Company Law Board
J. Venkat Rao, J. Vani And Ch. Chidambara ... vs M. Satyendra And Ors. on 19 September, 2007
Equivalent citations: [2008]143COMPCAS635(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. The Petitioners 1 & 2 together holding 11.76% of the issued and paid up capital of M/s VJIL Consulting Limited ("the Company"), aggrieved on account of certain alleged acts of oppression and mismanagement in the affairs of the Company it the instance of the first respondent, have invoked the provisions of Sections 111A, 237, 397 & 398 read with Sections 402, 403 & 406 of the Act, seeking the following reliefs:
a) to remove the first respondent from the post of Joint Managing Director of the Company,
b) to direct the respondents 1, 3 to 7 to sell their shares in favour of the Company and order corresponding reduction of share capital of the Company;
c) to direct the Company rectifying the register of members and reducing the number of equity shares of the respondents 1, 3 to 7, acquired in violation of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and SEBI (Insider Trading) Regulations, 1992; and
d) to order investigation into the affairs of the Company.
2. Shri P.H. Aravindh Pandian, learned Counsel, while arguing in support of the petitioners submitted:
2.1 The Company promoted by the first petitioner under the brand name "VJ", v representing his family name and registered as a public limited Company in May 1992 is mainly engaged in the business of software development and training. The first petitioner's father was the Chairman of the Company till his demise upon which the first petitioner succeeded him as the Chairman and continues to be the Chairman-Cum-Managing Director of the Company contributing towards growth of the Company. However, the first petitioner was constrained to sell his shares in order to meet the urgent cash commitments at the relevant point of time. The first respondent having been appointed as the Joint Managing Director is solely entrusted with substantial powers including managerial powers to run the day-to-day affairs of the Company, in exclusion of other directors, who do not have any access to any records or books of account or details of the Company. The first respondent has been taking material business decisions without the knowledge of the board of directors of the Company. The other directors are not allowed to participate in the affairs of the Company. At no point of time, the petitioners were party to any business decision, which was unilaterally taken by the first respondent and in the process, the first respondent has been conducting the affairs of the Company in a manner which is prejudicial to public interest and also in a manner oppressive to the members, creditors, suppliers, banks and financial institutions, having dealing with the Company and further mismanaging the affairs of the Company in violation of the provisions of law rules and regulations of various regulatory authorities.
2.2 The first respondent being sole signatory has been individually operating the bank accounts of the Company since its inception, without furnishing any details of monies spent and expenditure incurred on account of the Company.
2.3 The first respondent has lent an amount of Rs. 15 lakh to M/s Yemmem Agro Mills Private Limited (YAMPL) wherein he is a director and member, in violation of Section 295 read with Section 283(1)(h), resulting in vacation of his office as a director of the Company herein. The outstanding amount from YAMPL amounting to nearly Rs. 27.50 lakh remains un-recovered, causing immense prejudice to the Company and its shareholders.
2.4 The first respondent has availed huge sums of money aggregating Rs. 1.05 crore on behalf of the Company at a higher rate of interest from related parties by way of unsecured loans without either the knowledge or consent of the board of directors of the Company and in violation of the articles of association, Section 58A of the Act and Companies (Acceptance of Deposit) Rules, 1975, thereby exposing the petitioners for huge penalties and punishments by the regulators. The nil observations in the auditor's report in respect of related party transactions are restricted to the year 2005-06, whereas, the disputed unsecured loans impugned in the petition have been taken by the first respondent from October 2006 onwards after the end of financial year 2005-2006. Hence, the auditor's observations relied on by the first respondent are irrelevant to the main issue. The percentage of debtors exceeded sixty percent of the turnover achieved by the Company for the year ended 31.03.2006, which is abnormal in the industry. The Company, as a result had to incur a loss of Rs. 13.25 lakh for the period ended 31.02.2006.
2.5 The first respondent has ingeniously invested without any authority of the board of directors to an extent of Rs. 6.38 crore in equity shares of several companies, including that of its subsidiary company, namely, M/s. Mercury Outsourcing Management Limited accounting for Rs. 2.92 crore. without any return to the Company.
2.6 The first respondent lavishly spent monies of the Company by way of making foreign travels amounting to Rs. 90 lakh during the years 2003-04; 2004-05 and 2005-06, without the knowledge of the board of directors. The documents and vouchers relating to the foreign trips have been approved by first respondent himself and not by any one else. All the vouchers and receipts have been authorised by the first respondent himself without bringing to the notice of the board for its consideration and adoption.
2.7 The first respondent with a malafide intention and in order to gain illegal control over the Company has been acquiring shares of the Company alongwith his close relatives namely, respondents 3 to 7, over a period of time over and above the prescribed limits without duly complying with the relevant provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and the SEBI (Insider Trading) Regulations, 1972, details of which are separately set out in the company petition. As per the SEBI Regulations it is the acquirer, namely, the first respondent herein, who ought to have complied with regulations by intimating and making public announcements. The first respondent along with persons acting in concert with him was holding 11, 67, 120 shares constituting 14.85% of the share capital as at 31.03.2003, which came to be increased to 17.10% along with the fourth respondent during the financial year 2003-04, before which the first respondent ought to have made a public announcement in terms of Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. 1997. However, the first respondent failed to make a public announcement prior to the acquisition of shares which entitled him to exercise 17% of the voting rights in the Company and till date made no public announcement and thus violated the SEBI Regulations. The first respondent continued his acquisition along with the respondents 3 & 4, being the wife and brother during the financial years 2004-05 and 2005-06 also. As at 31.12.2005, the aggregate shareholding of the first respondent along with respondents 3 & 4 stood at 16, 34, 496 shares constituting 20.80% of the paid up capital of the Company. Similarly as at 31.12.2006, the total shareholding of the first respondent along with the respondents 3 to 7, being the wife, brother, father, mother and sister-in-law respectively, rose to 18,80,361 shares accounting for 23.93% of the paid up capital of the Company. The first respondent who was already holding more than 15% ought to have disclosed at every stage his total shareholding to the Company, which he failed to act in accordance with Regulation 7(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. Thus, the respondents 1, 3 to 7 have acquired the shares of the Company in gross violation of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The auditor's report on Corporate Governance only states that no complaints have been received by the Company from SEBI or Stock Exchange for the last three years, which will be applicable only to the Company and the first respondent cannot take protection under such report of the auditors. The Company never framed Insider Trading Policy, as required by SEBI Regulations, 1992.
