Section 111, as set out above, was incorporated in the Companies Act subsequent to the report of a committee appointed to consider amendments to the Companies Act. The Sachar Committee, as it came to be called, said:

"Under the existing law, there are two remedies open to as aggrieved person—to file an appeal under section 111, or to apply to the court for rectification of the share register under section 155. We think that these two remedies should now be assimilated and provision be made (at one place) for a person aggrieved (including any person aggrieve by a refusal of the board of directors to register a transfer or transmit of shares) to apply to the Company Law Board—as proposed to be constituted—for rectification of the share register on any of the grounds mentioned in sub-clause (a) or (b) of sub-section (1) of the present section 155 Our proposals are—

Accordingly, we would recommend as follows:

Sections 111 and 155 should be assimilated into a single statutory provision."

Section 155, as it read before May 31, 1991, entitled a person aggrieved or any member of a company or a company to apply to the court for rectification of the company's register of members if the name of any person was, without sufficient cause, entered in it or, after having been entered in it, was, without sufficient cause, omitted there from or default was made or unnecessary delay took place in entering on it the fact of any person having become, or ceased to be, a member. The court was entitled to order rectification of the register and to direct the company to pay the damages, if any, sustained by a party aggrieved. The court was entitled to decide any question relating to the title of any person Who was a party to the application to have his name entered in or omitted from the register. An appeal from the order of the court was provided for.

It will be seen that the Company Law Board now exercises the powers that were exercisable by the court under section 155. It is entitled to direct rectification of the register and the payment of damages by the company. It is entitled to decide any question relating to the title of any person who is a party to the application to have his name entered in or omitted from the register and to decide any question which it is necessary or expedient to decide in this connection. An appeal to the High Court against any decision or order of the Company Law Board on a question of law is available to any person aggrieved thereby under the provisions of section 10F.

Whereas sub-sections (2) and (3) of section 111 term the pleading that the person aggrieved has to file before the Company Law Board an appeal", sub-section (4) requires the person aggrieved to apply, sub-section (5) speaks of it as an "appeal" or an "application", sub-section (7) as an application" and sub-section (10) as an "appeal or application", which shall be made "by a petition in writing". The words "appeal" and "application” in the context of the provisions of section 111 have the same meaning. Plainly, it is an application that has to be made.

The powers under section 155 were exercised by a civil court. Reference may be made to the definition of "court" in the Companies

Act. Section 2(11) defines "court" to mean, with respect to any matter relating to a company, other than any offence against the Companies Act, the court having jurisdiction under the Companies Act with respect to that matter relating to that company. "District Court" is also defined. The definition thereof in section 2(14) is that it is the principal civil court of original jurisdiction in a district, but does not include a High Court in the exercise of its ordinary original civil jurisdiction. Section 10 deals with the jurisdiction of courts and it reads thus:

"Jurisdiction of courts.—(1) The court having jurisdiction under this Act shall be—

(a) the High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situate, except to the extent to which jurisdiction has been conferred on any District Court or District Courts subordinate to that High Court in pursuance of sub-section (2); and

(b) where jurisdiction has been so conferred, the District Court in regard to matters falling within the scope of the jurisdiction conferred, in respect of companies having their registered offices in the district.

(2) The Central Government may, by notification in the Official Gazette and subject to such restrictions, limitations and conditions as it thinks fit empower any District Court to exercise all or any of the jurisdiction conferred by this Act upon the court, not being the jurisdiction conferred—

(a) in respect of companies generally, by sections 237, 391, 394, 395 and 397 to 407, both inclusive;

(b) in respect of companies with a paid-up share capital of not less than one lakh of rupees by Part VII (sections 425 to 560) and the other provisions of this Act relating to the winding up of companies.

(5) For the purposes of jurisdiction to wind up companies, the expression "registered office" means the place which has longest been the registered office of the company during the six months immediately preceding the presentation of the petition for winding up."

The provisions of section 10E of the Companies Act, as they were amended with effect from May 31, 1991, read thus:

"10E. Constitution of Board of Company Law Administration.—(1) As soon as may be after the commencement of the Companies (Amendment) Act. 1988, the Central Government shall, by notification in the Official Gazette constitute a board to be called the Board of Company Law Administration.

(1A) The Company Law Board shall exercise and discharge such powers and functions as may be conferred on it, by or under this Act or any other law, and shall also exercise and is charge such other powers and functions of the Central Government under this Act or any other law as may be conferred on it by the Central Government, by notification in the Official Gazette under the provisions of this Act or that other law."

Reference to the provisions of section 10F has already been made.

It is to be noted that the Company Law. Board performs functions which are administrative, as under sections 224 and 269, and curial, as under section 111.

Contentions:

Mr. Salve, learned counsel for the Canara Bank, who was supported by Mr. J. C. Seth, learned counsel for the Nuclear Power Corporation. submitted that section 9A(1) conferred upon the Special Court the jurisdiction of a civil court "in the wider sense", as including courts exercising the powers conferred upon civil courts. The word "civil" was used in section 9A(1) to contrast the provisions thereof with those of section 9(2), where under the Special Court was given all the powers of a Court of Sessions. The jurisdiction of the Special Court until the coming into force of the Amendment Ordinance, under sections 7, 8 and 9 of the Special Court Act was in respect of criminal matters and the powers of a Court of Sessions had, therefore, been conferred upon it. It was found necessary to confer upon the Special Court the powers of a civil court to deal with the civil matters set out in section 9A(1). Such an interpretation of section 9A was in accord with the legislative intend which was to exclude from the jurisdiction of all courts save the Special Court the matters described In section 9A(1). A clear indication of this was provided by section 9B by reason of which even matters in court relating to arbitration proceedings Concerning causes of action arising out of the matters specified in section 9A(1) were confined to the Special Court. The legislative intent was to place all cases arising out of such causes of action before the Special Court so that a court having knowledge of all the cases would decide all matters provided for in the Special Court Act. A purposive interpretation ought, therefore to be placed upon the provisions of section 9A. Emphasis was laid upon the fact that, by reason of section 111(7) of the Companies Act, the Company Law Board had the power to decide the title to the securities in question before it; the jurisdiction in this behalf conflicted with the jurisdiction exclusively conferred upon the Special Court by section 9A.

Mr. Nariman, learned counsel for Stanchart, submitted that the relevant question was whether the Company Law Board was a "civil court" In his submission it was not. Mr. Nariman drew attention to the provisions of section 13 of the Special Court Act, which stated that the provisions of the Special Court Act would have effect notwithstanding anything contained, inter alia, "in any decree or order of any court, tribunal or other authority", and emphasised the distinction made by Parliament between court, tribunal and other authority. The Company Law Board was not intended to be covered by the provisions of section 9A(1), for those provisions did not exclude the jurisdiction of a tribunal or authority; but only of a court. Secondly, the jurisdiction of the Special Court was in regard to matters arising out of transactions in securities entered into between the stated dates in which a person notified was involved as a broker, intermediary or in any other manner. It would be very difficult for an intending litigant to know whether a person notified had been involved in a transaction relating to securities which he had purchased and which were not being registered in his name, as a broker or intermediary or in any other manner at any time between the stated dates. It was, therefore, inappropriate to hold that such a litigant was bound, to take recourse to the law before the Special Court and not before the Company Law Board under section 111 of the Companies Act, particularly when, by reason of the provisions of the latter provision, he had to more within a specified time limit. The interpretation suggested on behalf of the Canara Bank was not really a purposive interpretation. Attention was, drawn to the provisions of section 4 whereunder the custodian was entitle if satisfied after such inquiry as he thought fit that any contract or agreement entered into between the stated dates in relation to any property of a person notified under section 3(2) had been entered into fraudulently or to defeat the provisions of the Special Court Act, to cancel such contract or agreement whereupon such property stood attached. Even if the Company Law Board under the provisions of section 111 of the Companies Act made any order with regard to any securities, that order would stand at naught if an order relating to the same securities was made under section 4 of the Special Court Act by reason of the fact that, under section 13 of the Special Court Act, the Special Court Act had effect not with standing anything inconsistent therewith contained in any decree or order of any court, tribunal or other authority. In any event, an appeal did not stand transferred to the Special Court under the provisions of section 9A(2), what was filed before the Company Law Board under section 111 of the Companies Act was an appeal.

Discussion:

As to what are courts and tribunals, the leading decision is Harinagar Sugar Mills Ltd. v. Shyam Sundar Jhunjhunwala [1961] 31 Comp Cas 387; [1962] 2 SCR 339 delivered by a Constitution Bench of this court. A person "who held a large number of shares in the appellant-company transferred two blocks of the shares to his son and daughter-in-law. The transferees applied to the company to register the transfers. Purporting to act under the articles of association of the company, the directors resolved not to "register the transfers. The transferees preferred appeals under section 111 of the Companies Act, which, as the provision read at that time, lay, to the Central Government. The Central Government set aside the resolution of the directors and directed the company to register the transfers, but it did not give any reasons for its decision. The company obtained special leave to appeal under article 136 of the Constitution against the decision of the Central Government. The transferees raised the objection that the Central Government, exercising the powers under section 111, was not a tribunal exercising judicial functions and was, therefore, not subject to the appellate jurisdiction of the Supreme Court under article 136. J.C. Shah J. spoke for four of his brethren and held that a person aggrieved by the refusals to register the transfer of shares had two remedies under the Companies Act, namely, to apply to the court for rectification of the register under section 155 or to appeal against the resolution refusing to register the transfer under section 111. It was common ground that in the exercise of the power under section 155, the court had to act judicially to adjudicate upon the right exercised by the directors in the light of the powers conferred upon them by the articles of association. The transferees, however, submitted and were supported by the Union of India, that the authority of the Central Government under section 111, was nevertheless, purely administrative. In an appeal under section 111 there was a lis or dispute between the contesting parties relating to their civil rights, and the Central Government was invested with the power to determine that dispute according to law; it had to consider and decide the proposal and the objections in the light of the evidence and not on grounds of policy or expediency. The power to order registration of transfers had to be exercised subject to limitations similar to those imposed the exercise of the power of the court in a petition under section 155. Those restrictions also applied to the exercise of the power by the Central Government. The Central Government had to decide whether, in exercising their power, the directors were not acting oppressively, capriciously or corruptly or in some way mala fide. The decision had manifestly to stand those objective tests. The exercise of such authority of rendering a decision upon the respective contentions by reason of which the rights of the contesting parties were directly affected was judicial. It was immaterial that the statute which conferred the power upon the Central Government did not expressly set out the extent of the power, the very nature of the jurisdiction required that it be exercised subject to the limitations which applied to the court under section 155. Section all also provided that in the circumstances specified therein reasonable: compensation could be awarded in lieu of the shares. This compensation, which was to be reasonable, had to be ascertained by the Central Government, and reasonable compensation could not be ascertained except by the application of some objective standards of what was just having regard to all the circumstances of the case. The authority of the Central Government to entertain an appeal under section 111 was an investiture of the judicial power of the State. As the dispute between the parties related to civil rights and the Companies Act provided for a right of appeal and made detailed provisions about hearing and disposal according to law. In was impossible to avoid the inference that a duty was imposed upon the Central Government in deciding the appeal to act judicially. Hidayaulah J. delivered a separate but concurring judgment. He said that all-Tribunals were not courts though all courts were tribunals. The word Courts" was used to designate those tribunals which were set up in an organized state for the administration of justice. By administration of justice was meant the exercise of the judicial power of the State to maintain and uphold rights and to punish wrongs. Whenever there was an in fringement of a right or an injury, the courts were there to restore the vinculum juris. When rights were infringed or invaded, the aggrieved party could go and commence a "querela" before the ordinary civil courts These courts were invested with the judicial power of the State and their authority was derived from the Constitution or some Act of Legislature constituting them. Their number was ordinarily fixed and they were ordinarily permanent and could try any suit or cause within their jurisdiction. Their numbers might be increased or decreased but they were almost always permanent and went under the compendious name of "Courts of civil Judicature". There could be no doubt that the Central Government did not come within this class. With the growth of civilizations and the problems modern life, a large number of administrative tribunals had come into existence. These tribunals had the authority of law to pronounce upon valuable rights. They acted in a judicial manner and even on evidence upon valuable rights they were not part of the ordinary courts of civil judicature. They shared the exercise of the judicial power of the State but were brought into existence to implement some administrative policy or to determine controversies arising out of same administrative law. They were very similar to courts but were not courts. When the Constitution spoke of "courts" in articles 136. 227 and 228 and in articles 233 to 237 and the Lists, it contemplated courts of civil judicature but not tribunals other than such courts. This was the reason for using both the expressions in articles 136 and 227. By "court" was meant courts of civil judicature and by "tribunals" those bodies or men who were appointed to decide controversies arising under certain special laws. Among the powers of the State was included the power to decide such controversies. This was undoubtedly one of the attributes of the State and was aptly called the judicial power of the State. In the exercise of this power, a clear division was noticeable. Broadly speaking, certain special matters went before tribunals and the residue went before the ordinary courts of civil judicature. What distinguished them had never been successfully established. A court in the strict sense was a tribunal which was a part of the ordinary hierarchy of courts of civil judicature maintained by the State under its Constitution to exercise the judicial power of the State. These courts performed all the judicial functions of the State except those that were excluded by law from their jurisdiction. The word "judicial" was itself capable of two meanings. It might refer to the discharge of duties exercisable by a judge or by justices in court or to administrative duties which need not be performed in court but in respect of which it was necessary to bring to bear a judicial mind to determine what was fair and just in respect of the matters under consideration. That an officer was required to decide matters before him judicially in the second sense did not make him a court or even a tribunal because that only established that he was following a standard of conduct and was free from bias or interest. Courts and tribunals acted judicially in both senses and in the term "courts" were included the ordinary and permanent tribunals and in the term "tribunals" were included all others which were not so included. The matters would have been simple if the Compares Act had designated a person or persons, whether by name or by office, for the purpose of hearing an appeal under section 111. It would then have been clear that though such person or persons were not "courts" in the sense explained, they were clearly “tribunals” The Companies Act said that an appeal would lie to the Center Government. The court was there fore, faced with the function then the Center Government performed under the Companies Act and Rules was to hear an appeal against the action of the directors. For that purposes a memorandum of appeal setting out the grounds had to be the company, on notice, was required to make representations, if any and so also the other side, and both sides were allowed to tender evident to support their representations. The Central Government by its orders then directed that the shares be registered or need not be registered. The Central Government was also empowered to include in its orders directions as to payment of costs or otherwise. The function of the Central Government was curial and not executive. There was provision for a hearing an a decision on evidence, and that was indubitably a curial function. In functions the Central Government often reached decisions but all its decisions could not be regarded as those of a tribunal. Resolutions of the Government might affect rights of parties and yet they might not be the exercise of judicial power. Resolutions of the Government might be amenable to writs under articles 32 and 226 in appropriate case but might not be subject to a direct appeal under article 136 as the decisions of a tribunal. The position, however, changed when the Government embarked upon curial functions and proceeded to exercise judicial power and decide disputes. In these circumstances, it was legitimate to regard the officer who dealt with the matter and even the Government itself as tribunal. The word '"tribunal" was a word of wide import and the words "court" and "tribunal" embraced within them the exercise of judicial power in all its forms. The decision of the Central Government thus fell with is the powers of the Supreme Court under article 136.

In Kihara Hollohan v. Zachilhu [1992] Suppl 2 SCC 651, the observations in the case of Harinagar Sugar Mills Ltd. v. Shyam Sunder JhunJhunwala [1961] 51 Comp Cas 387 (SC) were quoted with approval and it was said that where there was a lis —an affirmation by one party and by another, the dispute involved the rights and obligations of the parties to it and the authority was called upon to decide it, there was an exercise of judicial power. That authority was called a tribunal if it did not have all the trappings of a court.

In the case of Harinagar Sugar Mills Ltd. v. Shyam Sunder JhunJhunwala [1961] 51 Comp Cas 387 (SC) this court was called upon to decide whether an order of the Central Government under section 11 of the

Companies Act as it then read, was appealable under article 136 of the Constitution. Article 136 empowers this court to grant special leave to appeal from any judgment, decree, determination, sentence or order in any cause or matter passed or made by "any court or tribunal" in the territory of India. The connotation of the words "court" and "tribunal": determined in the judgment in the context of article 136. The argument was that the Central Government, acting under section 111 of the Companies Act, as it then read, was exercising administrative authority. The court held that it was exercising judicial authority. The majority judgment relied upon the provisions of section 111 for so holding. Hidayatullah J. concurring, held that all tribunals were not courts though all courts were tribunals. The word "courts" was used to designate the tribunals that a State established to administer justice. They were fixed and permanent and could try any suit or cause within their jurisdiction. They went under the compendious name of "Courts of Civil Judicature". A large number of administrative tribunals had come into existence with the growth of civilisation and the problems of modern life. They acted on a judicial manner but they were not part of the ordinary courts of civil judicature. What distinguished them had never been successfully established. When the Constitution spoke of "courts" in article 136 and other article it contemplated courts of civil judicature but not tribunals other than Rich courts. This was the reason both expressions were used in articles 136 and 226. The judgment is, therefore, determinative in deciding whether a tribunal is subject to the jurisdiction of this court under article 136 or of the High Court under article 227, but it does not hold that a "court" is only a court of civil judicature in the ordinary hierarchy of court.

In our view, the word "court" must be read in the context in which, It is used in a statute. It is permissible, given the context, to read it as comprehending the courts of civil judicature and courts or some tribunals exercising curial or judicial, powers. In the context in which the word “court” is used in section 9A of the Special Court Act, it is intended to encompass all curial or judicial bodies which have the jurisdiction to decide matters or claims, inter alia, arising out of transactions in securities entered into between the started dates in which a person notified is involved.

The occasion for enacting the Special Court Act must not be lost sings of. The Statement of Objects and Reasons of the Bill to replace the Amendment Ordinance has already been quoted. A Joint Parliamentary Committee was constituted to investigate what the Statement of Objects and Reasons called "the large scale irregularities and malpractices which were noticed in the securities transactions of banks". This is what the Joint Parliamentary Committee said in its report about the "scam"

"The scam is basically a deliberate and criminal misuse of public funds through various types of securities transaction with the aim of illegally siphoning off funds of banks and PSUs to select brokers for speculative returns. The latest irregularities in the securities and banking transaction, are manifestations of this chronic disorder since they involved not only the banks but also the stock market, financial institutions, PSU, the central bank of the country and even the Ministry of Finance, other economic ministries in varying degrees. The most unfortunate aspect has been the emergence of a culture of non-accountability which permeated all section; of the Government and banking system over the years. The state of the country's system of governance, the persistence of non-adherence to rules, regulations and guidelines, the alarming decay over time in the banking systems has been fully exposed. These grave and numerous irregularities persisted for so long that eventually it was not the observance of regulations but their breach that came to be regarded and defend as 'market practice". Through all these years the ability of the concerned authorities to effectively address themselves to the problems has tested and found wanting. The consequence of these irregularities in securities and banking transactions are both financial and moral. During the period from July, 1991, to May, 1992, the most glaring proof of the nexus between the irregularities in banks and the overheating of the stock ma which came to light is explained by the graphic representations of the BSE Index and the fact that there was a sharp increase in securities trans transactions during the corresponding period of the banks involved in serious irregularities related with the scam. What is more apparent is the systematic and deliberate abuse of the system by certain unscrupulous elements It is abundantly clear that the scam was the result of failure to check irregularities in the banking system and also liberalisation without adequate safeguards. There is also some evidence of collusion of big industrial houses playing an important role. It is because of these elements that the economy of the country had to suffer and while some gained thousands of crores, millions of investors lost their savings. The criminality of the perpetrators of the scam becomes all the more despicable as it was during this period that the country was passing through most trying times economically and financially. An observation that the Committee has been constrained to make at a number of places in the succeeding chapters is that for all these not many have yet been identified and effectively punished."

Having regard to the enormity of the "scam" and its vast ramifications, Parliament thought it was necessary that all the matters of claims arising out of transactions in securities entered into between the. stated dates in which a person notified was involved should be brought before and tried by the same forum. That forum had been invested with the jurisdiction to try persons accused of offences relating to transactions in securities sentered into between the stated dates. It was also required to give directions to the custodian in regard to property belonging to persons notified which stood attached under the provisions of the Special Court Act. The object of amending the Special Court Act invest the Special Court with the power and authority to decide civil claims arising out of transactions in securities entered into between the stated dates in which a person notified was involved has already been stated. In these circumstances, it is proper to attribute to the word "court" in section 9A(1) of the Special Court Act, not the narrower meaning of a court of civil judicature which is pan of the ordinary hierarchy of courts, but the broader meaning of a curial body, a body acting judicially to deal with matters and claims arising out of transactions in securities entered into between the slated dates in which a person notified is involved. An interpretation that suppresses the mischief and advances the remedy must, plainly, be given.

In Halsbury's laws of England, fourth edition, volume 10. paragraphs 701 and 702, this is observed:

"701. Meaning of 'court'.-Originally the term 'court' meant, among Other things, the Sovereign's palace; it has acquired the meaning of the place where justice is administered and, further, has come to mean the persons who exercise judicial functions under authority derived either directly or indirectly from the Sovereign. All tribunals, however, are not in the sense in which the term is here employed. Courts are tribunals, which exercise jurisdiction over persons by reason of the sanction of the law, and not merely by reason of voluntary submission to their jurisdiction. Thus, arbitrators, committees of clubs and the like, although they may be tribunals exercising judicial functions, are not ‘court’ in this sense of that term. On the other hand, a tribunal may be a court in the strict sense of the term even though the chief part of its is not judicial. Parliament is a court. Its duties are mainly deliberative and legislative; the judicial duties are only part of its functions. A coroner's court is true court although its essential function is investigation

702. What is a court in law.—The question is whether the is a court, not whether it is a court of justice, for there are courts which, are not courts of justice. In determining whether a tribunal is a judicial, body the facts that it has been appointed by a non-judicial authority, that it has no power to administer on oath, that the chairman has a casting vote, and that third parties have power to intervene are immaterial, especially if the statute setting it up prescribes a penalty for making false statements: elements to be considered are (1) the requirement for a public hearing, subject to a power to exclude the public in a proper case, and (2) a provision that a member of the tribunal shall not take part in any decision in which he is personally interested, or unless he has been present throughout the proceedings.

A tribunal is not necessarily a court in the strict sense of exercising judicial power merely because (1) it gives a final decision; (2) it" hears witnesses on oath; (3) two or more contending parties appear before it between whom it has to decide; (4) it gives decisions which affect the rights of subjects; (5) there is an appeal to a court; and (6) it is a body to which a matter is referred by another body.

Many bodies are not courts, even though they have to decider questions, and in so doing have to act judicially, in the sense that the proceedings must be conducted with fairness and impartiality. Examples are the benchers of the Inns of Court when considering the conduct of one of their members, the disciplinary committee of the General Medical Council when considering questions affecting the conduct of a medical man, a trade union when exercising disciplinary jurisdiction members..."

These passages, from the earlier edition of Halsbury, were cited by this court in Thakur jugal Kishore Sinha v. Sitamarhi Central Co-operative Bank Ltd. [1967] 2 SCR 163; AIR 1967 SC 1494. The question there was whether the provisions of the Contempt of Courts Act applied to a Registrar exercising the powers under section 48 of the Bihar and Orissa Co operative Societies Act. It was held that the jurisdiction of the ordinary civil and revenue courts of the land was ousted in the case of disputes the fell under section 48. A Registrar exercising the powers under section 48 therefore, discharged the duties which would otherwise have fallen on the ordinary civil and revenue courts. He had not merely the trappings of a court but in many respects he was given the same power as were given to the ordinary civil courts of the land by the Code of Civil Procedure, including the power to summon and examine witnesses on oath the power to order inspection of documents, to hear the parties after framing issues, to review his own order and to exercise the inherent jurisdiction of the courts mentioned in section 151. In adjudicating a dispute under section 48 of the Bihar Act, the registrar was held to be, “to all intents and purpose a court discharging the same functions and duties in the same manner as a court of law is expected to do.”

Now, under section 111 of the Companies Act as amended with effect from May 51, 1991, the Company Law Board performs the functions that were theretofore performed by courts or civil judicature under section 155. It is empowered to make orders directing rectification of the company register, as to damages, costs and incidental, and consequential orders. It may decide any question relating to the title of any person who is a party before it to have his name entered upon the company's register, and any question which is necessary or expedient to decide. It may make interim orders. Failure to comply with any order visits the company with a fine. In regard to all these matters it has exclusive jurisdiction (except under the provisions of the Special Court Act, which is the issue before us). In exercising its function under section 111 the Company Law Board must, and does, act judicially. Its orders are appealable. The Company Law Board, further, is a permanent body constituted under a statute. It is difficult to see how it can be said to be anything other than a court, particularly for the purposes of section 9A of the Special Court Act.

We shall assume that a shareholder whose name the company has refused to enter in its register would be put to some difficulty in deciding whether he should approach the Special Court or the Company Law Board, but that is no reason to interpret the provisions of section 9A in a manner that would defeat its intendment and adversely affect the public interest. In any event, the time taken in approaching the Company Law Board in a matter that should have been filed before the Special Court would not be of any consequence for there is no time limit within which the Special court has to be approached; and it is most unlikely that the Special court would be approached unless the shareholder was sure that his claim within section 9A(1).

It will be remembered that Mr. Nariman had drawn attention to the provisions of section 4 of the Special Court Act and argued that even if the company Law Board, under the provisions of section 111 of the Companies Act, made any order with regard to any securities, that order would stand at naught if an order relating to the same securities was made under section 4 of the Special Court Act by reason of the fact that, under section 13 of the Special Court Act, the order of the Special Court had effect not with standing anything inconsistent therewith contained in any decree or order of any court, tribunal or other authority. Section 3(2) of the Special Court Act empowers the custodian, on being satisfied on information received that any person has been involved in any offence relating to transactions in securities entered into between the stated dates to notify the name of such person in the Official Gazette. On such notification, by reason of section 3(3), the property of the person notified stands attached. That property, by reason of section 3(4) is to be dealt with by the custodian in such manner as the Special Court may direct, section 4 states that if the custodian is satisfied after such, inquiry as he may think fit that any contract or agreement entered into at any time between the stated dates in relation to the property of a person notified has been entered into fraudulently or to defeat the provisions of the Special Act, he may cancel such contract or agreement whereupon such propel stands attached. The scope, therefore, of section 4 is limited. It applies only in regard to property that belongs to a person notified. Section 9A(1), is much wider and it invests the Special Court with jurisdiction to entertain matters or claims arising out of transactions in securities entered into between the stated dates in which a person notified is involved not only as a party but also as a broker, intermediary on in any other manner The argument based on section 4 must, therefore, fail.

As has been pointed out, sub-sections (2) and (3) of section 111 of the Companies Act term the pleading that -the person aggrieved has to file before the Company Law Board an appeal, sub-section (4) requires the person aggrieved to apply, sub-section (5) speaks of it as an “appeal” or an "application", sub-section (7) as an "application" and sub-sec (10) as an "appeal or application" which shall he made by a "petition in writing". The words "appeal" and "application" in the context of the provisions of section 111 have, therefore the same meaning and it is plainly, an original application that is made. The shareholder does not resort to a superior court to review the decision of an inferior court or tribunal. The fact, therefore, that section 9A(2) of the Special Court. Act speaks of the transfer of "every suit, claim or other legal proceeding (other than an appeal)" does not exclude the "application" or "appeal made under the provisions of section 111 of the Companies Act from the purview of section 9A(1) of the Special Court Act.

Conclusion:

For all these reasons, the appeal must succeed. No order on the transfer petition is now called for.

The appeal is allowed. The judgment and order of the Company Law Board under appeal is set aside. The application of the Canara Bank pending before the Company Law Board shall stand transferred to the Special Court constituted under the provisions of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

The transfer petition is dismissed.

There shall be no order as to costs.

[1996] 85 COMP CAS 716 (DELHI)

HIGH COURT OF DELHI

Abn Amro Bank

Indian Railway Finance Corporation Ltd.

DALVEER BHANDARI J.

COMPANY APPEAL NO. 19 OF 1994

NOVEMBER 10, 1995

V.N Koura and Sandeep Sethi for the Appellant.

P.A.S Rao, Mrs. Pallavi Shroff, Ms. Ritu Bhalla and A.K. Roy for the Respondent.

Vijay Kumar for Vysya Bank.

JUDGMENT

Dalveer Bhandari J.—ABN Amro Bank N.V. has filed the company appeal under section 10F of the Companies Act, 1956, in which a prayer has been made to set aside the order dated August 25, 1994, passed by the Company Law Board. It is also prayed in the appeal that the company petition filed by the appellant before the Company Law Board be allowed and respondent No. 1 be directed to rectify the register maintained by it in respect of the said IRFC bonds, by entering the appellant's name as the holder of the said 1 lakh 9 per cent, (tax free) secured redeemable non- convertible (VI-A series 1991-92) bonds of Rs. 1,000 each and to restore to the appellant the said letter of allotment, after making due endorsements and issue bond certificates in respect of the said bonds to the appellant along with interest warrants.

The appellant has also prayed that respondents Nos. 1 to 4 be directed to pay compensation for non-payment of interest on the said IRFC bonds on and after June 26, 1992, comprising the taxable amount of interest/ compensation on the IRFC bonds payable up to October 1, 1994, and interest/compensation for non-payment of these amounts from the due date till October 1, 1994. It is also prayed by the appellant that respondents Nos. 1 to 4 be directed to pay to the appellant, as specified in para. 21 of the petition, on the instalment of interest becoming due on the said IRFC bonds pendente lite and future.

During the pendency of this matter before this court, respondent No. 4, Standard Chartered Bank, filed Company Application No. 388 of 1995. The principal prayer in this company petition is that the impugned judgment of the Company Law Board is contrary to the settled law which has been declared by the Supreme Court in Civil Appeal No. 3206 of 1995—Canara Bank v. Nuclear Power Corporation of India Ltd. [1995] 84 Comp Cas 70 (SC). It is prayed that the order of the Company Law Board be set aside and the petition be transferred to the Special Court constituted under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

Mrs. Pallavi Shroff, learned counsel for the applicant-Standard Chartered Bank, submitted that the Special Court (Trial of Offences Relating to Transactions in Securities) Amendment Ordinance, 1994, was brought into effect on January 25, 1994, and section 9A was inserted. Section 9A reads as under:

"9A.Jurisdiction, powers, authority and procedure of Special Court in civil matters.—(1) On and from the commencement of the Special Court (Trial of Offences Relating to Transactions in Securities) Amendment Ordinance, 1994, the Special Court shall exercise all such jurisdiction, powers and authority as were exercisable, immediately before such commencement, by any civil court in relation to any matter or claim—

(a) relating to any property standing attached under sub-section (3) of section 3;

(b) arising out of transactions in securities entered into after the 1st day of April, 1991, and on or before the 6th day of June, 1992, in which a person notified under sub-section (2) of section 3 is involved as a party, broker, intermediary or in any other manner.

(2) Every suit, claim or other legal proceeding (other than an appeal) pending before any court immediately before the commencement of the Special Court (Trial of Offences Relating to Transactions in Securities) Amendment Ordinance, 1994, being a suit, claim or proceeding, the cause of action whereon it is based is such that it would have been, if it had arisen after such commencement, within the jurisdiction of the Special Court under sub-section (1), shall stand transferred on such commencement to the Special Court and the Special Court may, on receipt of the records of such suit, claim or other legal proceeding, proceed to deal with it so far as may be in the same manner as a suit, claim or legal proceeding from the stage which was reached before such transfer or from any earlier stage or de novo as the Special Court may deem fit.

(3) On and from the commencement of the Special Court (Trial of Offences Relating to Transactions in Securities) Amendment Ordinance, 1994, no court other than the Special Court shall have, or be entitled to exercise, any jurisdiction, power or authority in relation to any matter or claim referred to in sub-section (1).

(4) While dealing with cases relating to any matter or claim under this section, the Special Court shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice, and subject to the other provisions of this Act and of any rules, the Special Court shall have the power to regulate its own procedure.

(5) Without prejudice to the other powers conferred under this Act, the Special Court shall have, for the purposes of discharging its functions under this section, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:—

(a) summoning and enforcing the attendance of any person and examining him on oath;

(b) requiring the discovery and production of documents;

(d) subject to the provisions of sections 123 and 124 of the Indian Evidence Act, 1872 (1 of 1872), requisitioning any public record or document or copy of such record or document from any office;

(e) issuing commissions for the examination or witnesses or documents;

(f) reviewing its decisions;

(g) dismissing a case for default or deciding it ex parte;

(h) setting aside any order of dismissal of any case for default or any order passed by it ex parte; and

(i) any other matter which may be prescribed by the Central Government under sub-section (1) of section 14."

In the said case of Canara Bank [1995] 84 Comp Cas 70, their Lordships of the Supreme Court have held that under section 111 of the Companies Act, 1956, as amended with effect from May 31, 1991, the Company Law Board performs the functions which were performed by the courts of civil judicature under section 155. It is empowered to make orders directing rectification of the company's registers, as to damages, costs and incidental and consequential orders. It may decide any question relating to the title of any person who is a party before it to have his name entered upon the company's register and any question which is necessary or expedient to decide. It may make interim orders. Failure to comply with any orders would make the company liable, with a fine. In regard to all these matters, it has exclusive jurisdiction (except under the provisions of the Special Court Act, which is the issue before us). In exercising its function under section 111, the Company Law Board must and does act judicially. Its orders are appealable. The Company Law Board is a permanent body constituted under a statute. It is difficult to see how it can be said to be anything other than a court, particularly for the purposes of section 9A of the Special Court Act.

She also submitted that, before the said amendment, only criminal offences were dealt with, now other than criminal matters are also dealt with by the Special Court. All the transactions during the interregnum period of, April 1, 1991, to June 6, 1992, have to be dealt with by the Special Court after the amendment. Admittedly the transaction in question had taken place during the said period and the present appeal falls in that category.

The brief facts relevant to the present controversy are recapitulated as under. The appellant, ABN Amro Bank, purchased NPC bonds of Rs. 100 each at a price Rs. 97 plus accrued interest, worth Rs. 9.76 crores through N.K. Agarwala, respondent No. 3, who purchased these bonds from the Andhra Finance Services. The said NPC bonds could not be delivered by Naresh K. Agarwala, respondent No. 3, and in turn, he gave bonds of respondent No. 1, Indian Railway Finance Company Ltd. (IRFC), as security. The petitioner wanted these bonds to be registered in its name. Respondent No. 1 did not register them in the name of the petitioner and they filed the petition before the company judge.

In accordance with the instructions of N.K. Agarwala, respondent No. 3, ABN Amro Bank, issued an account payee cheque in favour of Andhra Bank, Bombay, for the aforesaid amount and attached a memorandum which represents the cost of the NPC bonds purchased on behalf of the petitioner. It was delivered to N.K. Agarwala on March 9, 1992, and was encashed by the payee on the same day. Respondent No. 3 failed to deliver the said NPC bonds purchased through him or a bank receipt in spite of repeated reminders. Instead, on March 18, 1992, respondent No. 3 delivered to the appellant the original letter of allotment covering 1 lakh 9 per cent. IRFC secured redeemable of Rs. 1,000 fully paid-up (VI-A series) bonds 1991-92 issued by the IRFC Ltd. Respondent No. 3 delivered to the petitioner, Amro Bank, a transfer deed in respect of the said bonds duly executed in blank by Karur Vysya Bank Ltd., respondent No. 2, the last registered holder of the said IRFC bonds. The appellant accepted the delivery of the letter of allotment and transfer deed in respect of the IRFC bonds on the understanding that it would hold these bonds as; alternative security pending delivery of the NPC bonds. According to the petitioners, on delivery of the letter of allotment, the ownership of the IRFC bond's was transferred to them as purchasers in due course and fur valuable consideration.

Respondent No. 3 did not deliver the NPC bonds by June 25, 1992, which was the ultimate date fixed by the petitioner for delivery. On the same day, the petitioner-bank lodged the bonds with IRFC who did not register the bonds as the ownership was disputed. According to the petitioner, respondent No. 1, IRFC, is bound to register the bonds on the intimation of the transfer submitted along with the letter of allotment as per the terms and conditions of the issue.

Mr. Sareen, learned counsel for N.K. Agarwala, at the outset, submitted that as far as his client is concerned, it makes no difference whether the matter is heard and disposed of by this court or it is sent to the Special Court for disposal.

Mr. G. Sarangan, who appeared on behalf of respondent No. 2, Karur Vysya Bank Ltd., submitted that only this court has the jurisdiction and not the Special Court and, consequently, the petition need not be transferred to the Special Court. He submitted that N.K. Agarwala is not a notified person. The only notified person is Hiten Dalai. There has been no dealing with Hiten Dalai. The bank had dealings through respondent No. 3, N.K. Agarwala. According to him, neither respondent No. 3 nor Karur Vysya Bank nor the Andhra Bank are notified persons. So this matter cannot be decided by the Special Court.

Mr. Koura, learned counsel, repudiated the submissions made by Mrs. Shroff and submitted that this court has jurisdiction to decide this matter and it must be decided by this court. He placed reliance on Vasudev Gopalkrishna Tambwehar v. Board of Liquidators, Happy Home Co-operative Housing Society Ltd. (In Liquidation), AIR 1967 SC 369.

In this judgment, he relied on paras. 8 to 10 of the judgment and particularly laid stress on the following portion of the judgment which reads as under (at page 374):

"The exclusive jurisdiction of the Court of Small Causes arises only if the person invoking the jurisdiction of the court alleges that the other party is a tenant or a landlord and the question is one which is referred to in section 28. Where the person so invoking does not set up the claim that the other party .is a tenant or a landlord the defendant is not entitled to displace the jurisdiction 6f the ordinary court by an allegation that he stands in that relation qua the other and on that ground the court has no jurisdiction to try the suit or proceeding or an application."

This passage was relied on primarily to strengthen the submission regarding jurisdiction and to canvass that only the averments and allegations incorporated in the plaint alone should be taken into consideration for determining the question of jurisdiction. The averments mentioned in the written statement or reply cannot be looked into for determining the question of jurisdiction.

Mr. Koura also placed reliance on Natraj Studios (P.) Ltd. v. Navrang Studios, AlR 1981 SC 537. In this case, the Supreme Court has observed that a suit will have to be brought in the Court of Small Causes which has been made the court of exclusive jurisdiction. For such a suit the tenant may deny the tenancy and denial by the tenant will not oust if ultimately the court finds that the tenant is not denying. The suit will fail for that reason. He also placed reliance on Oil and Natural Gas Commission v. Utpal Kumar Basu, [1994] 4 SCC 711. In this case, the court has observed that the question of territorial jurisdiction must be decided on the basis of the facts pleaded in the petition.

Mrs. Pallavi Shroff, learned counsel appearing for the respondent, submits that at the threshold for invoking the jurisdiction of any particular court the facts pleaded in the petition may be taken into consideration. But in a case where a reply and a rejoinder have also been filed in that event the defence in the written statement and/or reply should also be taken into consideration while determining the question of jurisdiction. She also placed reliance on Ram Singh v. Gram Panchayat, Mehal Kakrn, AIR 1986 SC 2197. In this case, the court has observed that the plaintiffs cannot by drawing their plaint cleverly by not claiming a declaration that the land in question was not shamlat deh confer jurisdiction on the civil court when by virtue of section 13 of the Act, the jurisdiction of civil courts to try such suits had been taken away. In reply the panchayat had taken the stand that the land in question belongs to it shamlat deh as it is not possible for the civil court to make a, decree in favour of the plaintiff without deciding the question whether the property in question belongs to the panchayat or not.

In this case, the question of jurisdiction was determined by taking into, account the stand of the panchayat taken in reply. Therefore, in a case where pleadings are complete and reply and a rejoinder have also been filed, in that case to ignore the reply or rejoinder in deciding the question of jurisdiction, would be totally unjustified.

Mrs. Shroff also relied on Natraj Studios (P.) Ltd. v. Navrang Studios, AIR 1981 SC 537. In para 18, the court has observed that, the defendant's plea regarding jurisdiction may straightaway oust the jurisdiction of the ordinary civil court but if ultimately the plea of the defendant is accepted the, suit must fail on this ground.

Mrs. Shroff also submitted that the stand of the respondent in the reply or written statement would be relevant in determining the question of jurisdiction. She submitted that in this case, there is no dispute that the transaction had taken place during the interregnum period, then the only question which remains to be determined is that in view of section 9A of the said Act, this matter should be decided by this court or this matter be sent to the Special Court for disposal.

According to Naresh Agarwala, he was a broker of the Standard Chartered Bank and his role as intermediary or at least in the category of any other person cannot be denied. She also referred to the affidavit filed by Naresh Agarwala. The relevant portions are reproduced hereunder to appreciate the controversy in its correct perspective.

(a) That the answering respondent has been acting as a mercantile broker on behalf of Karur Vysya Bank Ltd.

(b) Pursuant to an order placed upon the answering respondent, the answering respondent arranged for a transaction for sale of 9 per cent. IRFC bonds (Sixth "A" series) bearing distinct Nos. 1500001-1600000 from Karur Vysya Bank Ltd. to Standard Chartered Bank through their representative/broker.

(d) Karur Vysya Bank Ltd. handed over the aforesaid bonds to the answering respondent for onward remittance to the purchaser, viz., Standard Chartered Bank.

(e) The aforesaid bonds were duly received by Sh. Hiten P. Dalai, representative/broker of the Standard Chartered Bank on March 12, 1992. A copy of the letter addressed to Sh. Hiten P. Dalai is annexed hereto as Annexure R-3/A.

(f) In the meantime an order was placed upon the answering respondent by the petitioner herein for the purchase of 9 per cent. IRFC bonds. In confirmation of the said order a specific contract Note No. 92/ 4878 was issued by the answering respondent on March 9, 1992.

(g) That the answering respondent for the fulfilment of the said order contacted Sh. Hiten P. Dalai representative/broker of Standard Chartered Bank. Sh. Hiten P. Dalai forwarded the said 9 per cent. IRFC bonds to the answering respondent on March 18, 1992, and the same were delivered to the petitioner herein on the same very evening. The covering letter accompanying the said bonds from Sh. Hiten P. Dalai dated March 18, 1992, and the covering letter forwarding the said bonds to ABN Amro Bank dated March 18, 1992, which was duly received at 6.30 p.m. on March 18, 1992, by ABN Amro are being annexed hereto as annexures R-3/B and R-3/C.

In para. 9, page 15 of the impugned judgment, the company court observed that in the present case because the transaction was entered into on a day which falls within the period referred to in the Ordinance and there were references to involvement of a notified person. Therefore, according to the amended section 9A, the company court has no jurisdiction. The matter must be referred to the Special Court.

Their Lordships of the Supreme Court in the case of Canara Bank [1995] 84 Comp Cas 70 have dealt with the aspect of the amendment by which matters have to be referred to the Special Court. Their Lordships of the Supreme Court have mentioned that the Special Court Act was enacted to provide for establishment of the Special Court for the trial of offences relating to transactions in securities and matters connected therewith or incidental thereto.

The securities were defined in section 2(c) to include shares, scrips, stocks, bonds, debentures, debenture stock, units and other marketable securities of a like nature, Government securities and rights or interest in securities. Section 3(1) provided for the appointment by the Central Government of a custodian. By reason of section 3, the custodian was empowered on being satisfied on information received that any person had been involved in any offence relating to transactions in securities after April 1, 1991, and before June 6, 1992, to notify the name of such person in the Official Gazette.

The Supreme Court has also analysed section 9A and mentioned that by reason of sub-section (1) of section 9A, on and from the date of commencement of the Amendment' Ordinance, the Special Court exercises all such jurisdiction, power and authority as were exercisable by any civil court in relation to any matter. The Special Court is empowered to exercise such jurisdiction, power or authority in relation to the matters or claims therein specified. These matters or claims include those arising out of transactions in securities entered into between the aforesaid dates in which a notified person is involved.

Sub-section (2) of section 9A deals with transfer of suits, claims or legal proceedings (other than an appeal) to the Special Court. Every suit, claim or other legal proceeding pending before any court, the cause of action whereof is such that, had it arisen after the Amendment Act, the suit, claim or legal proceedings can be initiated only before the Special Court and all such matters pending before other courts shall stand transferred to the Special Court. Every suit, claim or other legal proceedings pending before any court, the cause of action whereof arises out of a transaction in securities entered into between the stated dates, in which a notified person is involved, would, therefore, if it is pending before any court on the date on which the Amendment Ordinance came into force, stand transferred to the Special Court. By reason of sub-section (3) of section 9A, on and after the commencement of the Amendment Ordinance, no court other than the Special Court may exercise any jurisdiction, power or authority in relation to any matter or claim referred to in sub-section (1), that is to say, in relation to any matter or claim inter alia, arising out of transactions in securities entered into between the stated dates in which a notified person is involved.

Their Lordships of the Supreme Court in the said case of Canara Bank [1995] 84 Comp Cas 70 also came to the conclusion that the Company Law Board is a court on the reasoning that it is divested of the jurisdiction, power and authority to entertain matters or claims arising out of transactions in securities entered into between the stated dates in which a notified person is involved.

The Supreme Court has also dealt with the aspect why the Special Court was enacted. A Joint Parliamentary Committee was constituted to investigate what the Statement of Objects and Reasons called "the large- scale irregularities and malpractices which were noticed in the securities transactions of banks."

In the Report, the Joint Parliamentary Committee had mentioned about the scam and the relevant portion is quoted as under :

"The scam is basically a deliberate and criminal misuse of public funds through various types of securities transactions with the aim of illegally siphoning off funds of banks and PSUs to select brokers for speculative returns. The latest irregularities in the securities and banking transactions, are manifestations of this chronic disorder since they involved not only the banks but also the stock market, financial institutions. PSU, the central bank of the country and even the Ministry of Finance, other economic ministries in varying degrees.

The most unfortunate aspect has been the emergence of a culture of non-accountability which permeated all sections of the Government and banking system over the years. The state of the country's system of governance, the persistence of non-adherence to rules, regulations and guidelines, the alarming decay over the time in the banking systems has been fully exposed. These grave and numerous irregularities persisted for so long that eventually it was not the observance of regulations but their breach that came to be regarded and defended as "market practice". Through all these years the ability of the concerned authorities to effectively address themselves to the problems has been tested and found wanting. The consequences of these irregularities in securities and banking transactions are both financial and moral. During the period from July, 1991, to. May, 1992, the most glaring proof of the nexus between the irregularities in banks and the overheating of stock market which came to light is explained by the graphic representations of the BSE Index and the fact that there was a sharp increase in securities transactions during the corresponding period of the banks involved in serious irregularities related with the scam. What is more apparent is the systematic and deliberate abuse of the system by certain unscrupulous elements. It is abundantly clear that the scam was the result of failure to check irregularities in the banking system and also liberalisation without adequate safeguards. There is also some evidence of collusion of big industrial houses playing an important role. It is because of these elements that the economy of the country had to suffer and while some gained thousands of crores, millions of investors lost their savings. The criminality of the perpetrators of the scam becomes all the more despicable as it was during this period that the country was passing through most trying times, economically and financially. An observation that the Committee has been constrained to make at a number of places in the succeeding chapters is that for all these not many have yet been identified and effectively punished."

Parliament having regard to the enormity of the scam and its vast ramification thought it proper that all matters arising out of the transaction in securities entered into between the stated dates in which a person notified was involved should be brought before and tried by the same forum. The forum of the Special Court had been invested earlier with jurisdiction to try persons accused of offences relating to transactions in securities entered into between the said dates. It was also required to give directions to the custodian in regard to property belonging to persons notified .which stood attached under the provisions of the Special Court Act. The object of amending the Special Court Act is to invest the Special Court with the power and authority to decide civil claims arising out of transactions in securities entered into between the stated dates in which a person notified was involved.

The entire purpose of enacting the Special Court Act-was that all the transactions of the interregnum period between the dates April 1, 1991, and June 6, 1992, shall be dealt with by the Special Court for the reasons stated in the Statement of Objects and Reasons of the Act in which a notified person was involved.

From a bare reading of section 9A of the Act, it is abundantly clear that it was the intention of Parliament that transactions during the said interregnum period shall be dealt with by the Special Court.

In the instant case, the transaction in question had taken place during the said interregnum period and Hiten Dalai who was involved in the transaction is a notified person.

The Hon'ble Supreme Court in Canara Bank's case [1995] 84 Comp Cas 70, while interpreting the amendment by which section 9A was inserted, has clearly laid down that transactions during the interregnum period (June 1, 1991, to June 6, 1992) must he decided by the Special Court set up for dealing with such transactions in which a notified person is involved.

In this view of the matter, the application is allowed and consequently, this appeal and other connected applications shall stand transferred to the Special Court constituted under the provisions of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

The petition is allowed and disposed of. There shall be no order as to costs.

MADRAS HIGH COURT

Companies Act

[2004] 51 scl 158 (mad.)

High Court of Madras

S. Bhuvaneswari

ACI (Agro Chemical Industries) Ltd.

K. Govindarajan and S. Sardar Zackria Hussain, JJ.

C.M.A. No. 1757 of 1996

November 27, 2003

Section 111, read with section 36, of the Companies Act, 1956 - Transfer of shares and debentures - Power to refuse registration and appeal against refusal - Appellants transferred some shares of 1st respondent-company to 2nd respondent-company - Thereafter 1st respondent-company at instance of 2nd respondent rectified register of shareholding as if 2nd respondent had transferred all shares from appellants to respondent Nos. 3 to 6 - Appellants alleged that in view of articles of association of 1st respondent-company indicating that a member wishing to transfer must give his intention to board which in turn would offer same to existing members in pro rata, transfer of shares in favour of respondent Nos. 3 to 6 was illegal - Company Law Board set aside aforesaid transfer of shares, but appellants’ prayer with respect to transfer of shares in their favour on pro rata basis was rejected - Whether even in view of aforestated article, appellants could not have any vested right to purchase shares of 2nd respondent-company until notice was issued by board offering such transfer - Held, yes - Whether, therefore, appellants could not compel 2nd respondent to sell shares de hors procedure contemplated under articles of association - Held, yes - Whether moreover, in absence of any specific power under section 111(5)(b) to direct a member to transfer his shares to other members, CLB rightly refused to issue such a direction as prayed for by appellants - Held, yes

Facts

The appellants herein had transferred certain shares of the 1st respondent-company to the 2nd respondent. The 1st respondent-company at the instance of the 2nd respondent-company rectified the register of share-holding as if the 2nd respondent had transferred all the shares from the appellants to respondent Nos. 3 to 6. The appellants filed company petition praying the CLB to declare that said transfer of shares in favour of respondent Nos. 3 to 6 was illegal and contrary to the articles of association. The CLB appreciating articles 7 of the article of association of the company came to the conclusion that the transfer of the impugned shares, was not in accordance with the provisions of article 7 and had to be set aside. But with respect to the prayer requesting for pro rata transfer of said shares to the appellants, the same was rejected by the CLB. Latter part of the aforesaid order was challenged in the instant appeal.

Held

The 1st respondent-company was a private company within the meaning of section 3(1)(iii). According to article 3 of the articles of association, the right to transfer the shares of a company would be restricted in the manner and to the extent mentioned under the articles of association. As contemplated under section 36, the memorandum and articles, when registered, shall bind the company and the members thereof to the same extent as if they respectively had been signed by the company and each member, and contained covenants on its and their part to observe all the provisions of the memorandum and the articles. In view of the abovesaid provision, the restrictions made in article 7 of the articles of association would be binding on the members, namely, the appellants and the 2nd respondent, and they had to follow the procedure as contemplated under the said article to transfer the shares. [Para 9]

It had been mentioned in article 7(c) of the 1st respondent-company that a member wishing to transfer shares must give notice of his intention to the board, which upon receipt of such notice would offer the same to the existing members in pro rata. Since the said procedure had not been followed by the 1st and 2nd respondents, the CLB had set aside the transfer and directed to rectify the register of members. [Para 10]

Now it had to be decided, on the basis of the above said portion of the order of the CLB, whether the appellants had got any right to compel the 2nd respondent to sell the shares to them. [Para 11]

As rightly found by the CLB, the appellants could not have any vested right to purchase the shares of the 2nd respondent until the notice was issued by the board offering such transfer. Merely because the 2nd respondent violated the procedure contemplated under article 7 of the articles of association, it could not be said that such shares should be sold to the appellants, but only if notice was issued by the 2nd respondent to the board, regarding its intention to transfer the shares, the board had to offer the same to the existing members in pro rata. Only on receipt of such offer from the board, the appellants would get a right to purchase the said shares on the value fixed by the board of directors or the auditor or the auditors of the company, if the board so desired; merely because the 2nd respondent sold the shares to respondent Nos. 3 to 6, it could not be said that the appellants could straightaway offer to purchase the shares. The procedure contemplated under article 7(c) of the articles of association was binding on the appellants and they could make offer only if the procedure contemplated under article 7(c) was followed and so the appellants could not compel the 2nd respondent to sell the shares de hors the procedure contemplated under article 7(c) of the articles of association. [Para 12]

Moreover, the CLB can only direct the company to register the transfer or transmission and direct rectification of the registers and to pay the damages, if any, sustained by the party aggrieved. No specific power is given under section 111(5)(b) to direct a member to transfer his shares to the other members. When no such power is given under the provisions of the Act, the CLB was correct in refusing to give such a direction as prayed for by the appellants. [Para 13]

In view of the above discussion, no merit was found in the instant appeal and it was, accordingly, dismissed. [Para 14]

T.K. Seshadri for the Appellant. S. Ramasubramaniam and Saseedharan for the Respondent.

Order

K. Govindarajan, J. - The petitioners before the Company Law Board having aggrieved by the latter portion of the order, have filed the above Appeal.

2. The 1st appellant claims that she is the promoter of the 1st respondent-company and the 2nd petitioner is her daughter. Both of them had shares of 42,517 and 7,503 respectively. It is not in dispute that subsequently, the 1st and appellants have transferred 34,500 shares and 6,000 shares respectively to the 2nd respondent. The 1st respondent-company at the instance of the 2nd respondent-company rectified the register of shareholding as if the 2nd respondent transferred all the shares from the appellants to respondents 3 to 6. So the appellants filed Company Petition No. 23/1993, originally praying the Company Law Board to declare that the transfer of 40,500 equity shares bearing distinctive numbers 021 to 34520 and 44021 to 59920 in favour of respondents 3 to 6 by the 2nd respondent-company and the registration of such transfer in the Register of Members by the 1st respondent-company is illegal and contrary to the Articles of Association and without sufficient cause and direct the 1st respondent-company to rectify the Register of Members in relation to 40,500 equity shares by deleting the names of respondents 3 to 6 from the Register and restore the name of 2nd respondent as the holder of 40,500 equity shares therein with reference to the above said shares. Subsequently, a petition to amend the prayer was filed and there is no dispute that the same was ordered. The said amended prayer reads as follows :—

“The petitioners therefore pray that this Hon’ble Board may be pleased to declare that the transfer of 40500 equity shares bearing distinctive numbers 021 to 34520 and 44021 to 59920 in favour of respondents 3 to 6 by the second respondent-company and the registration of such transfer in the Register of Members by the first respondent-company is illegal and contrary to the Articles of Association and are without sufficient cause and direct the first respondent-company to rectify the Register of Members in relation to 40500 equity shares, by deleting the names of respondents 3 to 6 from the Register and restore the name of second respondent as the holder of 40500 equity shares therein, with reference to distinctive numbers referred to hereinabove, and thereafter substitute the name of the petitioners in the place of the second respondent in terms of Article 7 of the Articles of Association with reference to 40500 equity shares, as shareholders upon payment of the price as may be directed by this Hon’ble Board, and further restraining the respondents 3 to 6 from exercising right as members in relation to 40500 equity shares with reference to aforesaid distinctive numbers and pass such further order or orders, directing the respondents 3 to 6 to pay costs of the proceedings of the petitioners and pass such further order or orders, as this Hon’ble Board deems fit and proper in the circumstances of the case.”

3. The Company Law Board, appreciating Article 7 of the Articles of Association of the Company came to the conclusion that the transfer of the impugned shares, which was not in accordance with the provisions of Article 7 on the ground that the shares which were not offered to existing members before transferring to outsiders, has to be set aside. But with respect to the latter part of the prayer requesting for pro rata transfer of shares to the appellants, the same, was rejected by the Company Law Board in the order dated 15-4-1996. Questioning the same, the above Appeal is filed.

4. Learned counsel for the appellants submitted that according to Article 7 of the Articles of Association, if a member has an intention to sell the shares, he has to give a notice to the existing members. Lathe present case, no such notice was issued. According to him though the Company Law Board has set aside the transfer made by the 2nd respondent-company in favour of respondents 3 to 6, in view of the fact that the 2nd respondent is having an intention to sell the shares, the Company Law Board should have directed to sell the shares in favour of the appellants, who are the existing members, on the price to be fixed by the Board of Directors. The substance of the arguments of the learned counsel was that once the 2nd respondent was having intention to sell the shares, the appellants got the right to purchase the said shares especially when they have offered to purchase the same in the Company Petition itself.

5. Learned counsel for the 1st respondent-company submitted that such a right is not vested right. Only if any offer is made by the 2nd respondent-company to the appellants, the appellants can come forward with the willingness to purchase the said shares. According to him, in this case, though the transfer of such shares is set aside, no such notice was issued to the appellants so as to enable the appellants to claim such pre-emptive right. Learned counsel also relied on section 111(5)(b) of the Companies Act in support of his submission that the Company Law Board can only direct rectification of the register and also direct the Company to pay the loss if any sustained by any party and the Board is not having power to direct the parties to transfer the shares to other members. According to him, since the Company Law Board has no power to give direction to transfer the shares in favour of a particular party, a portion of the impugned order in this Appeal need not be interfered with.

6. Learned counsel for the 2nd respondent-company also adopted the above said argument advanced by the learned counsel for 1st respondent-company.

7. The question that arises for consideration in this case is whether the appellants are having any right to compel the 2nd respondent-company to transfer the shares in their favour in view of the fact that the Company Law Board has set aside the transfer of shares in favour of respondents 3 to 6 in view of Article 7(c) of the Articles of Association of the 1st respondent-company.

8. To appreciate the above said arguments, it is beneficial to extract the relevant portion of Article 7 of the Articles of Association of the 1st respondent-company, which reads as follows :—

“Transfer of shares :

7 (a) The Directors may in their discretion, refuse to register any transfer of shares to a transferee of whom they do not approve. But the Directors may before the transfer is effected give permission in advance for a contemplated transfer and such permission shall be binding on the company.

(b) A Share may be transferred by a member or other person entitled to transfer to any member selected by the transferor but save as aforesaid and save as provided by these presents no share shall be transferred to any person who is not a member unless such person is approved of by the Directors as one whom it is desirable in the interests of the company to admit to membership.

(c) A member wishing to transfer must give notice of his intention to the Board who upon receipt of such notice will offer the same to the existing members in pro rata and if any member is not willing to buy his shares it shall be offered to the other member or members. If no response is received from the board within 60 days from the date of receipt of notice of intention the transferor can transfer to anyone of his choice.

(d) Shares shall be transferred under the foregoing clause upon the value fixed by the Board of Directors or by the auditor or the auditors of the Company if the Board so desires.

(e) The Directors may refuse to register any transfer of a share;

(i) Where the company has lien on a share, or

(ii) In the case of shares not fully paid up where it is not proved to their satisfaction that the proposed transferee is responsible person, or

(iii) Where the Directors are of the opinion that the proposed transferee (not being already a member) is not a desirable person to admit to membership, or

(iv) where the result of such registration would be to make the number of persons exceed the limit prescribed under the Act.”

9. The 1st respondent-company is a Private Company within the meaning of section 3(1)(iii) of the Companies Act. According to Article 3 of the Articles of Association, the right to transfer the shares of a Company shall be restricted in the manner and to the extent mentioned under the Articles of Association. As contemplated under section 36 of the Companies Act, the memorandum and articles, when registered, shall bind the Company and the members thereof to the same extent as if they respectively had been signed by the Company and each member, and contained covenants on its and his part to observe all the provisions of the Memorandum and the Articles. In view of the above said provision, the restrictions made in Article 7 of the Articles of Association shall bind on the members, namely, the appellants and the 2nd respondent and they have to follow the procedure as contemplated under the said Article to transfer the shares.

10. Learned counsel for the appellants, mainly relied on Article 7(c) of the Articles of Association, which is reproduced as above. According to the said provision, a member wishing to transfer must give of his intention to the Board, which upon receipt of such notice will offer the same to the existing members in pro rata. Since the said procedure was not followed by the 1st and 2nd respondents, the Company Law Board has rightly set aside the transfer and directed to rectify the register of members.

11. Now we have to decide, on the basis of the above said portion of the order of the Company Law Board, whether the appellants got their right to compel the 2nd respondent to sell the shares to them.

12. As rightly found by the Board, the appellants cannot have any vested right to purchase the shares of the 2nd respondent until the notice is issued by the Board offering such transfer. Merely because the 2nd respondent violated the procedure contemplated under Article 7 of the Articles of Association, it cannot be said that such shares should be sold to the appellants, but only if notice is issued by the 2nd respondent to the Board, regarding its intention to transfer the shares, the Board has to otter the same to the existing members in pro rata. Only on receipt of such otter from the Board, the appellants will get a right to purchase the said shares on the value fixed by the Board of Directors or the auditor or the auditors of the Company if the Board so desires. Merely because the 2nd respondent sold the shares to respondents 3 to 6, it cannot be said that the appellants can straightaway offer to purchase the shares. The procedure contemplated under Article 7(c) of the Articles of Association is binding on the appellants and they can make otter only if the procedure contemplated under Article 7(c) is followed and so the appellants cannot compel the 2nd respondent to sell the shares de hors the procedure contemplated under Article 7(c) of the Articles of Association.

