Alaknanda Manufacturing And Finance ... vs Bahubali Services Ltd. And Ors. on 30 August, 1993

[Cites 24, Cited by 2]

Company Law Board

Alaknanda Manufacturing And Finance ... vs Bahubali Services Ltd. And Ors. on 30 August, 1993

Equivalent citations: [1996]86COMPCAS291(CLB)

ORDER

1. The Alaknanda Manufacturing and Finance Private Ltd. and eight other petitioners have filed a petition/complaint on September 23, 1992, under Sections 247 and 250 of the Companies Act, 1956, praying for a declaration for investigation to find out the true and relevant facts about 4,75,618 shares of Gammon India Ltd. (GIL) and determine the identity of the true persons who are or have been financially interested about the success or failure, whether real or apparent, of the company or who are or have been able to control or materially influence the policy of the company and also praying for interim orders imposing restrictions in respect of the said shares under Section 250(2) of the Companies Act. It is also alleged in the petition that by transfer of these shares there has been a change in the composition of the board of directors of the company which is prejudicial to public interest as persons who are ostensibly involved in the company have no experience or technical expertise relating to business of the company. It is also alleged that the management is seeking to transfer the shares held by the ostensible owners to some other persons whereby there is likely to be a change in the composition of the board of directors which would be prejudicial to the public interest and detrimental to the interest of the company and its bona fide shareholders. The petitioners have further complained that whereas the 6,75,587 shares lodged by them and their group for registering the transfer were rejected in 1989 on the ground that their induction will be prejudicial to the interests of the company, the directors have indiscriminately registered the transfers lodged by various parties in order to perpetuate themselves in the management of the company. In addition, certain allegations have also been made about GIL management in respect of loss of foreign exchange/improper deployment of funds relating to construction contracts.

2. There are 17 respondents. Respondents Nos. 1 to 16 have become shareholders during the period September, 1988, to February, 1992, and some of them are also at present shareholders. Respondent No. 17 is Gammon India Ltd. At the initial hearing, we gave necessary directions for filing of replies by the respondents. We had also given certain directions to the respondents to file additional information regarding the invest ment in, shares of GIL, sources of finance of the investment, etc. Ultimately, out of 17 respondents, the following did not file any replies or additional information nor were they represented at the hearings.

(a) Respondent No. 1--Bahubali Services Ltd. (Bahubali).

(b) Respondent No. 7--The Motor and General Finance Ltd. (MGF).

3. The following parties though filed their reply and additional information did not argue at the hearings :

(a) Respondent No. 4-Mahavir Fire-Bricks and Insulation Works Private Ltd. (Mahavir Fire-bricks).

(b) Respondent No. 5--Mahavir Refractories (P.) Ltd. (Mahavir Refractories).

(c) Respondent No. 6--Mahavir Business Services (P.) Ltd. (Mahavir Business Services) ;

(d) Respondent No. 3--Excalibur Securities and Financial Trust (P.) Ltd. (Excalibur Securities) ;

(e) Respondent No. 8--Sri Theertha Investments Pvt. Ltd. (Shrec Theertha) ;

(f) Respondent No. 9--Prudential Securities and Financial Trust Private Ltd. (Prudential) ;

(g) Respondent No. 10--Excalibur Consolidated Capital Trust Private Ltd. (Excalibur Consolidated).

4. Ultimately detailed replies and additional information as well as full representation at the hearings were all there, in respect of seven companies, namely, (a) respondent No. 11, Motivala Investment and Company Private Ltd. (Motivala), (b) respondent No. 12, Benaras Beads Limited (Benaras Beads), (c) respondent No. 13, Prashant Glass Works Private Ltd. (Prashant Glass), (d) respondent No. 14, Mogra Investment Private Ltd. (Mogra), (e) respondent No. 15, Lakhani Engineering Works Private Ltd. (Lakhani), (f) respondent No. 16, Cuckoo Trading Private Ltd. (Cuckoo), (g) respondent No. 2, Bhavi Investments Ltd. (Bhavi), besides the company, viz., Gammon India Ltd. (GIL). We gave further opportunity to respondents Nos. 1 and 7, viz., Bahubali and MGF, to file replies, etc. We also called for information from the Registrar of Companies.

5. On behalf of the respondents preliminary objections were raised. Shri Chinoy, appearing on behalf of GIL, argued that the petitioners were involved in corporate takeover since 1986 and in the judgment given by the Company Law Board on September 18, 1990, in the proceedings under Sections 247 and 250 of the Companies Act, initiated by Bhavi Investments (respondent No. 2) with respect to the shares acquired by the petitioners and certain others in GIL, it was found that the acquisition of shares by the petitioner companies which are directly or indirectly under the control of Shri Chhabria was prejudicial to the interests of GIL and also public interest and, therefore, the Company Law Board issued orders freezing the voting rights of eight petitioner companies in respect of the disputed shares. He also pointed out that by orders dated November 26, 1991, and January 22, 1992, under Section 22A of the Securities Contracts (Regulation) Act, 1956, the Company Law Board confirmed the decision of the board of directors and rejected the transfer of shares in favour of the petitioner companies in respect of the same shares. It was contended that these findings are binding on the petitioners as they are party to the above petitions/proceedings. He pointed out that the allegation that as many as seven changes have been made in the board of directors in contravention of the order dated September 18, 1990, of the Company Law Board is incorrect as all these changes in the board of directors were approved by the Company Law Board.

6. Regarding grounds of petition, Shri Chinoy pointed out that the three allegations of mismanagement made in para 26(1), (2) and (3) were also before the Bombay High Court and in that proceeding the advocate for the petitioners did not press for the twq allegations and the High Court of Bombay rejected the contention of the petitioners in respect of the third allegation. He pointed out that the other allegations of mismanagement made in paras 26(4) to (9) are too general and no specific allegations have been made. According to him, there are hardly any new facts in the present petition apart from paras 17(7) and 24(2) relating to Banaras Beads Ltd., which are hardly relevant. Shri Chinoy also pointed out that the petition does not fulfil the essential requirements of sections 247 and 250, as there is neither any corporate interest or public interest mentioned in the petition. It was also pointed out that all the allegations made in the present petition were before the Company Law Board or the Bombay High Court and on these issues final judgments were pronounced. He pointed out that the order dated September 18, 1990, of the Company Law Board has become final as no appeal is pending and the Division Bench of the Bombay High Court had also rejected the petitioners' allegations. Therefore, the petitioner is barred to raise the same issues as earlier Company Law Board order and orders of the High Court of Bombay will act as res judicata. Shri Chinoy further pointed out that since all the facts up to September, 1990, were already before the Company Law Board and the complaint regarding acquisition of shares by some of the respondents has been already held by the Company Law Board as a "defensive reflex action against the take-over attempt of Chhabria", there is no adequate justification for filing the present petition. Shri Chinoy pointed out that the petition also suffers on account of non-disclosure to the effect that these matters were raised in the earlier proceedings between the parties. Shri Chinoy further pointed out that there is a clear suppression of facts as there is no mention in the petition about the decisions of the Bombay High Court. The jurisdiction of the Company Law Board under Sections 247 and 250 is a discretionary jurisdiction and the Company Law Board should not take cognizance of this petition as there is deliberate suppression of facts and by passage of time, the petitioners have acquiesced and there is no cause of action and, therefore, discretion should not be exercised in favour of the petitioners. Shri Chinoy also submitted that even if the power is considered as one suo motu, as a demurrer he referred to the guidelines issued by the Central Government in connection with the exercise of the powers under Section 237 of the Companies Act and pointed out that these, guidelines are also applicable in respect of use of power under Section 247. In support of this, he also referred to Ramaiya's Commentary on Company Law (11th Edition) page 741. While pointing out that all these matters raised in the present petition were also before the Company Law Board, in the proceedings under Section 247/250 filed by Bhavi Investments, Shri Chinoy admitted that there were no oral arguments in the proceedings as these issues and these matters were only stated in the written statements filed in reply to the statement filed by GIL regarding the pattern of shareholding in GIL.

