Company Law Board
T.N.K. Govindaraju Chetty And Co. And ... vs Kadri Mills (Cbe) Limited And Ors. on 31 March, 1998
Equivalent citations: [1999]96COMPCAS871(CLB)
ORDER
1. In the matter of Kadri Mills Ltd., two petitions under Section 397/398 of the Companies Act, 1956, have been filed. The substantive issue raised, in both the petitions, relates to a preferential allotment of certain convertible warrants made in September, 1994.
2. The first petition, C. P. No. 8 of 1995, was filed in the Southern Bench on November 11, 1994, and on advice, was again filed in the Principal Bench in June, 1995. In the hearing on March 29, 1995, we passed certain interim orders, which are still continuing. The second petition, C. P. No. 32 of 1695, was filed in July, 1995.
3. Both the petitions were heard together. While the issues agitated in both the petitions are similar, the number of petitioners including the con-sentors and the number of respondents in the second petition are more and that reliefs sought therein are also more comprehensive.
4. The allegation in these petitions relates to the allotment of 110 convertible warrants of Rs. 1 lakh each to the promoters of the company on a preferential basis with the right to convert the same into 10,000 equity shares of Rs. 10 each at par. The grievance of the petitioners is that when the ruling market price was about Rs. 400 per share, the directors of the company had, to the exclusion of the other shareholders, bestowed upon themselves, undue benefits to the tune of nearly Rs. 40 crores, which, according to the petitioners, is a grave act of oppression, meriting appropriate relief.
5. The respondents have raised a preliminary issue regarding the maintainability of the petition on the ground that the requirements of Section 399 of the Act have not been fulfilled in both the petitions. Shri Padmana-bhan, advocate for the petitioners, dealing with the preliminary objection, stated that, the petitioners in C. P. No. 8 of 1995 held more than 10 per cent. shares in the company, and as a matter of fact, were not aware of any allotment of additional shares in the company till filing of the petition. That is why in the said petition, there is no prayer for setting aside any allotment. Even otherwise, he contended that the purported allotment of further shares is consequent on the passing of the special resolution under Section 81(1)(a) and this resolution itself has been sought to be declared as null and void. He further stated that the main and the only act of oppression raised in the petition relates to the action of the directors in increasing their holding by misusing their fiduciary position which has also resulted in the reduction in the holding of the petitioners. In such cases, he submitted that the Company Law Board will have to look into the holding of the petitioners before the issue of additional shares. Since the petitioners held 11.6 per cent. before the issue of additional shares they should be held to qualify to file the petition. Further, he also submitted that to counter this type of preliminary objection the petitioners have filed another petition, C. P. No. 32 of 1995, wherein they have obtained consent from many shareholders so as to qualify the numerical requirement under Section 399. Therefore, according to him, both the petitions are maintainable and sought for the grant of the reliefs prayed for declaring the special business conducted in the annual general meeting on August 2, 1994, relating to issue of convertible warrants, private placement and amendment to articles as null and void and consequential reliefs.
6. K. N. V. Ramani, advocate for the respondents, referring to C. P. No. 8 of 1995, pointed out that, even though the petitioners claimed to hold 11.6 per cent. shares in the company, they actually held only 6.18 per cent., in view of further allotment of shares having been made to the promoters' group on conversion of the convertible debentures on September 14, 1994. Since the petition was filed only in January, 1995, the petitioners were not having the requisite percentage of the shares to file the petition on that date. Likewise, referring to the second petition, he submitted that the same having been filed only in July, 1995, that is, after the preferential allotment having been made, suffers from the same disability as the shareholding of the petitioners together with the holding of the consentors comes only to 8.03 per cent. He also pointed out that the second petition does not also satisfy the requirement relating to 10 per cent. of the membership which is an alternate qualification prescribed under Section 399. According to him, when the second petition was filed, there were 568 shareholders in the company and as such 10 per cent. of the same would be 57. Even though the petition has been made on behalf of 12 petitioners with 53 consentors, totalling 65, yet 21 consent letters are not valid for various reasons. Thus, according to him, both the petitions have to be dismissed as not maintainable in terms of Section 399, the satisfaction of which is a pre-requisite to maintain a petition under Section 397/398.
7. To the proposition that satisfaction of the provisions of Section 399 is a pre-condition to proceed with a petition under Section 397/398, he relied on the following case law :
(a) Ved Prakash v. Iron Traders Pvt. Ltd. [1961] 31 Comp Cas 122 (Punj) in which it was held that if persons who wish to file a petition under Section 397/398, are not shown as members rightly or wrongly, they must have the register rectified before they can bring a petition.
