Order In the matter of The Canning Industries Cochin Limited

WTM/MPB/EFD-1-DRA-IV/ 18 /2018 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: MADHABI PURI BUCH, WHOLE TIME MEMBER FINAL ORDER Under Sections 11, 11(4),11A and 11B of the Securities and Exchange Board of India Act, 1992 read with Companies Act, 2013 In the matter of The Canning Industries Cochin Limited In re Deemed Public Issue In respect of Serial Entity Name PAN CIN/DIN no.

1. The Canning Industries Cochin AAACC9788Q U01122KL1947PLC000257 Limited 2. Mr. Chiriankandath Palu Jose ACPPJ8027R 00764405

3. Mr. Parappilly Varunny Davis ABSPD2248Q 01204901

4. Mr. Paul Thalokaren Timothy AENPP6875K 00668710

5. Mr. Mazhuvancheriparambath ACPPA1949P 00896687 Kuriakose Aelias 6. Mr. Chiriyankandath George Joy ABSPJ1073H 01205014

7. Mr. Jessy Pavoo ALXPP7358N 06670178

8. Mr. Vadakken Raphael ABRPV9569B 02028276

9. Mr. Paul Ovungal Raphael AEAPP2327R 07407137

Order in the matter of The Canning Industries Cochin Limited

10. Mr. Ovungal Pyloth Rappai ACKPR9190A 00870144

11. Mr. Joseph Chiramel (Debenture AQXPJ4232C Not applicable Trustee)

CASE FACTS 1. The Canning Industries Cochin Ltd. (hereinafter referred to as “CAICO”/ “the Company”) is a Public company incorporated on March 25, 1947 and registered with Registrar of Companies–Ernakulam (RoC) with CIN: U01122KL1947PLC000257. Its registered office is at Caico Road, Trichur, Kerala - 680006. 2. Securities and Exchange Board of India (hereinafter referred to as “SEBI”) received complaints against CAICO in respect of issue of Fully Convertible Debentures (hereinafter referred to as “FCDs”) and undertook an enquiry to ascertain whether CAICO had made any public issue of securities without complying with the provisions of the Companies Act, 2013; Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act”) and the Rules and Regulations framed thereunder including the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements), Regulations, 2009 (hereinafter referred to as “ICDR Regulations”). 3. Further, RoC-Kerala & Lakshadweep vide letter dated March 15, 2016, inter alia, informed SEBI that CAICO filed a Form – GNL2 in the MCA Portal for registration of Prospectus for issue of 1,92,900 FCDs aggregating to Rs. 4,82,25,000/- to the existing members by passing a special resolution under section 62(3) read with section 71 read with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014. 4. On enquiry by SEBI, it was observed that CAICO had made an offer of FCDs in the financial year 2015-2016 (hereinafter referred to as “Offer of FCDs”) and raised an amount of Rs. 2,83,50,000 from 335 allottees. It was also observed that CAICO appointed Mr. Joseph Chiramel as Debenture Trustee for the Offer of FCDs by that company. 5. As the above said Offer of FCDs was found prima facie in violation of respective

Order in the matter of The Canning Industries Cochin Limited provisions of the SEBI Act, 1992, the Companies Act, 1956, and the ICDR Regulations, SEBI passed an interim order dated August 9, 2017 (hereinafter referred to as “interim order”) and issued directions mentioned therein against CAICO and its present and past Directors viz. Mr. Chiriankandath Palu Jose, Mr. Parappilly Varunny Davis, Mr. Paul Thalokaren Timothy, Mr. Mazhuvancheriparambath Kuriakose Aelias, Mr. Chiriyankandath George Joy, Mr. Jessy Pavoo, Mr. Vadakken Raphael, Mr. Paul Ovungal Raphael and Mr. Ovungal Pyloth Rappai, and its Debenture Trustee Mr. Joseph Chiramel (hereinafter collectively referred to as “Noticees”). 6. Prima facie findings/allegations: In the said interim order, the following prima facie findings were recorded. CAICO had made an Offer of FCDs during the financial year 2015-2016 and raised an amount of Rs. 2,83,50,000 as shown below:

Year of Issue Security Issued Amount raised (Rs.) Number of allottees 83,00,000 332 2015-2016 FCD 2,00,50,000 3 Total 2,83,50,000 335

7. Further, CAICO appointed Mr. Joseph Chiramel who was not registered as debenture trustee, for the offer of FCDs by that company. 8. The above Offer of FCDs and pursuant allotment were deemed public issue of securities under the Section 42 (1) of the Companies Act, 2013 (Explanation-I) and Rule 14 (2) (b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014. Accordingly, the resultant requirement under section 40 of the Companies Act, 2013 and the relevant provisions of the SEBI Act and the ICDR Regulations were not complied with by CAICO in respect of the Offer of FCDs. Further, the Debenture Trustee viz. Mr. Joseph Chiramelhas prima facie violated section 12(1) of the SEBI Act and regulation 7 of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993 (hereinafter referred to as " Debenture Trustees Regulations").