7. Shri G. Subramaniam, senior advocate, appearing for Bhavi Investments and Shri T. R. Andhiyarujina, senior advocate, appearing for Moti-wala, Banaras Beads and Prashant Glass reiterated the points made by Shri Chinoy and pointed out that no new facts have been alleged in the petition and no corporate interest or public interest is involved in the present petition requiring exercise of discretionary powers of the Company Law Board. Shri T. R. Andhiyarujina pointed out that the essential elements of the provisions of sections 247 and 250 are not fulfilled in respect of these allegations as there is already a change in the management, and, therefore, there is no ground for exercise of the powers under Section 250. He also referred to Palmer's commentary to elaborate the situations in which restrictions can be placed on shares to find out the true facts. He stated that since the respondents have already filed the information as per directions given by the Company Law Board, there is no case for exercise of the powers under Section 250(1) and (2). He also stated that the respondents are ready to extend full co-operation to the Company Law Board if any further information is required by the Company Law Board.

8. Shri A. K. Sen, senior advocate, appearing on behalf of Mogra and Lakhani, reiterated the objections raised by Shri Chinoy and pointed out that Section 247 contemplates an objective test and not a subjective test for forming opinion. It is not enough to have reasonable ground but there should be good reasons for exercise of the powers by the Company Law Board. He also pointed out to the Government guidelines in respect of exercise of these discretionary powers and stated that since the essential ingredients required under Sections 247 and 250 are absent, the petition should be dismissed in limine. Shri Sen also pointed out that the present petition should be rejected on the ground of delay as in the petition, the petitioners have requested for investigation by the Company Law Board in the share transfers which took place in October/November, 1988, and all the transfers, except transfers to Prashant Glass, Mogra, Lakhani and Cuckoo were disclosed in the earlier proceedings before the Company Law Board, He pointed out that since the third party interest has been created and the petitioners had chosen earlier not to challenge the transfers, it is not permissible for the petitioners to raise these old matters again in view of the earlier orders of the Company Law Board. He also supported the arguments advanced by Shri Chinoy that the petition is not maintainable on the principles of res judicata and constructive res judicata as the petitioners had opportunity in the earlier proceedings to raise objections which they are now raising and the failure to raise such objections or appeal against the final orders of the Company Law Board or the Bombay High Court precludes the petitioners from raising it now as third party rights have been created.

9. Shri S. B. Mookherjee, senior counsel appearing on behalf of the petitioners, stated that on behalf of the respondents preliminary objections regarding the maintainability of the petition have been raised on the ground of res judicata/constructive res judicata, demurrer, delay and suppression of facts. Regarding res judicata and constructive res judicata, Shri Mookherjee argued that the present proceedings are not adversary proceedings and the subject-matter of the present petition was not heard in earlier proceedings. He pointed out that there is no lis between the parties. Shri Mookherjee also pointed out that the proceedings under Section 247 are suo motu proceedings and the parties to the present proceedings are different from the parties which were in the earlier Company Law Board proceedings or proceedings before the Bombay High Court and the subject-matter is also not the same. Referring to the provisions of sections 11 and 141 of the Civil Procedure Code, 1908, and the Company Law Board Regulation 47 and the provisions of Sections 10E (4C) and (5) of the Companies Act, 1956, Shri Mookherjee argued that the law is very clear on this matter and as essential ingredients required for application of the principle of res judicata are absent the application is not to be barred on that principle. Shri Mookherjee also referred to the documents filed in the earlier Company Law Board proceedings initiated by Bhavi Investments and pointed out that the last hearing was held on August 51, 1990, and on that day as per the directions of the Company Law Board, GIL filed the shareholding pattern of the company and in that connection, certain submissions were made in the written affidavit filed on September 6, 1990, and GIL had filed a written rejoinder on September 10, 1990. In view of this, it is clear that as the hearing was over on August 31, 1990, these matters were neither gone into by the Company Law Board nor the matters raised in the affidavit of September 6, 1990, were issues before . the Company Law Board. Shri Mookherjee also pointed out that it will not be correct to assume that these matters were before the Company Law Board as the Company Law Board order makes a reference only to 8 per cent. shares of the respondents, while in the present proceedings, the subject-matter relates to 22 per cent. shares of GIL acquired by them. He also argued that the observations in the order of September 18, 1990, about acquisition of some of the shares, which are the subject-matter of the present proceedings, as a "defensive reflex action" cannot be considered as a finding of the Company Law Board. Referring to the decision of the Bombay High Court, relating to the matters in paras. 26(1), 26(2) and 26(3), Shri Mookherjee pointed out that these matters do not relate to acquisition of GIL shares and sources of finance, which are the main issues raised in the present proceedings. Shri Mookherjee contested the arguments advanced by the respondents about the applicability of the departmental guidelines on Section 237 of the Companies Act as also applicable to matters in the present proceedings under Section 247. Shri Mookherjee pointed out that prior to the 1988 amendment, the Company Law Board was exercising the power as a delegate of the Central Government. However, from May 31, 1991, the Company Law Board have become an independent authority an.d not as delegate of the Central Government and, therefore, the departmental guidelines will not be applicable. Shri Mookherjee also referred to Order 14, Rule 2 of the Civil Procedure Code, 1908, and pointed out that the issues involved in the present proceedings are not questions of pure law but also of fact and, therefore, cannot be dismissed at the preliminary stage. In this connection, Shri Mookherjee referred to the decision of the Supreme Court in Major S. S. Khanna v. Brig. F. J, Dillon, AIR 1964 SC 497, in which it was held that under Order 14, Rule 2, where issues both of law and of fact arise in the same suit, the court should try all the issues especially when the decision on issues even of law depend upon the decision on issues of fact and not to do so would result in a lop-sided trial of the suit. He also referred to the decision of the Supreme Court in D. P. Maheshwari v. Delhi Administration, AIR 1984 SC 153, 154 in which it was observed "Tribunals and courts who are requested to decide preliminary questions must, therefore, ask themselves whether such threshold part-adjudication is really necessary and whether it will not lead to other woeful consequences". He also referred to the decision of the Supreme Court in A.B. Ali v. Gallapa, AIR 1985 SC 577, in support of his arguments that he cannot be non-suited on the ground that he had failed to raise these matters in earlier proceedings when he had the opportunity.

10. Regarding the respondents' arguments on demurrer, Shri Mookherjee pointed out that action under Section 247(1A) is suo motu and since there are no pleadings required, the principle of demurrer will not be applicable'. He referred to various paragraphs of the petition and pointed out that the complainant has placed material facts before the Company Law Board so as to enable the Company Law Board to exercise its powers for ordering investigation and under Section 250(1) what is required is only satisfaction of the Company Law Board. Shri Mookherjee also pointed out that Section 250 has been amended in 1960 and the test prescribed under the earlier provision that "the difficulty (in finding relevant facts) is due wholly or mainly to the unwillingness of the persons concerned or any of them to assist the investigation" is now deleted.

11. Regarding suppression of material facts, Shri Mookherjee pointed out that this ground can be taken only in cases where an ex parte order has been obtained by suppressing the facts. In support of this he referred to the decision in King v. General Commissioners for the purposes of Income-tax Acts for the District of Kensington [1917] 1 KB 486 and also the decision dated July 15, 1987, of the Calcutta High Court in respect of Sinclair Hotels and Transportation Ltd. In the first case, it was held that the court was deceived by the affidavit filed in support of the application for the rule nisi, and, therefore, the court without further discussion of merits refused to make absolute the rule nisi. In the decision of the Calcutta High Court it was held that when there is a statutory right, even if an interim order was obtained by suppression of material facts, it cannot be dismissed in limine as not maintainable without going into the merits of the case. Shri Mookherjee argued that in view of this, the suppression of material facts cannot be a ground for dismissing the petition in limine. He further pointed out that while the Company Law Board decision has been referred to in the petition, the decision of the Bombay High Court, which only relates to points relating to mismanagement, is not a material fact so far as grounds made out in the petition for existence of good reasons to find out the true identity of the owner of these shares are concerned.