(b) Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1977] 47 Comp Cas 151, 159 (Guj), wherein the court observed that "the prerequisite for invoking jurisdiction under Section 397/398, which has been sta-tutorily provided for in Section 399(1), is that the complaint must come from a member ... if the petitioner's title to the membership is in dispute, he has to seek relief under Section 155 for getting his name placed on the register of members to clothe himself with the rights of a member, it would be improper till the dispute is decided, to permit such a person to maintain a petition under Section 397/398".
8. Shri Ramani submitted that, in the first petition, there is no prayer for setting aside the allotment while, in the second petition, there is a prayer to that effect. But, at the same time, the petition is not a composite petition and even if it is so, then, in view of the Depositories Ordinance, no rectification of the register of members of a listed company can be sought otherwise than relating to transfer of shares. He argued to state that maintainability which depends on the success of the petition cannot satisfy the requirements of Section 399.
9. In regard to the consent letters attached with the second petition, he submitted that 10 consentors are no longer members of the company as they had already transferred their shares prior to the filing of the petition ; two of the consentors are not members of the company ; in respect of six consent letters, they do not bear the signatures of the members and that three consent letters have not been signed by all the joint shareholders. Therefore, according to him, if all these 21 consent letters are ignored, there are only 32 consent letters, which together with 12 petitioners works out only to 44 which is below 10 per cent. of the total number of share-holders of the company when the petition was filed.
10. We heard the arguments of counsel on the maintainability as well as on the merits of the case. Since the need to go into the merits would arise only if we hold the petitions maintainable, we first deal with the maintainability of the petitions. In the first petition there are ten petitioners and in the second petition there are 12 petitioners. Their holdings, without considering the issue of additional shares, work out to 11.5 per cent. and 11.73 per cent., respectively, and after the issue of additional shares, work out to 6.18 per cent. and 6.30 per cent. The issue for our consideration is what holding should be taken into consideration to examine the maintainability in terms of Section 399. According to counsel for the petitioners, it should be prior to the further issue and, according to counsel for the respondents, it should be the dates of filing of the petitions which occurred after further issue of shares. Both cited certain cases in furtherance of their arguments. We are inclined to agree with the submissions of counsel for the petitioners for the reasons elaborated below.
11. As per Section 399 of the Act, members holding not less than one tenth of the issued capital of the company or members constituting not less than one tenth of the total number of members or 100 members, have a right to apply under Section 397/398. The primary condition is that they should be members. In addition, they should also satisfy the condition relating to the numerical requirement. Both are prerequisites for filing a petition under Section 397/398 and these requirements are not procedural requirements. In the present case, the petitioners in both the petitions are members of the company. They had held the required percentage of shares as required under Section 399, but the same got reduced due to further allotment of shares when they presented these petitions. The allotment of further shares is impugned in this petition. Now, the question that arises is whether the petitions are maintainable in terms of Section 399. Shri Ramani cited a few cases according to which, before the petitioners apply under Section 397/398, they should get the register of members rectified so as to satisfy the requirements of Section 399, and since the present petitions are not composite petitions, the matter relating to the allotment of shares cannot be adjudicated in these petitions.
12. This issue has raised an interesting question of law. The percentage holding of a member can be brought down, normally, in two ways. One is omitting his name from the register of members in respect of certain shares, or allotment of further shares, either excluding him from further allotment or by allotting shares to others in a higher proportion. Omission of name may arise on account of transfer of his shares, or by any other manner with or without sufficient cause. When the omission of one's name from the register of members in respect of any shares is impugned in a Section 397/398 petition, the courts have taken the view that the aggrieved person should proceed under Section 111. This is what has been decided in the two cases cited by Shri Seshadri: Ved Prakash's case [1961] 31 Comp Cas 122 (Punj) and Gulabrai's case [1977] 47 Comp Cas 151 (Guj). In the first case, the petitioners had already moved a court under Section 155 (present Section 111) and when the court found that it was not in a position to decide the issue under summary proceedings, referred the petitioners to a suit. Instead of filing a suit, the petitioners filed an application under Section 397/398. Since there were no shares in the names of the petitioners when they moved the court, it observed (page 124) : "I consider that a petition under Section 397/398 can only be maintained by a person or persons who are shown as members in the register of the company, and if the persons who wish to file such petition are not shown as members rightly or wrongly, they must first have the register rectified before they can bring a petition". In this, allotment of further shares was not an issue. It only related to an alleged wrongful removal of names from the register of members. In the second case also, the matter in issue was alleged wrongful removal of names from the register of members, consequent of which, the petitioners ceased to be members of the company when they presented the petition. However, the petition was a composite petition. The court observed (page 159) : "One has to be a member before he can complain of oppression as member of the company.
