Company Law Board
Gujarat Machinery Manufacturers Ltd. vs Nile Ltd. on 1 November, 2000
ORDER
Balasubramanlan, Vice-Chairman
1. The petitioner in CP No. 15 (GMM for short) is the holding company of Karamsad--the petitioner in the other petitions. The first respondent company (the company) is common in all these petitions. Since the facts and circumstances in these petitions are inter-linked they are being disposed of by this common single order.
2. A brief of the facts in this case arc that GMM had acquired 2,86,200 equity shares (CP 15 of 1998) of the company during the period 23-4-1997 to 11-2-1998. Likewise, Kararnsad acquired 10,000 shares (CP 22 of 1998) of the company during the period 30-6-1997 to 11-2-1998. These shares together constituted 9.91 per cent of the shares of the company. These share were lodged with the company for registration of transfer on 9-4-1998 and 4-9-1998 respectively. While the registration was pending, Karamsad decided to acquire further shares of company and accordingly a public announcement was made through newspapers on 21-4-1998 to acquire 6,00,380 shares representing 20 per cent of the subscribed equity share capital of the company at a price of Rs. 40 per share. This was done in terms of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997 (Takeover Code). The acquirer was in a position to acquire through public offer 18,300 shares (CP No. 21 of 1998). In the meanwhile, it had also acquired through the Stock Exchange and negoti-
ated deal, a further 3,15,595 shares (CP No. 23 of 1998). When the petitioners sought registration of 2,86,200 and 10,000 shares acquired by them respectively, the company refused registration of the transfers and the same was communicated to the petitioners on 7-5-1998. Aggrieved by this refusal, the petitioners wrote to the company on 12-5-1995 seeking the reasons for such a refusal. The company, by a letter dated 11-5-1998 complained to the department of the Company Affairs that GMM and its associates were acquiring the shares in the respondent company in violation of the provisions of section 108A of the Companies Act ('the Act') and as such sought for taking necessary action in this regard. It appears that GMM also made a reference to the Central Government regarding the applicability of section 108A of the Act for acquiring shares in the respondent company. The Central Government passed an order on 24-7-1998 holding that GMM was a dominant undertaking and as such the provisions of section 108A were applicable in the acquisition of shares in the company. GMM has challenged the order of the Central Government in Bombay High Court which is pending. The board of directors of the company had also rejected the transfer of the shares acquired during the public offer in September 1998. Thus the company had rejected the registration of transfer of all the shares impugned in the above four petitions and hence the petitioners have filed these petitions under section 111A of the Act for a direction to the company to register the shares in favour of the petitioners. Thus, we have two situations, one relating to 2,86,000 shares (CP No. 15 of 1998) and 10,000 shares (CP No. 22 of 1998) which were acquired before the public offer and 18,300 shares (CP No. 21 of 1998) and 3,15,595 shares (CP No. 23 of 1998) acquired during the period of public offer.