12. Regarding the arguments of delay, Shri Mookherjee referred to the text of Section 247(1A) and pointed out that the section provides for looking into past transfers of shares and, therefore, such plea is not barred by limitation. He also pointed out that the main question involved is regarding the illegality of transfers and, therefore, since no personal interest of the petitioners is involved, the principle of laches/acquiescence will not be applicable. Shri P. C. Sen, senior advocate, also appearing on behalf of the petitioners pointed out the provisions of Section 250A to state that . it is clear that an investigation may be initiated under Section 247 notwithstanding that there is a voluntary winding up or a petition under Section 397/398 is pending and no investigation so initiated can be stopped or suspended. It is thus clear Shri Sen concluded that the petition cannot be dismissed in limine on the grounds of res judicata or suppression of facts especially since these are not adversary proceedings. He also referred to the decision of the Supreme Court in Mathura Prasad Sarjoo Jaiswal v. Dossibai Jeejeebhoy, AIR 1971 SC 2355, 2357, in which it was held "But the doctrine of res judicata belongs to the domain of procedure, it cannot be exalted to the status of a legislative direction between the parties so as to determine the question relating to the interpretation of enactment affecting the jurisdiction of a court finally between them, even though no question of fact or mixed question of law and fact and relating to the right in dispute between the parties has been determined thereby.".

13. In reply, Shri Chinoy argued that action under Section 247 can be taken only in a proceeding before the Company Law Board. Thus, if a petition under Section 250 is not maintainable, the jurisdiction of the Company Law Board in Section 247 cannot be invoked. He pointed out that under Section 250(1) the petitioners have to make out a case stating good reasons for investigation and there are no good reasons stated in the petition. He pointed out that this is a discretionary remedy and no corporate interest or public interest is involved in this petition and, therefore, the petition should be dismissed in limine.

14. We have carefully considered the averments made by the learned advocates on behalf of the petitioners and the respondents. The issue involved in the present proceeding relates to the shares acquired by the respondents, while the issue in the earlier Company Law Board proceedings was about the shares acquired by the Chhabria group. The parties in both the proceedings are different. We do not think that there was any suppression of material facts which has resulted in misleading us. Some instances of mismanagement and the litigation in the Bombay High Court do not relate to the ownership of shares which is the question before us. Neither any interim orders have been obtained by the petitioners by such a deceit, if any. It is also a fact that while acquisition of some of the shares involved in the present proceedings was mentioned in the earlier proceedings after the hearing was concluded, neither were any parties heard on these matters nor did the Company Law Board have an opportunity to evaluate and decide these allegations. The statement that these shares were acquired as a defensive reflex action is just an observation and not a fact finding relating to the acquisition of shares. Since the issues involved in the two proceedings are different, the question of res judicata does not arise in this case. There is also no suppression of material facts.

15. In view of this we hold that the petition is maintainable. While coming to the conclusion we have also been guided by the observations of the Supreme Court in D.P. Maheshwari v. Delhi Administration, AIR 1984 SC 153, which states that Tribunals and courts should consider whether part adjudication is really necessary to avoid woeful consequences.

16. We heard Shri Mookherjee on the inconsistencies in the replies filed by the respondents and GIL, the doubtful nature of the resources indicated by the respondents, further acquisition of shares over and above indicated in the complaint and violations of the provisions of the Companies Act. Mr. Mookherjee pleaded that even after availing of the opportunity some of the respondents have failed to furnish the information and, therefore, a stage has come to impose restrictions mentioned in Section 250(2) especially freezing the voting rights and restraining respondents Nos. 2 and 11 to 16 from further transferring the shares and creating third party rights. This was opposed by counsel for the respondents on the ground that the respondents are ready to give any further information within a week and also made a statement that they are not intending to transfer any shares of GIL held by them. In view of this and as the next hearing is fixed on May 11 and 12, 1993, we did not think that a stage has come when the restrictions mentioned in Section 250(2) ought to be imposed. In exercise of the specific power available under Section 248, we issued further detailed directions to the respondents to file information relating to the exact number of shares acquired, sold and at present held by them, consideration paid/received for the same, names of transferor/ transferee, details of resources used for the same, loans raised and terms of such loans including guarantee/surety given, audited balance-sheets for the relevant period and also changes in the shareholders register/members of the board of directors in respect of certain companies. We also directed GIL to bring the relevant members register, annual general meeting minutes since the 66th annual general meeting and information regarding voting pattern at such meetings. The purpose of calling for this information was to come to a conclusion about the ownership of the company, if such information would be adequate enough.

17. The main contention of the petitioner is that by adopting dubious methods the various corporations involved in the frequent transfers of GIL shares are manouvering to hide the identity of the true owner in respect of large number of shares and the modus operandi having remained unquestioned and unchallenged, there is no deterrent for the management to effect further transfer of the shares to confer legal rights or beneficial interest in favour of the third parties to the detriment of the interests of the shareholders, interest of the company and public interest.

18. It is also contended that since the identity of the real owner is being carefully concealed, it is necessary to enquire into the sources of funds by the various companies and the controlling hand behind the said companies and the nexus between the present board of directors of GIL and the said companies. It was submitted that there are good reasons to appoint one or more inspectors to investigate and report on the membership of GIL in respect of the impugned shares, for the purpose of determining the identity of the true persons who are or have been financially interested in the success or failure of the companies and who are or have been able to control and materially influence the policy of the company, by reason of the control of the aforesaid shares.

19. In support of the above prayer for investigation the petitioners have also set out certain alleged financial embezzlements, fraud and mismanagement detrimental to the interests of shareholders, employees and public interest. These include avoidable payment in foreign exchange for sub-contracts in connection with the construction of a 3-star hotel in Moscow ; misuse of an imported tunnel-boring machine by leasing out the machine to another contractor for contract job instead of taking the job by the company itself; investment of advances received to the extent of Rs. 6.5 crores in intercorporate deposits in unknown and unstable companies in which the present managing director is directly or indirectly interested ; alleged steps taken by the management to dispose of some valuable immovable properties ; mooting of the proposal to acquire odd lot shares of the company to the extent of 8 per cent. of the capital in order to consolidate the position of the management; initiating legal action through its employees against the Reserve Bank of India so tbat restrictions can be placed on "Elcano investments" belonging to the petitioners' group from acquiring 18 per cent. of the shares from Andrew Gammon and family and preventing and rejecting registration of the shares by the petitioners' group as well as considering issue of rights shares to reduce the percentage holding of the petitioners.

20. It is also contended that the petitioners were prevented from getting their majority holding registered and the respondents are retaining the control with a minority holding of about 22 per cent. It is also submitted that due to the acts of mismanagement, the senior executives of the company have resigned and left the services. The petitioners have submitted that in view of the above facts there are good reasons to investigate into the membership of GIL and to identify the true persons who are in control of the impugned shares. The allegations are three-fold, namely,

(a) allegations of frequent changes in shareholding camouflaging the identity of the true persons financially interested and controlling the company ;

(b) allegations of mismanagement of the affairs of the company ; and

21. The facts as emerging from the petition and from the additional information are as follows :

During 1988-92, a total of 5.31 lakhs equity shares of GIL which are the subject-matter of this petition, out of the paid-up capital of 21.64 lakhs equity shares, constituting 22 per cent. were changing hands. Out of this, 0.72 lakhs shares were held by Bhavi in 1989, when proceedings were instituted by that company under Section 247/250 against the petitioners.

22. At the time of filing of the petition, these 5.31 lakhs shares were being held by the following seven entities :

(figures in lakhs) (figures in lakhs)

1.