2.8 By virtue of Sub-section (3) of Section 111A, it is mandatory on the part of the Company Law Board, as decided in Bombay Dyeing and Manufacturing Co. Ltd. v. Arun Kumar Bajoria and Ors. (2001) 4 CLJ 775, to order rectification of the register of members, once it comes to the conclusion that any contravention of the provisions of the SEBI Act, 1992, or Regulations made thereunder, which is one of the grounds in that section, has been established. This Board held in Aska Investments Private Ltd. v. The Grob Tea Co. Ltd. and Ors. (2004) 2 CLJ 392 that the CLB has power to look into any complaint of violation of the SEBI Regulations and pass appropriate orders notwithstanding the power of SEBI to look into the same complaint for appropriate orders, in spite of the fact SEBI exercises power under the SEBI Act, while the CLB exercise its powers under the Companies Act and the consequences of such exercise of powers are entirely different. In view of the patent violation of the SEBI Regulations, the acquisition of shares by the respondents 1, 3 to 7 must be set aside.
2.9 The first respondent issued a notice dated 22.11.2006 requesting the first petitioner to call for an extra ordinary general meting on 23.12.2006 in order to "(i) remove the first petitioner from the office of Chairman-cum-managing director; (ii) remove other petitioners from the office of director of the Company: and (iii) appoint five new directors in the place of the petitioners who are sought to he removed from directorship" The notice dated 22.11.2006 requisitioning an extra ordinary general meeting on 23.12.2006 suffering from serious infirmities is neither a notice nor a requisition, and does not meet the requirements of Sections 169 & 284 of the Act. Consequently, the resolutions proposed to be passed at the extra ordinary general meeting are unlawful and oppressive.
2.10 All the employees were directly reporting to the first respondent. Neither the employees have any access to any other director nor the directors have any access to any employee of the Company. All the statutory records were directly under the control and custody of the first respondent and are not made available to other directors of the Company. There is an intranet facility available to the Company and all the employees, but no details would be made available in relation to the Company's affairs to other directors through the intranet facility. The petitioners were totally sidelined, marginalized and cornered by the first respondent by virtue of his shareholding in the Company.
2.11 The first respondent has published false statutory information in the local newspapers relating to the unaudited quarterly results of the Company for the quarter ending 31.12.2006 in February 2007, without the knowledge and adoption of the board of directors. No board meeting was ever held on 31.01.2007 as claimed by the first respondent and the unaudited quarterly result of the Company were neither approved by the board of directors. The first respondent was neither authorised to publish any such unauthorized audited of financial results of the Company for the quarter ending 31.12.2006. All the vouchers and receipts have been authorised by the first respondent himself without bringing them to the notice of the board for its consideration and adoption. Though the accounts of the Company are audited and reports are issued by the auditor ever year, the same do not deal with the aspects of oppression or instances of mismanagement in the affairs of the Company.
2.12 The first respondent has been indulging in the practice of diverting funds by making illegal and unauthorised payments under the heads communication and satellite link charges, consulting expenses, foreign tour and travel, miscellaneous expenses and rent, details of which have not been furnished in spite of the repeated requests made by the first petitioner. The tax deduced at source and provident fund deducted from the employees' salary remained unremitted to the concerned Authorities for the last 11 months. The first respondent is equally responsible for the treatment of cash credit account as irregular by the bankers. The first respondent is guilty of suppressing the income generated by the Company and is responsible for the major set back suffered by the Company year after year in spite of the boom in the information technology industry. The audited financial results for the past three years would show that the Company has been incurring losses year after year under the first respondent, who is wholly responsible for the downfall of the Company and not for its growth.
3. Mrs. Nalini Chidambaram, learned Senior Counsel, opposed the company petition and submitted as under:
3.1 The first petitioner, who conceptualised the business and first respondent have been the promoters, founders and directors of the Company since its inception. The name of the Company includes the initials VJ as a mark of respect to the first petitioner's (late) father. However, the first petitioner has already sold approximately 50% of his holding of the Company and does not evince any interest in the future of the Company. The first petitioner, a sitting legislator has no time for the Company, despite being the Chairman-Cum-Managing Director. The second petitioner is a director and has no business qualifications other than being the wife of the first petitioner. The first respondent is alone responsible for the growth as well as success of the Company, and for establishment of a BPO, which is essential for the future success of the Company.
3.2 The petitioners have always been a part of the board of directors since inception of the Company, but they totally dis-associated from the operations of the Company and never co-operated in running the day-to-day affairs of her Company. The first respondent never acted unilaterally but carried out the management of the Company in accordance with the resolutions passed by the board of directors of the Company and all times kept informed the board of directors of all the activities and transactions entered for and on behalf of the Company. The entire records of the Company are in the physical custody of the first petitioner. All the activities and transactions of the Company are documented and the entire transactions are available on the intranet facility of the Company, to which the petitioners being directors have all access to the transactions of the Company. The first petitioner being the Chairman-Cum-Managing Director, could have at any time called for a board meeting and demanded any information in connection with the affairs of the Company, which he never exercised ensuring the interest of the Company. All the acts complained of by the petitioners have been in their knowledge and are being implemented with the full knowledge and consent of the petitioners, as borne out by the annual reports of the Company signed by the first petitioner, in his capacity as Chairman-cum-Managing Director of the Company.
