Company Law Board
Rasoi Limited vs Shri Jaideep Halwasiya And Ors. on 18 February, 2008
Equivalent citations: [2008]44COMPCAS145(CLB)
ORDER
S. Balasubramanian, Chairman
1. This is a petition filed under Sections 247/250 of the Companies Act, 1956 (the Act) by M/s. Rasoi Limited (the company) seeking for the following reliefs: (a) Declaration by an order that the membership of respondent Nos. 1 to 27 in the company are to be investigated for the purpose of determining the true persons who are or have been financially interested in the success or failure, whether real or apparent, of the company; (b) To order an investigation by the inspectors of the circumstances which suggests the existence of arrangement and understanding between the respondents in connection with the acquisition of shares of and in the company by the respondents. By way of interim relief, the petitioner has also sought for an order restraining the respondents from dealing with or transferring the shares held by them in the company in any manner and also for restraining them from exercising voting rights.
2. The facts of the case arc: The company has earlier filed a petition under Section 111A of the Act seeking for rectification of the register of members of the company to remove the names of respondents 1 to 16 on the ground that they had, by acting in concert, acquired shares in the company in violation of the provisions of SEBI (Substantial Shares Take Over) Regulations, 1999. In that petition I passed an order on 14.11.2006 that any further acquisition of shares by the respondents would be subject to the final order on the petition. However, I declined to pass an order of restraint against the respondents from transferring their shares impugned in the petition. The said petition is pending disposal. During the pendency of the said petition, some of the respondents therein had transferred their shares to respondents 18 to 27 herein. The company has filed the instant petition thereafter. At the time of mentioning the petition, in terms of Section 250(2) of the Act, the petitioner sought for restraining the respondents from transferring their shares and accordingly, I passed an order on 12.7.2007 directing the respondents to maintain status quo with regard to their shareholdings in the company. Thereafter, the matter was heard on 26th & 27th July, 2007 and an order was passed on 18th August, 2007 vacating the restraint orders in so far as the respondents 18 to 27 are concerned, but the order against other respondents was continued till the disposal of the petition. Aggrieved by the said order, the 1st respondent filed an appeal before the Calcutta High Court which has directed this Board to consider the prayer of the respondents for modification of the said order. Instead of considering the prayer for modification, I decided to hear the petition finally and accordingly concluded the hearing on 25.1.2008.
3. Shri Sarkar, Sr. Advocate, appearing for the petitioner submitted: In terms of Section 7(1) of Take Over Regulations, by a notice dated 14.10.2005, the 1st respondent intimated the company that he had acquired 5.13% shares in the company. Thereafter, sometime in September, 2006, he, along with a director of 2nd and 3rd respondents met the Vice Chairman of the company and informed him that the 1st respondent was controlling about 21% shares in the company and that the entire shares should be bought over by the promoters of the company. Thereafter, the movement of the shares of the company was monitored and it was found that from June, 2005 onwards, the 1st respondent and several other persons had started purchasing the shares of the company in a systematic manner due to which the share price of Rs. 119.92 as on 9th June, 2005 went up to Rs.384.95 as on 24th August, 2006. Such a movement of shares had never taken place in the past. The company had sought for the approval of the members for a proposal to make a preferential allotment of shares to the promoters in the AGM held on 25.9.2006. While the proposal was approved by 78.37% votes in favour and 21.63% against, most of the respondents voted against the proposal. The 1st respondent filed a suit in Calcutta High Court seeking for a declaration that the resolution for allotment of shares on preferential basis was null and void. In that proceeding, respondent Nos. 2 to 17 and another person made applications for intervention. This act of the respondents made the company to make further enquiries regarding the connection between the 1st and other respondents. From the enquiries made, it was found out that there is a common shareholding in most of the respondent companies, that there have been grant of loans from one company to another, that majority of these respondent companies have a common registered office and most of them have common directors, common bank account and common auditors etc., thus clearly indicating the possibility of a connection among all the respondents. However, the company has not been able to find out all the facts with regard to the commonality of all these respondents other than finding out that the 1st respondent has close connections with all the other respondents. During the pendency of the proceedings under Section 111A, respondents 2 to 5, 7, 8, 9, 11 and 14 have sold their entire shareholdings to respondents 18 to 27. The quantum of shares so transferred is 134270 shares. In spite of huge number of shares involved, the price at which the shares were transferred is more or less static clearly indicating that the transfers were all concerted and not on arms length basis again indicating the close connection between the transferors and the transferees.