Banares Beads 0.25

2. Motivala 0.24

3. Prashant 0.90 1.39 1.39 (Banares group)

4. Mogra

1.00

5. Lakhani 0.80

6. Cuckoo

1.05

7. Bhavi _ 1.07 5.31

23. In the acquisition and transfer of these shares during 1988-92, a large number of corporate entities were involved which have been made respondents in the present proceedings. However, GIL shares held by the respondents, Mahavir Fire-bricks, Mahavir Refractories and Mahavir Business Service Private Limited, were disposed of prior to 1989. Similarly, though the acquisition of GIL shares made by Peerless General Finance and Investment Co. Limited, which is not a party to the present proceedings and acquisition by Motor and General Finance Limited (MGF), respondent No. 7 (who has not filed any reply) falls during this period of 1989-92, there are no specific allegations against these corporate entities and they Have been mentioned only as they were holders of these shares for some time which at present are held by seven entities as mentioned above. Similar is the case of Bahubali, respondent No. 1. Thus, against these five respondent companies, viz., the three Mahavir Companies, MGF and Peerless, neither there are any specific allegation nor any facts have emerged during the hearing except that some of the impugned shares passed through their hands. The corporate entities whose acquisition and transfer of GIL shares became a focal point of discussion can be divided conveniently in the following groups :

(i) Kumri group of companies.-Prudential, Excalibur Securities and Excalibur Consolidated were all promoted by Mr. and Mrs. Kumri in 1987-88. The paid-up capital of these companies was Rs. 200, Rs. 2,000 and Rs. 10,000, respectively, and they have acquired, respectively, 1,89,751/ 1,84,404 and 1,10,919 GIL shares. The purchases of these shares were financed by raising loans from corporate entities including some of the sister companies. Practically the entire holding by all these three companies subsequently came to be held by the seven entities mentioned earlier except one share held by Prudential and 17 shares held by Excalibur Consolidated. At the time when GIL shares were held by these companies, one or more of the directors of GIL, namely, Sri H. S. Nageshwaran, Sri N. R. Krishnan, Sri T. N. Subba Rao happen to be inducted into the board of directors of these companies and they ceased to be directors, once the GIL shares were transferred. These three companies did not appear to hold any other substantial investment and in the sale and purchase of GIL shares, they have suffered substantial losses.

(ii) Sri Theertha Investment Pvt. Ltd.--This company was promoted by Shri Hari Om Lal Pandya in 1987 and the paid-up capital of the company is only Rs. 18,000. It has acquired 45,954 GIL shares during November, 1988--January, 1989, at a cost of about Rs. 75 lakhs and the acquisition was financed by loans raised from various corporate entities. The details of these remittances are :

6-12-1988 Abhim Investments Pvt. Ltd. - Rs. 25 lakhs.

8-12-1988 Sopan Leasing Pvt; Ltd. - Rs. 25 lakhs.

6-1-1989 Abhim Investments Pvt. Ltd. - Rs. 26.33 lakhs.

24. The funds borrowed were ultimately paid from the sale proceeds of the shares which included a receipt of Rs. 65,00,000 from Peerless General Finance and Investment Co. Ltd. The shares were partly sold to Peerless in April, 1989, and partly to the Kumri group in November, 1989, and subsequently all came to be held by seven entities mentioned above. In this case also when GIL shares were held by the company, GIL directors, Shri H. S. Nageshwaran and Shri N. R. Krishnan, were inducted in the board of directors and they ceased to be directors once the shares were sold. The company has claimed that it has made a small profit of Rs. 10,000 in the purchase and sale of GIL shares.

25. From the additional information, it is evident that the payment of Rs. 50 lakhs towards the cost of the shares was made out of remittances received from Abhim Investments Pvt. Ltd. From the additional information filed by Cuckoo (respondent No. 16), it is evident that Abhim Investments Pvt. Ltd. is an associate company of the Rajan group and it is also stated to be holding 7,500 shares of GIL purchased on May 11, 1992.

26. Having dealt with the facts relating to four respondent companies which were used for temporary parking of GIL shares, we now come to the facts relating to seven entities which are at present holding GIL shares which are the subject-matter of this petition :

I. Banares group :

The Banares group consists of three companies, namely, Banares Beads, Prashant Glass and Motivala, and they all belong to the Gupta family as these companies were promoted by members of the Gupta family and the controlling directors also belong to the Gupta family. These companies were promoted between 1980 and 1986, much before the date of acquisition of GIL shares. Banares Beads was incorporated in 1980 and its main business is export of beads. Prashant Glass was incorporated in 1982 and its main business was manufacture of glass. Motivala was incorporated in 1986 and its main business is investment of funds. All these companies were incorporated at Varanasi in the State of U. P. and their paid-up capital is, Banares Beads Rs. 149 lakhs, Prashant Rs. 25 lakhs and Motivala Rs. 81 lakhs. As on the date of the acquisition of GIL shares, these companies had substantial net worth being their own funds. The acquisition of shares has been financed from their own resources and borrowings from group companies/family members and relatives. The object of the investments in GIL shares is stated to be to prevent Chhabrias from taking over the management of GIL. Shri Ajit Kumar Gupta, who is the promoter director of this company is also a representative on the board, of directors of GIL from January 30, 1991.

II. Bhavi Investments Ltd :

Bhavi Investments Ltd. is a public limited company whose shares are listed on the Bombay Stock Exchange and was incorporated on December 6, 1977. The company was promoted by Shri H. M. Sapat, Dr. P. M. Sapat, Shri S. R. Sood, Smt. S. H. Sapat, Shri D. P. Pawar, Smt. S. P. Sapat and Shri V. Madhavlal. The first three of the above are also the first directors. The present directors of Bhavi are Shri Ghanshyam Kakani a business man, Shri Arun Arora, chartered accountant and Shri C. R. Dugar, chartered accountant.

During October-November, 1988, Bhavi held 72,042 shares costing about Rs. 105.56 lakhs of GIL. In addition, the company acquired directly from resident individual shareholders 35,000 shares costing about Rs. 56 lakhs thereby raising their holding to 1,07,042 shares. According to the additional information filed by the company, during the year 1988-89 when the GIL shares were acquired, the company has obtained unsecured loans to the extent of about Rs. 4.51 crores from the Premier Consolidated Capital Trust of India Ltd. It is also stated that during 1992-93, when additional 35,000 shares were acquired at a cost of about Rs. 56 lakhs unsecured loans were obtained from Mogra Investments Pvt. Ltd.--Rs. 12 lakhs, Prudential Securities and Financial Trust Pvt. Ltd.--Rs. 56 lakhs, besides Rs. 50 lakhs from Shreejee Real Properties Pvt. Ltd. As per the affidavit filed by the company (Bhavi) Shreejee Real Properties Pvt. Ltd. is a company associated with Shri N. C. Dave who is an industrialist of repute (having been the chairman of Swan Mills Ltd.) and who has also been appointed as director of GIL on January 30, 1991.

From the above unsecured loans the cost of Rs. 56 lakhs has been met. The directors' report for the year ended March 31, 1990, also indicates that Shri T. N. Kumri was one of the directors of Bhavi during the year 1988-89. The additional information also indicates that as on March 31, 1992, besides loans from Prudential Securities, the company had also outstanding unsecured loans of Rs. 28 lakhs from Abhim Investments Pvt. Ltd. an associate company of the Rajan group.

III. Mogra, Lakhani and Cuckoo (MIC group) :

Mogra, Lakhani and Cuckoo acquired GIL shares from the market in 1991-92. Mogra was incorporated in 1991, Lakhani in 1988, and Cuckoo in 1991. Mogra was promoted by Daves, Lakhani by Lakhanis and one Shri A. R. Poojari and Cuckoo by Rajans. The paid-up capital of these companies on the date of acquisition of GIL shares was Rs. 200, Rs. 30 and Rs. 200, respectively. The present board of directors of Mogra is under the control of Hingorani and the original promoters are no longer directors in the company. One of the present directors is a distant relative of the deputy managing director of GIL. In Lakhani and Cuckoo, there is no change in the management control. All the companies have categorically stated that the object of the acquisition of GIL shares was to prevent the Chhabrias from taking over the management of GIL.