13. Moreover as rightly submitted by the learned counsel for the 1st and 2nd respondents, the Company Law Board can only direct the Company to register the transfer or transmission and direct rectification of the registers and to pay the damages, if any, sustained by the parry aggrieved. No specific power is given under section 111(5)(b) of the Companies Act to direct a member to transfer his shares to other member. When no such power is given under the provisions of the Companies Act the Company Law Board is correct in refusing to give such a direction as prayed for by the appellants.

14. In view of the above discussion, we do not find any merits in this Appeal. Hence this Appeal is dismissed. No costs.

BOMBAY HIGH COURT

COMPANIES ACT

[1995] 6 SCL 110 (BOM.)

HIGH COURT OF BOMBAY

Jagishchandra Champaklal Parekh

Kantilal Prabhudas Mehta

M.L. PENDSE, ACTG. CJ.

AND A.V. SAVANT, J.

APPEAL NO. 542 OF 1994

IN NOTICE OF MOTION NO. 1465 OF 1991

IN SUIT NO. 1054 OF 1988

APRIL 13, 1995

Section 111 of the Companies Act, 1956 - Transfer of shares - Refusal to register - Whether powers conferred on Central Government under section 111 to entertain appeal against order of company declining to register transfer of shares do not confer upon Central Government right to determine issue of title of shares which can be determined only by Civil Court - Held, yes

Section 111 of the Companies Act, 1956 - Transfer of shares - Refusal to register - Appellant advanced loan against share certificates - Claiming that he became owner of shares in terms of oral agreement on respondent's failure to repay loan, appellant applied for effecting transfer - Company refused to register transfer - CLB directed company to effect transfer - Respondent thereafter filed suit for redemption of shares alleging that there was no such oral agreement with appellant by which appellant became owner of share-Trial Judge granted interim stay restraining implementation of CLB's order - Whether since CLB is not competent to decide question of title, decision 01 CLB did not operate as res judicata - Held, yes - Whether even otherwise, on facts, it could not be said that CLB determined title to disputed shares and as such Trial Judge rightly granted interim stay - Held, yes

FACTS

Appellant who held 16,440 shares and blank transfer forms as security against loan of Rs. 1,50,000 advanced to the respondents, deposited them with the company for registration in his name claiming that as per oral agreement with respondents the pledged transaction was to amount to sale of shares in his favour on respondents' failure to repay loan and that the respondents had actually failed to repay amount in spite of his notice to them under section 176 of the Indian Contract Act, 1872. The company was directed by the CLB to register the transfer in appellant's favour. Thereafter, respondent filed a suit for redemption of shares pledged with the appellant denying receipt of any notice or existence of any oral agreement, as alleged by appellant. The trial judge came to the conclusion that the oral agreement was highly improbable and granted interim stay restraining implementation of the CLB's order.

On appeal, the appellant (pawnee) contended that CLB's decision operated as res judicata and as such the trial court was not competent to grant interim relief.

HELD

The powers under section 111 are conferred upon the Central Government to entertain appeal against the order of the company declining to register the shares. The Central Government, though a Tribunal, cannot be equated with a civil court. The right to decide issue of title to movable or immovable property vests in the civil court and the civil court is not divested of that right unless and until specific provision is found in some statute or such a provision can be gathered by implication. The provisions of section 111 does not provide that the Central Government can determine the issue of title. The submission that section 155 confers power for deciding issue of title and the ambit of section 111 and section 155 is almost similar. It overlooks that the powers conferred under section 155 are on the High Court and not on the Central Government in respect of rectification of register. It is not permissible to equate the High Court to the Central Government.

Even assuming that the Board while exercising powers under section 111 can determine issue of title to the disputed shares, the question which required determination was whether in fact the Board had determined such issue. A perusal of the order of the Board made it clear that it had not even considered whether there was oral agreement between the appellant and respondents that the pledged shares would automatically stand transferred in favour of the appellant. The Board had also not examined whether the alleged notice claimed to have been given by the appellant under section 176 of the Indian Contract Act was at all served upon the respondents. No evidence had come to the knowledge of the Board to indicate that the shares were handed over to the transferee as a security without authority to the transferee to fill in the blanks. The fact that the shares were initially pledged with the appellant was not in dispute and the appellant's claim that the transfer of pledged shares automatically became a transaction of sale because of oral agreement or in the alternative because of notice given under section 176 was not at all examined by the Board. It was, therefore, futile to suggest that the Board had determined the issue of title to the disputed shares and consequently civil court could not re-examine the question. The contention of the appellant that the plea of the respondents was barred by principles of res judicata was prima facie not acceptable.

Section 176, inter alia, provides that if the pawner makes default in payment of the debt at the stipulated time, then the pawnee may sell the thing pledged on giving the pawner reasonable notice of the sale. The appellant could not produce any acknowledgement nor the proof of despatch of the alleged notice. The appellant contended that there was oral agreement between him and the respondents whereby it was agreed that on failure of the respondents to repay the amount by stipulated period, the transaction of pledge would automatically stand converted into an agreement of sale and in view of the oral agreement, service of notice was not necessary. There was no merit in the submission because the assumption that there existed an oral agreement was not sustained by any material at that interim stage. The alleged oral agreement was highly improbable. The issue as to whether there was an oral agreement could be determined finally only at the hearing of the trial after the appellant led evidence. At the interim stage, the claim of the appellant about such oral agreement could not be accepted. In these circumstances, the order passed by the trial judge could not be faulted.

The appeal was, therefore, dismissed

CASE REFERRED TO

Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwah. [1961] 31 Comp. Cas. 387 (SC).

Kirit Mehta for the Appellant. P.K. Samdani, Virendra Tulzapurkar and Pradeep Sancheti for the Respondent.

JUDGMENT

Pendse, Actg. CJ. - The respondent No. 4 - Deccan Paper Mills Co. Ltd. is a public limited company registered under the Indian Companies Act, 1913. 16,440 shares of respondent No. 4 - company - were held by respondent Nos. 1 to 3. The appellant - original defendant No. 1 - claims that a loan of Rs. 1,50,000 was advanced to respondent Nos. 1 to 3 and, as a security, a demand promissory note was obtained. The respondent Nos. 1 to 3 also pledged 16,440 shares along with the transfer forms. The appellant claims that an oral agreement was reached between the appellant and respondent Nos. 1 to 3 that in case the amount of loan along with interest was not repaid within a stipulated period, the pledged transaction would amount to sale of the shares in favour of the appellant. The appellant claims that as the amount was not paid by respondent Nos. 1 to 3, the appellant served notice on 2-6-1987 that the shares stand transferred in favour of the appellant. The appellant then lodged the shares on 16-9-1987 with the company for registration. The request of the appellant was rejected by the board of directors in the meeting held on 14-11-1987. The grounds for rejection were:

§ There are disputes between transferee and the chairman of the company

§ There are disputes between the director of the company and one Mehta who had attested the transfer forms

§ The transfer forms handed over to the appellant were blank and consideration was not paid

§ The transferee is an undesirable person and is likely to create difficulties and problems for the company and

§ The transferors have filed Suit No. 1054 of 1988 in Bombay High Court against the transferee for redemption of the shares

The appellant, feeling aggrieved by the decision of the board of directors refusing to transfer the shares, preferred appeals under section 111 of the Companies Act, 1956 ('the Act') before the Company Law Board (Western Region) Bench. The CLB by decision dated 31-1-1991 (vide [1991] 6 CLA 34) allowed the appeals and directed the company to register the transfer of impugned shares and give effect to the decision within ten days of the order. The transferors and the company preferred Writ Petition No. 1850 of 1991 under article 226 of the Constitution in this Court but the petition was withdrawn with a liberty to file suit. Pursuant to the liberty, the respondent Nos. I to 3 filed suit for redemption of shares pledged with the appellant. The respondent Nos. 1 to 3 claimed that the contention of the appellant that there was an oral agreement that the pledged transaction would automatically result into a sale transaction, was untenable as the parties had not entered into any such oral agreement. The respondent Nos. 1 to 3 denied receipt of alleged notice dated 2-6-1987, claimed to have been served by the appellant under section 176 of the Indian Contract Act, 1872. The respondent Nos. 1 to 3 claimed that respondent No. 4 is a closely held company and the shares were handed over and blank transfer forms were signed merely as a collateral security for return of Rs. 1,50,000.

The respondent Nos. 1 to 3 took out Notice of Motion No. 1465 of 1991 restraining the appellant and respondent No. 4 from giving effect to the decision of the CLB. The respondent Nos. 1 to 3 claimed that the company should not transfer the impugned shares in the name of the appellant. The relief sought in the motion was resisted by the appellant by claiming that the decision recorded by the CLB in proceedings under section 111 of the Act operates as res judicata and it is not open for respondent Nos. 1 to 3 to claim that the shares which are sought to be transferred in favour of the appellant were merely pledged. The appellant claimed that title to the shares stands transferred automatically on failure of respondent Nos. 1 to 3 to make payment at the stipulated period as per oral agreement. The trial Judge by impugned judgment dated 19-7-1994 came to the prima facie conclusion that the oral agreement alleged by the appellant is highly improbable. The trial Judge also held that it is difficult to accept the claim of the appellant that the alleged notice dated 2-6-1987 under section 176 of the Indian Contract Act was served on respondent Nos. 1 to 3. The trial Judge found that the contention that the decision of the CLB operates as res judicata is not correct because CLB was not a competent court to decide question of title and, in any event, the decision of the Board has not decided title to the shares. The decision of the learned Single Judge is under challenge.

2. Shri Mehta, the learned counsel appearing on behalf of the appellant, reiterated the contentions raised before the learned Single Judge. Before examining the contentions, we wish to make it clear that the appeal is preferred at an interim stage and any observations made by the learned Single Judge and in this judgment are merely prima facie observations. Shri Mehta submitted that the CLB was competent to decide the question of title while exercising powers under section 111 and has indeed decided the issue of title to the disputed shares and that decision must operate as res judicata and the learned Single Judge was not entitled to grant interim relief. We are unable to accept the contention urged by the learned counsel. The powers under section 111 are conferred upon the Central Government to entertain the appeal against the order of the company declining to register the shares. The Central Government, though a Tribunal, as held by the Supreme Court in Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp. Cas. 387, cannot be equated with a civil court. The right to decide issue of title to movable or immovable property vests in the civil court and the civil court is not divested of that right unless and until specific provision is found in some statute or such a provision can be gathered by implication. The provisions of section 111 do not provide that the Central Government can determine the issue of title. Shri Mehta submitted that section 155 of the Act confers power for deciding issue of title and the ambit of section 111 and section 155 is almost similar. The submission overlooks that the powers conferred under section 155 are on the High Court and not on the Central Government in respect of rectification of register. It is not permissible to equate the High Court to the Central Government. The reliance on the decision of the Supreme Court is not accurate because the Supreme Court was concerned with the issue as to whether an appeal is competent against the decision of the Central Government under section 111 in accordance with the powers conferred under article 136 of the Constitution. The Supreme Court held that the Central Government had all the trappings of judicial Tribunal while deciding the appeal and, therefore, the appeal is perfectly competent to the Supreme Court under article 136. Shri Mehta referred to the observations of the Supreme Court that the powers to entertain appeal under section 111 is not unrestricted being an alternative to the right to approach the civil court and is subject to the same limitations which are implicit in the exercise of power by the civil court under section 155. It is not possible to accept the contention of the learned counsel that these observations should be construed as to mean that the powers of the Central Government under section 111 and the High Court under section 155 are identical. The question of title cannot be decided by the Central Government and there is nothing in section 111 to warrant a contrary conclusion.

3. Even assuming that the CLB, while exercising powers under section 111, can determine issue of title to the disputed shares, the question which requires determination is whether in fact the CLB has determined such issue. The perusal of the order passed by the CLB on 31-1-1991 makes it clear that the CLB has not even considered whether there was oral agreement between the appellant and respondent Nos. 1 to 3 that the pledged shares would automatically stand transferred in favour of the appellant. The CLB has also not examined whether the alleged notice claimed to have been given by the appellant under section 176 was at all served upon the respondent Nos. 1 to 3. The CLB in paragraph 10 of the order observes that no evidence had come to the knowledge of the Board to indicate that the shares were handed over to the transferee as a security without authority to the transferee to fill in the blanks. The Board then observed that "even accepting the arguments advanced by the transferor, it is an admitted fact that there was physical delivery of shares along with the transfer forms...." We fail to appreciate how this observation can at all enable the appellant to claim that the question of title was determined by the CLB. The fact that the shares were initially pledged with the appellant is not in dispute and the appellant's claim that the transfer of pledged shares automatically becomes a transaction of sale because of oral agreement or in the alternative because of notice given under section 176, was not at all examined by the CLB. It is, therefore, futile to suggest that the CLB has determined the issue of title to the disputed shares and consequently civil court cannot re-examine the question. In our judgment, the contention of the appellant that the plea of the respondent Nos. 1 to 3 is barred by principles of res judicata is prima facie not acceptable.

4. Shri Mehta then submitted that the appellant had served notice dated 2-6-1987 on respondent Nos. 1 to 3 in accordance with section 176. The section inter alia provides that if the pawner makes default in payment of the debt at the stipulated time, then the pawnee may sell the thing pledged on giving the pawner reasonable notice of the sale. The trial Judge rightly observed that the appellant did not produce any record to substantiate the contention that notice was served. The appellant could not produce any acknowledgement nor the proof of despatch of the alleged notice. We do not find any infirmity in the conclusion reached by the trial Judge at the interim stage. Shri Mehta then submitted that in fact, in view of the oral agreement pleaded by the appellant, it was not necessary to even serve notice under section 176. The learned counsel urged that there was oral agreement between the appellant and respondent Nos. 1 to 3 whereby it was agreed that on failure of the respondents to repay the amount by stipulated period, the transaction of pledge would automatically stand converted into agreement of sale. The learned counsel urged that in view of the oral agreement, service of notice under section 176 was necessary. We are unable to find any merit in the submission because the assumption that there exists an oral agreement is not sustained by any material at this interim stage. The learned Single Judge observed that the alleged oral agreement apart from being highly improbable is impermissible in law. We share the view of the learned Single Judge that the alleged oral agreement is highly improbable. The issue as to whether there was an oral agreement can be determined finally only at the hearing of the trial after the appellant leads evidence. At the interim stage, we are not prepared to accept the claim of the appellant about such oral agreement. In our judgment, in these circum stances, the order passed by the learned Single Judge cannot be faulted.

5. It is required to be stated at this juncture that the amount advanced by the appellant for securing pledge of shares was Rs. 1,50,000 and that amount was advanced on 2-6-1986. The learned Single Judge granted relief to respondent Nos. 1 to 3 on condition that the respondents deposit Rs. 2,50,000 with the Prothonotary and Senior Master of this Court. The amount has accordingly been deposited and that sufficiently protects the interest of the appellant. In these circumstances, the order passed by the learned Single Judge does not suffer from any infirmity and is not required to be disturbed.

Accordingly, appeal fails and is dismissed. In the circumstances of the case, there will be no order as to costs.

KARNATAKA HIGH COURT

COMPANIES ACT

[1995] 5 SCL 136 (KAR.)

HIGH COURT OF KARNATAKA

Aeg-Aktiengesellschaft

Insotex (India) Ltd.

P. KRISHNA MOORTHY AND V.P. MOHAN KUMAR, JJ.

MISCELLANEOUS FIRST APPEAL NO. 1564 OF 1993

JANUARY 24, 1995

Section 111 of the Companies Act, 1956 read with section 34 of the Arbitration Act, 1940 - Register of members - Rectification of - Shares of respondent No. 2 Indian company, purchased from appellant, a foreign company, by respondent No. 1, were duly transferred in its name - Subsequently transfer was cancelled and its name removed from register of members of respondent No. 2 on ground that there was no valid approval from RBI - Foreign company, which was impleaded as party in proceedings before CLB on application by respondent No. 1 under section 111, sought for stay of proceedings on ground that it involved question of ownership of shares in question which was to be settled by arbitration in terms of agreement between appellant and respondent No. 1 - CLB refused to accept foreign company's request - Whether dispute before CLB being about validity of action of respondent No. 2 in removing name of respondent No. 1 from register of members and respondent No. 2 being not a party to arbitration agreement, proceedings before CLB took in issues not covered by arbitration clause and as such CLB was right in holding that proceedings could not be stayed - Held, yes - Whether even otherwise, entire transaction of sale or transfer by foreign company having taken place in India and object of foreign company to have arbitration in a third foreign country apparently being to make it difficult for applicant (transferee) to enforce its rights, it would be improper to exercise discretionary power under section 34 of Arbitration Act to stay proceedings before CLB - Held, yes

FACTS

The first respondent-company purchased certain shares of an Indian company, the second respondent, held by the appellant, a German company. As per the agreement for sale, it was agreed between the first respondent and the appellant that any dispute that might arise was to be referred to arbitrators appointed in accordance with the Rules of conciliation and arbitration of the International Chamber of Commerce, Paris and the arbitration was to take place in Zurich, Switzerland. The first respondent lodged shares with the second respondent-company for transfer and the transfer was effected. But subsequently, the transfer was cancelled on the ground that as on the date of transfer, there was no valid approval from the RBI. The first respondent made an application under section 111 to the CLB for rectification of register of members. In these proceedings, the appellant-German company was impleaded as a party. The appellant sought stay of the proceedings contending that since there was an arbitration clause in the agreement between the first respondent and the appellant, the first respondent should have invoked that clause for settlement of dispute as to validity of the contract between them. The CLB dismissed the application under section 34 holding that the issue for consideration before it was only about the removal of the name of the first respondent from the register of the second respondent company and as such it was not a fit case for staying proceedings under section 34.

HELD

The appellant was relying on the agreement to contend for the position that the agreement had worked itself out and in such circumstances, the question as to the effect of the provisions of the agreement in question was a dispute arising out of the agreement and would be covered by the arbitration clause. It was not the case of the appellant that the agreement was void ab initio but its only case was that it had worked itself out and the agreement had come to an end Certainly, this question came under the arbitration clause. But the further question was as to whether in spite of that, the CLB should exercise its discretion by staying the proceedings under section 34. No doubt, the question of title to the shares of the first respondent may also be relevant, but that was not the only question to be decided Originally the name of the first respondent company was entered in the register of the second respondent company which was later removed on the basis that there was no valid approval from the RBI. So, one of the important questions to be considered by the CLB was as to whether the removal of the name of the first respondent company was proper on the ground given by the second respondent company. Whether the reason given by the second respondent company for cancellation of name of the first respondent company was proper or not, was not a dispute coming under the arbitration agreement between the appellant and the first respondent but it was outside the same. The removal of the name from the register was by the second respondent. The second respondent was not a party to the arbitration agreement and it was the action of the second respondent that was challenged in the application before the CLB. In the light of these facts, the proceedings before the CLB took in issues which were not covered by the arbitration clause and were also against a party which was not a signatory to the agreement. In other words, the proceedings before the CLB covered also issues not covered by the arbitration clause, though one of the disputes that might arise was within the arbitration clause. Moreover, it was the action of the second respondent that was challenged before the CLB which was not a party to the arbitration agreement. In the circumstances of the case, it could not be said that the second respondent was only a formal party. The validity of their action on the ground given by them had also to be considered

For the aforesaid two reasons, the CLB was right when it held that this was not a fit case to be stayed under section 34. From the facts of the case, it was clear that the contract was entered into in India, the first respondent was an Indian company, the entire evidence of both the appellant and the respondents was in this country; the contract as a whole was executed and carried out in this country and the whole claim arose in this country. The appellant was a German company and the first respondent was an Indian company and the arbitration had to take place in a third country, viz., Switzerland, and as such the object of the appellant was only to make it very difficult for the first respondent to enforce its rights. Moveover, relief had to be granted by a special Tribunal, though no doubt, they would be a judicial proceedings. At any rate, the entire dispute before the CLB was not covered by the arbitration clause and the second respondent was not a party to the arbitration agreement. For all these reasons, it was not a fit case where the discretion under section 34 had to be exercised in favour of the appellant. Accordingly, the impugned order of the CLB was to be upheld

CASE REFERRED TO

Ramji Dayawala & Sons (P.) Ltd v. Invest Import MR 1981 SC 2085.

King and Partridge for the Applicant. H.C. Sundaraswamy, K.R. Prasad and Vijayashankar Associates for the Respondent.

JUDGMENT

Moorthy J. — This appeal arises out of an order rejecting an application under section 34 of the Arbitration Act, 1940 by the CLB. The first respondent in the appeal is an Indian company by name Insotex (India) Ltd.

2. The first respondent filed an application before the CLB under section 111 of the Companies Act, 1956 ('the Act') alleging that they purchased 13,600 shares of the second respondent company from the appellant which is a German company and a non-resident company, under an agreement between them dated 1-9-1989, for a total consideration of Rs. 13,60,000. The first respondent, Insotex (India) Limited, duly lodged transfer instruments together with share certificates with the second respondent-company on 4-9-1989. Since the transaction involved transfer of shares by a non-resident company, permission of the RBI was obtained subject to certain terms and conditions stipulated by the RBI. The time granted by the RBI was extended from time to time up to 5-9- 1989. According to the first respondent Insotex (India) Limited, they also handed over to the appellant a cheque dated 4-9-1989, for the consideration amount and also paid relevant tax on the same. According to Insotex (India) Limited, they had completed all the formalities regarding transfer of shares by the stipulated date 4-9-1989. The first respondent, Insotex (India) Limited, also received a communication from the second respondent-company through a copy of the letter addressed by them to the RBI that the transfer of shares had been effected in the books of account of the company by a resolution of the board of directors on 17-5-1991. Immediately, thereafter, they received another copy of the letter dated 31-7-1991, addressed by the company to the RBI intimating that the board of directors of the second respondent company had, in their board meeting held on 24-7-1991, rescinded the resolution passed on 17-5-1991, and consequently, the name of the first respondent Insotex (India) Limited has been removed from the register of members. Insotex (India) Ltd. further alleged that, no notice of the proposed removal of the name from the register of members was given to them. On various grounds, Insotex (India) Limited filed a petition before the CLB under section 111 for rectification of the register of members and thereby to include the name of Insotex as holder of 13,600 shares in the second respondent company.

3. This petition came up for hearing on 4-9-1992, and at the suggestion of the learned counsel for the second respondent and agreed to by the learned counsel for Insotex (India) Ltd., a direction was issued by the CLB that the appellants shall also be impleaded as a party and that a copy of the petition should be served on them.

4. On receipt of the notice from the CLB the appellant filed an application under section 34 praying for staying the proceedings before the CLB in view of a provision for arbitration in the agreement between the appellant and the first respondent Insotex (India) Limited. It was contended by the appellant that there is a serious dispute in existence between the appellant and the first respondent-company as to the validity of the contract entered into between them for the sale of 13,600 shares in the second respondent-company. This dispute warrants adjudication on the validity of the contract and as per clause 7 of the agreement dated 14-9-1989, between the appellant and the first respondent, any dispute arising out of the agreement should be settled by arbitration. The first respondent should have invoked the arbitration clause for settlement of the above dispute and if it were invoked, the appellant would, at all time, have been and was even now ready and willing to accept the arbitration and do everything necessary for the proper conduct of the same. It was, therefore, prayed that the proceedings before the CLB may be stayed as per section 34.

5. The matter was elaborately heard by the CLB. The contentions of all the parties were considered and it was held that the issue for consideration in the proceedings before them is only as to whether the removal of the name of the first respondent from the register of members by the second respondent after having been entered is valid and proper, that the dispute is mainly Respondent Nos. 1 and 2 and accordingly, the case is not a fit one for being stayed under section 34 and dismissed the application filed by the appellant. This appeal is against the abovesaid order.

6. The learned counsel for the appellant contended that the contract between the appellant and the first respondent for sale of 13,600 shares is covered by an agreement dated 1/4-9-1989, and that the title of the first respondent to the shares will depend upon the terms of the agreement. If the terms of the agreement had not been complied with, there will be no transfer of shares in favour of the first respondent and accordingly, they will not be entitled to have the shares transferred in their name. That agreement contains an arbitration clause, which provides that, all the disputes which arise out of or in connection with that, shall be referred to arbitration. According to them, the right to have the register of the second respondent company rectified in favour of the first respondent will depend on as to whether the first respondent has obtained title to the shares in question. The CLB is competent under section 111(7) to decide any question in regard to any title of a person who is a party to an application. The question of title of the first respondent will depend upon the agreement which is a dispute or question which arises out of the agreement and accordingly, the matter is to be referred to the arbitrator. On the other hand, the learned counsel for the first respondent contended that the only question before the CLB is as to whether there are justifiable grounds for the second respondent company removing the first respondent company from the register of the company. According to the first respondent, their name was removed from the register of the second respondent only on the ground that there was no valid approval from the RBI and not on the basis that they had not obtained title. It is further contended that, at any rate, the second respondent who is a necessary party before the CLB is not a party to the agreement and as the relief is mainly claimed against them and the arbitration clause being not applicable to them, the proceedings could not be stayed. It was further contended by them that, at any rate, on the facts and circumstances of the case, the court should not exercise the discretion vested in it under section 34 in favour of the appellant taking into account the facts of the case.

7. The question to be decided is as to whether on the facts and circum stances of the case, the proceedings before the CLB should be stayed under section 34. As stated earlier, the appellant sold 13,600 shares in the second respondent-company to the first respondent-company under an agreement dated 1/4-9-1989. It is seen from annexure 'D' letter of the second respondent-company dated.30-5-1991, that by a resolution of the board dated 17-5-1991, the transfer was effected and the name of the first respondent, Insotex (India) Ltd., has been registered in the name of members of company effective from that date. Thereafter, by a subsequent resolution dated 24-7-1991, the name of the first respondent has been removed from the register of members. The reason for the removal of the name of the first respondent as could be seen from annexure 'E' letter is that, there was no valid approval of the RBI subsisting on the date when the transfer was effected. It is in pursuance of this removal of their name, that the first respondent has filed an application before the CLB for the rectification of the register. The appellant-company no doubt, raised a dispute regarding the title of the first respondent to the shares under the terms of the agreement entered into between them. According to them, the terms of the contract have worked out themselves as the formalities have not been complied with within the period stipulated therein. It is not necessary for us to go into that question at this stage. But it has to be noted that, in the proceedings before the CLB, the question of title of the first respondent to the shares may also be relevant and the CLB is also competent to go into that question under section 111(7). The case of the appellant is that the agreement has come to an end by its own terms and the dispute regarding the effect of the agreement is a matter fully covered by the arbitration clause. The arbitration clause contained in the agreement is clause 1(b) of the agreement, which reads:

"(b). If, for whatever reason, disputes shall arise out of or in connection with the present agreement that cannot be solved by the parties they shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, France, by three arbitrators appointed in accordance with the said rules. The applicable law shall be the law of the Republic of India. The arbitration shall take place in Zurich, Switzerland."

8. The terms of the arbitration clause are very wide and any dispute arising out of the contract has to be settled by arbitration. The dispute between the appellant and the first respondent as to whether the first respondent has acquired title under the agreement is certainly a matter which comes under the arbitration clause. The fact that the case of the appellant is that the agreement itself has worked itself out will not put an end to the arbitration clause. The appellant is relying on the agreement to contend for the position that the agreement has worked itself out and in such circumstances, the question as to the effect of the provisions of the agreement in question is a dispute arising out of the agreement and will be covered by the arbitration clause. It is not the case of the appellant that the agreement is void ab initio but their only case is that, it has worked itself out and the agreement has come to an end. Certainly, this question comes under the arbitration clause.

9. But the further question is as to whether in spite of that, this Court should exercise its discretion by staying the proceedings under section 34. No doubt, the question of title to the shares of the first respondent may also be relevant but that is not the only question to be decided. As stated earlier, originally the name of the first respondent-company was entered in the register of the second respondent-company which was later removed by a subsequent resolution dated 24-7-1991, on the basis that, there was no valid approval from the RBI. So, one of the important questions to be considered by the CLB is as to whether the removal of the name of the first respondent-company was proper on the ground given by the company. Whether the reason given in the second resolution dated 24-7-1991, is proper or not, is not a dispute coming under the arbitration agreement between the appellant and the first respondent but it is outside the same. The removal of the name from the register was by the second respondent. The second respondent is not a party to the arbitration agreement and it is the action of the second respondent that is challenged in the application before the CLB. In the light of the above facts, we are clearly of the view that the proceedings before the CLB take in issues which are not covered by the arbitration clause and are also against a party who is not a signatory to the agreement. In other words, the proceedings before the CLB cover also issues not covered by the arbitration clause, though, one of the disputes that may arise is within the arbitration clause. Moreover, it is the action of the second respondent that is challenged before the CLB which is not a party to the arbitration agreement. In the circumstances of the case, it cannot be said that the second respondent is only a formal party. The validity of their action on the ground given by them has also to be considered. For the aforesaid two reasons, we are of the view that the CLB was right when it held that this is not a fit case to be stayed under section 34.

10. It is well settled that the power under section 34 to stay any proceedings before a judicial authority is discretionary. The appellant is a German company and the first respondent is an Indian company. According to clause 7(4) of the arbitration agreement, any dispute has to be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, France by three arbitrators appointed in accordance with the said rules. It is further provided that the law applicable shall be the law of the Republic of India and the arbitration shall take place in Zurich, Switzerland.

11. Thus, the arbitration as provided for is by a Foreign Arbitral Tribunal. A similar case, wherein a Foreign Arbitral Tribunal was agreed between the parties, came up for consideration before their Lordships of the Supreme Court in the matter of stay under section 34 in Ramji Dayawala & Sons (P.) Ltd v. Invest Import AIR 1981 SC 2085. In that case, the plaintiff therein, a labour contractor, entered into a sub-contract with the defendant, a Yugoslavia-based company, which, in turn, had entered into a contract with the Bihar State Electricity Board for setting up the power station. The plaintiff sub-contractor, pursuant to the sub-contract dated 10-7-1961, had to supply skilled labour, unskilled labour and apprentice labour, to carry out the erection work and incidentally to do other things provided in the sub-contract. The plaintiff claims that it carried out certain extra work for which it was entitled to recover Rs. 70,000 from the respondent. There were also other claims made by the plaintiff and the plaintiff therein, filed an original suit in the Calcutta High Court to recover a sum of Rs. 4,25,343 from the defendant therein. On service of notice on the defendants, they appeared before the Court and filed an application purporting to be under section 151 of the Code of Civil Procedure, 1908 contending that the sub-contract between the plaintiff and defendant incorporates an agreement to refer all the disputes arising out of the contract to arbitration and, therefore, the suit should be stayed. The arbitration agreement in that case provided that the arbitration has to be done by the International Chamber of Commerce in Paris with application of Yogoslav materials and economical law. In the circumstances of the case, their Lordships considered the question as to whether the suit is liable to be stayed under section 34 or not. In that context, their Lordships observed as follows:

"22 When parties by contract agree to arrange for settlement of their disputes by a Judge of their choice, by procedure of arbitration voluntarily agreed upon, ordinarily the court must hold the parties to their bargain. As a corollary, if a party to a subsisting arbitration agreement in breach or violation of the agreement to refer dispute to arbitration approaches the court, the court would not lend its assistance to such a party and by staying the suit compel the party in breach to abide by its contract. When the parties have agreed to an arbitration by a foreign Arbitral Tribunal the case for stay would be stronger than if there was a domestic arbitration agreement. This proceeds on the assumption that parties not only sought and agreed upon the forum for resolution of dispute but also the law according to which the dispute would be resolved. However, this is not an absolute rule. Granting or refusing to grant stay is still a matter within the discretion of the court. How discretion would be exercised in a given case would depend upon various circumstances. But to grant stay of the suit is still a matter within the discretion of the court...." (p. 2095)

12. Their Lordships also quoted with approval the following passage from Russell on the Law of Arbitration, 19th edition, which reads thus:

"The principles established by the authorities can, I think, be summarised as follows: (1) Where plaintiffs sue in England in breach of an agreement to refer disputes to a foreign court, and the defendants apply for a stay, the English court, assuming the claim to be otherwise within its jurisdiction, is not bound to grant a stay but has a discretion whether to do so or not. (2) The discretion should be exercised by granting a stay unless strong cause for not doing so is shown. (3) The burden of proving such strong cause is on the plaintiffs. (4) In exercising its discretion the court should take into account all the circumstances of the particular case. (5) In particular, but without prejudice to (4), the following matters, where they arise, may properly be regarded:—(a) In what country the evidence on the issues of fact is situated, or more readily available, and the effect of that on the relative convenience and expense of trial as between the English and foreign courts, (b) Whether the law of the foreign court applies and, if so, whether it differs from English law in any material respect, (c) With what country either party is connected, and how closely. (d) Whether the defendants genuinely desire trial in the foreign country, or are only seeking procedural advantages, (e) Whether the plaintiffs would be prejudiced by having to sue in the foreign court because they would: (i) be deprived of security for their claim; (ii) be unable to enforce any judgment obtained; (iii) be faced with a timebar not applicable in England; or (iv) for political, racial, religious or other reasons be unlikely to get a fair trial." (p. 2099)

13. After considering various aspects of the matter, their Lordships held as follows:

"29. To sum up, the entire evidence both of the appellant and the respondent is in this country; the contract as a whole was executed and carried out in this country; the claim as a whole arose in this country; the appellant is a company incorporated in this country and the respondent is having its office in this country; and that the respondent is not motivated by any principle to have the decision of the foreign Arbitral Tribunal at Paris but the principal object of the respondent is merely to make it more difficult, if not impossible, for the appellant to assert the claim. Add to this two other vital considerations, viz, that the cost of arbitration at Paris will be so disproportionately high to the claim involved in adjudication that one would never think of incurring such a huge cost to realise such a small sum claimed, and the restriction on the availability of foreign exchange, another vital relevant consideration. The sum total of all these well established circumstances clearly indicate that this was a suit in which when discretion is exercised on well settled judicial consideration no court would grant stay and the stay has to be refused." (p. 2099)

14. In the light of the principles laid down by the Supreme Court in the aforesaid case, we do not think that this is a fit case where we should exercise discretion in favour of the appellant by granting stay of the proceedings under section 34. From the facts of the case, it is clear that the contract was entered into in India; that first respondent is an Indian company; the entire evidence of both the appellant and the respondents is in this country; the contract as a whole was executed and carried out in this country and the whole claim arose in this country. The appellant is a German company and the first respondent is an Indian company and the arbitration has to take place in a third country, viz., Zurich, Switzer land and we feel that the object of the appellant is only to make it very difficult for the first respondent to enforce their rights. Moreover, relief has to be granted by a special Tribunal, though, no doubt, they are a judicial proceedings. At any rate, the entire dispute before the CLB is not covered by the arbitration clause and the second respondent is not a party to the arbitration agreement. For all these reasons, we are of the view that this is not a fit case where the discretion under section 34 has to be exercised in favour of the appellant.

15. In view of what is stated above, we do not find any reason to interfere with the order of the CLB and accordingly, the appeal is dismissed but without any order as to costs.

ANDHRA PRADESH HIGH COURT

Companies Act

[2001] 34 scl 269 (Ap)

HIGH COURT OF ANDHRA PRADESH

Karamsad Investments Ltd.

Nile Limited & Others

J. Chelameswar, J.

Company Appeal Nos. 2 to 5 of 2001

August 16, 2001

Section 111A, read with section 108A, of the Companies Act, 1956 - Transfer of shares - Rectification of register on transfer - Appellant GMM was admittedly holding company of other three appellant companies - Together with its subsidiaries, it acquired 6,30,095 equity shares of respondent-company constituting 21.08 per cent of its paid-up equity share capital without obtaining prior approval of Central Government under section 108A - Appellants sought registration of shares with respondent-company which refused it and also lodged complaints with Department of Company Affairs and SEBI for violation of section 108A and Takeover Regulations, 1997 - Whether having regard to fact that GMM had admittedly acquired 9.8 per cent of paid-up capital of respondent-company by 25-3-1998 and its subsidiary KHL had resolved to acquire up to 20 per cent of shares of said respondent-company on 15-4-1998, requirement of obtaining prior approval of Central Government under section 108A was imperative and said sanction had to be sought by KHL only by whose decision intention of both bodies to acquire more than 25 per cent of shares of respondent-company was made - Held, yes - Whether expression ‘agree to acquire’ occurring in section 108A has only reference to agreement between some persons enumerated in preceding clause in that section to jointly acquire shares of a company, and not to agreement between intending purchaser and prospective seller - Held, yes - Whether there was no violation of provisions of section 108A insofar as GMM’s acquisition of 9.58 per cent of respondent-company’s share capital was concerned and same was required to be registered by respondent if acquisition was otherwise in accordance with law - Held, yes - Whether respondent-company was justified in refusing to register shares acquired by KIL - Held, yes - Whether with regard to acquisition of 10,000 shares by KSPL, matter had to be remanded to Company Law Board to record finding on exact date of acquisition in question so as to decide applicability of requirement of section 108A - Held, yes

Section 111A of the Companies Act, 1956 - Transfer of shares - Rectification of register on transfer - Whether expression ‘sufficient cause’ occurring in proviso to sub-section (2) of section 111A takes within its sweep not only those contingencies contemplated under sub-section (3) but there can be other circumstances and reasons which might require company to refuse to register transfer of shares and such refusal would be refusal for sufficient cause - Held, yes

Section 108A of the Companies Act, 1956 - Transfer of shares - Restrictions on acquisition of certain shares - Whether though interest of company is one of factors to be considered by Central Government while granting or declining to grant approval under section 108A or 108D, necessarily Government is required to examine various factors like impact of acquisition on management of company, whether such an impact is desirable, etc. - Held, yes - Whether existing legal obligations of company should also be one of factors - Held, yes - Whether expression ‘agree to acquire’ occurring in section 108A has only reference to agreement between some persons enumerated in preceding clause in that section to jointly acquire shares of a company, and not to agreement between intending purchaser and prospective seller - Held, yes

Words and phrases - ‘sufficient cause’ occurring in proviso to section 111A(2) and ‘agree to acquire’ occurring in section 108A of the Companies Act, 1956

Facts

The appellant GMM was admittedly holding company of the other three appellant companies, namely, KHL, KIL and KSPL. Between 23-4-1997 and 11-2-1998, GMM acquired 1,48,100 equity shares of the respondent-company Nile which constituted 4.96 per cent of the paid-up share capital of the respondent-company. Subsequently, GMM acquired another lot of 1,38,100 such shares and then the total acquisition constituted 9.58 per cent of the total paid-up capital of the respondent company. On 15-4-1998, the Board of Directors of the appellant-company KHL resolved to acquire up to 6,00,380 shares of the respondent-company which would constitute 20 per cent of the subscribed equity share capital of the respondent-company and made a public announcement in various newspapers in terms of regulations 10 and 15 of the Takeover Code. However, the company could acquire only 18,300 shares pursuant to said public offer. On 13-5-1998, the Board of Directors of the appellant-company KIL resolved to acquire up to 4 lakhs of equity shares of the respondent-company and did in fact acquire 3,15,595 equity shares between 4-6-1998 and 2-7-1998. Thereafter on 4-9-1998 KIL forwarded these shares to the respondent-company for registration. On the same date the appellant-company KSPL also forwarded 10,000 equity shares acquired by them between 30-6-1997 and 11-2-1998 for the said purpose. Thus, admittedly between 23-4-1997 to 3-7-1998, all the four appellant-companies acquired 6,30,095 equity shares of the respondent-company which constituted 21.08 per cent of its paid-up equity share capital. The respondent-company by resolution of its Board of Directors dated 7-5-1998 and 30-10-1998, resolved to refuse registration of the ownership of these shares and the fact of refusal was intimated to the appellants between 7-5-1998 and 28-7-1998.

On 11-5-1998, the respondent-company informed the Department of Company Affairs and SEBI about the violation of section 108A by GMM and the regulations framed under the SEBI Act. On 22-5-1998, the respondent-company filed a writ petition seeking a declaration that the public offer made by KHL was illegal and inoperative and the Court on 28-5-1998 directed the Department of Company Affairs to consider various representations made by the respondent-company and to pass appropriate order. By the letter dated 24-7-1998 addressed by the department, it was opined that the GMM was a dominant undertaking for the purpose of section 108G read with section 108H. Aggrieved by the conclusion reached by the department, GMM and KHL filed a writ petition in the Bombay High Court which was said to be still pending.

Aggrieved by the decision of the respondent-company, the petitioner invoked the jurisdiction of the CLB under section 111A which dismissed the petition by its common order dated 1-11-2000; while dismissing the petition, it held that the petitioners were acting in concert to acquire the shares of the respondent-company and, therefore, they fell within the definition of 2(e) of the Take Over Code, 1997. It also held that the acquisition of shares by the petitioners was in contravention of regulation 7 of the Regulation and that in view of Department of Company Affairs holding GMM as a dominant undertaking, it ought to have taken prior approval of the Government as per the stipulation made in section 108A and in its absence, the acquisition of shares by the appellants was illegal and, consequently, the respondent-company’s refusal to register them was for ‘sufficient cause’ as contemplated under section 111A(2) and was valid.

On appeal :

Held

In substance, the Scheme of the provisions of sections 108A, 108B, 108C, 108D, 108E, 108G, 108H, 111 and 111A appears to be that the shares of public companies are freely transferable and the right of transfer cannot be restricted by the company. But in the interest of the company or in the public interest, the Central Government is required to monitor the transfer of shares of public companies where the transfer is made in bulk or the transfer is made by or in favour of the owner of a ‘dominant undertaking’ or the transfer itself has the effect of making the acquirer the owner of a dominant undertaking. The purpose of imposing such restrictions on the right to acquire or to transfer shares which is property, seems to be the need to monitor and regulate the stock markets as the recent economic history of India demonstrated the need for such monitoring, secondly, the need to control acquisition or transfers by the owners of dominant undertakings as those undertakings could seriously affect the supply of materials to the society and also perhaps to see that the control of industrial undertakings does not go into the hands of inexperienced and inefficient as the same might seriously affect the availability of goods or services to the society. The Scheme when it imposes a condition that the previous approval of the Central Government is required to be taken in the various instances mentioned under the various provisions discussed above implies that in an appropriate case the Government could withhold or decline to accord such permission.

Sub-section (1) of section 108A prohibits the acquisition of the equity shares in public company or a private company, which is a subsidiary of a public company by the various categories of persons mentioned therein either jointly or severally without the previous approval of the Central Government. Apart from the well-known legal persons like natural persons firms and bodies corporate, two more entities described as a “group” and “constituent of a group” are also brought within the sweep of this prohibition. The expression ‘group’ by virtue of section 108H shall have the same meaning as assigned to it under the Monopolies Restrictive Trade Practices Act though the expression ‘constituent of a group’ is not defined anywhere and must be understood in the normal grammatical sense in the context of the preceding expression ‘group’. But section 108A does not demand the previous approval of the Central Government in every case of acquisition of shares. Such an approval is required only when the total nominal value of the equity shares intended to be so acquired exceeds 25 per cent of the paid-up equity share capital of such company. Sub-section (2) mandates that any company in which not less than 51 per cent of the share capital is held by the Central Government or a Corporation or a Financial Institution (once again a defined expression under the MRTP Act) shall not transfer or agree to transfer any shares to any one of the categories of the persons mentioned in sub-section (1) called the acquirers unless such acquirer has obtained the previous approval of the Central Government for the acquisition or agreement for acquisition of such shares. In substance, sub-section (1) places an embargo on the acquirer whereas sub-section (2) places an embargo on the various kinds of public bodies (intending transferors) mentioned therein from transferring or agreeing to transfer any shares held by them in favour of an acquirer who has not obtained the previous approval of the Central Government but obliged to obtain the same in view of sub-section (1).

The embargo both on the acquirer and the transferor although in a limited variety of the cases has significance in the context of the penal provisions of section 108-I.

Section 108G makes the restrictions adumbrated under section 108A applicable to the acquisition by or transfer to of the various categories of ‘acquirers’ mentioned under section 108A(1), who are the owners of a dominant undertaking or would become the owners of a dominant undertaking as a consequence of such acquisition or transfer by the owners of dominant undertakings.

In the present case, admittedly the previous approval of the Central Government as required under section 108A was not taken by the appellants.

On the facts of the case at least by 25 March 1998, GMM admittedly, acquired 9.8 per cent of the paid-up capital of the respondent-company and on 15-4-1998 one of the subsidiaries, that is, KHL resolved to acquire up to 20 per cent of the shares of NILE, which resolution, if accomplished, would have made the total holding of these two companies more than 25 per cent of the equity share capital of the respondent-company. However, KHL could acquire pursuant to its resolution in the public offer only 18,300 shares. It was an admitted fact that 6,00,380 equity shares of the respondent-company would represent 20 per cent of the subscribed equity share capital of the respondent-company, as could be seen from the public announcement made by KHL. It was also an admitted fact that four appellants together did in fact acquire 6,30,095 shares. Therefore, the entire acquisition by all the four appellants put together did not cross the prescribed limit of 25 per cent under section 108A(i). The Company Law Board while deciding the aspect of the violation of section 108A of the Act held that the previous approval of the Central Government is required even to implement a proposal to acquire shares beyond 25 per cent.

The appellants argued that such a requirement was not contemplated under section 108A. The appellant further submitted that what is prescribed under section 108A is either an acquisition of 25 per cent or more of the shares of a company or an agreement to acquire the same without the previous approval of the Central Government but not the decision of the intending acquirer. According to the appellant, the agreement contemplated under section 108A is an agreement between the intending acquirer and the prospective seller.

The submission made by the appellants had no merit for the reason that the expression “agree to acquire” occurring in section 108A has only reference to an agreement between some of the persons enumerated in the preceding clause in that section to jointly acquire the shares of a company but not to an agreement between the intending purchaser and the prospective seller. The expression “agree to acquire” which immediately follows the clause “....shall jointly or severally acquire....” makes the intention of the Legislature clear that the agreement to acquire contemplated therein is an agreement in the context of a joint acquisition by some of the enumerated categories of persons in the said section. This view gains further strength from the language of the later part of the same section which says “...if the total nominal value of the equity shares intended to be so acquired...” The expression ‘intended’ is significant in this context. Obviously, the Legislature in its wisdom thought that the Union of India must have the information regarding the acquisition of shares in any company beyond 25 per cent the moment a prospective acquirer, either severally or jointly with some other person, takes such a decision. The reason for such a stipulation appears to be that not only the actual acquisition of the shares of a company but even a decision to acquire in bulk, depending on the person taking such a decision, would have a serious effect on the stock market. Apart from that, the decision of the intending acquirer if implemented would have serious impact on the management of the target company and in some cases even on the community at large depending on the nature of the industry run by the target company.

If that is the true meaning and import of section 108A applying the same to the facts of the case, the acquisition by GMM was complete at least by 26-3-1998. The decision of KHL to acquire 20 per cent of the equity share capital of the respondent-company was on 15-4-1998. The intention of KHL to acquire 20 per cent coupled with the fact that the holding company of KHL (GMM) by then held 9.58 per cent of the paid up share capital of the respondent-company made the requirement of obtaining the previous approval of the Central Government imperative under section 108A. It was not available on the record whether there was any agreement between GMM and KHL to acquire beyond 25 per cent of the equity share capital of the respondent-company. In fact, only those two bodies could make it clear whether there was any such agreement or not as it was a matter or the internal affair of those two companies - one, the holding company and the other subsidiary company. In the absence of any material on record to show as to when such an agreement between these two bodies came into existence, the only inference that could be drawn was that at least by 15-4-1998 when KHL resolved to acquire 20 per cent of the share capital of the respondent-company, there was an agreement between these two bodies to acquire more than 25 per cent of the shares of the respondent-company having regard to the inter-relationship between the said two companies. That raised two further questions (1) whether it was GMM or KHL which was required to obtain the previous approval of the Central Government? In view of the fact that there was nothing on the record to show that by 26-3-1998, by which date at the latest GMM completed the acquisition of 9.58 per cent of the share capital of the respondent-company, there was an agreement to acquire beyond 25 per cent of the share capital of the respondent-company as explained above, GMM need not have sought the previous approval of the Central Government. It was the decision of the KHL to acquire 20 per cent of the share capital of the respondent-company which called for the previous approval of the Central Government. In view of the fact that the holding company of KHL (i.e., GMM) already held 9.58 per cent of the share capital of the respondent-company making the intention of both the bodies to acquire 25 per cent of the shares, it was only the KHL which was required to obtain the previous approval of the Central Government. Then the second question was as to what should happen to the shares acquired by the GMM. In view of the conclusion reached above that there was no violation of the provisions of section 108A insofar as GMM’s acquisition of 9.58 per cent of the respondent-company’s share capital was concerned, the same was required to be registered by the respondent if the acquisition was otherwise in accordance with law. On the other hand, the acquisition of 18,300 shares by the KHL as already discussed above was in contravention of the provisions of section 108A. The respondent-company was justified in refusing to register the same.

Coming to acquisition of 3,15,595 shares acquired by KIL—another subsidiary company of GMM—the resolution to make such an acquisition was admittedly made on 13-5-1998. To decide whether such a decision would fall within the prohibition contained under section 108A the facts that the holding company GMM had already acquired by then 9.58 per cent of the equity share capital of the respondent-company and another subsidiary of the same holding company, i.e., KHL had by then, i.e., 15-4-1998, resolved to acquire up to 25 per cent of the share capital of the respondent-company, were relevant in view of the inter-relation between the three bodies. The decision of KIL coupled with the existing decision of KHL to acquire 25 per cent shares of the respondent-company by itself would make KIL liable to obtain the previous approval of the Central Government as required under section 108A of the Act as the decision of KIL coupled with the decision of KHL would make the intention of both the bodies put together clear that they intended to acquire more than 25% shares of the respondent-company. Apart from that, it must be remembered that by the said date the holding company had already acquired 9.58% paid-up share capital of the respondent-company. Therefore, the respondent-company was justified in refusing to register the shares acquired by KIL.

Coming to the legality of the acquisition of 10,000 shares of the respondent-company by the KSPL - third subsidiary company of GMM, was concerned, nothing was available on record as to when the decision to make such an acquisition was made nor the actual date of the acquisition. The only admitted fact available on record was that on 4-9-1998 KSPL forwarded the said 10,000 equity shares to the respondent-company for registration, by which date the resolutions of both KHL and KIL - the other two subsidiaries of GMM—to acquire more than 25% of the equity share capital of the respondent-company were in existence and the holding company, i.e., GMM, had already acquired 9.58 per cent of the respondent company’s equity share capital. In the absence of any specific material as to the exact date of the acquisition, it was not possible for the High Court to decide whether the same was hit by section 108A, if the acquisition was prior to 15th April, 1998 (the date on which KHL resolved to acquire 20 per cent of the respondent-company’s share capital), such an acquisition would not be hit by section 108A and if the acquisition was later than the above mentioned date, the same would be hit by section 108A.

Therefore, the appeal of KSPL, i.e., company appeal No. 5 of 2001, was required to be remanded to the CLB for recording evidence in this regard.

The next issue that was required to be dealt within these appeals was—whether the acquisition of the shares by the appellant companies herein or any one of them was in contravention of regulations of the Substantial Acquisition of Shares and Take Over Regulations, 1997 framed by the SEBI.

A close analysis of regulation 7(1) shows that an acquirer who acquires more than 5 per cent of the shares of the particular company or who has acquired some shares of a particular company coupled with the existing share holding of such an acquirer in the same company would make him the holder of more than 5 per cent of the shares of a particular company, he is called upon to make a disclosure of the aggregate of his share holding to that particular company within the period stipulated under sub-regulation (2).

Regulation 10 mandates that no acquirer shall either acquire 15 per cent or more of the shares of any particular company, or such number of shares coupled with the existing share holding of such an acquirer in the same company would make him the holder of more than 15 per cent of the shares unless such an acquirer makes a public announcement contemplated under the Chapter.

It is sufficient to notice that there is a clear difference in the scheme of regulation 7 and regulation 10; while regulation 7 obligates the acquirer, that on the acquisition of 5 per cent or more of the shares of any company, to intimate the same to that company Regulation 10 mandates that no acquirer shall acquire shares of any particular company beyond 15 per cent without following the procedure mentioned under the Chapter.

The distinction in the Scheme of both the above mentioned regulations and the difference in the language of the above mentioned two regulations would be very relevant for the purpose of deciding the consequences of the acquisition made in violation of those regulations.

Coming to the facts of the case, GMM acquired a total of 2,86,200 shares in two lots. Admittedly, the first lot of 1,48,100 shares was acquired between 23-4-1997 to 11-2-1998. The said shares admittedly constitute 4.96 per cent of the total equity share capital of the respondent-company in which case the regulation 7 was not attracted. The second lot of 1,38,100 shares was acquired by GMM on 25-3-1998. The CLB refused to believe that the acquisition of the second lot of 1,38,100 of shares by GMM was made on 25-3-1998.

The finding of CLB was not based on the material on record but it was purely a conjecture made by the CLB. In a matter like this where the dates of acquisition were very crucial, the CLB should have called upon the parties to adduce evidence to establish the date of the acquisition of the shares before rejecting their claim that the shares were acquired on 25-3-1998. This requirement of permitting the GMM to adduce evidence became all the more necessary in view of the fact that the respondent-company when it decided to reject the registration of the transfer of 2,86,200 shares in favour of GMM by its resolution dated 7-5-1998, nowhere indicated that the violation of regulation 7 of the Take Over Regulations was one of the grounds on which such a resolution was passed. Naturally, GMM did not know as to what exactly the case was that it was required to meet. Therefore, the appeal of GMM, i.e., Company Appeal No. 3 of 2001, was required to be remanded to the CLB for recording the evidence as to the date of the actual acquisition of the second lot of 1,38,100 shares by GMM and if the entire lot was not acquired on the same day on what date did GMM’s acquisition exceeded the limit of 5 per cent shares contemplated under regulation 7 but the Court did not propose to remand the appeal on this count for the reason that the violation, if any, on the part of the GMM did not affect the legality of the acquisition by the GMM, but the failure on its part, if any, to comply with an obligation created under regulation 7 after the acquisition was validly made, might expose GMM to penalties contemplated under regulation 45 and nothing more in the facts of the present case.

The only question which still remained to be considered was that apart from the violation of any law in acquiring the shares, was there any other reason for which a company could refuse to register the transfer of shares? As it is already noticed that section 111A(2), proviso of the Act contemplates the refusal to register the transfer of shares for sufficient cause.

Sub-section (3) of section 111A empowers the CLB to issue directions to a company to rectify its registers or records in cases where it is found by the CLB that the transfer of shares is in contravention of any one of the specified enactments under the said sub-section or any other law for the time being in force. Obviously, the Parliament thought it fit to authorize the CLB to look into the complaints of the acquisition of shares in contravention of law and take appropriate action in that regard as nothing done in contravention of law shall be permitted to subsist. The scope of the power under sub-section (3) conferred on the CLB is limited only to the acquisition of shares in contravention of law, but violation of statutory law is not the only infirmity in the matter of acquisition of shares. In a given case, shares could be acquired or transferred by a person in contravention of some existing contractual obligations of the transferor or some other obligations attached to those shares.

A party seeking to transfer shares held by it which would result in the breach of an obligation attached to the shares created by a prior contract could be injuncted from transferring the shares. It logically follows that the transfer if made and registered even before the aggrieved party could obtain an order of injunction, the transfer could be declared illegal in an appropriate action before a court of law. In which case the company would be bound by such a declaration made by the Court of the illegality arising out of a breach of the contractual obligation and bound to give effect to the decree of the Court to refuse registration of transfer.

The declaration of free transferability contained in section 111A(2) must be understood in the background of the pre-existing legal position that the articles of association of a company could restrict the right of the shareholder to transfer his shares. The existence of such power is still recognized in the context of private companies under section 111. But the right to transfer is the right of the holder of the shares (property). All that section 111A(2) declares is that such a right cannot be restricted. However, a transfer of property requires always two parties; the transferor and transferee. The declaration of the right of the transferor need not always create a corresponding legal right in the transferee. For instance, to take an extreme example, a transferor decides to transfer his shares in favour of a person who is legally incapacitated to enter into a contract like an alien enemy, or an insane person, the transaction is clearly illegal in which case the transferor cannot be heard to say that his right to freely transfer the shares held by him is curtailed. In such cases what is curtailed is the right of the acquirer. From the examination of the Scheme of sections 108A to 108G it is clear that the Parliament thought it fit to curtail the right of the acquirers in certain cases, either in the interests of the company or the public [see 108B(2), 108D]. Though it is not made express in section 108A, the Central Government while exercising the authority under the said section is obviously required to keep in mind both the above-mentioned factors, i.e., interests of the company and public. The language and the Scheme of section 108D makes the above clear.

Therefore, if the interest of the company is one of the factors to be considered by the Central Government while granting or declining to grant the approval under section 108A or 108D, necessarily the Government is required to examine various factors like the impact of the acquisition on the management of the company, whether such an impact is desirable, etc. The existing legal obligations of the company should also be one of the factors.

If that is the true import of the Scheme of sections 108A to 108G, the company (target) would be equally entitled to at least make an assessment of the probable impact of the registration of the acquisition of the bulk shares by any acquirer on the interests of the company. If in the process the company comes to the conclusion that registering such a transfer would be detrimental to the interests of the company, the company could certainly avail the benefit of section 108D and seek an appropriate direction from the Central Government or in the alternative itself take a decision to refuse registration and render itself liable for an appellate scrutiny by the CLB as provided under section 111A(2) proviso.

Similarly, if the transfer of shares in favour of a person is likely to create or would ultimately place the company itself, in a situation to make a breach of certain existing contractual obligations of the company, thereby exposing the company to action in law, the company would be justified in refusing to register such transfer of shares.

The expression ‘sufficient cause occurring in the proviso to sub-section (2) of section 111A takes within its sweep not only those contingencies contemplated under sub-section (3) but there can also be circumstances and reasons other than those contemplated under sub-section (3) which might require the company to refuse to register the transfer of shares and such a refusal would be refusal for sufficient cause’.

There can be various reasons, though it is not possible to enumerate all of them and it is to be decided on the facts of each case, which could constitute ‘sufficient cause’ for a company to refuse the registration of transfer of shares.

The submission of the appellants that in view of the language of section 111A(2) there cannot be any other ground contemplated under section 111A(3), could not be accepted.

One of the reasons recorded by the respondent-company in its minutes dated 7-5-1998 and also 30-10-1998 was that the respondent-company obtained the technology from Hakko Sangyo Co. Ltd. of Japan on condition that the respondent-company would not transfer either directly or indirectly the technology to any other individual or organization without the said Japanese company’s permission. The language of the resolutions of the respondent-company by which they decided to refuse the registration of the transfers in favour of the appellants herein did not clearly indicate what exactly was the obligation owned by the respondent to the Japanese company and, therefore, it was not possible for the Court to make any assessment whether the acquisition of shares by appellants herein would in any way undermine the legal obligations of the respondent-company to the above-mentioned Japanese company or not.

In the result, all the four appeals were remanded to the CLB for recording evidence as to what were the contractual obligations of the respondent-company to the Japanese company which made available the technology to the respondent-company. Insofar as the appeal preferred by KSPL was concerned, the CLB was also directed to record evidence as to the actual date of acquisition of 10,000 shares by the said company of the respondent-company and record a further finding as to whether the acquisition of 2,86,000 shares by GMM and 10,000 shares by KSPL would in any way result in a situation by which the respondent-company would be compelled to violate any one of its contractual obligations, if any with the Japanese company from whom the respondent-company acquired technology and disposed of the appeals accordingly.

Case referred to

Swiss Bank Corpn. v. Lloyd Bank Ltd. [1982] (2) All ER 419.

S. Ravi for the Applicant. Y. Ratnakar for the Respondent.

Judgment

1. These four appeals are preferred against the common order passed by the CLB, Southern Bench, Chennai, in C.P. Nos. 15, 21, 22, 23/111-A/SRB of 1998. The appellants in Appeal Nos. 2, 3, 4 and 5 of 2001 herein were the petitioner in C.P. Nos. 23, 15, 21 and 22 of 1998 respectively before the CLB. NILE Ltd. is the common respondent in all the appeals herein and before the CLB.

2. All the four company petitions were disposed by the CLB by its common order dated 1-11-2000. The appellant in Appeal No. 3 of 2001 viz., Gujarat Machinery Mfg. Ltd. (‘GMM’) is admittedly the holding company of all three other companies which are appellants in other three appeals, i.e., company appeal Nos. 2, 4 and 5 of 2001.

3. The various dates and facts to be mentioned hereafter are culled out from the list of dates furnished by the appellants at the time of the hearing of the appeals which list is directed to be made a part of the record.

4. The admitted facts are that between 23-04-1997 and 11-02-1998, GMM acquired 1,48,100 equity shares of the respondent company, viz., Nile Ltd. Admittedly, the said quantum constituted 4.96 per cent of the paid up share capital of the respondent company. Subsequently GMM acquired another lot of 1,38,100 equity shares of the respondent company. There is dispute about the actual date of acquisition of the said shares; to which I shall advert to later. But the fact remains that, the total number of shares thus, acquired by GMM constituted 9.58 per cent of the total paid up capital of the respondent company.

4A. On 15-4-1998, the Board of Directors of the appellant in Appeal No. 4 of 2001, i.e., Karamsad Holdings Ltd. (‘KHL’) resolved to acquire up to 6,00,380 shares of the respondent company which would constitute 20 per cent of the subscribed equity share capital of the respondent company. In view of the fact that KHL decided to acquire up to 20 per cent of the shares of the respondent company and in view of the stipulation contained in Regulation 10 of the Substantial Acquisition of Shares and Takeovers Regulation, 1997 (‘the Regulation’) framed under the Securities and Exchange Board of India Act, 1992, by virtue of power vested in it under section 30 of the Act, which obligated persons acquiring shares or voting rights of any ‘company’ beyond 10 per cent of the total share capital of such company to make a public announcement, as stipulated under regulation 15 of the Regulation, KHL made a publication in various newspapers as required under the regulation. However, the company could acquire only 18,300 shares pursuant to the said public offer.