3.3 The first petitioner having signed the directors report and report on Corporate governance, certified by the Company's auditors forming pan of the annual report for the year 2005-06, is barred from raising the financial irregularities purportedly indulged by the first respondent in the affairs of the Company. The Company's auditors have further certified that (a) the accounts are being properly maintained; (b) the secured and unsecured loans taken by the Company are in proper order and do not violate any provisions of law; (c) the Company has not accepted any deposits from the public within the meaning of Sections 58A and 58AA of the Act and the rules framed hereunder; and (d) no instance of any fraud on or by the Company surfaced in the course of examination of the books of accounts of the Company. Similar certification has been made in every annual report since the very inception of the Company. Therefore, the allegations of any fraud or other improper dealings in the financial affairs of the Company must be treated as fabrications at the instance of the petitioners.
3.4 All the finances of the Company are looked after by a finance manager, who is reporting only to the first petitioner. The cheque books for the bank accounts are in possession of the petitioners. The first petitioner and first respondent are both authorised to operate the bank accounts of the Company and there is no scope for sole operation of the bank account by the first respondent.
3.5 The loan extended in the year 2000-2001 in favour of YAMPL was with approval of the board of directors of the Company. The interest on the loan has been regularly paid and the relevant tax deducted at source has been paid and certificates have been issued to the Company. The auditors have not raised any objection in respect of the loan extended to YAMPL, in which case there is no question of vacation of the office of director by the first respondent, pursuant to Section 283(1)(h) of the Act. Even otherwise, the first respondent has been twice thereafter, appointed as a director and hence he is validly appointed director entitled to hold the post of director.
3.6 All the loans availed by the Company with the approval of the board of directors were necessitated to make necessary payments of salaries so as to retain the employees in the Company. The Auditors, during the earlier years have certified that the loans taken by the Company are in order and were taken after following the proper procedure and were absolutely necessary for the benefit of the Company.
3.7 The investments made by the Company in its wholly owned subsidiary was with the approval of the board of directors. The subsidiary in USA is under the day-to-day management of the petitioners 1 & 2, who are the Chairman and Secretary respectively of the subsidiary. The bank accounts, finances and business of this subsidiary are being operated exclusively by the petitioners 1 & 2. The investments made several years back by the Company in various mutual funds were with the full approval of the board of directors of the Company. These investments, which yielded profits have appreciated and are reflected in the accounts of the Company.
3.8 The alleged expenses on the foreign travel are exaggerated, which represent the total expenses of the Company on foreign travel and not the expenditure incurred only by the first respondent. All the expenses incurred in connection with foreign travel on the corporate credit card are duly supported by vouchers and documents relating to foreign travel. The financial officer is kept informed of details of such foreign travels undertaken by the second respondent.
3.9 The publication of un-audited results of the Company for the quarter ended 31.12.2006 was inadvertently made by the first respondent due to lack of his knowledge of law. The first respondent had called for a meeting of the board of directors to approve the un-audited results on 31.01.2007 under intimation to the Stock Exchanges. Nevertheless, the petitioners failed to attend the board meeting and consequently, the schedule board meeting could not be held. The first respondent had in good faith published the results in view of the intimation already given to the Stock Exchanges. Therefore, the first respondent cannot be found fault on this account.
3.10 The first respondent being the shareholder of the Company, is entitled to requisition a general meting of the shareholders of the Company under Section 169 of the Act, according to which any requisition can be made by members constituting not less than 10% of the shareholding of a company by setting out the matters for consideration and depositing such requisition at the registered office of the company. If these conditions are fulfilled, the board of directors is bound within 21 days of receipt of such requisition, to call for the meeting as requisitioned on a day not later than 45 days from the date of receipt of the requisition. If on the other hand the board fails in it obligation, the meeting may be called by the requisitionist within three months from the date of deposit of the requisition in a manner, as nearly as possible, as if, the meeting has been called by the board of directors.
3.11 The first respondent in due compliance with Section 169 deposited a requisition on 22.11.2006 at registered office of the Company, requesting the first petitioner to convene a general meeting of the shareholders of the Company, who along with other petitioners failed to concede to the request, made by the first petitioner. Consequently, the first respondent was forced to call for a meeting himself by sending notices to the shareholders of the Company including the petitioners. The petitioners having admitted these facts cannot claim any defect in the calling of the extra ordinary general meeting of the Company, more so, when the first respondent has duly complied with the provisions of Section 169 while making the requisition to call for a general meeting of the shareholders of the Company.
3.12 The shareholders and/or the board of a Company may appoint any person to hold any office in the Company including the office of Joint Managing Director of the Company and, therefore, it is only the appointing authority, which has the necessary power to remove any person from any post in the Company. The CLB does not have jurisdiction over the appointment or removal of any person from the post of Managing Director.
3.13 The CLB has no jurisdiction to determine matters falling within the ambit of the SEBI Act, 1992 or SEBI (Insider Trading) Regulations. 1992 over which SEBI alone has exclusive jurisdiction and therefore, no order as to whether the acquisition of shares by the respondents 1, 3 to 7 is in violation of the SEBI Act or Regulations framed hereunder cannot be adjudicated by the CLB in the present proceedings, being barred, as held by this board in Redwood Holdings Private Limited v. The Sandesh Ltd. order dated 21.08.2002 made in C.P. No. 37/111A/CLB/WR/2000. The first respondent. has not committed any illegality in relation to the acquisition of shares in the Company. Regulation 11(1) allows for creeping acquisition of shares, namely not exceeding 5% in any financial year. The first respondent has not breached this limit and has made all the necessary regulatory filings in connection with such share acquisitions, thereby complying with the applicable laws. The petitioners failed to substantiate their allegation that the petitioner is acting in concert with respondents 3 to 7 to violate SEBI Takeover Code. The report on Corporate Governance forming part of the annual report for the year 2005-2006 shows that there was no noncompliance during the last three years as any matter relating to capital market. The respondents 1, 3 to 7 have not acted in concert to acquire shares in violation of the SEBI Regulations, with a view to gain control over the Company. The chart annexed to the main petition discloses that the first respondent has in fact reduced his shareholding in the Company. The fourth respondent has consistently maintained the percentage of shareholding since the year 2003. The fifth respondent has only 0.16% while the sixth respondent has only 0.09% shareholding. The seventh respondent holds only 0.22% shareholding of the Company. Every acquisition is less than 5%. which is not violative of Regulation 11 of the SEBI Takeover Code. The respondents 1, 3 to 7 have notified acquisition of shares as acquired by law by filing all the necessary regulatory filing in connection with such acquisition of shares. The petitioners challenging the acquisitions belatedly are guilty of laches and their claim must fail. By virtue of Section 111A(3), an application before the CLB can be made only when the SEBI has determined that a contravention of the SEBI Act or regulations there under has occurred and not at any earlier point of time. The CLB has no jurisdiction to adjudicate whether there is a violation of the SEBI Act and/or the regulations there under.