27. The total cost involved in the acquisition of GIL shares by "Mogra" and "Lakhani" was about Rs. 100 lakhs each and for Cuckoo it is about Rs. 130 lakhs. All the three companies appeared to have obtained financial accommodation from the selling broker for a short period and, thereafter, each company has resorted to a loan of Rs. 100 lakhs from other share brokers for a few more months. These loans from share brokers were repaid by means of intercorporate loans from certain other companies not belonging to the group companies. The names of these lending companies feature in all the three companies at some time or the other. Yet another feature is that in the two companies, namely, Lakhani and Cuckoo, the source of finance includes substantial advances received against orders for supplies. In the case of Lakhani, an advance of Rs. 50 lakhs was obtained against order for supplies from Khaitan Agro Limited which was ultimately repaid with the cancellation of the order. In the case of Cuckoo the advance of US $ 4,50,000 (Rs. 1.30 crores) received on December 23, 1992, relates to an export order of leather jackets, T. shirts, artificial jewellery of Rs. 2.6 crores from Tokia Trading Investment Ltd. of West Germany and this order is to be executed by the last quarter of 1993. In the case of Mogra, the inter-corporate loan was ultimately repaid by raising the paid-up capital in stages whereas in the case of Cuckoo the advance was still outstanding.

28. After carefully perusing the averments made in the petition as well as the additional information supplied by the respondents as per our directions and further keeping in view the provisions of sections 247 and 250 of the Companies Act, 1956, the following two main issues emerge for our decision.

(i) Whether there is likelihood of a change in the composition of the board of directors of the company consequent upon transfer of shares (already made, likely to be made) and if so whether imposition of restrictions is warranted.

(ii) Whether it appears to the Company Law Board that the true persons who are or have been--

(a) financially interested in the success or failure of the company are different from the apparent shareholders ;

(b) able to control or materially influence the policies of the company are different from the persons who are apparently in the control of the management of the company ; and if so whether it warrants a declaration for investigation under Section 247(1A), with or without restrictions as provided under Section 250(2) of the Act.

29. The arguments advanced on behalf of the petitioners mostly relate to the alleged presence of mysterious persons behind the share transactions. Shri S. B. Mookherjee, senior advocate, illustrated the charge of wrongful registration of transfers made by the management which were convenient to them. For instance, he stated that the transfers from the Poddar group to the Kumri group, which ultimately got transferred to the Banares group/MLC group, were done much beyond the validity period as stipulated in Section 108 of the Companies Act. Similarly, the transfer from Peerless General Finance and Investment Co. Ltd. is evidenced by transfer deeds in which there is a substantial alteration in the consideration. He also pointed out that there has been transfer of shares from Shri T. N. Subba Rao, managing director, before his stepping down from the position, which indicates the change of management. He also referred to violation of Rule 40A of the listing agreement in respect of share transfers in favour of Cuckoo and the violation having been overlooked while on the same ground share transfers in favour of the petitioners were earlier rejected. Shri Mookherjee alleged that the impugned share transfers were consequent to misuse of deposits/public funds for financing the purchase of shares particularly by the Peerless Finance and Investment Co. Ltd. and even use of the company's own funds by routing the same through a supplier as intercorporate deposits for purchase of its own shares.

30. Shri Mookherjee pointed out that the facts submitted by the respondents reveal certain inconsistencies with regards to the consideration involved in transfer of 1,79,715 shares from Prudential to the MLC group. Shri Mookherjee further pointed out that there is a common pattern in acquisition of shares and there is a close involvement of the directors of GIL in acquisition and transfer of these shares as is evident from changes in the directorship of the Kumri group companies and Sri Theertha Investments. Shri Mookherjee submitted that there is a common motive in all the acquisitions, namely, to stall the Chhabrias from taking over GIL. He pointed out that losses have been incurred by the transferee companies in the process of acquisition and subsequent transfer, which reflects the real motive behind the acquisition and the respondents appear to have meticulously worked out the percentage they required to stall Chhabrias from acquiring control of GIL. Referring to the consideration amount paid for acquiring these shares, Shri Mookherjee pointed out that the acquisition of shares was made at exorbitant prices even after knowing the litigations in which the company was involved and these investments cannot be of a genuine investor who would not stake his funds in such a situation unless there is an ulterior motive. It was also submitted that companies with no resources, with meagre paid-up capital as low as Rs. 30 have claimed to have acquired shares, worth crores of rupees. Referring to the additional information submitted by the respondents, Shri Mookherjee submitted that though the sources of finance for purchase of shares were indicated, they are mostly in the nature of unsecured loans which could not have been given to the companies without any net worth, without the backing of the creditworthiness of some party ; even the interest rates compared to the market rates are unusually moderate. He pointed out that Mogra, Lakhani and Cuckoo do not have any business activity and some of the companies do not have any other investments excepting the investment in GIL shares. Thus, the set up is used as a smoke screen by unknown operators. Shri Mookherjee submitted that there is not only a common purpose behind these acquisitions of shares but also it reveals the financial backing of some person without whose help these paper companies would not have been able tb raise funds to purchase shares. Shri Mookherjee concluded his arguments making a strong plea for investigation to find out the mysterious person behind these acquisitions. These suspicious circumstances were also strongly put forth by Shri P. C. Sen, senior advocate, referring to the financial position of Mogra, Lakhani and Cuckoo. He pointed out that "Lakhani" with a paid-up capital of Rs. 30 was formed to take up a manufacturing business and did not commence any such activity and in the memorandum of association, it has no object relating to investment activity. The company has no employees and had no money at the time of purchase of the shares. As regards Cuckoo which belongs to the present managing director, he pointed out that it is a trading company with a paid-up capital of Rs. 200 and in the memorandum of association, it has also no object of investment and it has violated the listing agreement as the total shareholding, after taking into account 7,600 shares held by the other group companies, exceeded 5 per cent. of the capital. He further submitted that the company could manage to obtain advance for exports to the extent of US $ 4,50,000, i.e., roughly Rs. 1.30 crores at a time when the company's paid-up capital was just Rs. 20,000. He pointed out that the advance was received in December, 1992, for delivery of the goods to be made in the last quarter of 1993 and this alone is sufficient to generate grave doubts about the genuineness of the transactions. As regards "Mogra", Shri. Sen pointed out that at the time of acquisition of the shares, the paid-up capital was only Rs. 200 and the company, though an investment company, has no other investment. He also pointed out that the company has availed of inter-corporate loans from Day Kon Financial Services Ltd., Producin Ltd., and Beccarose Perfumes and Beauty Products Ltd., the last name featuring in financing GIL shares purchased by Cuckoo as well. These facts go to show that there is some unknown person of influence who is master-minding all the acquisition through front companies like Mogra, Lakhani and Cuckoo requiring a detailed investigation by a team of officers and which cannot be done in a proceeding before us just by calling for documents and information.

31. Shri G.L. Sanghi, senior advocate, appearing on behalf of the petitioners, submitted that the jurisdiction of the Company Law Board in this case is one of suspicion. The meagre paid-up capital, insignificant operations, the nature of the transactions, and the identical nature of the pattern of financing the acquisitions of GIL shares and common source of intercorporate loans, all go to establish clearly the interconnection between Mogra, Lakhani and Cuckoo. On going through all the information submitted by the respondents, further questions arise which could be better dealt with in a detailed investigation and hence, the Company Law Board should exercise its powers to order a detailed investigation. He also cited a decision in S. R. Nayak v. Union of India, and 5 other cases, AIR 1991 SC 1420 ; [1991] 72 Comp Cas 651 (SC), to establish that changing situations should be taken into account by an authority in arriving at conclusions.

