Startup’s Private Placement Filing Error Leads to Reduced Penalty
A Hyderabad-based Regional Director has overturned a significant penalty levied on a startup, LOCALBUY TECHNOLOGIES PRIVATE LIMITED, for a procedural lapse related to private placement filings. The original penalty, imposed by the Registrar of Companies (ROC), Vijayawada, for an alleged violation of Section 42(10) of the Companies Act, 2013, was deemed disproportionate after an appeal. The company, identified as a startup, was found to have largely adhered to the requirements of Section 42, with the core issue being the submission of an incorrect attachment with Form MGT-14.
Understanding the Alleged Violation and the Ruling
The crux of the matter revolved around the filing of Form MGT-14, which companies use to file various resolutions and agreements with the ROC. In this instance, the company attached an incorrect document to PAS-4, a form related to private placement offers. However, a key observation by the Regional Director was that the requirement to file PAS-4 with the ROC was removed following an amendment to Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, effective from August 7, 2018. Since LOCALBUY TECHNOLOGIES PRIVATE LIMITED is a startup, the provisions for levying a lesser penalty under Section 446B of the Companies Act, 2013, were deemed applicable.
The authority concluded that while the company did file PAS-4 with a defective attachment, this constituted a procedural oversight rather than a fundamental violation of Section 42. The original penalty under Section 42(10), which can be substantial, was therefore set aside. This section stipulates that companies making offers or accepting monies in contravention of private placement rules can face penalties up to the amount raised or ₹2 Crore, whichever is lower, and may be required to refund monies with interest.
Revised Penalties and Next Steps
In light of the technical nature of the default and the company’s status as a startup, the Regional Director modified the penalty. Instead of the original charge under Section 42, a nominal penalty was imposed under Section 450 read with Section 446B of the Companies Act, 2013. This resulted in a penalty of ₹5,000 each for the company and its directors.
The specific penalties imposed are:
- LOCALBUY TECHNOLOGIES PRIVATE LIMITED: ₹5,000
- Neeraj Menta, Director: ₹5,000
- Sailesh Tulshan, Director: ₹5,000
- Anil Thontepu Naga Purushithama: ₹5,000
The appellants are directed to rectify the identified default and pay the imposed penalty within 60 days of receiving the order. Payment is to be made through the Ministry of Corporate Affairs website’s ‘Appeal dashboard’, with proof of payment uploaded to the same portal. The penalty is to be paid from the personal income of the individuals involved.
The ROC Vijayawada has been instructed to initiate action as per Section 454(8) of the Companies Act, 2013, should the penalty remain unpaid within the stipulated timeframe. The appeal, filed on February 26, 2025, was heard and adjudicated by the Regional Director, Hyderabad, on April 22, 2026.
Build a better, regular income stream with LAMORC DIGITAL. Join as our partner today.
Readers should treat this as a tax and compliance update, not as personal advice.
This article is for general information based on available source information. It should not be considered legal, tax, investment, or financial advice.