5. On 13-5-1998, the Board of Directors of the appellant in Appeal No. 2 of 2001, viz., Karamsad Investments Ltd. (‘KIL’) resolved to acquire up to four lakhs of equity shares of the respondent company. In pursuance of the said decision, it appears the KIL did in fact acquire 3,15,595 equity shares of the respondent company between 4-6-1998 to 2-7-1998 on the stock exchange. Thereafter, on 4-9-1998 KIL forwarded the abovementioned shares to the respondent company for registration.

6. On 4-9-1998, the appellant in Appeal No. 5 of 2001, viz., Karamsad Securities (P.) Ltd. (‘KSPL’) forwarded 10,000 equity shares of the respondent company acquired by them between 30-6-1997 to 11-2-1998 for the purpose of registration.

7. Thus, admittedly, between 23-4-1997 to 3-7-1998 the appellants herein acquired 6,30,095 equity shares of the respondent company, though the acquisitions were made on different dates. The said shares constituted 21.08 per cent of the paid up equity share capital of the respondent company.

8. The respondent company by resolution of its Board of Directors dated 7-5-1998 resolved to refuse registration of the ownership of the shares of GMM insofar as 2,86,200 shares acquired by it. The same Board by another resolution dated 30-10-1998 resolved to refuse registration of the ownership of the shares acquired by the other 3 appellants herein. The fact that the respondent company refused such registration, mentioned above, was intimated to these companies. Insofar GMM is concerned the same was intimated by letter dated 7-5-1998. Insofar as KHL is concerned the same was intimated by letter dated 21-9-1998 and insofar as KIL and KSPL are concerned the same was intimated by letter dated 28-9-1998.

9. On 11-5-1998 the respondent company informed the Department of Company Affairs, Government of India, that there was violation of section 108A of the Companies Act by the GMM and requested the Government to take appropriate action in that regard. By another letter on the same day, the respondent company also complained to the SEBI regarding the violation of section 108A and the regulations framed under the SEBI Act.

10. On receipt of intimation from the respondent company refusing to register the transfer of shares in favour of GMM, GMM by letter dated 12-9-1998 called upon the respondent company to furnish a copy of the minutes of the meeting where the decision to reject registration was taken.

11. On 22-5-1998 the respondent company filed a writ petition, W.P. No. 14014 of 1998 in this Court seeking a declaration that the public offer made by KHL (referred to earlier) was illegal and inoperative. On 28-5-1998, this Court directed to the department of Company Affairs to consider various representations made by the respondent company herein and to pass appropriate orders. Eventually the writ petition came to be disposed by order dated 30-6-1998 by this Court on the ground that nothing survived in the writ petition since the department of company affairs was considering the complaint filed by the respondent company.

12. A letter dated 24-7-1998 addressed by the Government of India, Department of Company Affairs to the solicitors of the three subsidiary companies of GM (is admitted by the learned counsel on both sides that such a communication was made by the Department of Company Affairs in response to the complaint made by the respondent company about the violation of section 108A of the Companies Act). By the said communication, the department of company affairs opined that GMM is a ‘dominant undertaking’ for the purpose of section 108G, read with section 108H. The expression ‘dominant undertaking’ is defined in section 108H to have the same meaning as assigned to that expression in the Monopolies and Restrictive Trade Practices Act, 1969. Aggrieved by the conclusion reached by the Department of Company Affairs both the GMM and KHL filed writ petition, W.P. No. 2227 of 1998 in the Bombay High Court and the same is still said to be pending.

13. Aggrieved by the decision of the Board of Directors of the respondent company in rejecting the registration of the shares acquired by the appellants herein, the appellants herein approached the CLB invoking its jurisdiction under section 111A. The CLB, by its common order dated 1-11-2000, as already mentioned, dismissed the petitions. Hence, the present appeals.

14. While dismissing the petitions filed by the appellants, the CLB recorded a finding that........ ‘the petitioners are acting in concert, being a holding and subsidiary companies-to acquire the shares in the company and, therefore, they fall within the definition of section 2(e) of the Take Over Code’..... The CLB also held that the acquisition of shares by GMM and its subsi-diaries is in contravention of clause 7 of the regulation. Apart from that the CLB also held that the Government of India had already taken a view that GMM is a dominant undertaking for the purpose of section 108G of the Companies Act and, therefore, in view of the stipulation made in section 108A, the previous approval of the Government ought to have been obtained and in the absence of such a previous approval, the acquisition of shares by the appellants herein is illegal and consequently held that the refusal on the part of the respondent company to register the acquisition of shares by the appellants is valid and held to be for ‘sufficient cause’, as contemplated under sub-section 2 of section 111A.

15. On behalf of the appellants Shri Chagala, the learned counsel made the following submissions, that the order of the CLB rejecting the petitions of the appellants herein is illegal for the reason,

1. that the respondent company in its decisions to reject the registration of the ownership of the shares of the appellants herein never mentioned anything about the contravention of Regulation 7 of the takeover regulations of 1997 referred to earlier.

2. that the expression “sufficient cause” occurring under section 111(2) proviso takes within its sweep only those contingencies contemplated under sub-section (3) of section 111A. Therefore, the rejection by the respondent to register the shares, for the reasons, which are not covered by sub-section 3, are not sufficient reasons for refusing.

3. that the decision of the CLB insofar as it held that the acquisition of the shares held by GMM and its subsidiaries is in contravention of Regulation 7 of the takeover Regulations for the reason that the requisite intimation contemplated under the said regulation is not made within the period of four days is factually incorrect. Assuming for the sake of arguments that such an intimation was not made within the stipulated period of four days, the consequences of such a violation would only be the expose of the appellants to penal action under the provisions of the SEBI Act but cannot authorize the respondent to refuse the registration of the ownership of shares. Ancillary to this submission, the learned counsel further submitted that the stipulation under regulation 7 calling upon the acquirer to intimate the ‘target company’ is not mandatory but only directory.

16. The learned counsel fairly submitted that the decision of the Government of India to the effect that GMM is a ‘dominant undertaking’ as defined under section 108H read with Monopolies and Restrictive Trade Practices Act, 1969, is the subject matter of an attack before the Bombay High Court in a writ petition, the details of which are already mentioned earlier. Therefore, for the propose of present case he would proceed on the basis that GMM is a ‘dominant undertaking’, still it is not under an obligation to obtain the previous approval of the Central Government before the acquisition of the shares is made as the expression ‘agree to acquire’ occurring in section 108A only contemplates a concluded agreement between an intending purchaser of shares and an intending seller. Obtaining the previous approval of the Central Government, the moment a decision is taken by KHL to acquire 20 per cent of the equity share capital of the respondent is not contemplated under section 108A as held by the CLB.

17. For deciding the correctness of the submissions made by the learned counsel for the appellants an analysis of various provisions of law applicable to the case is required. The subject of transfer of shares of companies is dealt with under sections 108 to 112 of the Companies Act. Section 108 prescribes the various conditions which are required to be complied with before a transfer of shares is registered by the company, the details of which may not be necessary for the purpose of present case.

18. Sections 108A to 108-I as they appear in the statute today were inserted by the MRTP Amendment Act, 1991 with effect from 27-9-1991.

19. Section 108A, mandates that no person shall acquire more than 25 per cent of the paid up equity share capital of a public company or a private company, which is a subsidiary of a public company except with the previous approval of the Central Government. A more closer analysis of section 108A is required to be made, but at a later stage. Section 108B mandates that whenever shares of some company are held by a body corporate or bodies corporates under the ‘same management’ to the extent of 10 per cent or more, they shall intimate to the Central Government if they propose to transfer any portion of their holding to any other person. In this regard, the transferring company is required to furnish certain particulars mentioned in the section to the Central Government and this section also contemplates certain action to be taken by the Central Government wherever felt necessary, the details of which may not be necessary for the present purpose.

20. The point then required to be emphasized in this regard is that section 108B, in substance, restricts or regulates the right of the holder of the shares to transfer such shares where such holder happens to be body corporate and also happens to hold more than 10 per cent of the total equity share capital of a company.

21. Section 108C on the other hand imposes certain restrictions on the right of bodies corporate described in the section to transfer the equity share capital of the ‘foreign company’ in favour of a citizen of India or body corporate incorporated in India. The section stipulates that before any such transfer is made the previous approval of the Central Government is required to be taken in all those cases where the transferor happens to hold 10 per cent or more of the equity share capital of the foreign company.

22. Section 108D empowers the Central Government to direct any company not to give effect to the transfer of any shares if in the opinion of the Central Government, such a transfer would result in a change in a controlling interest of the company and in the opinion of the Central Government such a change would be prejudicial to either the interest of the company or the public.

23. Section 108E prescribes the time limit within which the Government is required to accord its approval in cases falling under section 108A or 108C at the consequences of the non communication of the decision of the Central Government within the period stipulated therein. Section 108F declares broadly that various restrictions contemplated under sections 108A to 108D shall not apply to the companies held by the Central Government, bodies corporate and ‘financial institutions’ an expression defined under the MRTP Act.

24. Section 108G declares that the provisions contained in sections 108A to 108F shall apply to the acquisition or transfer of shares by or to, as the case may be, to the various persons mentioned therein in cases where such an acquisition is by the owner in relation to a dominant undertaking. (Both the expressions ‘owner’ and ‘dominant undertaking’ bear the same meaning assigned to them under the MRTP Act.) It is further stipulated that if as a result of such an acquisition of shares by the owner of dominant undertaking, the consequences stipulated under sub-section (a)(i)(ii) follow or in the alternative where such an acquisition or transfer itself would have the effect of making the acquirer of such shares, the owner of a dominant undertaking, sub-section (c) of section 108G also stipulates that the restrictions contained under sections 108A to 108F would also apply, in cases where the owner in relation to a dominant undertaking is seeking to transfer his shares of share capital.

25. Section 108H defined certain expressions like dominant undertaking etc., employed in the preceding sections. Section 108-I provides for the penalties for the contravention of the preceding sections. The analysis of other sections in the group other than the sections 111 and 111A, in my view is not required for the purpose of present case.

26. Section 111 recognizes certain contingencies under which a company is entitled to refuse the registration of the transfer of its shares and the procedure for such refusal and the remedy of the person seeking the transfer. But in view of language of sub-section (14) of section 111, the content of section 111 is applicable only to private companies and private companies, which have become public companies by virtue of operation of section 43A.

27. Section 111A deals with companies other than those covered under section 111 subject of course to the clarification wherever the context required, it also applies to the companies covered under section 111 also. Sub-section 2 of section 111A declares that the shares or debentures and any interest therein of a company shall be freely transferable; this freedom is subject to the other parts of section 111A. A closer analysis of section 111A is required but at a later stage.

28. In substance, the scheme of above-mentioned provisions appears to be that the shares of public companies are freely transferable and the right of transfer cannot be restricted by the company. But in the interest of the company or in the public interest, the Central Government is required to monitor the transfer of shares of public companies where the transfer is made in bulk or the transfer is made by or in favour of the owner of a ‘dominant undertaking’ or the transfer itself has the effect of making the acquirer the owner of a dominant undertaking. The purpose of imposing such restrictions on the right to acquire or to transfer shares which is property, seems to be the need to monitor and regulate the stock markets as the recent economic history of this country demonstrated the need for such monitoring, secondly the need to control acquisition or transfers by the owners of dominant undertakings as those undertakings could seriously affect the supply of materials to the society and also perhaps to see that the control of industrial undertakings does not go into the hands of inexperienced and inefficient as the same might seriously affect the availability of goods or services to the society. The scheme, when it imposes a condition that the previous approval of the Central Government is required to be taken in the various instances mentioned under the various provisions discussed above implies that in an appropriate case the Government could withhold or decline to accord such permission.

29. In the context of the present case, the provisions of sections 108A and 111A require a more closer analysis. Section 108A reads as follows :

“108A. Restriction on acquisition of certain shares—(1) Except with the previous approval of the Central Government, no individual, firm, group, constituent of a group, body corporate or bodies corporate under the same management, shall jointly or severally acquire or agree to acquire, whether in his or its own name or in the name of any other person, any equity shares in a public company, or a private company which is a subsidiary of a public company, if the total nominal value of the equity shares intended to be so acquired exceeds, or would, together with the total nominal value of any equity shares already held in the company by such individual, firm, group constituent of a group, body corporate or bodies corporate under the same management, exceed twenty-five per cent of the paid-up equity share capital of such company.

(2) Where any individual, firm, group, constituent of a group, body corporate or bodies corporate under the same management (hereafter in this Act referred to as the acquirer), is prohibited, by sub-section (1), from acquiring or agreeing to acquire except with the previous approval of the Central Government, any share of a public company or a private company which is subsidiary of a public company, no—

(a) company in which not less than fifty-one per cent of the share capital is held by the Central Government; or

(b) corporation (not being a company) established by or under any Central Act; or

(c) financial institution, shall transfer or agree to transfer any share to such acquirer unless such acquirer has obtained the previous approval of the Central Government for the acquisition, or agreement for the acquisition, of such share.”

Sub-section (1) prohibits the acquisition of the equity shares in public company or a private company, which is a subsidiary of a public company by the various categories of persons mentioned therein either jointly or severally without the previous approval of the Central Government. Apart from the well known legal persons like natural persons’ firms and bodies corporate, two more entities described as a ‘group’ and ‘constituent of a group’ are also brought within the sweep of this prohibition. The expression group by virtue of section 108H of the Companies Act shall have the same meaning as assigned to it under the MRTP Act though the expression ‘constituent of a group’ is not defined any where, it must be understood in the normal grammatical sense in the context of the proceeding expression group. But section 108A does not demand the previous approval of the Central Government in every case of acquisition of shares. Such an approval is required only when the ‘total nominal value of the equity shares intended to be so acquired exceeds’ 25 per cent of the paid up equity share capital of such company. Sub-section (2) mandates that any company in which not less than 51 per cent of the share capital is held by the Central Government or a Corporation or a Financial Institution (once again a defined expression under the MRTP Act) shall not transfer or agree to transfer any shares to any one of the categories of the persons mentioned in sub-section (1) called the acquirers unless such acquirer has obtained the previous approval of the Central Government for the acquisition or agreement for acquisition of such shares. In substance, sub-section (1) places an embargo on the acquirer where as sub-section (2) places an embargo on the various kinds of public bodies (intending transferors) mentioned therein from transferring or agreeing to transfer any shares held by them in favour of an acquirer who has not obtained the previous approval of the Central Government but obliged to obtain the same in view of sub-section (1).

30. In my view, the embargo both on the acquirer and the transferor although in a limited variety of the cases, has significance in the context of the penal provisions of section 108-I.

31. Section 108G makes the restrictions adumbrated under section 108A applicable to the acquisition by or transfer to of the various categories of ‘acquirers’ mentioned under section 108A(1), who are the owners of a dominant undertaking or would become the owners of a dominant undertaking as a consequence of such acquisition or transfer by the owners of dominant undertakings. To understand the exact purport of section 108G, it requires a more closer scrutiny of the same, I do not propose to go into the same as it is not required for the present case.

32. The next question is as to the meaning to be given to the expression ‘agree to acquire’ occurring under section 108A(1). The expression ‘agree’ or ‘agreement’ presupposes the existence of more than one person to the transaction. In the context of transfer of shares according to the learned counsel for the appellants, such person could be only the intending purchaser and the prospective seller of the shares and only when both the persons reach an agreement, the transfer of shares is possible. The learned counsel for the appellants argued, that to interpret section 108A in such a way as requiring the intending acquirer to seek the approval of the Central Government even before an agreement with the prospective sellers is entered into would be highly unreasonable and impracticable. According to the learned counsel, a decision by any acquirer may be taken to acquire more than 25 per cent of the shares of any company, but he may not really pursue the same or even if he pursues he may not fully succeed in achieving his goal, in either case, the approval would be unnecessary.

33. In the present case, admittedly, the previous approval of the Central Government as required under section 108A was not taken by the appellants.

34. On the facts of the case, at least by 25-3-1998 GMM admittedly, acquired 9.8 per cent of the paid up capital of the respondent company and on 15-4-1998 one of the subsidiaries that is KHL resolved to acquire up to 20 per cent of the shares of NILE, which resolution if accomplished would have made the total holding of these two companies, more than 25 per cent of the equity share capital of the respondent company. However, KHL could acquire pursuant to it’s resolution, in the public offer, only 18,300 shares. It is an admitted fact that 6,00,380 equity shares of the respondent company would represent 20 per cent of the subscribed equity share capital of the respondent company as can be seen from the public announcement made by KHL. It is also an admitted fact that four appellants herein together, did in fact acquire 6,30,095 shares.

Therefore, the entire acquisition by all the four appellants put together did not cross the prescribed limit of 25 per cent under section 108A(i). The CLB while deciding the aspect of the violation of section 108A held that the previous approval of the Central Government is required even to implement a proposal to acquire shares beyond 25 per cent.

35. The learned counsel for the appellants argued that such a requirement is not contemplated under section 108A. The learned counsel further submitted that what is proscribed under section 108A is either an acquisition of 25 per cent or more of the shares of a company or an agreement to acquire the same without the previous approval of the Central Government but not the decision of the intending acquirer. According to the learned counsel, the agreement contemplated under section 108A is an agreement between the intending acquirer and the prospective seller.

36. I am not able to agree with the submission made by the learned counsel for the appellants, for the reason, that the expression ‘agree to acquire’ occurring in section 108A has only reference, in my view, to an agreement between some of the persons enumerated in the preceding clause in that section to jointly acquire the shares of a company, but not to an agreement between the intending purchaser and the prospective seller. The expression ‘agree to acquire’ which immediately follows the clause ‘... shall jointly or severally acquire......’ in my view, makes the intention of the Legislature clear that the agreement to acquire contemplated therein is an agreement in the context of a joint acquisition by some of the enumerated categories of persons in the said section. This view of mine gains further strength from the language of the later part of the same section which says “.......if the total nominal value of the equity shares intended to be so acquired...”. The expression “intended” is significant in this context. Obviously, the Legislature in its wisdom thought that the Union of India must have the information regarding the acquisition of shares in any company beyond 25 per cent the moment a prospective acquirer either severally or jointly with some other person takes such a decision. The reason for such a stipulation, to me, appears to be that not only the actual acquisition of the shares of a company but even a decision to acquire in bulk, depending on the person taking such a decision, would have a serious effect on the stock market. Apart from that the decision of the intending acquirer if implemented would have serious impact on the management of the target company and in some cases even on the community at large depending on the nature of the industry run by the target company.

If that is the true meaning and import of section 108A applying the same to the facts of the case the acquisition by GMM was complete at least by 26-3-1998. The decision of KHL to acquire 20 per cent of the equity share capital of the respondent company is on 15-4-1998. The intention of KHL to acquire 20 per cent coupled with the fact that the holding company of KHL (GMM) by then held 9.58 per cent of the paid up share capital of the respondent company makes the requirement of obtaining the previous approval of the Central Government imperative under section 108A. It is not available on the record whether there was any agreement between GMM and KHL to acquire beyond 25 per cent of the equity share capital of the respondent company. In fact, only those two bodies can make it clear whether there was any such agreement or not as it is a matter of the internal affair of those two companies—one the holding company and the other subsidiary company. In the absence of any material on record to show as to when such an agreement between these two bodies came into existence, the only inference that can be drawn is that, at least by 15-4-1998 when KHL resolved to acquire 20 per cent of the share capital of the respondent company, there was an agreement between these two bodies to acquire more than 25 per cent of the shares of the respondent company having regard to the inter-relationship between the said two companies. That raises two further questions :

(1) whether it was GMM or KHL which is required to obtain the previous approval of the Central Government? In view of the fact that there is nothing on the record to show that by 26-3-1998 by which date at the latest GMM completed the acquisition of 9.58 per cent of the share capital of the respondent company, there was an agreement to acquire beyond 25 per cent of the share capital of the respondent company as explained above, GMM need not have sought the previous approval of the Central Government. It was the decision of the KHL to acquire 20 per cent of the share capital of the respondent company which calls for the previous approval of the Central Government. In view of the fact that the holding company of KHL (i.e., GMM) already held 9.58 per cent of the share capital of the respondent company making the intention of both the bodies to acquire 25 per cent of the shares, it is only the KHL which is required to obtain the previous approval of the Central Government. Then the second question is as to what should happen to the shares acquired by the GMM? In view of the conclusion reached above by me that there is no violation of the provisions of section 108A insofar as GMM’s acquisition of 9.58 per cent of the respondent’s company share capital is concerned, the same is required to be registered by the respondent if the acquisition is otherwise in accordance with law. On the other hand, the acquisition of 18,300 shares by the KHL as already discussed above is in contravention of the provisions of section 108A. The respondent-company is justified in refusing to register the same.

37. Coming to acquisition of 3,15,595 shares acquired by KIL - another subsidiary company of GMM, the resolution to make such an acquisition was admittedly made on 13-5-1998. To decide whether such a decision would fall within the prohibition contained under section 108A, the fact that the holding company GMM had already acquired by then 9.58 per cent of the equity share capital of the respondent-company and another subsidiary of the same holding company, i.e., KHL had by then i.e., 15-4-1998 resolved to acquire up to 25 per cent of the share capital of the respondent-company are relevant in view of the inter-relation between the three bodies. The decision of KIL coupled with the existing decision of KHL to acquire 25 per cent shares of the respondent-company by itself would make KIL liable to obtain the previous approval of the Central Government as required under section 108A as the decision of KIL coupled with the decision of KHL would make the intention of both the bodies put together clear that they intended to acquire more than 25 per cent shares of the respondent-company. Apart from that it must be remembered by the said date the holding company had already acquired 9.58 per cent paid up share capital of the respondent-company. Therefore, in my view, the respondent-company was justified in refusing to register the shares acquired by KIL.

38. Coming to the legality of the acquisition of 10,000 shares of the respondent-company by the KSPL - third subsidiary company of GMM is concerned, nothing is available on record as to when the decision to make such an acquisition was made nor the actual date of the acquisition. The only admitted fact available on record is that on 4-9-1998 KSPL forwarded the said 10,000 equity shares to the respondent-company for registration, by which date the resolutions of both KHL and KIL—the other two subsidiaries of GMM to acquire more than 25 per cent of the equity share capital of the respondent-company were in existence and the holding company, i.e., GMM had already acquired 9.58 per cent of the respondent-company’s equity share capital. In the absence of any specific material as to the exact date of the acquisition, it is not possible for this Court to decide whether the same is hit by section 108A as in my view, if the acquisition is prior to 15-4-1998 (the date on which KHL resolved to acquire 20 per cent of the respondent-company’s share capital), such an acquisition would not be hit by section 108A and if the acquisition is later than the above mentioned date the same would be hit by section 108A. Therefore, the appeal of KSPL, i.e., Company Appeal No. 5 of 2001 is required to be remanded to the CLB for recording evidence in this regard.

39. The next issue that is required to be dealt in these appeals is - whether the acquisition of the shares by the appellant companies herein or any one of them is in contravention of regulations of the substantial acquisition of shares and take over regulations, 1997 framed by the SEBI. Before such an enquiry is embarked upon a brief survey of the scheme of the regulations is necessary. The regulations are divided into 5 chapters. Chapter I deals with the definitions of various expressions used in the regulations and the applicability of the regulations etc., Three expressions ‘acquirer’, ‘person acting in concert’ and ‘target company’ defined therein are relevant for the purpose of the present case.

40. Chapter II deals with the obligations of the ‘acquirer’ and the ‘target company’ to make disclosure as stipulated therein in all cases where the shares are held or acquired by any person in excess of 5 per cent. Chapter III deals with the acquisition of shares by any acquirer beyond 15 per cent and consequential obligations of such an acquirer. The further details of Chapter III may not be required for the present.

41. Chapter IV deals with bail out take-overs with we are not concerned in the prevent case. Chapter V deals with the authority, obligations and procedure of the SEBI to conduct investigations into the violations of the regulations. Regulation 45 which occurs in the said Chapter deals with the penalties for the violation of the regulations.

Regulation 7 reads as follows :

“Acquisition of 5 per cent and more shares or voting rights of a company.—(1) Any acquirer, who acquires shares or voting rights which (taken together with shares or voting rights, if any, held by him) would entitled him to more than five per cent shares or voting rights in a company, in any manner whatsoever, shall disclose the aggregate of his shareholding or voting rights in that company, to the company.

(2) The disclosures mentioned in sub-regulation (1) shall be made within four working days of,—

(a) the receipt of intimation of allotment of shares; or

(b) the acquisition of shares or voting rights, as the case may be.

(3) Every company, whose shares are acquired in a manner referred to in sub-regulation (1), shall disclose to all the stock exchanges on which the shares of the said company are listed the aggregate number of shares held by each of such persons referred above within seven days of receipt of information under sub-regulation (1).”

It can be seen from the above that regulation 7(1) deals with the obligation of the acquirer to disclose the aggregate of his share holding if he happens to be of more than 5 per cent of the shares of any particular company. Sub-regulation (2) prescribes the time limit within which the disclosure contemplated under sub-regulation (1) is to be made. Sub-regulation (3) deals with the obligations of the company the shares of which are acquired as contemplated under sub-regulation (1).

A close analysis of regulation 7(1) shows that an ‘acquirer’ who acquires more than 5 per cent of the shares of the particular company or who has acquired some shares of a particular company coupled with the existing share holding of such an acquirer in the same company would make him the holder of more than 5 per cent of the shares of a particular company, he is called upon to make a disclosure of the aggregate of his shareholding to that particular company within the period stipulated under sub-regulation (2); whereas regulation 10 occurring in Chapter III reads as follows :

“10. Acquisition of 15 per cent or more of the shares or voting rights of any company.—No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitled such acquirer to exercise (fifteen) per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations.”

42. It is sufficient to notice that there is a clear difference in the scheme of regulation 7 and regulation 10; while regulation 7 obligates the acquirer, that on the acquisition of 5 per cent or more of the shares of any company, to intimate the same to that company. Regulation 10 mandates that no acquirer shall acquire shares of any particular company beyond 15 per cent without following the procedure mentioned under the Chapter.

43. The distinction in the scheme of both the above mentioned regulations and the difference in the language of the above mentioned two regulations would be very relevant for the purpose of deciding the consequences of the acquisition made in violation of those regulations.

44. Coming to the facts of the case, GMM acquired a total of 2,86,200 shares in two lots. Admittedly, the first lot of 1,48,100 shares were acquired between 23-4-1997 to 11-2-1998. The said shares admittedly constitute 4.96 per cent of the total equity share capital of the respondent-company. In which case, the regulation 7 is not attracted. The second lot of 1,38,100 shares acquired by GMM according to it on 25-3-1998. The Company Law Board refused to believe that the acquisition of the second lot of 1,38,100 of shares by GMM is made on 25-3-1998 in the following words :

“. . . that the petitioners are acting in concert, being a holding and subsidiary companies—to acquire the shares in the Company and therefore they fall within the definition of 2(e) of the Take Over Code. . . .”

In my view, the finding is not based on the material on record, but it is purely a conjecture made by the CLB. In a matter like this where the dates of acquisition are very crucial, the CLB in my view should have called upon the parties to adduce evidence to establish the date of the acquisition of the shares before rejecting their claim that the shares were acquired on 25-3-1998. This requirement of permitting the GMM to adduce evidence becomes all the more necessary in view of the fact that the respondent-company when it decided to reject the registration of the transfer of 2,86,200 shares in favour of GMM by its resolution dated 7-5-1998, nowhere indicated that the violation of regulation 7 of the take over shares is one of the grounds on which such a resolution was passed. Naturally, GMM did not know as to what exactly the case that it is required to meet. Therefore, in my view, the appeal of GMM, i.e., Company Appeal No. 3 of 2001 is required to be remanded to the CLB for recording the evidence as to the date of the actual acquisition of the second lot of 1,38,100 shares by GMM and if the entire lot is not acquired on the same day on what date did GMM’s acquisition exceed the limit of 5 per cent shares contemplated under regulation 7, but I do not propose to remand the appeal on this count, for the reason, that the violation, if any, on the part of the GMM, in my view, does not affect the legality of the acquisition by the GMM, but the failure on its part if any to comply with an obligation created under the regulation 7 after the acquisition is validly made, might expose GMM to penalties contemplated under regulation 45 and nothing more in the facts of the present case.

45. Coming to the issue of KSPL, I have already indicated that the appeal is required to be remanded for recording the evidence as to the actual date of acquisition by the said appellant of the 10,000 shares of the respondent-company in the context of the alleged violation of section 108A. But even in the context of the violation of regulation 7 assuming for the sake of arguments that the acquisition of the said 10,000 shares is made either simultaneously with the dates of the acquisition of the shares by GMM or prior to it thereby rendering the total share holding of these two companies more than 5 per cent of the total share capital of the respondent-company. Even then the legality of the acquisition is not effected but if the violation is established, it might expose the case to penalties under regulation 45.

46. Insofar as the other two subsidiaries of GMM, KHL and KIL are concerned, the CLB has not recorded any finding that there was any violation of regulation 7. Therefore, those two appeals do not require any consi-deration from that angle.

47. The only question which still remains to be considered is that apart from the violation of any law in acquiring the shares is there any other reason for which a company could refuse to register the transfer of shares? As it is already noticed that section 111A(2). Proviso of the Act contemplates the refusal to register the transfer of shares for ‘sufficient cause’.

48. The learned counsel for the appellants - Shri Chagala very vehemently argued that the said expression ‘sufficient cause’ should be understood only in the light of the various grounds enumerated under sub-section (3) of section 111A, which authorized the CLB to direct any depository or a company to rectify its registers or records. The learned counsel further argued that in view of the language of sub-section (2) of section 111A which declares that the shares of any company shall be freely transferable, the conclusion such as the one suggested by him is irresistible and the company cannot refuse to register the transfer of shares on any other ground whatsoever.

49. I regret my inability to agree with the submission made by the learned counsel for the appellants. Sub-section (3) of section 111A empowers the CLB to issue directions to a company to rectify its registers or records in cases where it is found by the CLB that the transfer of shares is in contravention of any one of the specified enactments under the said sub-section or any other law for the time being in force. Obviously, the Parliament thought if fit to authorize the CLB to look into the complaints of the acquisition of shares in contravention of law and take appropriate action in that regard as nothing done in contravention of law shall be permitted to subsist. The scope of the power under sub-section (3) conferred on the CLB is limited only to the acquisition of shares in contravention of law, but violation of statutory law is not the only infirmity in the matter of acquisition of shares. In a given case, shares could be acquired or transferred by a person in contravention of some existing contractual obligations of the transferor or some other obligation attached to those shares. The legal position in the case of such contravention of contractual obligations is discussed in Palmer’s Company Law, 24th Edition, at page 637 at para 40-34 :

“If the shares have been acquired by means of a loan which requires payment of the debt out of specific property including those shares, such a contract is enforceable by a grant of specific performance and creates an equitable interest in the shares in favour of the lender. A subsequent equitable mortgagee of the shares, who proposes to deal with the shares in such a way as to cause a breach of that contract will be restrained by injunction if he acquired them with actual knowledge of the contract.”

This position of law stated by the Palmer is based on a decision of the Courts of Appeal reported in Swiss Bank Corpn. v. Lloyd Bank Ltd. [1982] (2) All ER 419.

50. The principle of law was confirmed by the House of Lords on an appeal from the above decision [1981(2) All England Report 449]. Though on the facts of the case both the courts held that there was no violation or any contractual obligation. It, therefore, follows that a party seeking to transfer shares held by him which would result in the breach of an obligation attached to the shares created by a prior contract could be injuncted from transferring the shares. It logically follows that the transfer if made and registered even before the aggrieved party could obtain an order of injunction, the transfer could be declared illegal in an appropriate action before a court of law. In which case the company would be bound by such a declaration made by the Court, of the illegality arising out of a breach of the contractual obligation and bound to give effect to the decree of the Court to refuse registration of transfer.

51. The declaration of free transferability contained in section 111A(2), in my view must be understood in the background of the pre-existing legal position that, the articles of association of a company could restrict the right of the shareholder, to transfer his shares. The existence of such power is still recognized in the context of private companies under section 111. But the right to transfer is the right of the holder of the shares (property). In my view all that section 111A(2) declares is that such a right cannot be restricted. However a transfer of property requires always two parties; the transferor and transferee. The declaration of the right of the transferor need not always create a corresponding legal right in the transferee. For instance, to take an extreme example, a transferor decides to transfer his shares in favour of a person who is legally incapacitated to enter into a contract; like an alien enemy, or an insane person the transaction is clearly illegal in which case the transferor cannot be heard to say that his right to freely transfer the shares held by him is curtailed. In such cases what is curtailed is the right of the acquirer. From the examination of the scheme of sections 108A to 108G it is clear that the Parliament thought it fit to curtail the right of the acquirers in certain cases, either in the interests of the company or the public [see 108B(2), 108D]. Though it is not made express in section 108A, the Central Government while exercising the authority under the said section is obviously required to keep in mind both the above mentioned factors, i.e., interests of the company and public.The language and the scheme of section 108D makes the above clear.

52. Therefore, if the interest of the company is one of the factors to be considered by the Central Government while granting or declining to grant the approval under section 108A or 108D, necessarily the Government is required to examine various factors like the impact of the acquisition on the management of the company, whether such an impact is desirable, etc. In my view, the existing legal obligations of the company should also be one of the factors.

If that is the true import of the scheme of sections 108A to 108G, the company (target) would be equally entitled to at least make an assessment of the probable impact of the registration of the acquisition of the bulk shares by any acquirer, on the interests of the company. If in the process the company comes to the conclusion that registering such a transfer would be detrimental to the interests of the company, in my view the company could certainly avail the benefit of section 108D and seek an appropriate directions from the Central Government or in the alternative itself take a decision to refuse registration and render itself liable for an appellate scrutiny by the CLB as provided under section 111A(2) proviso.

53. Similarly if the transfer of shares in favour of a person is likely to create, or, would ultimately place the company itself, in a situation to make a breach of certain existing contractual obligations of the company, thereby exposing the company to action in law, in my view the company would be justified in refusing to register such transfer of shares.

In my view, the expression ‘sufficient cause’ occurring in the proviso to sub-section (2) of section 111A takes within its sweep not only those contingencies contemplated under sub-section (3) but, there can also be circumstances and reasons other than those contemplated under sub-section (3) which might require the company to refuse to register the transfer of shares and such a refusal in my view would be refusal for ‘sufficient cause’.

Thus, in my view, there can be various reasons, though it is not possible to enumerate all of them and it is to be decided on the facts of each case, which could constitute ‘sufficient cause’ for a company to refuse the registration of transfer of shares.

54. The submission of the learned counsel for appellants that in view of the language of section 111A(2) there cannot be any other ground that they are contemplated under section 111A(3) cannot be accepted.

55. One of the reasons recorded by the respondent-company in its minutes dated 7-5-1998 and also 30-10-1998 is that the respondent-company obtained the technology from Hakko Sangyo Co. Ltd. of Japan on condition that the respondent-company will not transfer either directly or indirectly the technology to any other individual or organization without the said Japanese company’s permission. In this background, the respondent-company’s Board opined as follows :

“Nile started its glasslining operations more than a decade ago with technology from Hakko Sangyo of Japan. GMM’s technology is from Pfaudler of USA, which has a 40% shareholding in GMM. Pfaudler also has manufacturing facilities in several countries, and is a direct competitor of Hakko Sangyo in global market. Hakko Sangyo Company Limited has transferred the technology to Nile on the condition that it will not be transferred directly or indirectly to any other individual or organization without Hakko’s permission. If GMM were to acquire 30% stake in Nile, it would be difficult for Nile to honour the confidentiality commitments given to Hakko Sangyo. Also, at the time of termination of the technical collaboration between Nile and Hakko Sangyo it was agreed by both parties that Hakko would transfer new technologies to Nile as and when developed on a case to case basis. This access to continue technological upgradation is vital to Nile’s survival and growth.

One such technology relates to the manufacture of glasslined shell and tube heat exchangers. Hakko is widely acknowledged as having by far the best technology for their product. Hakko indicated that they would transfer their technology only if Nile can give an unconditional guarantee that this technology would not be directly or indirectly passed on to any other individual/organization, who is a competitor.

If GMM were to acquire a 30% stake in Nile now there is every likelihood of Hakko backing out on the fears that GMM may one day be able to get access to this critical technology and may ultimately let it fall into the hands of their competitor in the world market viz., Pfaudler. Under these conditions, Hakko will not part with either this or any other glasslining technology. If access to these new technological developments is thus Denied To Nile, it will be highly detrimental to the interests of Nile, and will threaten its very survival.”

The language of the resolutions of the respondent-company by which they decided to refuse the registration of the transfers in favour of the appellants herein does not clearly indicate what exactly is the obligation owned by the respondent to the Japanese company and, therefore, it is not possible for this Court to make any assessment whether the acquisition of shares by appellants herein would any way undermine the legal obligations of the respondent-company to the above mentioned Japanese company or not.

56. In the result, all the four appeals are remanded to the CLB for recording evidence as to what are the contractual obligations of the respondent-company to the Japanese company which made available the technology to the respondent-company. Insofar as the appeal preferred by KSPL is concerned, the CLB is also directed to record evidence as to the actual date of acquisition of 10,000 shares by the said company of the respondent-company and record a further finding whether the acquisition of 2,86,000 shares by GMM and 10,000 shares by KSPL would any way result in a situation by which the respondent-company will be compelled to violate any one of its contractual obligations, if any, with the Japanese company from whom the respondent-company acquired technology and dispose of the appeals accordingly.

BOMBAY HIGH COURT

Companies Act

[2001] 34 SCL 1 (Bom.)

High Court of Bombay

M. Sreenivasulu Reddy

Kishore R. Chhabria

H. R. GOKHALE, J.

NOTICE OF MOTION NOS. 3120 OF 1997 AND 3932 OF 1998
AND CHAMBER SUMMONS NO. 1153 OF 1998 IN SUIT NO. 3910 OF 1997
WITH NOTICE OF mOTION NO. 184 OF 1999
IN SUIT NO. 297 OF 1999

APRIL 19/20/21/22, 1999

Section 111A of the Companies Act, 1956 - Transfer of shares - Rectification of register on transfer - Whether remedy of seeking rectification of company’s register by way of filing of suit would be available despite existence of other statutory remedies where matter can be more conveniently decided in suit by reason of its complexity - Held, yes - Whether fact that under section 111A(3) a remedy has been provided, by way of a necessary application to CLB, to 5 categories of entities and persons means only that third parties cannot approach CLB but not mean that they cannot have access to Civil Court - Held, yes - Whether where defendants were related companies and individuals and they had acquired shares in breach of mandatory requirement of regulation 10 of Takeover Regulations, 1994, without making public announcements, they had to be directed to refrain from exercising their voting rights, directly or indirectly, insofar as they pertained to disputed shares - Held, yes - Whether interim injunction would be available in respect of shares acquired by conversion of convertible debentures issued before Takeover Regulations came into force - Held, no

Regulation 10 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1994, read with rules 1 and 2 of order 39 of Code of Civil Procedure, 1908 - Scope of Regulation - Whether if plaintiffs’ suit is otherwise competent and maintainable, it will be within function of a civil court as a court of unlimited jurisdiction to declare legal meaning of relevant provisions of SEBI Act and Regulations of 1994 - Held, yes - Whether term ‘holds’ in regulation 10 will have to be interpreted to cover also those purchases of shares which have not been lodged for transfer or transferred - Held, yes - Whether fact that words ‘directly’ or ‘indirectly’ were specifically brought in when definition of acquirer was amended in 1997 can mean that clandestine/indirect acquisition had earlier not been covered under its definition as it existed prior to its amendment - Held, no - Whether clandestine and indirect acquisitions were covered by regulation 10 even prior to amendment - Held, yes

Order 39, read with rules 1 and 2 of the Code of Civil Procedure, 1908 - Whether interim injunction can be granted only if plaintiffs establish that they have a prima facie case that balance of convenience is in their favour and that there may be irreparable injury if an interlocutory order is denied to them - Held, yes

Interpretation of statutes - Rule of purposive interpretation

Facts

A suit was filed by some members of a company, described as Reddy Group, against the defendants seeking to challenge the conversion of large number of debentures of said company into shares and also the acquisition of large number of shares of said company from third parties, being in breach of the provisions of Takeover Regulations of 1994. It was prayed that these conversions and acquisition of shares should be declared null and void and that the register of membership of the company should be appropriately rectified and the names of the disputed entrants be removed therefrom. Two notices of motion were taken out by the plaintiffs in the suit seeking to freeze the voting rights flowing from these disputed shares and to obtain appropriate orders in that behalf with respect to the annual general meetings of the said company held on 27-10-1997 and 30-12-1998 respectively. Another suit was filed by the companies which were defendant Nos. 3, 7 and 8 in the first suit seeking a declaration that plaintiffs of the second suit were the beneficial owners of the disputed shares of the first suit. Notice of motion was taken out in the second suit seeking a restraint on the defendants thereof from preventing the plaintiffs from attending the AGM on 30-12-1998 and exercising voting rights flowing from the concerned shares. The company whose shares were involved in the two suits was engaged in manufacture and distribution of liquor. The defendant Nos. 1 to 11, on the other hand, disputed the right of third parties like the plaintiffs to challenge such acquisitions, the rights of plaintiffs claimed to be based in common law and/or statute and as to whether the voting rights flowing from such shares could be injuncted by filing a suit in the context of the relevant provisions of the Companies Act, 1956. Consequently, the questions pertaining to balance of convenience and appropriate orders to be passed at the interlocutory stage were also raised.

Held

On the question grant of interim injunction in a given case :

As far as the Indian Courts are concerned, what is laid down by the Supreme Court in United Commercial Bank v. Bank of India AIR 1981 SC 1426 holds good. At the interlocutory stage, the Court has to see whether there is a bona fide contention between the parties or a serious question is involved. The bona fide contention between the parties has to be gone into by the Court.

The court would have to examine the defence of the defendants prima facie so as to decide whether the plaintiffs are entitled to the interim reliefs that they have prayed. In fact, in a subsequent judgment in the case of Gujarat Bottling Co. Ltd. v. Coca Cola Co. [1995] 5 SCC 545, the Supreme Court has crystallised the law with respect to various aspects to be examined at the interlocutory stage, which very much includes examination of the question as to whether the plaintiffs have a prima facie case. According to the Supreme Court, while exercising the discretion the court applies the following tests - (i) whether the plaintiff has a prima facie case; (ii) whether the balance of convenience is in favour of the plaintiff; and (iii) whether the plaintiff would suffer an irreparable injury if his prayer for interlocutory injunction is disallowed.

Thus, in the light of what is stated, in the above case, the court would have to go into the submissions of the rival parties as appearing from their plaint and affidavits to find out as to whether the plaintiffs have made out a prima facie case to justify the interlocutory reliefs that they have sought.

With regard to the function of the Courts to determine the scope of the regulation and the meaning of expressions used in enactments :

It is true that SEBI, while resolving the dispute before it in exercise of its jurisdiction in a given case may have to arrive at the decision on certain points as well, but it will not have the force of an authoritative pronouncement. And it certainly cannot mean that the Court ought not to exercise its lawful function to lay down the frontiers of jurisdiction of SEBI or interpretation of various concepts which are used in the SEBI Act and regulations. This is not something like an actual exercise of the powers vested in another competent authority under a particular statute. If the Court interprets the concepts involved and lays down the frontiers of jurisdiction of SEBI, that would be within its powers and something which is expected of the Court. Prima facie, therefore, it cannot be said that merely because this is an area in which SEBI can take a decision while deciding the merits of a case before it, the Court cannot go into and decide these issues involving interpretation. Therefore, if the plaintiffs’ suit is otherwise competent and maintainable, it would be within the function of the Court as a court of unlimited jurisdiction to declare the legal meaning of the relevant provision of the SEBI Act and Regulations, 1994.

With regard to the question whether acquisition of disputed shares without making any public announcement fell under the mischief of regulation 10 :

If regulation 10 is interpreted to mean that it operates only against someone who holds some shares, then all those who do not hold any shares and at one go acquire more than 10 per cent shares would be outside the scope of these regulations. That could not be said to be the intention of regulation 10 as originally drafted. It was no doubt true that regulation 10 was specifically amended to make certain things clear. That, however, would not mean that such an interpretation was not available while interpreting regulation 10 as it stood before amendment.

Purposive approach is necessary to advance the remedy and to suppress the mischief. Clandestine acquisition are not acquisitions which are supported under the regulations. If that was not so, there was no need to provide a negative covenant by using the expression ‘unless’ in regulations 9 and 10 to provide that at the time an acquirer goes for the second lot of shares purchased if his holding goes beyond 10 per cent, he shall have to make a public announcement.

Similarly, although it is true that in the definition of ‘acquirer’ amended in 1997, the words ‘directly’ or ‘indirectly’ are specifically brought in, it cannot mean that such an indirect acquisition was not covered under the definition as it stood earlier when it included the persons with whom the acquirer was acting in concert. If these concepts and regulations were not read purposively it would be very easy to defeat them.

Regulation 10 will have to be held mandatory and the term ‘holds’ will have to be interpreted to cover those purchasers of shares whose shares have not been lodged or transferred.

It was not possible to accept the submission that the fact that certain provisions were specifically made in the regulations of 1997 to widen their coverage, clearly establishes that the coverage under the Regulations of 1994 was a narrow one. Now, in this connection, it cannot be lost sight of that these regulations are for the benefit of the shareholders, companies and society at large and hence while interpreting them one will have to adopt the purposive approach as done by the Supreme Court in Md. Quasim Larry v. Muhammad Samsuddin AIR 1964 SC 1699 on Industrial Disputes Act. Indirect acquisitions cannot be read as outside the Regulations of 1994 or else the regulations will be frustrated. Similarly, for the same reasons as far as the concept of ‘persons related’ or ‘persons acting in concert’ is concerned, one cannot accept the inclusive interpretation.

If regulations 9 and 10 expect a particular conduct from the incoming party and if the regulations are worded in a negative manner, in the event they are not read to give full effect to their simple meaning, the regulations will be rendered redundant. If the public announcement part is taken away as a necessary requirement in regulations 9 and 10, the result of it would be that without making the announcement, shares will be purchased in bulk and SEBI will be requested that if at all there is any grievance, post facto announcement be permitted. It is seen very often that when shares are purchased in bulk and particularly with a view to takeover the company, the result thereof is to dislodge the existing management. This is not something which any existing management is likely to appreciate unless it is prepared to make an exit. This being so, more often the incoming parties are likely to buy such shares by different devices which would not be easily known. It is only to avoid such things from happening and to bring in transparency in these transactions that this provision has been made which is in the interest of the investors, incoming party as well as the existing management. Everybody is put to notice that particular purchases are being made and if corporate democracy requires free transferability and right to vote, it equally requires transparency and openness in the functioning of the company and its takeover. Democracy, corporate or otherwise, implies an open system. It implies knowledge, information and availability of equal opportunity to everybody concerned. If that is not something as to be read in these regulations, then it is better that no such regulations are passed. The fact that some of these difficulties are sought to be taken care of in the subsequent regulations by making specific provisions, need not deter the Court from looking into the regulations as they existed when drafted in the year 1994. The 1994 Regulations are no longer in force. Even so, when a controversy is raised with respect to the approach that one should adopt pertaining to these regulations and which is something which goes to the root of this matter one will have to deal with problems as they are raised herein. In the circumstances, as the regulations stand, if there is a breach of Regulations and particularly regulation 10 as in the present case, the party concerned cannot say that he will not suffer the consequences thereof.

In the instant case, it was not possible to say that the plaint is defective or is lacking in particulars. The defendants had understood the case of the plaintiffs and they were protesting too much. The plaintiffs had given particulars that could become available to them. When the plaintiffs were making an allegation of concerted action, they were complaining of a state of mind of the defendant Nos. 1 to 11 and could not be expected to give particulars of something which was not within their own knowledge. They had made allegations with particulars based on notices given by SEBI and they would be entitled to insist for the inference based thereon. The dicta of Chagla, CJ. in Lady Dinbai Dinshaw Petit’s case (supra) making a distinction between the provisions of order 6, rule 4, and rule 10, was quite apt and applies with full force in the facts of the present case. The plaintiffs could not be expected to give the particulars of time, date and place where the defendants arrived at the concerned design or as to which the directors of these companies had entered into this conspiracy. This was a civil suit, wherein an inference based on probabilities is pressed into service. Whatever particulars were necessary to lay the foundation had to be given and they are given in the facts of the present case as required, and then an inference is sought to be pressed into service which is permitted by order 6, rule 10 of CPC. The plaint could not, therefore, be faulted as defective on this ground of the alleged lack of particulars.

Regarding remedy of seeking rectification of company’s register of members by way of civil suit :

The remedy of seeking rectification of register of company’s register by way of filing a civil suit is recognised in common law and is translated into the statutes. That would be available where the matter can be more conveniently decided in a suit by reason of its complexity or otherwise as held by the Apex Court in Public Passengers Services Ltd. v. M.A. Khadar AIR 1966 SC 489 and confirmed in Ammonia Supplies Corpn. v. Modern Plastic Containers (P.) Ltd. AIR 1998 SC 3153. It is also clear from the observations of Bharucha, J. in Om Prakash Berlia v. UTI [1983] 54 Comp. Cas. 469 (Bom.) that this right is available to see to it that the share register reflects the true composition, and the shareholders cannot be told that he is not an aggrieved person vis-a-vis an entry in the register which is bad or illegal. This is so, since it affects his rights (i) to receive his due share in the profit by way of dividend, (ii) his right to exercise his vote, and (iii) to have it correctly assessed against the votes of other rightful shareholders.

With regard the right of plaintiffs to file a civil suit, inspite of the changes in section 111A, the remedy by way of filing of a civil suit cannot be said to be taken away. This is because as held long back by the Supreme Court right from the judgment in Dhulabhai v. State of Madhya Pradesh AIR 1969 SC 78 the Court should go slowly when it comes to ouster of jurisdiction of the civil court and the remedies which are available to the citizen.

A shareholder does have an interest in having the true and correct picture in company’s register. That is his right flowing from membership of the company, the right based in contract and in common law as held from time to time. The remedy for that has also been held to be one by filing suit in different matters including the leading Om Prakash Berlia’s case (supra). As far as the submission with respect to transparency is concerned, the SEBI Regulations require the intending purchaser to follow a transparent procedure. As far as that responsibility is concerned, it has been provided under section 111A(3) that breach of the SEBI Regulations would be a ground to approach the CLB. That would also be one of the factors to be pressed into service by a plaintiff who is disputing the correctness of the company’s register by filing a suit where he is agitating the erroneous entries obtained on the basis of clandestine purchases. Once it is held that a shareholder has a right in having the purity and the correctness of the register, it flows that the manner in which the illegal purchases and entries are made could always be a ground to press into service.

As far as the SEBI Takeover Code being a complete Code is concerned, the plaintiffs have a right to elect. They may approach the SEBI or they may in a suit like the present one agitate their grievances.

It is possible that some of the consequential directions flowing from prayer (a), namely the declaration of the purchases of the shares being void, could be within the realm of SEBI and hence while passing the final appropriate orders, the Court will have to be careful, but that would not make the raising up of that submission along with prayer (b) as a misjoinder of the causes of action. Prayer (b) would be at all times be a prayer maintainable in a civil suit and the plea of the purchasers being tainted was connected therewith and if not raised, it could be contended that the plaintiffs had not taken the grounds which were otherwise available to them along with the ground supporting the rectification of register. It could not be said that this was a suit for enforcement of the law generally. The plaintiffs were asserting their rights as shareholders of the company and it could not be said that the suit was essentially in the nature of an interlocutory suit only. Prayer (b) was a substantive prayer which was, otherwise maintainable in a suit at the final hearing and connected interim prayer could be sought for seeking the injunction. All that the plaintiffs had to point out was that the concerned shares were tainted. They had made out a prima facie case. They were seeking to prevent the consequences of these purchases which consequences through votes were yet not completed. Prima facie these purchases were bad. Pending the final determination thereon, the preventive order could certainly be sought. In the present case, the plaintiffs had made out a case on fact that defendant Nos. 1 to 11 were related companies and individuals and that they had acquired shares in breach of the mandatory requirements of section 10 of 1994 Code without making a public announcement. They had made out a more than prima facie case on facts as well as in law.

In the facts and circumstances of the case and in the light of the narration of issues and discussion thereon as mentioned above on the points raised the findings were as follows :

(a) It was difficult to accept the submission of the plaintiff that merely because serious questions were raised, an interim injunction could be claimed. It could only be claimed when a prima facie case was made out by the plaintiffs. Examination of the prima facie case of the plaintiffs would involve examining the prima facie defence of the defendants also. On this issue, the law laid down by the Supreme Court in Gujarat Bottling Co. Ltd.’s case (supra) holds the field.

(b) As far as 3,75,000 equity shares, which became available to defendant No. 2 by virtue of acquisition of 75,000 fully convertible debentures on 14-12-1993 were concerned, these purchases were prior to the Regulations coming into force and hence as far as the voting rights which flowed therefrom and against which an injunction was sought in terms of the submission in para 18(i) of the plaint was concerned, there will not be any such injunction.

(c) As far as 10,39,091 equity shares purchased by defendant No. 3 and 4,72,250 equity shares purchased by defendant No. 4 were concerned, they are referred to in para 18(ii) of the plaint. Similarly 3,64,750 unregistered equity shares acquired by defendant No. 5 were referred to in para 18(iii). With respect to all these shares, the plaintiffs had made out a prima facie case to justify the injunction as sought by them that they are purchases in excess and in breach of the mandatory requirement of prior public announcement provided in the regulations. Hence, the plaintiffs would be entitled to an interim order as detailed below with respect to the shares referred to in paras 18(ii) and (iii) of the plaint.

The order in these motions was being passed on the footing that the plaintiffs did have a prima facie right to maintain the present suit to seek the declaration that the acquisition of the disputed shares was void being in breach of the concerned regulation. It was also on the footing that the civil court does have the jurisdiction to interpret the provisions of the statute and the SEBI Regulations so as to lay down the correct interpretation and the frontiers of jurisdiction of the statutory authorities concerned. This was coupled with the prima facie view that this exercise by the Civil Court should not be extended beyond that inasmuch as what is within the jurisdiction of SEBI will have to be done by SEBI alone. Now, if at the end of the trial the disputed acquisition were held to be bad, the Court could give the declaration as sought for. The second prayer for rectification of company’s register was otherwise also maintainable in a civil court in common law. The direction for rectification would mean removal of the names of the disputed members. The consequential decision on disinvestment would, however, have to be arrived at after considering all aspects, including a hearing to SEBI, in which case the actual order of disinvestment could be passed by SEBI, or SEBI may as well direct a post facto public announcement which will, however, include the disputed shares also.

SEBI was already looking into the notice which it had issued. It was possible that SEBI might in exercise of its own powers in the meanwhile and for the purposes of exercising those powers interpret the regulations concerned to the extent it becomes necessary for discharging its functions and for deciding the notices. As stated earlier in this order, the function to interpret the parameters of jurisdiction will, however, in strict sense remain with the civil court and it is not reduced or taken away by any such exercise on the part of SEBI and the view to be taken by this Court should prevail over any view taken by the authorities of SEBI.

The shareholders concerned would therefore, be entitled to all their rights until their names were removed from the register. But the rights to vote on the basis of their shareholding could, however, be restricted by this Court and/or SEBI in view of the decision taken in the order passed above.

In the circumstances, having held that the plaintiffs had made out a prima facie case with respect to the disputed acquisitions, it would be proper that defendant Nos. 1 to 11 and their power of attorney and proxy holders ought to be restrained and they were to hereby directed and restrained from exercising voting rights, directly or indirectly, insofar as they pertained to the shares detailed in paras 18(ii) and (iii) of the plaint. This would, however, be with a rider that any policy decision to be taken by the board of directors on items such as sale of assets, amalgamation, merger, etc., if objected to by the defendant Nos. 1 to 11 in writing, would not be implemented for a period of 8 weeks from the date on which the decision was communicated to the defendants. Any objection in this behalf would be furnished to defendant No. 12 within two days from the date of meeting and in no case any decision in the meeting would be implemented for a period of 4 days from the date of the meeting. This was subject to the earlier embargo of 8 weeks. Similarly, no general meeting would be held except with prior application to this Court until SEBI decided the notices before it and/or until further orders.

As a consequence of the above order, a part of those votes which had been segregated, namely, those which pertained to the shares covered under para 18(i) acquired by way of conversion of convertible debentures before Takeover Regulation came into force would have to be counted as valid votes while deciding the disputed items on the agenda of the meeting of 30-12-1998. That would be done by the scrutinisers appointed by the chairman of the defendant No. 12 company in the presence of one representatives of the plaintiffs, one representative of defendant No. 12 and two persons to represent the defendant Nos. 1 to 11 together as well as the Court officer who had already been appointed. The scrutinisers would then make his report to the chairman who would declare the result on that basis.

As far as the votes of the shareholders who were covered under paras 18(ii) and (iii) of the plaint were concerned, their votes would be excluded while arriving at the result.

Notices of Motion Nos. 3120 of 1997 and 3932 of 1998 were, therefore, made absolute in part on terms as above.

As far as notice of Motion No. 184 of 1999 in Suit No. 297 of 1997 was concerned, in view of the statement made by the plaintiffs, as recorded earlier, the said motion was not being pressed and hence there would not be any order thereon. This was, however, with a clarification that since the status of those shares was same as that of those in para 18(iii) of Suit No. 3910 of 1997, it would be expected of the chairman of the meeting to adopt a similar approach, viz. that those votes would be excluded.

Cases referred to

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Union of India AIR 1988 SC 752, V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453, Papanasan Union [1995] 1 JT (SC) 71, Smt. Ganga Bai v. Vijay Kumar AIR 1974 SC 1126, Estate Investment Co. Ltd. v. Siltap Chemicals Ltd. [1999] 32 CLA 409 (Mum.), N. Parthasarathy v. Controller of Capital Issues AIR 1991 SC 1420, Transatlantic Life Insurance Co. Ltd. [1979] 3 All ER 352, Towers v. African Tug Co. [1904] 1 Ch. 558, Nurcombe v. Nurcombe & Paines [1985] 1 WLR 370 (CA), Prudential Assurance Co. Ltd. v. Newman Industries Ltd. [1982] 1 All ER 354 (CA), East Pant Du United Lead Mining Co. Ltd. v. Merryweather [1864] 2 Hem & M 254, Berrett v. Duckett [1995] 1 BCLC 243, Mutter v. Eastern & Midland’s Railway Co. 38 Ch. D. 92, Mosely v. Koffyfontein Mines Ltd. [1911] (1) Ch. D. 73, Sulleman Samji v. Bank of Bombay 31 Bom. LR. 319 (Bom.), Dr. Kashinath G. Jalmi v. Speaker [1993] 2 SCC 703, Shiv Chander Kapoor v. Amar Bose AIR 1990 SC 325, State of Punjab v. 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Rama Narang [Notice of Motion No. 2646 of 1994 in Suit No. 3535 of 1994 dated 15-2-1995].

F.S. Nariman, I.M. Chagla, Aspi Chinoy and J.P. Avasia for the Plaintiffs. Harish Salve, T. N. Subramanian, R. K. Krishnamurthi, Abeezar E. Faizullabhoy, Ranjit Bhonsale, Rafiq Dada, Arif Bookwala, V.R. Manohar, Sharukh K. Kathawala, Saleh Doctor, D. D. Madan, P. Chidambran, T. N. Subramanian, R. F. Nariman, S. J. Vajifdar, N. Seervai, A. P. Hariani and Birendra Choudhary for the Defendants.

Judgment

1. The notices of motion in Suit No. 3910 of 1997 seek to challenge the legality and validity of substantial acquisitions of shares by defendants Nos. 1 to 11 in defendant No. 12-company allegedly in violation of the provisions of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 and pray for the annulment thereof, particularly in the context of the breaches of regulations 9 and 10 which require a public announcement of the intention to acquire substantial shares in certain circumstances. The defendant Nos. 1 to 11, on the other hand, dispute the right of third parties like the plaintiffs to challenge such acquisitions, the rights of plaintiffs claimed to be based in common law and/or statute and as to whether the voting rights flowing from such shares can be injuncted by filing a suit in the context of the relevant provisions of the Companies Act, 1956. Consequently, the questions pertaining to balance of convenience and appropriate orders to be passed at the interlocutory stage are also raised.

2. Suit No. 3910 of 1997 has been filed by eleven plaintiffs; first nine of these plaintiffs are individuals and the latter two are private companies. They are all described as the ‘Reddy Group’ in para 1 of the plaint. Defendant No. 1 to this suit is one Kishore R Chhabria and defendant No. 11 is one Mr. Madan D Chhabria (stated to be uncle of defendant No. 1). Defendant Nos. 2 to 10 are companies which are described in para 3 of the plaint as the companies ‘owned and/or controlled’ by the 1st defendant. Defendant No. 12-Herbertsons Ltd. is a company engaged in manufacture and distribution of liquor. One Mr. Vijay Mallya is the chairman of this company.

3. Suit No. 3910 of 1997, inter alia, seeks to challenge the conversion of certain large number of debentures of defendant No. 12 into shares in favour of defendant No. 2 and also the acquisition of large number of shares of defendant No. 12 by defendant Nos. 3, 4, 5, 7 and 8 for being in breach of the provisions of the SEBI Regulations. These Regulations are framed under section 30 of the Securities and Exchange Board of India Act, 1992 (‘the SEBI Act’). Some of these shares are registered whereas some of them are not registered. This suit seeks (a) declaration that these conversions and acquisitions of shares are null and void, (b) it also seeks a direction that the register of membership of defendant No. 12 be appropriately rectified and the names of the disputed entrants be removed from the register. The two notices of motion bearing Nos. 3120 of 1997 and 3932 of 1998, which are taken out by the plaintiffs in this suit, inter alia, seek freezing of voting rights flowing from these disputed shares. They also seek appropriate orders in that behalf with respect to the annual general meetings of defendant No. 12 which were held on 27-10-1997 and 30-12-1998, respectively.