Order in the matter of The Canning Industries Cochin Limited

9. In view of the prima facie findings on the violations, the following directions were issued in the said interim order dated August 9, 2017 with immediate effect. i. “CAICO shall forthwith cease to mobilize fresh funds from investors through the Offer of FCDs or through the issuance of equity shares or any other securities, to the public and/or invite subscription, in any manner whatsoever, either directly or indirectly till further directions;

ii. CAICO (PAN: AAACC9788Q), its present directors viz. Mr. Chiriankandath Palu Jose (PAN: ACPPJ8027R), Mr. Parappilly Varunny Davis (PAN: ABSPD2248Q), Mr. Paul Thalokaren Timothy (PAN: AENPP6875K), Mr. Mazhuvancheriparambath Kuriakose Aelias (PAN: ACPPA1949P), Mr. Chiriyankandath George Joy (PAN: ABSPJ1073H), Mr. Jessy Pavoo (PAN: ALXPP7358N), Mr. Vadakken Raphael (PAN: ABRPV9569B) and Mr. Paul Ovungal Raphael (PAN: AEAPP2327R) and the past Director viz., Mr. Ovungal Pyloth Rappai (PAN: ACKPR9190A) are prohibited from issuing prospectus or any offer document or issue advertisement for soliciting money from the public/investors for the issue of securities, in any manner whatsoever, either directly or indirectly, till further orders;

iii. CAICO and its abovementioned Directors shall provide a full inventory of all their assets and properties;

iv. CAICO and its present Directors, viz. Mr. Chiriankandath Palu Jose (PAN: ACPPJ8027R), Mr. Parappilly Varunny Davis (PAN: ABSPD2248Q), Mr. Paul Thalokaren Timothy (PAN: AENPP6875K), Mr. Mazhuvancheriparambath Kuriakose Aelias (PAN: ACPPA1949P), Mr. Chiriyankandath George Joy (PAN: ABSPJ1073H), Mr. Jessy Pavoo (PAN: ALXPP7358N), Mr. Vadakken Raphael (PAN: ABRPV9569B) and Mr. Paul Ovungal Raphael (PAN: AEAPP2327R) shall not dispose of any of the properties or alienate or encumber any of the assets owned/acquired by that company, without prior permission from SEBI;

Order in the matter of The Canning Industries Cochin Limited v. CAICO and its abovementioned present Directors shall not divert any funds raised from public at large through the Offer of FCDs, which are kept in bank account(s) and/or in the custody of CAICO;

vi. CAICO and its abovementioned Directors shall co-operate with SEBI and shall furnish all information/documents sought by SEBI;

vii. The Debenture Trustee, viz. Mr. Joseph Chiramel (PAN: AQXPJ4232C) is prohibited from continuing with its assignment as debenture trustee in respect of the Offer of FCDs of CAICO and also from taking up any new assignment or involvement in any new issue of debentures, etc. in a similar capacity, from the date of this Order till further directions.”

10. The interim order also directed CAICO, its past and present Directors, and its debenture trustee viz., Mr. Joseph Chiramel to show cause as to why suitable directions/prohibitions under sections 11(1), 11(4), 11A and 11B of the SEBI Act, read with ICDR Regulations should not be passed against them: i. Directing CAICO and its past and present Directors to jointly and severally refund money collected from investors through the issue of FCDs that are impugned in this Order, along with interest of 15% per annum; ii. Directing CAICO, its past and present Directors not to issue prospectus or any offer document or issue advertisement for soliciting money from the public for the issue of securities, in any manner whatsoever, either directly or indirectly, for an appropriate period; iii. Restraining CAICO, its past and present Directors and debenture trustee, viz. Mr. Joseph Chiramel from accessing the securities market and prohibiting them from buying, selling or otherwise dealing in securities for an appropriate period.

11. Vide the said interim order, CAICO, its past and present Directors along with its Order in the matter of The Canning Industries Cochin Limited

Debenture Trustee were given the opportunity to file their replies, within 21 days from the date of receipt of the said interim order. The order further stated the concerned persons may also indicate whether they desired to avail themselves an opportunity of personal hearing on a date and time to be fixed on a specific request made in that regard. 12. Service of interim order: The copy of the said interim order was sent to the Noticees vide letter dated August 14, 2017 which were delivered to all the Noticees. Vide letter dated September 22, 2017, CAICO submitted its reply wherein, it was stated inter alia, as following: i. The Company was making continuous losses resulting in the complete erosion of the Company’s paid-up capital. The Company’s bankers agreed to sanction Rs. 110 lakh whereas the total requirement of funds was Rs. 312 lakh. The objection of the bank was mainly that the Company had become a sick unit requiring reference to the Board for Industrial and Financial Reconstruction (BIFR). ii. Company sought contributions from the Directors in the form of unsecured loans which could be converted into equity at a future date, in case the Company could not service the loans. iii. Company received Rs. 2.02 crores on various dates through cheque/bank transfers from four Directors of the Company, viz. Mr. C.P. Jose, Mr. P.D. Jose, Mr. A.J. Pavoo and Mr. K. Aelias. iv. Company incurred arrears of interest, net of taxes, payable to the aforesaid directors, of Rs. 10,57,500, which when added to the original loan of Rs. 2.02 crores stood at Rs. 2,12,57,500. Board decided to convert the loans into equity by making preferential allotment of 170060 equity shares to the four directors. However, two shareholders of the Company filed a Petition under section 397 and 398 of the Companies Act, 1956 challenging the said allotment. Thereafter, the Company Law Board (CLB), granted an ex parte Order restraining the Company from proceeding with the said preferential issue. v. In the Notice of the Annual General Meeting held on September 28, 2015 the Company proposed to move a resolution to issue unsecured FCDs aggregating Rs.

Order in the matter of The Canning Industries Cochin Limited

4.8225 crores, to all existing shareholders at the rate of 100 debentures per shareholder, with no right of renunciation. However, the issue was not successful and the Company could collect only Rs. 83 lakh by allotting to 332 persons on December 10, 2015. Since the Company was in urgent need of funds, and since the Company was authorized to dispose of the unsubscribed portion to the existing shareholders, the Company allotted shares to 3 promoters and collected Rs. 200.50 lakh. vi. The Company never intended to violate the Companies Act or the Rules made thereunder in relation to the FCD issue. The FCDs were issued only to the existing shareholders of the Company. 13. Vide letter dated February 8, 2018, SEBI granted an opportunity of personal hearing to the Noticees on March 20, 2018. The said letter was delivered to the Company. Vide letter dated February 21, 2018 the Company confirmed its presence for the personal hearing on the said date. 14. Hearing and submissions: CAICO appeared through its authorized representative, Mr. Srikant Mohan, Practicing Company Secretary and Mr. Thomas P. T., General Manager of the Company, and made inter alia, the following oral submissions in line with its earlier reply: a. Since the Company was not able to repay the loan owed to its Directors, the same was proposed to be converted into equity shares.

This was challenged by some shareholders of the Company before the Kerala High Court/NCLT/CLB on the ground that the directors/promoters were trying to increase their shareholding in the company. In September 2014, these shareholders obtained an interim stay from the Kerala High Court/NCLT/CLB, Chennai stating that the company cannot make preferential allotment/issue which would increase the shareholding of the board of directors/management of the company. b. Therefore, in 2015, the company did not have any option except to go through with the issue of FCDs which would not increase the shareholding of promoters/directors. The director’s/promoter’s intention of this issue was the wider participation of the Order in the matter of The Canning Industries Cochin Limited shareholders and not to increase their shareholding. It was decided to issue 100 debentures per shareholders for Rs. 250/- per debenture. The total no. of shareholders are 1929 and total no. of FCDs offered were 1,92,900. c. Before the issue of FCDs, the shareholders of the Company had again approached the Kerala High Court/NCLT, Chennai challenging the aforesaid issue.

