Company Law Board
Redwood Holdings Pvt. Ltd. vs The Sandesh Ltd. on 21 August, 2002
ORDER
C.R. Das
1. The Petitioner named above has filed this Petition under Section 111A of the Companies Act, 1956 (hereinafter referred to as the Act) against Sandesh Ltd. (hereinafter referred to as Respondent). The Petitioner has prayed for an order against the Respondent company, inter alia, directing it to record and register the transfer of 3000 equity shares of the respondent company in their favour and return the share certificates relating to the said equity shared duly endorsed in their favour. The petitioner also prayed for directions to rectify the register of members to place their name in the register of members in respect of there 3000 shares. The petitioner has also sought for directions for payment of all dividends that might have been declared in respect of the said shares. The petitioner lodged the above equity shares of Rs. 10/- each of the respondent company for effecting the registration of transfer in their name. However, the respondent company failed and refused to record the registration of transfers of the said shares in favour of the petitioner. The respondent conveyed the company's decision to refuse to register the transfers of the said shares alleging that the petitioner has violated the provisions of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 by acquiring more than the stipulated percentage of shares in concert with others. It is further submitted that the respondent company has not submitted any concrete evidence as to how the above named petition (sic) has violated the SEBI Take Over Code.
2. The respondent company in its reply submitted that the petitioner was required to company with the provisions of the SEBI Take Over Regulations, 1997 as also various provisions of the SEBI Act. The respondent company further submitted that they had already registered the transfer of 8.82% of shares in favour of the petitioner and other companies associated with them. According to the respondent company any further acquisition of shares, if registered, would exceed the 5% limit as is prescribed in SEBI Regulations. It is further submitted that Aaspas Limited (Aaspas for short) had financed substantial amount to Anwesha Stocktrade Pvt. Ltd. (Anwesha for short) and Red Wood Holding Pvt. Ltd. (Red Wood for short). It is also submitted that the Managing Director of Lok Prakashan Limited (LPL for short) is a Director in Aaspas. It is further submitted that Registered Office of Kamal Exports Pvt. Ltd. (Kamal for short) is situated at the premises of Gujarat Samachar, i.e. the Daily of LPL. It is further submitted that the directors of Kamal and the directors of Sound Finlease Pvt. Ltd. (Sound for short) are common, i.e. 3 directors out of 5 of Kamal are also the Directors of Sound. It was submitted that Red Wood, Sound, Kamal and Anwesha held 8.82% of the total shares of the respondent company. It was further submitted that the Stamp papers were purchased on the same day, the sequence number of Stamp paper is same, drafting is common and there is common auditors in case of two companies.
3. In the counter reply the petitioner denied the allegation made by the respondent and requested this Bench to direct the respondent company to produce the evidence. The petitioner also submitted that the respondent company be put to strict proof to substantiate the averments made about the alleged violation of the SEBI Take Over Regulations. The petitioner has also denied the claim of being business rivals of the respondent company and submitted that the said contention is irrelevant to justify the refusal of transfer of shares and is not covered under the provisions of Section 111A of the Companies Act. It is only under provisions of Section 111A the transfer of shares can be refused. The petitioner submitted that in arriving at the conclusion of crossing the limit of 5% as prescribed by the SEBI Take Over Regulations the respondent company has falsely and without any basis included the shares acquired by 3 Private Limited companies, namely, Anwesha, Sound and Kamal. It is further submitted that as per the provisions of Section 111A the petitioners are entitled to have shares registered in their names since the respondent company being a listed company is bound by listing Agreement and further after taking into account the share transfer provisions of the Companies Act as amended through the Depositories Act, 1996, the listed company has no right to reject transfer as the shares are freely transferable.