3. Shri R.A. Kapadia, Senior Advocate appearing for the petitioners submitted that 2,86,200 shares acquired by the petitioner (CP 15 of 1998) and 10,000 shares acquired by the petitioner in CP 22 of 1998 constituted 9.91 per cent shares in the respondent company. The respondent company refused registration of the above shares without assigning any reason and as such the refusal is invalid in terms of section 111A according to which shares of a public company are freely transferable. Referring to Annexure-B to the rejoinder, he submitted that GMM had informed the respondent company on 26-3-1998 that the petitioner had acquired 1,38,100 shares of the respondent company on 25-3-1998. This was done with a view to comply with requirements of Regulation 7 of the Takeover Code. In spite of repeated reminders, the respondent company had not informed the reasons for refusal of registration of the shares. He pointed out that Karamsad made a public offer to acquire 20 per cent shares in the company in terms of Regulation 10 of Takeover Code. While, through the public offer, it could acquire 18,300 shares (CP 21 of 1998), by private negotiations and in open market it could acquire further 3,15.595 shares (CP 23 of 1998) in terms of regulation 22(17) of the Takeover Code. The shares so acquired were sent to the respondent company along with a certificate from the Merchant Bankers as contemplated by regulation 23(6) of the Takeover Code on 24-8-1998 and 4-9-1998, in respect of 18,300 shares and 3,15,595 shares respectively. The board of directors of the company had rejected the registration of transfer on 21-9-1998 and 28-9-1998 respectively. In the meanwhile, the company had also complained to SEBI that the public offer suffered from various infirmities and non-disclosures. This was done with a view only to prevent Karamsad from proceeding with the public offer. The company also made a complaint to the Department of Company Affairs alleging that the petitioner group is a dominant undertaking and that since the acquisition would take the holding of the petitioner group to more than 25 per cent shares in the company, GMM should obtain permission from the Central Government in terms of section 108 A. In the meanwhile, the company had also filed a writ petition in Andhra Pradesh High Court for a declaration that the public announcement by Karamsad was invalid. Later, when the Central Government gave an order that GMM was a dominant undertaking and as such had to follow the provisions of section 108A before acquisition of the shares, GMM challenged the decision of the Central Government before the Bombay High Court, which is pending. By a letter dated 21-9-1998, the company returned the transfer documents asking Karamsad to obtain Central Government approval in terms of the order of the Central Government dated 24-7-1998. By a letter dated 5-10-1998, Karamsad wrote to the company pointing out that the total acquisition of shares by the petitioner group was only to the order of 21.08 per cent and as such notwithstanding their stand that theirs was not a dominant undertaking and that the provisions of section 108A were not applicable in respect of these acquisitions, the company cannot refuse registration in terms of section 108A. He pointed out that notwithstanding this letter, once again the company reiterated its earlier stand and returned all the transfer instruments to Karamsad. Therefore, he contended that the action of the company to have refused the registration of these shares impugned in the four petitions is not only mala fide but also against the provisions of section 111A as well as the Takeover Code, as also the Listing Agreement. Accordingly, he sought for a direction to the company to register all the shares impugned in the four petitions. Referring to his contention that the respondent company cannot refuse registration of transfer of shares which arc freely transferable, he pointed to cases wherein the CLB has held that the company could refuse transfer of shares only on the grounds specified in sub-section 3 of section 111A and not on any other ground. Estate Investment Co, (P.) Ltd.v.Siltap Chemicals Ltd [1999] 96 Comp. Cas. 217/19 SCL 207 (CLB) - wherein the CLB observed "..... only when a company refuses to register the transfer of shares on the grounds that transfer is in violation of the provisions of the Securities and Exchange Board of India Act or regulations thereunder, the provisions of the Sick Industrial Companies (Special Provisions) Act or any other law for the time being in force, such refusal could be considered to be with sufficient cause. Refusal on any other ground in respect of a public company cannot be considered to be a sufficient cause for such refusal." On the same proposition he relied on the following cases also wherein the CLB has decided likewise. Canara Bank v. Ankit Granites Ltd [1999] 97 Comp. Cas. 511/21 SCL 83, Azzilfi Finlease & Investments (P.) Ltd v. Ambalal Sarabhai Enterprises Ltd [2000] 100 Comp. Cas. 355 CLB and Trade Links Ltd v. Mount Shivalik Breweries Ltd [1999] 95 Comp. Cas. 150/23 SCL 52 (CLB).