The Company stated that NCLT, Chennai confirmed that the Company could go ahead with the alleged issue and complete the issue. d. The Company/directors/promoters had followed the spirit of law. The scheme was so designed to comply with the Kerala High Court order i.e. the shareholding of the promoters/directors should not be increased. Further, issue of FCD was a private placement and was a preferential issue. 15. The company was advised to submit the following documents: i. Copy of Kerala High Court Order imposing restriction on the Company from making preferential allotments which would increase the shareholding of the board of directors/management of the company. ii. Copy of order from NCLT, Chennai confirming that the Company can go ahead with the allotment of FCDs. iii. Proof/evidence to show that the application for issuance of FCDs were made individually in the name of persons/shareholders and not a blank application form and also not to public. iv. Proof/evidence to show that the company’s intention was not issue the FCDs to third party other than the shareholders. 16. It is noted that the past and present directors of CAICO viz. Mr. Chiriankandath Palu Jose, Mr. Parappilly Varunny Davis, Mr. Paul Thalokaren Timothy, Mr. Mazhuvancheriparambath Kuriakose Aelias, Mr. Chiriyankandath George Joy, Mr. Jessy Pavoo, Mr. Vadakken Raphael, Mr. Paul Ovungal Raphael and Mr. Ovungal Pyloth Rappai and the Debenture Trustee, viz. Mr. Joseph Chiramel have failed to appear for the personal hearing.

Order in the matter of The Canning Industries Cochin Limited

17. Vide replies dated April 4 and 5, 2018, the Company has filed its additional written submissions, wherein the following, inter alia, have been submitted, i. It was submitted that the FCDs were issued as “preferential offer” as per section 62(1) (c) of the Companies Act, 2013, as the shares were offered to the existing members of the Company for cash and that it is not a private placement as the offer of securities is not to a select group of persons, but to the entire existing shareholders or members of the Company. It was submitted that CAICO had passed a Special Resolution dated September 28, 2015 under section 62(3) of the Companies Act, section 71 and other applicable provisions of Companies Act, 2013. As per section 62(3) of the Companies Act, if the increase in the subscribed capital of a company is caused by the exercise of an option, as a term attached to debentures issued or loans raised by the company, to convert such debentures or loans into shares of the company, then the stipulations as per provisions of section 62(1)(c) will not apply; provided, that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or raising of loan, by a Special Resolution. It was submitted that, in view of this, the allotments should be considered a “preferential offer” in compliance with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014. ii. The Board of Directors intended to ensure that all 1929 shareholders would invest in the FCDs and the Board of Directors never intended for the FCDs to be issued to the public. Therefore, the Board passed a resolution to ensure that in case of under-subscription, the FCDs shall be disposed of by allotting them only to existing shareholders. The application form and prospectus were sent only to the members of the Company. Copies of postal receipts of the same were provided as annexures. iii. CLB passed an Order on October 20, 2014 in the Petition No. CP/57/2014, restraining the Company from making preferential allotments of 1,70,600 equity shares against conversion of loan. Copy of the said Order was provided as annexure. Further, in application no. CA 1/2015 in Original Petition CP/57/2014,

Order in the matter of The Canning Industries Cochin Limited

CLB vide order dated September 21, 2015 dismissed the prayer for a grant of stay on the issue of 1,92,900 unsecured FCDs by the Company. Therefore, the Company was allowed to proceed with the issue of the FCDs. Copy of the said Order was provided as annexure. Against the said Order, appeal was preferred before the Hon’ble High Court of Kerala which was also dismissed vide order dated October 15, 2015, and wherein it was held that the CLB Order cannot be branded as arbitrary or illegal. Copy of the said Order was provided as annexure. Based on the aforesaid Orders, CAICO proceeded with the issuance of FCDs. iv. The Petitioners in the aforesaid Company Petitions and Appeal before the High Court of Kerala, who are also shareholders of CAICO, are members of a cartel based in Thrissur, Kerala, who try to corner shares and acquire companies. 18. I have considered the allegations and materials available on record. On perusal of the same, the following issues arise for consideration. Each question is dealt with separately under different headings. (1) Whether the company came out with the Offer of FCDs as stated in the interim order. (2) If so, whether the said issues are in violation of section 40 of the Companies Act, 2013 read with the relevant provisions of ICDR Regulations. (3) Whether appointment of Mr. Joseph Chiramel as the Debenture Trustee by CAICO is in violation of Section 12(1) of SEBI Act and regulation 7 of the Debenture Trustees Regulations (4) If the findings on Issue No.2 and 3 are found in the affirmative, who are liable for the violation committed?