3.14 The CLB can pass no orders under Section 237 on mere allegations. It is absolutely mandatory, for the petitioners to prove conclusively the allegations made in support of the prayer for any relief claimed under Section 237. The petitioners have not produced any concrete evidence to support the allegations justifying appointment of any competent person as inspectors to investigate the affairs of the Company.
3.15 The profit and loss account of the Company cannot be the basis for any claim 7 of oppression and/or mismanagement of a company. Nevertheless, the annual report for the year 2005-06 clearly indicates a profit of Rs. 23.14 lakh for the year ended 31.03.2006. The accounts for the year ended 31.03.20.07 are yet to be finalised and hence it cannot be assumed that the Company has p' suffered financial losses.
3.16 The first petitioner, after obtaining the interim order on 09.02.2007 has been acting prejudicial to the interest of the Company, which resulted in refusal of the bankers to allow operations in the accounts maintained by the Company, non-payment of salaries to employees, dues to vendors/suppliers, charges toward utility services etc. The petitioners have failed to establish any circumstances which justify winding up of the Company on just and equitable grounds, which would, however, unfairly prejudice the interest of the Company as mandated in Section 397 of the Act. The petitioners have neither made out any case regarding any material change in the management control of the Company in order to maintain any action under Section 398, and therefore, the petitioners must fail and are not entitled for any of the reliefs claimed by them.
4. After considering the pleadings, claim and counter claim of the contesting parties, the issue before me is whether the CLB shall exercise its jurisdiction under Sections 111A, 237, 397 & 398, thereby remedying the grievances of the petitioners, as sought by them, in the facts and circumstances of the present case. The Company under the name and style of M/s VJIL Consulting Limited, of which represents the family name of the first petitioner, being a public company is mainly engaged in the business of software development as well as training and is running a Business Processing Out sources Centre. Among others, the petitioners 1 & 2 and respondents 1 & 5 are subscribers to the Memorandum of Association of the Company and these subscribers save the fifth respondent and Shri J. Nrupendar Rao are the first directors of the Company. The present board is constituted by the petitioners, first respondent and Dr. B.V.R. Sridhar Rao, with the first petitioner being the Chairman-Cum-Managing Director and first respondent as the Joint Managing Director. While the petitioners 1 & 2 hold 11.76%, first respondent 16.92%, the promoters and promoter group which shall also include the petitioners 1 & 2 and first respondent, are holding 37.75% of the paid up capital of the Company. The stake of the public accounts for 62.27%. The main grievances of the petitioners on account of the financial irregularities in the Company are that (i) the first respondent is exclusively conducting the affairs of the Company without involvement of the petitioners being directors; (ii) lent amounts to YAMPL; (iii) availed huge sums of money by way of unsecured loans; (iv) invested large sums of money in the subsidiary company and other mutual funds; (v) spent lavishly on account of foreign travels; and (vi) diverted funds of the Company under the guise of unauthorised payments. While the petitioners claim that none of these transactions is either with the knowledge or consent of the board of directors, it is vehemently put forth on behalf of the first respondent that every one of the disputed transactions is within the knowledge of the first petitioner and duly authorised by the board of directors of the Company.
5. The petitioners are accusing the first respondent for keeping custody of the statutory records of the Company, while the latter, however, categorically asserted that the books of account are in possession of the petitioners. The net result is that neither the statutory records nor the books of account of the Company are before this Bench to gauge the probabilities and improbabilities of the contentious issues involved in the company petition. While the first respondent has been accusing the petitioners of their dis-association from the operations of the Company, the petitioners cannot legitimately be expected to retain custody of the statutory records of the Company. There is nothing to suggest whether the first respondent ever made any demand at any point of time calling upon the petitioners to cause production of those records. Non-availability of the statutory records is deplorable and the Company being a public company, public interest, is seriously prejudiced. It is observed that the petitioners with a view to substantiate the charges levelled in the company petition have produced, the following documents:
copy of shareholding pattern in the Company;
statement of unsecured loans accepted by the Company;
statement of shares acquired by the respondents 1. 3 to 7;
copy of the notice dated 22.11.2006 caused by the first respondent convening an extra ordinary general meting together with explanatory statement thereon;
copy of the notice dated 11.01.2007 issued by the first respondent convening an extra ordinary general meeting together with the explanatory statement thereon;
copies of news papers dated 31.01.2007 containing unaudited financial results for the quarter ended 31.12.2006 of the Company;
annual reports of the Company for the financial years 2003-2004; 2004-2005 and 2005-2006; and communication dated 22.03.2007 sent by the Company to its banker in London.
6. A careful perusal of the above documents made available on behalf of the petitioners, in the absence of the books of account and the relevant minutes of the board meetings of the Company, in my view, does not conclusively establish that the first respondent is wholly responsible for the financial irregularities pointed out by the petitioners. The first respondent cannot be mulct with any liability on the strength of mere copies of statements and other records discussed here above. However, the publication of the un-audited results of the Company for the quarter ended 31.12.2006 caused by the first respondent is undoubtedly without the authority of the board of directors. The purported inadvertence on his part in such publication, without knowledge of law is however, is not excusable, more so in the absence of any material whatsoever on record to substantiate that the first respondent had convened the board meeting on 31.01.2007 for the purpose of approving the un-audited results and further that he intimated to the Stock Exchanges about the board meeting proposed on 31.01.2007. It shall be borne in view that any director cannot singly borrow monies on behalf of the Company, in view of the explicit restrictions imposed in Clause 50 of the articles of association of the Company. Therefore, the plea of the petitioners that the first respondent availed unsecured loans without the consent of the board of directors runs parallel to the relevant articles of association of the Company. Any borrowing incurred contrary to Clause 50 of the article cannot bind the Company.
