or 1% of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to 5 years or with fine which may extend to ₹ 50 lakh or with both.

Topics: Companies Act, 2013

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic