Company Law Board
Sanmukhlal Rangildas Ghael vs Reliance Petroleum Ltd. on 18 January, 2001
ORDER
1. Mr. Sanmukhlal Rangildas Ghael along with 17 other petitioners who were members of the same family ('the petitioners') have filed petitions under section 111A of the Companies Act, 1956 ('the Act') for issuance of directions, to Reliance Petroleum Ltd. ('respondent-company') to allot in their favour equity shares in lieu of tradeable warrants held by them on payment of the consideration. They have further sought for directions that the purported allotment made in favour of the promoters/third parties in lieu of the tradeable warrants held by the petitioners be cancelled and set aside and be allotted in their favour. They have further sought for directions that the respondent-company be restrained from entering the name of any other person in their register of members if they were allotted the shares in lieu of the warrants held by them, or if any other persons' names have been entered into the said register, the same may be deleted and be restrained from transferring the said shares or in alternative the respondent-company be ordered and directed to repay the consideration for the said tradeable warrants held by the petitioners.
2. Since the cause of action in all these 18 appeals is the same, they are being disposed of by this common order.
3. It appears that the respondent-company had issued tripple option convertible debentures (TOCD) worth Rs. 2,172 crores sometime in 1993. One of the options available to the debenture holders was the entitlement of two freely tradeable warrants against each debenture on which call monies upto second calls have been duly paid and the debenture holders were entitled on a day to be decided by the board of directors or committee thereof to apply for one equity share of Rs. 10 of the company at a price of Rs. 20 for each warrant. These warrants were freely transferable and the company was to maintain a separate register of warrant-holders for this purpose. In June, 1998 the company sent a letter of offer with application form to all warrant-holders including the petitioners giving them one month's time for exercising their rights to apply for equity shares of the respondent-company by making payment at the rate of Rs. 20 per share. Again, in August, 1998 the respondent-company in terms of prospectus dated 26-8-1993 gave a reminder notice to all the wan-ant holders including the petitioners who had earlier not exercised their rights pursuant to letter of offer sent in June, 1998 to apply for equity shares by remitting a sum of Rs. 20 per share. The petitioners did not apply for equity shares even after the issue of reminders. The petitioners after receiving the application form claimed to have written to the respondent-company vide their letter dated..... (no letter annexed with the petition) sought for the extension of time for exercising their rights due to financial situation prevailing in the market.
4. The board of directors of the respondent-company proceeded to allot the shares to all those who exercised their option and also allotted the shares which remained unallotted due to non-exercise of option by warrant-holders. According to the petitioners the board of directors allotted the shares relating to unexcrcised option to the persons of their choice in an arbitrary and discriminatory manner. It is the petitioners' case that by subsequent letters also they requested the respondent No. 1 company to consider their request by allotting two equity shares against unexercised warrant and shown willingness to pay the interest and principal amount on the said shares and the petitioners are still ready and willing to pay the price of shares with interest on such unexercised rights vide their letter dated 13-9-1999 and 19-9-1999. According to petitioners, in response to their aforesaid letters Karvy Consultants Ltd., Registrars and Transfer Agents of the Respondent No. 1 company informed that the rights attached to the unexercised warrants to apply for equity shares had lapsed, according to the petitioners, the said stand of the respondent No. 1 is contrary to the terms stipulated in the prospectus and articles of association of the company. According to petitioners the power of forfeiture is a power of fiduciary nature and ought to be exercised in good faith for the benefit of the company. According to petitioners, no notice of forfeiture was served upon the shareholders which was condition precedent and even the slightest defect in the notice will invalidate the forfeiture. According to petitioners as per the prospectus which empowered the board of directors/Commit tee of directors to charge the interest at the rate of 21 per cent per annum or such lower rate in case of failure to pay the amount due on allotment and/or on calls before the last date fixed for payment. According to petitioners in exercising of the right of forfeiture the basic principles of law that it should be in the interest and for the benefit of the company, has not been exercised by the Board. According to petitioners these warrants were transferable/transmittable in the same manner and to the same extent and subject to same regulations and limitations as in the case of existing equity shares of the company. According to the petitioners, the tradeable warrants of the respondent-company No. 1, were share warrants within the meaning of sections 114 and 115 of the Act. The board of directors of the company have allotted 45.53 crores (approximately) shares to the promoters on account of unsubscribed portion of the tradeable warrants ignoring the petitioners' request for extending the time for payment. According to petitioners, the board of directors have misused their power and deprived the actual/rightful owners who are holding tradeable warrants and the same has been done with fraudulent and mala fide intention. According to petitioners, under the circumstances, if any allotment took place in favour of the promoters/associates, it was bad in law and said allotment requires to be cancelled and promoters/associates be restrained from dealing with, disposing of or alienating these shares and/or receiving dividend warrants in respect thereof.