13. Now, if the petitioner's title to the membership is in dispute, and he has to seek relief under Section 155 for getting his name placed on the register of members to clothe himself with the rights of a member, it would be improper, till that dispute is decided, to permit such a person to maintain a petition under Section 397/398".
14. A perusal of the facts of these cases would show that they are not similar to the facts in the petitions before us. In the petitions before us, the petitioners are admittedly shown as members and no transfer of shares has been impugned. What they question is further allotment of shares by which their percentage holding has come down. There was a suggestion that the petitioners should first institute some other proceedings to get their percentage holding firmed up before they could apply under Section 597/398 or they should have filed a composite petition invoking the provisions of Section 111 also. We had taken a view in Kannappa Automobiles' case [1995] 1 Comp LJ 486 ; [1996] 86 Comp Cas 18 (Mad) which had been filed under Section 111, that, allegations of mala fides in allotment of shares cannot be impugned in a petition under Section 111. Allotment of shares to the exclusion of some shareholders has been held, by many High Courts and the Company Law Board itself, as an issue which could be agitated as^an act of oppression, in a petition under Section 397/398. Therefore, we are of the view that when the holding of a petitioner is reduced below 10 per cent. due to further allotment of shares and such allotment itself is impugned in a petition under Section 397/398, the petition should be held to be maintainable on the strength of his holding before the further allotment of shares. However, we hasten to add that no further allegations in the. petition will be gone into till the issue relating the allotment of shares is decided and the petitioner succeeds in getting his holding restored to the original percentage, qualifying him to apply under Sections 397 and 398 in terms of Section 399. In other words, the allegation relating to the further allotment of shares can be gone into even when the petition is not a composite one, as a preliminary issue. Since, in both the petitions, the petitioners held more than 10 per cent. shares before the allotment of further shares, we hold that both the petitions are maintainable. In view of this, we are not examining the issues raised in respect of the consent letters enclosed with the second petition. We also note the objection of counsel for the respondents, that with the amendments to Section 111, brought through the Depositories Act, no matters other than transfer matters could be adjudicated by the Company Law Board under Section 111A. This objection has no relevance, as the cause of action as well as the filing of the petitions occurred before the promulgation of the Depositories Ordinance.
15. Even though we have held that both the petitions are maintainable, since the second petition is more comprehensive, we are considering only that petition in this order. The cause of action for this petition is a decision taken in the board meeting of the company held on June 27, 1994, in which the board passed the following resolution relating to issue of convertible debentures to the promoters' group.
"Item 19. Keeping in view the larger interest of the company and also safeguarding the interest of the controlling group of the company, it was proposed to issue convertible warrants to the present promoters group and their friends, associates and relatives. And after some discussions the board resolved as follows :
Resolved that the proposal for the issue of convertible warrants to the present promoters/controlling group of the company and their friends, relatives, and associates be and is hereby approved and the said proposal be recommended as a special business in the agenda for the forthcoming annual general meeting. Resolved further that the articles of association of the company be altered for enabling the company to issue the said convertible warrants."
16. In the same meeting, vide item 30, the board also constituted a committee of the board styled as "convertible warrant allotment committee"
constituting Shri Lakshminarayanan and Shri K. Arumugam, both directors of the company, specifying that the quorum for the committee meeting would be two. This committee was authorised to allot 110 convertible warrants of Rs. 1 lakh each to the promoters group, entitling the holders to 10,000 fully paid shares of Rs. 10 each at par in exchange for each such warrant. The committee was also authorised to issue share certificates in respect of shares allotted in exchange for the warrants.
17. In the 48th annual general meeting of the company, the shareholders' approval was sought, under Section 81 of the Companies Act, for issue of convertible warrants, convertible into equity shares within a period of 60 months from the date of allotment of warrants. In the explanatory statement enclosed with the notice of the meeting, it has been explained, that the preferential issue to the promoters has been proposed to maintain the promoters' shareholding at a reasonable level, as the company has sought, in the same meeting, the approval of the shareholders for issue of 4 lakhs shares to institutional investors on a private placement basis.
18. Notice dated June 27, 1994, convening the 48th annual general meeting on August 2, 1994, was issued to all shareholders, including the petitioners. On receipt of the notice, each of the petitioners wrote to the company, with a copy to the Registrar of Companies, lodging their protest to the resolutions relating to the private placement and the amendment to the articles of association and consequent issue of convertible warrants to the promoters' group and, therefore, advised the company to drop these three proposals. In the annual general meeting, the ninth petitioner gave a note to the chairman of the meeting suggesting that the resolution relating to the preferential allotment be amended to provide for pricing the issue at the market value, as per the recent guidelines issued by the Reserve Bank of India and the Finance Ministry. As per the minutes of the said meeting, the preferential issue to the promoters was passed unanimously.
