[Opinion] ROC Penalizes Co. Its Directors for Allotting Securities Without Approval Under ESOP Scheme Before the Vesting Period of One Year

Prof R Balakrishnan – [2024] 161 taxmann.com 273 (Article)

Background of the case

1. In a recent adjudication order passed by the Registrar of Companies, Gujarat, Dadra & Nagar Haveli, in respect of Ms Krazzy Fin Private Limited, the company and its directors were penalized for violations of section 62(1)(b) of the Companies Act 2013. The order, was passed on 27th March 2024, highlights the regulatory actions taken against the company and its directors in default. The violation committed by the directors and the company was that they had allotted equity shares in excess of the shares approved for allotment under the company’s ESOP scheme and the allotment was done even before the vesting period of mandatory one year as required under the provisions of Rule prescribed under the Companies (Share Capital and Debentures) Rules 2014.

The company, in this case had filed a suo-moto compounding application stating that the company had inadvertently allotted 216 equity shares before the completion of the vesting period of one year resulting into a violation of section 62(1) (b) of the Companies Act 2013. While the company sought compounding for the offense, it was deemed by the Registrar of Companies/Adjudication Officer that the same was not maintainable as it fell under the adjudication of penalty jurisdiction. Accordingly the Registrar of Companies/Adjudication Officer proceeded on this matter the adjudication proceedings and passed an order penalizing the company and its directors for the violation committed by them. The company being a small company, the company and its directors ended up paying a penalty of Rs.2.75 lakhs. Let us go through this case in details in order to understand the provisions of the Act read with the relevant rules and also the key findings and observations of the regulators which had finally resulting into the adjudication order.

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