32. Shri T. R. Andhiyarujina, senior advocate appearing on behalf of the Banares group of companies, submitted that Motiwala, Banares Beads and Prashant Glass are all companies which are actively engaged in business and have been under the control of the Guptas. Banares Beads and Prashant Glass are engaged in manufacturing and trading activities including exports, whereas Motiwala investments is an investment company. These companies are financially sound with substantial net worth and have generated considerable internal resources, with the internal resources and the loans from companies under the same group, the group has made investments in GIL shares. Motivala is also engaged in investment in other shares details of which were provided. He stated that the objective of making investments in GIL shares was to prevent take-over of the company by the Chhabrias and there is nothing wrong in such acquisition or objective. He also confirmed that Shri Ajit Kumar Gupta one of the promoter directors of the group companies is a director on the board of GIL. Referring to the arguments of the petitioners regarding investments made by Banares Beads, when in the memorandum of association, there is no main object to that effect, and there is no disclosure of any resolution under Section 149(2A) of the Companies Act, 1956, he submitted that there may be minor violations of the company law, but that does not constitute a basis for questioning the ownership of the shares. He further submitted that the need for investigation and to make the shares temporarily worthless arises only if information is not forthcoming. In the present case, however, the respondents have provided full information and are willing to submit further information if required. Hence there is no need for the Company Law Board to exercise its jurisdiction to order an investigation or freeze the. voting rights under Section 250(2) of the Companies Act, 1956. He also submitted detailed fund flow statements of the three companies to establish that no outside financial help has been taken to acquire this GIL shares.

33. Appearing on behalf of Mogra and Lakhani, Shri A. K. Sen, senior advocate, submitted that detailed disclosures have been made to the effect that in the case of Lakhani the money for the purchase of the shares was ultimately provided from Mrs. Lakhani to the extent of Rs. 68 lakhs and from Kotak Mahendra Ltd. to the extent of Rs. 40 lakhs as intercorporate loan though temporary financing was arranged till these funds were forthcoming. He further stated that Mrs. Lakhani has valuable properties worth Rs. 2 crores for the sale of which permission was given by the income-tax authorities which goes to show that she is a person of sound financial standing and could finance the acquisition of the shares. He submitted that though there are no manufacturing companies under the Lakhani group, they are the leading distributors of engineering items manufactured by leading engineering companies. He further submitted that since the order from Khaitan Agro could not be executed according to the specification prescribed by the buyer, the advance had to be refunded though the same has been used to finance temporarily the purchase of the shares. In response to our specific query whether there is any interconnection between Mogra and Beccarose Perfumes and Beauty Products Ltd. who had advanced a loan of Rs. 100 lakhs to Mogra, Shri A. K. Sen stated that there is no interconnection between the directors of these companies and the directors of Beccarose Perfumes and Beauty Products Ltd. He also stated that neither Mogra nor Lakhani had any other investments and the purpose behind the investments in shares of GIL was to stall the take-over attempt by the Chhabrias. He stated that borrowings by Mogra have been ultimately settled by the promoters contributing to the share capital of the company. Thus, both Mogra and Lakhani are backed by resources brought in by the promoters and hence there is no divorce between the apparent and real owners. The apparent owners are the real owners.

34. Appearing on behalf of Cuckoo, Shri T. N. Subramanian, advocate, submitted that the petition is speculative and based on newspaper reports. He confirmed that Cuckoo has not made any business during 1991-92 but a foreign contract was entered into by the company on December 10, 1992, for supply of goods. He produced a copy of the order from Tokio Trading International Ltd., West Germany, for supply of various kinds of apparels for which an advance of Rs. 1.30 crores was received. He further, stated that the company has not violated any listing agreement as has been alleged by the petitioners, as, when the shares were acquired going beyond 5 per cent. of the total share capital, there was no such listing requirement on the date of the acquisition. Hence, the violation of the listing agreement does not arise at all. He further contended that Cuckoo is a separate company belonging to the Rajans and it has nothing to do with Mogra or Lakhani. He produced a copy of the contract with the broker as evidence to show that the shares were purchased by each company in its own name. The Rajans are resourceful persons and have been able to arrange finance for Cuckoo as it is their own company. They own this company and through their other shareholding, are represented in the board of GIL as well.

35. Shri Chinoy, advocate, appearing on behalf of GIL, submitted that as far as the company is concerned, the affairs of the company are being conducted as per the provisions of the company law and hence there is no need for an investigation. The petitioners have not put forth any arguments with regard to the allegations of mismanagement or with regard to instances contained in para 26 of the petition. Three of these allegations were also the subject-matter of a suit in the Bombay High Court in which ultimately two allegations were not pressed and the remaining allegation was not established in the court and the High Court has given a verdict in favour of the company which has not been appealed against. The other remaining allegations about mismanagement have not been substantiated nor any arguments were advanced to support these. He offered clarification about the allegations of loan by GIL to suppliers and stated that it was only an intercorporate deposit of Rs. 15 lakhs to a supplier company, viz., Mahavir Refractories (respondent No. 4), Mahavir Refractories is a supplier of fire bricks and a substantial amount (over Rs. 10 lakhs) was due to respondents Nos. 4 and 5. As the entire supplies were not completed, an intercorporate deposit of Rs. 15 lakhs was placed for one year which was duly repaid within a year's time. As regards the allegation of disposal of immovable properties, he clarified that the company sold its land at Mysore for Rs. 2.4 crores and the same has been accounted. It has been explained that the transaction was approved by the annual general meeting in 1988 but due to the interim order of the Bombay High Court it has held it in abeyance till 1992. In 1992, after the disposal of the petition by the Bombay High Court the company made the sale after publishing a notice in newspapers. Shri Chinoy submitted that the working results of the company for the last two years are satisfactory and, therefore, the allegations about mismanagement are being trumpeted just to support the petition. Referring to the allegation of blank transfers held by the Poddars he stated that there was no illegality involved and the requirements of Section 108 have been complied with. He further submitted that the petition is merely intended to harass the company and hence the Company Law Board should dismiss the same.

36. The root cause for the apprehension of the complainant that the real owners are not the apparent owners and about the likelihood of further transfer of shares resulting in change of management which may.be prejudicial to the public interest or adverse to the interest of the company, lies in frequent changes in the management which took place in the past 2-3 years contemporaneous with the changes in the ownership of the shares. To understand these changes we have to keep in view the background of these changes. With the threat of likely take over by the Chhabrias, the management led by Dr. T. N. Subba Rao appears to have attempted to consolidate their position with the support of management-friendly persons who were motivated to acquire GIL shares from the market. This process appears to have started in 1988-89 itself. All the respondent companies who have acquired substantial GIL shares have made a categorical declaration that the objective of the acquisition was to stall the Chhabrias' take-over. As there was an obligation cast on the company to obtain the Company Law Board's approval for any change in the composition of the board of directors during the period in which the voting rights of shares acquired by the Chhabrias were suspended, all the changes till December 18, 1991, were made with the Company Law Board's approval. Another noticeable development is the stepping down from managing directorship by Dr. T. N, Subba Rao and the appointment of Shri Rajan in his place. As Dr. Subba Rao continued as a director and Shri Rajan's appointment as director was already approved by the Company Law Board, the change in managing directorship did not come for the Company Law Board's approval. Thus, all the changes in the composition of board of directors except the appointment of Mr. W. Paul Hariman as the director on September 30, 1992, were approved by the Company Law Board and the last change was made after the expiry of the period in which the Company Law Board order was in operation, i.e., after December 18, 1991.

37. Since, about 22 per cent. shares had passed from hand to hand escorted by the management, the complainants have an apprehension that the shares are not finally resting anywhere but are likely to be further transferred which might result in prejudicial changes in composition of the board of directors. The petitioners in para 30 of their petition have stated that "it is reliably learnt that the management is seeking to transfer the shares held by the ostensible owners detailed in paras 13 and 14 to some other persons as a result whereof there is likelihood of a change in the composition of the board of directors which would be prejudicial to public interest and detrimental and prejudicial to the interests of the company and its bona fide shareholders". What is incomprehensible is that though the petitioners have complained against the present management, they are also averse to the change in the composition of the board of directors as evidenced from the above averments.