5. The respondent No. 1 company in its affidavit in reply denied each and every allegation, contention, submission made in the petition which is contrary to or inconsistent with what has been stated in their affidavit except what is specifically admitted by them. According to respondent No. 1 company the petition is misconceived and not maintainable and liable to be dismissed with costs. According to them the said pelitions has been purportedly made under section 111A. The provisions of section 111A can be invoked only on company's refusal to register the transfer of shares or intimation thereof being delivered to the company if the same is without sufficient cause within two months from the date of lodgement of instrument of transfer. Only in that event the transferee is entitled to appeal to the CLB and the said Board thereafter may issue necessary directions. According to respondent No. 1 company the provisions of section 111A are not applicable to the present case inasmuch as the relief sought for in the present petition are not in respect of transfer of any shares or debentures but in respect of tradeable warrants which are neither shares nor debentures. According to respondent No. 1 it had issued triple option convertible debentures (TODC) worth Rs. 2,172 crores and the debenture holders were entitled for two freely tradeable warrants. The said warrants were listed on the Stock Exchange and were transferable. As per the terms of the issue the holders of warrant were entitled on a date to be decided by the board of directors or Committee thereof, to apply for 1 equity share of Rs. 10 each at a price of Rs. 20 for each warrant. Such entitlement was available only to the warrant-holders. According to respondent No. 1 company, by giving a reasonable notice it called upon the warrant-holders to apply for equity shares within the period stipulated in the prospectus. According to the prospectus, the Board/Commit tec thereof shall call upon the warrant-holders to apply for equity shares within such time as prescribed in the notice and if the said right is not exercised within the said specified time, the Board/ Committee thereafter shall be entitled to allot the equity shares of the uncxercised option by warrant-holders to such persons as the Board in the best interest of the company deem fit. According to respondent No. 1 company the rights of the warrant-holders as spelt out in the prospectus are freely transferable and transmittable in the manner subject to such restrictions and limitations. It was also made clear that warrant-holders shall not have any right to receive any notice of the meeting of the shareholders or annual report of the company and/or to obtain/vote at any general meeting of the shareholders and/or debenture holders. The respondent-company further stated that the said tradeable warrants were listed on the Stock Exchanges and the petitioners acquired 1,94,600 tradeable warrants from the market and were entitled to exercise their option to apply for equity shares in terms of the letter of option dated 27-5-1998 issued to the warrant-holders including the petitioners. The petitioners did not exercise their option. According to respondent No. 1 company, the terms and conditions contained in the said prospectus as well as in the letter of option which have been duly filed with SEBI were binding upon the petitioners and they cannot make any grievance with regard to the allotment made to the promoters. According to respondent No. 1 company since the petitioners have not subscribed for the shares, the question of allotment of any shares or inclusion of their names in the register of members docs not arise and hence the question of rectification of register of members under section 111A also does not arise.
6. The respondent No. 1 company in its reply have further submitted that the allegation regarding the exercise of power of forfeiture is irrelevant in the facts and circumstances of the present case. According to them the present case is not with regard to shares or debentures or forfeiture pursuant to failure to pay the call money but only with regard to exercise of the rights attached with the tradeable warrants to apply for equity shares as per the terms and conditions in the said prospectus and letter of option.
7. The petitioners in their rejoinder have submitted that the prospectus deals with the rights of warrant-holders and it is specifically mentioned in the said clause that the warrant shall be transferable and transmit table in the same manner and to the same extent and subject to same restrictions and limitations as in the case of debenture holders. Thus, the prospectus clearly postulates and gives character of debentures to the present warrants. The said terms and conditions in the prospectus are binding on the respondent-company and now they cannot take a contrary stand than what is stipulated in the prospectus. According to them the present petition is well within the purview of section 111A and is, therefore, maintainable. According to petitioners it is a decided law that the issue relates to remedy available to an investor of a public company only under section 111A. According to petitioners the prospectus provided that in case of failure to pay the amount due on allotment and/or calls on or before the last date of payment, the board of directors/committee at their absolute discretion determine, shall render the allottees/debcnturehold-ers as the case may be liable to pay interest thereon at the rate of 21 per cent per annum or such, lower rate as the Board may determine. The allotment of unexercised warrants at the rate of Rs. 20 to promoters are neither as per the terms and conditions of the prospectus nor it is in the interest or benefit of the company. According to petitioners it is a well settled principles of law that where the partly paid shares are forfeited for non-payment of further calls and if they are reallotted at a same price, the reallotment will amount to allotment at discount and will, therefore, be invalid. According to petitioners they have requested the Chairman of the company to extend the date and shown readiness and willingness to pay the interest but it was not taken into consideration and at the same time the unexercised portion was allotted to the promoters without charging interest or any other higher rate, though at the relevant time the share price was Rs. 60 in spile of that unexercised portions were allotted at a discount of Rs. 20. According to petitioners the board of directors ought to have exercised their rights in favour of warrant-holders in the interest of the company, which the directors have failed to do and it reveals that the affairs of the company were being conducted in a manner oppressive to some part of the members. According to petitioners the respondent-company even accepted the applications from promoters and associates to subscribe to the shares which were due in November, 1999, November, 2000 and November, 2001, thereby they have put the company into considerable loss. The said action on the part of the company/board of directors are prejudicial to the interest of the company, shareholders and public at large and said action was without authority.
8. It was also alleged by the petitioners that the company failed to give one months notice to the option holders to exercise their option. It was further submitted that the warrants are attached to shares and thus it is not within the control of the board of directors to detach the same unless the resolution to that effect was passed and approved. Thus, the promoters were not entitled for allotment of share in respect of which the warrant-holders did not exercise their option. It was further submitted that even in the prospectus it was mentioned that the object of issue was to part finance project by setting up of the grass root refinery. According to petitioners warrant by itself have right to equity as all terms and conditions applicable to shares and debentures equally apply to warrants and under the circumstances the right cannot be deemed to have lapsed. The petitioners have again reiterated that there was no sufficient cause for omission of the name of the petitioners from the register when the omission was due to invalidate forfeiture of their right and if the CLB comes to conclusion that the forfeiture was invalid, it has jurisdiction to order the rectification of register of members. It is further submitted by the petitioners that according to them after the allotment of the warrant, the petitioners become the registered holders and once the warrants are registered in their name, the company has no power to forfeit the warrants on the ground of failure of consideration. According to petitioners, the allotment of new shares to the promoters has been done as a strategy to deprive the warrant-holders and, therefore, in preventing oppressive conduct of affairs, the allotment of shares is required to be set aside and the respondent be ordered to allot the shares to the petitioners as they are still ready and willing to pay reasonable rate of interest.
9. Shri Kinkhubawala, counsel appearing for the petitioners submitted that as per the prospectus and the articles of association, these warrant-holders had all the rights and privileges of the debenture holders and as such the company was required to give individual notices for the forfeiture of shares which the company has failed to do so. He invited attention to the prospectus dated 26-8-1993 wherein at page 20 the following note was given :
"Wherever the context permits, Triple Option Convertible Debentures (TOCDs) and non-convertible portion of TOCDsareref erred tocollectively as 'the debentures' and holders of such debentures as 'the debenture holders'."
The counsel appearing for the petitioners submitted that it is clear from the note appearing at page 20 of the prospectus that TOCDs are the debentures and, therefore, all rights which are available to the debenture holders are available to the tradeablc warrant-holders also. He further invited attention to note No. 7 appearing on page 21 of the said prospectus and submitted that the board of directors have erred in allotting the shares to the promoters without the surrender of the tradeablc warrants. He further invited attention to the note appearing at page 22 of the prospectus and submitted that the board of directors had a right to extend the date for exercising the option by the tradeable warrant-holders and they could have even collected the interest not exceeding 21 per cent per annum. He further invited attention to the rights of the holders of equity shares, TOCDs and warrants as mentioned in the said prospectus and at page 24 it is mentioned that the Board/Committee will give reasonable notice to call upon the warrant-holders to apply for equity shares during any time between 10 to 12 months from the date of final call notice. If such right attached to a warrant is not exercised, within such specified period, the Board/Committee thereof shall again call upon the warrant-holders to apply for equity shares within one month from the date of such notice and submitted that it was incumbent upon the board of directors to have given them clear one month's notice for exercising the option to the warrant-holders. He further invited our attention to the 'means of finance' stated at page 34 of the prospectus wherein it was clearly mentioned that warrant-holders shall exercise their right attached to the warrants to subscribe to equity shares by exercising options II and/or III and submitted that promoters had no right to get the shares allotted against the tradeable warrants. He further submitted that since tradcable warrants are debentures as has been mentioned in the prospectus, it was incumbent upon the company as per article 48 of the articles of association to have given individual notices to each of the warrant-holders for forfeiture of their rights. He further submitted that the petitioners have written to the Chairman of the company on 14-6-1998 for extending the time for exercising the option by the warrant-holders. However, their request was never considered and the board of directors proceeded to allot the shares. He further submitted that the allotment of the shares to the promoters in respect of shares on which the warrant-holders had not exercised their option is mala fide and as such the Board is empowered to adjudicate upon the matter under section 111A(3) on application from the investors. He further invited our attention to the annual report of the respondent No. 1 company for the year 1998-99 from where it is clear that 45,52,73,900 equity shares have been allotted to the promoters in respect of unsubscribed portion of the eligible warrant-holders. No details have been provided as to when these shares have been allotted. It is clear from the accounts that no interest or premium have been charged from them whereas the board of directors could have collected the interest from the warrant-holders which would have benefited the company. The allotment of shares by the board of directors was, therefore, not in the interest of the company. During the course of the arguments the counsel for the petitioners placed reliance on the following cases :
1. Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd [1999] 97 Comp. Cas. 301 (Guj.)
2. Prayan Prasad v. Gaya Bank & Traders Association Ltd. AIR 1931 at. 44, Ross and Scroope, JJ.
3. Rashmi Seth v. Chemon (India) (P.) Ltd. [1995] 82 Comp. Cas. 563 (CLB)
4. Mrs. Promila Bansal v. Wearwell Cycle Co. (India) Ltd. [1978] 48 Comp. Cas. 202 (Delhi)
5. Public Passenger Service Ltd. v. M.A. Khadar [1966] 36 Comp. Cas. 1 (SC)
6. Smt. Premila Devi v. Peoples Bank of Northern India Ltd. (In Liquidation) AIR 1938 PC 284 (Lord Romer).
In the case of Mafatlal Industries Ltd. (supra) it has been held that the provisions of sections 111 and 111A, is not jurisdiction of merely a summary nature but includes within its compass power to hold full-fledged enquiry in respect of title to shares and to decide any question which it considers necessary or expedient to decide in connection with the application for rectification. The Court has also held that the remedies provided by the provisions of section 111A read with section 111 are a complete code in so far as any dispute about non-compliance with or non-observance of the provisions of the Act, is concerned and thus the scope under section 111A is wide enough and this Board is competent to adjudicate upon any dispute relating to the transfer of shares or the rectification of the register of members. The counsel further invited our attention to the other cases referred by him and submitted that procedure is required to be followed by the company in respect of giving prior notice as is required under the law or articles of association of the company, so also a resolution is required to be passed for such forfeiture which in this case has not been done by the company. He further submitted that the power to issue further shares is exercised by the directors not for the benefit of the company and it is exercised simply and solely for the purpose of consolidating their voting power to the exclusion of existing majority shareholders. He submitted that in the present case the board of directors by not extending the date of exercising the option have acted with the sole intention to get these shares allotted to themselves.
10. Shri J.J. Bhatt, the learned counsel for the respondent-company submitted that the tradeable warrants are neither shares nor debentures. The debenture holders on surrender of the warrant get a right to apply for one share against one warrant at Rs. 20. Warrant-holders need not be shareholders or debenture holders as these warrants were freely transferable in the market. He further submitted that the register of warrants was maintained only to keep a track of the warrant-holders in whom right to apply had accrued or existed and were entitled for the notice for exercising their option. They had no right to vote which are available to the shareholders or debenture holders. He further submitted that it is incorrect to attribute motive that the warrant-holders were denied the right to exercise their option by not extending the date even though they were prepared to exercise their option and to pay the money with interest. The fact of the matter is that when the option was to be exercised by the warrant-holders the shares of the respondent No. 1 company were being traded in the market in the range of Rs. 15 to 17 per share. Thus, the petitioners in their commercial wisdom at that time did not exercise their option and having not exercised the option they have lost all the rights which were available to the warrant-holders. He further submitted that even after sending a reminder notice to all the tradeable warrant-holders who had not exercised their option for equity shares, the petitioners did not apply for equity shares during the extended period, ie., between 7-8-1998 and 5-9-1998 due to tight financial position. He further submitted that now to say that they are prepared to exercise their option and pay interest at the rate of 21 per cent is mainly on account of prevailing market price of the shares. He further submitted that it is not. correct to say that in allotting the shares the promoters have been benefited. These shares have been allotted to them in pursuance to the undertaking given by the promoters and which was duly reflected in the letter of option and that unexercised portion of the warrants would be allotted to the promoters of the company. He further submitted that the petitioners have argued that the company has not followed the procedure for the forfeiture of the shares as is contemplated in the articles of association of the company. He submitted that there is no question of forfeiture of any shares or debentures. It is a case where warrant-holders had a right to apply for the shares and once they have not done so, their right has extinguished. The forfeiture comes in case if the shares or debentures are partly paid and there is a failure to pay allotment money or any other calls made by the company on such shares or debentures. He further submitted that the warrants are akin to the right issue where the shares offered to the members of the company on the rights basis. Further he emphasized that what is necessary is one has to apply for the shares and they are to be allotted and then only question of forfeiture comes. The provisions of section 111A can only be invoked in case when there is refusal on the part of the company to register the transfer of shares on 'sufficient cause' or where the shares have been transferred in violation of the grounds mentioned in sub-section (3) of section 111A. In the present case neither there is a case of refusal to transfer the shares in favour of the petitioners nor any shares have been registered in violation of the grounds enumerated in sub-section (3) of section 111A. The whole dispute arises on account of non-allotment of shares to the warrant-holders who had not applied for the same at the relevant time, same cannot be covered under section 111A(3) and the cases which have been relied upon by the petitioners' counsel are in respect of forfeiture of the shares or in respect of the failure on the part of the company to follow the procedure of the forfeiture of the shares or where there is any mala fide in exercise of the powers of forfeiture. He further submitted that the petitioners' counsel has rightly pointed out that the powers of this Board are not of a summary nature under section 111 or section 111A, however, he submitted that this Board is empowered only to adjudicate for the transfer of shares, in cases where the company has refused to register the transfer of shares or involves rectification of the register of members only on the grounds which are available under sub-section (3) of section 111A. He submitted that no such case has been made out for rectification of register of members on any of those grounds.
11. After both the counsels for the petitioners as well as the respondent completed their arguments, the petitioner Sanmukhlal Rangildas Ghael submitted that the conduct of the board of directors of the company in not extending the time and thereby denying the warrant-holders their right to exercise their option, is mala fide, oppressive and with the intention to benefit the promoters of the company. He further submitted that the promoters have manipulated the price of the share in the market and thereby warrant-holders were prevented from exercising their right due to the depress value of the shares prevailing in the market at that time. He further submitted that conduct of the respondent No. 1 company needs to be looked into.