7. The annual reports for the period between the financial years 1999-2000 and 2005-2006 reveal, on various accounts, the following financial position of the Company:
(Rs. in lakhs) _______________________________________________________________________________________________ Year Unsec- Inves- Invest- Amount Commun- Income Income Profits ured tment ment in incurred ication & from from of the Loan in others on Satellite invest- others Company Subsi- foreign link ments diary traver charges _______________________________________________________________________________________________ 1998 143.51 - 5.13 NA * NA * - 6.99 155.99 1999 _______________________________________________________________________________________________ 1999- Nil - 343.77 NA * NA * NA * 19.50 284.61 2000 _______________________________________________________________________________________________ 2000- Nil - 263.12 NA * NA * NA * 37.31 346.94 2001 _______________________________________________________________________________________________ 2001- Nil - 158.99 NA * NA * 10.87 NA 73.12 2002 _______________________________________________________________________________________________ 2002- Nil 292.10 163.76 34.85 20.65 7.75 - 52.85 2003 _______________________________________________________________________________________________ 2003- Nil 523.41 69.99 31.29 20.05 30.54 - 84.94 2004 _______________________________________________________________________________________________ 2004- Nil 611.17 15.49 28.85 36.32 0.64 3.42 51.73 2005 _______________________________________________________________________________________________ 2005- Nil 623.78 14.33 29.87 31.29 4.59 3.18 23.15 _______________________________________________________________________________________________ * For the years 1998-99 to 2002-03 only extract of annual reports made available.
8. The annual returns for relevant years reveal the following essential features:
• The annual reports for the years 2001-2002, 2002-2003, 2003-2004, 2004-2005 and 2005-2006 have been signed by, among others, the first petitioner.
• The Company paid dividend at 10% on the paid up share capital at pro-rata (1999-2000).
• The Company had secured and unsecured loans from companies, firms, and other parties listed in the register maintained under Sections 301 and 370(1-C) of the Act (1999-2000 to 2005-2006).
• The Company has not accepted any deposits from the public, (1999-2000: 2001-2002 to 2005-2006).
• The Company has established off-shore and on-sight facilities in USA and established a branch office in UK for monitoring of, off-shore and on sight services. The Company continued to extend its sales and marketing network in Europe and USA. The Company offices in Chicago. New Jersey and UK worked closely with clients taking support from off-shore located at Hyderabad in India. (2000-2001).
• The Company constituted an audit committee comprising of the second petitioner, first respondent and an independent director, under the Chairmanship of the first respondent. (2000-2001).
• The Company was having adequate internal control procedures commensurate with the size of the Company. (2000-2001 to 2005-2006).
• It was proposed at the annual general meeting held on 30.09.2002, to extend remuneration on long term basis in favour of the first petitioner not exceeding US $ 75,000 per annum, as may be decided by the board of directors, whenever he worked abroad on long term basis. (2000-2001).
• The Company has been awarded with ISO 9001 Certificate. (2000-2001).
• The Company proposed to incorporate wholly owned subsidiary in USA and UK in order to overseas marketing outfits for the Company. (2000-2001).
• There was no non-compliance by the Company during the last three years on any matter relating to capital markets and there were no penalties, strictures imposed on the Company by Stock Exchange or SEBI or any Authority.
• The Company has neither accumulated losses as at 31.03.2004. 31.03.2005 & 31.03.2006 nor it has incurred any cash losses during the financial year ended on those dates and the immediately preceding financial year. (2003-2004 to 2005-2006).
9. The annual reports for various years unequivocally reveal that the Company's board has a representation of the executive, non-executive and independent directors. The annual general and board meetings are being regularly convened as well as held and the audit committee constituted in March, 2001 is found to be active, and discharging as borne by the annual reports for the period from 2003-2004 to 2005-2006. The Company has been from time to time complying with the conditions of corporate governance, in terms of the requirements of Clause 49 of the Listing Agreement entered with the Stock Exchange, which is reflected in the Auditor's certificate on compliance with the Code of Corporate Governance. Neither the first petitioner nor any other director has been excluded by the first respondent while carrying on the management of the Company. All the borrowings, lending, investments and expenditure incurred on account of foreign travels have been either with the knowledge or consent of the board of directors of the Company. With all these, it is rather difficult to conceive that the petitioners are being sidelined from the management of the Company.
All the financial irregularities levelled against the first respondent, on account of, inter-alia unauthoritised lending, borrowings, investments, foreign travels. satellite charges, exclusive management, etc., have been mutely acquiesced by the first petitioner, as evidenced from the annual reports produced for the period between 1999-2000 and 2005-2006. This acquiescence by the first petitioner in the conduct of the affairs of the Company, which he has complained of will disentitle him from seeking any relief on these accounts. The loan in favour of YAMPL has been reportedly extended during the year 2000-2001. It is the Company, which established a subsidiary in USA and not first respondent, of which the petitioners cannot plead ignorance. The investments are made over a period of time. The Company, as found reflected in the annual reports, has offices in Chicago and New Jersey in USA and in UK for monitoring off-shore and on-site facilities and further extending its sales and marketing network in Europe and USA. At the annual general meeting held on 30.09.2002, there was proposal to extend a remuneration of US Dollars 75000, in favour of the first petitioner whenever he worked abroad on long term basis. The sequence of events would show that foreign trips, without any doubt, ought to have been undertaken, apart from the first respondent, by first petitioner and other officials of the Company. In this background, the expenditure of Rs. 90 lakh on account of foreign trips cannot be exclusively attributed to the first petitioner, and further the accusation pointed at the first respondent is not supported by any concrete evidence on the part of the petitioners. This Bench, with a view to ensure un-interrupted day-to-day operations of the Company, by an order dated 13.03.2007 directed that the board of directors constituting the board of the Company prior to filing of the company petition, namely, 08.02.2007 will operate the bank accounts), maintained by the Company, in pursuance of which, the Company in its communication dated 22.03.2007 authorised the banker in London to allow operation of the company's account jointly by the petitioners 1 & 2 and first respondent. This mandate would show beyond doubt that the first respondent could never be the sole signatory for operating the bank accounts of the Company.