4. Suit No. 297 of 1999 (lodged vide Stamp No. 6264 on 28-12-1998) is filed by companies which are defendant Nos. 3, 7 and 8 to the above referred Suit No. 3910 of 1997. Herbertsons Ltd. (defendant No. 12 in Suit No. 3910 of 1997) and its chairman Mr. Vijay Mallya are the two defendants to this suit. This second suit is concerning a part of the subject-matter of the first suit, viz., unregistered shares disputed therein and which are acquired by the plaintiffs of the second suit. It seeks a declaration that the plaintiffs of the second suit are the beneficial owners of these shares. It is material to note that in the two notices of motion taken out in the first suit, no injunction has been sought with respect to these unregistered shares of defendant Nos. 3, 7 and 8 (plaintiffs of the second suit) though the final prayer in that suit very much covers them. There is, however, an interim prayer with respect to unregistered shares of defendant No. 5 of the first suit in these two notices of motion. The status of these shares of defendant No. 5 of the first suit being similar to the shares acquired by defendant Nos. 3, 7 and 8, (i.e., all of them are unregistered), what will be decided about the unregistered shares of defendant No. 5 in these motions in the first suit would apply in principle to the unregistered shares of defendant Nos. 3, 7 and 8. Notice of Motion No. 184 of 1999 in this second Suit No. 297 of 1999 seeks a restraint on the defendants thereof from preventing the plaintiffs from attending the AGM on 30-12-1998 and exercising voting rights flowing from the concerned shares. This second suit can, therefore, be generally described as a sort of a counter suit. Hence for the sake of convenience, the submissions of the rival parties are considered hereinafter initially in the context of the first suit. Thereafter whenever it is necessary, there is a reference to the second suit and it is so stated specifically.

A short business profile of Herbertsons Ltd. (Defendant No. 12)

5. Para 1 of the plaint places on record some information about defendant No. 12-company which is as follows:

(a) Control - It is stated that this company has been for past many decades a constituent of the United Breweries Ltd. Group UB Group), which group was initially controlled by one Mr. Vittal Mallya and his family and it is stated that after his demise it is controlled by his son Mr. Vijay Mallya.

(b) Issued and paid-up capital - The issued and paid-up capital of this company is said to be Rs. 9,52,23,230 divided into 95,22,323 equity shares of Rs. 10 each. Para 3 of the plaint informs that Mr. Vijay Mallya owns 23,71,422 shares in this company representing 24.90 per cent of the subscribed capital as on 31-3-1997. This ownership is by himself and through the companies under his control and/or his nominees.

(c) Activities of the company - It is further stated that the company was initially a distributor of the products of UB Group. Subsequently, it has also started manufacture of liquor. Mr. F.S. Nariman, senior counsel appearing for the plaintiffs, has filed a short note giving the brief history and business profile of this company wherein it is stated that the company became a listed public limited company in the year 1992.

(d) Products - It is stated that the company launched a whisky by name ‘Bagpiper’ Whisky in the year 1976 which is said to be largest selling whisky in the Indian market with sales in excess of 5 million cases. It is also stated that the company manufactures other products of liquor under its own brand. The sales/turnover as per the annual account unanimously approved from year to year was of order of Rs. 219.57 crore in the year 1997-98.

(e) Dividend - The company is stated to have declared the dividend of 20 per cent in the year 1992-93 and 1993-94 and thereafter for 4 years beginning from 1994 it has declared the dividend of 25 per cent.

(f) Working capital and reserves - The total working capital of this company from the consortium of banks is Rs. 17 crore. In the year 1997-98 the reserves are stated to be Rs. 25.90 crore.

(g) Work force - The company employs about 500 employees in its distillery at Alwar in Rajasthan and in its 30 branch offices all over India.

Interest of the plaintiffs in defendant No. 12-company

6. Para 2 of the plaint states that the plaintiffs are the shareholders of defendant No. 12-company for last several years and they are registered shareholders of 4,23,950 equity shares representing 4.45 per cent of the subscribed capital. Further it is stated in para 8 that the plaintiffs have over the years, invested vast sums of money on distribution, marketing and recently on the production of various products of Herbertsons. As an instance, it is informed that in the State of Tamilnadu, the plaintiff group has spent an amount of over Rs. 10 crore from 1985-86 onwards to promote and establish the products of defendant No. 12 in the market. It is stated in para 2 that their association with defendant No. 12 initially commenced with distributing their products in various States including the State of Tamilnadu, Andhra Pradesh and Kerala, but the relationship between Mallya family and the Reddy family dates back to a generation and from 1985 onwards the Reddy group has spent huge amounts over setting up and purchasing various distilleries in Madras, Hyderabad, Goa and Kerala for the purposes of production and bottlling of liquor exclusively for the UB group including defendant No. 12-company. In paras 14 and 17 of the plaint, it is stated that the plaintiffs are the valuable holders of rights of property and it is the breach thereof which has led them to file the present suit.

Shareholding of defendant Nos. 1 to 11 prior to the acquisition disputed in the suit

7. It is stated in para 3 of the plaint that defendant No. 1 through defendant Nos. 2 and 6 to 10 initially acquired through negotiations sometimes in December 1993 in all 22,15,800 shares in defendant No. 12-company aggregating to 26 per cent of the voting rights. These acquisitions prior to filing of the suit are not disputed or challenged in any manner whatsoever in the present suit. These prior acquisitions, however, give a foundation to some of the submissions of the plaintiffs with respect to the acquisitions made subsequently which are challenged in the present suit.

Disputed acquisitions

8. Suit No. 3910 of 1997 disputes the acquisitions of shares by following defendants as detailed in paras 18(i) to (vi) read with paras 4 and 5 of the plaint:

Acquisitions by conversion of debentures

(i) Defendant No. 2 - Airdale Investment & Trading (P.) Ltd. - Acquiring 3,75,000 shares on 11-8-1995 due to the conversion of 75,000 fully convertible debentures purchased on 14-12-1993.

Acquisition through open market

(A) Whether transfer of shares is effected by defendant No. 12-company—

(ii)(a) Defendant No. 3, IMFA Holdings (P.) Ltd. - Acquiring 10,39,091 shares (constituting 10.91 per cent themselves as a block) in December 1995. Transfer of these shares was initially rejected by the board of directors of defendant No. 12 on 3-1-1996, but subsequently in supersession of the previous resolution the transfer thereof was accepted on 30-5-1996.

(b) Defendant No. 4, Mahameru Trading Co. (P.) Ltd. - Acquiring 4,72,250 equity shares in 1995-96. Transfer accepted in September 1996.

(B) Where transfer of shares is not effected or registered by defendant No. 12-company.

(iii) and (iv) Defendant No. 5, Shirish Finance & Investment - Stated to have acquired further 3,64,750 shares in May 1997, but the transfer of these shares was rejected by the board of directors of defendant No. 12 on 17-7-1997 for being in violation of the SEBI Regulations.

(v) Defendant No. 3, IMFA Holdings (P.) Ltd. - Acquired further 54,000 shares on 22-10-1997 which constitute 0.56 per cent of the paid-up capital of defendant No. 12. These shares are not registered as yet.

(vi) (a) Defendant No. 7, Beethoven Traders (P.) Ltd. - Acquiring further 1,25,000 shares on 19-12-1998 constituting 1.31 per cent of the paid-up capital. These shares are also not registered as yet.

(b) Defendant No. 8, Darrel Traders (P.) Ltd. - Acquiring 25,800 shares on 19-12-1997 constituting 9.27 per cent of the paid-up capital. These shares are also not registered as yet.

9. It is stated in para 6 of the plaint that through the acquisition of shares preferred to in paras 4(a) to (d) of the plaint, which are same as the above mentioned clauses (i) to (iv) of para 18 quoted above, defendant No. 1 along with defendant Nos. 2 to 10 acquired a further 20.91 per cent shares taking the tally of the shareholding of defendant Nos. 1 to 11 to 46.91 per cent. If one adds the acquisitions in paras (v) and (vi) above to these acquisitions, the percentage of holding of defendant Nos. 1 to 11 goes up to 49.05 per cent.

Allegation of concerted and clandestine action

10. The above referred acquisition of the shares of defendant No. 12 by defendant Nos. 1 to 11 from time to time are alleged to have been effected in concert with each other in a planned manner to acquire the voting rights “directly or indirectly with others acting in concert with them” as stated in para 16 of the plaint. The allegation of acting in concert is made in the following manner:

(a) In para 4(a) of the plaint, it is alleged that the acquisition of shares by converting them from fully convertible debentures (FCDs) was done by defendant No. 2 acting in concert with defendant Nos. 1 and 3 to 11 and the same was done without making a public announcement.

(b) In para 4(b) of the plaint, the allegation against defendant No. 3 is that it acquired the concerned shares from open market in concert with defendant Nos. 1, 2 and 4 to 11 without making a public announcement.

(c) The allegation against defendant No. 4, as stated in para 4(c) of the plaint, is that it acquired the concerned shares in concert with defendant Nos. 1 to 3 and 5 to 11, without any public announcement.

(d) The allegation against defendant No. 5, as stated in para 4(d) of the plaint, is that the acquisitions were made by it in concert with defendant Nos. 1 to 4 and 6 to 11 without any public announcement.

(e) Allegation against defendant No. 3, as stated in para 4(e) of the plaint, is that it acquired the concerned shares in concert with defendant Nos. 1, 2 and 4 to 11 without making a public announcement.

(f) The allegation against defendant Nos. 7 and 8, as stated in para 4(f) of the plaint, is that the concerned acquisition of shares by them is in concert with defendant Nos. 1 to 6 and 9 to 11 without making a public announcement.

11. It is stated in para 12 of the plaint that an article which appeared in Economic Times of 15-7-1997 gave the information to the plaintiffs of the disputed acquisitions. Based on that article (ex. E to the plaint), the plaintiffs caused further inquiries to be made into the purported holding of defendant No. 1. It is further stated in para 13 that from the declarations filed by defendant Nos. 1 to 11 in particular (and other defendants as well) dated 17-4-1997, it is evident that defendant Nos. 1 and 11 are the persons having control over defendant Nos. 2 to 10 companies. These declarations are filed as required by regulation 6(3) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (‘the SEBI Regulations of 1997’). These Regulations replaced the earlier mentioned SEBI Regulations of 1994 from 20-2-1997. It is stated in para 7 of the plaint that the continuing increase in the holdings of the group led by defendant No. 1 acting in concert with defendant Nos. 2 to 11 (defendant Nos. 2 to 10 of which are companies) is an attempt to takeover defendant No. 12-company. It is further stated that “this exercise is being conducted through clandestine transactions and constitutes undesirable practices which negate transparency and fair and truthful disclosure in the interest of the public and is contrary to public policy and the policy of the law”. The above referred declarations made on 17-4-1997 under the SEBI Regulations of 1997 are relied upon to infer a prior existing arrangement amongst defendant Nos. 1 to 11. The actual arrangement/understanding amongst defendant Nos. 1 to 11 would be a matter of evidence, though the aforesaid declarations are relied upon as a prima facie piece of evidence in this behalf.

Legal submissions

12. It is, therefore, stated in para 13 of the plaint that the defendants are proposing to acquire the shares referred to in paras 4(b) and (c) of the plaint in violation of the SEBI Regulations of 1994 (in force from 7-11-1994) and particularly regulations 9 to 11 and the shares mentioned in para 4(d) being in violation of the SEBI Regulations of 1997 (in force from 20-2-1997). The acquisition of voting rights by conversion of FCDs mentioned in para 4(a) of the plaint are stated to be in violation of regulation 9(3) of the SEBI Regulations of 1994. It is stated that all these acquisitions are made through open market without making a public announcement as required by these Regulations and, therefore, the acquisition of these shares is void under section 23 of the Indian Contracts Act, 1872 being contrary to law as well as on account of the penal provisions in the SEBI Act. It is, therefore, submitted that defendant Nos. 2 to 5 are not entitled to the voting rights in respect of various shares which are mentioned in paras 4(a) to (d) which are also corresponding to paras 18(i) to (iv) of the plaint. It is further stated at the end of this para that if such public announcement or offers, as required by law, were made, the plaintiffs would have given their competitive bid for acquisition of these shares, and that the plaintiffs continue to be ready and willing to do so. In this connection, it is further stated in para 21 of the plaint that the provisions contained in section 15-I of the SEBI Act (providing for adjudication by the Adjudicating Officer in certain situations), section 15Y (providing that the civil courts will have no jurisdiction with respect to any matter which an Adjudication Officer has to decide) and section 20A (creating a bar of jurisdiction for the civil courts with respect to the orders of the SEBI Board) would have no application in the present circumstances. It is stated that the plaintiffs are seeking reliefs in the nature of declarations and injunction which fall within the jurisdiction of civil courts and are attributes of a court and which are beyond the powers conferred upon the SEBI Board or its adjudicating officers. In this connection, it is further stated during arguments that the interpretation of the law as also laying down the parameters of jurisdiction of the authorities under the SEBI Act would also be required in the present matter and the same should fall only within the jurisdiction of civil court.

Cause of action

13. Paras 9 and 10 of the plaint state that the AGMs of defendant No. 12-company held from year to year were held smoothly until the meeting of the year 1996. However, in the meeting to be held on 27-10-1997, defendant Nos. 2 to 11 intended to dislodge the existing management. It is stated that notices had been given by defendant No. 12-company for seeking the re-appointment of three directors who were retiring and also to confirm the appointment of one more director who was appointed as an additional director. The plaintiffs apprehended that defendant Nos. 1 to 11 would exercise their voting power (increased in the above referred manner) to defeat these resolutions and it is, therefore, that they have been required to move this Court. They have sought declarations, as stated above, with respect to the illegality of the conversions and acquisitions of shares as mentioned in para 18 (referred to above) and the rectification of the membership register of defendant No. 12 in prayer clause 23(b) which clause again refers to clauses (i) and (ii) of para 18. Prayer (c) seeks an interim injunction on the voting rights flowing from the disputed acquisitions.

The course taken by the present proceeding

14. The plaint has been amended twice and the above referred narration flows from the plaint as it exists now after the two amendments. No written statement has been filed so far though the time to file written statement has expired long back.

15. The first notice of motion bearing No. 3120 of 1997 is concerning the AGM which was to be held on 27-10-1997 and it seeks an injunction on exercise of voting rights flowing from the shares detailed in paras 18(i) to (iii) of the plaint. It also prays that the decisions to be taken in the said meeting be made subject to the orders of the Court. The affidavit in support of this motion reiterates principally what is stated in the plaint.

16. This notice of motion was first moved before my brother D.G. Deshpande, J. on 23-10-1997 when after hearing the learned counsel for the plaintiffs as well as the defendants and after considering the facts and circumstances of the case, but without prejudice to the rights of the parties and their contentions, the learned Judge granted ad interim injunction in terms of prayer (b)(i) of the motion until 13-11-1997. The said prayer reads as follows :

“(b)(i) In the alternative to prayer (b) above and pending the grant of further ad-interim and interim reliefs, it may be ordered and directed that all the proceedings and decisions taken at the annual general meeting of defendant No. 12 scheduled to be held on 27th October, 1997 will be subject to orders of this Hon’ble Court on the present Notice of Motion.”

This AGM, which was to be held on 27-10-1997, proceeded peacefully and the resolutions moved were passed unanimously without any opposition, and by show of hands. The annual accounts and other decisions were also approved. The existing management was not disturbed in any manner.

17. (i) The next AGM of defendant No. 12 was to be held on 30-12-1998. This time the plaintiffs moved the other motion bearing No. 3932 of 1998 again praying that defendant Nos. 1 to 11 be restrained from exercising any voting rights directly or indirectly in respect of the shares detailed in paras 19(i) to (iii) of the plaint. An affidavit in support of this motion was affirmed by the 1st plaintiff on 14-12-1998. In this affidavit, it was stated that the earlier AGM of 27-10-1997 was held smoothly, defendant Nos. 2 to 4 and 6 to 10 did not attend the meeting and the resolutions proposed were passed unanimously by show of hands and no one had demanded any poll. The plaintiffs had in the meanwhile become aware of the devices utilised by the defendants. The devices were that through a proprietary concern and/or companies of defendant No. 11, namely, Royal Wines & Tracstar Investments (P.) Ltd., large sums of money were shown as loans to defendant Nos. 3 to 5 (Rs. 4.13 crore to defendant No. 3, Rs. 1.12 crore to defendant No. 4 and Rs. 1.35 crore to defendant No. 5) from which defendant Nos. 3 to 5 had acquired the shares disputed in paras 4(b), (c) and (d) corresponding to paras 18(ii), (iii) and (iv) of the plaint. It was further stated in the supporting affidavit that defendant Nos. 3 to 5 had a nominal paid-up capital of Rs. 4,00,200, Rs. 200 and Rs. 200, respectively. Defendant Nos. 3 to 5 feigned inability to repay the above referred loans and allegedly offered the entire paid-up capital of these companies, as stated above, in discharge of the loans of Rs. 4.13 crore, Rs. 1.12 crore and Rs. 1.35 crore. It is, thus, submitted in para 12 of the affidavit in support of this second notice of motion that these acquisitions of shares of defendant No. 12 were made through defendant Nos. 3 to 5 from the funds of defendant No. 11 who is the uncle of defendant No. 1. In their support, the plaintiffs rely upon the investigation report by the SEBI authorities annexed as Annexure O to the affidavit in support. This report, however, bears no date nor any signature and is not on the letter-head of SEBI nor is it disclosed in the affidavit in support as to how the plaintiffs got a copy thereof. In the circumstances, I am refraining from referring to this report or its contents.

(ii) Then, in the affidavit in support of this motion, it is stated in paras 19 to 22 that BDA Ltd. (which is a wholly owned subsidiary of defendant No. 12) is having a lot of mismanagement. This BDA Ltd. is said to be under the control of defendant No. 1. The plaintiffs referred to and relied upon the auditor’s report of BDA Ltd. for the accounting years 1995-96 and 1996-97 and submitted in para 21 of the affidavit that the reports of the auditors bring out the following major infirmities :

(a) The auditors were unable to obtain information and/or explanations which were required.

(b) The balance-sheet and profit and loss accounts did not give the information as required by the Companies Act.

(d) Huge amounts to the tune of Rs. 10 crore were due from a proprietary concern, the proprietor of which was a director of this BDA Ltd. (It is submitted that this proprietary concern was Royal Wines). Over Rs. 3 crore were shown as due from private companies in which directors of BDA Ltd. were directors, Rs. 14.45 lakh were shown as due from its director and Rs. 66.67 lakh as cash in hand which could not be verified by the auditors. An amount of over Rs. 4 crore was shown as due from a company which was marketing its products, and Rs. 4.5 crore were shown as expenditure for defending ownership of a distillery. It is submitted that this expenditure was incurred to defend the ownership of defendant No. 1 on a distillery against Shaw Wallace Ltd. It is stated that all these expenses were on account of the companies belonging to Chhabria group such as Royal Wines & Chhabria Marketing Co. It is further stated that as of now defendant No. 12 was in good hands and management thereof was likely to be dislodged in favour of those who had a track record of mismanagement and, therefore, the injunction was necessary.

18. This second motion came up before my brother D.K. Deshmukh, J. on 21-12-1998 when the counsel for the plaintiffs as well as the defendants were heard. Certain arrangement was arrived at between the parties and it was also agreed that it was not necessary to give any reasons in support thereof. It was agreed that item Nos. 2, 6 and 7 in the notice convening the AGM will be passed unanimously by show of hands. Item No. 1 would not be opposed by defendant Nos. 1 to 11. The votes cast by defendant Nos. 2 to 5, which were disputed, will be kept separately in a separate cover. An officer of the Court was directed to remain present at the time of the meeting and to act accordingly. The relevant para 2 of the said order dated 21-12-1998 reads as follows :

“2. The parties are agreed that for passing ad interim order in following terms on this motion, no reasons are necessary to be recorded.

(1) The 61st annual general meeting of Herbertsons Ltd. (defendant No. 12) convened to be held on 30th December, 1998 shall be held and that the resolutions in respect of item Nos. 2, 6 and 7 of the notice dated 30th November, 1998 convening the said annual general meeting (Exh. “A” to the affidavit dated 14th December, 1998) in support of this motion, shall be passed unanimously by show of hands and without the requirement of taking any poll. Item No. 11 would not be opposed by the defendant Nos. 1 to 11.

(2) That all other items except those set out in clause (i) above shall be taken up for consideration by the meeting - The poll, if any, on those items shall be taken. The votes cast by the defendant Nos. 2 to 5, which are disputed as mentioned in para 18 of the plaint, shall be kept separately as also all the other votes shall be kept separately, but not counted. The votes shall be kept in separate covers under the seal of the company. The votes, if any, cast by the transferors or their proxies in respect of shares acquired by defendant No. 5 shall be kept in a separate cover.

(3) The meeting shall be held and the voting shall be taken under the chairmanship of the person who is to preside over the meeting, but in the present of an officer of this Court, to be nominated by the Prothonotary and Senior Master of this court.

(4) The separate covers in which the votes are to be kept as indicated above shall be sealed by the chairman of the meeting as also the officer who is to be present at the meeting and at the voting as directed above.

(5) The officer of the court shall deposit the containers/envelopes with the Prothonotary and Senior Master.”

The aforesaid order was sought to be modified on 22-12-1998 and on hearing the learned counsel for both the sides the following sentence was directed to be added at the end of the first sentence in para 2 of the order :

“These items include proposed resolutions under section 257 of the Companies Act, 1956.”

The Counter Suit No. 297 of 1999 and Notice of Motion No. 184 of 1999 therein

19. Defendant Nos. 3, 7 and 8 to the above referred first suit bearing No. 3910 of 1997 thereafter filed the second suit being Suit No. 297 of 1999. This suit was lodged vide stamp No. 6264 on 28-12-1998. As stated earlier, defendant No. 12 in the first suit, namely, Herbertsons Ltd., and its chairman Mr. Vijay Mallya are the only two defendants in the second suit. The second suit is concerning a part of the subject-matter of the first suit, namely, unregistered shares acquired by the plaintiffs of the second suit. It seeks a declaration that the plaintiffs of the second suit are the beneficial owners of those shares. The plaintiffs of the second suit thereafter took out a draft notice of motion therein which was moved before Radhakrishnan, J. on 29-12-1998. The motion sought a restraint on the defendants of the second suit restraining them from preventing the plaintiffs in attending the AGM on 30-12-1998 and from exercising the voting rights flowing from the concerned shares. The learned Judge on hearing the counsel on both the sides, passed an order similar to one which was passed earlier on the motions in Suit No. 3910 of 1997. This order was also passed by an agreement of the parties and hence no reasons were recorded. Relevant para 2 of this order reads thus :

“2. The parties are agreed that for passing ad interim order in following terms on this motion, no reasons are necessary to be recorded.

(1) The votes cast at the 61st annual general meeting of the 1st defendant-company by the plaintiffs in respect of the suit shares mentioned in prayer (a) of the plaint shall be kept separately, but not counted. The votes shall be kept in separate covers under the seal of the company. The votes, if any, cast by the transferors or their proxies, in respect of the suit shares acquired by the plaintiffs shall be kept in separate covers.

(2) The separate covers in which the votes are kept as indicated above, shall be sealed by the chairman of the meeting as also the officer of the court appointed under order dated 21st December, 1998 in suit No. 3910 of 1997 who is to be present at the meeting and at the voting as directed above.

(3) The said officer of the court shall deposit the containers/envelopes with the Prothonotary & Senior Master.

(4) The Notice of Motion to be listed for hearing on 9th February, 1999 peremptorily along with Notice of Motion No. 3120 of 1997 and the second Notice of Motion in the said Suit No. 3910 of 1997. Both sides are agreed that they will go on with the matters and shall not seek any adjournment. All pleadings to be completed well in advance. Counsel appearing for the parties waive service.

(5) All questions including the question of maintainability of suit are kept open to be argued at the hearing of the notice of motion.

(6) The said officer of the court and the parties to act on a copy of this order duly authenticated as true by an Associate of this court.

(7) Certified copy expedited.”

This motion was subsequently numbered as Notice of Motion No. 184 of 1999. It is relevant to note in the context of this motion that when it came up for hearing before me along with the earlier mentioned two motions in Suit No. 3910 of 1997. Mr. Dada, the learned senior counsel appearing for the plaintiffs in support of Notice of Motion No. 184 of 1999 made a statement on instructions that the plaintiffs of that motion were not pressing the same.

20. This second suit bearing No. 297 of 1999 is filed by companies shortly known as IMFA, Bethovan & Darrel. As far as the dispute regarding 54,000 shares of IMFA is concerned, it was stated that an Appeal No. 22 of 1998 is already filed before the Company Law Board (‘CLB’). With respect to the 3,67,750 disputed shares of Shirish (defendant No. 5), this company has already filed Appeal No. 21 of 1998 before the CLB. As far as Bethovan and Darrel are concerned, registration of their shares was rejected by Herbertsons in December, 1998. Mr. Dada stated that as far as these two companies are concerned, they will file appropriate appeal before the CLB under section 111A(2) of the Companies Act, in view of the judgment of the Supreme Court in Canara Bank v. Nuclear Power Corpn. of India Ltd. [1995] 84 Comp. Cas. 70. He submitted that these plaintiffs in the second suit will follow their remedy in the CLB, and, therefore, stated that they were not pressing the notice of motion moved in the second suit.

21. Mr. F.S. Nariman, the learned senior counsel appearing for the plaintiffs in the first suit, therefore, submitted that the order passed by Radhakrishnan, J. on 29-12-1998 would no longer survive and that it will also mean that since the plaintiffs of the second suit were no longer pressing for the injunction that they had sought therein, they could be prevented from attending the meeting and their votes which had been segregated, need not be counted at all. Mr. Dada, on the other hand, submitted that merely because the plaintiffs of the second suit were not pressing the motion, it did not mean that the defendants of the motion could do something which was not permissible in law. In my view, Mr. Dada is right in his submission. Merely because the motion is not pressed, it will not mean that the plaintiffs of the second suit could be prevented from attending and voting at the meeting (and their votes being considered) if they are otherwise entitled to the same. However, as noted earlier, the status of the shares, which are concerned in this motion, is the same as that of the shares acquired by defendant No. 5 of the first suit, namely, that they are all unregistered (and with respect to the unregistered shares of defendant No. 5 there is a specific reference in paras 18(iii) and (iv) of the plaint of the first suit). In Notice of Motion No. 3120 of 1997, there is a specific prayer seeking freezing of the voting rights with respect to these shares mentioned in para 18(iii) of the plaint, and again in Notice of Motion No. 3932 of 1998 there is a specific prayer seeking restraint on exercise of the voting rights available to the shares detailed in paras 18(i) to (iv) of the plaint. Besides, it has already been directed on 29-12-1998 as agreed amongst the parties that the three motions are to be heard together. In the circumstances, whatever is decided with respect to the shares of defendant No. 5 while deciding the two motions in the first suit, the same will in principle be applicable to these shares about which the motion is not pressed in the second suit. Hence, although this motion in the second suit is not being pressed, whatever that will be decided with respect to the shares of defendant No. 5 in the first suit will apply to the shares in this motion also. In the circumstances, the only order on this motion will be that no order is being passed thereon except recording as above.

Chamber Summons No. 1153 of 1998

22. It is material to note in this context that the affidavit in reply to the notice of motion No. 3120 of 1997 in the first suit, which was moved as early as on 23-10-1997 for ad interim orders, was filed much later, i.e., on 21-12-1998 by defendant No. 11-M.D. Chhabria. Before filing this reply, the defendants had moved a chamber summons bearing No. 1153 of 1998 seeking further particulars from the plaintiffs to enable them to file an appropriate reply to the notice of motion. An affidavit in reply to the chamber summons was thereafter filed by the plaintiffs opposing the prayers therein. It is the submission of the defendants that the information made available to them through the plaint is a limited one and, therefore, although the reply to the motion was filed on 21-12-1998, in para 3 thereof it has been specifically stated that the chamber summons for particulars be disposed of prior to the hearing of the notice of motion. It is further stated that the plaintiffs have failed to furnish all the necessary particulars and in the absence of them, it is not possible for defendant No. 11 to file a complete and exhaustive affidavit in reply. The affidavit in reply was, therefore, being filed without prejudice to the aforesaid chamber summons and leave was sought to file a further affidavit after the necessary particulars became available. Inasmuch as the three notices of motion subsequently reached together for hearing before me and were argued at length without the chamber summons being disposed of first, while passing this order, I asked Mr. Bookwala and Mr. Madon, the learned counsel appearing for the defendants, as to whether they were pressing for an order on the chamber summons at this stage, and they stated that the motions be decided as of now and that the defendants were not pressing for any order on the chamber summons before the motions being decided. In the circumstances, the only order on the chamber summons at this stage will be that it will be heard and decided at a later point of time either separately or along with the suit.

The reply of defendant No. 11 and defendant Nos. 1 to 10

23. The affidavit in reply of defendant No. 11 affirmed on 21-12-1998 in reply to Notice of Motion No. 3120 of 1997 principally sets out the defence of all the defendant Nos. 1 to 11. Para 1 of the reply states that the plaint fails to disclose any cause of action against any of the defendants and the same is misconceived. It is further stated that the suit was not maintainable and ought to be dismissed in limine on various grounds which are stated therein and which are principally as follows:

(a) It is stated that the plaintiffs were acting in abuse of the process of the Court and the suit was filed for subserving the interests of Mr. Vijay Mallya, notwithstanding the fact that he did not enjoy the support of the majority of shareholders of defendant No. 12. It is stated that the suit was filed in collusion with Mr. Mallya, the same was mala fide and was not in the interest of either the shareholders of defendant No. 12 or of defendant No. 12.

(b) The plaint was vitiated by suppressio veri suggestio falsi.

(c) As regards the shares purchased by defendant No. 5 (3,64,750 shares) and those purchased by defendant No. 3 (54,000 shares) (which were not registered by defendant No. 12), these defendants had filed appeals under section 111A(2) before the CLB and which were numbered as Appeals Nos. 21 and 22 of 1998. It is stated that the CLB is a statutory authority with exclusive jurisdiction and hence the present suit was not maintainable.

(d) The plaintiffs had no locus standi and were not in any event entitled in law to the reliefs sought in the suit.

(e) The suit was not a derivative action and was not maintainable in law.

(f) The suit and the application for interim relief were vitiated by delay, laches, acquiescence and waiver.

(g) This Court did not have the jurisdiction to try, entertain and dispose of this suit.

24. Then in para 2 of the reply, it is submitted that no interim reliefs could be granted on the notice of motion also for similar reasons which were as follows:

(a) The suit itself was not maintainable.

(b) Due to this conduct of the plaintiffs, viz., that they were put up by Herbertsons Ltd. and Mr. Vijay Mallya, they were not entitled for any equitable or interlocutory relief.

(c) It was submitted that at least with respect to 41,03,241 equity shares aggregating to 43.09 per cent, defendant Nos. 2 to 10 were registered owners in respect thereof, and in law they could not be restricted or prevented from exercising any voting rights.

(d) Defendant Nos. 2 to 10 own/hold over 50 per cent of the equity capital of defendant No. 12, of which 43.09 per cent is registered and any relief affecting the voting rights flowing from all these shares would be contrary to all cannons of corporate democracy.

25. In paras 6(a) and (b) of the reply, the collusion and collateral purposes of the plaintiffs were placed on record which were as follows:

(a) The plaintiffs have attached the copies of the Board minutes which were not easily available to the shareholders.

(b) The plaint itself indicates that the plaintiffs had obtained their information from Mr. Mallya and his officers and this confidential information include—

(i) copies of statutory disclosures made by defendant No. 11 under the SEBI Regulations of 1997;

(ii) precise details of shareholding of each of the companies under the control of defendant No. 11.

26. Thereafter there are various similar statements made in paras 6(c) to (g). However, what is stated in paras 6(h), (i) and (j) is quite serious. In para 6(h) of the reply, a reference is made to the assessment order dated 31-3-1997 passed by the income-tax authorities with respect to Herbertsons Ltd. for the financial year 1993-94 in which it is stated that there has been siphoning of funds of Herbertsons Ltd. with active connivance of Balaji group (which is another name of Reddy group). In para 6(i) of the reply, a reference is made to two invoices of Paramount Distilleries, a group distillery of the plaintiffs, and it is submitted that the price paid for the same product by Herbertrons is inflated when the sale is effected through the Balaji group. In para 6(j) of the reply, it is placed on record that whereas the plaintiffs are disturbed by the acquisitions by defendant Nos. 1 to 11 they have not referred or challenged the acquisition of 5.2 per cent of the equity shares of defendant No. 12 by the said Mr. Mallya through the companies under his control.

27.

(i) Thereafter from para 7 onwards, defendant No. 11 has set out the facts which, according to him, are the true facts concerning all these purchases. In para 7(2), he has stated that defendant Nos. 2, 6, 7, 8, 9 and 10 purchased 26 per cent of the total equity capital of Herbertsons on 14-12-1993 on the basis of a negotiated arrangement. These shares were purchased from Mallya group of companies. It is further stated in para 7(4) that the said six companies were under the ultimate control of Galan Finvest (P.) Ltd. (‘Galan’). It is thereafter stated that at the time when the shares of Herbertsons were so acquired by these six companies, 80 per cent of the share capital of Galan was owned and controlled by defendant No. 1, his wife and daughters and remaining 20 per cent were owned by defendant No. 11 and his wife. Thereafter, it is stated in para 7(6) that the acquisition of shares by each of the six companies was less than 5 per cent of the equity capital of defendant No. 12 and hence the then prevailing listing agreement of the stock exchange and particular clause 40A thereof (containing provisions similar to the SEBI Regulations) was not attracted to these purchases. It is further stated that SEBI Regulations of 1994 came into force much later on 7-11-1994 and on that ground also were not applicable to these acquisitions of 26 per cent as well as the subsequent conversion of the debentures which were purchased initially on 14-12-1993.

(ii) In para 8 of the affidavit in reply, it is stated that defendant Nos. 3, 4 and 5, (to whom defendant No. 11 had advanced diverse amounts) had purchased shares of Herbertsons. They, however, failed to repay those amounts, and, therefore, the shareholders of those companies were taken over by defendant No. 11, his wife and/or Seven Star Investments & Trading (P.) Ltd. (hereinafter referred to as ‘Seven Star’), a company owned and controlled by defendant No. 12.

(iii) As far as the acquisition of shares by defendant No. 3 is concerned, they had acquired the shares of defendant No. 12 in December 1995. In para 9 of the reply, it is stated that before defendant No. 11 acquired the entire shareholding of defendant No. 3, (as stated above, through the purchase of its shares by Seven Star) the shareholders of defendant No. 3 were one Imtiaz Kheyroolla, Farida Kheyroolla and Ram Raheja. It is further stated that these persons were not related to defendant No. 11 within the meaning of the concept of being ‘related’ as defined under the Companies Act. It is further stated that it was only on 29-7-1996 that defendant No. 11 became additional director of defendant No. 3 along with three other directors. On that day, the earlier directors including Ram Raheja resigned as directors. Much prior to that date, defendant No. 3 had already acquired the shares of defendant No. 12 to the tune of 10.91 per cent as stated earlier.

28. Thereafter this reply refers to the correspondence by these defendants with SEBI from time to time. Thus, it is stated that on 7-12-1995 when IMFA (defendant No. 3) lodged for registration 10,39,341 shares with Herbertsons, the same day it wrote to SEBI informing about this fact and seeking certain clarification. Thereafter, it is stated that although initially on 16-12-1995 the request for registration of these shares was not accepted and was specifically refused on 3-1-1996, the same was later on accepted on 30-5-1996. Then in para 10, it is stated that defendant No. 3 wrote to the SEBI on 19-8-1996 as per the draft letter provided by defendant No. 12 under the cover of their letter dated 6-8-1996. It is sought to be contended that whatever that was being done was being done with full understanding of defendant No. 12 and with their approval. It is also sought to be contended that right from the first day of the acquisition of shares by defendant No. 3, these defendants had entered into correspondence with the SEBI, that is from 7-12-1995 onwards. It is, therefore, suggested that what was being done was being done openly. In para 11 of the reply, it is accepted that on 22-11-1996 the wife of defendant No. 11 acquired 30 per cent holding of K.R. Chhabria in the capital of Galan, which is a holding company of defendant Nos. 2, 6, 7, 8, 9 and 10. Thereafter, in para 12 of the reply, it is the defendant No. 11 who himself has placed on record that the above referred Mr. Ram Raheja was called upon by the SEBI to show cause as to why proceeding should not be initiated against him for alleged violation of regulations 6 and 10 in the manner of acquisition of 10,39,141 equity shares of defendant No. 12 by defendant No. 3. That notice is dated 9-10-1996 and is issued invoking the powers of SEBI under section 24 of the SEBI Act. It is further stated in that para that Mr. Raheja replied the same by his own letter dated 19-11-1996 and by his advocates’ letter dated 23-12-1996 that there has been no violation of the SEBI Regulations of 1994 and that he had already sold off his shareholding in IMFA (defendant No. 3) and had also resigned as its director.

29.

(i) Thereafter in para 13 of the reply, defendant No. 11 deals with the acquisition of shares by defendant No. 4 (Mahameru). It is stated that before defendant No. 11 acquired the control of Mahameru on 13-2-1997 (when he was appointed as additional director thereof), Mahameru was already the registered shareholder of 4,71,600 shares in defendant No. 12. A further 1,500 shares were acquired by it by 26-8-1997. It is also accepted that on the very day, i.e., on 13-2-1997, a group company of defendant No. 11, namely, Seven Star, had purchased the entire shareholding of defendant No. 4. Thereafter in that para, it is explained as to how these 4,71,600 shares were purchased from time to time during the year 1995-96 and as to how different persons unrelated to the family of defendant No. 11 were in charge of defendant No. 4. It is further stated that before defendant No. 11 took over the control of defendant No. 4, through the purchase of Seven Star, the directors of defendant No. 12 had already, i.e., on 26-9-1996 approved the registration of transfer of 4,71,150 shares to the name of defendant No. 4. Thus it is stated in this reply that as on the date on which either defendant No. 3 or defendant No. 4 acquired the disputed shares, defendant No. 11 was not at all in picture and that he has taken over these companies much later after the transfer of the shares in their favour was approved by defendant No. 12. It is, however, relevant to note that the allegation in para 12 of the affidavit in support of Notice of Motion No. 3932 of 1998 that the defendant Nos. 3, 4 and 5 and a nominal paid-up capital of Rs. 4,00,200, Rs. 200 and Rs. 200 only and that they were used as devices had not been specifically denied in this reply though this reply has been affirmed on 21-12-1998, i.e., subsequent to the affidavit in support of Motion No. 3932 of 1998 which is affirmed on 14-12-1998. What is further material to note is that this very affidavit has been adopted as a reply in the affidavit in reply of defendant No. 11 to Notice of Motion No. 3932 of 1998. That affidavit is affirmed later on 27-1-1999 and in para 3 thereof, this earlier reply has been specifically referred to and it is stated that defendant No. 11 repeats, reiterates, confirms and adopts each and every averment, allegation, submission and contention made in the affidavit in reply to Motion No. 3120 of 1997 also. The status of these companies, viz., that they are very small companies, is not disputed. It is also relevant to note that defendant No. 11 has himself accepted in para 8 of this reply that diverse amounts had been advanced to these companies and because of their inability to repay them, the companies had been taken over by defendant No. 11.

(ii) Similarly, in para 14 of the reply, while dealing with the acquisition of 3,64,750 shares by defendant No. 5 (Shirish), it is stated that these acquisitions were made prior to defendant No. 11 purchasing the entire shareholding of defendant No. 5. For that purpose, it is stated in para 14(a) that the board of directors of Shirish had resolved to purchase shares of Herbertsons on 22-8-1996 and the shares were purchased through various stock exchanges between 27-8-1996 and 14-2-1997. It is only on 18-2-1997 that defendant No. 11 and his wife purchased the entire shareholding of defendant No. 5. Prior thereto, it was one Mr. S.J. Chhabria (a nephew of defendant No. 11) and his wife, who were holding those shares. Thereafter in para 14(e), it is stated that Herbertsons refused to register these transfers for being in violation of SEBI Regulations and it is further stated in para 14(i) that Shirish had filed Appeal No. 21 of 1998 before the CLB under section 111A(2) of the Companies Act to challenge the said refusal.

Legal submissions of defendant No. 11

30. Thereafter in para 15 of the rely, defendant No. 11 has culled out his legal submissions in this behalf, which, in a nutshell, are as follows:

(a) The provisions of SEBI Regulations of 1997 would not apply to these acquisitions since they are supposed to operate prospectively and they had come into force on 20-2-1997. It is, therefore, submitted that the widening of the coverage, as has been done in the SEBI Regulations of 1997, would not cover the disputed acquisitions which are all prior.

(b) The acquisitions do not violate clauses 40A and 40B of the Listing Agreement of the Stock Exchange.

(c) The acquisition of shares of defendant No. 12 by defendant Nos. 3, 4 and 5 do not violate any of the provisions of the SEBI Regulations of 1994 for the following reasons:

(i) Defendant Nos. 3, 4 and 5 and the other six companies, namely, defendant Nos. 2, 6, 7, 8, 9 and 10 are all unlisted companies and SEBI Regulations of 1994 do not apply to those companies whose shares are not listed on any stock exchange as per the provisions of regulation 3(d) of SEBI Regulations of 1994. Defendant No. 11 has acquired the shares in these companies which are not listed companies.

(ii) Then again acquisition of shares by defendant Nos. 3, 4 and 5 does not violate the provisions of Chapters II and III of SEBI Regulations of 1994, particularly regulation 10 thereof because the regulation provides that ‘an acquirer, who holds shares 10 per cent or less’, is required to act in a particular manner. Defendant Nos. 3, 4 and 5 did not hold a single share in defendant No. 12 prior to their acquiring the disputed shares and were not on the register of membership of defendant No. 12 as shareholders at any time earlier.

(iii) It is further stated that this interpretation has been accepted by the Securities Appellate Tribunal, Mumbai in its decision dated 5-8-1998 in the case of Fascinating Leasing & Finance Ltd. v. SEBI [1998] 30 CLA 206.

(iv) Since defendant Nos. 4 and 5 each had acquired shares which were 5 per cent, in any event regulation 10 (read with regulation 6) would not apply.

(v) There is no concept of ‘indirect acquisition’ of shares of a listed company in the SEBI Regulations of 1994. The takeover of the affairs of defendant Nos. 3, 4 and 5 by defendant No. 11 and thereby controlling the disputed shares in defendant No. 12 indirectly would not, therefore, be hit by 1994 Regulations. The subsequent report of Bhagwati Committee dated 18-1-1997 recommending a provision to deal with such situations and the order of SEBI dated 6-3-1997 in the case of Sesa Goa are relied upon in support of this submission.

(vi) Defendant Nos. 3, 4 and 5 or the other six companies are not ‘persons acting in concert’ within the meaning of regulation 2(d) of the SEBI Regulations of 1994, and the shareholders of these companies were not ‘related’ within the meaning of section 6 of the Companies Act.

(vii) The stand taken by defendant No. 3 is accepted by defendant No. 12 inasmuch as defendant No. 3 had written on 6-8-1996 as per the draft reply recommended to it by defendant No. 12.

31. Thereafter in paras 16 to 18 of the reply, defendant No. 11 has accepted that SEBI called upon the managing director of defendant No. 3 to show cause as to why prosecution should not be launched under section 24 of the SEBI Act and for alleged violation of regulations 6 and 10 of 1994 Regulations and that the same was replied by defendant No. 3 by its advocate’s letter dated 3-7-1997. It is further accepted in para 17 that on 17-4-1997, defendant Nos. 1, 2, 3 and 11 made the necessary disclosures under the SEBI Regulations of 1997.

32. It is recorded in para 21 of this reply that the shares lodged by defendant No. 4 - Mahameru were registered by defendant No. 12 on 26-9-1996.

33. Thereafter, in paras 15, 26 and 27 of the reply, it is stated that in a meeting held on 31-12-1997 the chairman of SEBI asked defendant No. 11 to make a public offer in respect of the aforesaid acquisitions to resolve all controversies. Accordingly by his letter dated 20-1-1998 addressed to SEBI, defendant No. 11 ‘offered to make public offer’ jointly or severally through his companies under regulations 10, 11 and 12 of the SEBI Regulations of 1997 while stating that the offer was without prejudice to the rights and contentions of defendant No. 3. It is, however, stated that defendant No. 12 got perturbed by this stand taken by defendant No. 11 and, therefore, instructed their advocate to call upon SEBI to issue directions for disinvestment of the shares acquired by defendant Nos. 3, 4 and 5.

34. Thereafter the reply contains the denials of various other averments in the plaint and reiteration of the stand of defendant No. 11. It is stated that defendant No. 11 and his companies all throughout have been transparent and that they have not acquired any shares in defendant No. 12 either directly or indirectly in contravention of law or acting in concert or fraudulently or illegally. This affidavit in reply affirmed by defendant No. 11 has been adopted with appropriate additions and/or modifications by defendant Nos. 1 to 10. Defendant No. 1 has, however, while confirming what is stated by defendant No. 11, made some more additional statements and submissions. In para 7(a) of his reply, he has stated that he was the Vice Chairman and whole-time director of defendant No. 12 with effect from 1-4-1995. He was, however, not in any way in control of the Board of directors. He had participated in the management of defendant No. 12 from 1992 onwards in which year for the first time he had become director. “He was regularly consulted concerning the management and administration of defendant No. 12”. In para 7(e) of the reply, it is alleged that the funds of defendant No. 12 were being siphoned off with the connivance of Balaji group, i.e., the plaintiffs. There is also a reference to the income-tax assessment order dated 31-3-1997 in this behalf and that he had written to the managing director of defendant No. 12, Mr. S.D. Lalla on 13-6-1997 making an inquiry about the high prices being paid by defendant No. 12 to the Balaji group. Thereafter he has stated that one of the valuable assets which was being transferred by defendant No. 12 was a brewery known as ‘Bombay Brewery’.

Reply of defendant No. 12

35. Defendant No. 12-company filed its reply to this motion through one Mr. A Raghunathan who has affirmed his reply on 5-2-1999. This defendant first filed a reply to the second Notice of Motion No. 3932 of 1998 on 5-2-1999 and the same is adopted and confirmed by specifically so stating in para 2 of this affidavit. This affidavit denies the allegation of collusion between the plaintiffs and Dr. Mallya or that the plaintiffs had been put up by defendant No. 12 as alleged. In para 10, the allegation of siphoning off funds with active connivance of the plaintiff group are also denied. In para 26 of the reply, it is denied that high prices were being given by defendant No. 12 to the Balaji group. In respect of transfer of Bombay Breweries, it is stated that the same was effected way back in 1995 and legitimately after seeking the approval of the shareholders in the AGM of 16-12-1995.

36. Inasmuch as defendant No. 12 has chosen to adopt the reply filed to the Notice of Motion No. 3932 of 1998, it would be advisable to refer to some of the relevant statements and therein. This is a joint affidavit of one Mr. A. Raghunathan, divisional vice president (finance) and Mr. S.R. Gupte, a director of defendant No. 12 and vice-chairman of UB group. This affidavit in reply to the Notice of Motion No. 3932 of 1998 affirmed on 5-2-1999 by and large supports the plaintiffs and the prayers sought by them. The affidavit, however, explains in para 14 as to why defendant No. 12 had initially declined to accept the transfer of shares to defendant No. 3 (IMFA) and subsequently permitted the same. It is stated that the initial refusal as well as subsequent acceptance was on the basis of legal advise received from time to time. In para 20 of the reply, a reference is made to the accounts of BDA Ltd., a 100 per cent subsidiary of Herbertsons Ltd., and it is alleged that “these accounts reveal that defendant No. 1 siphoned away from BDA Ltd. an amount in excess of Rs. 180 crore”. In para 36 of the reply, it is contended that defendant Nos. 3, 4 and 5 were essentially ‘devices put in place to acquire shares in Herbertsons Ltd. with a clear intent of evading the SEBI Regulations’. The acquisitions by them were ‘sham and were never intended to be acted upon’. In para 40 of the reply, it is stated that the offer made by defendant Nos. 1 and 11 to make a public announcement was to acquire further 20 per cent shares and thereafter it is stated that had such a public offer been allowed to be made, they would have succeeded in their ploy of getting defendant No. 12 de-listed since its public holding would have fallen below 20 per cent of its paid-up capital (which is the minimum requirement for a continued listing on the stock exchanges). Thereafter in paras 48 and 49 of the reply, there is a reference to an agreement or understanding between Chhabria group, UB Ltd. and Herbertsons Ltd. entered into in December 1993. It is stated that, that agreement or understanding was arrived at in the presence of many others. The terms and conditions of that agreement are referred to in para 49. It was provided in the agreement that Chhabria Marketing Ltd. would give a licence to defendant No. 12 to use its trademark ‘Lord and Master’ for a consideration of Rs. 8,35,00,000. Two private companies owned and controlled by defendant Nos. 1 and 11, namely, Trust Securities & Breweries (P.) Ltd. and Mercury Distillery & Breweries (P.) Ltd. would be sold to defendant No. 12. It was in consideration of the above that it was agreed that defendant Nos. 2, 6, 7, 8, 9 and 10 would acquire 26 per cent of the issued capital of defendant No. 12. It was, however, further stated that it was clearly understood that the shareholding of the Chhabria group including that of defendant Nos. 1 and 11 shall not be more than 26 per cent and no further shares in Herbertsons Ltd. shall be issued/purchased by any of them. It is further stated in clause (viii) of para 49 that it was expressly agreed that Mr. Vijay Mallya and his nominee directors shall exercise complete control over the management of defendant No. 12.

37. Plaintiff No. 1 has thereafter filed an affidavit in rejoinder on 5-2-1999 denying various allegations which are made in the reply filed by defendant Nos. 1 to 11 and particularly defendant No. 11.

Notice of Motion No. 3932 of 1998

38. As far as Notice of Motion No. 3932 of 1998 is concerned, the principal prayers therein are same as that of Notice of Motion No. 3120 of 1997 except that as stated earlier, now there is a reference specifically to para 18(iv) of the plaint in the prayer clause. The affidavit in support reiterates and repeats what is stated mainly in the plaint and as stated earlier, para 12 thereof particularly emphasises that defendant Nos. 3, 4 and 5 were small companies put up as devices mainly to buy the shares of defendant No. 12, their monies came from Royal Wines & Tracstar Investments, companies under the control of defendant No. 11 which amounts were shown as loans and on the ground that they were unable to return the money, the companies were taken over, prior whereto, they had acquired the shares in defendant No. 12. Certain correspondence exchanged between the parties is also annexed along with this affidavit.

39. As far as replies to this motion are concerned, as stated earlier, the affidavit of defendant No. 11 dated 21-12-1998 through para 3 thereof principally adopts his reply filed earlier to Notice of Motion No. 3120 of 1997. The other defendant Nos. 1 to 10 have by and large adopted the affidavit filed by defendant No. 11. Defendant No. 11 has, however, filed one more affidavit in reply to this motion on 27-1-1999 contending that the Chhabria group had all 43.09 per cent shares which were registered, and 4.39 per cent and 1.58 per cent votes which were unregistered taking the tally to 49.06 per cent. If the proxy votes collected on behalf of the Chhabria group are added to these, the percentage would go to 50.4 per cent. In paras 6 to 9 of this reply, it is stated that each of the transactions between defendant No. 11 and defendant Nos. 3, 4 and 5 were made on the basis of the evaluation of the capacity of their directors to repay as individuals and not on the basis of the share capital or the networth of these three companies. Each of these transactions provided for adequate safeguards and in all these transactions, the advice of professional qualified chartered accountants including that of one Mr. T.A. Kukreja was taken. It is stated that promissory notes were executed by these companies for return of the amounts which were so advanced and it is only when they failed to return those amounts, that it was felt advisable to take over those companies. Thereafter in this reply, there is a reference to the third show-cause notice by the SEBI dated 8-1-1999 which was addressed to defendant Nos. 1 and 11 and which is referred to in para 15 of this affidavit. In para 16, it is alleged that this notice smacks of mala fides and was issued at the instance of Mr. Vijay Mallya. It is further suggested in para 16(h) that SEBI was about to take a particular stand and issue a confirmatory letter regarding public offer to be made by these defendants, which was altered due to the interference of a high functionary (whose name has been mentioned in that paragraph) as alleged in this sub-para.

40. As far as defendant No. 12-company is concerned, the reply filed by it on 5-2-1999 is already referred to. After these replies were filed, plaintiff No. 1 filed a rejoinder on 5-2-1999 controverting various allegations made in the reply of defendant No. 11 particularly the one made in para 16(h) of the affidavit of defendant No. 11 dated 27-1-1999, which is specifically denied. This denial is seen in para 32 of this rejoinder.

41. It is relevant to note that defendant No. 11 has filed a third reply on 9-2-1999 to the above referred joint affidavit in reply filed by defendant No. 12 in this motion. He has repeatedly and exhaustively dealt with the stand which he has taken from time to time. He has referred to the statement made by Mr. Vijay Mallya before the income-tax authorities which is annexed at Annexure D to this third reply to challenge his credentials. Defendant No. 11 has filed two sur-rejoinders dated 16-2-1999 in both the motions.

42. After the orders as referred to earlier were passed, at the initial stage, the officer of this court attended the AGM which was to be held on 30-12-1998 and has filed a report in her capacity as Commissioner. This report is made on 6-1-1999 and along therewith the segregated votes have been placed in a sealed packet as directed earlier. 20-4-1999

Securities and Exchange Board of India Act, 1992 and Regulations

43. Having dealt with the pleadings of the parties, it would be advisable to refer to the provisions of the SEBI Act and various regulations which are involved in this matter. The SEBI Act came into force on 30-1-1994. This Act, amongst others, provides for framing of regulations under section 30 thereof for carrying out the purposes of the Act. Section 15H provides for penalty for non-disclosure of acquisition of shares and takeover and it states that if any person, who is required under the Act or the rules and the regulations, fails to disclose the aggregate of his shareholding before he acquires any shares of that body corporate, or fails to make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding Rs. 5 lakhs. The relevant regulations with respect to substantial acquisition of shares and takeovers were for the first time framed in the year 1994 and the same became effective from 7-11-1994. Prior to these regulations coming into force, clause 40 of the listing agreement (which every listed company had to enter with the stock exchange) governed the field. It provided for making a public offer for acquisition of shares by any person who sought to acquire 25 per cent or more voting rights. Subsequently this clause was replaced in the year 1990 by clauses 40A and 40B. Clause 40A(b) provided that when any person holds securities which in the aggregate carry less than 10 per cent of the voting right in the company, shall not acquire any securities which, when aggregated with the securities already held by him, shall carry 10 per cent or more of the voting rights unless he notifies the stock exchanges and fulfils the conditions specified in clause 40B. The proviso to this sub-clause provided that on an application SEBI could examine specifically any such person. Clause 40B provided that such a person will have to make a public announcement of the takeover offer. Public announcement was to be made both by the offeror company and the offeree company in the manner as stipulated in that clause. The SEBI Act states in its preamble that it is an Act to provide for the establishment of a Board which is created for the following three purposes :

(a) to protect the interest of the investors in securities;

(b) to promote the development of and to regulate the securities market; and

Section 3 of the SEBI Act provides that the Board shall be a body corporate and it is for the Central Government by notification to establish it. Section 4(2) of the SEBI Act provides that the management of the affairs of the Board shall vest in the Board consisting of the members as laid down in the section. Section 4(3), however, additionally provides that except otherwise determined by the regulations, the chairman shall also have powers of general superintendence and directions of the affairs of the Board and may also exercise all powers and do all acts and things which may be exercised by the Board. Section 11 of the SEBI Act deals with the functions of the Board. The provisions of this section which are relevant in this matter are as follows:

“11. Functions of Board.—(1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.

(2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may be provided for—

(a) to (d) ** ** **

(e) prohibiting fraudulent and unfair trade practices relating to securities markets;

(f) promoting investors’ education and training of intermediaries of securities markets;

(g) prohibiting insider trading in securities;

(h) regulating substantial acquisition of shares and takeover of companies;”

Section 11A of the SEBI Act, provides for the matters to be disclosed by the companies. Section 11B of the SEBI Act gives the power to issue directions to the Board and it reads as follows:

“11B. Power to issue directions.—Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,—

(i) in the interest of investors, or orderly development of securities market; or

(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; or

(iii) to secure the proper management of any such intermediary or person, it may issue such directions,—

(a) to any person or class of persons referred to in section 12, or associated with the securities market; or

(b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market.”

Section 15E of the SEBI Act provides for the penalty for failure to observe rules and regulations by an asset management company. Section 15F of the SEBI Act provides for penalty for default in case of stock brokers. Section 15G provides for penalty for insider trading. Section 15H provides for penalty for non-disclosure of acquisition of shares and takeovers and section 15-I of the SEBI Act provides for power to adjudicate. Sections 15H and 15-I as follows:

“15H. Penalty for non-disclosure of acquisition of shares and takeovers.—If any person, who is required under this Act or any rules or regulations made thereunder, fails to,—

(i) disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate; or

(ii) make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakh rupees.

15-I Power to adjudicate.—(1) For the purpose of adjudging under sections 15A, 15B, 15C, 15D, 15E, 15F, 15G and 15H, the Board shall appoint any of its officers not below the rank of Division Chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

(2) While holding an inquiry the adjudicating officer shall have power to summon and enforced attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub-section (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections.”

Section 15K provides for establishment of Securities Appellate Tribunal and under section 15T an appeal is provided against the order of the adjudicating officer to the Securities Appellate Tribunal. Section 15Y provides that no civil courts shall have jurisdiction to entertain any suit or proceedings in respect of any matter which an adjudicating officer is empowered to determine. Thereafter an appeal is provided to the High Court under section 15Z against the decision of the Securities Appellate Tribunal. As far as the decisions of the Board are concerned, an appeal is provided to the Central Government under sections 20 and 20A of the SEBI Act provides that no civil court shall have any jurisdiction in respect of any matter which the Board is empowered to decide and that an order passed by the Board shall be appealable only as provided under section 20. Section 24 provides for the offences and section 26 provides for cognisance of offences by courts. Section 30 gives the power to make regulations and sub-section (1) thereof provides that the Board may with the previous approval of the Central Government by notification make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act. Under section 31, these Regulations are to be laid before the Parliament while it is in session for a period of 30 days and thereafter they become enforceable with or without modifications. Section 32 provides that the provisions of the Act are in addition to and not in derogation of the provisions of any other law for the time being in force.

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994

44. The Regulations of 1994 framed under section 30 of the SEBI Act became enforceable from 7-11-1994. For our purposes, the relevant Chapters are Chapter III which is on takeover and Chapter V which is on investigation. However, before those regulations are considered, it is necessary to refer to some other provisions in these regulations. Thus, for example, definitions of ‘acquirer’, ‘person acting in concert’ and ‘shares’ are relevant which read as follows:

‘2(b) “acquirer” means any person who acquires or agrees to acquire shares in a company either by himself or with any person acting in concert with the acquirer;’

(d) “person acting in concert” comprises persons who, pursuant to an agreement or understanding acquires or agrees to acquire shares in a company for a common objective or purpose of substantial acquisition of shares and includes—

(i) a company, its holding company, or subsidiaries of such companies or companies under the same management either individually or all with each other;

(ii) a company with any of its directors, or any person entrusted with the management of the funds of the company;

(iii) directors of companies, referred to in clause (i) and his associates; and

(iv) mutual fund, financial institution, merchant banker, portfolio manager and any investment company in which any persons has an interest as director, fund manager, trustee, or as a shareholder having not less than 2 per cent of the paid-up capital of that company.

(i) “shares” means share in the share capital of a company carrying voting rights and includes any security which would entitle the holder to receive shares with voting rights.’

Regulation 3(d) provides that nothing contained in Chapter III (which is on takeover) shall apply to the acquisition of shares in companies whose shares are not listed on any of the stock exchange. Regulation 4 grants a power to the Board to grant exemption which reads as follows:

“4. Power of the Board to grant exemption.—The Board may after considering all the relevant factors, such as family arrangements amongst promoters or re-organisation of the company where more than 10 per cent of the voting rights of shares are acquired by the existing shareholders of that company or any of its holding company or of a company under the same management, may pass an order of exemption from the provisions of Chapter III after recording the reasons in writing for grant of such exemption.”

Thereafter Chapter II provides for disclosures of shareholding and regulation 6 provides that any acquirer, who holds 5 per cent or less than 5 per cent shares in a company and acquires more than 5 per cent shares, shall disclose the aggregate of his shareholding in that company to the company and to all the stock exchanges.

45. As far as Chapter III on takeovers is concerned, practically every Regulation thereof is relevant for the purposes of deciding these motions and, therefore, all these Regulations are incorporated herein below and they reads as follows:

‘Chapter III

Takeovers

7. Acquisition of 10 per cent or more of the shares of any company through negotiation.—(1) Any acquirer, who holds shares carrying ten per cent or less of voting rights in the capital of the company, shall not through negotiations acquire any further shares, which, when taken together with his existing shareholdings, would carry more than ten per cent of the voting rights, unless the acquirer makes a public announcement to acquire shares at a minimum offer price from the other shareholders of the company in accordance with these regulations.

(2) Any acquirer, who on the date of commencement of these regulations, holds shares in a company which carry more than ten per cent of the voting rights in the capital of the company, shall not acquire any further shares through negotiations unless, the acquirer makes a public announcement to acquire shares at a minimum offer price from the other shareholders of the company in accordance with these regulations.

(3) Where an acquirer acquires securities which would entitle him more than ten per cent of the voting rights together with voting rights on shares already held by him, then, such person shall make a public announcement referred to in sub-regulation (1) at the time immediately before his entitlement to obtain voting rights on such securities.

(4) Nothing in sub-regulation (2) shall apply to any person, who on the date of coming into force of these regulations holds shares carrying more than ten per cent of the voting rights in the capital of a company, if he has already complied with the provisions of clause 40A and clause 40B of the listing agreement of any stock exchange.