38. We. find that apart from this expression of apprehension there is no other material available in the complaint to indicate that there is a further likely transfer of shares which is likely to result in the change in the composition of the board of directors of the company. During the course of the hearing also the petitioners have not substantiated their apprehension with any specific events. In fact Shri S. B. Mookherjee did not deal with the respondents' argument that no case is made out either under Section 250(3) or Section 250(4) but tried to project that the main issue is the mysterious hand behind the past transfers rather than the likely transfers. Subsequent information called for by us also shows that there has been only some inter se transfers within the Banares group which cannot he a cause for any apprehension. Consequently, no case is made out for intervention under Section 250(4) and for imposing any restrictions as contemplated under Section 250(2) on this count.

39. As regards transfer of shares which have already taken place, the petitioners have averred that "by reason of the transfer of the said shares in favour of the aforesaid companies, there has been a change in the composition of the board of directors of the company which is prejudicial to the public interest as persons who are ostensibly involved in the said companies, have no experience or technical expertise relating to the business of the company". The petitioners have stated that certain changes in the composition of the board of directors have taken place in the past consequent to the certain transfer of shares which disposes of the claim of the respondents in the earlier proceedings that the management of the company is always in the hands of technocrats and professionals. It was contended by the petitioners that there had been at least eight changes in the composition of the board of directors during 1989-1991 and these are in total violation of Section 22A(3)(c) of the Securities Contracts (Regulation) Act, and are prejudicial to the public interest. On the other hand, the respondents have countered that these changes were made with the approval of the Company Law Board as per its earlier order and hence cannot be considered as prejudicial to the public interest. We have examined this issue as well, though, strictly speaking, the provisions of Section 250(3) are not attracted. The provisions of Section 250(3) of the Companies Act read as follows ;--

"Where a transfer of shares in a company has taken place and as a result thereof a change in the composition of the board of directors of the company is likely to take place and the Company Law Board is of the opinion that any such change would be prejudicial to the public interest, it may, by order, direct that--

(a) the voting rights in respect of those shares shall not be exer-cisable for such period not exceeding three years as may be specified in the order ;

(b) no resolution passed or action taken to effect a change in the composition of the board of directors before the date of the order shall have effect unless confirmed by the Company Law Board."

40. In order to attract this provision, three conditions are required to be fulfilled : (a) transfer of shares must have taken place ; (b) because of such transfer of shares a change in the board of directors is likely to take place ; and (c) in the opinion of the Company Law Board such a change is prejudicial to the public interest. In this case, after the transfer of the impugned shares, change in the composition of the board of directors has already taken place and that too with the approval of the Company Law Board. Thus, except the first limb of the provisions of Section 250(3), the other two limbs are not satisfied and, therefore, the situation is not such as warranting our intervention under Section 250(3). Thus, we have come to the conclusion that no intervention under Section 250(3) or (4) is warranted in the present case.

41. The only issue to be considered now is whether the complainants have made out any case for ordering an investigation under Section 247(1A) of the Companies Act, 1956, and invoking the suo motu powers of the Company Law Board under Section 250(1) and consequently imposing restrictions under Section 250(2) if good reasons exist for the same. The exercise of suo motu powers involves two sequential stages, viz., the Company Law Board making a declaration and directing the Central Government to investigate and, secondly, if good reasons exist, in order to enable the investigation, impose restrictions under Section 250(2). The scope and ambit of Section 247(1A) will be clear from the text of the section which is reproduced below :

"247. (1A) Without prejudice to its powers under this section, the Central Government shall appoint one or more inspectors under Sub-section (1), if the Company Law Board, in the course of any proceedings before it, declares by an order that the affairs of the company ought to be investigated as regards the membership of the company and other matters relating to the company, for the purpose of determining the true persons--

(a) who are or have been financially interested in the success or failure, whether real or apparent, of the company ; or

(b) who are or have been able to control or materially to influence the policy of the company."

42. The essential ingredients of this sub-section are --

(a) there should be some proceedings before the Company Law Board,

(b) in the course of those proceedings the Company Law Board should form an opinion that either (i) the true persons who are or have been financially interested in the success or failure of the company are different from the persons who appear to be the members of the company ; or (ii) the true persons who are or have been able to control or materially influence the policy of the company are different from the persons who appear to be in the control of the company,

(c) the Company Law Board should come to the conclusion that in order to find out the true identity of these persons an investigation is necessary and make a declaration to that effect.

43. We have carefully considered the contents of the complaint, scrutinised the additional information and heard the arguments of learned counsel from both the sides. The only issue to be decided is whether the material placed before us calls for an investigation of the membership of the GIL under Section 247(1A) of the Companies Act. It is an admitted fact that all the respondents have made a categorical statement on affidavit, that the main objective of acquiring GIL shares was to resist the attempted take-over by the Chhabrias. It is also on record that when the GIL shares were held by the four respondent corporate entities, which were used as temporary "parking places", the directors of GIL were brought on the board of these corporate entities and part of the financing for the purchase of GIL shares was arranged with the help of corporate entities under the direct or indirect control of persons who are or were in the management of GIL. The complainant has also alleged that the volume of shares acquired clearly shows that the persons who were involved in this operation "Resist Chhabria take-over" knew exactly how many shares should be acquired to ward off the take-over. This is also established by the fact that after the expiry of restrictions imposed on exercise of voting rights of Chhabria shares on December 31, 1991, in the annual general meeting of the members, the management had garnered enough voting strength to get their supporters elected as directors and ensured that there is no de-stabilisation of the management. A substantial portion of these 22 per cent: of GIL shares for which the complainant is asking for investigation were acquired by the respondent companies, when the "Chhabria take-over" matter was still being argued before the Company Law Board in a complaint filed by Bhavi under Section 247/250 of the Companies Act. It is also now on record that while registering the transfer of shares in the name of transferees, who were management-friendly, the board of directors of GIL did not apply the same standard of scrutiny as was applied to shares which were acquired by corporate entities which were directly or indirectly under the control of the Chhabria group. On the contrary, in some of the cases of registration of transfers in favour of these management-friendly entities, the provisions of the Companies Act might have been violated. All these circumstances clearly establish that the management was aware of the identity of persons who are behind the acquisition of these shares.

44. It is also an admitted fact that the financial position of the four entities, Sri Theertha and the three Kumri companies--Excalibur Consolidated, Excalibur Securities and Prudential Securities--which were used for "temporary parking" of shares is not at all satisfactory. While the two Kumri companies have suffered substantial losses in these transactions, one company Excalibur Consolidated has claimed to have made a profit of Rs. 6 lakhs on purchase and sale of GIL shares, though it seems that this profit does not take into account the cost of the borrowing of the funds utilised for these purchases. Sri Theertha has made a small profit of Rs. 10,000 but here also whether the cost of the borrowed funds is included or not in the profit is not clear. On the basis of information filed by these four entities before us, the position regarding profit and loss on the purchase and sale of GIL shares, the net worth of these companies and profit or loss of these companies as per the balance-sheet figures is as follows :

(Rs. in lakhs) Name of the company Number of GIL shares purchased/ sold Profit/ loss on sale of shares (Rs.) Net worth as on 31-3-92 (Rs.) Profit and loss as per balance-sheet 31-3-90 31-3-91 31-3-92

1. Sri Theertha 45,954 +00.10

-06.57 "

-02.60 *

-

2. Excalibur Consolidated 1.01,042 +06.01 +00.16 "

00.09

3. Excalibur Securities 1,84,402

-04.75

-38.39

-19.62 *

-00.93

-02.02

4. Prudential Securities 1,89,751

-33.00

-86.80

-42.84 *

-14.01

-28.85 For period from 1-7-1989 to 31-3-1990.

"As on 31-3-1990.