4. Therefore, the company has invoked the provisions of Section 247/250 of the Act to find out the relevant facts about the shares. The promoters hold about 55% shares and are in the management of the company. Therefore, it is essential to know as to why suddenly, during a short period, nearly 21% of shares have been acquired by the respondents. An averment has been made in the petition that the 1st respondent had approached the Vice Chairman of the company indicating that he was controlling 21% shares and offering the same to be purchased by the promoters. In the reply of the 1st respondent to the petition under Section 111A, there is no denial to this averment. However, only in the reply to the present petition, he has denied. In terms of the provisions of Section 247(1A)(a) of the Act which the petitioner has invoked, it is necessary to find out as to who are or have been financially interested in the success or failure whether real or apparent, of the company. The very fact that the respondents 2 to 17 impleaded themselves in the suit filed by the 1st respondent to support his case would indicate that they arc all acting in concert. The motive of the respondents acquiring 21% shares in a short span of time has to be found out especially since the company is a listed company. Further, this investigation would also be in the aid of the petition under Section 111A of the Act. An investigation under Section 247(1A) docs not adjudicate any issue and is only a fact finding enquiry. The petitioner has given enough material to indicate that there is connection among all the respondents. In a number of cases, this Board has held that a petition can be filed in terms of Section 250 to find out fuels about shares and in that proceeding, recourse to Section 247 can be taken. Since the respondents are likely to further transfer their shares, as it has happened already, restraint order passed earlier should be continued, failing which more and mote parties might have to be impleaded to establish interconnection.
5. Shri Mookherjee, Sr. Advocate, appearing for the 1st respondent submitted: The petition is not maintainable. The provisions of Section 247 of the Act which were in force before the coming into effect of Take Over Regulations, would no longer be applicable to a listed company. To invoke the provisions of Section 247(1A) of the Act, there should be a proceeding pending before the CLB as held by this Board in Padma Taparia v. Assam Brook Limited 88 CC 838. If at all, the provisions of Section 247(1A) could be invoked, it has to be with reference to Section 250(1) of the Act and even in that case the petitioner has to establish that there are circumstances in terms of cither Section 247(1A)(a) or (b) of the Act. In the present case, it is not the case of the petitioner that the respondents in the petition do not hold shares in their own name or that they are not the true owners of the shares. It is also not the case of the petitioner that funds for acquisition of shares by these respondents have been provided by someone else. It is to be noted that up to 17 paras of the petition, same averments as in Section 111A petition have been reproduced. The complaint in the petition is that respondents 1 to 17 were acting in concert and the challenge was that as a whole, they were holding excess of 15% shares in the company. The true identity of the respondents had not been challenged in that petition. In the present petition, there is no allegation against the 1st respondent. Further, a company by itself cannot file a petition seeking to find out the true persons holding its own shares. As is evident from para 21 of the petition, the main allegation in this petition is that there is inter relationship between the transferors and transferees i.e. between the transferor respondents and respondents 18 to 27. There is no complaint against the 1st respondent that he is connected with these 1st respondents in any manner. It is to the knowledge of the company that the 1st respondent has been purchasing the shares of the company and has also been selling the shares and therefore company knows the true identity of the 1st respondent. In Birla Corporation Ltd. case 133 CC 515, the Calcutta High Court has held that the expression "true persons" in Section 247(1A) requires identification of human agencies who control the policy of body the corporate. In other words, the 1st respondent holding less than 10% in the company, cannot control the policy of the company. Further, it has also held that an investigation can be ordered only if public interest is involved and not by way of a fishing investigation. No public interest has been shown in the present case and as a mailer of fact investigation has been sought for the purposes of establishing the company's case under Section 111A of the Act. Further, investigation is always against the management and not by the management. If the petitioner has any grievance that the respondents are acting in concert, in terms of Regulation 38(a) of the Take over Regulations, they should approach the SEBI for investigation not through a petition under Section 247. The expression "relevant facts" cannot or include finding out whether persons are acting in concert and whether there is any violation of the Take Over Regulations. In Gauri Shanhar Kayan v. East India Investment Co. Pvt. Ltd. 128 CC 145, the Company Law Board has held that if the identity of the person who has interest in the shares is known, no investigation is necessary in respect of the shares. There is no allegation in the petition that the ostensible and real owners are different. When the management controls the company, the question of invoking by the company itself the provisions of Section 247/250 docs not arise. Section 247 cannot be invoked in the aid of the proceedings under Section 111A which is adversarial in nature and as held by the Supreme Court in Padam Sens v. State of Uttar Pradesh AIR 1961 218 a court cannot collect evidence for a party (Para 10). The restraint order against the 1st respondent has adversely affected his interests as he has not been able to deal with the impugned shares. It is to be noted that when the petitioner sought for such a restraint order in the proceeding under Section 111A, the Board had declined to grant the same. Now the petitioner cannot seek the same relief in the present petition.