10. Acquisition of 10 per cent or more of the shares of any company through open market purchase.—

(1) An acquirer, who holds shares carrying ten per cent or less of voting rights in the capital of the company, shall not acquire any further shares in the company from the open market which when taken together with his existing shareholdings, would carry more than ten per cent of the voting rights, unless such acquirer makes a public announcement of intention to acquire shares in the open market in accordance with these regulations.

(2) An acquirer who on the date of commencement of these regulations holds shares which carry more than ten per cent of the voting rights in the capital of the company, shall not acquire any further shares in the company from the open market unless such acquirer makes a public announcement of intention to acquire shares in the open market in accordance with the regulations.

11. Who should make the public announcement of offer.—Before making any public announcement of offer referred to in regulation 9 or regulation 10, the acquirer shall appoint a merchant banker holding a certificate of registration given by the Board.

12. Public announcement of offer.—A public announcement to be made under regulation 9 or 10 shall be made in at least one national English daily and one vernacular newspaper of that place, where the shares of the company are listed and most frequently traded.

13. Timing of the public announcement of offer under regulation 10.—The public announcement referred to in regulation 9 shall be made not later than four days of either the finalisation of the negotiation, or entering into an agreement or memorandum of understanding to acquire shares, whichever is earlier.

14. Timing of the public announcement of intention under regulation 10.—A public announcement of intention to acquire shares referred to in regulation 10 shall be made either immediately before the acquisition of any shares, which would increase the existing shareholding of the person making the announcement beyond ten per cent or in case his existing shareholding is already beyond ten per cent, any time before the person seeks to acquire any shares in order to increase his existing shareholding.

15. Contents of the public announcement of offer.—A public announcement referred to in regulation 9 or 10 shall contain the following particulars, namely :—

(i) the object and terms of offer including the price at which the shares are being sought to be acquired;

(ii) the identity of the ultimate person seeking to acquire shares;

(iii) details of the existing holdings of the person acquiring shares together with those of persons acting in concert with him;

(iv) details of shareholdings in respect of which the person acquiring shares has entered into an agreement or memorandum of understanding to acquire the shares;

(v) intention of acquisition of shares;

(vi) the record date and the date by which individual letter of offers would be posted to the shareholder and the manner and the date by which the acceptance or otherwise of offer should be communicated;

(vii) the time and manner of payment of consideration for acquisition of shares;

(viii) all conditions subject to which the offer is made including the following conditions, namely :

(a) the total number of shares to be acquired from the public, subject to a minimum as specified in regulation 21;

(b) the statutory approvals under the Companies Act, 1956 (1 of 1956), Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) and Foreign Exchange Regulation Act, 1973 (46 of 1973) required to be obtained for the purpose of acquiring the shares; and

(ix) such other information in the investors interest having a bearing on the substantial acquisition of shares.

16. Brochures, advertising material, etc.—(1) The public announcement of offer or any other advertisement, circular, brochure or publicity material issued in relation to the acquisition of shares shall contain information essential for the shareholder to make an informed decision on the offer made.

(2) Copies of any advertisement, brochure or document issued to the public under sub-regulation (1) shall be submitted to the Board at least twenty-four hours before its issuance.

17. Letter of offer.—(1) Within fourteen days of the public announcement made under regulation 9 or 10, the acquirer shall through a merchant banker submit the draft of a letter of offer to the Board for its approval.

(2) The acquirer shall along with letter of offer referred to in sub-regulation (1) make payment of a fee to the Board of a sum of Rs. 25,000 payable either by cheque or bank draft in favour of the Securities and Exchange Board of India at Bombay.

(3) The merchant banker shall submit a due diligence certificate to the Board stating that the statements made in any document, advertisement or brochure issued to the public contains statements, which are true to the best of his or its knowledge.

18. Record date.—(1) The letter of offer shall be sent to all the shareholders of the company whose shares are sought to be acquired and whose names appear on the books of the company as on the record date.

(2) The record date shall be not more than the sixtieth day from the date of the first public announcement.

19. Minimum offer price.—(1) An offer to acquire shares under regulation 9 or regulation 10 shall be made at a minimum offer which shall be—

(a) payable in cash; or

(b) by exchange of shares if the person seeking to acquire the shares is a body corporate; or

Provided that where the agreement or any memorandum of understanding stipulates payment in cash to any class of shareholders, whose shares are being acquired, the remaining shareholders shall also be paid in cash for the shares offered by them for sale of their shares.

(2) For the purposes of sub-regulation (1), the minimum offer price shall be :

(a) in case of acquisition of shares under regulation 9 the negotiated price or the average of the weekly high and low of the closing prices of the shares as quoted on the stock exchange during the last six months preceding the date of announcement, whichever is higher, provided there has been a market for such shares during that period in that stock exchanges;

(b) in case of acquisition of shares under regulation 10, the highest price paid by the acquirer in the open market or the average of the weekly high and low of the closing prices of the shares as quoted on the stock exchange during the last six months preceding the date of announcement, whichever is higher, provided there has been a market for such shares during that period in that stock exchange;

(c) where there has been no continuous market in the stock exchange for the share to be acquired, such average shall be calculated on the basis of weighted average prices quoted in at least one other stock exchange to be determined on the basis of the daily trading volume of such shares in that exchange or in any other reasonable manner with the prior approval of the Board;

(d) in case where the shares of the company are offered in lieu of cash payment, the value of such shares shall be determined in the same manner as mentioned in clauses (a) and (b) as the case may be.

20. General obligations.—(1) The announcements of public offer to acquire shares shall be made only when the acquirer has every reason to believe that he shall be able to implement the offer.

(2) Within fourteen days of the public announcement of offer, the acquirer must also submit a letter of offer to the Board of directors of the company, whose shares are being acquired.

(3) The acquirer shall state the period for which the offer to acquire shares from the other shareholders shall remain open :

Provided that every such offer shall be kept open for a period of not less than four weeks from the date of the offer.

(4) The directors of the company of which the shares are being acquired shall not sell or enter into an agreement for sale of assets not being sale or disposal of assets, in the ordinary course of business, of the company or its subsidiaries or issue any authorised but unissued securities carrying voting rights during the period, when the offer is open for acceptance unless the approval of the general body of shareholders is obtained.

(5) Every document issued to shareholders or any advertisement published in connection with the offer must state that the directors in case the acquirer, is a company, accept the responsibility for the information contained in the document or advertisement :

Provided that if any of the directors desire to exempt himself from the responsibility of the information in such document or, as the case may be, the advertisement the document or, advertisement, as the case may be shall, contain a statement to that effect together with reasons thereof.

(6) The company whose shares are being acquired shall furnish to the acquirer within seven days of the request of the acquirer, a list of names of shareholders and of those persons whose application for transfer of registration is considered valid and accepted by the company.

(7) The company, whose shares are being acquired, shall also inform the persons whose applications for transfer are considered valid within sixty days and also inform about such transfers to the transferor and transferee, so that they have an opportunity to accept the offer.

(8) The letter of offer shall be sent to all the shareholders so as to reach them within ten days from the record date.

(9) Any acquirer who has made any acquisition of shares either by negotiation or through open market purchases shall no t make any further public announcement for acquisition of shares in the succeeding six months.

21. Minimum number of shares to be acquired.—(1) Subject to sub-regulation (2) the offer shall be made to acquire shares from each of the shareholders, such number of shares, which shall not be less than minimum marketable lot as determined by the stock exchange in which these shares are listed, or the entire holding if it is less than the marketable lot.

(2) The public offer shall be made to the remaining shareholders of the company, to acquire from them an aggregate minimum of 20 per cent of the total shares of that company.

(3) Where an acquirer holds more than ten per cent shares at the time of commencement of these regulations and was not required to comply with the provisions of clause 40A and clause 40B of the listing agreement, the public offer referred to in sub-regulation (2) shall be to acquire a minimum of such percentage as would increase his shareholding to at least thirty per cent of the total shares of that company.

(4) The offer referred to above shall not result in the public shareholding being reduced to less than 20 per cent of the voting capital of the company.

(5) Where a person seeking to make acquisition of shares by reason of holding securities, which may carry voting rights at a later point of time, the percentage referred to in the sub-regulations (2) and (3), shall be computed with reference to voting capital of the company including the securities which would carry voting rights.

(6) Where number of shares offered for sale by the shareholders are more than the shares agreed to be acquired by the person making the offer, such person shall subject to sub-regulation (1) accept the offers received from the shareholders on a proportional basis.

22. Completion of the offer.—The acquirer shall within a period of four weeks from the date of the closure of the offer complete all procedures relating to the offer including payment of consideration to the shareholders who have accepted the offer.

23. Competitive acquisition.—(1) Any person other than the acquirer making a public announcement may within two weeks of such announcement make a competitive bid for acquisition.

(2) The provisions of this Chapter shall mutatis mutandis apply to competitive bid made under sub-regulation (1) :

Provided that the period of offer in the public announcement shall not in any case extend beyond that of the first offer mentioned in sub-regulation (3) of regulation 20.

24. Revised offer.—No change in the conditions of offer or any amendment to a public offer shall be made unless the person acquiring shares—

(a) obtains the prior approval of the Board;

(b) makes a public announcement in respect of such amendments in the same manner as specified in regulation 12; and

25. Withdrawal of offer.—(1) No public offer once made shall be withdrawn except on the happening of an event making it impossible for the person acquiring shares for reasons beyond his control to carry out his offer.

(2) No offer once made shall be withdrawn without the previous approval of the Board.

(3) Without prejudice to sub-regulation (1) a public offer shall be deemed to have been withdrawn if any of the following events occur :

(i) the death of the acquirer if he is a natural person;

(ii) the acquirer is adjudged insolvent or is subject to insolvency proceedings;

(iii) in case of acquirer, being a natural person, he has either become insane or incapable on account of physical disability or otherwise has become incapable of managing his affairs;

(iv) the acquirer being a company or a body corporate has either received notice or is subject to commencement of winding up proceedings;

(4) In the event of withdrawal of the offer under any of the conditions, the acquirer shall make a public announcement in the same newspaper in which the announcement of offer was published, indicating reasons for withdrawal of the offer.

(5) Where an offer is withdrawn under sub-regulation (1) the acquirer shall not make any offer for acquisition of shares in the same company for a period of 6 months from the date, the offer is withdrawn.’

46. Then comes Chapter IV which is on bail out takeovers which are by way of scheme of merger for rehabilitation with which we are not concerned in the present case.

Chapter V provides for investigation. Regulation 33 gives the Board the right to investigate and it reads as follows :

“33. Board’s right to investigate.—Where it appears to the Board so to do, it may appoint one or more persons as investigating authority to investigate and undertake inspection of the books of account, other records and documents of any person who may have acquired or sold securities to any person for any of the purposes specified in sub-regulation (2).

(2) The purposes referred to in sub-regulation (1) may be as follows :

(a) to investigate into the complaints received from investors, intermediaries or any other person on any matter having a bearing on the allegations of substantial acquisition of shares and takeovers; and

(b) to investigate suo motu upon its own knowledge or information, in the interest of securities business or investors interests, for any breach of the regulations.”

Thereafter regulation 34 provides for the procedure for investigation, including giving of a reasonable notice.

Regulation 35 gives the obligation of the person being investigated towards the investigating authority. Regulation 36 provides for submission of the report and regulation 37 provides for communication of finding. Regulation 37 reads as follows :

“37. Communication of findings, etc.—(1) The Board shall after consideration of the investigation report communicate the findings to the person concerned to give him an opportunity of being heard before any action is taken by the Board on the findings of the investigating authority.

(2) On receipt of the explanation, if any, from the person concerned, the Board may call upon the person concerned to take such measures as the Board may deem fit in the interest of the securities market and for due compliance with the provisions of the Act, rules and regulations.”

Regulation 39 provides that the Board may without its right to initiate criminal prosecution give the directions as stipulated therein. Regulation 39 reads as follows :

“39. Directions by the Board.—On receipt of the report under regulation 36, the Board may without notice to its right to initiate criminal prosecution under section 24 of the Act give such directions as it deems fit for all or any of the purposes, namely :

(a) directing the person concerned not to further deal in securities;

(b) prohibiting the person concerned from disposing of any of the securities acquired in violation of these regulations;

(d) taking action against the person concerned who is an intermediary holding a certification of registration under section 12 of the Act.”

Lastly, regulation 40 provides that any person aggrieved by an order of the Board may appeal to the Central Government.

Justice Bhagwati Committee recommendations leading to Regulations of 1997

47. The experience of the working Regulations of 1994 led to the constitution of the Committee under the chairmanship of former Chief Justice of India Mr. P. N. Bhagwati to examine the areas of deficiencies in the existing regulations and to suggest the amendments therein with a view to strengthen them and making them more fair, transparent and unambiguous so as to protect the interests of investors and all the parties concerned in the acquisition process. The Committee recommended various amendments in the Regulations, particularly with a view to cover the concept of indirect acquisition through acquisition of unlisted investment companies. The Committee recommended expansion of the concept of ‘person acting in concert’. The Committee recommended that not only acquisition of shares but also voting rights in a company or control over a company, whether the control is exercised directly or indirectly, must also be seen and recommended expansion of definition of ‘acquirer’. The Committee also recommended changes in the threshold limit. The Committee recommended that the regulating offer as stipulated in 1994 Regulations may continue but with a provision allowing minimum offer of only 10 per cent for consolidation of holdings by persons present in control of the company. These are some of the recommendations which are relevant for our purpose. Accordingly, new regulations were subsequently framed, namely, SEBI Regulations, 1997. The definition of ‘acquirer’ specifically stated that it included those persons, who directly or indirectly acquired or agreed to acquire the shares or voting rights in the target company. This principle of direct or indirect acquisition is also related to concept of control. The concept of ‘persons acting in concert’ was widened and the threshold limit was altered as stated above. As far as the present motions are concerned, admittedly the initial acquisition of defendant No. 2, namely, the acquisition of convertible debentures are of December 1993, i.e., prior to even 1994 Regulations coming into force. The acquisitions of defendant Nos. 3 and 4 are during the period when the 1994 Regulations were in force and the acquisitions of defendant Nos. 5, 7 and 8 are after the 1997 Regulations coming into force. We will, therefore, have to deal with these Regulations in this context.

Appearances

48. A large number of judgments and books by reputed authors on law were cited on by the learned counsel appearing for the parties. As far as the plaintiffs in Suit No. 3910 of 1997 are concerned, they were led by Mr. F. S. Nariman, senior counsel with Mr. Apsi Chinoy and Mr. J. P. Avasia assisting him. Mr. Rohinton Nariman with Mr. N. H. Seervai and Mr. S. J. Vajifdar appeared for defendant No. 12 and supported the plaintiffs’ motion. Mr. Harish Salve, senior counsel with Mr. P. N. Subramaniam appeared for defendant No. 1. Mr. V. R. Manohar, senior counsel with Mr. S. J. Khantawala appeared for defendant No. 3. Mr. S. H. Doctor, senior counsel with Mr. D. D. Madon appeared for the defendant Nos. 4 and 5. Mr. R. A. Dada, senior counsel with Mr. Arif Bookwala appeared for defendant Nos. 2 and 6 to 10. Mr. P. Chidambaram, senior counsel with Mr. Subramaniam appeared for defendant No. 11.

49. Since it is the plaintiffs who have moved these motions for the reliefs that they seek, the arguments advanced by the counsel for the different parties are being dealt with in this judgment in the order in which the arguments were placed before the Court on behalf of the plaintiffs at the outset as well as in the rejoinder (both taken together) and by specifying the particular topics wherever possible. The points raised by the plaintiffs have been dealt with by all the counsel appearing for defendant Nos. 1 to 11 in their reply, though some of them have emphasised particular aspects of the controversy. While doing so, some of the judgments cited were common on both sides, although with differing emphasis. The arguments of particular counsel for defendant Nos. 1 to 11 are, therefore, not dealt with in the order in which they addressed me. They are noted on the topics which they emphasised particularly. This has been done to avoid repetition. Wherever possible, I have referred to the relevant authorities cited and discussed the submissions based thereon by giving the emphasised quotations, though it has not been possible to refer to and deal with all of them sheerly due to the large number of judgments cited.

Documents relied upon

50. The learned counsel appearing on both sides assisted me by relying upon different charts and also giving their propositions in writing whenever necessary. They were allowed to rebut every proposition raised by their opponents without insisting on any technicalities. A large number of documents were tendered by the defendants and a few by the plaintiffs also. They consisted of four huge volumes which are marked as Compilation Nos. I, II, III and IIIA. Whichever of these documents are relevant will be referred to as and when necessary.

The show-cause notices

51. The three notices given by the SEBI to Ram Raheja, IMFA and thereafter to defendants Nos. 1 and 11 are, however, necessary to be referred at this stage itself. Out of these notices, the first two, namely, those given to Ram Raheja and IMFA, being dated 9-10-1996 and 31-3-1997 were issued prior to the filing of the suit whereas the third one dated 8-1-1999 issued to defendant Nos. 1 to 11 was issued and served after the filing of the suit.

52. The first show-cause notice issued to Ram Raheja on 9-10-1996 is produced by the defendant at page 45 of the Compilation C-I. The subject of the notice reads as follows :

“Show-cause notice under section 24 of SEBI Act for non-compliance of regulations 6 and 10 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994.”

Para 1 of this notice alleges that Mr. Ram Raheja appeared to have acquired over a period of time from 27-10-1994 to 21-11-1995 from open market 10,39,141 equity shares aggregating to 10.91 per cent of the voting capital of Herbertsons Ltd. with the intention of taking over the management of the target company. It is alleged that this acquisition is done in concert with the directors of the company, namely, Harish R. Raheja, Imtiaz E. Kheyroolla, Chunilal R. Maniar, Ramesh K. Ahuja and Deepak N. Gavlani. Para 2 of the notice records that by prior letter dated 7-12-1995, Mr. Raheja had written to the SEBI that Regulations of 1994 would have no application to him since he was not holding any share before acquiring the present shares. Para 3 of the notice rebuts this submission of Mr. Raheja and states that it is noted that the said shares are in excess of 5 per cent and 10 per cent of the equity capital of the company in the context of regulations 6 and 10 respectively. It further states that according to regulation 6, any acquirer, who holds 5 per cent or less than 5 per cent of the shares and acquires more than 5 per cent shares by one or more transaction, has to disclose the aggregate of his shareholding to the company and the stock exchanges. The notice further states that the expression ‘less than 5 per cent shares in the company’ in the context of the regulations would mean holding nil/no shares in a company. It further states that in terms of regulation 2(d), any person who agrees to acquire shares in a company is an acquirer. Thereafter, it states that on a combined reading of two regulations, it is apparent that an acquirer need not be an existing shareholder of a company. The said para further states that these acquisitions are made without making a public announcement and hence the person concerned was guilty of violation of the said regulation. Thereafter, the notice deals with the subsequent letter of Mr. Raheja dated 19-8-1996 including his submission that if a public announcement is permitted, the residual public holding would go down to less than 20 per cent, and states that the same is no ground for non-compliance of the provisions. The notice, therefore, informs Mr. Raheja that he is liable to be prosecuted and calls upon him to show cause, failing which the SEBI would be constrained to proceed before the appropriate court of competent jurisdiction.

53. Mr. Raheja subsequently resigned as a director of IMFA (defendant No. 3) and, therefore, second show-cause notice came to be issued to defendant No. 3 itself on 31-3-1997, a copy of which is provided at page 105 of Compilation C-I. This notice also principally reiterates what was alleged in the earlier notice. It repeats that as per regulation 10, an acquirer, who makes outright acquisitions carrying voting rights of more than 10 per cent, would be required to make a public announcement. It further states that the expression ‘less than 5 per cent’ would obviously include zero/nil shares also. The notice, which is addressed to the managing director of IMFA (defendant No. 3) again calls upon the director to show cause as to why criminal prosecution should not be initiated under section 24 of the Act for violation of regulations 6 and 10, failing which the SEBI would be constrained to initiate criminal prosecution and/or take any action as it thinks fit in the interest of the investors.

54. The third notice is issued to defendant Nos. 1 and 11 on 8-1-1999 and it is at page 309 in Compilation-IIIA. This notice states that from the material available to the SEBI, defendant Nos. 1 and 11 had acquired 47.48 per cent shares in Herbertsons Ltd. during the years 1993 to 1997 apparently without making any public offer. Para 1 of this notice states that defendant Nos. 1 and 11 had acquired some 27.21 per cent shares of Herbertsons Ltd. prior to notification of 1994 Regulations. That was done through the device of different companies which were financed by funds provided by Chhabria Marketing Ltd. Thereafter, in this para it is specifically stated as to how all the concerned six companies are having a common address and were very small companies with very few shareholders and the shareholding pattern of these companies revealed that all these companies held the shares of each other. All of them were subsidiaries of Golan Finvest (P.) Ltd. Para 2 of this notice deals with the acquisition of 10.91 per cent shares by IMFA (defendant No. 3). The notice comments that granting of interest free loan of Rs. 4.13 crore to such company does not appear to be based on any commercial prudence inasmuch as the paid-up capital of this company in March 1995 was Rs. 4,00,200 and the total reserves and surplus were only Rs. 3,17,640. The acquisition of shares of this company on account of its failure to repay the interest free loan is, therefore, criticised. In para 3 of the notice, the acquisition of 4.97 per cent shares of Herbertsons Ltd. through Mahameru is commented upon. Mahameru was given Rs. 1.12 crore by Mr. M.D. Chhabria through Seven Star and inability to return the amount led to takeover of the company. Paras 4 and 5 of the notice deal with the acquisition of 3.83 per cent shares by Shirish (defendant No. 5) and as to how it was a company with paid-up capital of only Rs. 200 and yet was given a huge loan of Rs. 1.35 crore leading ultimately to failure to repay the loan and takeover of the small company. Thereafter, in para 6, it is recorded that the loans were given to IMFA, Mahameru and Shirish for purchasing the shares of Herbertsons Ltd. and inasmuch as the borrowers defaulted in repayment of the alleged dues, the shareholding of the companies were taken over by defendant Nos. 1 and 11. This had resulted into defendant Nos. 1 and 11 acquiring the control of shares of Herbertsons Ltd. Then the notice states “It appears that the acquisition of shares are done in a manner to circumvent the provisions of the SEBI (Takeover) Regulations, 1994”. Thereafter, the notice states “If the corporate veil of all the companies referred to more specifically above, is lifted, then it appears that the acquisition of the shareholdings in Herbertsons Ltd. are a device to circumvent the provisions of the SEBI (Takeover) Regulations, 1994 and acquire the shares of Herbertsons Ltd. in violation of the said provisions of Takeover Regulation”. The notice, therefore, calls upon the two persons to show cause as to why one or more or all of the actions under sections 11, 11B and 24 of the said Act and regulation 39 of Regulations 1994 read with regulations 44, 45(6) and 47(2a) of Regulations 1997 be not initiated for the alleged violation.

55. All these notices have been replied and there has been further correspondence thereto which will be dealt with suitably at a later stage. It is further relevant to note that subsequent to the last notice, further inquiry by the SEBI has started and the representatives of defendant Nos. 1 and 11 are participating therein. The SEBI is seized of the matter and the matter has been adjourned from time to time as per the notes of different dates handed over by Mr. Madon, the learned counsel appearing for one of the defendants.

56. It is also material to note that as mentioned by defendant No. 1 in his reply, defendant Nos. 3 and 4 have filed appeals before the CLB with respect to the rejection of their request for registration of their shares and those appeals are pending before the CLB. There is a third proceeding before the CLB, namely, one initiated under sections 397 and 398 of the Companies Act by defendant No. 2 and others herein against defendant No. 12 being Company Petition No. 17 of 1999 making a grievance of oppression and mismanagement.

Question of jurisdiction

57. In the light of these other proceedings, which are independently pending, it was submitted amongst other submissions on behalf of defendant Nos. 1 to 11 that as far as the registration or non-registration of shares is concerned, the proper remedy would be to approach the CLB under section 111A of the Companies Act and that would be the competent forum. As far as the violation of the SEBI Regulations are concerned, it was submitted that it would be SEBI which would be the correct authority to decide those allegations and in fact SEBI was seized of the proceedings arising out of the notices issued by the SEBI. In ground (g) of the reply of defendant No. 11, a plea was, therefore, raised that this Court has no jurisdiction to try and entertain the present proceedings. Para 1(g) of the affidavit in reply of defendant No. 11 to Notice of Motion No. 3120 of 1997 raises the following plea :

“This Hon’ble Court does not have jurisdiction to try, entertain and dispose of this suit.”

58. In view of this ground raised in the reply, Mr. Nariman, the learned counsel appearing for the plaintiffs, submitted during the course of his arguments at the outset that he would require a clarification from the defendant Nos. 1 to 11 of the first suit with respect to their stand on jurisdiction. Mr. Nariman wanted a specific statement from the defendants as to whether they were pressing that plea. If that plea was pressed in service, Mr. Nariman submitted that an issue will have to be framed on this point and will have to be decided at this stage itself. This submission was advanced by Mr. Nariman principally because of the aforesaid submission on behalf of the defendants that it was Mr. Vijay Mallya who was behind the plaintiffs and the appropriate remedy for the reliefs was available to the plaintiffs by approaching the CLB through the company. Mr. Nariman submitted that if that issue was being pressed, then he will expect this Court to frame the issue only on that aspect and to have it decided as a preliminary issue. Mr. Nariman submitted that this issue cannot be mixed up with any other issue in view of the specific provision of section 9A introduced in the Code of Civil Procedure, 1908, through an amendment in the State of Maharashtra. Mr. Nariman submitted that otherwise not even a finding can be given on this aspect. He, however, conceded that at the highest the Court may record the submission of rival parties on this aspect while maintaining that no finding whatsoever will be given thereon. If a finding was to be given, an issue will have to be framed and decided.

59. Mr. Nariman referred to and relied upon a judgment of a Division Bench of this Court concerning this very section in the case of Meher Singh v. Deepak Sawhny [1998] 4 All MR 536. That judgment refers to the statement of objects and reasons for adding section 9A which in turn refers to an earlier judgment in the case of Institute Indo Portuguese v. Borges [1958] 60 Bom. LR 660, wherein this Court had taken a view that the city civil court need not go into the question of jurisdiction while granting interim relief. This had resulted into injunction being granted without going into the question of jurisdiction and had led to grave abuse of the process of law. That led to the insertion of this section 9A as stated in the statement of objects and reasons. In para 10 of the said judgment, the Court observed as follows :

“10. Section 9A is a departure from the procedure established for deciding the preliminary issue as prescribed under Order XIV, rule 2 of Civil Procedure Code. On many occasions, it is not always proper to pass an order of hearing the preliminary issue with regard to maintainability of a suit at the time of final hearing of the suit. If such issue is decided at an earlier stage, rights of the parties can be crystallised. As stated earlier, section 9A is a departure from the procedure prescribed under Order XIV, rule 2, of the Code of Civil Procedure, 1908 (CPC) for achieving that object. For determination of the preliminary issue, which may be mixed question of law and facts, the parties are required to lead evidence. Without permitting the parties to lead evidence the issue of jurisdiction cannot be finally determined. If it was to be decided only for prima facie purpose for granting interim relief, then there was no necessity of adding section 9A in the CPC. Secondly, on the basis of prima facie, determination without proper adjudication, in our view, suit cannot be disposed of. The plaintiff cannot be non-suited on the basis of the averments made in the plaint or in the written statement. If the issue is a pure question of law, then it may be decided without recording evidence, but if it is a mixed question of law and fact, then parties should be permitted to lead evidence on the facts of the case. Question of jurisdiction, even if it is a mixed question of law and fact, it is required to be decided first. For deciding the said issue, the parties are entitled to lead evidence, oral as well as documentary, as that issue is required to be tried and adjudicated finally by the court. The determination of the said issue is not only for the limited purpose of granting interim relief or vacating interim relief. It is true that this procedure requires piecemeal determination of the suit, but that cannot be avoided because of the mandate of section 9A.”

60. Mr. Nariman then relied upon a judgment of a Single Judge of this Court in the case of Ignatius O’Cunba v. Father Denis [1993] 2 MLJ 1441. In that case, the Trial Judge did not frame any preliminary issue with respect to jurisdiction but the application for temporary injunction as well as the application for deciding the question of jurisdiction were disposed of together. In para 5, the learned single Judge observed “the nature of evidence which a party would be required to place before the court when the court is considering a question of granting or refusing interim relief under order 39 would be totally different from the nature of the evidence which it would require to place before the court when the court is to consider question of jurisdiction”. Hence, in para 8, the learned Judge held that it would be always desirable that both the questions are not heard together.

61. In view of insistence of Mr. Nariman on the basis of the aforesaid authorities, Mr. Chidambaram and Mr. Doctor appearing for the defendants pointed out that their plea was not one of ouster of jurisdiction. Section 9A (as included in Maharashtra) contemplates what is known as ouster of jurisdiction. They submitted that the defendants were only insisting that the discretion to exercise jurisdiction may not be exercised looking to the fact that the concerned disputes would appropriately be tried either by the CLB or by the SEBI. The submission of the defendants was that the jurisdiction of the civil courts with that of the authorities concerned was somewhat overlapping and concurrent jurisdiction. The judgments of the Supreme Court Dhulabhai v. State of Madhya Pradesh AIR 1969 SC 78, onwards were referred to by both the learned counsel. In that context, Mr. Nariman also drew my attention to a letter on behalf of the defendants written by their advocates to the SEBI requesting it to defer the determination inasmuch as the High Court was seized of the matter. That letter dated 22-1-1999 is placed at page 487 in Volume IIIA of the compilation. Mr. Nariman, therefore, submitted that in case the defendants were raising the issue of jurisdiction, then in his view the issue will have to be framed and on which he may have to consider whether evidence should be recorded. Alternatively, the defendants must agree that they were not pressing the issue in the manner in which it was worded in para 1(g) of the above referred affidavit in reply of defendant No. 11.

62. In view of the objection raised by Mr. Nariman and after due deliberations and instructions, the defendants filed a joint affidavit of defendant No. 1 and defendant No. 11 affirmed on 16-3-1999, stating therein that for the reasons contained therein, clause (G) of para 1 was not being pressed. The said affidavit of defendant No. 1 reads as follows :

‘1. I say that I have filed an affidavit dated 21st December, 1998 in reply to notice of motion No. 3120 of 1997. In that affidavit in reply, in clause (G) of paragraph 1 have stated as under :

“(G) This hon’ble court does not have jurisdiction to try, entertain and dispose of this suit.”

2. Similarly, in the affidavit to oppose grant of ad-interim relief filed by me in notice of motion No. 3932 of 1998 also dated 21st December, 1998 in paragraph 1A, I have stated as under:

“1A. I submit that this hon’ble court does not have jurisdiction to entertain, try and dispose of this suit.”

3. In connection with the above submissions in the said affidavit, I wish to clarify and state as under :

4. If the company had filed the present suit, the defendants could and would have contended that the jurisdiction of this hon’ble court was ousted. Defendants would have relied on AIR 1998 SC 3153 read with section 111A(2) and (3).

5. However, it is Mr. Reddy (Plaintiffs) a shareholder who has filed the suit alleging violation of his civil rights. Such a suit can be filed before a civil court (which has territorial and pecuniary jurisdiction). In answer, the defendants urge, among other grounds that—

(i) At an interlocutory stage :

(a) that this hon’ble court should not in exercise of its discretion; grant any interim relief to Mr. Reddy (Plaintiffs) since there is another Forum which could be moved by the company for rectification of the register; and

(b) that as Mr. Reddy (Plaintiffs) is only a name lender for the company and no civil rights of Mr. Reddy are infringed, no relief should be granted to him.

These are some factors amongst others which the court should consider while exercising its discretion in refusing the interim relief.

(ii) At the trial of the suit :

That Mr. Reddy (Plaintiffs) does not have any civil right to oppose registration or to have the register rectified and hence his suit should be dismissed.

In the light of the above, the submissions contained in Ground G of paragraph 1 and in paragraph 1A of my two aforementioned affidavits both dated 21st December, 1998 are not pressed.’

Whether prima facie case is required to be made out by the plaintiffs

63. Having obtained the above clarification, Mr. Nariman submitted that at the interlocutory stage what the Court had to examine principally was whether there were serious issues to be tried and that the Court was not required to go into a detailed inquiry in the manner in which it is sought by the defendants herein. The interlocutory application was required to be decided on affidavits or otherwise as stated in order 39, rule 1, of the Code of Civil Procedure and principally what the Court has to see is that the application was not frivolous or vexatious. Mr. Nariman, however, submitted that serious questions of law or matters which were required to be decided an evidence were not expected to be gone into and decided at the interlocutory stage. What the Court had to see was the balance of convenience and to protect, if established by the facts, the last undisputed status as existing between the parties as laid down by the Supreme Court in the case of Dorab Cawasji Warden v. Coomi Sorab Warden AIR 1990 SC 867. The Court had to see the balance of convenience for that purpose and as to whom irreparable injury will be caused. The defendants very much dispute this proposition canvassed by Mr. Nariman. The learned counsel appearing for the defendants and particularly Mr. Doctor emphasised that the complainant had to make out a prima facie case to justify an interlocutory order. Merely because serious issues were raised, an interim order cannot be passed in favour of the plaintiffs if he fails to make out a prima facie case in their favour.

64. It, therefore, becomes material to go into this question as to whether as a proposition of law, the plaintiffs are required to make out a prima facie case based on legal rights to entitle them for an interim injunction. To justify his submission, Mr. Nariman referred to the leading judgment of House of Lords in the case of American Cyanamid Co. v. Ethicon Ltd. [1975] 1 All ER 504. That was a case involving an action for infringement of right of patent. The House of Lords observed :

“The object of the interlocutory injunction is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial; but, the plaintiffs need for such protection must be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated under the plaintiff’s undertaking in damages if the uncertainty were resolved in the defendant’s favour at the trial. The court must weigh one need against another and determine where ‘the balance of convenience’ lies.” (p. 509)

This very passage quoted above is referred to and quoted by the Supreme Court with approval in para 9 in the case of Wander Ltd. v. Antox India (P.) Ltd. [1990] Supp. SCC 727, which was also a case under the Trade and Merchandise Marks Act, 1958. The Supreme Court has, however, not given a specific reference to this judgment of House of Lords in the case of American Cyanamid Co. (supra) though the above quotation is reproduced in para 9.

65. In American Cyanamid Co.’s case (supra), the House of Lords further observed as follows :

‘The use of such expression as a “probability”, “a prima facie case”, or “a strong prima facie case” in the context of the exercise of a discretionary power to grant an interlocutory injunction leads to confusion as to the object sought to be achieved by this form of temporary relief. The court no doubt must be satisfied that the claim is not frivolous or vexatious; in other words, that there is a serious question to be tried.

It is no part of the court’s function at this stage of the litigation to try to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend not to decide difficult questions of law which call for detailed argument and mature considerations. These are the matters to be dealt with at the trial. One of the reasons for the introduction of the practice of requiring an undertaking as to damages on the grant of an interlocutory injunction was that ‘it aided the court in doing that which was its great object, viz., abstaining from expressing any opinion upon the merits of the case until the hearing.” (p. 510)

The above two judgments, namely, American Cyanamid Co.’s case (supra) and Wander Ltd.’s case (supra), were again referred to in a subsequent Supreme Court judgment in the case of Power Control Appliances v. Sumeet Machines (P.) Ltd. [1994] 13 CLA 348. Paras 34 and 35 of that judgment refer to this earlier judgment. Mr. Nariman also referred to and relied upon another judgment of the Supreme Court in the case of Dorab Cawasji Warden (supra) in this behalf.

66. Mr. Doctor, the learned counsel appearing for defendant Nos. 4 and 5, submitted that the proposition in American Cyanamid Co.’s case (supra) was no longer a valid proposition even in England and was not accepted by Indian Courts as well. He referred to a judgment of the Court of Appeal in the case of Hubbard v. Vosper [1972] 1 All ER 1023 which was decided prior to American Cyanamid Co.’s case (supra) and a judgment subsequent thereto by the Chancery Division in the case of Series 5 Software Ltd. v. Clarke [1996] All ER 853. In Hubbard’s case (supra), Lord Denning MR in para on Remedies observed as follows :

“In considering whether to grant an interlocutory injunction, the right course for a judge is to look at the whole case. He must have regard not only to the strength of the claim but also to the strength of the defence, and then decide what is best to be done. Sometimes it is best to grant an injunction so as to maintain the status quo until the trial. At other times it is best not to impose a restraint on the defendant but leave him free to go ahead... The remedy by interlocutory injunction is so useful that it should be kept flexible and discretionary. It must not be made the subject of strict rules.” (p. 1029)

In the subsequent judgment in the case of Series 5 Software Ltd. (supra), the earlier judgment of Court of Appeal in the case of Hubbard (supra) was referred, the principles were laid down in the following passage :

“Accordingly, it appears to me that in deciding whether to grant interlocutory relief, the court should bear the following matter in mind :

(1) The grant of an interlocutory injunction is a matter of discretion and depends on all the facts of the case.

(2) There are no fixed rules as to when an injunction should or should not be granted. The relief must be kept flexible.

(3) Because of the practice adopted on the hearing of applications for interlocutory relief, the court should rarely attempt to resolve complex issues of disputed fact of law.

(4)Major factors the court can bear in mind are : (a) the extent of which damages are likely to be an adequate remedy for each part and the ability of the other party to pay, (b) the balance of convenience, (c) the maintenance of the status quo, and (d) any clear view the court may reach as to the relative strength of the parties’ cases.” (p. 865)

Thereafter in the judgment, it was held that there was no significant inconsistency between the earlier judgments in the case of Hoffmann-La Roche [1974] 2 All ER 1128 and American Cyanamid Co. (supra).

67. Coming to the judgments in Indian cases, particularly the one in the case of Dorab Cawasji Warden (supra), Mr. Doctor submitted that the said judgment was essentially in the context of section 44 of the Transfer of Property Act, 1882. The provision required the dwelling house of the joint family to remain joint and, therefore, the injunction to prevent the transferee of a share in the dwelling house of the joint family from taking possession was essential. Mr. Doctor submitted that though the judgment does lay down the circumstances wherein mandatory injunction is to be given (particularly in para 14 thereof), it cannot lead to a blanket proposition canvassed on behalf of the plaintiffs that merely because serious issues were raised, the injunction should follow.

68. Mr. Nariman had given a list of important issues which arises in the matter. The serious questions to be tried, according to Mr. Nariman, are as follows :

(1) Whether an acquisition in violation of the SEBI Regulations would be void?

(2) Whether a transfer of shares in the register of members in violation of provisions of law would be entertained?

(3) Whether apart from the statutory violations, the plaintiffs had in common law the right to seek the rectification of the share register?

(4) Whether the plaintiffs had a legal personal right to maintain the suit?

(5) Whether the post facto public offer could be made to cure the illegalities committed by the defendants or whether any such post facto offer should include such disputed shares also?

(6) What should be the interpretation of various regulations, particular regulations 6 and 10, the expression ‘holds’ under regulation 10 and as to whether indirect acquisitions are covered under the concerned regulations?

(7) As to what should be the correct interpretation of ‘persons acting in concert’?

(8) Whether the plaintiffs should be denied the relief on account of the alleged improper conduct on their part or any delay or any improper motive?

69. With respect to various serious questions raised by Mr. Nariman, Mr. Doctor submitted that assuming that any such questions were raised, the plaintiffs must make out a prima facie case, otherwise the result of it would be that merely because some questions are raised, automatically interim relief will have to be granted to the plaintiffs. He submitted that the Court would be reduced to a rubber stamp on any such interim application being made and serious issues being raised. In my view, apart from the controversy as to what is the position currently existing in England, as far as the Indian Courts are concerned, what is laid down by the Supreme Court in United Commercial Bank v. Bank of India AIR 1981 SC 1426, in para 50 holds good. “No injunction could be granted under order 39, rules 1 and 2, of the Code of Civil Procedure, 1908 unless the plaintiffs establish that they had a prima facie case, meaning thereby that there was a bona fide contention between the parties or a serious question to be tried. The question that must necessarily arise is whether in the facts and circumstances of the case, there is a prima facie case and, if so, as between whom? In view of the legal principles applicable, it is difficult for us to say on the material on record that the plaintiffs have a prima facie case. It cannot be disputed that if the suit were to be brought by the Bank of India, the High Court would not have granted any injunction as it was bound by the terms of the contract. What could not be done directly cannot be achieved indirectly in a suit brought by the plaintiffs”. Thereafter in para 51, the Supreme Court further observed “Even if there was a serious question to be tried, the High Court had to consider the balance of convenience.” Thus, as seen in the above cited judgment of the Chancery Division in Series 5 Software Ltd.’s case (supra), there was no significant inconsistency between the earlier judgment in the case of Hoffmann-La Roche (supra) and American Cyanamid Co. (supra), and the propositions which should govern the grant of interlocutory injunction were laid down in the earlier paragraph of that judgment at p. 865. Later on in that judgment, the Chancery Division observed “There is nothing inherently unfair in a court here expressing at least a preliminary view based on written evidence.” Similarly as held in United Commercial Bank’s case (supra), at the interlocutory stage, the Court had to see whether there was a bona fide contention between the parties or a serious question to be involved. In England as well as in India, it appears that the proposition in American Cyanamid Co.’s case (supra) as placed therein no longer holds goods. The bona fide contention between the parties has to be gone into by the Court. To this extent, the submission of Mr. Doctor is well taken and this Court will have to examine the defence of the defendants prima facie so as to decide whether the plaintiffs are entitled to the interim reliefs that they have prayed. In fact, in a subsequent judgment in the case of Gujarat Bottling Co. Ltd. v. Coca Cola Co. [1995] 5 SCC 545, the Supreme Court has crystallised the law with respect to various aspects to be examined at the interlocutory stage, which very much includes examination of the question as to whether the plaintiffs have a prima facie case. In para 43, the Court observed as follows :

“43. The grant of an interlocutory injunction during the pendency of legal proceedings is a matter requiring the exercise of discretion of the Court. While exercising the discretion the court applies the following tests - (i) whether the plaintiff has a prima facie case; (ii) whether the balance of convenience is in favour of the plaintiff; and (iii) whether the plaintiff would suffer an irreparable injury if his prayer for interlocutory injunction is disallowed. The decision whether or not to grant an interlocutory injunction has to be taken at a time when the existence of the legal right assailed by the plaintiff and its alleged violation are both contested and uncertain and remain uncertain till they are established at the trial on evidence. Relief by way of interlocutory injunction is granted to mitigate the risk of injustice to the plaintiff during the period before that uncertainty could be resolved. The object of the interlocutory injunction is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial. The need for such protection has, however, to be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated. The court must weigh one need against another and determine where the ‘balance of convenience’ lies. In order to protect the defendant while granting an interlocutory injunction in his favour the court can require the plaintiff to furnish an undertaking so that the defendant can be adequately compensated if the uncertainty were resolved in his favour at the trial.” (p. 574)

Thus, in the light of what is stated above, this Court will have to go into the submissions of the rival parties as appearing from their plaint and affidavits to find out as to whether the plaintiffs have made out a prima facie case to justify the interlocutory reliefs that they have sought.

Whether the interpretation of SEBI Regulations and deciding the breaches thereof was a matter exclusively within the jurisdiction of SEBI and outside that of the civil court.

70. There is, however, one another legal aspect raised by the defendants, which will have to be gone into before one goes into the prima facie merits of the rival contentions. It had been submitted on behalf of the defendants that the plaintiffs have no legal right to claim the kind of relief that they were seeking in the present suit. It was submitted that they neither had such a right in common law nor in any statute. As far as the right in common law is concerned it was principally submitted that it was available to the shareholders of a company if they themselves were aggrieved by any particular action on the part of the company concerning there own shares. It was submitted that there was no right in common laws as such to disturb the acquisition of shares made by third parties at the instance of someone who had no stake in those shares. (This submission will be looked into later on in details). However, alternatively and by way of preliminary objection, it was submitted that as far as the rights based in statute are concerned, if there was any such alleged breach of the SEBI Regulations in the light of the interpretation canvassed by Mr. Nariman, it was a matter to be looked into by the authorities concerned, namely, SEBI and that this Court had no jurisdiction to look into it and in any case this Court was not expected to go into the issues which would be competently looked into by the SEBI. The judgment of the Supreme Court in the case of Supreme Court Bar Association v. Union of India AIR 1998 SC 1895 was relied upon in this behalf by Mr. Dada. It was submitted by Mr. Dada that just like the Supreme Court Bar Association’s case (supra), in the event of this Court holding that the plaintiffs do have a statutory right to make a competitive bid as claimed by them, the proper forum would be to go to the SEBI and to lodge the grievance over there. Whether there was any breach of the regulations of SEBI or as to what should be the interpretation of the concept of ‘acting in concert’ or ‘holding the proportionate shares’, etc., were all questions within the realm of jurisdiction of the SEBI and it had sufficient powers to give the necessary directions under the regulations. The case of the plaintiffs is that the acquisitions made by the defendants are bad and, therefore, they should be directed to disinvest the same. As against that, the case of the defendants is that firstly whether the concerned regulations apply is itself a doubtful proposition. Even if they apply, whether there is any breach of the particular Regulations in the facts of the case is another difficulty and thereafter also it would be for the SEBI to decide as to what remedial measures ought to be adopted. It was very much conceivable that SEBI may go for post facto announcement which is the remedy canvassed by the defendants. It is, therefore, submitted by Mr. Dada that the principles in the judgment of Supreme Court Bar Association’s case (supra) would squarely apply. In an earlier judgment the Supreme Court had held that the concerned advocate Mr. V.C. Mishra was guilty of contempt of court and the Court had exercised its powers under article 142 of the Constitution read with section 38 of the Advocates Act in a summary procedure to suspend his licence to practice. That earlier, judgment in the case of Vinay Chandra Mishra, In re [1995] 2 SCC 584 was in terms over ruled in this later judgment provided in Supreme Court Bar Association’s case (supra). As far as the order holding the advocate guilty of contempt and the exercise of powers in that behalf was concerned, the Supreme Court did not disturb the finding of guilt arrived at in the earlier judgment. However, when it came to the order of punishment of suspension of his licence debarring the advocate concerned from carrying on his profession, the Supreme Court in para 44 observed as follows :

“...Punishing a contemner advocate, while dealing with a contempt of court case by suspending his licence to practice, a power otherwise statutorily available only to the Bar Council of India, on the ground that the contemner is also an advocate, is, therefore, not permissible in exercise of the jurisdiction under article 142. The construction of articles 142 must be functionally informed by the salutary purposes of the article, viz., to do complete justice between the parties. It cannot be otherwise. As already noticed in a case of contempt of court, the contemner and the court cannot be said to be litigating parties.” (p. 1908)

Thereafter in para 45 the Court observed as follows :

“...Indeed this court is not a court of restricted jurisdiction of only dispute settling. It is well recognised and established that this court has always been a law maker and its role travels beyond merely dispute settling. It is a problem solver in the nebulous areas but the substantive statutory provisions dealing with the subject of a given case, cannot be altogether ignored by this court, while making an order under article 142. Indeed, these constitutional powers cannot, in any way, be controlled by any statutory provisions but at the same time these powers are not meant to be exercised when their exercise may come directly in conflict with what has been expressly provided for in a statute dealing expressly with the subject...” (p. 1909)

Mr. Dada emphasised these observations to contend that when the Supreme Court had all the powers to do complete justice under article 142, still the power itself led the Court to set the limits for itself within which to exercise those powers, viz., that while exercising its powers ordinarily it should not disregard a statutory provision governing a subject. Thereafter in the above referred para, the Court also emphasised that the powers are not meant to be exercised when the exercise may come directly in conflict with what has been provided in a statute dealing expressly with the subject. It was, therefore, submitted that when breach of the SEBI Regulations was involved and when SEBI possessed the adequate powers, this Court ought not to exercise its discretion in a civil suit in such a way as to fetter or reduce the powers that are available to the SEBI or to affect the orders that SEBI would pass.

71. Mr. Nariman, on the other hand, submitted in this behalf that what the plaintiffs were seeking was not a direction or an order which was within the jurisdiction of SEBI. Mr. Nariman accepted that the provisions laid down in Supreme Court Bar Association’s case (supra) were undoubtedly very relevant. He, however, stressed that fact that the earlier judgment of the Supreme Court had been reviewed since under the earlier judgment the Supreme Court had contemplated to do something which was within the jurisdiction of the Bar Council of India. He submitted that the Supreme Court undoubtedly laid down that the powers under article 142 are not meant to be exercised when their exercise may come directly in conflict with what has been expressly provided in another statute. The Court, has, however, in the very paragraph clearly stated, as quoted above, that the Supreme Court was not a Court of restricted jurisdiction and that it has always been a law maker. Thereafter the Court specifically observed “Indeed these constitutional powers cannot in any way be controlled by statutory provisions”. Similarly in para 81, the Court observed :

“...To the extent, this court makes the statutory authorities and other organs of the State perform their duties in accordance with law, its role is unexceptionable but it is not permissible for the court to ‘take over’ the role of the statutory bodies or other organs of the State and ‘perform’ their functions.” (p. 1918)

Mr. Nariman submitted that what was being canvassed on behalf of the plaintiffs was that let SEBI exercise the powers within its jurisdiction, but what is that power is something which this Court will have to lay down. The SEBI undoubtedly had the powers to pass appropriate orders including that of directing disinvestment of shares or to permit post facto announcement if deemed appropriate. However, in his submission, in the facts of the present case certain questions had arisen regarding the interpretation of SEBI Act and the regulations which required elucidation of law. What were the powers of the SEBI, and as to what should be the correct interpretation of the SEBI regulations were issues which were clearly within the jurisdiction of this Court. In fact, the regular Courts alone were expected to clarify the parameters of jurisdiction of the Tribunals constituted under various laws.

72. In this behalf, Mr. Nariman relied upon a judgment of the Supreme Court in the case of State of Tamilnadu v. State of Karnataka [1991] Supp. 1 SCC 240. It was a case concerning the Cauvery Water Tribunal set-up under the Inter-State Water Disputes Act, 1956 and which Tribunal is given complete protection under article 262 of the Constitution. In fact, Mr. Nariman submitted that this was one Tribunal which could be stated to be the most powerful Tribunal amongst the various Tribunals. This is because article 262(2) specifically declares that notwithstanding anything in the Constitution, the Parliament may by law provide that neither the Supreme Court nor any other Court shall exercise jurisdiction in respect of any such dispute or complaint as is referred in clause (1) of article 262 which provides that Parliament may by law provide for the adjudication of any dispute or complaint with respect to the use, distribution or control of waters of or in any inter-state river or river valley. Section 11 of the Inter-State Water Disputes Act, 1956 also specifically removed the jurisdiction of the Supreme Court by providing that notwithstanding anything contained in any other law, neither the Supreme Court nor any other Court shall have or exercise jurisdiction in respect of any water dispute which may be referred to a Tribunal under this Act. Thus, as can be seen, River Water Tribunal is a very powerful Tribunal as compared to other Tribunal which would come within the sweep of article 136 and against whose orders appeal would lie to the Supreme Court. In spite of this being the position, in the aforesaid judgment the Supreme Court did exercise jurisdiction in a controversy which was raised by the appellants with respect to an interim order that they had sought. The controversy raised by the appellants was that they had moved an application before the Tribunal for grant of interim relief on the ground of certain emergency till the final disposal of the dispute, and the Tribunal, according to the appellants, had wrongly held that it had no jurisdiction to entertain the application. The question raised in the appeal before the Supreme Court was whether the Tribunal had rightly held that it had no jurisdiction to entertain such applications. The Supreme Court accepted that inasmuch as the dispute referred by the Central Government to the Tribunal under the Act related to the controversy covered under the Inter-State Water Dispute Act, 1956 it had no jurisdiction to decide the merits of that dispute. Yet the Supreme Court declared in para 12 :

“The Tribuanl is a statutory authority constituted under the Act made by the Parliament and this court had jurisdiction to decide the parameters, scope, authority and jurisdiction of the Tribunal. It is the judiciary, that is the courts alone that have the function of determining authoritatively the meaning of the statutory enactment and to lay down the frontiers of jurisdiction of any Board or Tribunal constituted under the statute.”

In that judgment, the Supreme Court quoted with approval the observations of Francis Bennion from his book ‘Statutory Interpretation’, wherein he observed :

“It is the function of the court alone to declare the legal meaning of an enactment. If anyone else (such as the draftsman of the provision) purports to lay down what the legal meaning is the court will tend to react adversely, regarding this as an encroachment upon its constitutional sphere.”

The Court also quoted with approval the earlier judgment in the case of Sanjeev Coke Mfg. Co. v. Bharat Coking Coal Ltd. [1983] 1 SCC 147, wherein the Court had held :

“...No one may speak for the Parliament and Parliament is never before the Court. After Parliament has said what it intends to say, only the court may say what the Parliament meant to say. None else...” (p. 172)

73. Mr. Nariman, therefore, submits that the questions which are raised by the plaintiffs in the present suit require laying down of frontiers of jurisdiction of the SEBI. He submits that what measures SEBI should adopt, or what order ought to be passed by the SEBI in this or any other case are undoubtedly matters within the jurisdiction of SEBI. He, however, formulated some of the questions regarding ambit and scope of the regulations which require the determination by this Court as follows :

(1) Whether the acquisition of more than 10 per cent shares would not violate SEBI Regulations merely because such acquirer did not prior thereto hold any share in the company?

(2) Whether having regard to the true purpose of the regulations, it was permissible under the Regulations 1994 for the SEBI to validate the acquisition of shares purported to be acquired in breach of regulation 10 by merely directing an ex post facto public offer which would permit acquisition of further shares?

(3) What is the correct interpretation of the concept of ‘acting in concert’?

(4) Are indirect acquisition covered under these regulations?

(5) What is the correct connotation of the verb ‘holds’ in regulation 10?

Mr. Nariman submitted that the approach taken by Securities Appellate Tribunal in the case of Fascinating Leasing & Finance Ltd. (supra) (which is said to be binding on SEBI) is prima facie contrary to what should be the correct interpretation of this regulation. Whether regulation 10 prohibited any indirect acquisition of shares in the target company, is again a question required to be gone into due to a prima facie incorrect construction placed thereon by the appellate authority of SEBI in Sesa Goa’s case to the contrary. However, as in the river water dispute case and more so in the present case, Mr. Nariman submitted that there were concepts which required elucidation. There were controversies with respect to concepts such as acting in concert, holding of the necessary shares, etc. This is something which was certainly within the jurisdiction of this Court. On the other hand, Mr. Dada and Mr. Doctor submitted that this can be done by the SEBI itself while resolving the controversy referred to it.

74. In my view, the aforesaid submission of Mr. Nariman is well taken. It is true that SEBI while resolving the dispute before it in exercise of its jurisdiction in a given case may have to arrive at the decision on these points as well, but it will not have the force of an authoritative pronouncement. And it certainly cannot mean that this Court ought not to exercise its lawful function to lay down the frontiers of jurisdiction of the SEBI or interpretation of various concepts which are used in the SEBI Act and regulations. This is not something like an actual exercise of the powers vested in another competent authority under a particular statute. If this Court interprets the concepts involved and lays down the frontiers of jurisdiction of the SEBI, that would be within its powers and something which is expected of this Court. Prima facie, therefore, it cannot be said that merely because this is an area in which SEBI can take a decision while deciding the merits of a case before it, this Court cannot go into and decide these issues involving interpretation. Therefore, if the plaintiffs’ suit is otherwise competent and maintainable, it will be within the function of this Court as a Court of unlimited jurisdiction to declare the legal meaning of the relevant provisions of the SEBI Act and Regulations 1994. In fact, as held in the Cauvery Water Tribunal case (supra), “courts alone have the function of determining authoritatively the meaning of statutory enactments.”

Plaintiffs’ case alleging breaches of particular regulations by defendant Nos. 1 to 11 and interpretation thereof.

75. Then coming to the particular breaches of the regulations, Mr. Nariman submitted that in the facts of the present case, the grievance of the plaintiffs is that undoubtedly all the disputed shares were acquired without making any public announcement. Even if we keep aside debentures, which were purchased prior to 1994 Regulations coming into force, defendant Nos. 3, 4 and 5 had acquired the disputed shares from the open market without a prior public announcement. The disputed shares were purchased from 27-10-1994 to 14-2-1997, and it is his submission that these acquisitions would squarely fall under the mischief of regulation 10. These shares, which were purchased by defendant Nos. 3, 4 and 5 and thereafter by defendant Nos. 7 and 8, were purchased from open market and when taken together with the earlier holding of the group, they undoubtedly carry more than 10 per cent of the voting rights. Mr. Nariman submitted that the story of the defendants that these defendant Nos. 3, 4 and 5 had an independent existence is difficult to swallow. They were at all material times financed by Chhabria group of companies for buying these shares. Although they were microscopically small companies and on their failing to repay the loan, the companies themselves were taken over, Mr. Nariman submitted that such an indirect device cannot be permitted while interpreting the particular regulation. As against that, the defendants pressed into service the judgment of Appellant Authority of SEBI dated 6-3-1997 in the case of Sesa Goa wherein the indirect acquisition of shares of a listed company were held to be outside the jurisdiction or purview of these regulations. Mr. Nariman pointed out that the show-cause notice issued to IMFA (defendant No. 3) dated 31-3-1997 speaks of acquiring 10 per cent or more shares as violative of these regulations. On the other hand, the defendants relied upon another decision of SEBI in the case of Fascinating Leasing & Finance Ltd. (supra), which held that if an acquirer did not hold any shares earlier, he would not come within the mischief of regulation 10. The indirect acquisitions were not specifically covered in 1994 Regulations and, therefore, the regulations were amended as per the recommendations of the Bhagwati Committee. It is submitted on behalf of the defendants that if something is not specifically spelt out in a regulation, it cannot be read as existing at the relevant point of time. On the other hand, Mr. Nariman submitted that a purposive interpretation will have to be given to the particular clause. He relied upon the judgment of the Supreme Court in the case of Md. Quasim Larry v. Muhammad Samsuddin AIR 1994 SC 1699. That was a case under the Payment of Wages Act, 1936. The earlier definition of ‘wages’ as incorporated in section 2(vi) of the Act initially did not specifically cover wages fixed by an award. They were sought to be included by a specific amendment brought in by the Payment of Wages (Amendment) Act, 1957. The question before the Court was as to whether the term ‘wages’ as it existed earlier included wages fixed by an award in an industrial dispute between the employer and the employees. In short, the Court was to decide as to whether remuneration payable under the award was already included in the definition as it stood before this amendment and the Court answered it in the affirmative. The Apex Court went into the aspect as to how awards are made and held that “the amendment has merely clarified what, in our opinion, was included in the unamended definition” [last sentence in para 5 in AIR]. In this connection, Mr. Nariman relied upon another judgment of the Supreme Court in the case of Baldev Krishna Sahi v. Shipping Corpn. of India Ltd. AIR 1987 SC 2245. That was a case under section 630 of the Companies Act, which makes officers of a company liable for wrongfully holding company’s property. It was canvassed before the Supreme Court that the section did not include former officers of the company. The Court held that having regard to the object of the section and its purpose, the term must be held to include its former officers also. Thus, it is seen that even while dealing with the provisions involving penal consequences, the Court adopted a purposive approach. Mr. Nariman pointed out in this connection that even in a case under the SEBI Act, the Central Government has taken a purposive approach in the case of Fawn Trading (P.) Ltd. v. SEBI in its order dated 15-1-1999. This approach was necessary to advance the remedy and to suppress the mischief.

76. Mr. Nariman, therefore, submitted that what Bhagwati Committee has specifically proposed and was brought in by Regulations 1997 was something already inbuilt in regulation 10. If regulation 10 is interpreted to mean that it operates only against someone who holds some shares, then all those who do not hold any shares and at one go acquire more than 10 per cent shares would be outside the scope of these regulations. That could not be said to be the intention of regulation 10 as originally drafted. It was no doubt true that regulation 10 was specifically amended to make certain things clear. That, however, would not mean that such an interpretation was not available while interpreting regulation 10 as it stood before amendment. Similarly, although it is true that in the definition of ‘acquirer’ amended in 1997, the words ‘directly’ or ‘indirectly’ are specifically brought in, it cannot mean that such an acquisition was not covered under the definition as it stood earlier when it included the persons with whom the acquirer was acting in concert. If these concepts and regulations are not read purposively, it would be very easy to defeat them. Mr. Nariman submitted that the judgments in the case of Sesa Goa and Fascinating Leasing & Finance Ltd. (supra) do not lay down the correct proposition of law and it was, therefore necessary for this Court to lay down the frontiers of jurisdiction of the SEBI in this behalf. On the other hand, it was submitted by the defendants that those judgments were binding on the SEBI with respect to which Mr. Nariman pointed out that the judgment in Fascinating Leasing & Finance Ltd.’s case (supra) had arisen from the order of an Adjudicating Officer, an hierarchy distinct from that of SEBI. But even so assuming that those judgments will have a persuasive force for the SEBI, it cannot certainly be denied to the plaintiffs to canvass in this Court that the interpretation which was adopted in the two cases was defeating the policy underlying the regulations. Mr. Nariman submits that transparency is one of the objects sought to be attained under the regulations. All those persons who hold 5 per cent or more shares were required to disclose the aggregate of their shareholding to the company under regulation 6. Similarly, if regulation 10 required a person acquiring more than 10 per cent of shares to make a public announcement of his intention to acquire those shares in open market, transparency was very much writ large on this regulation also. Mr. Nariman submitted that this was necessary because the idea was to give the best price to the shareholders and, therefore, under regulation 19(2)(b) irrespective of the acquisition of shares under regulation 10, the offered price will have to be the highest price paid by the acquirers in the open market as arrived at the weekly closing price of the stock exchange during the last six months preceding the date of announcement. Mr. Nariman submits that this is a provision made in the interest of the investors so that they get the best price. This has to be read along with the provisions for competitive acquisition made in regulation 23 which permits a competitive bid to be made by a person other than the concerned acquirer. The idea is that the competitive investors would get the better price. Mr. Nariman submitted that in the absence of an opportunity to compete, the market would remain tight and the investors would suffer.

