Market regulator Securities and Exchange Board of India (SEBI) has directed Katalyst Software Services Ltd (KSSL) to refund money collected from investors through non-convertible debentures (NCDs) in FY17–18, along with 15% annual interest, after finding multiple violations in the debt issuance process. The regulator has also barred the former promoter, Rahul Dilip Shah, for six months from accessing the securities market.
KSSL, engaged in software products, enterprise resource planning (ERP), logistics, manufacturing and e-commerce services, was promoted by Mr Shah and Trupti Pandit. The regulatory probe was initiated after a complaint filed in August 2023 by Mr Shah. He alleged collusion between Karvy Capital Ltd and KSSL’s majority shareholders to create a default, invoke pledged shares, restructure debenture terms, and deprive him of voting rights.
Mr Shah also raised concerns regarding the cancellation of securities worth Rs300 crore and the denial of information on his pledged shares. He claimed that a scheme of arrangement was proposed to transfer KSSL liability to Nova Techset Ltd which further weakened his position as a shareholder and creditor.
SEBI’s investigation revealed that in July 2017, the KSSL board approved the issuance of secured NCDs worth Rs 75 crore. These were allotted to Karvy Capital Ltd, Demeter Portfolio through a private placement in August 2017. At first glance, the transaction appeared to be in compliance with Section 42 of the Companies Act.
However, within six months, Karvy Capital transferred the debentures to as many as 699 investors through off-market transactions. Since offers made to more than 200 persons qualify as a public issue under the Companies Act, SEBI held that KSSL had effectively conducted a disguised public offer without filing a prospectus or listing the securities.
The regulator observed that Karvy Capital acted only as a conduit, while the real intent was to distribute securities to a larger group of investors. By structuring the issue in this way, KSSL and its promoters bypassed disclosure obligations and compromised investor protection norms that lie at the heart of capital market regulation.
Mr Shah contested the proceedings, arguing that the SEBI show-cause notice (SCN), issued in October 2024, was delayed by seven years since the allotments were made in 2017. SEBI rejected this claim, clarifying that the matter came to light only after his own complaint in 2023 and that the SCN was issued within a year of that complaint.
His request to inspect additional documents and cross-examine other directors was also turned down. SEBI noted that all relevant documents had already been provided with the SCN and that no adverse reliance had been placed on statements of other directors.
His further argument that Karvy Capital, Catalyst Trusteeship Services and certain majority shareholders should have been included as parties to the case was dismissed, as the primary responsibility for compliance lay with KSSL and its directors managing the issuance.
SEBI concluded that KSSL, as the company in question, was directly liable for the violations. Mr Shah, as promoter-director who signed the private placement offer letter, debenture trust deed and indicative term-sheet, was deemed the ‘officer in default’ and personally liable. Ms Pandit, though a promoter, had no managerial role in the issuance process and was therefore not held responsible. An independent director, who resigned in March 2018, was also absolved, while directors appointed later were instructed to ensure compliance with SEBI’s future directions.
The regulator further clarified that arguments about intent or ‘mens rea’ were irrelevant in this context since SEBI’s proceedings are civil in nature. The defence that only the company could be penalised under Section 42 was dismissed, with SEBI emphasising that the company and responsible officers fall within its jurisdiction.
By disguising a public issue as a private placement, KSSL and its director misled investors. SEBI order directs KSSL and Mr Shah to refund the funds raised through the NCD issuance, along with 15% annual interest, while also prohibiting them from accessing the securities market until the repayment is complete.