6. Shri Sen, Sr. Advocate, appearing for respondents 6 & 10 submitted: Both these respondents arc investment companies. In the petition, there arc no allegations against these respondents nor any attempt has been made to connect these respondents with the 1st respondent. It is on record that CLB has not suo moto invoked the provisions of Section 247 in the proceedings under the pending petition under Section 111A of the Act. This petition has been filed with an oblique purpose of putting pressure on his clients and not for a bona fide purpose. It has to be necessarily examined whether the petitioner has filed this petition with a bonafide purpose of public interest. The only reason as given by the petitioner for adding his clients as respondents is that they supported the 1st respondent in the AGM and they also intervened in the civil suit filed by the 1st respondent in Calcutta High Court. In paragraph 4 and 8 of the petition, the petitioner has made a reference to the 6lh and 10th respondents stating that a relation of a director of the 4th respondent acted as the representative of the 1st respondent in the AGM and in respect of the 10th respondent, the only averment is that 10th and 11th respondents had appointed a common representative to attend the AUM. Other than this, there is no specific allegation against this respondent. A number of companies having offices in a single building is common in all Metropolitan cities and the same would not mean that all these companies are inter related or acting in concert, liven in the chart given in the petition purported to be showing inter connection, nothing has been shown that 6th and 10th respondents arc connected with the 1st respondent nor they have given any loans to any of the other respondents. According to the petitioner, it has invoked the provisions of Section 247(1A)(a) of the Act. In the petition, there is no allegation that 6th and 10th respondents are in any way financially interested in the company. In Barium Chemicals Ltd. v. CLB , while dealing with the provisions of Section 237(b) of the Act, the Supreme Court has held that the existence of circumstances is sine quo non lor forming an opinion and existence of circumstances is a condition fundamental to the making of an opinion and it has to be proved at least prima facie. In the present case, the petitioner has not satisfied the existence of the circumstances as stipulated in Section 247(1A)(a) of the Act. In Re, Patrokola Tea Co. Limited AIR 1967 Kal. 406, while dealing with the provisions of Section 237, the Calcutta High Court has held that on general allegations without full particulars, the powers under Section 237 should not be exercised. This decision would show that on mere suspicion, no investigation could be ordered. In so far as the restraint order is concerned, it is to be noted that the company is a listed company and its shares arc freely transferable. The right of transfer is a fundamental right and cannot be curbed in any manner and every shareholder should be free to deal with the shares in the share market. Therefore, the power to curb has to be exercised with caution and not with a view to witch-hunt. Therefore, notwithstanding the fact that the petition is nothing but a speculative petition and should be dismissed, the restraint order should be vacated immediately.
7. Shri Pratap Chatterjee, Sr. Advocate, appearing for 19th respondent submitted that his client docs not have any connection with any other respondent and to that effect his client has filed an affidavit also and therefore the question of ordering any investigation against his client docs not arise.
8. Shri R.K. Mitra, Advocate for respondents 23 to 26 submitted that he was adopting the arguments of the Counsel for other respondents. He further submitted that his clients being individuals are only investors collectively holding only about 2000 shares. There is no averment in the petition that these respondents are in any connected with the 1st respondent and that with the negligible shareholding they can never influence the affairs of the company.