19. On September 14, 1994, a meeting of the convertible warrants committee was held at 8.45 a.m. It identified the promoters' group and allotted 110 warrants of Rs. 1 lakh each convertible into shares of 10,000 shares at Rs. 10 each, with the stipulation that the warrants were to be converted within a period of 18 months and if the shares were not taken and fully paid for within this period, the warrants would lapse and that on conversion, the said shares would be subject to lock in period for three years. On the same day, at 10.15 a.m., the board of directors met and allotted equity shares against the warrants as all the warrant holders sought for immediate conversion on payment of the full value of the shares. On October 14, 1994, Form No. 2--return of allotment was filed with the Registrar of Companies.
20. Shri Padmanabhan, advocate for the petitioners, narrating the sequence of the events as indicated above, submitted that the preferential allotment suffers from various infirmities as indicated below and as such deserves to be cancelled.
(i) The board consists of twelve directors of which there is only one independent director (IDBI nominee), seven are family members and four are their friends. On June 27, 1994, when the decision was taken on preferential allotment, the IDBI nominee was not present and of the nine directors who attended the meeting, seven were interested directors and as such there was no quorum of four disinterested directors. The resolution also does not indicate that the interested directors had disclosed their interest. Therefore, this resolution itself is invalid as per relevant provisions of the Companies Act.
(ii) The explanatory statement did not disclose material particulars, more particularly relating to the constitution of the convertible warrants committee. This is in violation of the provisions of Section 173 of the Act and the resolution passed without disclosure of full details has no validity.
(iii) When the board approved conversion of warrants into shares on September 14, 1994, of the nine directors, seven were interested directors, and as such the remaining two directors could not constitute the quorum. What a board cannot do, the same cannot be done by a committee. As per the provisions of the Companies (Issue of Share Certificates) Rules, 1960, the quorum for approval to issue certificates is three, and since, the warrants were convertible, these provisions are applicable in this case also. Non-complying with these rules would nullify the issue of warrants/ shares. He even suggested, that, there was no meeting of the board/committee on September 14, 1994, and the minutes of the meetings on that day have been fabricated to see that the petitioners do not qualify under Section 399, due to increase in the share capital of the company consequent on conversion.
21. He further submitted that the entire preferential allotment was done only to enrich the promoters at the cost of the company. The market price of the shares of the company at the relevant time ranged between Rs. 330 and Rs. 405, and by allotting Rs. 11 lakhs at par at Rs. 10 each, the promoters group has enriched themselves by over Rs. 40 crores. One of the petitioners present in the annual general meeting specifically requested that the warrants should be allotted to be converted only at the market price, but the same was not accepted by the chairman of the meeting and the petitioner, being in the minority could do nothing. According to Shri Padmanabhan, the purpose of the preferential allotment, even though stated to be to maintain their shareholding at a reasonable level, was actually with a view to obtain a benefit of more than Rs. 40 crores. As against their original holding of 70.65 per cent., the present holding, on account of conversion of the warrants is 84.21 per cent. According to him, this itself is a gross act of oppression of the minority. The directors, being bound by fiduciary duties, should have ensured that the company's interests as well as other shareholders' interests are protected. By not pricing the shares at the market value and thus not charging any premium the directors have acted against the interest of the company and have reaped undue benefits at the cost of the company. By appropriating such benefits to the exclusion of other shareholders, the respondents have committed a grave act of oppression on the minority.
22. He pointed out, referring to the resolution of the annual general meeting, that the warrants were to be converted within 60 months, which the allotment committee changed to 18 months. But the board allowed conversion of the same within two hours of, allotment. Therefore he contended, that, the general body had been misled to believe that the warrants would be converted at a later date, while the respondents should have already decided to convert the warrants immediately after allotment. His further allegation was that, the respondents, apprehensive of the detection of the immediate conversion of the warrants, intentionally concealed the information from the shareholders and the Central Government. Referring to the letter written by the company to the Department of Company Affairs on October 14, 1994, he pointed out that this letter, even though mentions about allotment of convertible debentures, is silent about the conversion which had already taken place. Likewise, he also pointed out, that, when one of the petitioners asked for a list of members of the company, the company furnished such a list after the conversion had taken place, but did not disclose the same in that list. The only reason for concealing the vital information, if at all the allotment had been made on September 14, 1994, according to him, was that the respondents knew that their action could be challenged. The fact of allotment and the conversion of the same came to the knowledge of the petitioners only when the company filed its counter to the petition in March, 1995.