Acting in concert

77. As far as acting in concert is concerned, Mr. Nariman submits that it is something about which actual evidence is normally difficult to come. He relied upon a judgment of the Supreme Court in the case of CIT v. East Coast Commercial Co. Ltd. AIR 1967 SC 768 (‘Kedia Family case’) in the context of section 23A of the Indian Income-tax Act, 1922 wherein the question was whether Kedia family had acted in concert to control the affairs of the concerned company. In the facts of that case, there was no evidence of any overt act showing that they were acting in concert and thereby constituted and acted as a block. The Supreme Court allowed the appeal against the judgment of the High Court holding that its approach was erroneous and in para 14 observed as follows :

“...if the members of the Kedia family form a block and had more than 75 per cent of the voting power, it was not necessary to prove that they actually exercised controlling interest. It is the holding in aggregate of a majority of the shares issued by a person or persons acting in concert in relation to the affairs of the company which establishes the existence of a block. It is sufficient, if having regard to their relation, etc., their conduct and their common interest, that it may be inferred that they must be acting together, evidence of actual concerted acting is normally difficult to obtain, and is not insisted upon.” (p. 772)

78. In the present case, Mr. Nariman submitted that the entire financing of defendant Nos. 3, 4 and 5 was either through Chhabria Finance Co. or through Mr. Ram Raheja. Mr. Ram Raheja is said to be the husband of sister of Kishore Chhabria, the defendant No. 1. The defendants submit that Mr. Ram Raheja does not come within the definition of the concept of a ‘relative’ as defined under section 6 of the Companies Act and, therefore, financing done through Mr. Ram Raheja cannot be said to be through a person acting in concert. As against that, Mr. Nariman points out that what should be noted is that regulation 2(1)(d), which defines ‘persons acting in concert’ firstly mentions the persons who are comprised in that concept and thereafter it states that it includes the persons who are mentioned subsequently in that definition. Thus, the definition of ‘a person acting in concert’ is an inclusive definition. Then, in sub-clause (i) the companies which are subsidiaries or companies under the same management (either individually or all with each other) are included in the concerned companies. Thereafter, sub-clause (iii) includes the directors of companies referred to in sub-clause (i) and his associates in this definition. Thereafter in the Explanation the term ‘associate’ is explained in two clauses (A) and (B). ‘The relatives’ mentioned in section 6 of the Companies Act are included in clause (A), whereas the director or his relatives whether individually or in aggregate holding more than 2 per cent of the paid-up equity capital of such company are included in clause (B). ‘Such company’ would mean the concerned company referred in sub-clause (iii). Therefore, inasmuch as Ram Raheja was holding substantial interest (9 per cent in IMFA-defendant No. 3), he would certain fall in the definition of a ‘person acting in concert’. Mr. Nariman, therefore, submitted that there was undoubtedly a prima facie case made out by the plaintiffs that the defendants were acting in concert and were in breach of regulation 10 when it comes to the acquisition of defendant Nos. 3, 4 and 5.

Negative working implying mandatory requirement

79. The net submission of Mr. Nariman is that when the regulation is worded in a negative language that the acquirer shall not acquire any further shares unless a particular method is adopted, the wording will have to be given its due force. Breaches of these regulations invite penal actions and, therefore, it is submitted that when such negative covenants are provided with consequent deterrents and provisions ought to be read as mandatory provisions. He submitted that breaches can only lead to a direction, to disinvest such shares which was contemplated by the SEBI. Mr. Nariman submitted that any other interpretation including a post facto permission to make a public announcement would lead to a permission to regularise the purchases, which in his submission are void being in breach of regulation 10. This submission of Mr. Nariman is on the footing that regulations 9 and 10 contemplate purchases of shares in three parts. The first part is one which the acquirer has already purchased. It is at the time of the second lot of purchases that the acquirer is told that by virtue of those purchases if his holding is going to be more than 10 per cent, he shall have to make a public announcement of offer. This public announcement will undoubtedly lead him to buy some more shares which is the third lot as provided under regulation 21(2), namely, that he shall offer to buy from the public an aggregate minimum of 20 per cent of the total shares of that company. He has to buy this third lot in competition with any party which may give a competitive bid on his making the public offer. In the event, the public announcement is not made (in spite of the likelihood of one’s shareholding going above 10 per cent due to these purchases in the second lot), there is no occasion for a third party to give a competitive bid and the purchases of this second part would get tainted and would be void.

80. The submission of the defendants is that as far as the second lot of acquisitions under regulations 9 and 10 is concerned, it is something which is either acquired through negotiations or from market and this provision is done to facilitate the takeover. The submission of the defendants is that further 20 per cent shares are to be bought in the third lot and thus, this is a kind of exit opportunity for those shareholders who do not want to remain with the company. It is, therefore, contended that the second lot of the purchases cannot be tainted merely because regulations 9 and 10 have a negative covenant. The public announcement contemplated under regulations 9 and 10 could interpreted to mean a post facto announcement so that the defects of not giving a prior announcement could be cured and the market as well as the investors will benefit. The defendants submit that any other interpretation would create umpteen number of difficulties inasmuch as an order of disinvestment would lead to a number of complications and a dampening effect on the share market. In their view, it would be for the SEBI to decide what order should be made and it is not that merely because there was a breach of regulations 9 and 10 that ipso facto the acquisitions ought to be tainted or that there ought to be an order of disinvestment. As against their submission, Mr. Nariman pointed out that assuming that there could be a post facto announcement, it should also cover the second lot of purchases by the persons concerned. Otherwise it would mean that even though there is a breach of regulations 9 and 10, the second lot of purchases would go scot-free and over and above these shares in the second lot, the persons in breach would be permitted to acquire further 20 per cent shares. On this submission of Mr. Nariman, the defendants submit that even so there would be nothing wrong in an approach of that kind because what is more important is the interest of the investors and not as to who should be in control of the company. Although Chapter III is named as ‘Takeovers’, the submission of the defendants is that principally the SEBI Act and regulations are for the benefit of the investors and every order to be passed by the SEBI will have to be in the interest of the investors and the regulations will also have to be read and interpreted in the interest of the investors. The defendants submit that the regulations are not meant for protecting or safeguarding the companies or their existing managements. The object of the regulations is to bring in more investment and to protect the investors and not to protect the existing managements. As against that, as stated earlier, in the submission of Mr. Nariman, the protection of investors as also transparency in the transactions is an equally important objective to be attained through these regulations. Clandestine acquisition are not acquisitions which are supported under the regulations. If that was not so, there was no need to provide a negative covenant by using the expression ‘unless’ in regulations 9 and 10 to provide that at the time an acquirer goes for the second lot of shares purchases if his holding goes beyond 10 per cent, he shall have to make a public announcement. All these competing submissions on rival sides require a careful consideration and the learned counsel on both the sides have relied upon a number of authorities in support of their submissions to canvass as to what should be the correct approach towards these regulations in the facts of the present case.

21-4-1999

81. Mr. Nariman submitted that SEBI had all throughout maintained that the acquisitions made by the defendants were in breach of the regulations and this was reflected in the three notices that were given from time to time. It cannot be said that SEBI had changed its stand or had suggested that post facto announcement be made as claimed by the defendants. In this behalf, the defendants submitted that the notes from the files of SEBI indicated that at a later point of time, the authorities concerned had almost decided to approve post facto announcement. They also relied upon a report made by one Mr. Gupta of SEBI in this behalf. Mr. Nariman pointed out that the handwritten note relied by the defendants indicated that it was a kind of noting on a file and the earlier papers from that file were not being produced. That apart, inasmuch as both these documents are not coming from a proper custody nor are these authenticated documents or issued on the letter-heads of the authority concerned, I cannot but refrain from referring to them. I have already refused to look into Annexure “O” to the affidavit of the plaintiffs in support of their motion for the same reason. (See last three sentences of para 17(i) above). That was also a copy of a document from SEBI which was not an authenticated document. It was suggested by the defendants that it was because of the pressure brought by the Chairman of SEBI Committee that SEBI had changed its stand which it was about to take in favour of the defendants. I am not prepared to accept this submission inasmuch as neither SEBI nor the former Chairman of the Committee are before the Court and hence no inference can be drawn merely by production of a letter written by the former Chairman of SEBI Committee.

82. Mr. Nariman submitted that just as the protection of the investors was one of the objective of the regulations, so was transparency in the dealings. That was necessary in the interest of the large section of the small investors. As has been seen earlier, under regulation 6, and acquirer, who holds 5 per cent or less than 5 per cent shares and acquires more than 5 per cent shares, is required to make disclosure of his shareholdings to the company. The provisions of regulations 9 and 10 were in the same line requiring public announcement. He submitted that Chhabrias were admittedly having 26 per cent of the shares lawfully acquired prior to the disputed shares and hence they could not have acquired any further shares without making any public announcement. If the element of transparency is not given its due significance, it would lead to any number of such holders of large number of shares to surreptitiously increase their shareholdings without making a public announcement and this would certainly be to the detriment of the investors. The disputed shares were admittedly acquired in open market without making public announcement and were admittedly from a common source of funds. That ought to lead one to the inference as in East Coast Commercial Co. Ltd.’s case (supra) that the persons concerned were acting in concert and were covered under the mischief which was sought to be suppressed under the regulations. Mr. Nariman pointed out that from time to time SEBI had sought for information and the documents with respect to the source of funds. This can be seen from SEBI’s letter dated 8-5-1998. The information sought for was not given to SEBI but was submitted much later in this Court including the information that the decisions to invest monies in defendant Nos. 3, 4 and 5 companies were made on the advice of the chartered accountant one Mr. A.T. Kukreja. Incidentally, this Mr. Kukreja apart from being the auditor of defendant No. 3 was admittedly a director of two of the other group companies, namely, Darrel and Stingray (defendant Nos. 8 and 9 herein).

83. Mr. Nariman submitted that the conjunction ‘with’ used in the definition of ‘acquirer’ given in clause 2(b) of the regulations indicated the causal connection and would also include the meaning ‘acquiring through’. He placed reliance on the definition of the term ‘with’ as defined at p. 58 of Words and Phrases, Paramount edn., Vol. 46. Therein the term ‘robbery with firearms’ has been interpreted to mean robbery through firearms, thereby requiring presence of firearms. Similarly, in his view, the acquisitions made through other companies were the acquisitions of the principal acquirer. He submitted that the three SEBI notices not having been challenged specifically, it was not permissible for the defendants to challenge their legality in a collateral manner in the present proceedings. He relied upon the observations of the Supreme Court in LIC of India v. Escorts Ltd. AIR 1986 SC 1370, para 84 at p. 1413 in this behalf. He submitted that the plea of the defendants that SEBI notices were abandoned could not be accepted inasmuch as recently as on 20-1-1998, defendant No. 11 himself in his letter to the Chairman of SEBI (at pp. 220-221 of Vol. C-I) recorded as follows :

“However, I understand that SEBI is not satisfied with all the explanations given so far in relation to these acquisitions and that the directions issued vide SEBI’s letter dated 21st May, 1996 needs to be complied with.”

Mr. Nariman, therefore, submitted that a prima facie case of the violation of regulations has been made out and hence a direction in the same manner as in the case of M.Z. Khan v. SEBI [1999] 34 CLA 445 decided by the Delhi High Court is necessary per Anil Dev Singh, J. That was also a case where SEBI had instituted an inquiry and Delhi High Court held that the fact of institution of the inquiry by SEBI showed that there was a prima facie case of the violation of the Takeover Code by the Concerned companies (see para 12 of the judgment supra at p. 265). In that case, the acquirer was already the controlling group and hence there was no occasion of freezing the voting rights. Still the Court passed interim orders restraining the sale of the disputed shares in the target company to prevent an irrevocable alteration of the status quo with respect to the shareholding the facts of the case as can be seen from para 17 (supra).

84. To advance his submission that wording in regulations 9 and 10 was a mandatory requirement, Mr. Nariman relied upon the judgment of the Supreme Court in the case of Mannalal Khetan v. Kedar Nath Khetan AIR 1977 SC 536. That was a case under section 108 of the Companies Act and a dispute had been raised that the transfer of shares in the company’s register had been made illegally and without authority because no proper instruments of transfer duly stamped and executed were delivered to the respondent-company. The relevant part of section 108 as it then stood reads as follows :

“Transfer not to be registered except on production of instrument of transfer.—A company shall not register a transfer of shares . . . unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee. . . has been delivered to the company along with the certificate relating to the shares or debentures. . . or if no such certificate is in existence, along with the letter of allotment of the shares. . . .”

In para 16, the Court observed that “negative language is worded to emphasise the insistence of compliance with the provisions of the Act (See State of Bihar v. Sir Kameshwar Singh of Darbhanga AIR 1952 SC 252 at pp. 287-88). . . Negative words are clearly prohibitory and are ordinarily used as a legislative device to make a statutory provision imperative”. In para 17, the Supreme Court referred to the judgment in the case of Raza Buland Sugar Co. Ltd. v. Municipal Board AIR 1965 SC 895, wherein various tests had been laid down to find out whether a provision was mandatory or directory and which were (i) the purpose for which the provision has been made, (ii) its nature, (iii) the intention of the Legislature in making the provision, (iv) the general inconvenience or injustice which may result to the person from reading the provision one way or the other, (v) the relation of the particular provision to other provisions dealing with the same subject, and (vi) the language of the provision. Thereafter the Court observed :

“. . . Prohibition and negative words can rarely be directory. It has been aptly stated that there is one way to obey the command and that is completely to refrain from doing the forbidden act. Therefore, negative, prohibitory and exclusive words are indicative of the legislative intent when the statute is mandatory. (See Maxwell on Interpretation of Statutes 11th edn. p. 362 and Bhikraj Jaipuria v. Union of India AIR 1962 SC 113 at p. 119).” (p. 539)

The Court, therefore, held the words ‘shall not register’ as containing a mandatory direction. Thereafter, the Court observed as follows :

“21. If anything is against law though it is not prohibited in the statute but only a penalty is annexed the agreement is void. In every case where a statute inflicts a penalty for doing an act, though the act be not prohibited, yet the thing is unlawful, because it is not intended that a statute would inflict a penalty for a lawful act.

22. Penalties are imposed by statute for two distinct purposes (1) for the protection of the public against fraud, or for some other object of public policy; (2) for the purpose of securing certain sources of revenue either to the State or to certain public bodies. If it is clear that a penalty is imposed by statute for the purpose of preventing something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void, even though the penalty is imposed is not enforceable.” (p. 539)

85. Similar is the approach of the Privy Council in the case of Moti Chand v. Ikran Ullah Khan AIR 1916 PC 59 wherein the Privy Council laid down some of the guidelines with respect to the approach the Courts ought to take with respect to a legislation like the tenancy law (Agra Tenancy Act in that case). The judicial committee observed in that matter as follows :

‘The policy of the Act is not to be defeated by any ingenious devices, arrangements, or agreements between a vendor and a vendee for the relinquishment by a vendor of his “sir” land or land which he has cultivated continuously for twelve years at the date of the transfer; for a reduction of purchase money on the vendor’s failing or refusing to relinquish such lands; or for the vendor being liable to a suit for breach of contract on his failing or refusing to relinquish such lands. All such devices, arrangements, and agreements are in contravention of the policy of the Act and are contrary to law and are illegal and void, and cannot be enforced by the vendee in any civil court or in any Court of Revenue.’

In McDowell & Co. Ltd. v. Commercial Tax Officer AIR 1986 SC 649, while dealing with the interpretation of Andhra Pradesh General Sales Tax Act in the context of tax evasion, the Supreme Court observed as under :

“45. Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.” (p. 662)

As far as the responsibility of the Court in such matters is concerned, the Supreme Court observed in para 18 which was pressed into service by Mr. Nariman and which reads as follows :

“18. It is neither fair not desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of ‘emerging’ techniques of interpretation was done in Ramsay [1982] AC 300, Burma Oil [1982] STC 30 and Dawson [1984] 1 All ER 530, to expose the devices for what they really are and to refuse to give judicial benediction.” (p. 655)

86. Mr. Nariman also pressed into service the observation of a Division Bench of this Court in Dinkarrao Ganpatrao Kothare v. Narayan V. Mandlik, 24 Bom. LR 449 at p. 460, wherein the context of contract for sale of land, the Court observed that something which cannot be done directly cannot be permitted to be done indirectly. At page 460, the Court observed “. . . the law in England and India is substantially the same with regard to the enforcement of the contract. The only difference is that in England the owner of the equitable interest is considered as the owner of the property contracted to be conveyed. But no such result can follow from a contract creating an executory interest. If such a contract purports to do by indirect means what the law forbids to be done directly it is void and the principle is the same in India as in England.” The same approach has been taken by the Supreme Court in the case of UP Co-operative Federation Ltd. v. Singh Consultants [1989] 65 Comp. Cas. 285, wherein in the context of an irrevocable bank guarantee, an injunction had been issued to restrain the bank from performing the bank guarantee and that was sought to be justified on the ground that it was not sought against the bank but against the appellant. The Court negatived the contention by observing :

“In the instant case, the learned judge has proceeded on the basis that this was not an injunction sought against the bank but this was an injunction sought against the appellant. But the net effect of the injunction is to restrain the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do indirectly.” (p. 293)

Submission on behalf of defendant Nos. 1 to 11

87. The aforesaid submission of Mr. Nariman was countered by Mr. Doctor appearing for defendant Nos. 4 and 5 Mr. Nariman had relied upon the above referred judgment in the case of Mannalal Khetan (supra) Mr. Doctor referred to para 19 of that judgment and emphasised that all that was laid down was that if a contract was made to do a prohibited act, the same would be unenforceable. He submitted that the question as to whether the contracts entered into in the present case were for doing prohibited acts was itself a doubtful proposition and in his submission no such prohibited acts had been indulged into by the defendants. Assuming without accepting that such was the state of affairs, Mr. Doctor contended that all that the said judgment laid down was that such contracts would be unenforceable. He, however, submitted that the transfers themselves would not become void merely because the contracts were unenforceable. Mr. Doctor submitted that section 23 of the Indian Contract Act, 1872 applies only to executory contracts and not to the transfers which were already concluded and acted upon in pursuance of such contract. He relied upon the judgment of the Supreme Court in the case of B.O.I. Finance Ltd. v. Custodian AIR 1997 SC 1952 (para 46-47) and Sajan Singh v. Sardara Ali [1960] 2 WLR 180 in this behalf. In Sajan Singh’s case (supra), the respondent/plaintiff had acquired a title to a lorry which transaction was illegal under the relevant regulations, yet he was held entitled to succeed against the other party to the illegality in detinue and in trespass. The transaction between the plaintiff and the defendant though an illegal one, was nevertheless fully executed and carried out. The House of Lords (per Lord Denning, J.) held that on that account it was effective to pass the property in the lorry to the plaintiff. The Court observed:

“. . .There are many cases which show that when two persons agree together in a conspiracy to effect a fraudulent or illegal purpose - and one of them transfers property to the other in pursuance of the conspiracy - then, so soon as the contract is executed and the fraudulent or illegal purpose is achieved, the property (be it absolute or special) which has been transferred by the one to the other remains vested in the transferee, notwithstanding its illegal origin. . .” (p. 1966)

The said judgment was referred to with approval by the Supreme Court in the case of B.O.I. Finance Ltd. (supra). The Court observed:

“46. Even if it be assumed that the agreements were not severable, and they were composite agreements even then the ready leg having been performed, the position in law is that the illegality of the agreements cannot affect the transfers which had already taken place.” (p. 1966)

88. Mr. Doctor submitted that in the two cases, namely B.O.I. Finance Ltd. (supra) and Sajan Singh (supra), what is to be noted is that those cases were filed by the parties to the transaction and yet the contracts were not avoided. In the instant case, the parties who had transferred their shares to defendant Nos. 3 to 5 were not aggrieved by those transfers and had not challenged those transfers. The suit was by an absolute third party and the transferors were not even joined as party defendants. The share disputed in the present matter were already transferred and registered, particularly 10,39,091 shares purchased by defendant No. 3 (IMFA) and 4,72,250 shares purchased by defendant No. 4 (Mahameru). In a case like this, the only option available at the highest was to go for a post facto permission to make the public announcement and the question of prosecution for the alleged breaches could be looked into subsequently. Mr. Doctor again stressed that it was only because of the intervention of the plaintiffs and the former chairman of the Committee of SEBI on their behalf that SEBI was changing its stand. He submitted that once the title in the shares had passed into the hands of the concerned defendants, SEBI cannot direct them to disinvest these shares. He, therefore, submitted that if the prayer that acquisition were void could not be granted, which was prayer (a), consequently prayer (b) for rectification of share register could not be granted. The alternative submission of Mr. Doctor was that prayer (b) itself could not be granted independently in view of the provisions of section 111A of the Companies Act and if prayer (b) could not be granted, there was no question of granting prayer (a). This alternative submission as to whether prayer (b) could independently be granted or not would be looked into later on when submissions on section 111A are gone into. Mr. Doctor also relied upon the judgment of House of Lords in the case of Tinsley v. Milligan [1994] 1 AC 349 in this behalf, wherein Lord Browne-Wilkinson observed (at page 369) “It is said that the property lies where it falls, even though legal title to the property was acquired as a result of the property passing under the legal contract itself”.

89. With respect to the purposive approach towards interpretation, Mr. Doctor relied upon the judgment of the Supreme Court in Ravulu Subba Rao v. CIT AIR 1956 SC 604, wherein in the context of the Income-tax Act, 1961 the Court observed in para 10 that to bring about true interpretation one had to see “the character of the legislation, scheme of the act and the nature of the right conferred by section”.

90. Mr. Manohar, who appeared for defendant No. 3, submitted with respect to regulation 10 that the deficiencies in the 1994 Regulations were sought to be cured by 1997 Regulations by bringing in indirect acquisition. He referred to the judgments of the Supreme Court in Howrah Trading Co. Ltd. v. CIT AIR 1959 SC 775 (at pp. 779-780) and Balkrishan Gupta v. Swadeshi Polytex Ltd. AIR 1985 SC 520 (at p. 531) to emphasize as to what constitutes “holding of shares”. He submitted that regulation 10, as it existed in 1994, had three ingredients, firstly one had to hold certain number of shares, secondly thereafter one had to acquire further shares and thirdly the action had to be in concert with somebody. Mr. Manohar submitted that defendant No. 3 was not a listed company and hence when read with regulation 14, regulation 10 did not apply to defendant No. 3. Besides, defendant No. 3 was not holding any share prior thereto so as to be hit by regulation 10. As far as 54,000 shares, subsequently purchased by defendant No. 3 are concerned, he submitted that they were purchased in the year 1997 after the 1997 Regulations came into force and under regulation 11(1) of the 1997 Regulations, the acquisition up to 2 per cent were not hit. He submitted that 54,000 shares would be just 0.56 per cent which would mean permissible acquisitions. He also submitted that defendant Nos. 3 to 5 could be considered as related companies when one considers the definition ‘of being related’ under the Companies Act. The learned counsel relief upon the judgment of Lord Denning in the case of Seaford Court Estates Ltd. v. Asher [1949] 2 All ER 155, wherein it was observed that “the role of the court while interpreting was only to erase the creases and not to weave a new fabric”. It was submitted that the interpretation which was sought to be placed by Mr. Nariman, namely, to bring in indirect acquisition to widen the definition of ‘holding’ to include those who were not holding any shares would amount to weaving a new fabric in the language of Lord Denning. In Seaford Court Estates Ltd.’s case (supra), Lord Denning observed as follows:

“A judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out ? He must then do as they would have done. A judge must not alter the material of which the Act is woven, but he can and should iron out the creases.” (p. 164)

91. With respect to the authorities referred to by Mr. Doctor, Mr. Nariman submitted that the judgment in B.O.I. Finance Ltd.’s case (supra) did not disturb the proposition laid down in Mannalal Khetan’s case (supra) cited earlier, that illegality of a transaction can certainly be established. In Tinsley’s case (supra), he referred to the observation of Lord Browne Wilkinson at page 375, wherein he stated “A party to an illegality can recover by virtue of a legal or equitable property interest, if but only if, he can establish his title without relying on his own illegality”. As far as Sajan Singh’s case (supra) is concerned, Mr. Nariman pointed out that even in that case the plaintiff, who had acquired the legal title, was held entitled to succeed against the party to the illegality in detinue and trespass. He emphasised that this fact was also noted by the Full Bench of the Kerala High Court in Krishna Menon v. Narayana Ayyar AIR 1962 Ker. 21 (in para 10). That was a case where there was no provision making a contract of partnership in contravention of section 22 of the Cochin Abkari Act expressly void. Yet the Court held that the agreement was calculated to defeat the object of enactment and it would be void under section 24 thereof corresponding to section 23 of the Indian Contract Act. Thereafter in para 10 it has been recorded as follows :

“10. Lastly, it was urged that the appellant should be allowed return of his properties. But Sajan Singh v. Sardara Ali [1960] 2 WLR 180 is against the contention, and the appellant cannot still be treated as the owner of the properties. . . .” (p. 24)

92. Mr. Doctor, on the other hand, submitted that what is seen from B.O.I. Finance Ltd.’s case (supra) is that illegality of an agreement cannot affect the transfer which had already taken place. With respect to this submission that the contract of transfer of shares between the transferors of defendant Nos. 3 and 4 and these two defendants is already executed. Mr. Nariman submitted that what the plaintiffs were concerned was the consequence of this contract. He submitted that regulation 10 was primarily concerned with takeover and it formed a part of the Chapter which was titled as ‘takeover’. He submitted that the plaintiffs were not concerned as to whether the transferors like defendant Nos. 3 and 4 should get their dividends on the shares which were transferred to them. What they were concerned with were the voting rights flowing therefrom and in the context of the Regulations, that part of the contract had not been executed as well. He further submitted that regulation 20(4) of the regulations also indicates that the substantial acquisition is inextricably linked with the takeover. This is because the regulation provides that the directors of the company, of which the shares are being acquired are prohibited from selling or disposing of assets except in the ordinary course of the business during the offer period. This is, however, subject to a further exception of approval of the shareholders being granted in the general body. Thus, this is a kind of provision which requires the directors of the company to maintain a status quo once they were notified that bulk shares have been acquired and are being acquired for the purposes of takeover of the company. The idea behind this provisions is that just as the incoming party is required to have transparency, the existing directors of the company are also expected to follow some norms of the game and this will mean that, as stated above, they will maintain the status quo. If such a provision was not there, the effect would have been that on the one hand the incoming party would have notified and made public announcement, whereas on the other the existing directors would have proceeded to take steps by divesting shares or by other method to defeat the public announcement made by the incoming party. The idea is to see to it that there are no clandestine operations on either side. Mr. Nariman submitted that it is necessary that both these provisions ought to be read as inter-linked and the party concerned ought to be insisted upon that they observe the inter-link failing which the voting rights flowing from the acquired shares will have to be curtailed at the instance of whichever is the aggrieved party.

The right to vote

93. It is true that holding of a share in a company is holding of a property which is a movable property, yet it is not a property which is without any restraint. Mr. Nariman points out that the companies Act itself provides that in certain contingency, the acquisition of shares is restricted as also the transfer thereof. This is seen from sections 108A, 108B and 108C of the Companies Act itself. But over and above these provisions, section 108D of the Companies Act, retains a power in the Central Government to direct the companies not to give effect to certain transfers as mentioned therein and not to permit the nominees or proxies of the transferors from exercising voting rights. Section 108D provides in sub-section (1) thereof as follows:

“108D. Power of Central Government to direct Companies not to give effect to the transfer.—(1) Where the Central Government is satisfied that as a result of the transfer of any share or block of shares of a company, a change in the controlling interest of the company is likely to take place and that such change would be prejudicial to the interest of the company or the public interest, that Government may direct the company not to give effect to the transfer of any such share or block of shares and—

(a) where the transfer of such share or block of shares has already been registered, not to permit the transferee or any nominee or proxy of the transferee, to exercise any voting or other rights attaching to such share or block of shares; and

(b) where the transfer of such share or block of shares has not been registered, not to permit any nominee or proxy of the transferor to exercise any voting or other rights attaching to such share or block of shares.”

94. Basically the right to vote is a statutory right given under section 87 of the Companies Act to the persons who are originally on the register. If the transfer of shares to any person is in contravention of any of the provisions of the SEBI Act and the regulations made thereunder, the company can be directed to rectify the register even under the provisions of section 111A(3) of the Companies Act, though that power is retained to the CLB. The CLB is also given the power to suspend voting rights during the pendency of the inquiry under sub-section (4) of section 111. Thus the violation of the provisions of the SEBI Regulation is a ground on which the right to vote can be curtailed as provided in the Act itself. Mr. Nariman, therefore, submits that there is nothing sacrosanct as such with respect to right to vote which is undoubtedly an important ingredient of holding this property in shares. He drew may attention in this behalf to a constitution Bench judgment in Charanjit Lal Chowdhury v. Union of India AIR 1951 SC 41. That was a case where the petitioner was undoubtedly precluded from exercising his right of vote during the election of directors so long as the statutory directors continued to manage the affairs of the company. Yet while examining this restraint on the right of vote in the context of article 19(1) of the Constitution, the Supreme Court observed as follows:

“60 . . . even if it is conceded for argument’s sake that the disabilities imposed by the impugned legislation amount to restrictions on proprietary right, they may very well be supported as reasonable restraints imposed in the interests of general public, viz., to secure the supply of a commodity essential to the community and to prevent a serious unemployment amongst a section of the people. They are, therefore, protected completely by clause (5) of article 19. . . .” (p. 57)

The provisions of the very Act, namely, Sholapur Spinning and Weaving Co. (Emergency Provisions) Act, 1950 again came to be considered by the Supreme Court later in the case of Dwarkadas Shrinivas v. Sholapur Spg. & Wvg. Co. Ltd. AIR 1954 SC 119. In that case, the Supreme Court looked into the Act from the approach of article 31 of the Constitution and held the same to be void. The Court, however, distinguished the earlier judgment - Charanjit Lal Chowdhury’s case (supra) and left the observations referred to earlier undisturbed. Mr. Nariman, therefore, submitted that the purchase of these shares and the resultant takeover arising out of the voting in a particular manner are two parts of the contract and it is the latter part which is yet to be completed. This being the position, it cannot be said that the contract of purchase of shares by defendant Nos. 3 and 4 is already acted upon and is no longer subsisting. Therefore, in his submission, the provisions of section 23 of the Indian Contract Act would still apply.

95. Considering the rival submissions made by the learned counsel on both sides, in my view, ultimately it will all depend on how one looks at the objectives of the regulations and the kind of mechanism they have sought to create for the purposes of implementing the regulations. Thus, if regulations 9 and 10 expect a particular conduct from the incoming party and if the Regulations are worded in a negative manner, in the event they are not read to give full effect to their simple meaning, the regulations will be rendered redundant. If the public announcement part is taken away as a necessary requirement in regulations 9 and 10, the result of it would be that without making the announcement, shares will be purchased in bulk and SEBI will be requested that if at all there is any grievance, post facto announcement be permitted. It is seen very often that when shares are purchased in bulk and particularly with a view to takeover the company, the result thereof is to dislodge the existing management. This is not something which any existing management is likely to appreciate unless it is prepared to make an exit. This being so, more often the incoming parties are likely to buy such shares by different devices which would not be easily known. It is only to avoid such things from happening and to bring in transparency in these transactions that this provision has been made which is in the interest of the investors, incoming party as well as the existing management. Everybody is put to notice that particular purchases are being made and if corporate democracy requires free transferability (about which I will deal with later on separately) and right to vote, it equally requires transparency and openness in the functioning of the company and its takeover. Democracy, corporate or otherwise, implies an open system. It implies knowledge, information and availability of equal opportunity to everybody concerned. If that is not something as to be read in these regulations, then it is better that no such regulations are passed. The fact that some of these difficulties are sought to be taken care of in the subsequent regulations by making specific provisions, need not deter the Court from looking into the regulations as they existed when drafted in the year 1994. Mr. Chidambaram, the learned counsel appearing for defendant No. 11, submitted that 1994 Regulations are no longer in force. Even so, when a controversy is raised with respect to the approach that one should adopt pertaining to these regulations and which is something which goes to the root of this matter one will have to deal with problems as they are raised herein. In the circumstances, in my view, as the regulations stand, and if there is a breach of Regulations and particularly regulation 10 as in the present case, the party concerned cannot say that he will not suffer the consequences thereof. Whether there is prima facie a breach of the regulations or whether the same is brought out by the pleadings on record is another aspect which would be dealt with separately.

Whether the plaint is defective and what standard of proof should be applied while examining as to whether there is an action in concert on the part of the defendants

96. Mr. Manohar, the learned counsel appearing for defendant No. 3, submitted that the plaint in the present suit is devoid of any particulars in resect of the alleged illegalities committed by defendant No. 3 as well as the other defendants in the matter of acquisition of shares of defendant No. 12. The interim prayer is supposed to be in aid of the main prayer and hence the reliefs claimed have got to be set up and justified in the plaint itself. The entire suit is principally based on violation of SEBI Regulations of 1994 and unless there is an allegation of fraud supported with particulars as required under order 6, rule 4, of the Code of Civil Procedure, the plaintiffs cannot make their case good. Besides, unless the plaintiffs state clearly as to what they are alleging, the defendants will face all the difficulties in defending the proceedings. This is apart from the fact that it would be against the principles of natural justice. Mr. Manohar submitted that when an action in concert is alleged, it implies an element of conspiracy or fraud which will require a meeting of minds. It is, therefore, necessary under the provisions of order 6, rule 4, of the Code of Civil Procedure that the nature of the agreement and its particulars such as date, time, the parties between whom it was entered into and the place where it was entered into, etc., will have to be pleaded so as to constitute a valid pleading so that the relief can be granted. He submitted that a positive and precise case has to be made out and that very case is to be put and one is not permitted to substitute and prove something else. He further submitted that fraud and conspiracy are like any other charge in a criminal proceeding and it has to be established beyond reasonable doubt and finding as to fraud cannot be based on suspicion and conjectures. Mr. Manohar relied upon a series of judgment in this behalf starting from Privy Council judgment in Bal Gangadhar Tilak v. Shriniwas Pandit XVII (Bom.) LR 527 wherein the Privy Council observed as follows:

“Under the contract law of India, as well as by ordinary principles, coercion, undue influence, fraud and misrepresentation, are all separate and separable categories of law. It is true that they may overlap or may be combined. But in the present case it is impossible to discover what ground or grounds are really taken up. There is a well-known rule of pleading expressed in the frequently quoted language of Lord Selborne in Wallingford v. Mutual Society that—

‘With regard to fraud, if there be any principle which is perfectly well settled, it is that general allegations, however, strong may be the words in which they are stated, are insufficient even to amount to an averment of fraud of which any court ought to take notice.’ The law of India is in no way different from this, and it has been decided over and over again, e.g., in Gunga Narain Gupta v. Tiluckram Chowdhury (1888) LR 15 IA 129.” (p. 545)

97. Mr. Manohar then relied upon the observations of the Supreme Court in the case of Bishundeo Narain v. Seogeni Rai AIR 1951 SC 280, wherein the Supreme Court observed as follows:

“25. It is also to be observed that no proper particulars have been furnished. Now if there is one rule which is better established then any other, it is that in cases of fraud, undue influence and coercion, the parties pleading it must setforth, full particulars and the case can only be decided on the particulars as laid. There can be no departure from them in evidence. General allegations are insufficient even to amount to an averment of fraud of which any Ct. ought to take notice, however, strong the language in which they are couched may be, and the same applies to undue influence and coercion. See order 6, rule 4, Civil PC.

26. ** ** **

27. We will deal with the case of coercion first. It will be seen that the plaintiffs’ case regarding that is grounded on the single allegation that their father was threatened with death. When all the verbiage is cleared away, that remains as the only foundation. The rest and in particular the facts set out in paras 8 to 12 about the ferocious appearance of Firangi Rai and his allegedly high handed and criminal activities and his character, are only there to lend colour to the genuineness of the belief said to have been engendered in Ghughuli Rai’s mind that the threat of death administered to him was real and imminent. But as regards the threat itself, there is not a single particular. We do not know the date, time and place in which it was administered. We do not know the circumstances we do not even know who did the threatening. Now when a Ct. is asked to find that a person was threatened with death, it is necessary to know these particulars, otherwise, it is impossible to reach a proper conclusion.” (p. 283)

In the same line of proposition, Mr. Manohar cited the following judgments:

(1) Bijendra Nath Srivastava v. Mayank Srivatava [1994] 6 SCC 117 (Para 13); (2) Svenska Handelsbanken v. Indian Charge Chrome JT 1993 (6) SC 189 (paras 45 & 46)/; (3) Omar Saley Mohd. v. IT Commissioner AIR 1959 SC 1238 (para 26); Varanasaya Sanskrit Vishwavidyalaya v. Dr. Rajkishore Tripathi AIR 1977 SC 617 (paras 8 and 9); (5) Abubakar Abdul Inamdar v. Harun Abdul Inamdar AIR 1996 SC 112 (para 5) and (6) D.M. Deshpande v. J.K. Kadan [1998] 8 SCC 315 (paras 9 and 10).

98. In the context of fraud, Mr. Manohar specifically relied upon the judgment in the case of A.L.N. Narayanan Chettyar v. Official Assignee AIR 1941 PC 93, where the observations are quite relevant for the purposes of criminal as well as civil procedure. In that matter, sale was sought to be set aside on the ground of fraud at the instance of the official assignee. In the last para the Court observed:

“There are other difficulties in the plaintiffs’ way which have been sufficiently considered in the judgments of the High Court. Fraud of this nature, like any other charge of a criminal offence whether made in civil or criminal proceedings, must be established beyond reasonable doubt. The High Court were justified in holding that the trial Judge’s finding was largely based on suspicion and conjecture.” (p. 95)

99. With respect to order 6, rule 4, of the Code of Civil Procedure, Mr. Manohar emphasised observations of a single judge in para 9 in the case of Ashgar Ali v. Chidda AIR 1982 All. 186 :

“9. Rule 4 of order 6 of the CPC is based on the principle that a charge of fraud, undue influence, etc., is a charge of a quasi criminal nature whenever it is alleged that a transaction is vitiated on account of fraud or undue influence, an insidious and unworthy conduct is attributed to the person who is said to be guilty of fraud and undue influence. The policy of law, therefore, is that the person charged with a fraud or undue influence, etc., should be apprised of its particulars so that the said party may be in a position to rebute those particulars. If no particulars are furnished to the party charged with such conduct, he is put at a disadvantage and is unable to meet the case sought to be established by the party making the charge. In the case of Bharat Dharma Syndicate Ltd. v. Harish Chandra AIR 1937 PC 146, it was observed:—

‘Before parting this case their Lordships desire to call attention to the great difficulty which is occasioned both to person charged with fraud or other improper conduct, and to the tribunals which are called upon to decide such issues, if the litigant who, prefers the charges is not compelled to place on record precise and specific details of those charges. In the present case the petitioner ought not to have been allowed to proceed with his petition and seek to prove fraud, unless and until he had, upon such terms as the court thought fit to impose, amended his petition by including therein full particulars of the allegations which he intended to prove. Such cases as the present will be much simplified if this practice is strictly observed and insisted upon by the court, even if as in the present case, no objection is taken on behalf of the parties who are interested in disproving the accusations.’” (p. 189)

100. Thereafter, Mr. Manohar pointed out a number of contradictions in the plaint. He pointed out that opening part of para 4 of the plaint essentially makes an allegation against defendant No. 1 and not against defendant No. 11. It alleges that between May 1995 and May 1997 defendant No. 1 through defendant Nos. 2 to 5 has acquired shares in contravention of law as detailed in sub-paragraphs of para 4. Thereafter, para 4(a) makes an allegation that defendant No. 2 has acted in concert with defendant Nos. 1 and 3 to 11 on 14-12-1993 to acquire 75,000 fully convertible debentures. Mr. Manohar pointed out that defendant No. 4 company was not in existence in December 1993. It was born on 2-2-1994. Similarly, defendant No. 5 was born on 19-8-1996. This being the position, how could they be acting in concert on 14-12-1993 ? Similarly in para 4(b), the allegation is that defendant No. 3 had acted in concert in December 1995 with defendant Nos. 1, 2 and 4 to 11. They acquired further shares in Herbertsons. As seen above, defendant No. 5 was not in existence when these acquisitions were made in December 1995. The allegation in para 4(c) of the plaint is that defendant No. 4 acted in concert in September 1996. As against that, the submission of the defendants is that defendant No. 4 purchased the shares much prior thereto from 11-11-1995 to 10-8-1996. The allegations against defendant No. 5 in para 4(d) are that in May 1997, it acquired further 3,64,750 shares in concert, whereas in fact it has acquired those shares from 27-8-1996 to 14-2-1997. Mr. Manohar submitted that the common understanding must precede such disputed purchases. Here the purchases are made on such dates which are prior to the companies (that are supposed to be acting in concert) being even born or when the concert is alleged to have taken place. That apart, the SEBI Regulations of 1994 have themselves come into force on 7-11-1994, then how could the acquisitions of debentures made on 14-12-1993 be hit by these regulations ? He further submitted that particulars of persons who acted in concert, are necessary inasmuch as the companies ultimately act through individuals and unless those particulars are given, how could the defendants meet the case of the plaintiffs. This is because as per the plaint the conspiracy was going on from 14-12-1993 till May 1997, i.e., over a period of 3 years. Mr. Manohar relied upon the approach of the Supreme Court in Kehar Singh v. State (Delhi Admn.) AIR 1988 SC 1883 and submitted that unless precise particulars and proof are available, no conspiracy can be agitated.

101. Then Mr. Manohar submitted that whereas the fraudulent conduct was thus alleged in paras 4, 10 and 14 of the plaint, in the affidavit in support of the motion there were no specific allegations. As against that, the allegation in para 12 of the affidavit in support of the second motion was that the transaction was sham and bogus. Mr. Manohar submitted that both these allegations could not co-exit. A transaction cannot be sham and bogus and at the same time conspiratory.

102. In this connection, Mr. Manohar referred to a judgment of a Full Bench of the Nagpur High Court in the case of Vinayak Shamrao v. Moreshwar Ganesh Padhe AIR 1944 Nag. 44, wherein Bose, J., observed as follows:

“. . . What he (i.e., Polock J.) did was to hold that the appellate court had not realised the difference between a real and a sham transaction and that though its finding purported to uphold the finding of the first court to the effect that the transaction was sham his reasoning indicated that he had not the distinction in mind. In this I am of the opinion the learned Judge was justified. The lower appellate court says in the passage I have quoted that the transaction was bogus and liable to be set aside under section 53, T.P. Act. Now a bogus transaction is one which is not intended to have legal effect. It is a pretense and has no actual legal existence. Consequently there is nothing to set aside. Only real transactions intended to have effect can be set aside. Section 53, T.P. Act, speaks of fraudulent transfers and so indicates that it is dealing with real transactions and not sham ones; see as to this ILR (1943) Nag. 42 at p. 55. Therefore, when the learned Judge of the lower appellate court in one and the same breath holds that the transaction is bogus and at the same time says it can be avoided under section 53, T.P. Act, either he is not clear in his mind as to what bogus means or he is mistaken in thinking that bogus transactions either can or are required to be set aside; or he did not realise that section 53 does not apply to sham transfers. It is impossible to discover from the rest of the judgment which of these three misapprehensions the learned Judge had in mind. . . .” (p. 52)

Mr. Manohar then referred to and relied upon the observations of the Court of appeal in the case of Snook v. London & West Riding Investments Ltd. [1969] 1 All ER 518 (in the last para at page 528), and those of the Supreme Court in para 30 in the case of Sree Meenakshi Mills Ltd. v. CIT AIR 1957 SC 49 which are to a similar effect.

103. Mr. Doctor also laid emphasis on this aspect, namely, that on one hand the plaint alleges in para 14 thereof certain fraudulent acts on the part of the defendants and thereby seeks a declaration in prayer (a), on the transactions were sham and were not to be acted upon. Mr. Doctor submitted that the transfers were other hand in the affidavit of the defendant No. 12 in reply to the second motion, it was stated that the undoubtedly meant to be acted upon and it was none of the business of the company to say anything contrary to their own acts. But that apart, if that was the plea, the submission of Mr. Doctor was that the suit was not maintainable. This is because if the transfers were not to be acted upon, there was no cause of action. Similarly, the plaintiff No. 1 has also called the said transaction as sham in para 12 of his affidavit in support of notice of motion No. 3932 of 1996. Mr. Doctor also submitted that being sham and bonus and being illegal are two different things. In his view, the plaintiffs were not clear as to what they were maintaining and where taking contradictory pleas from time to time. He referred to the judgment of the Supreme Court in Vinod Kumar Arora v. Smt. Surjit Kaur AIR 1987 SC 2179 to canvas that a cause of action is a bundle of facts which the plaintiffs must prove. The court observed “. . .the pleadings of the parties from the foundation of that case and it is not open to them to give up the case set out in the pleadings and propound a new and different case”. Dr. Dada also supported the aforesaid contention of Mr. Manohar and Mr. Doctor by stating that the plaint was lacking in particulars of the allegations. He pointed out that the plaint had been amended twice and inspite of that it was insufficient in facts. He referred to the judgment of the Supreme Court in the case of Union of India v. Pandurang Kashinath More AIR 1962 SC 630. In that matter, inspite of time being granted to mend the pleadings, the opportunity was not availed of. The court observed in para 10 “It is well unknown that when an improper conduct is alleged it must be set out with all particulars”. The court quoted with approval the observations in Wellingford v. Mutual Society [1880] 5 AC 685 (QB), which are to the following effect:

“With regard to fraud, if there be any principle which is perfectly well settled, it is that general allegations, however, strong may be the words in which they are stated, are insufficient even to amount to an averment of fraud of which any court ought to take notice.”

Thereafter in para 11 it is stated that “In the absence of the particulars all that the opposite side could do would be simply to deny that there had been discrimination. . .”

104. As against the aforesaid submissions on behalf of the defendants, Mr. Nariman, the learned counsel appearing for the plaintiffs, relied upon a Constitution Bench judgment of the Supreme Court in the case of Gulabchand v. Kudilal AIR 1966 SC 1734, wherein in the context of allegation of fraud in a civil case, the Supreme Court made a distinction in the matter of the criterion applicable and the appreciation of evidence in criminal cases as against the civil cases. The observations of Woodroffe, J. in Weston v. Peary Mohan Dass [1913] ILR 40 Cal. 898, were pressed into service before the Supreme Court, wherein the learned Judge has observed as follows:

“And speaking for myself where, whatever be the form of the proceeding, charges of a fraudulent or criminal character are made against a party thereto, it is right to insist that such charges be proved clearly and beyond reasonable doubt, though the nature and extent of such proof must necessarily vary according to the circumstances of each case. . . .” (p. 1737)

The learned Judges referred to the definitions of ‘proved’, ‘disproved’ and ‘not proved’ in section 3 of the Indian Evidence Act and in terms held that Woodroffe, J., was wrong in insisting that such charges must be proved clearly and beyond reasonable doubt. In para 11, the Supreme Court observed as follows:

“It is apparent from the above definitions that the Indian Evidence Act applies the same standard of proof in all civil cases. It makes no difference between cases in which charges of a fraudulent or criminal character are made and cases in which such charges are not made. But this is not to say that the court will not, while striking the balance of probability, keep in mind the presumption of honesty or innocence or the nature of the crime or fraud charged. In our opinion, Woodroffe, J. was wrong in insisting that such charges must be proved clearly and beyond reasonable doubt.” (p. 1738)

Again, in para 13, the Supreme Court observed as follows:

“We are unable to agree with these observations. As we have said before, the fact that the party is alleged to have accepted bribe in a civil case does not convert it into a criminal case, and the ordinary rules applicable to civil cases apply. The learned counsel has not been able to cite any other authority to show that there is any such well settled proposition, as stated by Meredith, J.” (p. 1738)

105. Mr. Manohar had canvassed that the allegation of concerted action must be proved beyond reasonable doubt and relied upon the judgments in the case of A.L.N. Narayanan Chettiyar (supra) and Svenska Handel-sbanken (supra) amongst others. Another judgment in this line is one in the case of Union of India v. Chaturbhai M. Patel AIR 1976 SC 712. The judgment in the cases of Svenska Handel-sbanken (supra) and the one in Chaturbhai M. Patel’s case (supra) are judgments by two Judges. As against that, Mr. Nariman relied upon the judgment of the Supreme Court in the case of Bhagwati Prasad v. Chandramaul AIR 1966 SC 735 and the judgment of the Constitution Bench in Gulabchand’s case (supra) which is a judgment of five Judges. It had overruled the observations of Woodrroffe, J., In Western’s case (supra) favouring the contrary view. Mr. Nariman also relied upon the judgment of the Supreme Court in the case of Dr. N.G. Dastane v. Mrs. S. Dastane AIR 1975 SC 1534 which is a judgment of three Judges Bench. In para 25 thereof, the court held that proof beyond reasonable doubt is proof by a higher standard which generally governs criminal trials or trials involving inquiry into issues of a quasi-criminal nature. It is wrong to import such considerations in trials of a purely civil nature. He also pointed out that the same view is subsequently followed by the Supreme Court in the case of Shobha Rani v. Madhukar Reddy [1988] 1 SCC 105 (para 10). Mr. Nariman pointed out that the judgment of the Supreme Court in Gulabchand’s case (supra) was not considered in subsequent judgments like Svenska referred to by Mr. Manohar. Mr. Nariman referred to the judgment of the Supreme Court in the case of Poolpandi v. Supdt. Central Excise AIR 1992 SC 1795 (para 4), wherein the Supreme Court followed the earlier judgment of a Constitution Bench in preference to a subsequent one. He also referred me to the Supreme Court judgment in the case of General Manager, Telecom v. A. Srinivasa Rao [1997] 6 SCC 767, wherein the Supreme Court had held that the judgments in the case of T. Joseph [1996] 8 SCC 489 and Bombay Telephone Canteen Employee’s Association [1997] 6 SCC 723, as not laying down the correct law since they were in direct conflict with the judgment by a Bench of seven Judges in Bangalore Water Supply & Sewerage v. A. Rajappa [1978] 2 SCC 213 on the concept of ‘industry’. The Supreme Court had held “it is needless to add that it is not permissible for us, or for that matter any Bench of lesser strength, to take a view contrary to that in Bangalore Water Supply or to bypass that decision so long as it holds the field”.

106. Mr. Manohar was fair enough to accept that the law as laid down by the Supreme Court in Gulabchand’s case (supra) held the field as far as the Indian Courts are concerned. He, however, emphasised the part of the above observations that while striking the balance of probability, keep in mind the presumption of honesty or innocence or the nature of the crime or fraud charged. He submitted that even if one has to apply the standard of probability, the plaintiffs have to make out the case as disclosed in their pleadings. Mr. Nariman thereafter referred to the observations of the Supreme Court in the case of East Coast Commercial Co. Ltd. (supra), which was particularly in the context of acting in concert with respect to the complaint under the Income-tax Act and the Supreme Court has held that “it is sufficient, if having regard to their relation, etc., their conduct and their common interest, that it may be inferred that they must be acting together, evidence of actual concerted action is normally difficult to obtain, and is not insisted upon”. The submission of Mr. Nariman was that it would be order 6, rule 10, of the Code of Civil Procedure which would govern the field. He submitted that the plaintiffs were pressing into service the inference that should be drawn with respect to meeting of minds and the fraudulent intention of the defendants. That was not something within the knowledge of the plaintiffs. The plaintiffs have given the particulars to the extent that were available to them, but lack of very precise particulars in this set of facts cannot lead to the plaint being rejected by applying the strict standard of order 6, rule 4, of the Code of Civil Procedure.

107. It is true that there are many formalities expected when one comes to the particulars in the plaint. However, it cannot be ignored that the plaintiffs have sought to rely upon the declaration made by defendant Nos. 1 to 11 themselves which are annexed to the plaint. They are relying upon the show-cause notices which are issued by SEBI firstly to Ram Raheja, then to defendant No. 3 and then to defendant No. 1 and Herbertsons. They have filed the suit on the basis of whatever information they could get from defendant No. 12 company. Notwithstanding the long standing relation between the plaintiffs and Mallya family, that fact alone cannot be pressed against the plaintiffs contending that they ought to have given more particulars. In a case like this, one cannot have any strict evidence as to when the meetings were held between the persons concerned, at what place and as to how the planning was done, as sought by Mr. Manohar. That will have to be a matter of inference to be drawn from the documents which are on record and which would be placed on record during trial. It cannot, therefore, be said that the plaintiffs are so bad in particulars that the defendants did not know as to what is the case pleaded by them. Mr. Nariman referred to the judgment of the Supreme Court in the case of Bhagwati Prasad (supra) where the court observed as follows:

“10. . . If a plea is not specifically made and yet it is covered by an issue by implication, and the parties knew that the said plea was involved in the trial, then the mere fact that the plea was not expressly taken in the pleadings would not necessarily disentitle a party from relying upon it if it is satisfactorily proved by evidence. The general rule no doubt is that the relief should be founded on pleadings made by the parties. But where the substantial matters relating to the title of both parties to the suit are touched, though indirectly or even obscurely, in the issues and evidence has been led about them, then the argument that a particular matter was not expressly taken in the pleadings would be purely formal and technical and cannot succeed in every case. What the court has to consider in dealing with such an objection is : did the parties know that the matter in question was involved in the trial, and did they lead evidence about it? If it appears that the parties did not know that the matter was in issue at the trial and one of them has had no opportunity to led evidence in respect of it, that undoubtedly would be a different matter. . .” (p. 738)

The same is the approach of the Supreme Court in Ram Sarup Gupta v. Bishun Narain Inter College AIR 1987 SC 1242 wherein the court held that substance of the pleadings should be considered and it is not desirable to place undue emphasis on form. He then referred to a judgment of a Division Bench of this court (per Chagla, CJ.) in Lady Dinbai Dinshaw Petit v.Dominion of India AIR 1951 Bom. 72, wherein it was held that when the allegation relates to the state of mind or intention of the other part, it is sufficient to state the same as material fact though the circumstances from which it can be inferred may not be said. In para 8 the court observed:

“When an allegation of fraud is made, the party alleging the fraud is in possession of the particulars of the fraud practised upon him. Fraud in such a case is an objective fact known to the party complaining of it, and in such a case the law requires that particulars of such an objective fact must be given. Similar is the case with breach of trust, wilful default, or undue influence or misrepresentation, all covered by the provisions of order 6, rule 4. But when a party is complaining of a state of mind of the other party and making a grievance of that state of mind, it is impossible to expect that party to give particulars of something which is subjective as far as the other party is concerned, and the law has taken notice of this difficulty and has provided by order 6, rule 10, that wherever it is material to allege malice, fraudulent intention, knowledge or other condition of the mind of any person, it shall be sufficient not allege the same as a fact without setting out the circumstances from which the same is to be inferred.” (p. 72)

He further referred to in this behalf the judgments of the Supreme Court in East Coast Commercial Co. Ltd.’s case (supra) and submitted that where the transactions speak for themselves and furnish internal proof of a well thought of design, there need not be an insistence on further particulars and documents.

108. The defendants had contended that plaint was not clear as to what was the cause of action and relied upon authorities in support. Mr. Nariman pointed out that all these authorities were in cases which were finally heard and decided. In the present matter, we are still at the stage of deciding an application for interim relief where one has to decide it on affidavits as required by order 39, rule 1, of the Code of Civil Procedure. Mr. Nariman submitted that the so called deficiencies in the plaint cannot be read against the plaintiffs if it can be shown that the defendants had understood what the plaintiffs were saying. He referred me to the affidavit of M.D. Chhabria in reply to the first notice of motion, and paras 7, 10 and 15 thereof, to contend that M.D. Chhabria had understood the contention of the plaintiffs and their allegations that the defendants had acted in concert and that they had acquired shares in excess in violation of the law. He drew my attention to the reply of K.R. Chhabria and particularly para 12 thereof to make the same submission.

109. In the circumstances, it is not possible to say that the plaint is defective or is lacking in particulars. The defendants have understood the case of the plaintiffs and they are protesting too much. The plaintiffs have given particulars that could become available to them. When the plaintiffs were making an allegation of concerted action, they are complaining of a state of mind of the defendant Nos. 1 to 11 and could not be expected to give particulars of something which is not within their own knowledge. They have made allegations with particulars based on notices given by SEBI and they will be entitled to insist for the inference based thereon. The dicta of Chagla, CJ. in Lady Dinbai Dinshaw Petit’s case (supra) making a distinction between the provisions of order 6, rule 4, and rule 10, is quite apt and applies with full force in the facts of the present case. The plaintiffs cannot be expected to give the particulars of time, date and place where the defendants arrived at the concerned design or as to which of the directors of these companies had entered into this conspiracy. This is a civil suit, wherein an inference based on probabilities is pressed into service. Whatever particulars are necessary to lay the foundation have to be given and they are given in the facts of the present case as required, and then an inference is sought to be pressed into service which is permitted by order 6, rule 10. The plaint cannot, therefore, be faulted as defective on this ground of the alleged lack of particulars. Similarly as far as the standard of proof is concerned, as held in Gulabchand’s case (supra), this being a civil suit, the ordinary rules applicable to civil cases will apply and it cannot be converted into a criminal case. One will have to strike the balance and decide the matter on probabilities although keeping in mind the presumption of honesty or innocence and the nature of fraud or concerted action alleged.

Interpretation of Mr. Manohar as to whether the use of negative language makes the transaction void?

110. Mr. Manohar then submitted that the provisions in the concerned regulations were quasi criminal. Mr. Nariman had argued that in view of the use of negative mandatory language in the regulations, the transactions will have to be considered as void. With respect to that submission, Mr. Manohar submitted that the consequence that the transaction in breach of the regulations would be void was not specifically provided in the regulations. He, therefore, submitted that in the absence of there being a specific consequential provision, the mere use of negative mandatory language would not itself make the transaction void. He drew my attention to regulation 4 which provides for exemption from the entire relevant Chapter III concerning the takeovers. He pressed regulation 37(2) in service to submit that even in the event of any investigation, the explanation of any such person in breach can be entertained. He submitted that the moment there is a power to exempt from penal provisions, the argument of voidness would no longer survive. He relied upon the judgment of the Supreme Court in the case of G.S. Lamba v. Union of India AIR 1985 SC 1019. That was a matter concerning Indian Foreign Service and the conflict between the promotees and the direct recruits. In para 25, the court noted that the language of the concerned rule 13(1) was mandatory, but there was a provision to relax under rule 29(a). Hence, in para 27, the court observed as follows:

“27. . . Therefore, assuming there was failure to consult the Union Public Service Commission before exercising the power to relax the mandatory quota rule, and further assuming that the posts in Integrated Grades II and III were within the purview of the Union Public Service Commission and accepting for the time being that the Commission was not consulted before the power to relax the rule was exercised yet the action taken would not be vitiated nor would it furnish any help to Union of India which itself cannot take any advantage of its failure to consult the Commission. Therefore, it can be safely stated that the enormous departure from the quota rule year after year permits an inference that the departure was in exercise of the power of relaxing the quota rule conferred on the controlling authority. Once there is power to relax the mandatory quota rule, the appointment made in excess of the quota from any given source would not be illegal or invalid but would be valid and legal as held by this court in N.K. Chouhan v. State of Gujarat [1977] 1 SCR 1037....” (p. 1033)

He then relied upon the judgment of the Supreme Court in the case of Banarsai Das v. Cane Commissioner AIR 1963 SC 1417. In that case also, there was a mandatory provision and penal consequences. The Supreme Court quoted the relevant paragraph of Maxwell on Interpretation of Statutes in para 18 to observe that the whole scope and purpose of the statute under consideration has to be seen and then in para 22 observed as follows:

“22. In the present case the form prescribed set out a number of conditions and these have all been incorporated in the agreement which has been executed by the society. In other words the form has been used. There is no deviation from the prescribed form except in respect of the three defects which we have mentioned earlier. We have pointed out that the failure to execute the agreement in the form is made an offence but no other consequence is indicated if the form is not followed. The utmost that can be said is that if the form which was used included conditions which were at variance with the conditions in the prescribed form a contract might not have resulted. But we need not express any opinion on this, because in this case the terms as stated in the prescribed form are the terms in the form used. We have pointed out that no consequence attaches to the failure to observe the form except punishment by fine and section 18(2) is capable of being read as directory. Even if it be read as mandatory we have shown already that the failure of the appellant to sign the form is not a matter of which he can take advantage regard being had to his own conduct . . .” (p. 1425)

In this context he lastly relied upon the judgment of the Supreme Court in the case of Punjab Beverages (P.) Ltd. v. Suresh Chand AIR 1978 SC 995, wherein the Supreme Court had to consider whether the contravention of section 33(2)(b) of the Industrial Disputes Act, 1947 made the dismissal order void particularly when a penalty was provided for such a contravention. The Supreme Court held other wise as can be seen in paras 7 and 12 :

“7. . . We must, therefore, construe section 33 not as if it were standing alone and apart from the rest of the Act, but in the light of the next following section 33A and if these two sections are read together, it is clear that the legislative intent was not to invalidate an order of discharge or dismissal passed in contravention of section 33, despite the mandatory language employed in the section and the penal provision enacted in section 31(1).” (p. 1000)

“12. . . The very fact that even after the contravention of section 33 is proved, the Tribunal is required to go into the further question whether the order of discharge or dismissal passed by the employer is justified on the merits, clearly indicates that the order of discharge is not rendered void and inoperative by such contravention. . . .” (p. 1002)

111. Mr. Manohar then submitted that in view of the fact that the provision concerned was a quasi criminal in nature, it had to be read strictly. He relied upon the judgment of the House of Lords in the case of London & North Eastern Railway Co. v. Berriman [1946] AC 278, wherein the Court observed as follows :

“Where penalties for infringement are imposed it is not legitimate to stretch the language of a rule, however, beneficent its intention. Beyond the fair and ordinary meaning of its language. I quote and adopt the words of Aleson B :

“The rule of law, I take it, upon the construction of all statutes. . . . is, whether they be penal or remedial, to construe them according to the plain, literal and grammatical meaning of the words in which they are expressed, unless that construction leads to a plain and clear contradiction of the apparent purpose of the Act, or to some palpable and evident absurdity.” (p. 295)

In the same report, the court observed :

“If there are two reasonable constructions we must give the more lenient one.