4. It was further submitted that SEBI Take Over Code is for the protection of the shareholder and not for the Company. Basic emphasis was given keeping in view the basic concept of free transferability of shares and the Company's Management cannot be allowed to misuse this Regulation for the ulterior motive to prevent such investors whom they consider inconvenient by giving whatsoever false excuses. It was further submitted that the regulation 44 of the said Take Over Code reads as under:
"The Board may, in the interests of the securities market, without prejudice to its right to initiate action including criminal prosecution under Section 24 of the Act give such directions as it deems fit including:
(a) directing the person concerned not to further deal in securities;
(b) prohibiting the person concerned from disposing on any of securities acquired in violation of these Regulations;
(c) directing the person concerned to sell the shares acquired in violation of the provisions of these Regulations;
(d) taking action the person concerned".
5. It was further submitted by the petitioner that if there is a violation of the said Take Over Code of the SEBI there are sufficient provisions under the said Code which includes Criminal prosecution. It can also give a direction for disposing off such security directing the person concerned to sell the shares acquired in violation of such Take Over Code. It was further submitted that even the SEBI is examining the matter then why the investor should suffer merely because the Company has chosen to make reference and submitted that the company should be directed to register the transfer of shares and later on if the SEBI comes to a conclusion that there is no violation of Take Over Code then pursuant to Sub-section (3) of Section 111A of the Companies Act, the Company Law Board can direct the Respondent Company to rectify the Register of Members. It was further submitted that this is a fit case for ordering the registration of the transfer of shares as the Respondent Company has failed to place any material evidence as to how these companies are acting in concert.
6. The petitioner also submitted that the respondent had filed a complaint on 13th May, 1999 to SEBI but no action appears to have been initiated by them. It is further submitted that except making a vague allegation that they are acting in concert no evidence or any other materials have been placed to substantiate this claim. A mere allegation of action in concert is no substitute for evidence to establish the claim.
7. It may also be noted that the Management holds more than 50% of the paid up capital of the company and why they should be shy of registering the said shares when the same have been acquired within the prescribed limit and it will not effect their dominion over the company. It is further submitted that the shares are freely transferable and the provisions of Section 111A of the Companies Act have been made more emphatic regarding free transferability of the shares. It was further submitted that the grounds for refusal are limited to the provisions of Section 111A (3) of the Companies Act only as has been held by the Company Law Board in the matter of Estate Investment Company Pvt. Ltd. v. Siltap Chemicals Limited (1999) 96 Company Cases Page 217. It was further submitted that the shares are freely transferable and have been acquired within the limits prescribed by law, the respondent company has refused the registration on wrong assumptions and extraneous considerations and it is therefore submitted that necessary directions be given for effecting the registration of transfer of shares in favour of the petitioner company. It is further submitted that SEBI has not initiated any action and apparently the SEBI is satisfied that there is no violation of the SEBI Take Over Code.
8. It was further submitted that Aaspas has given fund to Anwesha and Red Wood. The other two company have not at all received any fund from that company. Anwesha and Red Wood jointly held 4.4% of the share capital of the respondent company. Without admitting anything and without prejudice to that contention, it is submitted that even if they are acting in concert the shareholding of both these companies shareholding of 4.4% is to be taken into consideration against the statutory requirement of 5%. In the same way funding done by Zora Traders Ltd. to Sound and Kamal the total shareholding held by Sound and Kamal together is 4.37% of the paid up capital of the respondent company, which is below the prescribed limit.
9. It was further submitted that the respondent had written a letter SEBI wherein it was stated that the purpose of acquiring the shares was for acting in trade for price manipulation, false market and creating volatility, which is not well received by genuine beneficiaries of the company, while in the Affidavit the respondent stated that Anwesha continued to hold the shares in the physical form even today.
10. It was further stated that all the 4 companies are separate private limited companies, each has its own independent existence and there is no material or evidence to show that they are acting in concert. The only fact that stamp papers are purchased by the petitioner from a common vendor and the sequence number of stamp paper is same and the same are filed during same period and having common Auditors in two companies would not mean that these companies are acting in concert and the same is in contravention of Take Over Code. It was further submitted that the respondent is already holding more than 50% of paid up share capital of the respondent company namely Sandesh Ltd.