23. Summing up his arguments, he stated that the Securities and Exchange Board of India guidelines on preferential allotment was notified on August 4, 1994, laying down the conditions of pricing preferential allotments. It also stipulated that preferential allotments approved by the general body before August 4, 1994, could be acted upon within three months. Since one of the respondents was a member of the stock exchange, he must have had prior knowledge of the guidelines, and that is why the issue was got approved in the annual general meeting held on August 2, 1994. Even assuming that the issue was legal and valid, yet, such act being oppressive to the minority, could be enquired into by the Company Law Board and relief could be granted as held by the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743. Since the directors have acted unfairly and in breach of their fiduciary duties in relation to the minority shareholders, the petitioners are entitled to the relief sought for as held by the Company Law Board in the Readers Digest case [1995] 82 Comp Cas 563, as lack of probity and fair play are abundantly clear from this action of the board. According to him, there was no need to have gone in for preferential allotment, as the promoters group was already having over 70 per cent. shares in the company and even after private placement, their shareholding would have been more than 51 per cent. He also submitted that with the preferential allotment to the promoters, the public holding has now been reduced to less than 15 per cent. as against the listing agreement requirement of 25 per cent.
24. Shri Ramani, initiating his arguments, stated that no act of oppression had been committed by the respondents by making preferential allotments to the promoters group since the company was proposing private placement of 4 lakhs shares of foreign institutional investors and others which had also been approved by the general body in the meeting held on August 2, 1994. In order to maintain the promoters' stake in the company at the same level after issue of shares to the FIIs, the general body's approval was sought for making preferential allotment of convertible warrants to the promoters' group. If the private placement as above had materialised, then, with the preferential allotment to the promoters' group, their shareholding would have come to 72.10 per cent. as against 70.65 per cent. shares held by the promoters before such allotment. The proposal for private placement could not be implemented in view of the restraint order passed by the Company Law Board. In other words, what was contemplated by the management was to maintain their shareholding intact and it was not with a view to gaining any undue advantage over the minority shareholders. He further submitted that the practice of preferential allotment to promoters was in vogue in many companies especially when private placement of shares to FIIs was being proposed. The entire exercise was done with absolute transparency and with the approval of the general body. He contested the claim of the petitioners, that, on coming to know of the impending issue of the Securities and Exchange Board of India Guidelines on August 4, 1994, regarding pricing of preferential allotment, the company had convened the annual general meeting on August 2, 1994. He stated that the board had decided on the issue as early as on June 27, 1994, and the notice for the annual general meeting convening the same on August 2, 1994, was issued on the same day. No one could have anticipated the impending the Securities and Exchange Board of India Guidelines to be issued on August 4, 1994. The Securities and Exchange Board of India Guidelines issued on August 4, 1994, specifically permitted the company to implement the resolution passed for preferential allotment within a period of three months. Accordingly, on the authority given by the general body, the convertible warrant allotment committee met on September 14, 1994, and allotted 110 warrants of Rs. 1 lakh each to the promoters' group which were, on the same day, converted into equity shares at par. The company also filed a return of allotment on October 14, 1994. Therefore, the allegation that the minutes of the warrants committee meeting as well as the board meeting on September 14, 1994, were fabricated after filing of the petition is baseless. He also referred to the various documents annexed at R-8 to R-22, to substantiate his stand, that notices for the board meeting on September 14, 1994, were issued to all the directors, that air tickets were purchased for travel in respect of certain board directors, that sitting fee had been paid to these directors, etc. He also referred to R-28 and R-29 to state that the loan agreements with the financial institutions provide for conversion of loans into shares in case of default. According to him, the preferential allotment was made only with a view to maintaining the promoters' stake in the company which action has also been statutorily recognised by the Securities and Exchange Board of India and hence the same cannot be viewed as an act of oppression. Even the allegation that when the market price of the shares was around Rs. 400 the warrants were converted into shares at par, he submitted that the allegation of undue advantage gained by the respondents by this allotment does not merit any consideration inasmuch as the agreement with the financial institutions stipulates that the promoters cannot part with their shares and that even the allotment was subject to a lock-in-period of three years.
25. He also contended that preferential allotment to a select group cannot be considered to be an act of oppression as decided by the Madras High Court in Maxwell Dyes and Chemicals Pvt. Ltd. v. Kothari Industrial Corporation Ltd. [1996] 85 Comp Cas 111 ; V. M. Rao v. V. L Dutt [1987] 61 Comp Cas 20 and also the decision of the Court of Appeal in Bamford v. Bamford [1969] 39 Comp Cas 838 (CA), Hindusthan Commercial Bank Ltd. v. Hindusthan General Electrical Corporation [1960] 30 Comp Cas 367 (Cal) and N. Parthasarathy v. Controller of Capital Issues [1991] 70 Comp Cas 651 ; [1991] 2 Comp L] 1 (SC). Summing up the decisions in the above cases, he submitted, that, the increase of share capital on allotment of shares being a matter of internal management, the same cannot be agitated in a 397/398 petition and that, according to him, once the general body had approved the proposal, the action taken in pursuance of the same which is also permitted by statute cannot be an act of oppression.
