No Violation of Private Placement Rules: RD Hyderabad Grants Relief to Localbuy Technologies

The company named Localbuy Technologies Private Limited actually followed all private placement rules, hitting them with the harsh penalty under Section 42(10) did not make sense. Instead, it was seen as a technical mistake and the Director imposed only a small penalty under Section 450 with Section 446B of the Companies act giving the start-up some relief.

Fact of the case

Localbuy Technologies Private Limited appealed to the Regional Director, Hyderabad, under Section 454 of the Companies Act. They challenged a penalty order from the Registrar of Companies (ROC), Vijayawada, dated 30.12.2024. ROC had fined the company for allegedly breaking Section 42, which deals with private placement of securities.

Localbuy, being a start-up, said it followed every step set out under Section 42 when raising funds privately. The issue was mainly about them filing an incorrect or defective PAS-4 attachment with Form MGT-14. Plus, after a rule change on 07.08.2018, there was no legal requirement to file PAS-4 with the ROC, yet the company did it anyway.

The company argued that slapping them with the heavy penalty under Section 42(10) made no sense, since there was no real breach of the private placement rules.

Issue of the case

The main questions before the Regional Director were:

— Did the company break Section 42 on private placement?
— Does filing an incorrect PAS-4 mean you’re punished under Section 42(10), or just a general penalty?
— Can the company get the reduced penalty meant for start-ups under Section 446B?

Judgement

The Regional Director looked at the facts and said:
Localbuy did not violate Section 42 of the Company act they followed the private placement process correctly. The only problem was attaching the wrong PAS-4, but after the recent rule change, PAS-4 wasn’t even required to be filed. So, slapping a big penalty under Section 42(10) was out of line.

The Director concluded that at worst, this was a technical or procedural slip. With no specific penalty for this, the case comes under Section 450 (General Penalty) and Section 446B (Lesser Penalty for Start-ups).

The heavy penalty under Section 42 was removed. Instead of this a smaller penalty of Rs 5000 each was set for the company and its director.

In the end, the appeal went through, and the ROC’s order got updated with a lighter touch.