45. As on March 31, 1992, Prudential Securities has Rs. 92.23 lakhs as unpaid interest and Excalibur Securities Rs. 72.95 lakhs. No clarification regarding unpaid interest on the funds borrowed for purchase of shares was given by these companies in the replies filed before us nor their advocates who were present during the hearing utilised the opportunity to provide information about how the huge losses were financed and why there has been a huge turnover of directors of these companies who had no other major investments except in GIL shares. All the GIL shares purchased by these four entities except a very insignificant number of shares held by Prudential and Excalibur Services have been sold to the seven respondent entities who are present holders of these shares. It has been contended in the affidavits of some of these four entities that powers under Section 247(1A) do not entitle the Company Law Board to look into the past membership of the company. However, it is clear that these four entities having no substantial own resources, borrowed heavily to buy GIL shares and allowed these companies to be under the control of GIL directors when the GIL shares were being held by them and all these dealings have resulted in substantial losses and there are huge arrears of interest on borrowed funds. All these facts call for further clarification as neither the documents before us throw any light on these transactions nor the advocates who were present during the hearing took the opportunity to explain these matters and left it to the present holders who acquired these shares to defend their acquisition. On behalf of GIL also, no explanation has been given whether these GIL directors had kept the board of directors informed about their active participation in the companies involved in acquiring GIL shares at the time when the board of directors considered the request for registration of transfer of these shares. It is difficult for us to believe that the board was not aware of what was going on as these transfers involved large volume of shares and prima facie it appears that in respect of registration of some of these shares there might be violations of the provisions of the Companies Act.

46. Another important fact to be noted is that the. composition of the board of directors of GIL has undergone changes during this period of 1989 to 1992 and all the changes till December 18, 1991, were approved by the Company Law Board. The employees who have been in the forefront to fight against the previous take-over attempts, did not resist or complain against the changes in the composition of the board of directors including the change of managing director. It is noted that new persons have been inducted in the board of directors and most of them are either professionals working in the company or have industrial experience and some of them were connected with GIL in some way prior to their induction in the board of directors. The managing director, Shri T. N. Subba Rao, and his family members who held 52,501 shares sold all except 700 shares to Mogra and Bhavi and Mr, Rajan who was appointed as a director on February 14, 1991, replaced Subba Rao as managing director on May 17, 1991. As on March 2, 1989, when the earlier proceedings before the Company Law Board under Section 247/250 were initiated, the board of directors consisted of eight directors out of which five are still directors but now the number of directors has gone up to 12. The dates of induction of new directors indicate that out of three directors Shri S. Dayal, Nageshwaran and Krishnan inducted on June 7, 1989, only Dayal still continues and Nageshwaran and Krishnan who were directors on "interloper" companies used for temporary parking of shares are no longer on the GIL board. Dave, Gupta, Rajan and Ashok Kumar were inducted in January/February, 1991, much before Lakhani, Cuckoo, Mogra acquired substantial shares. Coming to the individual corporate entities who are at present members of GIL, we find that the Banares group of companies holding 1.39 lakhs GIL shares (6.43 per cent.) and Cuckoo holding 1.05 lakhs GIL shares (4.85 per cent.) have their representatives on the board of directors. While Shri Rajan who is a managing director controls Cuckoo, some corporate entities like Abhim Investment Pvt. Ltd. which are under the direct or indirect control of Shri Rajan were involved in providing financial resources to Bhavi, Sri Theertha, Kumri Companies, when the GIL shares were being acquired by them and some loans are still outstanding. Shri Ajit Kumar Gupta who is a promoter director of the Banares group of companies is on the board of directors of GIL from January 30, 1991. His company Motiwala Investment was also involved in providing finance to some of the respondent corporate entities. Shri N. C. Dave, who was also inducted on the board of directors of GIL as on January 30, 1991, is also associated with Shreejee Real Properties (P.) Ltd. which has provided substantial finance to Bhavi Investments Ltd. for acquiring GIL shares. While a distant relative of Hingorani who is in control of Mogra is on the board of directors of GIL as deputy managing director, Mogra, has also given loans to other corporate entities which were involved in buying GIL shares. Lakhani which holds 80,000 GIL shares (3.68 per cent.) seems to have no representative on GIL. Thus, it is clear that while the GIL shares were held by Kumri companies and Sri Theertha who were temporary parking places, GIL directors were inducted on their boards, while in the case of Banares and Cuckoo who are the present holders of GIL shares their representatives have been taken on the board of GIL. This difference in treatment given to the Banares group of companies and Cuckoo indicates that both Shri Rajan and Shri Gupta appear to have long-term interest in this company and there is no material produced by the complainant before us to show to the contrary.

47. In a proceeding under Sections 250 and 247(1A), the Company Law Board has to prima facie come to a conclusion that there are good reasons to find out the relevant facts about any shares and that the identity of the owners of shares is not clear based on the material disclosed in the complaint and facts revealed during the proceedings. Mere allegations in a complaint are not sufficient to appoint an inspector to investigate the affairs of a company. The material placed before the Company Law Board should be such as to satisfy the Company Law Board that a deeper probe into the company's affairs is desirable to establish the identity of true persons which is also desirable in the interests of the company itself. In this connection we have also to consider the main focus of the complaint. The reliefs sought in the complaint are two fold, namely, investigation under Section 247 and orders under Sections 250(2) and 250(3) of the Companies Act, 1956. Orders under Section 250(2) as contemplated under that sub-section are of interim nature. The only relief which is substantive in nature is to restrain under Section 250(3), the change in the composition of the board of directors by reason of the impugned shareholding.

48. We have already concluded that no case has been made out for relief under Section 250(3) or (4) as prayed for in the complaint and, therefore, the complaint in the proceedings under Section 250 stands dismissed. If no case is made out under Section 250(3) and (4) and that proceeding is closed, can we still order investigation under Section 247(1 A) if material exists before us for making such an order ? The provisions of Section 247 were incorporated in the Companies Act in,-1956. The provisions of Sub-section (1A) of Section 247 were introduced by the Companies (Amendment) Act, 1988, with effect from May 31, 1991, in order to give powers to the Company Law Board also which were earlier vested only in the Central Government under Section 247. Notes on clauses 41 to 43 of the Amendment Bill which amended sections 247, 248 and 250 stated "the powers to impose restrictions and prevent change in the management under Section 250 which is presently with the Central Government is sought to be transferred to the Company Law Board. In order that the Company Law Board may not be handicapped in its proceedings under Section 250 of the Act on transfer of the power to it, it is necessary to empower the Board, without prejudice to the existing powers of the Central Government, to cause investigation into the ownership of a company and to call for information in respect of ownership of shares and debentures without prejudice to the powers of the Central Government to do so as enjoined by present Sections 247 and 248 of the Act. Hence the amendments". From this, it seems that the powers under Section 247(1A) have been given to the Company Law Board so that it is not handicapped in the proceedings under Section 250 which was recast by the same Amendment Act giving the Company Law Board exclusive jurisdiction.

49. Thus, it is clear that if in any proceedings before the Company Law Board an issue arises requiring investigation into the ownership of the company, an order to investigate the membership could be issued and the' Inspector's report could be an aid to finalise proceedings pending before the Company Law Board. Proceedings under Section 247(1A) can also be initiated suo motu by the Company Law Board. Taking all this into consideration, it we have already reached a conclusion that no case is made out under Section 250(3) and (4) and the complaint made under that section is dismissed, there will not be any proceedings pending before us. The wording in Section 247(1A) "in the course of any proceedings before it" makes it clear that the declaration be made by the Company Law Board can be only during a proceeding and not at the end of proceedings. Thus, if the main proceeding is concluded, nothing survives and powers under Section 247(1A) cannot be invoked by the Company Law Board divorced of any proceeding before the Company Law Board. In this case, while we came to the conclusion requiring deeper probe in respect of past members like Sri Theertha and Kumri companies and involvement of GIL management in their affairs, if any violation of the provisions of the Companies Act are involved in these cases, it will be a matter for separate action. In view of this the application under Section 250 is dismissed and as no proceedings are pending before us, we have no hesitation to come to the conclusion that powers under Section 247(1A) cannot be used to order further investigation in this matter. A copy of this order may be also sent to the Central Government.

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Company Law Board

Alaknanda Manufacturing And Finance ... vs Bahubali Services Ltd. And Ors. on 30 August, 1993

Equivalent citations: [1996]86COMPCAS291(CLB)