26. He further submitted that the only issue in the entire petition relates to the preferential allotment which is a past and concluded one and as such cannot be agitated in 397/398 petition. Dealing with certain other legal issues raised by Shri Padmanabhan, Shri Ramani submitted that the allegation relating to insufficiency of the explanatory statement attached to the notice of the annual general meeting has not been substantiated by counsel for the petitioner. The explanatory statement specifically mentions the purpose for which the preferential allotment was being made, to which class of shareholders the allotment was proposed to be made and it also indicates the persons who were interested in the allotment. In other words, full disclosure regarding preferential allotment had been made for consideration of the general body. Regarding the explanatory statement relating to private placement, be submitted that the general approval of the general body was sought for such placement on terms to be decided later by the board. In regard to the scope of Section 173, he cited the following cases :
(i) Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh Ltd.) [1962] 32 Comp Cas 207 (Cal) ;
(ii) Shailesh Harilal Shah v. Matushree Textiles Limited [1994] 2 Comp LJ 291 ; [1995] 82 Comp Cas 5 (Bom) ;
(iii) Laljibhai C. Kapadia v. Lalji B. Desai [1973] 43 Comp Cas 17 (Bom).
27. He submitted that a reading of the above decisions would go to show, that, as long as the general body was aware of the business that was going to be conducted at the general body meeting on the basis of the materials furnished in the explanatory statement, later on, the shareholders cannot complain of insufficiency of the materials in the explanatory statement. He further submitted that on the basis of the notice, the petitioners had, in fact, sought for not considering these proposals in the annual general meeting through individual letters to the company. It was possible only because the petitioners knew what the proposal was. Further, he also pointed out, that, one of the petitioners did attend the general body meeting and he never complained of insufficiency in the explanatory statement.
28. In regard to the allegation that the decision regarding preferential allotment to promoters was taken in a board meeting wherein interested directors were present, he pointed out that even though the board approved the issue of convertible warrants on a preferential basis to the directors, the same was subject to the shareholders' approval. Allotment of shares cannot be treated as a contract as contemplated by Section 300(1) of the Companies Act nor as an arrangement in terms of Section 299 of the Act. Drawing an analogy he submitted, that, the decision taken in a board meeting for transfer of shares to certain relations of directors had been held to have not attracted Section 299 or 300 by the Kerala High Court in Mukkattukara Catholic Company Limited v. M. V. Thomas [1995] 4 Comp LJ 311 ; [1999] 96 Comp Cas 864 and appointment of additional director does not amount to a contract as contemplated by Section 300(1) as held in Public Prosecutor v. T. P. Khaitan [1957] 27 Comp Cas 77 ; AIR 1957 Mad 4. He also drew our attention to the clarification issued by Government of India (Letter No. 2/ 32/63/PR, dated September 20, 1963), according to which the resolution in regard to fixation of or increase in the directors' fee when the same when being considered by the board cannot be considered to be in violation of Section 300(1) since a final decision in regard to the same would be that of the company in a general meeting. Therefore, according to him, approving the proposal to allot convertible warrants on preferential basis in a board meeting by interested directors cannot be said to be against the provisions of law, when the same was to be approved by the general body.
29. We have considered the pleadings and the arguments of counsel on the merits of the case. The main thrust of the arguments of the counsel for the petitioner is, that, while the preferential allotment to the promoters suffered from various legal infirmities, even assuming that such allotment is legal, the act of the board of directors lacks in probity and fairness. Allotment of warrants/shares to themselves, that too, at par value when the market value was Rs. 400 per share, in exclusion of minority shareholders, itself is an act of oppression on the minority. In regard to legal infirmities, his submission has been that without a quorum of non-interested directors, the board decided to issue convertible warrants, and also issued shares against the warrants, that the explanatory statements placed before the general body did not give full details. As far as the presence of disinterested directors is concerned we are in full agreement with the submissions made by the counsel for the respondents. As rightly pointed out by him, as long as the board takes a decision which is subject to the general body approval, the question of directors being interested in the particular subject may not be of much relevance. What is required is that the general body should be advised about the interest of the directors when the subject is placed before the general body for their consideration. Even otherwise issue of shares/warrants cannot be considered to be an arrangement or a contract within the provisions of Section 299 or 300. If it is so, then no issue of rights shares/warrants could be made, in case all directors are shareholders of a company. Regarding the allegation, that when the warrants were converted, in that meeting also the quorum was absent in view of the presence of interested directors, one has to keep in mind that the general body has already approved conversion of warrants into shares, and what the board did was only with the authority of the general body which was aware of the interest of the directors. Therefore we do not find any infirmity in the interested directors participating in allotting the shares. Therefore, this objection relating to presence of interested directors in the board meeting held on September 14, 1994, where the decision to allot convertible debentures was taken, does not stand.