10. In this connection the explicit averments made in C.A. No. 62 of 2007 filed by the first respondent and left undenied by not filing any counter, reads thus: "The 1st Respondent therefore faxed a copy of this Hon'ble Bench's orders to the UK Bank which immediately suspended the account completely and wrote to the 1st Respondent stating that the account would be revived only upon receipt of a letter signed by all the 3 Directors, i.e., 1st and 2nd Petitioners and 1st Respondent, who were initially authorised to sign cheques (emphasis supplied) on the account signed a letter instructing the Bank that payments/debits (para-7). In view of this, the plea of the petitioners that that the first respondent has been solely operating the bank accounts since inception of the Company, without furnishing any details of monies spent and expenditure incurred on account of the Company does not merit any consideration. The alleged diversion of funds by way of unauthorised payments on the part of the first respondent towards communication and satellite link charges, consulting expenses and rent remains to be mere pleadings, without being supported by any material, whatsoever. The second respondent cannot solely be held responsible for non-compliance with the statutory requirements towards tax and provident fund authorities while the first petitioner has been the Chairman-Cum-Managing Director of the Company ever since the demise of his father. The mere apprehension that the petitioners are exposed to huge penalties and punishments by the regulators for violation of, inter-alia, Section 58A and Companies (Acceptance of Deposits) Rules cannot be the basis for invoking the provisions of Sections 397 & 398, more so when the Company never resorted to acceptance of deposits at any point of time, as reflected in the auditor's reports for the period from 1999-2000 to 2005-2006. The materials made available before me do not suggest and are inadequate to form prima-facie opinion that the essential requirements of Sections 237(b) are duly satisfied to exercise the power in ordering any investigation into the affairs of the Company. The first petitioner being the Chairman-cum-Managing Director and other petitioners in their capacity as directors, in exercise of their statutory rights, no doubt, are empowered and entitled to seek access to the statutory records and books of account of the Company and inspect these records, which they never even endeavoured at any point of time before approaching the CLB. Nothing prevented the petitioners from participating in the affairs of the Company, and there is no trace of any evidence either for having denied such rights by the first respondent nor for enforcement of the same by the petitioners. The Company never suffered any loss in any of the financial years since 1999-2000, though profits are dwindling from time to time and the annual accounts for the financial years 2006-2007 are yet to adopted by the members of the Company, in which case, the loss of Rs. 13.25 lakh purported to have been suffered by the Company for the period ended 31.12.2006. as contended by the petitioners is meaningless.
11. The petitioners' yet another major grievance against the respondents 1, 3 to 7 is on account of the acquisition of shares of the Company reportedly in gross violation of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and the SEBI (Prohibition of Insider Trading) Regulations, 1972 which is however, under serious dispute. Before appreciating the rival contentions, the preliminary objection on the jurisdiction of the CLB to determine matters falling within the ambit of the SEBI Act. 1992 or regulations made there under is required to be considered. This objection when arose on an earlier occasion was rejected by this Board in Aska Investments (P) Ltd. v. The Glob Tea Co. Limited (Supra) on the ground that SEBI exercises powers under the SEBI Act and the CLB exercises its powers under the Companies Act especially when the statutory duties and obligations of the CLB are not similar to the statutory duties and obligations of SEBI and the consequences of such powers are different. Thus, the CLB has the powers to entertain the present complaint of the petitioners and pass appropriate order, notwithstanding the power of SEBI to look into the same complaint for any appropriate orders. In the decision of Redwood Holdings Private Limited v. The Sandesh Ltd. (Supra) this Board categorically found that there was no violation of the SEBI (Prohibition of Takeover Code) Regulations, 1972 by the petitioner therein and consequently directed the company to register the transfer of shares and therefore, this decision is of little assistance to the respondents.
12. I shall, therefore, now proceed to consider whether the acquisition of shared by the respondents is or not violative of the SEBI Regulations 1992 or the SEBI Regulations 1997, for which the details of acquisition of shares under dispute assume relevance and they are founded reflected in the respective statement of the contesting parties, as under:
STATEMENT-A DETAILS OF SHARES ACQUIRED BY RESPONDENTS 1, 3 to 7, AS GIVEN BY PETITIONERS ______________________________________________________________________________________________ Name of the Acquirer Shares as on Shares as on Shares as on Shares as on 31.03.2003 31.03.2004 31.12.2005 31.12.2006 ____________________________________________________________________ Percentage of Percentage of Percentage of Percentage shares held shares held shares held of shares held ______________________________________________________________________________________________ M. Satyendra 1073227 1247356 1380500 1329651 (13.66) (15.87) (17.57) (16.92) ______________________________________________________________________________________________ M. Sunitha 0 0 154203 414117 0 0 1.96 5.27 ______________________________________________________________________________________________ Ravindra Manchala 93893 96793 99793 99793 (1.19) (1.23) (1.27) (1.27) ______________________________________________________________________________________________ Manchala Manchala 0 0 0 12300 0 0 0 (0.16) ______________________________________________________________________________________________ M. Sankara Kumari 0 0 0 17500 0 0 0 (0.22) ______________________________________________________________________________________________ M. Sarojini Devi 0 0 0 7000 0 0 0 (0.09) ______________________________________________________________________________________________ TOTAL 1167120 1344149 1634496 1880361 (14.85) (17.10) (20.80) (23.93) ______________________________________________________________________________________________ STATEMENT - B DETAILS OF SHARES ACQUIRED BY RESPONDENTS 1, 3 to 7, AS DISCLOSED BY THE COMPANY ______________________________________________________________________________________________ NAME 31-3-03 31-03-04 31-03-05 31-3-06 30 09 06 ______________________________________________________________________________________________ M. Satyendra 1073227 1247356 1380500 1329651 1329651 (13.66) (15.87) (17.57) (16.92) (16.92) ______________________________________________________________________________________________ M. Sunitha 45169 50169 68369 389866 414117 (0.57) (0.64) (0.87) (4.96) (5.27) ______________________________________________________________________________________________ Ravindra Manchala 93893 96,793** 95,793 99793 99793 (1.19) (1.23) (1.219) (1.27) (1.27) ______________________________________________________________________________________________ M. Mallesham 12300 12300** 12300 12300 12300 (0.16) (0.16) (0.16) (0.16) (0.16) ______________________________________________________________________________________________ M. Sankara Kumari -- 17500 17500** 17500 17500
-- (0.223) (0.223) (0.223) (0.223) ______________________________________________________________________________________________ M.Sarojinidevi 7000 7000 7000 7000 7000 (0.09) (0.09) (0.09) (0.09) (0.09) ______________________________________________________________________________________________ TOTAL 1231589 1431118 1581462 1856110 1880361 (15.67) (18.213) (20.132) (23.623) (23.933) ______________________________________________________________________________________________ * Not furnished by the Company but appears in the website of Bombay Stock Exchange and accordingly incorporated.