That is the settled rule for construction of penal sections.” (p.313)

112. Mr. Manohar then relied upon the judgment of the Supreme Court in the case of Tolaram v. State of Bombay [1955] 1 SCR 158, wherein the Supreme Court also reiterated the same proposition and referred to the above judgment :

“ ‘The question that needs our determination in such situation is whether section 18(1) makes punishment, receipt of money at a moment of time when the law had not come into existence, and when there was possibility that the contemplated lease might come into existence. It may be here observed that the provisions of section 18(1) are penal in nature and it is a well settled rule of construction of penal statute that if two possible and reasonable constructions be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty. It is not competent to the court the stretch the meaning of an expression used by the legislation in order to carry out the intention of the legislation. As pointed out by Lord Macmillan in London and North Eastern Railway Co. v. Beriman, where penalty for infringement are imposed it is not legitimate to stretch the language of rule, however, beneficent intention, beyond the fair and ordinary meaning of language. . .’

‘. . .If the Legislature intended to make receipts of money on executory agreements punishable, the section would have read as follows : “receives any fine, premium or other like sum or deposit or any consideration other than the standard rent in respect of the lease or an agreement of lease of the premises, such landlord or person shall be punished’.” (p.164)

In this context, he further relied upon the judgment of the Supreme Court in the case of Union of India v. Rai Bhadur Shree Ram Durga Prasad (P.) Ltd. [1969] (2) SCR 727, wherein the Supreme Court cautioned against stretching the meaning of expression given by the Legislature beyond an ordinary meaning and relied upon the above referred two judgments at page 753.

Mr. Manohar’s submission on regulation 10

113. Manohar then submitted that the concerned regulation 10 of 1994 had been specifically changed in 1997. He submitted that what the plaintiffs were trying to do was to ignore the words ‘who holds shares carrying ten per cent or less of voting rights in the capital of the company’, which occur in regulation 10(1), and wanted to add the words ‘if any’ existing in the new regulations into regulation 10(1) of 1994. The regulation 10(1) of 1994 reads as follows:

“10(1) An acquirer (who holds shares carrying ten per cent or less of voting rights in the capital of the company) shall not acquire any further shares in the company from the open market which when taken together with his existing shareholdings would carry more than ten per cent of the voting rights, unless such acquirer makes a public announcement of intention to acquire shares in the open market in accordance with these regulations.”

The plaintiffs want to read the regulation by deleting the bracketed portion above and by adding the words ‘if any’ . It would then read as under :

“10(1) An acquirer shall not acquire any further shares in the company from the open market which when taken together with his existing shareholding if any would carry more than ten per cent of the voting rights, unless such acquirer makes a public announcement of intention to acquire shares in the open market in accordance with these regulations.”

Mr. Manohar submitted that it is only if such a course is permitted that the plaintiffs can succeed in the present motion.

114. Mr. Manohar drew my attention to be observations of Lord Denning in the case of Seaford Court Estates Ltd. (supra) which were further elucidated by the Supreme Court in para 11 of Union of India v. Sankal Chand Himatlal Sheth [1977] 4 SCC 193 as follows :

‘11. The normal rule of interpretation of a statute is that the words used by the Legislature are generally a safeguard to its intention. Lord Reid in Westminister Bank Ltd. v. Zang 1966 AC 182 observed that no principle on interpretation of statutes is more firmly settled than the rule that the court must deduce the intention of Parliament from the words used in the Act’. Applying such a rule, this court observed in S. Narayanaswami v. G. Panneerselyam AIR 1972 SC 2284, 2290 that ‘where the statute’s meaning is clear and explicit, word cannot be interpolated’. What is true of the interpretation of an ordinary statute is not anytheless true in the case of constitutional provision, and the same rule applies equally to both. But if the words of an instrument are ambiguous in the sense that they can reasonably bear more than one meaning, that is to say, if the words are semantically ambiguous, or if a provision, if read literally, is patently incompatible with the other provisions of the instrument, the court would be justified in construing the words in the manner which will make the particular provision purposeful. That, in essence is the rule of harmonious construction. In M. Pentiah v. Muddala Veeramallappa AIR 1961 SC 1107, 1115 this court : observed ‘where the language of a statute, in its ordinary meaning and grammatical construction leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the essence. . .’ But, if the provision is clear and explicit, it cannot be reduced to a nullity by reading into it a meaning which it does not carry and, therefore, ‘courts are very reluctant to substitute words in a statute or to add words to it and it has been said that they will only do so where there is a repugnancy to good sense’. In the view which I am disposed to take, it is unnecessary to dwell upon Lord Denning’s edict in Seaford Court Estates Ltd. v. Asher [1949] 2 All ER 155, 164 that when a defect appears in a statute, a Judge cannot simply fold his hands and blame the draftsman, that he must supplement the written word so as to give force and life to the intention of the Legislature and that he should ask himself the question how, if the makers of the Act had themselves come across the particular ruck in the texture of it, they would have straightened it out. I may only add, though even that does not apply, that Lord Denning wound up by saying, may be not by way of recanting, that ‘a Judge must not alter the material of which the Act is woven, but he can and should iron out the creases’.” (p.215)

He drew my attention to the following observations of the Privy Council in the case of Crawford v. Spooner [1846] 6 Moore PC 1. This is what the Privy Council has held :

“Their Lordship are clearly of opinion that the judgment of the court of Bombay cannot stand. The construction of the Act must be taken from the bare words of the Act. We cannot fish out what possibly may have been the intention of the Legislature ; we cannot aid the Legislature’s defective phrasing of the Act ; we cannot add, and mend and by construction, make up deficiencies which are left there. If the Legislature did intend that which it has not expressed clear ; must more, if the Legislature intended something very differently ; if the Legislature intended something pretty nearly the apposite of what is said, it is not for judges to invent something which they do not meet with in the words of the text (aiding their construction of the text always, of course, by the context); it is not for them so to supply a meaning, for, in reality, it would be supplying it ; the true way in these cases is, to take the words as the Legislature have given them, and to take the meaning which the words given naturally imply, unless where the construction of those words is, either by the preamble or by the context of the words in question, controlled or altered ; and therefore, if any other meaning was intended than that which the words purport plainly to import, then let another Act supply that meaning, and supply the defect in the previous Act.” (p. 69)

The judgment was quoted with approval by the Supreme Court in the case of Nalinakhya Bysack v. Shyam Sunder Haldar AIR 1953 SC 148, in para 9. Both these judgments are again referred to and quoted with approval subsequently by the Supreme Court in para 14 of a recent judgment in the case of P.K. Unni v. Nirmala Industries AIR 1990 SC 933.

115. With respect to allegations against the defendants, Mr. Manohar emphasised the discrepancies in the conduct of the plaintiff themselves. Mr. Nariman had emphasised that the companies, which were take over by defendant No. 11, were all small companies with a very small capital. Mr. Manohar, therefore, submitted that investment companies by their very nature are very often small companies with small capital, but that itself should not make one suspicious. In that context, he pointed out that as seen from para 43(iii) of joint reply affidavit of Raghunathan and Gupte on behalf of the company (at p. 192 of motion No. 3932 of 1998), the United Breveries of Mallya group sold 26 per cent shares in Herbertsons to those very small companies which were referred to as Rs. 200 worth companies. Besides, it is an undisputed position that Herbertsons purchased the trademark ‘Lord and Master’ from Chhabria Marketing Ltd. by paying Rs. 4.5 crore for that purpose as the non-competing consideration. In fact, the total consideration of the transaction was in the range of Rs. 8.35 crore. This Chhabria Marketing Ltd. was a Rs. 70 Crore worth company. With respect to the allegation that these companies were given loans without interest, Mr. Manohar submitted that though no interest amount was mentioned in the loan transactions, returns were agreed as indicated in the chartered accountant’s report. He emphasised that the fact that loans and finances were given was not disputed by the plaintiffs as can be seen form Mr. Reddy’s affidavit. He further emphasised that it was not the plaintiffs’ case that these transactions of the investment companies were their solitary transactions or that they were floated only for these transactions. Mr. Manohar submitted that in fact they were having other transactions as well. He further submitted that if defendant Nos. 3 to 5 had any collusion with defendant No. 11, it was inconceivable that defendant No. 11 would takeover those companies even before throwing out Vijay Mallya from the management of Herbertsons. He could have very well permitted the shares to Lie and Park with defendant Nos. 3 to 5 who obviously would have voted in fovour of defendant No. 11.

116. Then turning to the declaration made in April 1997, Mr. Manohar submitted that the declarations will have to be read with the letter dated 2-4-1998 which explained the stand of the defendants. Those declarations were made within 2 months of the 1997 regulations coming into force. They will have to be read in that context. Mr. Manohar emphasised the dicta of the Supreme Court in Prem Ex-Servicemen Co.op. v. State of Haryana AIR 1994 SC 1121 which states that the statements to be considered as admissions under section 21 of the Evidence Act must be read in their context. Besides, if one looks at the declarations, all that they stated were the names of the directors of the concerned company. Mr. Manohar, therefore, categorised these declarations as innocent declarations and that nothing much should be made out of them.

117. With respect to Regulation 10, Mr. Manohar drew my attention to the report of the Committee on substantial acquisition of shares and takeover which was constituted by the SEBI under the chairmanship of Mr. Justice P.N. Bhagawati (redt. CJI). He drew my attention to paragraphs 3,7 to 10, 15 and 20 of that report and submitted that these paragraphs clearly indicate that 1997 Regulations were drafted to improve upon and to remove the deficiencies in the 1994 Regulations. The 1997 Regulations sought to bring in the indirect acquisitions which were not covered earlier. Mr. Manohar referred to the judgment of the Supreme Court in Hawrah Trading Co. Ltd.’ case (supra) (at pp. 779-780) and Balkrishan Gupta’s case (supra) to emphasise as to what constitutes holding of a share. On that background, he submitted that regulation 10 as it existed in 1994 has three ingredients. Firstly, one had to hold certain shares, secondly thereafter one had to acquire further shares and then that action has to be in concert with somebody else. Mr. Manohar submitted that defendant No. 3 was not a listed company and hence regulation 10 did not apply to defendant No. 3. Besides. defendant No. 3 was not holding any share earlier so as to be hit by regulation 10. He thereafter submitted that 54,000 shares which were purchased by defendant No. 3 during 27-2-1997 and 1-8-1997 were not yet registered. They were purchased after 1997 Regulations came into force. Under regulation 11(1) of the 1997 Regulations, acquisition upto 2 per cent was not hit and these 54,000 shares would be just 0.56 per cent.

118. Then Mr. Manohar submitted that it would be wrong to say that defendant Nos. 3 to 5 were in any way related companies. Such a concept was not defined under the Regulations and if one turns to the companies Act, the relation was defined under section 6 read with Schedule 1A thereof. Even Mr. Raheja did not fall in that concept vis-a-vis Mr. M.D. Chhabria, leave aside any of the directors of defendant Nos. 3 to 5. Mr. Manohar, therefore, submitted that under section 111A(5) read with sub-section (6) thereof, a transferee was entitled to vote. A free transferability of shares was coupled with right to vote and hence the right of defendant No. 3 should not be curtailed in any manner whatsoever.

119. It is not possible to accept the above submission of Mr. Manohar concerning the negative mandatory language of Regulation 10. He has relied upon the judgment of the Supreme Court in the case of G.S. Lamba (supra) which was a service matter and the proposition in that matter is in the context of relaxing the service quota. The proposition, viz., that once there is a power to relax the mandatory quota rule, the appointments made in excess of quota will not be illegal is for recognising the reality of break down of quota in the area of service promotions. The proposition is evolved to see to it that persons promoted due to service exigencies are not unnecessarily made to suffer for no fault of theirs. The proposition made in that context can certainly not be imported while dealing with the mandatory requirement of public advertising provided in the regulation governing purchases of shares leading to takeover of a company and which regulation is not observed by an interested party acting clandestinely. Similarly, the decision in the case of Banarsi Das (supra) relied upon by Mr. Manohar is essentially dealing with a situation arising out of failure to execute an agreement in the prescribed form to be given to the Cane Commissioner and then what is important is that as the Court holds, the failure to sign the form was sought to be used to the advantage of the party which did not conform the necessary form and the same was frowned upon. Similarly the judgment in the case of Punjab Beverages (P.) Ltd. (supra) is entirely on a different context of the Industrial Disputes Act wherein it is laid down that although there may be a contravention of section 33 of that Act, the Tribunal is permitted to go into the question of illegality of the order of discharge or dismissal and, therefore, the discharge or dismissal is not made void merely because of the contravention of section 33. It is just not possible to import the proposition given in that judgment while interpreting the present Regulations, the purpose of which is quite different. The judgments relied upon by Mr. Manohar governing quasi criminal cases and the principles of interpretation concerning penal provisions pressed by him into service otherwise have their own place and authority. However, as far as the present case is concerned, we are as of now in the realm of a civil dispute and the consequences of breach of these regulations for the purposes of takeover of a company and how it is to be prevented if it is illegal. We have not yet reached the stage of the prosecution for those breaches. As against this submission of Mr. Manohar, the reliance by Mr. Nariman on the judgment of the Supreme Court in Mannalal Khetan’s case (supra) is absolutely apt inasmuch as it is a judgment in the context of transfer of shares under section 108. When the Supreme Court has given the guidelines as to how negative words used in the context of Companies Act are to be interpreted, there is no reason for us to look elsewhere.

120. Mr. Nariman, on the other hand, submitted that the term ‘holds’ in Regulation 10 cannot be restricted only to a registered shareholder, but it would also cover a purchaser of shares which had not been lodged or transferred. In fact, in the second suit filed by the defendants, in para 18 they have taken the same stand. He however, submitted that independent of that, a member may be a holder of shares but a holder may not be a member. This wider approach was adopted by the Supreme Court in the case of Worldwide Agencies (P.) Ltd. v. Margaret Desor [1990] 67 Comp. Cas. 607. The Court had approved the judgment of a Single Judge of Calcutta High Court in the case of Kedar Nath Agarwal v. Jay Engg. Works Ltd. [1963] 33 Comp. Cas. 102 wherein the Court held :

“There is a material difference between the provisions of the older Companies Acts and regulations and those of section 81 of the Act of 1956. Previously where increase of capital was proposed by issue of further shares such shares had first to be offered to the ‘members’. The Act of 1956 prescribes that they shall be offered to the persons who at the date of the offer are ‘holders’ of the equity shares of the company. A ‘member’ may be a ‘holder’ of shares, but a ‘holder’ may not be a ‘member’. A person whose name is on the register may have sold his share and from the moment his property in the share has passed to his purchaser he ceases to be a ‘holder’ of those shares. Under section 81 such a person is not entitled to accept offers of new shares or to exercise any right of renunciation.” (p. 102)

Mr. Nariman then submitted that regulation 2(2) of the SEBI regulations requires us to refer to the Companies Act in difficulty. Section 81(1)(a) of the Companies Act, which deals with this situation, does not define the word. In the circumstances, he submitted that proper course will be to adopt the approach taken by the Supreme Court in the case of World Wide Agencies (supra).

121. The defendants had referred to the SEBI Committee Report to contend that what was brought in by 1997 regulations was not included in the earlier regulations. Mr. Nariman submitted that such Committee Reports cannot be used to interpret the statutes and regulations; that is the responsibility of the Court. He referred to the observations of Bennion in his commentary on ‘Statutory Interpretation’. Bennion has been subsequently quoted with approval by the Supreme Court in State of Tamilnadu v. State of Karnataka [1991] Supp (1) SCC 240 in a rival inter se dispute. In that case, in the context of Cauvery Water Disputes Tribunal, the Supreme Court held :

“It is the judiciary, i.e., the courts alone that have the function of determining authoritatively the meaning of a statutory enactment and to lay down the frontiers of jurisdiction of any body or Tribunal constituted under the statute.”

Then the Court quoted with approval the following observations of Francies Bennion on pp. 53 and 548.

“Under the British constitution, the function of determining authoritatively the meaning of a parliamentary enactment is entrusted to the judiciary. In the words of Richard Burn they have the exposition of Acts, which must not be expounded in any other sense than is truly and properly the exposition of them. This is but one aspect of the court’s general function of applying the relevant law to the facts of the case before it. The starting point is, therefore, to consider this function.”

It is the function of the Court alone to declare the legal meaning of an enactment. If anyone else (such as the draftsman of the provisions) purports to lay down what the legal meaning is the Court will tend to react adversely, regarding this as an encroachment upon its constitutional sphere.

122. Mr. Nariman, therefore, rightly submitted that the report of Justice Bhagwati Committee could not be pressed into service to decide as to what should be the interpretation of 1994 Regulations. They will have to be interpreted purposefully by looking into the objective for which they are made. Regulation 10 will have to be held mandatory and the term ‘holds’ will have to be interpreted to cover those purchasers of shares whose shares have not been lodged or transferred.

123. It is not possible to accept the submission of Mr. Manohar that the fact that certain provisions were specifically made in the 1997 Regulations to widen their coverage, clearly establishes that the coverage under the 1994 Regulations was a narrow one. Now, in this connection, it cannot be lost sight of that these Regulations are for the benefit of the shareholders, companies and society at large and hence while interpreting them one will have to adopt the purposive approach as done by the Supreme Court in Md. Quasim Larry’s case (supra) on Industrial Disputes Act. Indirect acquisitions can not be read as outside the 1994 Regulations or else the Regulations will be frustrated. Similarly, for the same reason as far as the concept of ‘persons related’ or ‘persons acting in concert’ is concerned. I am inclined to accept the inclusive interpretation canvassed by Mr. Nariman and recorded earlier. The approach of the Supreme Court in East Coast Commercial Co. Ltd.’s case (supra) is instructive in this behalf.

Derivative action

124. Then comes the question as to whether the present suit is filed by way of a personal action or whether it is a derivative action and secondly whether the plaintiffs have a right to maintain an action for rectification of the register, which does not disclose the correct picture of company’s membership. In this behalf, Mr. Nariman all throughout maintained that the action of the plaintiffs was a personal action and was not by way of a derivative step. As against that, the defendants maintain that the nature of the plaint was in fact in the interest of the company and on behalf of the other shareholders and it was in that manner only that it could be considered as permissible as an exception to the rule in Foss’ case (supra) wherein it was laid down that normally an individual shareholder cannot bring an action into Courts to complain of an irregularity as distinct from illegality. He submitted that when illegality is pleaded by the plaintiff, a personal action was permissible. There is of course the second aspect of this controversy as to whether in what circumstances and for what kind of rights such an action can be maintained and whether it is still available after the recent amendments to the Company Law in sections 111 and 111A.

Three aspects of the present controversy on the basis of Company Law

125. Thus, there are three aspects of this particular controversy, namely, (1) Whether the kind of correction as sought by the plaintiffs through a suit with respect to third party shares is available as a common law right; (2) Whether the remedy is still available after the recent amendments in sections 111 and 111A; (3) Whether the suit can be maintained for rectification as a personal action.

Relevant provisions of Companies Act and the legislative history thereof

126. Before I deal with the aforesaid aspects, it is desirable to refer to the relevant sections with respect to the rectification of company’s register and particularly the manner in which they have been amended from time to time. As can be seen from the legislative history of Companies Act, the earlier provisions, namely, section 23 of the Companies Act, 1857, section 34 of the Companies Act, 1866 and section 58 of the Companies Act, 1882 dealing with rectification were partly retained and partly altered in the Companies Act, 1913. Section 38 of the Companies Act, 1913 gave a power to the Court to rectify the register at the instance of the aggrieved person or any member of the company. An application was to be filed for this purpose and under sub-section (3) of section 38, on an application being made, the Court could decide the question relating to title also, though, however, in the proviso thereof, it was provided that when any questions of law were raised, the Court may direct the issue to be tried. This section 38 reads as follows :

“38. Power of court to rectify register.—(1) If,

(a) the name of any person is fraudulently or without sufficient cause entered in or omitted from the register of members of a company; or

(b) default is made or unnecessary delay takes place in entering on the register the fact of any person having ceased to be a member, the person aggrieved or any member of the company, or the company may apply to the court for rectification of the register.

(2) The Court may either refuse the application or may order rectification of the register and payment by the company of any damages sustained by any party aggrieved, and may make such order as to costs as it in its discretion thinks fit.

(3) On any application under this section the Court may decide any question relating to the title of any person who is a party to the application to have his name entered in or omitted from the register, whether the question arises between members or alleged members, or between members or alleged members on the one hand and the company on the other hand; and generally may decide any question necessary or expedient to be decided for rectification of the register :

Provided that the Court may direct an issue to be tried in which any question of law may be raised, and an appeal from the decision on such an issue shall lie in the manner directed by the Code of Civil Procedure, 1908 on the grounds mentioned in section 100 of that Code.”

127. The right of the person aggrieved or for that matter of any member of the company was retained when the Act No. 1 of 1956 came into force. A suitable modification in section 155 of the Companies Act was effected. Under section 111, the power of the company either to register or refuse to register a member was retained. These two sections in the Companies Act, namely, sections 111 and 155, read as follows :

“111. Power to refuse registration and appeal against refusal.—(1) Nothing in sections 108, 109 and 110 shall prejudice any power of the company under its articles to refuse to register the transfer of, or the transmission by operation of law of the right to, any shares or interest of a member in, or debentures of, the company.

(2) If, in pursuance of any such power, a company refuses to register any such transfer or transmission of right, it shall, within two months from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as the case may be.

If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.

(3) The transferor or transferee, or the person who gave intimation of the transmission by operation of law, as the case may be, may, where the company is a public company or a private company which is a subsidiary of a public company, appeal to the Central Government against any refusal of the company to register the transfer or transmission, or against any failure on its part, within the period referred to in sub-section (2), either to register the transfer or transmission or to send notice of its refusal to register the same.

(4) An appeal to the Central Government under sub-section (3) shall be made—

(a) in case the appeal is against the refusal to register a transfer or transmission, within two months of the receipt by him of the notice or refusal; and

(b) in case the appeal is against the failure referred to in sub-section (3), within two months from the expiry of the period referred to in sub-section (2).

(5) The Central Government shall, after causing reasonable notice to be given to the company and also to, the transferor and the transferee or, as the case may require, to the person giving intimation of the transmission by operation of law and the previous owner, if any, and giving them a reasonable opportunity to make their representations, if any, in writing, by order, direct either that the transfer or transmission shall be registered by the company or that it need not be registered by it; and in the former case, the company shall give effect to the decision forthwith.

(6) The Central Government may, in its order aforesaid, give such incidental and consequential directions as to the payment of costs or otherwise as it thinks fit.

(7) All proceedings in appeals under sub-section (3) or in relation thereto shall be confidential, and no suit, prosecution or other legal proceedings shall lie in respect of any allegation made in such proceedings, whether orally or otherwise.

(8) In the case of a private company which is not a subsidiary of a public company, where the right to any shares or interest of a member in, or debentures of the company, is transmitted by a sale thereof held by a court or other public authority, the provisions of sub-sections (3) to (7) shall apply as if the company were a public company :

Provided that the Central Government may, in lieu of an order under sub-section (5) pass an order directing the company to register the transmission of the right unless any member or members of the company specified in the order acquire the right aforesaid within such time as may be allowed for the purpose by the order, on payment to the purchaser of the price paid by him, therefore, or such other sums as the Central Government may determine to be a reasonable compensation for the right in all the circumstances of the case.”

“155. Power of court to rectify register of members.—(1) If,—

(a) the name of any person is, without sufficient cause, entered in or omitted from the register of members of a company; or

(b) default is made, or unnecessary delay takes place, in entering on the register the fact of any person having become, or ceased to be, a member; the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register.

(2) The Court may either reject the application or order rectification of the register; and in the latter case, may direct the company to pay the damages, if any, sustained by any party aggrieved.

In either case, the court in its discretion may make such order as to costs as it thinks fit.

(3) On any application under this section, the court—

(a) may decide any question relating to the title of any person who is a party to the application to have his name entered in or omitted from the register, whether the question arises between the members or alleged members, or between members or alleged members on the one hand and the company on the other hand; and

(b) generally, may decide any question which is necessary or expedient to decide in connection with the application for rectification.

(4) From any order passed by the court on the application, or on any issue raised therein and tried separately, an appeal shall lie on the grounds mentioned in section 100 of the Code of Civil Procedure, 1908 (Act 5 of 1908)—

(a) If the order be passed by a District Court, to the High Court;

(b) If the order be passed by a Single Judge of a High Court consisting of three or more Judges to a Bench of that High Court.”

128. Thereafter with effect from 31-5-1991 by the Amendment Act No. 65 of 1960, sections 111 and 155 were amended as follows :

“27. Amendment of section 111 - In section 111 of the Principal Act,- (a) in sub-section (2), for the words ‘If, in pursuance of any such power, a company refuses’, the words ‘If a company refuses, whether in pursuance of any power under its articles or otherwise’, shall be substituted;

(b) After sub-section (4), the following sub-section shall be inserted, namely:—

‘(4A). Every appeal under sub-section (3) shall be made by a petition in writing and shall be accompanied by such fee not exceeding fifty rupees as may be prescribed by the Central Government.’

(c) in sub-section (5), for the word ‘forthwith’ the words ‘within ten days of the receipt of the order’ shall be substituted;

(d) after sub-section (5), the following sub-section shall be inserted, namely:—

‘(5A) Before making an order under sub-section (5) on an appeal against any refusal of the company to register any transfer or transmission, the Central Government may require the company to disclose to it the reasons for such refusal, and on the failure or refusal of the company to disclose such reasons, that Government may, notwithstanding anything contained in the articles of the company, presume that the disclosure, if made, would be unfavourable to the company.’;

(e) after sub-section (8), the following sub-section shall be inserted, namely:—

‘(9) If default is made in giving effect to the order of the Central Government within the period specified in sub-section (5) or to a direction of that Government given under the proviso to sub-section (8), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees, and with a further fine which may extend to one hundred rupees for every day after the first during which the default continues.’

“36. Amendment to section 155—In section 155 of the Principal Act,—

(a) in sub-section (1), for clause (a), the following clause shall be substituted, namely:—

‘(a) the name of any person—

(i) is without sufficient cause, entered in the register of members of a company, or

(ii) after having been entered in the register, is, without sufficient cause, omitted therefrom; or’;

(b) after sub-section (4), the following sub-section shall be inserted, namely:—

‘(5) The provisions of sub-sections (1) to (4) shall apply in relation to the rectification of the register of debenture holders as they apply in relation to the rectification of the register of members.’”

129 On 17-1-1986 the Securities Contracts (Regulation) (Amendment) Act, 1985 came into force which inserted new section 22A to emphasise free transferability and registration of shares and making provision with respect to the circumstances wherein transfer of shares may be declined. Under sub-section (3)(c) thereof, the power to decline transfer of shares on the ground of its likely change in composition of the Board of directors was specifically provided. There was also a provision for a reference to the CLB. The said section 22A, which came into force on 17-1-1986, reads as follows :

“Free transferability and registration of transfers of listed securities of companies.—(1) In this section, unless the context otherwise requires,—

(a) ‘company’ means a company whose securities are listed on a recognised stock exchange;

(b) ‘security’ means security of a company, being a security listed on a recognised stock exchange but not being a security which is not fully paid-up or on which the company has a lien;

(c) all other words and expressions used in this section and not defined in this Act but defined in the Companies Act, 1956 shall have the same meaning as are assigned to them in that Act.

(2) Subject to the provisions of this section, securities of companies shall be freely transferable.

(3) Notwithstanding anything contained in its articles or in section 82 or section 111 of the Companies Act, 1956, but subject to the other provisions of this section, a company may refuse to register the transfer of any of its securities in the name of the transferee on any one or more of the following grounds and on no other ground, namely:—

(a) that the instrument of transfer is not proper or has not been duly stamped and executed or that the certificate relating to the security has not been delivered to the company or that any other requirements under the law relating to registration of such transfer has not been complied with;

(b) that the transfer of the security is in contravention of any law;

(c) that the transfer of the security is likely to result in such change in the composition of the Board of directors as would be prejudicial to the interests of the company or to the public interest;

(d) that the transfer of the security is prohibited by any order of any court, tribunal or other authority under any law for the time being in force.

(4) A company shall, before the expiry of two months from the date on which the instrument of transfer of any of its securities is lodged with it for the purposes of registration of such transfer, not only from in good faith, its opinion as to whether such registration ought not or ought to be refused on any of the grounds mentioned in sub-section (3) but also—

(a) if it has formed the opinion that such registration ought not to be so refused, effect such registration;

(b) if it has formed the opinion that such registration ought to be refused on the ground mentioned in clause (a) of sub-section (3), intimate the transferor and the transferee by notice in the prescribed form about the requirements under the law which has or which have to be complied with for securing such registration; and

(c) in any other case, make a reference to the Company Law Board and forward copies of such reference to the transferor and the transferee.

(5) Every reference under clause (c) of sub-section (4), shall be in the prescribed form and contain the prescribed particulars and shall be accompanied by the instrument of transfer of the securities to which it relates, the documentary evidence, if any, furnished to the company along with the instrument of transfer, and evidence of such other nature and such fees as may be prescribed.

(6) On receipt of a reference under sub-section (4), the Company Law Board shall, after causing reasonable notice to be given to the company, and also to the transferor and the transferee concerned and giving them a reasonable opportunity to make their representations, if any, in writing by order direct either that the transfer shall be registered by the company or that it need not be registered by it.

(7) Where on a reference under sub-section (4), the Company Law Board directs that the transfer of the securities to which it relates—

(a) shall be registered by the company, the company shall give effect to the direction within ten days of the receipt of the order as if it were an order made on appeal by the Company Law Board in exercise of the powers under section 111 of the Companies Act, 1956;

(b) need not be registered by the company, the company shall, within ten days from the date of such direction, intimate the transferor and the transferee accordingly.

(8) If default is made in complying with the provisions of this section, the company and every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees.

(9) If any reference made under clause (c) of sub-section (4) of this section, any person makes any statement—

(a) which is false in any material particulars, knowing it to be false; or

(b) which omits any material fact knowing it to be material he shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine.

(10) For the removal of doubts, it is hereby provided that nothing in this section shall apply in relation to any securities the instrument of transfer in respect whereof has been lodged with the company before the commencement of the Securities Contracts (Regulation) Amendment Act, 1985.”

130. Thereafter with effect from 31-5-1991 the entire section 111 was substituted by a new section by the Amendment Act No. 31 of 1988. The new section 111 reads as follows :

“Power to refuse registration and appeal against refusal.—(1) If a company refuses, whether in pursuance of any power of the company under its articles or otherwise, to register the transfer of or the transmission by operation of law of the right to, any shares or interest of a member in, or debentures of, the company, it shall, within two months from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal.

(2) The transferor or transferee, or the person who gave intimation of the transmission by operation of law, as the case may be, may appeal to the Company Law Board against any refusal of the company to register the transfer or transmission, or against any failure on its part within the period referred to in sub-section (1), either to register the transfer or transmission or to send notice of its refusal to register the same.

(3) An appeal under sub-section (2) shall be made within two months of the receipt of the notice of such refusal or, where no notice has been sent by the company, within four months from the date on which the instrument of transfer, or the intimation of transmission, as the case may be, was delivered to the company.

(4) If—

(a) the name of any person—

(i) is, without sufficient cause, entered in the register of members of a company, or

(ii) after having been entered in the register, is, without sufficient cause, omitted therefrom; or

(b) default is made, or unnecessary delay takes place, in entering in the register the fact of any person having become, or ceased to be, a member including a refusal under sub-section (1), the person aggrieved, or any member of the company, or the company, may apply to the Company Law Board for rectification of the register.

(5) The Company Law Board, while dealing with an appeal preferred under sub-section (2) or an application made under sub-section (4) may, after hearing the parties, either dismiss the appeal or rejected the application, or by order—

(a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within ten days of the receipt of the order; or

(b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.

(6) The Company Law Board, while acting under sub-section (5), may, at its discretion, make—

(a) such interim orders, including any orders as to injunction or stay, as it may deem fit and just;

(b) incidental or consequential orders regarding payment of dividend or the allotment of bonus or rights shares.

(7) On any application under this section, the Company Law Board—

(a) may decide any question relating to the title of any person who is a party to the application to have his name entered in, or omitted from, the register;

(b) generally, may decide any question which it is necessary or expedient to decide in connection with the application for rectification.

(8) The provisions of sub-sections (4) to (7) shall apply in relation to the rectification of the register of debenture-holders as they apply in relation to the rectification of the register of members.

(9) If default is made in giving effect to the orders of the Company Law Board under this section, the company and every officer of the company who is in default shall be punishable with fine which may extend to one thousand rupees, and with a further fine which may extend to one hundred rupees for every day after the first day after which the default continues.

(10) Every appeal or application to the Company Law Board under sub-section (2) or sub-section (3) in writing and shall be accompanied by such fees as may be prescribed.

(11) In the case of a private company which is not a subsidiary of a public company, where the right to any shares or interest of a member in, or debentures of, the company is transmitted by a sale thereof held by a court or other public authority, the provisions of sub-sections (4) to (7) shall apply as if the company were a public company :

Provided that the Company Law Board may, in lieu of an order under sub-section (5), pass an order directing the company to register the transmission of the right unless any member or members of the company specified in the order acquire the right aforesaid within such times as may be allowed for the purpose by the order, on payment to the purchaser of the price paid by him therefor or such other sum as the Company Law Board may determine to be a reasonable compensation for the right in all the circumstances of the case.

(12) If default is made in complying with any of the provisions of this section, the company and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.

(13) Nothing in this section and section 108, 109 or 110 shall prejudice any power of a private company under its articles to enforce the restrictions contained therein against the right to transfer the shares of such company.”

By that very Amendment Act No. 31 of 1988, sections 155 and 156 of the Principal Act were omitted. Then by the Depositories Ordinance No. 11 of 1995, which came into force on 20-9-1995, a new sub-section (14) was added to section 111 whereby the provisions of section 111 were restricted to the private companies. This added sub-section (14) reads as follows :

“(14) In this section ‘company’ means a private company and includes a private company which had become a public company by virtue of section 43A of this Act.”

131. Then an entirely new section 111A was included to govern the field of public companies. This new section provided for rectification of register on transfers in certain manner. Section 111A reads as under :

“Rectification of register on transfer.—(1) In this section, unless the context otherwise requires, ‘company’ means a company other than a company referred to in sub-section (14) of section 111 of this Act.

(2) Subject to the provisions of this section, the shares or debentures and any interest therein of a company shall be freely transferable.

(3) The Company Law Board may, on an application by a depository, company, participant or investor or the Securities and Exchange Board of India, within two months from the date of transfer of any shares or debentures held by a depository or from the date on which the instrument of transfer or the intimation of transmission was delivered to the company, as the case may be, after such inquiry as it thinks fit, direct any company or depository to rectify register or records if the transfer of the shares or debentures is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986).

(4) The Company Law Board while acting under sub-section (3), may at its discretion make such interim order as to suspend the voting rights before making or completing such enquiry.

(5) The provisions of this section shall not restrict the right of a holder of shares or debentures, to transfer such shares or debentures and any person acquiring such shares or debentures shall be entitled to voting rights unless the voting rights have been suspended by an order of the Company Law Board.

(6) Notwithstanding anything contained in this section, any further transfer, during the pendency of the application with the Company Law Board, of shares or debentures shall entitle the transferee to voting rights unless the voting rights in respect of such transferee have also been suspended.

(7) The provisions of sub-sections (5), (7), (9), (10) and (12) of section 111 shall, so far as may be, apply to the proceedings before the Company Law Board under this section as they apply to the proceedings under that section.”

Thereafter by the Depositories Related Laws (Amendment) Ordinance No. 5 of 1997, section 111A was further amended with effect from 15-1-1997 by adding a proviso to sub-section (2) and by substituting sub-section (3).

These alterations read as follows :

Addition to sub-section (2) :

“Provided that if a company without sufficient cause refuses to register transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the Company Law Board and it shall direct such company to register the transfer of shares.”

Substitution of sub-section (3) by the following :

“(3) The Company Law Board may, on an application made by a depository, company, participant or investor or the Securities and Exchange Board of India, if the transfer of shares or debentures is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992), or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), or any other law for the time being in force, within two months from the date of transfer of any shares or debentures held by a depository or from the date on which the instrument of transfer or the intimation of the transmission was delivered to the company, as the case may be, after such inquiry as it thinks fit, direct any depository or company to rectify its register or record.”

The result of all these amendments, additions and alterations under section 111 is that now we have one mechanism for private company whereas there is a different mechanism and arrangement with respect to public company under section 111A with which we are more concerned in the present case.

Whether right of rectification through a suit is a common law right

132. Mr. Nariman submitted that these provisions, as they stood from time to time, have come to be interpreted by Court on different occasions and it has been specifically held all throughout that right to seek rectification of company’s register was a common law right. He submitted that the fact that a certain remedy to approach the civil court was provided under section 155 on an earlier occasion under the law as it then stood, and that it is not so specified now need not mean that a suit by a member of a public company was barred because that was a right which existed prior to section 155 and it was founded on law of contract with its origin in common law. The earliest judgment which he referred in this context was T.A.K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. AIR 1928 Mad. 571. In that case, the respondent-company had refused to register the shares purchased by the applicant. The question before the Court was as to whether the plaintiff-appellant was entitled to enforce his rights by way of a suit as against the procedure which was provided under the Act. In that matter, the Division Bench observed as under :

“. . .The principle would undoubtedly appear to be that if the new enactment is such that certain new rights unknown previously to law are created by the new statute and certain remedies are provided for the infringement of such rights, it must logically follow that it was the clear intention of the Legislature that such remedies should be enforced only in the manner and by following the procedure indicated. No doubt it is open to the Legislature even in other cases to take away any subsisting general right of suit and provide a special remedy instead, but it must be done by express provision and such a general right is incapable of being taken away merely by implication.” (p. 572)

The Judges of the Division Bench then referred to two earlier judgments. In Manilal Brijlal Shah v. Gordhan Spg. & Mfg. Co. 19 Bom. LR 982 in similar circumstances a petition under section 38 was regarded as proper. In Ramesh Chandra Mitter v. Jogini Mohan Chatterjee [1920] 47 Cal. 901, it was observed “In a simple case where an immediate rectification is essential, it may be desirable to apply under that section; but if the case is at all complicated, an action should be brought”. Srinivasa Ayyangar, J., then in this leading judgment observed on behalf of the Division Bench as follows :

“I respectively agree entirely with those observations. If the principle is that the provisions contained in and the procedure prescribed by a certain enactment are exhaustive and it should be open to parties to seek for such reliefs in regular actions only to cases where the enactment can be said to create entirely a new sphere of rights and obligations, it becomes important to discuss the question in this case whether the Indian Companies Act must, having regard to its true nature, be regarded as an Act creating such a new sphere or as merely legislating for or regulating certain rights recognised under the common law. It seems to me that the true and correct view would be to regard it only as of the latter kind.

By the terms of section 4, the Act declares as illegal any association or partnership consisting of more than ten persons formed for the business of banking and any company, association or partnership of more than twenty persons formed for the purpose of carrying on any other business. It is clear that the scope of the Act is regulative and it is concerned only with making provisions in respect of rights and obligations which would have existed apart from the Act. In all such cases the true principle is that though remedies are provided in the enactment, the general right of suit cannot be considered as taken away merely by reason of such provision and except by express enactment. The objection, therefore, that the appellant-plaintiff had no right of suit must be overruled.” (p. 573)

133. This question came up before this Court in Killick Nixon Ltd. v. Dhanraj Mills (P.) Ltd. [1983] 54 Comp. Cas. 432, wherein a Division Bench in an order in appeal from an interlocutory application held that a member was entitled to apply for rectification of register under section 155. Subsequently the question again came up in the case of Om Prakash Berlia v. Unit Trust of India [1983] 54 Comp. Cas. 469 before a single Judge of this Court (Bharucha, J. as he then was in this Court). The learned Judge expressed that he was entirely in agreement with the reasoning of the Division Bench. He referred to an earlier judgment in the case of Rao Saheb Manilal Gangaram Sindore v. Western India Theatres Ltd. [1963] 33 Comp. Cas. 826. In that case, J C Shah, J. (as he then was in this Court) held—

“Now it is clear to my mind that even for the relief contemplated by section 155 of the Companies Act, 1956 a suit would be a primary remedy under the general law. The relief which is contemplated by that section is one which would be available under common law as well. . . . The provision made in section 155 of the Companies Act, 1956 for a procedure by way of an application is only a provision for a summary procedure. The object of this procedure is not to whittle down or abrogate the procedure by way of a suit for getting the relief contemplated by that section. . . .” (p. 828)

134. Mr. Nariman then referred to another judgment of a single Judge of this Court (per K.K. Desai, J.) in Jayashree Shantaram Vankudre v. Rajkamal Kalamandir (P.) Ltd. [1960] 30 Comp. Cas. 141. In that matter, the Court held that complicated questions of fabrication and forgery were involved. The Court took the view that a petition under section 155 was not the correct remedy therefor but a suit would be the proper remedy. The Court observed that “filing a suit for rectification is not unknown and is generally resorted to where rights of third parties are concerned”. In the case of Jayashree Shantaram Vankudre (supra), the Court referred with approval to an earlier judgment in the case of Matheran Steam Tramway Co. v. B.N. Lang [1931] 1 Comp. Cas. 206 (Bom.) wherein a suit was preferred to a summary action. The Court quoted with approval the following observations from Volume VI of Halsbury’s Laws of England :

“The application may be made by the person aggrieved. . . . It may be by motion or summons or by action commenced by writ. If the court thinks that the case, by reason of its complexity or on the ground that there are matters requiring investigation or otherwise, could more satisfactorily be dealt with by an action, the court will decline to make an order on a motion, without prejudice to the right of the applicant to institute an action for rectification. An action may, without any direction by the court, be instituted for rectification of the register, a course which should be followed where there is much complexity, or where other relief is required.”

135. In this connection, the following observations of Bharucha, J. (as he then was in this Court) in Om Prakash Berlia’s case (supra) are of particular significance :

“In my view, every shareholder of a company has an individual right and interest in seeing that the share register of the company reflects the true position. Upon the share register rests each shareholder’s right to receive his due share of the company’s profits by way of dividend, his right to exercise his vote and to have it correctly assessed as against the votes of the other rightful shareholders, and his right to acquire new shares in the company pro rata with other rightful shareholders. An entry in the register which is bad or illegal affects these rights of the individual shareholder. He is thereby prejudiced and aggrieved.

The right to rectify was recognised at common law and was translated into the statutes. English and Indian. (The provisions of section 116 of the English Companies Act, 1948 provide to any member of the company the right to apply for rectification of the company’s share register). The statutes do not create any new right in the member.

In England, as in most High Courts in India, it is recognised that the procedure of rectification made available by the Companies Act is a summary procedure and that the petitioner may, in the court’s discretion, if the matter be a complex one, be referred to a suit. It would be anomalous if a shareholder, who can maintain a petition under section 155 of the Indian Companies Act, or section 116 of the English Act, is directed to file a suit because the matter is complex, and is then told that he is not entitled to maintain the suit because he is not a person aggrieved.” (p. 502)

136. Similarly of particular significance is the judgment of M. Jagannatha Rao, J. (as he then was in Andhra Pradesh High Court) in the case of Avanthi Explosive (P.) Ltd. v. Principal Subordinate Judge [1987] 62 Comp. Cas. 301. In that matter the very question was raised by canvassing before the learned Judge that if the rights of the 2nd respondent concerned were creatures of the company law, then the remedy in that law alone had to be followed. The learned Judge referred to the judgment of the Supreme Court in the case of Premier Automobiles Ltd. v. Kamlakar Shantaram Wadke AIR 1975 SC 2238, arising under the Industrial Disputes Act, 1947. Reliance was also placed on a well known passage in the case of Wolverhampton New Waterworks Co. v. Hawkesford [1859] 6 CB (NS) 336 which was also referred to before the Supreme Court in Premier Automobiles Ltd.’s case (supra). Thereafter the learned Judge posed a question as to whether the rights and obligations in question in that particular case owed their very creation to the Companies Act or whether they were traceable to a basic contract which had come to be statutorily regulated. The learned Judge went into the historical background of the amendments to the company law and finally held that right to file a suit was a common law right available to the parties.

137. Mr. Chidambaram, the learned counsel appearing for the defendant No. 11, submitted that these cases do not lead the plaintiffs any further. They were all cases which are related to the plaintiffs’ own shares in respect of which the plaintiffs in each of these matters had a property right. Even in Om Prakash Berlia’s case (supra), the real complaint was that by introduction of 43,700 new shares the proportionate holding of the plaintiff would have gone down and in a sense there also the plaintiff was asserting a personal right. Mr. Chidambaram submitted that the said judgment of the learned single Judge in Om Prakash Berlia’s case (supra) was no longer good law in view of the same being overruled by a Division Bench in UTI v. Om Prakash Berlia [1983] 54 Comp. Cas. 723 (Bom.). Mr. Nariman, however, pointed out that the said appeal was allowed on other aspects of the matter and not with respect to the finding given by the learned single Judge with respect to maintainability of the suit for the reasons given by him. Mr. Chidambram submitted that once a judgment is overruled, it was no longer good. He relied upon the ratio of the judgment of the Supreme Court in Gojer Bros. (P.) Ltd. v. Ratan Lal Singh AIR 1974 SC 1380, wherein the Supreme Court held as follows :

“10. The juristic justification of the doctrine of merger may be sought in the principle that there cannot be, at one and the same time, more than one operative order governing the same subject-matter. Therefore, the judgment of an inferior court, if subjected to an examination by the superior court, ceases to have existence in the eye of law and is treated as being superseded by the judgment of the superior court. In other words, the judgment of the inferior court loses its identity by its merger with the judgment of the superior court.

11. To 17. ** ** **

18. The fundamental reason of the rule that where there has been an appeal, the decree to be executed is the decree of the appellate court is that in such cases the decree of the trial court is merged in the decree of the appellate court. In course of time, this concept which was originally restricted to appellate decrees on the ground that an appeal is a continuation of the suit, came to be gradually extended to other proceedings like revisions and even to proceedings before quasi-judicial and executive authorities.” (p. 1382)

138. Mr. Nariman, on the other hand, submitted that this judgment was on doctrine of merger which was relevant for ascertaining as to which was the final executable order, and had nothing to do with precedents. He pointed out that this position had been clarified in State of Orissa v. Krishna Stores [1997] 3 SCC 246, wherein para 13 the court observed :

“In the case of State of Madras v. Madurai Mills Co. Ltd., this court, however, observed that the doctrine of merger was not a doctrine of rigid and universal application. The application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provision conferring the appellate authority has applied its mind to the original order or any issue arising in appeal while passing the appellate order, one should be careful in applying the doctrine of merger to the appellate order.”

139. That apart, Mr. Nariman submitted that the judgment in Gojer Bros. (P.) Ltd.’s case (supra) could not be cited as a proposition that even if a part of the judgment of a trial court is not reversed, that would not be binding as a proposition of law. What we are concerned here is as to whether the observations of Bharucha, J (as he then was in this Court) with respect to individual shareholder’s right in having a correct register of members any longer holds the field. Mr. Nariman in this behalf referred to a judgment of a Division bench of the Gujarat High Court in Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality AIR 1968 Guj. 124. That was a case wherein Bharuch Municipality had sought to levy house tax on the basis of capital value of land and building and that was challenged. Earlier in Municipal Commissioner v. Gordhandas Hargovandas AIR 1954 Bom. 188, a Division Bench of the Bombay High Court had upheld the competency of the State Legislature to levy such tax when the rule provided for a levy of a rate. An appeal was preferred therefrom to the Supreme Court, wherein the Supreme Court had held by a majority of four versus one that a rate was a levy on beneficial occupation and it included only a levy based on annual letting value and could not take within its purview a levy based on capital value. This point was not argued in the High Court. The appeal was allowed on this point and the majority Judges did not deal with the question of competence and kept the question open - Patel Gordhandas Hargovindas v. Municipal Corporation AIR 1963 SC 1742. Thereafter the Municipality of Bharuch had levied the tax based on the capital value of the land under the rule which provided for levy of a tax. The Gujarat Assembly also had enacted a validating Act. This levy by the Bharuch Municipality was challenged in the High Court. On behalf of the Municipality, reliance was placed on the judgment of the Bombay High Court in Gordhandas Hargovandas’s case (supra) to defend it being within the legislative competence. It was contended by the petitioner that the decision of the High Court in Gordhandas Hargovandas’s case (supra) had no legal existence at all since it was reversed by the Supreme Court. The High Court, however, held in Shri Prithvi Cotton Mills Ltd.’s case (supra) that the earlier decision, which had been reversed, continued to constitute a binding principle on the question of legislative competence. This decision of the Gujarat High Court in Shri Prithvi Cotton Mills Ltd.’s case (supra) was challenged before the Supreme Court and the Supreme Court dismissed the appeal. It expressed no view on the decision of the Division Bench Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality AIR 1970 SC 192. The Division Bench of the Gujarat High Court took a view that part of the judgment which is not overruled by the superior court would continue to remain intact and biding on subordinate and co-ordinate Bench. The Court observed in para 12 as follows :

“. . . Mr. Nanavati tries to justify this submission by propounding the principle that, when a decision of one court is reversed in appeal by another court, then the decision of the appellate court gets substituted to the decision of the other court and the decision so reversed has no legal existence. We are unable to agree that any such principle is applicable for determining the binding nature of a decision of a court. The principle, undoubtedly, applies vis-a-vis decrees of the higher and the lower courts. It may apply to the decisions of the same two courts on the identical questions. But, it is difficult to uphold the contention that any such principle is applicable in regard to a part of the judgment solemnly pronounced by a court which has not been overruled and kept expressly open by the appellate court. The binding nature of a decision arises from the fact that the point of law raised and considered therein has been decided by the court concerned and it is obvious that so long as that decision remains intact, it is binding on all courts and tribunals which are subordinate or co-ordinate to the court recording the decision. . . .” (p. 136)

Mr. Nariman, therefore, submits that the proposition of Bharucha, J. (as he then was in this Court) in Om Prakash Berlia’s case (supra) holds good as far as this Court is concerned inasmuch as the maintainability of the suit on that behalf was not disturbed by the Appeal Bench though the appeal had been allowed on other points.

140. Mr. Nariman submitted that the remedy of a suit being available in complicated matters had been accepted by the Supreme Court in the case of Public Passenger Services Ltd. v. M.A. Khadar AIR 1966 SC 489. In that case also, it was canvassed that remedy under section 155 was a special remedy and the Courts below should have refused the relief in exercise of their descretion. The Supreme Court observed in para 8 as follows :

“8. . . . Now, where by reason of its complexity or otherwise the matter can more conveniently be decided in a suit, the court may refuse relief under section 155 and relegate the parties to a suit. But the point as to the invalidity of the notice, dated 20th January, 1957 could well be decided summarily, and the courts below rightly decided to give relief in the exercise of the discretionary jurisdiction under section 155. Having found that the notice was defective and the forfeiture was invalid, the court could not arbitrarily refuse relief to the respondents.” (p. 492)

The above observations of the Supreme Court subsequently came to be considered in a recent judgment in Ammonia Supplies Corpn. (P.) Ltd. v. Modern Plastic Containers (P.) Ltd. AIR 1998 SC 3153. The question before the Court amongst other was as to whether remedy under section 155 was summary remedy. In para 11, the Court noted that various High Courts including Bombay High Court, as in the case of Rao Saheb Manilal Gangaram Sindore (supra), had held that the remedy was of a summary nature. In para 12, the Court noted that on the other hand, the contrary view was taken by other High Courts including Gujarat High Court and Kerala High Court. Thereafter it was canvassed before the Supreme Court that the decision in Public Passenger Services Ltd.’s case (supra) was per incurium. This submission was subsequently negatived by the Court by observing as follows :

“12. . . . In order to resolve this conflict as aforesaid the Delhi High Court in the case of petitioner company relying on Public Passengers Service Ltd. AIR 1966 SC 489 (supra) held that the jurisdiction of the court under section 155 is summary in nature.

13. In Public Passengers Service Ltd. (supra), this court held by reasons of its complexity or otherwise the matter can more conveniently be decided in a suit, the court may refuse relief under section 155 and relegate the parties to a suit.

14. Learned counsel for the appellant initially made feeble submission as aforesaid to hold that the decision in Public Passenger Service Ltd. (supra) case is per incuriam. We have no hesitation to reject such a submission. This issue was directly there and was considered with respect to the interpretation of section 155 and was a case not under 1913 Act but 1960 Act hence by no stretch of imagination it could be said that the said decision is per incuriam. . . .” (p. 3157)

141. The learned counsel appearing for the defendants tried to impress upon me by relying different passages from the judgments of the Supreme Court in Ammonia Supplies Corpn. (P.) Ltd.’s case (supra) to contend that the Supreme Court had taken now a different view. They also relied upon the observations of my brother Rebello, J. in National Insurance Co. Ltd. v. Glaxo India Ltd. [1999] 34 CLA 30 to the effect that the judgment in the case of Public Passenger Services Ltd. (supra) will have to be read in the context of the observations in the case of Ammonia Supplies Corpn. (P.) Ltd. (supra). In Ammonia Supplies Corpn. (P.) Ltd. v. Modern Plastic Containers (P.) Ltd. AIR 1994 Delhi 51 what happened was that on a reference being made, a Full Bench of the Delhi High Court by its decision dated 11-10-1993 (per Sabharwal, J., as he then was in that Court) held that the jurisdiction under section 155 was discretionary and summary in nature and that the remedy of suit for adjudication of dispute relating to the title to shares was not barred. The decision rendered thereafter (on 16-5-1994) on the matter being relegated, was carried in appeal to the Supreme Court. The Supreme Court had partly interfered with this subsequent order of the single Judge of the Delhi High Court by observing in the facts of that case that instead of relegating the parties to a suit, it would have been better if the learned Judge had himself exercised the jurisdiction inasmuch as he was functioning as a company Judge in that matter and that jurisdiction was available to him under section 446 of the Companies Act. As far as the observations of the Full Bench of the Delhi High Court are concerned, they were left totally undisturbed by the Supreme Court. The ratio of the judgment is in para 31 where it was held as follows :

“. . . There is nothing under the Companies Act expressly barring the jurisdiction of the Civil Court, but the jurisdiction of the ‘court’ as defined under the Act exercising its powers under various sections where it has been invested with exclusive jurisdiction, the jurisdiction of the civil court is impliedly barred. We have already held above the jurisdiction of the ‘court’ under section 155 to the extent it has exclusive, the jurisdiction of civil court is impliedly barred. For what is not covered as aforesaid, the civil court would have jurisdiction.” (p. 3163)

142. Thus, it is clear as recorded in the judgments in T.A.K. Mohideen Pichai Taraganar’s case (supra), Avanthi Explosives (P.) Ltd.’s case (supra), Rao Saheb Manilal Gangaram Sindore’s case (supra) and Om Prakash Berlia’s case (supra), the remedy of seeking rectification of company’s register by way of filing of a suit is a right recognised in common law and translated into the statutes. That would be available where the matter can be more conveniently decided in a suit by reason of its complexity or otherwise as held by the Apex Court in Public Passenger Services Ltd.’s case (supra) and confirmed in Ammonia Supplies Corpn. (P.) Ltd.’s case (supra). It is also clear from the observations of Bharucha, J. in Om Prakash Berlia’s case (supra) quoted above that this right is available to see to it that the share register reflects the true composition, and the shareholder cannot be told that he is not an aggrieved person vis-a-vis an entry in the register which is bad or illegal. This is so, since it affects his rights (i) to receive his due share in the profit by way of dividend, (ii) his right to exercise his vote, and (iii) to have it correctly assessed against the votes of other rightful shareholders.

What is the change brought about by section 111A?

143. Then comes the question as to whether section 111A as subsequently amended and its scheme brings about any change over and above the position as it existed earlier. Mr. Chidambaram, the learned counsel appearing for defendant No. 11, submitted that free transferability was the objective in bringing about the amended position as it exists now. He said that the policy of the law now is as follows :

“(a) Shares of a public limited company are freely transferable and the registration of transfers is mandatory under the proviso to section 111A(2).

(b) The right to seek rectification of the register was a statutory right inasmuch as the company itself was a creature of the statute. Five categories of persons and entities are given a right to apply for rectification to the Company Law Board and by necessary implication no other person has such a right. The Company Law Board is empowered to issue the direction to the company to effect rectification under section 111A(3). This will again mean by implication that no other authority can issue any such direction.

(c) Even when registration of shares is in dispute, the shareholders or further transferees are entitled to voting rights unless the voting rights are expressly suspended by an order of the Company Law Board. [Section 111A(6)]

(d) Parliament has now made a deliberate departure. Earlier section 38 of the Companies Act, 1913 and section 155 of the Companies Act, 1956 allowed the members of the company to seek the rectification of the membership register. This right is not available in the statute in respect of shares held by a third party in a public company. That right to apply for rectification is now available only to 5 specified categories of persons/entitites. It is available with respect to one’s own shares. That does not include a category like the plaintiffs which is a party objecting to purchase and transfer of shares by a third party.

(e) This right of rectification is now available only by filing a proceeding before the Company Law Board and by no other device.”

144. Mr. Chidambaram submitted that the entire objective behind these provisions was to remain in tune with the idea of free enterprise which was now gaining ground in this country. Free enterprise requires free transferability of shares and when the Legislature makes a deliberate departure, addition and omission, the Court should take note of the same and give effect to the change brought about by the Parliament. He relied upon the judgments of the Supreme Court in Member, Board of Revenue v. Arthur Paul Benthall AIR 1956 SC 35 (paras 4 and 7) and Labour Commissioner v. Burhanpur Tapti Mills Ltd. AIR 1964 SC 1687 (para 7). In Arthur Paul Benthall’s case (supra) the Court observed :

“4. . . . When two words of different import are used in a statute in two consecutive provisions, it would be difficult to maintain that they are used in the same sense, . . .

** ** **

7. . . . It is not without significance that the Legislature has used three different words in relation to the three sections, ‘transaction’ in section 4, ‘matter’ in section 5 and ‘description’ in section 6.” (p. 38)

In A.P. Burhanpur Tapti Mill’s case (supra) the Court was concerned with two provisions of the CP & Berar Industries Disputes Act as to whether the words describing a strike as ‘rendered illegal’ are same as ‘held illegal’ and the Court held that when different phraseology had been used, the ‘conclusion is irresistible that this was done deliberately’. He then referred to the decision of the Court of Appeal in Guardians of Parish of Brighton, In re 1891 2 QB 156. The Court was concerned with the use of words ‘pauper’ and ‘persons’ at different places by changes brought about in the Divided Parishes Act, 1876 and Lord Esher M R observed :

“In the present case we find a change of expression in the statute, a change which was noticed in the judgment of the Divisional Court, and which enables us, not to add anything but, to construe a word used in the Act and to expand its meaning. Now sections 34 and 35 of the Act are made applicable to a “person”, and expression which is section 36 is altered to “pauper”; and it is a rule of construction that where in the same Act of Parliament, and in relation to the same subject-matter, different words are used, the court must see whether the Legislature has not made the alteration intentionally, and with some definite purpose; prima facie such an alteration would be considered intentional.” (p. 167)

Mr. Chidambaram submitted that until the decision in Ammonia Supplies Corpn. (P.) Ltd.’s case (supra), the relevant law was as provided under old section 155 and the aggrieved party could either file a petition for rectification or if there were complicated questions involved, file a suit. Mr. Chidambaram submitted that the remedy of filing of a suit was no longer available and the changes brought in by statute ought to be read in the correct perspective. Even if there was no specific bar as such against filing of a suit in the concerned context, it will have to be read into the provision.

145. Mr. Nariman, in this connection, referred to two judgments of the Supreme Court. Firstly, State of Tamil Nadu v. Ramalinga Samigal Madam AIR 1986 SC 794 and then Raja Ram Kumar Bhargava v. Union of India AIR 1988 SC 752. In the judgment in Ramalinga Samigal Madam’s case (supra), the Court was concerned with the question as to whether the remedy of filing civil suit was available in spite of certain procedure made available under the revenue law and after referring to the judgments starting from Dhulabhai’s case (supra), the Supreme Court held that ouster of jurisdiction has to be specifically provided for. In Raja Ram Kumar Bhargava’s case (supra), the question was as to whether a suit for recovery of interest on refund of excess tax was maintainable. In para 9 amongst others, the Supreme Court referred to earlier judgments in Dhulabhai’s case (supra) and Premier Automobiles’ case (supra) and observed :

“Generally speaking, the broad guiding considerations are that wherever a right, not pre-existing in common law, is created by a statute and that statute itself provided a machinery for the enforcement of the right, both the right and the remedy having been created uno flatu and a finality is intended to the result of the statutory proceedings, then, even in the absence of an exclusionary provision the civil court’s jurisdiction is impliedly barred. If, however, a right pre-existing in common law is recognised by the statute and a new statutory remedy for its enforcement provided, without expressly excluding the civil court’s jurisdiction, then both the common law and the statutory remedies might become concurrent remedies leaving open an element of election to the persons of inherence.” (p. 756)

Mr. Nariman submitted that as is seen from a series of judgments and particularly the one in Om Prakash Berlia’s case (supra), it has been held that the right to seek rectification of the register is a common law right. In Om Prakash Berlia’s case (supra), it has been held to be a right available when certain additional shares were being given to third parties. Thus, if it was a common law right and for which now a new statutory remedy has come to be provided by an approach to the CLB without excluding the civil court’s jurisdiction, then both the remedies would be available to a litigant with a right to elect.