11. We have considered the various averments made by the parties. The difference between the petitioner having acquired 2.02% and the respondent company alleging their acquiring more than 5% of the shares of the respondent company is on account of the respondent company clubbing the shares acquired by Anwesha and Sound and Kamal identifying them as persons acting in concert on the plea that the shares have been acquired through the same broker, the Stamp papers were purchased on the same day, the sequence number of Stamp paper is same, drafting is common and there is common auditors in two companies. These are neutral allegations, which do not necessarily lead to the conclusion that the persons concerned are acting in concert. Something more is required to establish the allegation that the companies are acting in concert. The respondent company has not been able to place any material or evidence to substantiate the allegation that these four companies are acting in concert. The petitioner has emphatically denied that these four companies are in any way connected with them. These companies are Corporate bodies registered under the Companies Act. They are required to file various documents under the Companies Act including the shareholding pattern, the names of the directors etc. with the Registrar of Companies and the same are available for inspection by the public. The respondent company has not taken pains to collect any necessary information and they have merely on the plea that these shares have been purchased through the same brokers, the company having very less capital, the fund is given by another company etc., assumed that these parties are also acting in concert. Therefore, merely on this ground it would not be proper to assume that all those who have acquired the shares through the same broker are acting in concert. In our opinion, from the material placed on record, it is not possible to agree with the respondent company's contention that these four private limited companies have also acquired these shares are acting in concert. If the shares acquired by these parties are excluded then the shares acquired by the petitioner company in the share capital of the respondent company would come to 2.02% i.e. below 5% ceiling prescribed under the Code. We do find some force in the argument that the respondent company cannot be permitted to misuse the provisions of the SEBI Take Over Code for the ulterior motive to prevent such investors who may be inconvenient to the management in the grab of violation of the Take Over Code and to defeat the basic concept of free transferability of the shares as enshrined in law.
12. In view of the provisions of SEBI Act and the Regulations, any breach of the Regulations can be looked into and appropriate order passed only by SEBI and that the jurisdiction of the CLB, so far SEBI Regulations are concerned, is barred.
13. Under the SEBI Regulations, SEBI has right to enquire and investigate suo motu, or upon complaint received for breach of the regulations and for this purpose, it may appoint an investigating authority and thereafter call upon the person concerned and offer his comments on the investigation report. Regulation 39 authorises the SEBI to give certain directions. It is, therefore, obvious that if any provision or regulation is breached and it appears to SEBI that the matter needs to be investigated, it may appoint an investigating authority and investigate the matter and thereafter pass an appropriate direction/order in accordance with the regulations as the Respondent Company already filed complaint with the SEBI.
14. It was further contended by the Petitioner that the Respondent had given a letter dated 1st September, 1999 for refusing the transfer of the said shares. However, no reasons whatsoever were set out for such refusal by the Respondent Company. It was only after the present appeal was filed that grounds of refusal were made out only in the Affidavit in reply of the Respondent Company. This shows that the refusal was first made and subsequently it was sought to justify the same by subsequently working out various grounds. Even during the hearing Respondent Company had sought for time to obtain the evidence to substantiate their allegation in the hearing on 11th July, 2001. At that time the Petitioner argued that there was no material on record supporting the allegation that the 4 companies are acting in concert as they were not in a position to give any record till 11th July, 2001 and hence the extension of time should not be granted to the Respondent Company. The Petitioner further contended that even during the hearing the Respondent Company was not in a position to substantiate their allegation made. This only shows that the decision to refusal of the transfer of shares had been taken without any basis or prima facie reason and when it was required to give the details for unjustifiable action they have come out with various reasons. It is therefore submitted that the refusal to transfer was made earlier without any basis or prima facie reason and hence it was not justified at all. Under the circumstances they should be asked to transfer shares in the name of the Petitioner Company.
15. It was further argued by the petitioner that the complaint was lodged with SEBI somewhere in 1999. It was submitted that SEBI has not initiated any further action and apparently SEBI was satisfied that there is no violation of Take Over Code.