** Not furnished by the Company in the statement as at 31 /03/2004 but appears in previous year column of statement as at 31/03/2005.
13. It is relevant to point out that statement-B hereinabove comprises of details of J shares acquired by the respondents 1, 3 to 7. as culled out from the periodical disclosures made by the Company in terms of the SEBI Regulations, 1997, in favour of the Stock. Exchange. There is, however, no disclosure of 93893 shares in the name of the fourth respondent as at 31.03.2003 by the Company, but they are found reflected in the website of Bombay Stock Exchange and therefore, cannot be ignored. In view of this, I am inclined to go by the shareholding as set out in Statement-B, for the purpose of adjudicating the purported violation of the SEBI Regulations, 1997 and the SEBI Regulations, 1992 on the part of the respondents 1, 3 to 7 at the time of acquiring the shares of the Company. In this connection, Regulations 7(1), 7(1A), 8, 10 and 12(1) of the SEBI Regulations, 1997 and the relevant regulations under the SEBI Regulations. 1992 assume relevance.
14. Regulation 7(1) stipulates that any acquirer, who acquires shares or voting rights which (taken together with shares or voting rights, if any. held by him) would entitle him to more than five per cent or ten per cent or fourteen per cent shares or fifty four per cent or seventy four per cent shares or voting rights in a company, shall disclose within two days at every stage the aggregate of his shareholding or voting rights in that company to the company and to the stock exchanges where shares of the target company are listed. The term "acquirer", in terms of Regulation 2(b) means any person who directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer. In this case, since, on the admission of the Company as disclosed to the Bombay Stock Exchange that the respondents 3 to 7 were acting in concert, the aggregate holding of the respondents 1, 3 to 7 will have to be considered in terms of Regulation 7 and other relevant regulations.
15. In terms of statement-B hereinabove, the respondents as at 31.03.2003, was holding 15.67% of share capital, which got increased to 18.213% as at 31.03.2004 and thereafter to 20.132% as at 31.03.2005, which was enhanced to 23.623% as at 31.03.2006. In view of this, it was obligatory on the part of the respondents 1, 3 to 7 to have disclosed in the prescribed format at every stage when the aggregate of their share holding exceeded 5%, 10% & 14% as the case may be in favour of the Company as well as the Bombay Stock Exchange, wherein shares of the Company are listed. There is no material whatsoever substantiating the fulfilment of Regulation 7(1) by the respondents 1, 3 to 7.
16. Regulation 7(1A) provides that any acquirer who has acquired shares or voting rights of a company under Sub-Regulation (1) of Regulation 11, shall disclose purchase or sale aggregating two per cent or more of the share capital of the target company to the target company and the concerned stock exchange within two days of such purchase or sale along with the aggregate share holding after such acquisition or sale. It is beyond doubt that the respondents on account of acquisition of further shares during the financial year 2003-2004 and 2005-2006 increased his share holding from 15.67% to 18.213% and 20.132% to 23.623% respectively, i.e. over 2% during these financial years, which they ought to have disclosed to the Company as well as Bombay Stock Exchange as specified in Regulation 7(1A), which are found lacking.
17. Regulation 8(1) contemplates that every person, including a person mentioned in Regulation 6, who holds more than fifteen per cent shares or voting rights in any company, shall, within 21 days from the financial year ending March 31, make yearly disclosures to the company, in respect of his holdings as on 31st March deregulation 8(2) provides that a promoter or every person having control over a company shall, within 21 days from the financial year ending March 31, as well as the record date of the company for the purposes of declaration of dividend, disclose the number and percentage of shares or voting rights held by him and by persons acting in concert with him, in that company to the company. Even according to the version of the respondents 1, 3 to 7, they were holding 15.67% as at 31.03.2003, 18.213% as at 31.03.2004 and 20.132% as at 31.03.2005 and 23.263% as on 31.03.2006 in which case they ought to have made yearly disclosures to the Company within 21 days from the close of financial year as at 31.03.2003, 31.03.2004, 31.03.2005, and 31.03.2006 respectively. These requirements of Regulation 8(1) remain unsubstantiated. Among others, the respondents 1 & 5 being promoters or other respondents, namely, respondents 3, 4, 6 & 7 did not have "control" within the meaning of the Regulations, 1997, over the Company during any of the relevant financial years and, therefore, the fulfilment of the requirement of Regulation 8(2) does not arise.
18. Regulation 10 states that no acquirer shall acquire shares or voting rights which? (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise fifteen percent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company.
19. In terms of the statement - B, the shareholding of the respondents 1, 3 to 7, as at 31.03.2003 stood at 15.67%, which acquisition of 15% or more ought to have been done, as specified in Regulation 10, by a public announcement before such acquisition of shares. The subsequent acquisitions during the financial years between 2003-2004 and 2005-2006 though do fall under creeping acquisition route in line with Regulation 11(1), yet the acquisition crossing the trigger limit of 15% as at 31.03.2003 was failed to be done by a public announcement and therefore, all such subsequent acquisitions made during the financial years stated here above are also hit by Regulation 10.