146. Mr. Dada, the learned counsel appearing for defendant Nos. 2 and 6 to 10, submitted that the 1997 Regulations have come subsequent to the insertion of section 111A and, therefore, if at all the regulations create any impediment on the right to vote, their provisions ought to be read down to be in conformity with the provisions of section 111A. This submission of Mr. Dada presupposes that free transferability is a new concept introduced when these amendments were brought into the company law. To emphasise this submission, the learned counsel for defendant No. 1, Mr. Salve relied upon the judgment of the Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453, wherein, Sawant, J. referred to Pennington’s Company Law, 6th edn., p. 753 and observed :

“Dealing with ‘restrictions on transfer of shares’ in Pennington’s Company Law (6th edn.) at p. 753, it is stated that shares are presumed to be freely transferable and restrictions on their transfer are construed strictly and so when a restriction is capable of two meanings, the less restrictive interpretation will be adopted by the court. . . .” (p. 456)

Mr. Nariman, however, referred me to the relevant observation from Pennington’s Company Law, wherein it is noticed that reliance was placed on an old judgment as in [1868] 4 Ch. App. 20 for the proposition that shares are freely transferable. Again in this connection, what is to be noted is that the words ‘free transferability’ were introduced in 1986 in the company law by section 22A(2) of the Securities Contracts (Regulation) Act, 1956 and yet under the law, as it existed prior to 1995, members’ right to seek rectification of other’s share was expressly recognised under section 111 as it then stood. That was also the position under section 155 until 1991 when it was deleted. As seen above, inspite of there being the provision of free transferability, the Central Government has retained the power to restrain the voting rights in certain situation under section 108D. These provisions existed earlier with respect to the MRTP undertakings and now they are available to all those undertakings which fall under section 108D from 27-9-1991. Thus, what is seen is that free transferability is as such not a new concept and is coupled with certain restrictions. There is, therefore, no reason to read down the provisions in the 1997 Regulations or to read the 1994 Regulations in such a manner that free transferability alone is permitted whatever may be the circumstances or other objectives under the regulations such as transparency, competition and participation.

147. It has come to be recognised, as seen earlier, way back in 1951 - Charanjitlal Chowdhury’s case (supra) that right to vote of a member of a company is a statutory right and in that case it was curtailed under the Ordinance under which the management of Solapur Spg. & Wvg. Mill was taken away and it was held not violative of article 19 of the Constitution. A right given by a statute can always be curtailed by the statute in a suitable way and for permissible reasons. In the context of industrial law, although an employer has a right to hold a property and the right to property includes a right to close down the industry when deemed necessary, the particular facets of this right of the employer to close the industry, to retrench employees, etc., have come to be regulated by specific provisions under sections 25M, 25N and 25-O of the Industrial Disputes Act, specifically introduced for this purpose. In Papanasan Union’s case [1995] 1 JT (SC) 71, such curtailment of the right for a limited period was held to be justified in para 19. In the facts of the present case, therefore, if a party makes out a case that shares have been acquired in breach of the provisions, the wording of which is negative and mandatory, the consequences will have to follow.

148. It is true that under section 111A a remedy has been provided by way of a necessary application to the CLB to 5 categories of entities and persons. Third parties or other members are not specifically mentioned in this section 111A(3). Mr. Nariman submitted that nothing new has come up in these provisions except an emphasis in these amendments on free transferability. Under section 111A(3), a right to object to the transfer of shares in contravention of provisions of the SEBI Act and regulations is provided but it is available to only the specified five entities/persons. The absence of such a provision now will only mean that the other members will not have an approach to the CLB. Can it, however, mean that the access, which they otherwise had all throughout to the civil court, is no longer available now under the law? The answer was in the negative when Ammonia Supplies Corpn. (P.) Ltd.’s case (supra) was decided by the Supreme Court, and in my humble understanding, in spite of the changes in section 111A, the answer will continue to be in the negative and the remedy by way of filing of a civil suit cannot be said to be taken away. This is because as held long back by the Supreme Court right from the judgment in Dhulabhai’s case (supra), the Court should go slowly when it comes to ouster of jurisdiction of the civil courts and the remedies which are available to the citizen.

Whether the plaintiffs have any legal right to sue

149. It was canvassed by Mr. Chidambaram and other learned counsel appearing for the defendants that the right to rectify a register of a company is a statutory right and now available only to certain categories of people on certain grounds as specified under section 111A. It was submitted by them that even if there is any breach of any provision, now the wording of section 111A made it necessary that the company had no option but to transfer the shares and if aggrieved, all that it could do was to appeal to the CLB to get such members removed from the register. It was submitted by Mr. Chidambram and others that in any case in the meanwhile the voting rights shall continue to be available to such persons.

150. As against that, Mr. Nariman submitted that this submission implies that even if the enrolment of any shareholder is in complete violation of law, he will be entitled to remain thereon and such persons will have the right to vote until the register is rectified. Mr. Nariman submitted that the prevention is better than a cure and the provisions of sections will have to be read to see as to whether any prevention was provided or not.

151. As far as right to more the civil court for rectification of the register is concerned, Mr. Nariman submitted that if one looks to the 1994 Regulations, it was clear that the shareholders were given a right to complain to the SEBI under regulation 33(2)(a). The shareholders were also given a right to give a public bid and to receive the highest price when offered by successful bidder. In the circumstances, Mr. Nariman submitted that the plaintiffs did have a stake or a locus as members of the company. He stated that, that was particularly necessary in view of the SEBI’s own letter of Imfa dated 21-5-1996 that defendants were violating the regulations as can be seen in compilation I at page 121.

152. In this context, Mr. Nariman drew my attention to the observations of the Supreme Court in para 15 in the case of Smt. Ganga Bai v. Vijay Kumar AIR 1974 SC 1126 and submitted that the plaintiffs’ right to sue was not taken away by any statute or any provision specifically. He submitted that unless any such specific provision is made, the right to sue cannot be taken away. The Supreme Court observed in the aforesaid matter as follows :

“. . . There is a basic distinction between the ‘right of suit and the right of appeal’. There is an inherent right in every person to bring a suit of a civil nature and unless the suit is barred by statute one may, at one’s peril, bring a suit of one’s choice. It is no answer to a suit, howsoever, frivolous the claim, that the law confers no such right to sue. A suit for its maintainability requires no authority of law and it is enough that no statute bars the suit. But the position in regard to appeals is quite the opposite. The right of appeal inheres in no one and, therefore, an appeal for its maintainability must have the clear authority of law. That explains why the right of appeal is described as a creature of statute.” (p. 1129)

Grounds on which the suit can be entertained

153. Then comes the question that if such a suit can lie, what should be the grounds on which such a suit can be entertained for rectification. Mr. Nariman in this connection submitted that the grounds which are available under section 111A (3) which were originally contained in section 38 and section 155 will be available to the plaintiffs. They will be so available under the clause of ‘sufficient cause’ which existed under the proviso to section 111A(2). Mr. Nariman submitted that even additional grounds would be available but, in any case, his case was of violation of the regulations of SEBI which was a specifically provided clause under section 111A(3). Mr. Nariman submitted that on superficial reading of section 111A(2) proviso, it can be argued that all those appeals have got to be entertained. Mr. Chidambaram had submitted that now under section 111A(2), shares are made freely transferable and the proviso thereto provides that if a company refuses to transfer shares without sufficient cause, the CLB is duty bound to direct the registration of transfer. Mr. Nariman, however, pointed out that section 111A(2) proviso cannot mean that the CLB has to allow all the appeals seeking registration of transfer of shares, whatever may be the facts. It can reject it for sufficient cause. Now section 111A(7) refers to other clauses of section 111 which are saved and made available under section 111A. Once such clause is clause (7) which is with reference to title. Mr. Nariman, therefore, submitted that if there is no valid title, or if a title is sought to pass in contravention of the SEBI regulations, the company has a right to reject the application for transfer. It cannot mean that it must first entertain the transfer and then go in appeal to the CLB as canvassed by Mr. Chidambaram. Such a construction cannot be placed on section 111A(2) proviso. Mr. Nariman submitted that this ground will also be available to a litigant whose right under a common law as a member is preserved as declared by the Supreme Court as recently as in Ammonia Supplies Corpn. (P.) Ltd.’s case (supra). Mr. Nariman in this context referred to me the order of the CLB, Western Region, Mumbai in the case of Estate Investment Co. Ltd. v. Siltap Chemicals Ltd. [1999] 32 CLA 409. In para 17, the CLB has discussed as to what sufficient cause would mean under the section. Mr. Nariman drew my attention to those observations for my approval. Mr. Nariman in this contexts also referred to section 9 of the Act to submit that section 9 restricts the right of a member and it is made subject to the articles and memorandum of association. Now those grounds are further subjected under section 111A(3) to some further restrictions. In any case, the submission of Mr. Nariman is that the ground of violation of the SEBI Regulations is specifically provided and is available to the plaintiffs in their suit.

Whether the amendments create mandatory transferability of shares

154. Then comes to next question as to whether the new amendments create a complete and mandatory transferability of shares as submitted by Mr. Chidambaram. Mr. Nariman in this context referred me to the observations of the Supreme Court in para 84 in the case of LIC of India (supra). In that para, the Supreme Court held that “a shareholder has undoubted interest in a company, an interest is represented by his shareholding. Share is movable property”. Thereafter the Supreme Court has held as under :

“. . . Where the transfer is regulated by a statute, as in the case of a transfer to a non-resident which is regulated by the Foreign Exchange Regulation Act, the permission, if any, prescribed by the statute must be obtained. In the absence of the permission, the transfer will not clothe the transferee with the right ‘to get on the register’ unless and until the requisite permission is obtained. A transferee who has the right to get on the register, where no permission is required or where permission has been obtained, may ask the company to register the transfer and the company who is so asked to register the transfer of shares may not refuse to register the transfer except for a bona fide reason, neither arbitrarily nor for any collateral purpose. The paramount consideration is the interest of the company and the general interest of the shareholder. On the other hand, where, for instance, the requisite permission under the FERA is not obtained, it is open to the company and, indeed, it is bound to refuse to register the transfer of shares of an Indian company in favour of a non-resident. . . .” (p. 1412)

Mr. Nariman submitted that if the interpretation of Mr. Chidambaram is accepted, it would run contrary to the aforesaid observations of the Supreme Court and foreign companies could walk in and buy majority shares and it would be without any competitive bid as required by the law. Mr. Nariman drew my attention in this behalf to the observations of the Supreme Court in paras 68 and 69 in the case of N. Parthasarathy v. Controller of Capital Issues AIR 1991 SC 1420, wherein even before coming into operation of the Regulatory Code of 1994, the Supreme Court had disapproved the cornering the shares and clandestine transactions entered into surreptitiously by holding that it would be against public policy and illegal and void under section 23 of the Indian Contract Act. The Supreme Court observed as under :

“68. We cannot subscribe to the contention raised by Dr. Singhvi that there was nothing wrong or illegal even if the action of Reliance Group was to corner of purchase all the shares of L&T, and even if done through intermediaries or surreptitiously cannot become illegal, if, that is the law laid down by Calcutta High Court in Babulal Chaukhani v. Western India Theatres AIR 1957 Cal. 709, we disapprove it.

69. It is no doubt correct that any person or company is lawfully entitled to purchase shares of another company in open market, but if the transaction is done surreptitiously with a mala fide intention by making use of some public financial institutions as a conduit in a clandestine manner, such deal or transactions would be contrary to public policy and illegal. . . .” (p. 1442)

Mr. Nariman also pressed into service a judgment of the Chancery Division in the case of Transatlantic Life Insurance Co. Ltd. [1979] 3 All ER 352, wherein the Chancery Division has held that where the acquisition of shares was effected without the consent of the treasury and which was necessary under the law, the same was vitiated.

Whether the present suit is a personal action or a derivative action

155. Mr. S.H. Doctor, senior advocate, who appeared for defendant Nos. 4 and 5, submitted to begin with that the motive of the plaintiffs behind the litigation was not a democratic one, but was to perpetuate the management of a minority company. He referred to the percentage of voters’ loyalty as indicated in the affidavit of Mr. M D Chhabria in support of Notice of Motion No. 3932 of 1998 at page 146. Mr. Doctor submitted that it clearly shows that but for the segregation of votes it was done at the instance of the plaintiffs, the defendants had a clear majority and the objective in seeking the segregation of votes and the injunction in the present suit was to perpetuate the minority shares. Mr. Doctor further submitted that the segregated votes ought to be permitted to be counted. However, the plaintiffs were not satisfied with that limited order which was passed on 21-12-1998 and it was, therefore, only that they got the show-cause notice issued from the SEBI on 8-1-1999. Mr. Doctor submitted that it was with this ulterior motives that they got the chairman of the SEBI Committee Report of 1997 to write to the law officer of the SEBI by way of an interim measure. But for this intervention, SEBI had in fact decided earlier to permit a subsequent announcement by the defendants as can be seen from their chairman’s internal noting. Not only that but the newspaper report which was annexed to the plaint at page 46 also indicated that the learned functionary had intervened and advised SEBI to function in a particular manner. Mr. Doctor criticized this conduct on the part of the plaintiffs and the manner in which SEBI succumbed to these pressures. He submitted that this was not expected from a high functionary like the former chairman of SEBI Committee nor was it expected from the SEBI which was supposed to function as an independent authority.

156. Then commenting at para 8 of the plaint, Mr. Doctor submitted that it showed the ulterior motives of the plaintiffs. It clearly showed that the plaintiffs have not filed the suit either as shareholder nor they have filed the suit as a derivative action on behalf of the company. It clearly showed that they have filed it to threaten if there was a change in the management. In fact, as can be seen from paras 9 and 10 of the plaint, during 1995 and 1996 the plaintiffs clearly say that they have no cause of action because the defendants did not disturb the then management and thereby the plaintiffs were happy. But as can be seen from para 10 of the plaint, the plaintiffs decided to file the suit only because the defendants decided to dislodge them because of the rejection of the shares in favour of Shirish. Mr. Doctor, therefore, submitted that the commercial interest of the plaintiffs are sought to be made the basis of the plaint to deny them voting rights to the majority of the shareholders. This cannot be permitted.

157. Mr. Doctor submitted that in fact there was a clear collusion between the plaintiffs and the management of the company. Para 12 of the plaint states that on inquiries, the plaintiffs came to know about the illegalities of the defendants. It was, therefore, that the defendants took out Chamber Summons No. 1153 of 1998 for seeking particulars about these inquiries. In para 9 of their reply, the plaintiffs stated that they got the information orally. In the circumstances, Mr. Doctor asked as to how all such information can be obtained orally. The information consisted of the precise shareholding of various defendants and the documents in support thereof. How could all this information can be gathered orally. Obviously the statement was not a true one and it was made to hide the collusion between the plaintiffs and the company, but for which the plaintiffs would not got the entire information to file the suit. Similarly, the defendants’ attorney specifically asked information by sending a notice to the plaintiffs and the reply of the plaintiffs’ attorney was that the information will be given in evidence. This refusal to give them the particulars and to hide them merely show that there was hand in glows with the company.

158. Mr. Doctor pointed out that the plaintiffs were undoubtedly happy with the existing management and they had no cause of action against the company. It was not in that sense a personal action. But as clearly stated by them, it was an action in personal interest for their commercial purpose. This could not be styled even as a derivative action which is supposed to be on behalf of the body of shareholders on the company who could not act on their behalf in their protection. He relied upon a judgment of the Chancery Division in the case of Towers v. African Tug Co. [1904] 1 Ch. 558. Mr. Doctor submitted that the only right which a shareholder had was to receive dividends and to vote in the general body meeting of the company. In the present case, the plaintiffs had admittedly received dividends as can be seen at page 567 of the compilation of documents. Apparently, therefore, the plaintiffs were filing the suit in support of the Mallyas and in support of the existing management. The Chancery Division observed thus:

“If it be the fact, as I think it is, that these plaintiffs knew of all that had been done, received their dividends with knowledge of all the facts, and then brought this action with the money still in their pockets, ought they to be allowed to bring this action, which, as I have pointed out, is, to my mind, an action such as they can bring in consequence of their personal interest in the matter? I think not. I think that an action cannot be brought by an individual shareholder complaining of an act which is ultra vires if he himself has in his pocket at the time he brings the action some of the proceeds of that very ultra vires act. Nor, in my opinion, does it alter matters that he represents himself as suing on behalf of himself and others. I think that the reason which requires us to say he ought not to bring such an action equally requires us to say that he ought not to be the peg upon which such an action is to be hung for the benefit of others.” (p 567)

The court held in that case that in a case like this, where the plaintiff was acting as a peg for the benefit of others, all personal objections against the individual plaintiff must be gone into and considered before relief can be granted. Mr. Doctor, therefore, submitted that the defendants are entitled to point out as to how the plaintiffs were acting as agents of the company not for the welfare of the majority of the shareholders but for their own personal aid and for the benefit of the Mallya group and the defendants were entitled to point out the personal objections against the individual shareholder. They are got to be considered before it is decided to grant any relief to such plaintiffs. Mr. Doctor then relied upon the judgment of the Court of Appeal in the case of Nurcombe v. Nurcombe & Paines [1985] 1 WLR 370, wherein the court cautioned that the derivative action should not be permitted to be misused for individual purpose. The court observed thus:

“It is pertinent to remember, however, that a minority shareholder’s action in form is nothing more than a procedural device for enabling the court to do justice to a company controlled by miscreant directors or shareholders. Since the procedural device has evolved so that justice can be done for the benefit of the company, whoever comes forward to start the proceedings must be doing so for the benefit of the company and not for some other purpose. It follows that the court has to satisfy itself that the person coming forward is a proper person to do so. In Gower Modern Company Law, 4th edn. [1979], the law is stated, in my opinion correctly, in these terms, at p. 652:

‘The right to bring a derivative action is afforded the individual member as a matter of grace. Hence, the conduct of a shareholder may be regarded by a court of equity as disqualifying him from appearing as plaintiff on the company’ behalf. This will be the case, for example, if he participated in the wrong of which he complains.” (p. 376)

Again, the court observed thus:

“May understanding of these judgments is that the court is entitled to look at the conduct of a plaintiff in a minority shareholder’s action in order to satisfy itself that he is a proper person to bring the action on behalf of the company and that the company itself will benefit. A particular plaintiff may not be a proper person because his conduct is tainted in some way which under the rules of equity may bar relief. He may not have come with “clean hands” or he may have been guilty of delay.” (p. 377)

Later on, the court quoted with approval the earlier cited observations in Towers case (supra).

159. Then, Mr. Doctor relied upon the judgment of the Court of Appeal in the case of Prudential Assurance Co. Ltd. v. Newman Industries Ltd. [1982] 1 All ER 354, wherein the court held as follows:

“Although the proper plaintiff in an action in respect of a wrong done to a company was prima facie the company itself, exceptionally a minority shareholder could being a derivative action where the wrong done to the company amounted to fraud and the wrongdoers were themselves in control of the company and, thus, able to prevent the company from suing; but when such an action was brought by a minority shareholder the question whether in fact the company was controlled by the alleged wrongdoers should first be determined before the derivative action itself was allowed to proceed.” (p. 355)

Later, in the judgment, the Court of Appeal discussed that, as laid down in the leading case of Foss (supra), an individual shareholder cannot bring an action into courts to complaint of an irregularity (as distinct from illegality) in the conduct of the company’s internal affairs provided that the irregularity is one which can be cured by a vote of the company in general meeting. The derivative action is an exception to this general rule. The idea behind this principle is that if the minority shareholders are denied this right, their grievance could never reach the court because the wrongdoers themselves being in control would not allow the company to sue. Hence, what is accepted is that it must be a genuine action on behalf of the aggrieved minority in the interest of the company and the credentials of the concerned minority will have to be gone into. In the case like this, the action must be against the management of the company to throw it out and not to tolerate as it was canvassed in East Pant Du United Lead Mining Co. Ltd. v. Merryweather [1864] 2 Hem & M 254:

“If a minority of a company were allowed to file a bill in the company’s name, charging fraud against some of the majority, and alleging that those persons were not to be considered as shareholders or entitled to vote, and thus endeavouring to turn their minority into a majority so as to acquire the right to use the name of the company, any company’s affairs might be made the subject of litigation upon allegations of fraud which might be entirely false; and yet, as this could not be proved till the hearing, irremediable mischief might be done in the meantime.” (p. 257)

160. Mr. Doctor submitted that as can be seen, the plaint clearly says that the plaintiffs decided to move the court because of the attempt to get the shares of Shirish (defendant No. 5) registered. That indicated the attempt to dislodge the present management on the part of the defendants. According to the plaintiffs, the shares of Shirish were rightly rejected but it was at that stage that the plaintiffs decided to file the suit. Similar is the stand of the company, as can be seen from the affidavit of Mr. Raghunathan in support of the second notice of motion at p. 162, wherein Mr. Raghunathan has stated that on 17-7-1997 the transfer of shares in favour of Shirish was rejected because of (i) the illegibility disclosed through the declarations of M.D. Chhabria and K.R. Chhabria made on 17-4-1997 and (ii) because of the breaches of the SEBI Regulations 1994-97. Mr. Doctor pointed out that this statement and stand is not correct inasmuch as much thereafter in the Board meeting of 26-8-1997, a transfer of 850 shares to Mahameru (defendant No. 4) and 250 shares to Imfa (defendant No. 3) was permitted. That was after the rejection of shares sought to be transferred on behalf of Shirish. This can be seen at p. 438 of the compilation. Hence, Mr. Doctor submitted that the declarations of 17-4-1997 upon rejection of shares of Shirish was not at all the real ground. The real intention was to obstruct the majority from exercising its rights and to perpetuate the minority group. This very thing was specifically there in Merryweather’s case (supra) and that was sought to be achieved through the present suit.

161. Mr. Salve, the learned counsel appearing for defendant No. 1 supported the above submission by the relying upon Barrett v. Duckett [1995] 1 BCLC 243, wherein the Court of Appeal held that a shareholder would be allowed to bring a derivative action on behalf of a company where the action was brought bona fide for the benefit of the company for redressal of wrongs to the company for which no other remedy was available and not for an ulterior purpose. Conversely, if the action was brought for an ulterior purpose, or if another adequate remedy was available, the court would not allow the derivative action to proceed.

162. Mr. Nariman pointed out that it was open to the shareholder to initiate a personal action. He made it clear that the actions by the plaintiffs was not a derivative action on behalf of the other shareholders of the company. He submitted that many allegations were made against the plaintiffs with respect to the alleged improper invoicing on their part as the distributors of Herbertson and, therefore, the income of Herbertson being increased correspondingly by the Assessment Officer. Mr. Nariman submitted that the said order of the Assistant Commissioner had been challenged by Herbertson. But that was a different matter. Assuming without conceding that the plaintiffs were in any way tainted, Mr. Nariman submitted that the doctrine that in a derivative action one should approach the court with clean hands is held to be having the exception, namely that of a personal action. He relied upon the following passage from Palmer’s Company Law, 24th edn. 1987 at p. 978.

“The derivative action is subject, however, to the doctrine of clean hands. As an equitable invention, the derivative action cannot be used to do injustice. The principle has been applied in cases of acquiescence by the plaintiff shareholder in the wrongdoing of which he later complains and in cases where the plaintiff has been regarded as the puppet of outsiders whose interests are opposed to those of the company. The requirement of clean hands does not apply to the personal action.”

He emphasised the observations of the Supreme Court in the case of Public Passenger Services (supra) thereof, which are to the following effect:

“9. Counsel for the appellant points out that the respondents are the trade rivals of the appellant and are anxious to cripple its affairs, and the appellate court recorded the finding that the respondents were acting mala fide and prejudicially to the interests of the appellant and their conduct in taking various proceedings against the appellant is reprehensible. Counsel then relied upon the well known maxim of equity that ‘he who comes into equity must come with clean hands’ and contended that the courts below should have dismissed the applications as the respondents did not come with clean hands. This contention must be rejected for several reasons. The respondents are not seeking equitable relief against forfeiture. They are asserting their legal right to the shares on the ground that the forfeiture is invalid, and they continue to be the legal owners of the shares. Secondly, the maxim does not mean that every improper conduct of the applicant disentitles him to equitable relief. The maxim may be invoked where the conduct complained of is unfair and unjust in relation to the subject-matter of the litigation and the equity sued for. The unwarranted proceedings under sections 402 and 237 of the Companies Act, 1956 and other vexatious proceedings started by the respondents have no relation to the invalidity of the forfeiture and the relief of rectification and are not valid grounds for refusing relief.” (p. 492)

Mr. Nariman, therefore, submitted that as observed in Palmer’s Company Law, the requirement of clean hands does not apply to personal action and again, as observed by the Supreme Court, one who comes to court must come with clean hands does not mean that every improper conduct of the applicant disentitles him to equitable relief. The maxim can be invoked where the conduct complained of is unfair and unjust in relation to the subject-matter of the litigation. Mr. Nariman submitted that what the plaintiffs were aggrieved was the violation of the Takeover Regulations and the clandestine manner in which the shares were being cornered by the defendants. The plaintiffs’ conduct is to be seen in that context and there is nothing to be blamed as far as the plaintiffs are concerned.

163. In this context, Mr. Nariman referred me to a judgment of the Chancery Division in the case of Mutter v. Eastern & Midland’s Railway Co. 38 Ch. D. 92. In that matter, the defendant company had declined to give copies of the debentures stock register to the plaintiff. The trial court had decided in his favour. In appeal, it was contended that he did not have such a right under the statute, he was not a bona fide shareholder but a nominee of a rival company and there was a want of condour in his affidavit. Lindley, J. held that there was want of candour in his affidavit and yet he was not guilty of such misrepresentation or deceit as to disentitle him to the relief to which he would otherwise be entitled. He also referred me to the another judgment of the Chancery Division in the case of Mosely v. Koffyfontein Mines Ltd. [1911] (1) Ch. D. 73. In that case, the plaintiff who was a director of the company at the relevant time had originated the alteration in the articles and subsequently he wanted to contend that the resolution altering the article and increasing the capital was ultra vires. Relying upon the earlier judgment in the case of Towers (supra), it was stated that it was impermissible. In that case, the plaintiff has with full knowledge received a dividend and still wanted to have a remedy against the directors to refund to the assets of the company the amount which had been wrongfully abstracted from the capital. In Mosely’s case (supra), what was sought was a prevention of the wrong in future. Cozens Hardy, M.R. observed as under:

“This appeal raises two points, one of which is of general importance, and the other of which is only of importance as affecting the construction of the articles of this particular company. The first point, which, as I say, is of general importance, is this. The plaintiff commences his action suing on behalf of himself and all other shareholders against the company and the directors, and he seeks to restrain an intended issue of a very large number of shares, which the plaintiff says are not authorised to be issued by the defendant-company or the directors at the present time. Mr. Upjohn takes a preliminary objection to this effect. He says, “You, the plaintiff, were a moving party to the passing of the resolutions which authorised this issue. You, yourself, have taken certain shares under an earlier issue made in pursuance of those resolutions, and there is a personal exception to your position as plaintiff, and, whatever other shareholders might do, you at least cannot restrain the company from issuing these shares, even on the assumption that the issue is improper”; and for that proposition Mr. Upjohn cites the case of Towers v. African Tug Co., which it is necessary for me to deal with. Now what was Towers v. African Tug Co.? That was a case in which the directors had paid dividends out of capital, and the plaintiffs in that case sought, not an injunction or anything with reference to the future, but a personal order upon the directors to refund to the assets of the company the amount which had been wrongfully obstructed from the capital. The company retaliated by saying: “You, the plaintiffs, yourselves received this dividend with full knowledge of all the facts, and, by way of counter-claim, we ask that you will repay to the company the dividend which you have wrongfully received.” That was an action in which, but for extraordinary circumstances, the company itself would have been the proper and the only proper plaintiff. I may observe that in the counter-claim the company recovered judgment against the plaintiffs in respect of these very dividends that they had in their pockets, and it is only under exceptional circumstances that anybody but the company is allowed to take proceedings to sue the very persons alleged to be liable to the company, whether in a fiduciary character as directors or in any other character. It is only under very exceptional circumstances that a plaintiff suing on behalf of himself and all other shareholders in a representative character is allowed to seek relief which properly or under any ordinary circumstances could be enforced by the company itself. In a case of that kind it was said in Towers v. African Tug Co. that a plaintiff who had himself with full knowledge received a dividend, and still had it in his pocket, was not a person who could be allowed under the peculiar procedure of the court to claim a remedy against the directors, which remedy prima facie ought to be enforced by the company, but, so far as I am aware, that doctrine has no application at all to a case where relief is not sought in respect of the past, but where what is sought is an injunction to restrain a wrong-doing in the future; and, indeed, it would be a little short of shocking to say that a person who, it may be, in good faith, with knowledge of the facts, but in ignorance of the law years ago, did take a step which he now finds was improper, and who, as it may be, received shares or money in years gone by in respect of that transaction, it disabled from saying to the court that what this company proposes to do in future is illegal and improper and asking the court to restrain them from doing it. In the decision in the case of Towers v. African Tug Co. (a decision to which I was myself a party, and which I see no reason whatever to question, if it were open to question) there is nothing, in my view, which has any bearing on the rights of a plaintiff suing not in a peculiar and irregular manner for the company or on behalf of the company, but suing in his own individual right as an individual shareholder seeking to restrain its future actions. There is nothing in that case, so far as I am aware, or in any other authority, and certainly nothing in principle, which prevents a plaintiff from saying “A wrong may have been done in the past - that is a matter with which we have nothing to do here - but you shall not do this wrong again in the future”. In my opinion, there is nothing in the preliminary objection taken by Mr. Upjohn, assuming as I do the accuracy of all the facts which he opened on this point, which prevents us from considering this appeal.”

Similar view is taken by a Division Bench of this court in the case of Sulleman Somji v. Bank of Bombay 31 Bom. LR 319. In that case, it was contended that the sole object of the appellant is seeking inspection was to cause annoyance to the bank officials. However, as can be seen at p. 332 the Division Bench held “And even if it be that the appellant has some indirect motive of the kind suggested, it cannot affect his legal right, if he makes out that right independently of the motive”. Mr. Nariman pointed out that similar is the approach of our Supreme Court in the case of Dr. Kashinath G. Jalmi v. Speaker [1993] 2 SCC 703, wherein the Supreme Court observed that (although in the context of a writ petition) where questions of lawful authority to occupy a public office are involved, such propositions are not to be dismissed merely on the ground of laches at the admission stage without examining the contention in it. In para 34, the Court observed as follows :

“34. In our opinion, the exercise of discretion by the court even where the application is delayed, is to be governed by the objective of promoting public interest and good administration; and on that basis it cannot be said that discretion would not be exercised in favour of interference where it is necessary to prevent continuance of usurpation of office or perpetuation of an illegality.” (p. 717)

Mr. Nariman, therefore, submitted that where the defendants were trying to corner the shares and capture power in the company in gross violation of the Takeover Regulations, the concern of the Court ought to be directed to the likely usurpation of this public office, unimpressed by the other improprieties (if any) on the part of the plaintiffs. That by itself would not disentitle the plaintiffs from canvassing their submissions. In this context, Mr. Nariman pointed out that the plaintiffs had at no point of time consented nor were they parties to any of the resolutions whereby the illegal transfer of shares to Imfa and Mahameru was sanctioned by the respondent-company on 30-5-1996 or thereafter. The plaintiffs were not even directors of the respondent-company nor were they present or have voted in favour of the aforesaid resolution which is sought to be challenged by the plaintiffs in the present case. Mr. Nariman referred me to the allegations made by M.D. Chhabria in paras 8, 9 and 10 of the affidavit in reply to notice of motion No. 3120 of 1996. Even in that affidavit, Mr. Chhabria had not alleged that the plaintiffs in any way were party to the resolutions which the plaintiffs were seeking to declare as void.

Conduct of defendants

164. Prior to filing of the suit : Mr. Nariman drew my attention to the conduct of the defendants. This was in the context of the allegation of the defendants that the plaintiffs have faulted the efforts of Imfa, K.R. Chhabria or M.D. Chhabria to make a public offer even ex post facto. As far as the period prior to the suit is concerned, it can be seen from the letter dated 7-12-1995 that Imfa wrote to SEBI contending that the 1994 Regulations were not applicable to it and it sought clarification from the SEBI. Imfa also wrote to Bombay Stock Exchange about non-applicability of clauses 40A and 40B of the Listing Agreement. On 10-1-1996, SEBI wrote to Imfa with respect of clarification sought (vide letter dated 7-12-1995) and in that requested Imfa to give notice of acquisition giving date of acquisition, number of shares acquired, name of broker, etc. The letter also sought clarification about the persons behind Imfa along with details of acquisition of any persons acting in concert with them. Imfa replied on 24-1-1996 giving the names of its directors and three shareholders (Ram Raheja - 40,000 shares, I Khairulla - 10,000 shares, and F Khairulla - 10,000 shares) and specifically stated “we have acted on our own and we have not acted in concert with any other person in the above transactions nor has any person acted in concert with us”. It was, however, added in that letter that “On inquiry we are informed that two of our directors, namely Ram Raheja and Harish Raheja, are also nominee directors (in some other companies) who have been holding shares of Herbertson for some time past.” However, the names of the companies were not mentioned in that letter. In response to this letter of Imfa, SEBI wrote back on 21-5-1996 referring to earlier correspondence and stated that ‘Upon the examination of facts of the case and legal opinion forwarded by you (i.e., Imfa), it was the view of SEBI that provisions of the regulations were applicable”. In the last paragraph, SEBI advised “You are, therefore, advised to comply with the provisions of the regulations immediately, failing which appropriate action would be initiated against you”.

165. It is also material to note that in response to Imfa’s letter to Bombay Stock Exchange dated 7-12-1995, Bombay Stock Exchange replied on 12-2-1996 that clauses 40A and 40B of the Listing Agreement were mandatory and Imfa should comply with them. What is surprising is that Imfa wrote back to stock exchange on 20-2-1996 that without prejudice to their stand, they were proceeding to comply with clause 40B as directed. Again on 23-2-1996, they wrote to the stock exchange that they were releasing the advertisement in the newspaper announcing the acquisition of shares. What is material to note is that no such offer was ever made to public. There is no explanation in any of the affidavits as to why such representation was made to the stock exchange.

166. As far as SEBI is concerned, Imfa carried on its correspondence with it further. It is relevant to note that they wrote a letter on 19-8-1996 to SEBI as per the draft of Herbertson requesting an exemption under regulation 4 of Chapter III of the Takeover Regulations. SEBI did not accept any of the submissions of Imfa and ultimately on 9-10-1996 issued the first show-cause notice to Ram Raheja of Imfa under section 24 of the SEBI Act for (a) non-compliance of regulation 6 which requires disclosure to the company and Stock Exchange of aggregate holding above 5 per cent and for (b) breach of regulation 10. The show-cause notice clearly stated as follows :

“It prima facie appears that you have violated the provisions of regulations 6 and 10 in not having made the public announcement before making the substantial acquisition of shares and are, thus, liable to be prosecuted for the violation of the said regulations under section 24 of the SEBI Act.”

In the same letter, SEBI turned down the request of Imfa for exemption under regulation 4. SEBI stated that the contention that the residual public holding will go down to less than 20 per cent was no ground for non-compliance. It further stated that in previous cases, the SEBI had allowed the acquirer to disinvest within a period of 6 weeks. Mr. Nariman submitted that this would be an aspect on which evidence will have to be sought from SEBI.

167. Ram Raheja replied to this notice of SEBI on 19-10-1996 that he had ceased to be a director of Imfa from 29-6-1996. M.D. Chhabria took over the management of the company. Hence, Mulla & Mulla wrote on 23-12-1996 again on behalf of Ram Raheja stating that he had no intention of either taking control or taking part in the management of Herbertson, and that he had purchased the shares only by way of investment. In view of reply of Ram Raheja that he was no longer a director, SEBI sent second show-cause notice now addressed to the managing director of Imfa on 31-3-1997 again initiating prosecution under section 24 for breaches of regulations 6 and 10. That letter specifically stated that the transactions from 27-10-1994 to 21-11-1995 were with an intention to takeover the management of the target company in violation of regulations 6 and 10 of 1994 Regulations. This second show-cause notice was replied by Mulla & Mulla on behalf of Imfa stating that a genuine investor should not be penalised. Thereafter, Mulla & Mulla forwarded two legal opinions to SEBI in July 1997 in support of their submissions.

168. Based on the aforesaid chain of events, Mr. Nariman submitted that whatever that is stated above has come on record of the Court only from the correspondence produced by the defendants which correspondence is entirely prior to the filing of the suit and of which the plaintiffs were not at all aware. It is clear that the Bombay Stock Exchange as well as SEBI were insisting on a prior announcement and Imfa (with the support of Herbertson) was trying to thwart the public announcement by relying on legal opinion. Imfa at some point of time stated to stock exchange on 23-2-1996 that it was ready to release the advertisement. A copy of that letter was also forwarded to SEBI along with Imfa’s letter dated 23-2-1996 to SEBI. Yet no announcement was made at any point of time. As far as SEBI is concerned, its stand was clear that the prior announcement was necessary and that there was breach of regulations 6 and 10 on the part of Imfa and, therefore, show-cause notices were given first to Ram Raheja and then to the managing director of Imfa. There is no official document produced on record from proper custody showing any decision/communication from SEBI to the contrary any time thereafter. They have never asked for any subsequent announcement nor have the defendants given any prior or subsequent announcement.

Conduct of the defendants subsequent to the filing of the suit

169. Mr. Nariman pointed out that whereas Suit No. 3910 of 1997 was filed in October 1997 to challenge the acquisitions of the defendants, and particularly those of Imfa which company was facing the show-cause notices issued by SEBI (and which were subsisting) did not care to challenge them. It was for the first time in September 1998 that the defendants took out chamber summons for particulars and for the first time they filed their reply on 18-12-1998. The writ of summons had been served on the defendants within the time stipulated for that and the written statement was expected to be filed by 16-4-1998 as per rule 74 of the High Court (OS) Rules. The same has not been filed as yet. Mr. Nariman submitted that the documents which were sought by SEBI right from 1995-96 were not made available to them leaving SEBI helpless, but they are being produced for the first time now in the Court, including some of the documents of SEBI itself. Mr. Nariman submitted that if the defendants are aggrieved by filing of the suit or prayers made therein, they were expected to move with clean hands and quickly. There was gross delay on their part in this behalf.

170. That apart, as far as SEBI is concerned, it was in the know of filing of the suit though it has not been joined as a defendant therein. Mr. Nariman tendered a photocopy of the letter dated 4-12-1997 which showed that the papers and proceedings of Suit No. 3910 of 1997 were forwarded to SEBI by the attorneys of the plaintiffs. In that letter it has been specifically stated that “It is our clients’ grievance in that suit that had a public announcement been made prior to the acquisition of the said shares, our clients would have made competitive bid. This right of our clients has been denied. In the suit, our clients have averred that they were prepared to make a competitive bid as they have substantial interest apart from in Herbertson. Copies of the plaint and proceedings in that suit are annexed. These copies also include an ad interim order of the High Court dated 3rd October, 1997. In the circumstances, it is imperative that our clients are given an opportunity of being heard before you take any decision in the investigation before as decision which you take is likely to affect our clients’ legally and otherwise.”

171. Mr. Nariman then drew my attention to the note of the meeting which K.R. Chhabria had with the chairman of SEBI on 31-12-1997. This noting has been produced at pp. 338-340 of compilation III-A, and it is supposed to be a copy of the internal record of SEBI. It is not stated as to how this record is obtained by the defendants though at p. 131 of his reply to the Notice of Motion No. 3922 of 1998, Mr. Chhabria has stated that he has received these internal documents. Mr. Nariman submitted that apart from the fact that it is a photocopy of a document which is not coming forward through proper custody, it is not a complete document also. The document produced in such a manner and which are incomplete ought not to be taken cognisance of by the Court. Mr. Nariman submitted that the entire case of the defendants is built on this document. Mr. Nariman pointed out that this note begins by saying ‘discussed’, and then there is certain noting if it is a noting beginning with the word ‘discussed’, it has to be a discussion on some statement, report, communication or representation. That document is not produced. Besides, on the rear side of the document, it appears as if there were certain further statements thereon and they have not been photocopied. The tenor of the document is that according to the director of SEBI, a subsequent announcement can be made. Thereafter there appears a letter of Mr. M.D. Chhabria to SEBI dated 20-1-1998 which is at p. 220 of the compilation C-1, which states that according to his understanding, SEBI was not satisfied with the explanation given and SEBI wants its letter of 21-5-1996 to be complied with. The letter further states “In order to settle the matter to the satisfaction of SEBI, I have now decided without prejudice to my earlier stand to make the public offer which will be made jointly and/or severally by the companies under my control under regulations 10, 11 and 12 of the Takeover Code, 1997”. The letter further states that he was going ahead with the appointment of merchant banker and seeks a confirmation from SEBI that they were in agreement with the above. SEBI does not give any such confirmation at any point of time. Thereafter there are series of letters dated 16-3-1998 and 2-4-1998 again seeking this confirmation. SEBI, however, did not give any such confirmation. On the other hand, on 8-5-1998, SEBI wrote to M.D. Chhabria asking for full details of acquisition by three companies, including terms and conditions of loan, rate of interest, time for which loan was given, securities, pro-note collateral furnished against this loan and other details. In para 5(f), SEBI specifically asked as to how and at what point of time did M.D. Chhabria reach the conclusion that promoters of Imfa, Mahameru and Shirish, would not be able to repay the loan. SEBI also asked for details of various steps taken by Chhabria to recover this amount from the above companies. It also sought complete correspondence in this behalf. Mr. M.D. Chhabria replied on 28-5-1998 wherein he stated :

“The position was confirmed through mutual discussion and since the erstwhile owners of Imfa, Mahameru and Shirish sold all their shareholding in these companies to me and my nominees, no further steps were considered necessary and, therefore, not taken.”

No papers containing the advice given by chartered accountant Kukreja were made available to SEBI along with these papers. In Mr. Chhabria’s letter, there was no mention whatsoever that there was to be a return of 25 per cent of 22.5 per cent per annum to either M.D. Chhabria or to Royal Wines. All these documents of chartered accountant are subsequently produced in the Court and never made available before. Mr. Nariman, therefore, submitted that such documents will have to be taken with a pinch of salt.

172. The defendants have also relied upon a report annexed in their compilation which is made by one Mr. Gupta to SEBI which is at pp. 476-486 and therefrom it is seen that p. 483 is incomplete and that there was something in between which is not made available to the Court. This is also a document which is not coming from proper custody and which is incomplete and on which reliance is sought to be placed. Mr. Nariman submitted that apart from the noting dated 31-12-1997 and Mr. Gupta’s report which suggested ex post facto announcement, there was nothing in the record on which the defendants could lay hand. However, what is important is that whereas the defendants were asking SEBI to confirm as to whether a subsequent announcement can be made, SEBI never gave any such communication either officially stating that such announcement can be made or confirming in reply to Chhabria’s letter that such an announcement be made. What is further interesting to note is that after the decision of SEBI. The Tribunal in the case of Fascinating Leasing & Finance Ltd. (supra), Mr. M.D. Chhabria withdrew his offer of public announcement, which is what he ultimately wrote to SEBI on 22-11-1998. Thus, the unilateral offer made by him on 20-1-1998 was withdrawn by him on 22-11-1998 allegedly on the basis of non-confirmation by SEBI when SEBI had never informed him that any such offer be made or that they would confirm it. The reference to the case of Fascinating Leasing & Finance Ltd. (supra) and its effect on the stand of the defendants can be seen from an opinion sought by the defendants of a former Solicitor General which is produced in the compilation. The querists had specifically asked a question therein as to whether it is advisable to go ahead with the public advertisement after the judgment in the case of Fascinating Leasing & Finance Ltd. (supra). Mr. Nariman, therefore, submitted that the case of the defendants that their public offer was thwarted by the plaintiffs has no basis, although they tried to contend so in their affidavit in reply. Mr. Nariman further submitted in this context that what is relevant is that under regulation 14, such an offer has to be made in advance before acquisition and there is no provision for a subsequent announcement and assuming without conceding that any such interpretation is possible, no such announcement was ever suggested by SEBI nor has the same been given by the defendants and that there was no impediment against the same.

173. Mr. Nariman submitted that from the record produced by the defendants, it is clear that SEBI had given a show-cause notice first to Ram Raheja and then to Imfa for violation of regulations 6 and 10 which were prior to filing of the suit. The note filed by M.D. Chhabria to SEBI on 22-7-1997 (which is also prior to the filing of the suit) clearly shows involvement of Chhabrias in the loan given to Imfa, Mahameru and Shirish, by which the shares of Herbertson were acquired (at p. 197 of compilation of document I). It also shows the action in concert. Though SEBI asked for particulars of loan, these particulars were not given. Even in March and May of 1998, when specific queries were made in that behalf, none of the supporting documents of chartered accountant Kukerja were produced to SEBI. In the light of all these circumstances, SEBI was ultimately constrained to issue the show-cause notices to M.D. Chhabria and K.R. Chhabria on 8-1-1999 alleging an action in concert in breach of the Takeover Code vis-a-vis the control of Herbertson.

Conduct of SEBI

174. With respect to the conduct of SEBI, Mr. Nariman pointed out that certain aspects thereof were undoubtedly unsatisfactory. However, by and large, it can be said that it was consistent in the stand it had taken. It had all throughout maintained that a prior public offer before acquisition was necessary under the Takeover Code. Mr. Nariman conceded that it was unfortunate that attempt to influence SEBI was made by tendering opinions of persons who at one time held high judicial offices. He, however, pointed out that it were the defendants who gave the opinion in this behalf for the first time on 21-5-1996 and then on 16-7-1997 and thereafter on 21-7-1997. Mr. Nariman accepts that the plaintiffs have also obtained such an opinion in September 1997, but he maintains that it was with a view to taking the decision of filing a suit which was filed in October 1997. On coming to know that the defendants had tendered the opinions to SEBI, the plaintiffs also found themselves helpless and gave one such opinion and forwarded the opinion obtained on 11-9-1997 on 31-12-1997 and later on forwarded another opinion on 10-2-1998. Mr. Doctor had certified the author of the opinion dated 10-2-1998 by alleging that he had tried to interfere in the decision making by SEBI. Mr. Nariman, on the other hand pointed out that as can be seen not less than three opinions were forwarded by the defendants to SEBI much earlier. That apart, the defendants were producing photocopies of the notings from the files of SEBI as also their reports and giving incomplete text thereof. Mr. Nariman submitted that this shows as to how and who had better access and influence on SEBI. That apart, he maintains that the stand of SEBI with respect to public announcement was also throughout very clear. He pointed out that it was because of the complaint lodged by the plaintiffs that not merely the defendant by Mr. Vijay Mallya was also given a notice for the acquisition made by him. This can be seen from the affidavit of Mr. Reddy at p. 90. Thus, the finding of SEBI is also against Mr. Vijay Mallya.

Orders unless set aside remains valid

175. Mr. Dada submitted that it was not known whether the investigating officer had done any investigation before issuing the notices. He, therefore, submitted that they were contrary to regulations 33 to 37 of 1994 Regulations. They were illegal and mala fide. Issuance of notices cannot mean that SEBI had taken a prima facie view. Mr. Nariman, therefore, submitted that what is to be noted is that there were two show-cause notices first to Ram Raheja dated 9-10-1996 and then second one to Imfa dated 31-3-1997 issued by SEBI which were both prior to the filing of the suit. The plaintiffs were not aware of the same and the notices have been placed on record by the defendants themselves. There is a third show-cause notice dated 8-1-1999 which is issued subsequent to the filing of the suit. Mr. Nariman submitted that the defendants have not cared to challenge any notices, and so long as these notices hold the filed, they could not be wished away. They were notices issued by competent authority and unless they were challenged appropriately by filing a writ petition, it would not be open to any one to go behind them and question them. He relied upon the observations of the Supreme Court in the case of LIC of India (supra) in para 84, wherein the Supreme Court observed as follows :

“. . . As we said earlier, under the scheme of the Act, it is the Reserve Bank of India that is constituted and entrusted with the task of regulating and conserving foreign exchange. If one may use such an expression, it is the ‘custodian-general’ of foreign exchange. The task of enforcement is left to the Directorate of Enforcement, but it is the Reserve Bank of India and the Reserve Bank of India alone that has to decide whether permission may or may not be granted under section 29(1) of the Act. The Act makes it its exclusive privilege and function. No other authority is vested with any power nor may it assume to itself the power to decide the question whether permission may or may not be granted or whether it ought or ought not to have been granted. The question may not be permitted to be raised either directly or collaterally. We do not, however, rule out the limited class of cases where the grant of permission by the Reserve Bank of India may be questioned, by an interested party in a proceeding under article 226 of the Constitution, on the ground that it was mala fide or that there was no application of the mind or that it was opposed to the national interest as contemplated by the Act, being in contravention of the provisions of the Act and the rules, orders and directions issued under the Act. Once permission is granted by the Reserve Bank of India, ordinarily it is not open to any one to go behind the permission and seek to question it. . . .” (p. 1413)

Similar is the observations of the Supreme Court in the case of Shiv Chander Kapoor v. Amar Bose AIR 1990 SC 325 in the context of Delhi Rent Control Act, wherein in paras 22 and 23, the Supreme Court observed as follows:

“22. There is another aspect of the matter. The Controller’s permission when granted to create a limited tenancy under section 21 of the Act is presumed to be valid unless declared otherwise. It is, therefore, for the person assailing its validity to get such a declaration from a proper forum in a proper proceeding. Unless this is done, the order remains enforceable. The duty is clearly on the tenant himself to raise the plea of invalidity and unless the order is declared invalid at his instance, its enforceability cannot be doubted.

23. In Wade’s Administrative Law, 6th edn. At pp. 351-353, there is an illuminating discussion of this topic. It has been pointed out that ‘void’ is meaningless in an absolute sense; and unless the necessary proceedings are taken at law to establish the cause of invalidity and to get it quashed or otherwise upset, it will remain as effective for its ostensible purpose as the most impeccable of orders. In the words of Lord Diplock, the order would be presumed to be valid unless the presumption was rebutted in competent legal proceedings by a party entitled to sue.” (p. 333)

176. In the case of State of Punjab v. Gurdev Singh [1991] 4 SCC 1, in the context of dismissal from service, the Supreme Court observed as follows :

‘7. In the instant case, the respondents were dismissed from service. May be illegally. The order of dismissal has clearly infringed their right to continue in the service and indeed they were precluded from attending the office from the date of their dismissal. They have not been paid their salary from that date. They came forward to the court with a grievance that their dismissal from service was no dismissal in law. According to them the order of dismissal was illegal, inoperative and not binding on them. They wanted the court to declare that their dismissal was void and inoperative and not binding on them and they continue to be in service. For the purpose of these cases, we may assume that the order of dismissal was void, inoperative and ultra vires, and not voidable. If an Act is void or ultra vires it is enough for the court to declare it so and it collapses automatically. It need not be set aside.

The aggrieved party can simply seek a declaration that it is void and not binding upon him. A declaration merely declares the existing state of affairs and does not ‘quash’ so as to produce a new state of affairs.

8. But nonetheless the impugned dismissal order has at least a de facto operation unless and until it is declared to be void or nullity by a competent body or court. In Smith v. East Elloe Rural District Council All ER 871, Lord Radcliffe observed:

‘An order, even if not made in good faith, is still an act capable of legal consequences. It bears no brand of invalidity on its forehead. Unless the necessary proceedings are taken at law to establish the cause of invalidity and to get it quashed or otherwise upset, it will remain as effective for its ostensible purpose as the most impeccable of orders.’

9. Apropos to this principle, Prof. Wade States : ‘the principle must be equally true even where the ‘brand’ decision of the court. Prof. Wade sums up these principles :

‘The truth of the matter is that the court will invalidate an order only if the right remedy is sought by the right person in the right proceedings and circumstances. The order may be hypothetically a nullity, but the court may refuse to quash it because of the plaintiff’s lack of standing, because he does not deserve a discretionary remedy, because he has waived his rights, or for some to her legal reasons. In any such case the void order remains effective and is, in reality, valid. It follows that an order may be void for one purpose and valid for another ; and that it may be void against one person but valid against another.’” (p. 5)

177. Of particular interest, in the judgment of the Supreme Court in the case of Tayyabbhai Mohammedbhai Bagosarwala v. Hind Rubber Industries (P.) Ltd. 1997 (2) MLJ 1. In that case, it has come to be held that the civil court has no jurisdiction over a particular matter. However, before the issue of jurisdiction was decided under section 9A added to the Code of Civil Procedure, by Maharashtra Amendment, the Court had granted ad interim order, which was within the power of the Court under sub-rule (2) thereof. It was alleged that ad interim order was valid and thereby there was contempt. The Supreme Court referred to the judgment in the case of Shiv Chander Kapoor (supra) and held :

“The interim orders so passed are orders within jurisdiction when passed and effective till the court decides that it has no jurisdiction to entertain the suit.”

178. Mr. Nariman, therefore, submitted that when the three show-cause notices were holding the field and were not challenged at any time by the parties or persons to whom they were issued, the Court was not expected to go behind those notices. SEBI was the authority which was endowed with the powers to take the necessary decision. Having arrived at its prima facie opinion, not once but thrice, the civil court was not expected to go into the rationale behind the same and substitute its own opinion for that of the appropriate authority as also observed by a Constitution Bench in LIC of India’s case (supra). This was particularly so when the matter was at the stage of show-cause notice, and the defendants were expected to file their reply. When the plaintiffs, who had no remedy or access in the CLB, have filed a suit for rectification of the register and to seek an injunction in the meanwhile, the defendants cannot be heard to point out that there was no basis to the notices issued by SEBI.

Appropriate protection and order

179. Mr. Nariman was fair enough to state that it was possible that at a later point of time, this Court may take a view that prayer (a) of the plaint seeking voiding of the acquisition of shares should be appropriately dealt with by SEBI and, therefore, may decline to grant that relief. Mr. Nariman submitted that it is also possible that consequence to the show-cause notice dated 8-1-1999 issued by SEBI, it may hold that these acquisitions were void in which case prayer (a) in the present suit may become redundant. He, however, submitted that prayer (b), which was for rectification of register, will always survive. Whether SEBI can do that or not, the plaintiffs can certainly seek that relief in this Court and as has been held right from T.A.K. Mohideen Pichai Taraganar’s case (supra) that in common law, right of shareholders based in their contract with the company is not abridged. He, therefore, submitted that under the judgment of the Supreme Court in Manalal Khetan’s case (supra), the suit will survive for rectification and if during the pendency thereof, the acquisition which were prima facie illegal were allowed to be acted upon, the relief will be rendered negative as held by the Supreme Court in Dorab Cawasji Warden’s case (supra), the last uncontested status is required to be maintained till the disposal of the case. In the present case, that has to be in the context of the taking over of the management. He, therefore, submitted that the injunction as sought was necessary. As far as developments subsequent to the filing of the suit is concerned, it is a moot question as to what extent it can be considered by the time the application for interim relief comes to be decided or by the time the suit comes to be heard and decided. There are judgments to canvass either of the proposition that they should be considered or they may not be considered. Mr. Nariman submitted that in either case, as far as the present proceedings are concerned, there are two show-cause notices prior to the suit and one subsequent which are both pending.

180. This, however, does not mean that the transferors of the shares from whom they were bought by the defendants should be left in lurch. They have got to be protected. In fact as rightly pointed out by Mr. Salve and as held by the Supreme Court in State of Rajasthan v. Associated Stone Industries (Kota) Ltd. AIR 1985 SC 466, if one party to a contract is asked to discharge the advantage received by him under a void contract, so too the other party to the void contract may ask him to restore the advantage received by him. It is possible that SEBI may make necessary order in their protection which is probably within its domain. However, inasmuch as a number of possibilities may come up subsequently, the plaintiffs were prepared to deposit the entire price of the shares in the Court so that in the event of any disinvestment was directed or any harm was likely to be caused to the transferors who were not before the court, they will be taken care of. He, therefore, offered to deposit an amount of Rs. 15,22,65,422.50 to cover all disputed acquisitions. Mr. Nariman relied upon a passage from Chitty on Contract, 25th edn. to make a distinction between executory and completed contract. He submitted that in the context of the present shares, the acquisition indicated the executory part whereas voting would indicate the completed part of the transaction. It is the latter part which was illegal and which was sought to be injuncted. The defendants will in the meanwhile continue to receive the dividends and can participate in all other decisions making except when it comes to taking over of the management.

Conduct of plaintiffs on allegation of collusion

181. With respect to the allegation of the defendants that the plaintiffs were the friends of Vijay Mallya, Mr. Nariman submitted that the plaintiffs never disputing that. In fact, the plaintiffs admitted that in para 2 of the plaint. However, he denied that the plaintiffs were put up by Vijay Mallya. They have filed the suit of their own in the interest of protecting the integrity of the company. With respect to concept of collusion, he relied upon the judgment of the Supreme Court in Rupchand Gupta v. Raghuvanshi AIR 1964 SC 1889 (paras 9 and 10) to contend that collusion in judicial proceedings will require a dishonest purpose to be intended behind it. Dealing with the affidavit of M.D. Chhabria, and particularly para 6 thereof, he submitted that whatever documents that the plaintiffs had relied upon were official papers or statutory documents which they have obtained from the company and there was nothing improper in that. In fact, it was the defendants who were relying upon the confidential papers of SEBI and which were illegally and, in any case, improperly procured. Mr. Nariman submitted that even if the plaintiffs are close to Vijay Mallya, they cannot be prevented from raising the issue of illegality.

182. On the other hand, the earliest document in the compilation produced by the defendants is the letter dated 31-8-1998 which is at p. 1 of Vol. II. It shows that K.R. Chhabria was invited by Vijay Mallya to join Herbertson. This was also admitted by K.R. Chhabria in his affidavit in para 7 at p. 46 in reply to the notice of motion in Suit No. 3120 of 1997. Mr. Nariman pointed out that K.R. Chhabria as well as the plaintiffs had come in Herbertson on the footing that the UB group of Vijay Mallya retains the control and he remains the chairman. It is the defendants who are now subsequently having second thoughts.

183. On p. 17 of the reply in ground (h), there was a reference to the assessment order against the company dated 31-3-1997 and to the allegations of siphoning of funds. In this connection, Mr. Nariman referred to K.R. Chhabria’s letter dated 13-6-1997 which is at page 132 of compilation I, which is supposed to allege siphoning of funds by Balaji group of companies. What is material to note is that neither that letter nor any letter thereafter protests or makes any grievance against the so-called alleged siphoning. In fact, thereafter on 27-10-1997 the accounts of the company are passed in AGM. K R Chhabria did not protest the passing of the accounts in any way. Similarly, on 30-12-1998 again accounts were passed and K.R. Chhabria did not protest. The reason given for this non-protest in the joint affidavit of Ganguly and Chhabria at p. 49 in the second suit is that K.R. Chhabria did not proceed further in the matter because of the assurance given by Mallya and, therefore, he did not attend the AGM. Mr. Nariman submitted that this reason is unconvincing because in the letter dated 31-12-1997 (at p. 245), Mr. Mallya had clearly stated that the truce between the parties was over and they were at war. In spite of that, in the reply of K.R. Chhabria he has stated that the discussions were without prejudice. Mr. Nariman asked as to why they should be without prejudice and why there was no reference to siphoning of funds if that was so. He then referred to the disputed role of Balaji which is at p. 132 in compilation I, where price per case comes to Rs. 996 in Andhra Pradesh. As against that, the bill of Patna was shown to contend that Andhra Pradesh bills were inflated. Mr. Nariman pointed out that in the Andhra Pradesh bill, excise amount was included and if similarly that amount is included in Patna bills, the amount per case would come to Rs. 1090.83. Thus, in fact there was neither siphoning nor over-cutting in Andhra Pradesh.

184. Then, Mr. Nariman referred me to the assessment order wherein there are certain observations against the plaintiffs. Mr. Nariman submitted that the order can be read against Herbertson, but the observations cannot be read against the plaintiffs because they were not heard when those observations were made. He referred to a Division Bench judgment of the Gujarat High Court (per Ahmadi, J, as he then was in that court) in Ishwarlal & Bros. v. CIT [1983] 143 ITR 517 (DB), wherein the court held that such observations would be against principles of natural justice.

185. Then coming to the allegation that the plaintiffs were not saying anything against Vijay Mallya, Mr. Nariman pointed out that as can be seen from the record, it is because of the complaint of the plaintiffs that a notice had been given to Vijay Mallya. That can be seen from the documents on record.

Whether transferors are necessary as parties

186. Mr. Nariman submitted that the dispute was between the plaintiffs and the persons or the companies which had illegally acquired share in violation of law. The transferors of shares were not in picture. If necessary, the transferees will suffer the penal consequences for breach of regulation 24(1) of the SEBI Regulations. As far as the transferors are concerned, they will not suffer any penal consequences and as far as civil consequences are concerned, assuming without conceding that there would be any, he submitted that even the plaintiffs are prepared to deposit an amount of over Rs. 15 crore in the court to safeguard their interest. He submitted that the prohibition was against the acquisition of substantial shares in violation of the SEBI Regulations when made before the announcement. Even the show-cause notice also stated it and that is how regulation 14 will have to be read. The only exception to this can be regulation 4 under which there can be exemption from Chapter III. He relied upon the following passage from Chitty on Contract, 1983 edn. at p. 623 which reads as follows :

“Statute : one party only affected. Statutes which prohibit certain contracts often impliedly recognise, for example by punishing only one of the parties, that the parties are not equally at fault, and, therefore, on their true construction only one of the parties to the contract is prevented from suing upon it. Accordingly, when “the policy of the Act in question is to protect the general public or a class of persons by requiring that a contract shall be accompanied by certain formalities or conditions, and a penalty is imposed on the person omitting those formalities or conditions, the contract and its performance without those formalities or conditions is illegal, and cannot be sued upon by the person liable to the penalties. But the other party to the contract is not deprived of his civil remedies because of the criminal default of the guilty party.”

In the aforesaid passage from Chitty on Contract the case of Anderson v. Daniel [1924] 1 KB 138 has been referred to and relied upon. The said judgment has been followed by a Division Bench of this court in Sundrabai Sitaram Narangikar v. Manohar Dhondu Khandalgaonkar [1932] 35 BLR 404.