30. In regard to insufficiency of information in the explanatory statement, we find from the explanatory statement, as rightly pointed out by counsel for the respondents, that full disclosures as to whom the preferential allotment was being made, the terms under which the same is to be made, etc., have been clearly elaborated. The non-mentioning of constitution of a committee for allotment, we do not consider, is material that, it would have, if mentioned, influenced the general body in any manner. In regard to his allegation that the explanatory statement relating to private placement, did not disclose any details other than empowering the board to decide on various issues relating to the same, Shri Ramani has dealt with the same as narrated in para. 25 of this order. We find this explanation as satisfactory. Therefore, the petitioner's objection on these two points fail.
31. Admittedly, the promoters held over 70 per cent. shares in the company before conversion of the warrant and even assuming that the private placement of 4 lakhs shares had materialised, even then the holding of the promoters' group would have been about 53 per cent. Keeping this in mind, we have to examine whether there had been any lack of probity and fairness in the board deciding to issue convertible warrants/shares to the promoters group. Counsel for the respondent strenuously argued to state that during the relevant time, the promoters of many companies had taken steps to consolidate their position by resorting to preferential allotment. As rightly pointed out by Shri Padmanabhan, in most of the companies such allotments were made when the promoters not having controlling interest, tried to consolidate their holdings to reach controlling interest. In the present case, even after the private placement as proposed, promoters would have continued to have over 53 per cent. shares which is more than the controlling interest. But the argument of counsel for the respondent was that the promoters desired to maintain their holding intact and did not want to dilute their holdings after private placement.
32. The action of the board to allot convertible warrants was on account of the proposed private placement of 4 lakhs shares to financial institution/ others. But for the proposed private placement there would have been no need for the board to decide on issue of convertible warrants. Normally, when further issue of shares to majority shareholders is made to the exclusion of the minority shareholders, the same would be held to be oppressive in case such allotment to the majority is with a view to either increase their shareholding er reduce the holding of minority shareholders. It is seen from the explanatory statement circulated along with the notice of the annual general meeting, that, the company had proposed to undertake a faster pace of modernisation and expansion at a cost of Rs. 700 lakhs in a phased manner during the next 18 months and considering the cost of term finances, the board had intended to issue shares at premium on private placement basis to the extent of four lakhs equity shares of Rs. 10 each to FFIs and others. Therefore, the purpose of private placement was to augment the resources of the company at a cheaper cost for modernisation purposes. Once it is done, naturally the promoters holding would come down from 70 per cent. to 53 per cent. Therefore, the proposal of the company to go in for convertible warrants, convertible into shares with a view to maintain the shareholding intact does not appear to be an act of oppression against minority. Whether the board should have at all proposed private placement instead of raising the funds from the existing shareholders either at par or at premium to meet the cost of modernisation is an issue wholly within the realm of the board of directors. As long as the object is not to increase in their shareholding thus reducing the holding of the minority then how the board decides to raise funds is for the board to decide, especially when the same is placed before the general body for its consideration and approval. Therefore, the issue of convertible warrants to the promoters cannot be held to be an act of oppression in the facts of the case.
33. Even assuming that the promoters decided to keep their holdings intact after the proposal for private placement, whether the share price which was ruling around Rs. 400 could have been fixed at par. Shri Padmanabhan quantified the benefit that had accrued to the promoters group at around Rs. 40 crores (even though subsequently the market price of the shares has come down substantially). In regard to pricing of shares allotted on preferential basis, it is worthwhile referring to the Securities and Exchange Board of India guidelines on preferential issues dated August 4, 1994, wherein the Securities and Exchange Board of India has observed "of late, the practice of making preferential allotment of shares, etc., at a price unrelated to the prevailing market price of such instruments seems to be on the increase. This development is particularly undesirable as the allotments are made to select persons, who are considered to be promoters, or persons for the time being incharge of the affairs of management of the company. Besides, the company has been issuing warrants to select persons with a right to obtain shares in future at a price, not bearing fair relation to the market price. Therefore, there appears to be a need for protecting the interests of investors, who do not receive such preferential treatment by ensuring that pricing of the preferential allotments is market related." From the above, it is apparently clear that at the relevant time, i.e., before the issue of the guidelines on August 4, 1994, many companies were making preferential allotments to the promoters group at a price not related to the market price. Therefore, the stand taken by Shri Ramani, that the board of directors had not done something which was not in vogue is tenable.