16. It is further argued that shares were acquired by other companies as they were acting in concert. However, when there is an acting in concert there has to be some motive behind such acquisition of shares. As the respondent is holding more than 50% of the paid up capital of the company any number of acquisition by the petitioner cannot effect the position of the Respondent and hence the question of acquiring the shares and acting in concert for that purpose would not serve. Even otherwise independently the Respondent Company is in a position to carry out its mandate because of its holding sufficient number of shares where any acquisition by petitioner would not affect the Respondent's position in the Company.
17. Having regard to the aforesaid position the scope of refusing to register the transfer of shares on sufficient cause is available only on the limited grounds incorporated in Sub-section 3 of Section 111A of the Companies Act. In Sub-section 3 of Section 111A there are only three grounds, i.e. if the transfer is in contravention of the provisions of the SEBI Act or Regulations thereunder; the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985, or any other law for the time being in force. In view of the aforesaid position, the respondent company's contention that the petitioner group is a business rival or that the investment has been made for mala fide purpose cannot be made a legitimate ground for refusing to register the transfer of shares. The only ground available in this case and which has been invoked by the Respondent Company is violation of the Regulations relating to SEBI Take Over Code. The Company has alleged that these shares have been acquired in violation of the said Code. However, as discussed earlier, it is not possible for us to concur with the company's contention of the alleged violation of the SEBI's Take Over Code in view of the inadequate material on the basis of which registration of transfer of shares has been refused. Hence there is no merit in the respondent company's submission that there exists sufficient cause to refuse the registration of transfer of these shares.
18. The respondent company has also taken the plea that we should not proceed in deciding the appeal as the respondent company has filed a complaint in SEBI. The matter is pending before SEBI since the respondent company has filed the complaint on 13th May, 1999. The SEBI is seized of the matter since May, 1999. In our opinion the investor should not be allowed to suffer when there are sufficient provisions under Section 111A to rectify the situation. Further if after examination or investigation SEBI comes to the conclusion that the shares have been acquired in violation of the SEBI Take Over Code then under Regulation 44 of the said Code they are also empowered to give necessary directions to take remedial measures. In view of this we are not inclined to keep these appeals in abeyance, particularly, having regard to the fact that the materials placed before us is found to be inadequate to form an opinion of alleged violation of the said Take Over Code. Further if this appeal is allowed, the shareholding would go only upto 2.02% which would be below the 5% ceiling prescribed under the Code.
19. It has been argued by the Respondent that the Respondent had made a Complaint in May, 1999 with SEBI where the purpose of acquisition of share was given as Company wants to operate in the market whereby they want to create a volatility, false market and price manipulation and to play down the image of the company as well as in the eyes of the shareholders and to fluctuate the share prices. However, in the Affidavit the Respondent has stated that the Petitioner Company has continued to hold the physical shares even today. Hence there are contrary arguments with different authorities. SEBI has not taken any action against the complaint letter which shows that there is no material to substantiate the allegation of the Respondent and hence the refusal of transfer of shares made by the company is not justified.
20. On the basis of the available materials placed before us we do not agree with the respondent company's contention that the petition is acting in concert has acquired more than 5% share capital of the respondent company and thus, there is a violation of the SEBI Take Over Code. Accordingly the appeal is allowed and the respondent company is directed to register the transfer of the shares involved in this appeal within one month from the receipt of this order.
21. There are 2 similar petitions being No. 36/111A/CLB/WR/2000 and 38/111A/CLB/WR/2000 filed by Sound Finlease Pvt. Ltd. and Anwesha Stocktrade Pvt. Ltd. respectively, against the same Respondent Company for transfer of 10,300 and 8,200 equity shares respectively. The Respondent Company has not effected the transfer of the said shares on the similar grounds. The Respondent Company is also directed to effect transfer of the said 10,300 and 8,200 shares within the said period of one month from the date of receipt of this order.
22. Accordingly, all the three petitions are hereby disposed of by this single common order with no order as to costs.