ISSUE No. 1- Whether the company came out with the Offer of FCDs as stated in the interim order. 19. I have perused the interim order dated August 9, 2017 for the allegation of Offer of FCDs. 20. I have also perused the documents/ information obtained from the 'MCA 21 Portal' other documents available on records. It is noted that CAICO has issued and allotted FCDs to Order in the matter of The Canning Industries Cochin Limited

335 investors during the financial years 2015-2016 and raised an amount of Rs. 2,83,50,000. From the replies of the Company dated April 4, 2018, I note that the Company has stated that the Board of Directors allotted 33,200 FCDs to 332 applicants, aggregating to Rs. 83,00,000/- on December 10, 2015 and allotted 80,200 FCDs to 3 Directors, aggregating to Rs. 2,00,50,000/- on December 16, 2015. 21. I therefore conclude that CAICO came out with an offer of FCDs as outlined above. ISSUE No. 2- If so, whether the said issues are in violation of section 40 of the Companies Act, 2013 read with the relevant provisions of ICDR Regulations. 22. The provisions alleged to have been violated and mentioned in Issue No. 2 are applicable to the Offer of FCDs made to the public. Therefore the primary question that arises for consideration is whether the issue of FCDs is ‘public issue’. At this juncture, reference may be made to section 42 of the Companies Act, 2013 and Rule 14(2)(b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014: Section 42 of Companies Act, 2013: “ (1) Without prejudice to the provisions of section 26, a company may, subject to the provisions of this section, make private placement through issue of a private placement offer letter. (2) Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, [excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed. Explanation I.—If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than

Order in the matter of The Canning Industries Cochin Limited the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter. Explanation II— For the purposes of this section, the expression— (i) "qualified institutional buyer’’ means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 as amended from time to time. (ii) "private placement" means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section. (3) No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company. (4) Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with.”

Rule 14(2) (b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014:

“(2) A company shall not make private placement of its securities unless- (b) such offer or invitation shall be made to not more than 200 persons in the aggregate in a financial year.” 23. The following observations of the Hon'ble Supreme Court of India in Sahara India Real

Order in the matter of The Canning Industries Cochin Limited

Estate Corporation Limited & Ors. v. SEBI (Civil Appeal no. 9813 and 9833 of 2011) (hereinafter referred to as the “Sahara Case”), while examining the scope of Section 67 of the Companies Act, 1956, which corresponds to the aforesaid section 42 of the Companies Act, 2013, are worth consideration:- “Section 67(1) deals with the offer of shares and debentures to the public and Section 67(2) deals with invitation to the public to subscribe for shares and debentures and how those expressions are to be understood, when reference is made to the Act or in the articles of a company. The emphasis in Section 67(1) and (2) is on the “section of the public”. Section 67(3) states that no offer or invitation shall be treated as made to the public, by virtue of subsections (1) and (2), that is to any section of the public, if the offer or invitation is not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation or otherwise as being a domestic concern of the persons making and receiving the offer or invitations. Section 67(3) is, therefore, an exception to Sections 67(1) and (2). If the circumstances mentioned in clauses (1) and (b) of Section 67(3) are satisfied, then the offer/invitation would not be treated as being made to the public.

The first proviso to Section 67(3) was inserted by the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000, which clearly indicates, nothing contained in Sub-section (3) of Section 67 shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more. … Resultantly, after 13.12.2000, any offer of securities by a public company to fifty persons or more will be treated as a public issue under the Companies Act, even if it is of domestic concern or it is proved that the shares or debentures are not available for subscription or purchase by persons other than those receiving the offer or invitation.”

Order in the matter of The Canning Industries Cochin Limited

24. Section 42(1) of the Companies Act, provides for the stipulations of a private placement stating that a company may make a private placement by issuing a private placement offer letter. Section 42(2) of the Companies Act, 2013 provides that such offer, to be considered a private placement, shall be made to persons not exceeding fifty, or such higher number as may be prescribed, in a financial year. The said provision provides exclusions to qualified institutional buyers and employees of the Company being offered securities under a scheme of employees stock option as per section 62(1)(b) of the Companies Act, 2013. Explanation 1 to Section 42(1) of the Companies Act, 2013 reiterates that if a company, listed or unlisted, makes an offer to allot or allots, securities to more than the prescribed number of persons, then irrespective of whether the Company has received payment for the securities or whether or not the company intends to list its securities on any recognized stock exchange in or outside India, the offer shall be deemed to be an offer to the public. Rule 14(2)(b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, prescribes that unless a company makes an offer of securities to less than 200 persons in a financial year, the company cannot be said to have made a private placement of its securities.