12. We have considered the various pleadings and averments made by the parties. The petitioners case is that they have acquired the tradeable warrants from market for consideration. These warrants are freely transferable and thus they have all the rights which are available to the shareholders and/or debenture holders. According to them, they had asked for the extension of time for exercising of their option to subscribe for the shares which the board of directors of the company or Committee thereof ought to have considered judiciously. According to them the company has failed to follow the procedure prescribed for forfeiture of the shares and as such the company's proceeding to allot the shares to promoters or third parlies against unexercised option by the warrant-
holders is mala fide and not in the interest of the company. The respondent-company on the other hand have stated that the so-called warrants are neither shares nor debentures. It was further submitted that these warrants are neither warrants within the meaning of section 114 or 115 because these warrants have not been exchanged/issued in lieu of fully paid-up shares of the respondent-company. These warrant-holders according to respondent-company had a right to get the shares allotted against the warrant by exercising their option and on payment of consideration. According to the respondent-company the provisions of section 111A are not attracted as the warrant-holders are not entitled for any relief as contemplated in the said section. We have carefully gone through the rights available to the tradeable warrant-holders as indicated in the prospectus issued in August, 1993 in respect of triple option convertible debentures. According to our understanding the warrant-holders had a right to get the shares allotted by exercising right as and when called upon to do so by the respondent-company on payment of the amount due on such shares. In other words only those warrant-holders who had exercised the option and had paid for shares were entitled for the allotment of the shares. In case those warrant-holders who did not exercise their option for allotment of the shares their right has extinguished. Beyond this they had no right in the company as is generally available to the shareholders or debenture holders of the company. Thus, according to us the warrant-holders were neither shareholders nor debenture holders of the company as per the provisions of the Act, or the articles of association of the company. In this case the question of any forfeiture also does not arise as the forfeiture come into play if the shares or debentures are allotted and there is a failure on the part of the allottee to pay the allotment money or call money, as and when called for by the company. Therefore, the question of company's adhering to the procedure prescribed under the Act, for forfeiture does not arise. In the present case, the petitioners have admittedly not-exercised their option and paid for within the stipulated period, hence the question of allotment of shares to them does not arise. It was open to the company to allot the unsubscribed portion of the shares due to non-exercise of option by warrant-holders in the best interest of the company, In this case the promoters had given an undertaking to subscribe for such unsubscribed portion of shares. The petitioners counsels have submitted during the course of hearing that the petitioners are prepared to pay for the shares against the rights available to the warrant-holders along with the interest as may be decided by the board of directors of the company. It was submitted that the company's proceeding to allot the shares to promoters and third parties at Rs. 20 per share and at the same time denying the right to wan-ant-holders, who are prepared to pay the interest, is not in the interest of the company and was intended for the benefit of the promoters. The promoters have been allotted the shares at the same price at which it was available to the warrant-holders. It is only when the warrant-holders did not exercise their rights, the board of directors had proceeded to allot the shares to the promoters. It was submitted during the course of arguments that when the warrant-holders were asked to exercise their right for share at Rs. 20, the shares were available in the market in the range of Rs. 15 to Rs. 17. Thus, the warrant-holders in their commercial wisdom did not exercise the rights and the promoters were required to subscribe for such shares at Rs. 20 in terms of the undertaking given by them. The petitioners' counsel had been harping that the petitioners are prepared to pay for the shares along with the interest due whereas the shares have been allotted to promoters without any premium or interest. We are not in a position to appreciate this point for the reason that promoters were allotted the shares at the same price at which it was offered to the warrant-holders and they were offered only due to non-exercise of rights by the warrant-holders and pursuant to the understandings given to subscribe for such unsubscribed portion of the shares.
13. Thus, according to us, there is no force in the argument that now warrant-holders are prepared to subscribe for the shares along with the interest due. The present proceedings have been taken out under section 111A which gives cause of action either on the company's refusal to register the transfer of shares or requires rectification of register of members if the shares have been transferred in violation of the conditions enumerated in sub-section (3) of section 111 A. We have already held that the tradeable warrants in question are neither shares nor debentures; nor there is a case of refusal to register the transfer of shares or debentures or rectification of register on transfer of shares /debentures. The question of invoking the provisions of section 111A in the present case does not arise. The dispute in question is outside the ambit of section 111A, hence no relief as sought for by the petitioners can be granted to them. The petitions arc accordingly dismissed with no orders as to costs.