4. Shri T. Raghavan, Senior Advocate for the company pointed out that GMM and the company are in the same line of business of glass lining operations. While GMM has technical collaboration with Pfaudler of USA, the company is having a collaboration with Hakko Sangyo of Japan. These two collaborators are competitors in the world market. Therefore, with the view to consolidate its position in the same line of business GMM acquired the shares in the company. He further contended that GMM is a dominant undertaking and therefore, to acquire 25 per cent for more shares in the company, it had to obtain the approval from the Central Government in terms of section 108A. He pointed out that the petitioners had acquired 9.91 per cent of the shares of the company and therefore the open offer made by Kararnsad, which is a subsidiary of GMM, to acquire a further 20 per cent of the shares would increase the shareholding and voting power of the petitioners beyond 25 per cent GMM, being a 'dominant undertaking' was bound to obtain prior permission from the Central Government in accordance with the provisions of sections 108A to 108H of the Act before making the public offer. Since the petitioners had not obtained such a permission, even the public offer was bad in law as also the acquisition of the shares through such offer. He contended that the board of directors of a company is empowered to refuse registration of any transfer of shares if in its opinion, the transfer of such shares would be prejudicial to the interests of the company. GMM and the company are engaged in glass lining operations. GMM is a competitor to the company's business and the acquisition of impugned shares is not a bona fide investment but only to consolidate its position in the same line of business. The company apprehends that their business interest would be adversely affected and great prejudice would be caused to it by the petitioners' embarking to acquire substantial stake in the company. The efforts of the petitioners in acquiring the shares is only to stifle the growth of the company and to block special resolution of the company including increase of share capital, increase in borrowing powers, diversification into new areas of business etc. which arc absolutely necessary for the company to grow in terms of expansion and diversification. The acquisition of shares by the petitioner and its associates is detrimental to the future growth and prosperity of the company. Further, the Japanese collaborator has transferred the technology to the company on the condition that it would not be transferred directly or indirectly to anyone without prior permission. If the petitioner and its associates were to acquire a substantial stake in the company and make an entry into the Board, GMM would have access to the Japanese technology resulting in the confidentiality commitment being breached. After taking into account these relevant factors, the board of directors of the company had rejected the transfer in the interest of the company as well as its members. GMM had acquired 2,86,200 shares in between 23-4-1997 and 11-2-1998, amounting to beyond 5 per cent of the paid-up capital of the company, in which case the petitioner ought to have intimated the company as well as the Stock Exchanges regarding the acquisition within four working days of such acquisition in accordance with regulation 7 of the Regulations. GMM did not intimate the company. Therefore, the acquisition of impugned shares without complying with regulation 7 is not a laid acquisition and has to be declared as invalid. Shri Raghavan pointed out that shares of a public limited company even though are freely transferable, a company has the power to refuse registration of shares for sufficient cause. He contended that when a company is able to establish that the grounds for refusal are bona fide and in the interest of the company, then such refusal should be deemed to be with sufficient cause. According to him, various courts, while interpreting the term 'sufficient cause' as appearing in section 111(4) have given liberal construction to this term and one such construction is that a company could refuse registration of transfers if the same is in the interest of the company and is bona fide. Therefore, he contended that the term 'sufficient cause' appearing in section 111A should also be constructed liberally and not in a restive sense as has been held by the CLB in the cases cited by the learned counsel for the petitioners. According to him, in addition to the grounds specified in section 111 A{3), a public company should have right to refuse registration of transfer of shares on any ground that may be available under section 111(4). The restrictions cannot be confined only to the grounds specified in section 111 A. If similar provisions are found in different statues, he pointed out that, one shall not go by the spirit of the provisions contained in one of the statutes alone. If two sections of the same statute use the same language, one should presume that the principles enunciated in both the sections should be made applicable. In this connection, he has relied upon Farrell v. Alexander[1976] 2 All ER 721. Shri Raghavan emphasised that the provisions of sections 111 and 111A are to be treated alike and that 'sufficient cause' stipulated in both these sections should be considered while considering the registration of transfer of shares in a public limited company, especially when the board of directors have no option but to refuse the transfer if it is in violation of section 111 A(3). In other words according to him, the interpretations given by various Courts on the term 'sufficient cause' in section 111 should also be taken into consideration while interpreting the same term used in section 111 A. He pointed out that the courts have held that if a company refuses registration of transfers in the interest of the company, the same would be with sufficient cause. According to Shri Raghavan, if this interpretation is not accepted, the existing provisions do not cover unlisted public limited companies, in view of the fact that section 111A applies to only listed public limited companies. Summing up his arguments, he submitted that that the acquisition of the shares by the petitioners is in violation of the provisions of the Takeover Code and that the Board had refused registration in the interest of the company and as such the petitions should be dismissed.