Under such circumstances, where a company has made an offer to allot securities to more than 200 persons in a financial year, whether the company intends to lists its securities on a recognized stock exchange, the offer of securities is deemed to be an offer to the public and is accordingly governed by the provisions of Part I of the Chapter III of Companies Act, 2013. Section 42(4) of the Companies Act, 2013 states that any offer which is not in compliance with the provisions of section 42 shall be treated as a public offer and all provisions of the Companies Act, 2013, the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, will be required to be complied with by the Company. 25. It was also submitted that, CAICO had passed a Special Resolution dated September 28, 2015 under section 62(3), section 71 and other relevant provisions of the Companies Act, 2013 for issuing FCDs. It was submitted that as per section 62(3) of the Companies Act, if the increase in the subscribed capital of a company is caused by the exercise of an option,

Order in the matter of The Canning Industries Cochin Limited as a term attached to debentures issued or loans raised by the company, to convert such debentures or loans into shares of the company, then the stipulations as per provisions of section 62 will not apply; provided, that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or raising of loan, by a Special Resolution. With regard to the said submission, I am of the view that the said issue is of no relevance for the present case, as section 62(3) applies only when increase of the subscribed capital of a company is caused by the exercise of an option to convert debentures into shares of the Company. In this case, the trigger for action is not of exercising an option to convert a debenture into shares of the Company, but that of offer of the debenture itself. 26. I note that CAICO, vide its reply dated April 4, 2018 has also submitted that when the FCDs are converted into equity shares they would be considered as “preferential offer” as per section 62(1)(c) of the Companies Act, 2013, as the securities were offered to the existing members of the Company for cash and that the offer of securities is to the entire existing shareholders or members of the Company.

During the personal hearing CAICO has submitted that the issuance of FCDs can be said to be a “preferential offer”. It was further submitted that when the FCDs are converted into equity shares then it would be considered a preferential allotment as per section 62(1)(c) of the Companies Act, 2013. I am of the view that the treatment of FCDs as preferential allotment, once they are converted into equity of CAICO, does not have any bearing in the present matter which is seeking to determine whether the issuance of the FCDs per se is deemed to be a ‘public issue’ or not. Therefore, it is appropriate to determine whether the offer of FCDs by CAICO to its existing shareholders is required to adhere to any limit of number of investors beyond which it would be deemed to be a ‘public issue’. On an analysis of the provisions of section 62(1)(c) of the Companies Act, 2013, I find that it provides that a company authorized by a Special Resolution is allowed to make preferential allotment of its shares. However, in the present case, CAICO had issued FCDs, and the relevant provision of law with respect to preferential allotment of debentures is Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.

Order in the matter of The Canning Industries Cochin Limited

27. In this regard, it is pertinent to peruse the provision of the said Rule: “Issue of shares on preferential basis 13. (1) For the purposes of clause (c) of sub-section (1) of section 62, if authorized by a special resolution passed in a general meeting, shares may be issued by any company in any manner whatsoever including by way of a preferential offer, to any persons whether or not those persons include the persons referred to in clause (a) or clause (b) of sub-section (1) of section 62 and such issue on preferential basis should also comply with conditions laid down in section 42 of the Act: Provided that in case of any preferential offer made by a company to one or more existing members only, the provisions of sub-rule (1) and proviso to sub-rule (3) of rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 shall not apply: … Explanation.—For the purposes of this rule, (i) the expression 'Preferential Offer' means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities; (ii) the expression, "shares or other securities" means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date. …” 28. On perusal of the aforesaid, I am of the view that as per Rule 13 and Explanation (i) to the said Rule 13, covers a scenario of Company making “preferential offer” with respect to shares and other securities to a select group of persons on a preferential basis by way of a Special Resolution, which does not include public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or Order in the matter of The Canning Industries Cochin Limited bonus shares or depository receipts.

As per Explanation (ii) to the Rule 13, the expression “Shares or other securities” means, inter alia, equity shares, fully convertible debentures (FCDs), etc. The Rule 13(1) of Companies (Share Capital and Debentures) Rules, 2014, provides that the preferential offer has to comply with the requirements of section 42 of the Companies Act, 1956. One of such requirement under section 42 of Companies Act, 2013 read with Rule 14(2)(b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 is the limit of 200 allottees. However, the proviso to the aforesaid Rule 13, stipulates that if such preferential offer is made by a Company to its existing members only, the provisions of sub-rule(1) of Rule 13 need not be complied with. In other words, for a preferential offer of shares and securities to the existing members, the prescribed limit of 200 persons is not applicable. The aforesaid provisions when read in conjunction with each other, in effect means that if a Company, being authorized by a Special Resolution, has made preferential offer of Fully convertible Debentures to its existing members and shareholders, then the company need not fulfil the conditions laid down in section 42 of the Companies Act, 2013. 29. With respect to Rule 14(2)(b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, prescribing 200 persons in a financial year as the limit to the number of allottees, is applicable to private placements under section 42 of the Companies Act, 2013. Under Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, the limit of 200 persons in a financial year and other requirements under section 42 is applicable for preferential allotment also.