34. However, according to the petitioners, the promoters have unjustifiably enriched themselves by over Rs. 40 crores in issuing the shares at par when the market price was around Rs. 400 per share. According to the petitioners the price should have been market related and should have been issued at a premium so that the company would have benefited in raising the additional resources. Shri Ramani, pointed out that even though at the time when the shares were issued the price was ranging around Rs. 400, it was due to the then prevailing stock market conditions. Otherwise, there have been fluctuations in price and as a matter of fact the present price in the stock market is only around Rs. 130. Further, there is a lock in period of three years and the promoters, since they desire to keep their holding intact, do not propose to divest their holding. If that is the case, then the question of notional undue advantage of Rs. 40 crores to the promoters does not merit any consideration. We are inclined to agree with the submission of Shri Ramani. Perhaps, the petitioner would have had a very valid claim if the respondents, after getting the allotment, disposed of the shares and thus appropriated the difference between the issue price and the sale price. Even the notional profit attributed by the petitioner at Rs. 40 crores has now, due to fall in the price of the shares, come down substantially low. Considering the fact that there is a lock in period, and the commitment of the promoters to the financial institutions not to part with the shares, we do not consider that the board has allowed the promoters to gain undue advantage at the cost of the company. May be that, the company could have charged a premium as contended by the petitioners, but the fact is, that, at the relevant time, many companies had resorted to such issues, and the provocation for the Securities and Exchange Board of India to come out with certain guidelines, was because of that. It appears that the company also fell in line in the same direction. It would be highly inappropriate for us to single out this company to hold that by issuing shares, at par, the interest of the company has been marginalised.
35. Having held that neither the allotment of convertible warrants/shares to the promoters group is oppressive nor by issuing the shares at par, the promoters have gained any undue advantage, we have to consider certain other issues that have been raised by the petitioners. In regard to the fabrication of the minutes of the board meeting held on September 14, 1994, the contemporaneous records that have been placed in the reply, the proof of issue of notice for the meeting, proof of attendance by the directors through receipt of sitting fees, purchase of air-tickets and most importantly, the receipt of issue by the Registrar of Companies relating to filing of Form 32 on October 14, 1994, lead us to hold that in fact a board meeting had been held on that day. As a matter of fact the company was bound to act on the general body resolution by November 4, 1994, in terms of the Securities and Exchange Board of India Guidelines, which the company actually did. To substantiate their claim, the petitioners have also relied on the communication dated October 14, 1994, sent by the company to the Department of Company Affairs also a list of shareholders furnished to the petitioner in which there have been no mention about conversion of the warrants into shares other than mentioning about allotment of convertible warrants. Counsel for the respondents drew our attention that both the communication and pointed out that the shareholding position was with reference to a date prior to the conversion, and, therefore, the development that took place after that date in the shareholding pattern had not been indicated. We are satisfied with this explanation.
36. Thus, on an overall consideration of our findings on various issues as above, we conclude that the petitioners have not made out a case for granting of the reliefs prayed for.
37. However, our finding that the respondents had not acted in an oppressive manner in resorting to preferential allotment, has been, with reference to the object of the allotment. Yet, we find that presently, the promoters hold about 84 per cent. shares in the company as against their earlier holding of about 70 per cent. This is because, as explained by Shri Ramani--due to an order passed by us restraining the company from proceeding with allotment of any further shares. Considering the fact, that, with the present holding by the promoters, the holding by the general public has gone below 20 per cent. and that the object of the issue of convertible warrants was only with a view to maintain the shareholding by the promoters intact, unless the company implements its decision to allot 4 lakhs shares on private placement basis to FFIs and others, the allegations of the petitioners, that the preferential allotment was made with a view to increase the promoters shareholding would become justified. Therefore, it has become necessary for us to issue the following directions :
38. The board of directors shall implement its decision to allot four lakhs shares to financial institutions and others as approved by the general body on August 4, 1994, before December 31, 1998. In case, their proposal does not materialise by then, within a further period of three months, the company shall issue shares at par to all the willing shareholders, other than those to whom convertible warrants/shares were issued, in the same proportion in which the shares were issued on conversion of the warrants, if need be, by increasing the authorised capital.
39. With the above directions we dispose of the petition, C. P. No. 32 of 1995. The other petition, C. P. No. 8 of 1995, is dismissed as infructuous. No order as to costs.