5. We have considered the pleadings and arguments of the counsel. One admitted fact is that that the petitioners are acting in concert, being a holding and subsidiary companies to acquire the shares in the company and therefore, they fall within the definition of 2(e) of the Takeover Code. In regard to the power to refuse registration, Shri Raghavan strenuously argued to state that the term 'sufficient cause' appearing in section 111 A(2) proviso cannot be strictly confined only to the grounds on which rectification can be sought for under section 111A(3) as has been held by the CUB in the cases cited by the learned counsel for the petitioners, as according to him, if the board of directors decide to refuse registration on bona fide grounds and in the interest of the company, then such grounds of refusal should also be considered to be within the meaning of 'sufficient cause' as has been held by various courts in interpreting this term with reference to section 111. He further argued to state that there cannot be different interpretation for the term 'sufficient cause', one for private companies and another for public companies. While we do agree with him on this proposition, yet, it is essential to note that even before the provisions of section 111A were inserted in the Act, the powers of refusal in a listed company was restricted by the provisions of section 22A of Securities Contracts (Regulation) Act, 1956 ('the SCR Act') only to certain grounds, notwithstanding the provisions of section 111. Therefore, the Legislature has consciously differentiated the grounds for refusal for listed and unlisted companies (including private limited companies) even before insertion of section 111A. Section 111A was introduced simultaneously by repealing the provisions of section 22A of SCR Act and most of the grounds provided therein have been provided in section 111A(3), except the one relating to change in the composition of the board of directors. While section 111A stipulates that the shares of public companies are freely transferable, section 3(1)(iii) authorizes a private company to make provisions in the articles to restrict the right to transfer shares. Thus, the shares in a public company are not similar to the shares in a private company. Shri Raghavan pointed out that section 111A(3) is applicable only to a listed public company and not to an unlisted public company. We do not find substance in this argument. While all the grounds specified in that section are applicable to a listed company an unlisted public company could refuse registration of transfer of shares if the same is in violation of the provisions of any Act or SICA. Therefore, as this board has held in several cases cited supra, the term 'sufficient cause' as appearing in proviso to section 111A(2) would cover only the instances under which rectification of the register of members can be ordered, in terms of section 111 A(3). If we accept the contention of Shri Raghavan, then there could be two sets of grounds for rectification - one for pre-registralion rectification and another for post-registration rectification. We are not in a position to accept this proposition. Therefore, in the instant cases we shall only examine whether the company's refusal to register the transfers falls within any of the grounds specified in section 111A(3) and if it is so then we cannot order the registration.
6. In the present case, ve find that GMM had lodged with the company 2,86,200 shares accounting for 9.58 per cent shares in the company on 9-4-1998. As per the provisions of clause 7 of the Takeover Code, any acquirer who acquires shares or voting rights which entitle him to more than 5 per cent shares or voting rights in a company, shall have to disclose the aggregate of his shareholding or voting rights within a period of four days from the date of such acquisition. According to counsel for the petitioners, such an intimation was given to the company on 26-3-1998 and therefore, there is compliance with the provisions of clause 7 of the Regulations. During the hearing, the counsel for the petitioners submitted a statement indicating certain relevant dates. As per this statement and also the averments made in para 6(b) of the petition in CP 23 of 1998, GMM had acquired 2,86,200 shares accounting to 9.58 per cent shares between the period 23-4-1997 to 11-2-1998. Likewise, Karamsad had acquired 10,000 shares (0.33 per cent) between the period 30-6-1997 to 11-2-1998. Even assuming that the threshold limit of 5 per cent was exceeded only on 11-2-1998, in terms of the clause 7 of the Regulations, GMM should have informed the company of such acquisition latest by 16-2-1998, i.e., within four days of such acquisition. However, such an intimation was given only on 26-3-1998 i.e., after delay of more than one month. Therefore, there is clear contravention of the provisions of clause 7 of the regulations.
