Ministry of Corporate Affairs highlights the features of ‘Company Stock Option Plans’ as ‘Securities’

Background of the case

• A Gurgaon-based sustainable investment company, that allows retail investors to invest in fractional ownership of renewable energy projects such as solar or EV, violated Sections 42(2) and 42(7) of the Companies Act 2013 by issuing CSOPs (Company Stock Option Plans) as subscription/membership fees.
• Section 42(2) of the Act read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 restricts private placements of securities to a maximum of 200 persons during a financial year. However, in this case, CSOPs (Company Stock Option Plans) were issued to 565 subscribers during FY 2021-22, clearly breaching this limit.
• Section 42(7) prohibits the use of public advertisements or media to inform the public at large about such security issues. The company used the technology-based community platform to publicize its CSOP issue, thereby violating Section 42(7) of the Act.

Issues raised before the Ministry of Corporate Affairs

Under what grounds can CSOPs issued by a company be classified as “securities” under section 2(81) of the Companies Act, 2013?

Outcome

From the present case, the Ministry of Corporate Affairs has emphasized the following:

1. CSOP shall fall under the category of “securities” as under section 2(81) of the Companies Act, 2013:
   1. If CSOP’s value is linked to the equity securities of the subject company at the inception stage, capital restructuring stage and the pay-out stage;
   2. If CSOPs are derivatives as per Section 2(ac)(B) of the Act;
   3. If CSOPs have features of securities such as transferability, maintenance of a register, etc.; and
   4. If the financial statements of the company indicated that CSOP holders could unlock value based on future valuations.

1. Section 42(6) mandates the allotment of securities within 60 days from the date of receipt of application money. Failure to do so requires the refund of the money with interest.
2. Under section 42(8), a company making private placement shall file with the Registrar a return of allotment in e-form PAS-3 including a complete list of all allottees, with their full names, addresses, number of securities allotted within 30 days as prescribed under rule 12 of Companies (Registration Offices and Fees) Rules, 2014. It is observed that while the subject company has issued “securities” in the form of CSOP to 565 subscribers, e-form PAS -3 has not been filed for the said issuance.

The Ministry of Corporate Affairs in India has taken a strict view on violations of the Companies Act 2013. The penalties imposed which were calculated in accordance with Section 446B, amounted to Rs. 10 Lakh. It emphasized the seriousness of the violations related to the issuance of CSOPs and their classification as securities.

Source

Ministry of Corporate Affairs- NO. ROC/D/ADJ/SECTION 42/SOLARGRIDX/3646-3650

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Last updated: 19/10/2023

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