Unlisted firms barred from privately raising funds from more than 49 persons

The ministry of corporate affairs has tightened norms for unlisted companies raising private capital through private placement of debt and equity in order to check a repeat of instances like the Sahara Group raising funds from the public at will.

Two unlisted companies belonging to the Sahara Group had issued optionally fully convertible debentures (OFCD) to millions of investors to raise crores of rupees from private investors.

The companies had issued OFCDs without conforming to the listing norms issued by the Securities and Exchange Board of India (SEBI).

The ministry of corporates affairs has tightened the norms contained in Unlisted Public Companies (preferential allotment) Rules, 2003.

Accordingly, hereafter no equity or quasi-equity or hybrid instruments such as convertible debentures can be issued without complying with the stringent norms prescribed.

They include restricting the issue and allotment to not more than 49 persons, special resolution at a general body meeting in favour of such allotment in terms of a specific provision to that effect in the articles of association and mandatory payment for these instruments by cheque or demand draft by investors.

They would be guilty of violating SEBI's public issue norms.