7. After the hearing was concluded, the petitioners have furnished a list of events in which it is indicated that the period of acquisition of shares by GMM was from 23-4-1997 to 25-3-1998 (i.e. 9.58 per cent shares). If the last date of acquisition as claimed by the petitioners now is 25-3-1998, then the letter dated 26-3-1998 would satisfy the provisions of clause 7 of the Regulations. Even though we could reject this statement as an afterthought, produced after the contravention was pointed out during the hearing, yet we shall examine the applicability of the clause 7 of the Regulations on the basis of this statement. In the letter dated 26-3-1998, the petitioner had informed the company that it had acquired 1,38,100 shares on 25-3-1998 and that it already had acquired 1,48,100 shares (dates not indicated). These 1,48,100 shares constituted 4.957 per cent of the shares in the company. Since it is inconceivable that all the 1,38,100 shares could have been acquired on a single day, i.e. on 25-3-1998, in the absence of the dates of acquisition of these shares by the Company, it is very difficult to pin-point the date on which the threshold limit of 5 per cent was exceeded. Further, we also note that Karamsad had also acquired 10,000 shares accounting for 0.33 per rent during this period. The dates of acquisition of these shares have also not been disclosed. Since as per this statement Karamsad held 0.33 per cent as on 11-2-1998 and GMM had admittedly held 4.957 per cent before acquisition of further shares of 1,38,100, the holding of both these petitioners in aggregate accounted to 5.287 per cent. Thus, exceeding the threshold limit of 5 per cent as stipulated in clause 7 of the Regulations occurred much earlier to 25-3-1998. Therefore, even as per the revised statement furnished by the petitioners, there had been violation of the provisions of clause 7 of the Regulations. One of the grounds under which a register can be rectified as per section 111A(3) is that if the registration of transfer had been effected in contravention of any of the provisions of SEBI Act, or the regulations made - thereunder. Likewise, if the refusal to register the transfer of shares is on the same grounds, CLB cannot direct registration. Since the petitioners had not informed the company within 4 days of crossing the limit of 5 per cent shares, there has been violation of clause 7 of the Takeover Code.
8. Therefore, the acquisition of the shares by GMM and Karamsad before the open offer will have to be declared to be in contravention of provisions of clause 7 of the Regulations and accordingly we do so. Since these petitioners have been acting in concert and there is contravention of clause 7 of the Regulations, the acquisition of the shares during the open offer period as impugned in CP 21 of 1998 and CP 23 of 1998 will also have to be declared to be in continuation of the said contravention. Even otherwise, the Central Government has declared GMM as a dominant undertaking (which is under challenge) in terms of provisions of section 108G. According to the learned counsel for the petitioners, since the total percentage of the shares acquired by the petitioners is only around 21 per cent, the provisions of section 108A are not applicable, without prejudice to his contention that GMM is not a dominant undertaking. As per section 108A of the Act, even when a dominant undertaking agrees to or intends to acquire shares in a company, if such proposed acquisition together with the existing holding would exceed 25 per cent shares in the target company, the previous approval of the Central Government is necessary. In other words, the previous approval of the Central Government is required even to implement the proposal to acquire shares beyond 25 per cent shares. It is an admitted position that the petitioners held 9.91 per cent at the time when Karamsad made the public offer to acquire 20 per cent shares in the company. Since the proposal to acquire 20 per cent shares, together with the existing holding would be more than 25 per cent shares it should have obtained the previous approval of the Central Government before making the offer. Since it had not done so, the acquisition of the shares during the offer period is violation of the provisions of the Companies Act. Even though, we find that the board of directors had not taken the contravention relating to the Takeover Code into account while refusing the registration, yet, since the contravention has been established before us, we cannot overlook the same and order registration of the transfers. Since we find that all the acquisition made by the petitioners as impugned in these petitions are in violation of the provisions of the Takeover Code/the Companies Act we have to declare that the company has refused registration of transfers with 'sufficient cause' and accordingly do so. In view of this, we dismiss all the four petitions.