20. By virtue of Regulation 12(1) irrespective of whether or not there has been any; acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the regulations. In the case before me the aggregate share holding of the respondents 1, 3 to 7 accounts for only 15.67% as at 31.03.2003; 18.213% as at 31.03.2004; 20.132% as at 31.03.2005 and 23.623% as at 31.03.2006, in which case it cannot be said that the respondents 1, 3 to 7 acquired control over the company, requiring the fulfilment of the stipulations thereon.
21. The sum and substance of the above conclusions are that the aggregate shareholding of the respondents 1, 3 to 7 exceeding the prescribed limit without being followed by the requisite disclosures would come under the purview of the CLB in the present proceedings and further that in the absence of any concrete material in this behalf, which is lacking absolutely in the present case. I am of prima facie view that the respondents 1, 3 to 7 have not established beyond doubt that they have complied with the statutory disclosures in the prescribed manner to the Company and Stock Exchange, as the case may be, in strict in compliance with Regulations 7(1), 7(1A), and 8(1) on acquisition of the impugned shares, that such acquisitions are by public announcements made as per Regulation 10 and further that there has been no violation of Regulation 8(2) and 12(1) of the Regulations, 1997 for the reasons stated supra. Therefore, the assertion of Mrs. Nalini Chidambaram, learned Senior Counsel, that the disclosures made by the Company of the disputed acquisitions from time to time to the Stock Exchange would prove the statutory disclosures by the respondents 1, 3 to 7 in favour of the Company in the absence disclosures made by the respondents 1, 3 to 7 does not merit any consideration. The SEBI Regulations, 1997, having been formulated by the SEBI in terms of the powers under Section 30 by the SEBI Act, 1992, the regulations also have statutory effect, and, as per Regulations 7(1), 7(1A), 8(1), an acquirer shall disclose, as envisaged therein and make a public announcement under Regulation 10, failure of which would attract the provisions of Section 111A(3). It is mandatory, as held in Bombay Dyeing and Manufacturing Co. Ltd. v. A.K. Bajoria (Supra) on the part of the CLB to order rectification of the register of members once its comes to the conclusion that any of the grounds in Section 111A(3) has been established, which shall include any transfer in contravention of any of the provisions of the SEBI Act. 1992 or Regulations made there under. All the shares acquired in contravention of the SEBI Regulations, 1997, will have to be necessarily declared invalid and the register of members be rectified.
22. SEBI (Prohibition of Insider Trading) Regulations, 1992 imposes several obligations on the board of directors, compliance officer, officers, designated employees of the company, as summarised hereunder:
• The board of directors shall decide a threshold limit upto which shares of the company can be bought or sold in the secondary market by the directors/officers/designated employees of the Company.
• The compliance office shall clear prior to any acquisition or sale of shares over and above the threshold limit fixed by the board of directors.
• None of the specified persons shall be allowed to trade in the shares of the Company even below the threshold limit at any time a price sensitive issue is decided by the board of directors, namely, declaration of dividend, issue of bonus/rights shares etc. • The Company shall form a "trading window" which shall remain closed when price sensitive information is decided by the Company.
• None of the specified persons shall engage in trading of shares of the company when the "trading window" is closed.
The first petitioner being the Chairman-Cum-Managing Director, is also responsible under law for statutory compliances and therefore, the first respondent cannot exclusively be found fault for any such non-compliances as mandated in SEBI Regulations, 1992. Therefore the plea of the petitioners that the respondents have contravened the provisions of SEBI Regulations, 1992 deserves to be rejected.
23. The day-to-day operations of the Company are in jeopardy, on account of the serious differences between the petitioners and first respondent forcing the Company to commit default in payment of salary to employees as well as suppliers, dues to statutory authorities and payment on account of utility services which warranted the intervention of the Bench on more than one occasion, in the course of the present proceedings, to restore the operation of the bank account(s) jointly by the petitioners 1 & 2 and first respondent, as brought out by the Company's communication dated 22.03.2007 addressed to it banker in London. The day-to-day operations of the Company cannot be brought to grinding halt on account of the internal squabbles between the parties. There has been no consensus on the exit proposal of either of the parties by sale of one's shares held in the Company in favour of the other. It is all the more left to the wisdom of the members for continuance of the petitioners and first respondent in the management of the Company. The cumulative impact of the existing state of affairs, no doubt, justifies winding up of the Company on just and equitable grounds, but such course of action would unfairly prejudice the interests of the Company and its shareholders of whom more than 60% constitute the public at large. The present situation warrants alternate remedial measures keeping in view the affairs of the Company in future. Against this background, I do not deem it fit to go into the validity of the requisition caused by the first respondent convening the extraordinary general meeting or the subsequent action initiated by the first respondent in convening the extraordinary general meeting, in view of the relief proposed in safeguarding the interest of the Company.
24. In view of my foregoing conclusions and in exercise of the powers under 7 Sections 111, 397 & 398 read with Section 402 of the Act, it is ordered as under:
(i) The acquisition of shares by the respondents 1, 3 to 7 beyond 5%, is declared as invalid.
(ii) The Company shall rectify the register of members in respect of all the shares acquired by the respondents 1, 3 to 7 beyond 5% within 30 days of receipt of this order.
(iii) The Company will convene a general meeting by 30.11.2007 in order to elect the board of directors, thereupon which, the directors so elected will elect the Chairman and Managing Director in accordance with the relevant articles of association and carry on the business strictly in accordance with the internal regulations of the Company.
(iv) The bank accounts maintained by the Company shall continue to be jointly operated by the petitioners 1 & 2 and first respondent in accordance with the interim order dated 13.03.2007 till reconstitution of the board of directors, in terms of this order.
With the above directions, the company petition and connected applications are disposed of. In view of this, the interim orders shall remain in force till the board of the Company is reconstituted in terms of this order. No order as to costs.