However, as discussed earlier in the case of a preferential allotment of FCDs to one or more of the existing members of a company the requirement of section 42 of Companies Act, 2013 is not required to be complied with. 30. I note that CAICO had passed a Special Resolution under section 71 dated September 28, 2015 in respect of issuance of FCDs. Since the issuance of FCDs are covered under the Proviso to Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, it is appropriate that the proof of the offer having been made to existing shareholders has to be provided by the Company itself. Accordingly, at the time of personal hearing, CAICO was advised to submit the proof/evidence that the application for issuance of FCDs were made

Order in the matter of The Canning Industries Cochin Limited individually in the name of persons/shareholders and not a blank application form and also not to public was sought for. 31. On perusal of the prospectus issued in respect of this offer of FCDs, I note that the date of opening of the issue is November 11, 2015, and the prospectus further states that only members holding equity shares were eligible for the allotment. Further, “Explanatory Statement” annexed with the Notice for Special Resolution dated September 28, 2015, states that FCDs were to be offered to “every share holder holding equity shares on the record date to be fixed by the Board of Directors”. Further, vide letter dated April 5, 2018, CAICO submitted certificates dated November 11, 12, 13 and 14, 2015 received from the Head Post Office towards the bulk booking of the applications and prospectus in connection with the issuance of FCDs sent to the shareholders of the Company. CAICO also provided Postal receipts dated November 12, 13, and 14, 2015 which identified the names and addresses of the Addressees. On tallying the said Postal receipts against the list of names of shareholders along with addresses, I note that the names of the Addressees brought on record are appearing in the list of shareholders of the Company. In view of the aforesaid, there is persuasive evidence to indicate that the Offer of FCDs was made individually to existing shareholders of the Company. 32. In the present case, in light of the legal position discussed in paragraphs 28 to 30, CAICO is not required to ensure compliance with the limit of allottees as applicable in case of private placement of securities. Therefore, I find that CAICO has not made a ‘public issue’ of FCDs. 33. The provisions of section 40 of the Companies Act, 2013 which are required to be complied with in case of a ‘public issue’ are given below: “40. Securities to be dealt with in stock exchanges.— (1) Every company making public offer shall, before making such offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges. (2) Where a prospectus states that an application under sub-section (1) has been made,

Order in the matter of The Canning Industries Cochin Limited such prospectus shall also state the name or names of the stock exchange in which the securities shall be dealt with. (3) All monies received on application from the public for subscription to the securities shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than— (a) for adjustment against allotment of securities where the securities have been permitted to be dealt with in the stock exchange or stock exchanges specified in the prospectus; or (b) for the repayment of monies within the time specified by the Securities and Exchange Board, received from applicants in pursuance of the prospectus, where the company is for any other reason unable to allot securities. (4) Any condition purporting to require or bind any applicant for securities to waive compliance with any of the requirements of this section shall be void. (5) If a default is made in complying with the provisions of this section, the company shall be punishable with a fine which shall not be less than five lakh rupees but which may extend to fifty lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both. (6) A company may pay commission to any person in connection with the subscription to its securities subject to such conditions as may be prescribed.” 34. Since, the present issuance of FCDs by CAICO is not a ‘public issue’, the Company is not mandated to comply with the requirements of 'public issue' under Part I of Chapter III of the Companies Act, 2013. Accordingly, I find that CAICO has not violated section 40 of the Companies Act. 35. Since the prima facie finding as per the interim order that CAICO has made a public issue of FCDs is determined to be negative, the ICDR Regulations are also not applicable to the instant offer of FCDs.