9. Shri Rujdeep Choudhary, Advocate, appealing for respondent Nos. 12, 13, 15 and 16 submitted: The 13th respondent acquired shares only after the AGM. There is no specific allegations against the other respondents except to show that some of them have common diuvtors. Even then, there is no allegation that these respondents are in any way connected with the 1st respondent.
10. In rejoinder, Slui Sarkar submitted: The petitioner has invoked the provisions of Section 247(1A)(a) of the Act. Anybody holding substantial shares can be said to be financially interested in the success or failure of the company. SEBI take Over Regulations define any holding beyond 5% as substantial. 1st respondent alone holds more than 6% and the very fact that many of the other respondents from 2 to 17 opposed the resolution for preferential allotment and that all of them supported the 1st respondent in the suit would indicate that they are all connected together. There used to be only negligible number of transactions of the shares of the company but because of the concerted action of these respondents, over 21% shares exchanged hands within a short period. Further, Section 250 of the Act clearly specifies that relevant facts could be found out about any shares. This would show that the provisions of Section 250 are not restricted only to instances as in Section 247(1A). A company is entitled to know who its real shareholders are and therefore, the company can file a petition under Section 247/250. In so far as the decision in Assam Brook case is concerned, the CLB came to the conclusion on the basis of the inspection carried out by the Regional Director that the shares impugned in the petition were held by the respective respondents in their own names and they had the necessary funds to make the investment and therefore, held that that there was no need for any investigation. In the present ease, in the absence of any inspection report, the facts could be ascertained only through an investigation. In Birla Corporation case, the Calcutta High Court held that investigation under Section 247(1A) might be deemed necessary to ascertain who is in control of the juristic entity. In the present case, most of the respondents arc incorporated companies and who actually controls these companies is necessary which can be done through an investigation.
11. I have considered the pleadings and arguments of the counsel. This petition has been filed under Sections 250(1) of the Act which reads "Imposition of restrictions upon shares and debentures and prohibition of transfer of shares or debentures in certain cases: (1) Where it appears to the CLB whether on a reference made to it by the Central Government in connection with any investigation under Section 247, 148 or 249 or on a complaint made by any person in this behalf that there is good reason to find out the relevant facts about any shares (whether issued or to be issued) and the CLB is of the opinion that such facts cannot be found out unless restrictions specified in Sub-section (2) are imposed, the CLB may, by order, direct that the shares shall be subject to restriction imposed by Sub-section (2) for such period not exceeding 3 years, as may be specified in the order".
12. The issue as to whether an application/petition could be independently filed under Section 250 has been examined by this Board in Assam Brook case (supra). On a detailed examination, this Board came to the conclusion that a petition could be filed under Section 250(1) independently provided there is enough material to order an investigation in terms of Section 247(1A). In other words, unless there are circumstances warranting an investigation in terms of Section 247(1A), a petition under Section 250(1) cannot be maintained. No petition can be filed under Section 250(1) only for the purpose of getting the relief as specified in Sub-section (2) unless there arc circumstances suggesting that an investigation under Section 247(1A) is called for.
13. The petitioner has invoked Section 247(1A) which reads: "Without prejudice to its power under this Section, the Central Government shall appoint one or more inspectors under Sub-section (1), if the CLB in the course of any proceeding before it, declares by an order that the affairs of the company ought to be investigation as regards the membership of the company and other matters relating to the company, for the purposing of determining 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".
14. In the present case, the petitioner seeks investigation in terms of Section 247(1A)(a) to find out whether all the respondents are acting in concert to acquire the shares of the company. All the respondents collectively hold 21% shares in the company and according to the petitioner, it is the 1st respondent with whom the other respondents acting in concert, have acquired these shares, which assertion is disputed by the Counsel for other respondents. At this stage, I do not propose to examine whether all the respondents arc acting in concert or not as, on the basis of the assertion that respondent Nos. 1 to 17 are acting in concert, the petitioner has filed another petition under Section 111A of the Act.
15. The cause of action to file this petition, according to the petitioner is, that during the pendency of the proceedings under Section 111A, some of the respondents had transferred their shares to respondent Nos. 18 to 27 who arc also alleged to be connected with the 1st respondent. If that be so, the proper course of action would have been to implead them as respondents in that petition so that any decision on the shares would have been applieable to these respondents also. It is to be noted that an investigation under Section 247(1A) is not an end in itself but is only a means for further action. Normally, when an investigation is ordered in terms of Section 247(1A) in a proceeding before this Board, the investigation report would facilitate this Board in adjudicating the matter in the proceeding. Since the jurisdiction of this Board has been invoked under Section 250, which is not an adjudicatory proceeding, the investigation report would be of no avail in that proceeding as that proceeding is intended only for imposition of restrictions, if warranted, till the investigation is completed. The report would be useful only in the petition filed by the petitioner under Section 111A. As a matter of fact, that what even Shri Sarkar submitted. It is to be noted that in terms of Section 111A, this Board has been vested with powers to make such enquiry as it thinks, thus clothing this Board with wide sou moto inquisitorial power. When such a power is available to this Board under Section 111A itself, the petitioner need not to have filed the instant petition. The purpose and object of filing this petition is evident from the circumstances of this case. During the course of the proceedings in the petition under Section 111A, the petitioner specifically sought for restraining the respondents from transferring their shares impugned in that petition, which I declined in view of not only that no such power is vested with this Board under Section 111A but it specifically provides that there is no restriction in the right to transfer the shares impugned in that proceeding. By filing this petition invoking the provisions of Section 247/250, the petitioner has sought for restraining the respondents from transferring their shares as provided in Section 250(2). When Section 111A, under which the allegation of acquisition against the provisions of Take Over Regulation has to be adjudicated, does not provide for restraining transfer of shares, the petitioner cannot seek the said relief by filing a fact finding petition under Section 247/250. In other words, when wide inquisitorial powers have been vested with this Board under Section 111A, there was no need to file this petition, which is obviously, only with the object of getting an order of restraint, which cannot be permitted. It is to be noted, that since the petitioner has not impleaded the respondents 17 to 27 in the petition under Section 111A, even if the investigation reveals inter connection, no order in respect of the shares impugned in Section 111A petition and acquired by these respondents, could be given.
16. In view of the foregoing alone, I could dismiss this petition. However, I am also examining whether in respect of a listed company, a petition under Section 247/250 could be filed to find out whether acting in concert, shares arc being acquired/have been acquired in violation of the provisions of Take Over Regulations, more so, when a petition under Section 111A is pending on the same allegation. The concept of acting in concert and substantial acquisition of shares/takeover came in with the coming into force of the Take Over Regulations. The Regulations are self contained and can be termed as a code by itself. In Regulation 38, the SEBI has been vested with the power to investigate into the complaints of any substantial acquisition of shares or take over and in terms of Regulation 44, it can give varied directions if the violation is established. Shri Sarkar pointed out that SEBI has no power to restrain further transfer of shares, and that this power is available only to this Board in terms of Section 250(2). I find that such a power is expressly available to SEBI as per Regulation 44(d). Therefore, I am of the considered opinion that in respect of listed companies, investigation sought on a complaint of violation of Take Over Regulations should rest with SEBI only and the provisions of Sections 247/250 cannot be invoked especially when a petition under Section 111A is pending. In view of this finding, I have not considered it necessary to deal with other legal and factual issues raised by the counsel, elaborated as a part of their submissions.
17. Accordingly, I dismiss this petition vacating all the interim orders. Liberty is granted to the petitioner to implead the respondents 17 to 27 in the petition under Section 111A, if so advised. While dealing with the petition under Section 111A, this Board will exercise its inquisitorial powers, if it considers to be necessary. On the last date of hearing, the petitioner filed an application alleging that in violation of the status quo order, the 1st respondent had transferred certain shares subsequent to the dale of that order. This application will be heard, notwithstanding the dismissal of the petition, as allegation of violation of a subsisting order has to be adjudicated. Accordingly, I direct the 1st respondent to file his reply to the said application within 15days and rejoinder, if any, is to be filed within 15 days thereafter.