ISSUE No. 3-Whether appointment of Mr. Joseph Chiramel as the Debenture Trustee

Order in the matter of The Canning Industries Cochin Limited by CAICO is in violation of Section 12(1) of SEBI Act and regulation 7 of the Debenture Trustees Regulations? 36. I have perused the Prospectus filed by the Company with the RoC-Kerala. I find that CAICO had appointed Mr. Joseph Chiramel as the debenture trustee. The prospectus also contains a copy of the signed consent letter from Mr. Joseph Chiramel for acting as the debenture trustee. I note that Mr. Joseph has not obtained a certificate of registration from SEBI to act as a Debenture Trustee under section 12(1) of the SEBI Act. 37. In this regard, we may note the provisions of section 24 of the Companies Act, 2013 which states: “24. Power of Securities and Exchange Board to regulate issue and transfer of securities, etc.— (1) The provisions contained in this Chapter, Chapter IV and in section 127 shall,— (a) in so far as they relate to — (i) issue and transfer of securities; and (ii) non-payment of dividend, by listed companies or those companies which intend to get their securities listed on any recognised stock exchange in India, except as provided under this Act, be administered by the Securities and Exchange Board by making regulations in this behalf; (b) in any other case, be administered by the Central Government. … (2) The Securities and Exchange Board shall, in respect of matters specified in subsection (1) and the matters delegated to it under proviso to sub-section (1) of section 458, exercise the powers conferred upon it under sub-sections (1), (2A), (3) and (4) of section 11, sections 11A, 11B and 11D of the Securities and Exchange Board of India Act, 1992 (15 of 1992).”

Order in the matter of The Canning Industries Cochin Limited

38. On perusal of the aforesaid, it is clear that SEBI has jurisdiction to exercise its powers conferred upon it under sub-sections (1), (2A), (3) and (4) of section 11, sections 11A, 11B and 11D of the SEBI Act, in respect of matters specified under sub-section (1) of section 24, by listed companies or companies intending to be listed. Since it has been determined that the issuance of FCDs by CAICO cannot be deemed to be a public issue, there is no deemed intention of listing on a recognized stock exchange by the Company. Since, the Company is not listed, and there is no deemed intention to list by virtue of the issue being a deemed public issue, the impugned issue does not come within the jurisdiction of SEBI. 39. Therefore, the determination as to the question of non-compliance of Section 12(1) of SEBI Act and regulation 7 of the Debenture Trustees Regulations by Mr. Joseph Chiramel does not arise. ISSUE No. 4- If the findings on Issue No.2 and 3 are found in the affirmative, who are liable for the violation committed? 40. As has been determined in Issue no. 2, CAICO has not violated section 40 of the Companies Act. Since the prima facie allegations against the Company and its past and present directors are not sustained, the directions issued with respect to CAICO and its past and present directors, vide interim order dated August 9, 2017, need not be continued and hence are liable to be revoked. 41. In view of the observations in Issue no. 3, Mr. Joseph Chiramel, the directions issued with respect to Mr. Joseph Chiramel, vide interim order dated August 9, 2017, need not be continued and hence are liable to be revoked. 42. In view of the aforesaid observations and findings, I, in exercise of the powers conferred under section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11, 11(4), 11A and 11B of the SEBI Act, hereby revoke the directions issued in respect of CAICO and its past and present directors, viz. Mr. Chiriankandath Palu Jose (PAN: ACPPJ8027R), Mr. Parappilly Varunny Davis (PAN: ABSPD2248Q), Mr. Paul Thalokaren Timothy (PAN: AENPP6875K), Mr. Mazhuvancheriparambath Kuriakose

Order in the matter of The Canning Industries Cochin Limited

Aelias (PAN: ACPPA1949P), Mr. Chiriyankandath George Joy (PAN: ABSPJ1073H), Mr. Jessy Pavoo (PAN: ALXPP7358N), Mr. Vadakken Raphael (PAN: ABRPV9569B), Mr. Paul Ovungal Raphael (PAN: AEAPP2327R) and Mr. Ovungal Pyloth Rappai (PAN: ACKPR9190A), and Mr. Joseph Chiramel, Debenture Trustee. 43. Copy of this Order shall be forwarded to the recognised stock exchanges and depositories and registrar and transfer agents for information and necessary action. 44. Needless to say, whether all the requirements relating to the impugned preferential allotments made by CAICO have been complied with, it would be appropriate that the matter may be referred to the Ministry of Corporate Affairs for its consideration. Accordingly, a copy of this Order shall also be forwarded to the Ministry of Corporate Affairs / concerned Registrar of Companies, for their information and necessary action, if warranted, with respect to the Company and the individuals.

DATE: July 12th, 2018 MADHABI PURI BUCH PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Order in the matter of The Canning Industries Cochin Limited