Bombay High Court
M. Sreenivasulu Reddy And Ors. vs Kishore R. Chhabria And Ors. on 19 April, 1999
Equivalent citations: [2002]109COMPCAS18(BOM)
Author: H.L. Gokhale
Bench: H.L. Gokhale
JUDGMENT H.L. Gokhale, J.
1. The notices of motion in Suit No. 3910 of 1997 seek to challenge the legality and validity of substantial acquisitions of shares by defendants Nos. 1 to 11 in defendant No. 12-company allegedly in violation of the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994, and pray for the anulment thereof, particularly in the context of the breaches of regulations 9 and 10 which require a public announcement of the intention to acquire substantial shares in certain circumstances. Defendants Nos. 1 to 11 on the other hand, dispute the right of third parties like the plaintiffs to challenge such acquisitions, the rights of plaintiffs claimed to be based in common law and/or statute and as to whether the voting rights flowing from such shares can be injuncted by filing a suit in the context of the relevant provisions of the Companies Act. Consequently, the questions pertaining to balance of convenience and appropriate orders to be passed at the interlocutory stage are also raised.
2. Suit No. 3910 of 1997 has been filed by eleven plaintiffs ; the first nine of these plaintiffs are individuals and the latter two are private companies. They are all described as the "Reddy Group" in para. 1 of the plaint. Defendant No. 1 to this suit is one Kishore R. Chhabria and defendant No. 11 is one Mr. Madan D. Chhabria (stated to be uncle of defendant No. 1). Defendants Nos. 2 to 10 are companies which are described in para. 3 of the plaint as the companies "owned and/or controlled" by the first defendant. Defendant No. 12--Herbertsons Limited is a company engaged in manufacture and distribution of liquor. One Mr. Vijay Mallya is the chairman of this company.
3. Suit No. 3910 of 1997, inter alia, seeks to challenge the conversion of certain large number of debentures of defendant No. 12 into shares in favour of defendant No. 2 and also the acquisition of large number of shares of defendant No. 12 by defendants Nos. 3, 4, 5, 7 and 8 for being in breach of the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 (hereinafter referred to as "the SEBI Regulations of 1994"). These regulations are framed under Section 30 of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the "SEBI Act"). Some of these shares are registered whereas some of them are not registered. This suit seeks (a) declaration that these conversions and acquisitions of shares are null and void ; (b) it also seeks a direction that the register of membership of defendant No. 12 be appropriately rectified and the names of the disputed entrants be removed from the register. The two notices of motion bearing Nos. 13120 of 1997 and 3932 of 1998, which are taken out by the plaintiffs in this suit, inter alia, seek freezing of voting rights flowing from these disputed shares'. They also seek appropriate orders in that behalf with respect to the annual general meetings of defendant No. 12 which were held on October 27, 1997, and December 30, 1998, respectively.
4. Suit No. 297 of 1999 (lodged vide Stamp No. 6264 on December 28, 1998) is filed by companies which are defendants Nos. 3, 7 and 8 to the above-referred Suit No. 3910 of 1997. Herbertsons Limited (defendant No. 12 in Suit No. 3910 of 1997) and its chairman Mr. Vijay Mallya are the two defendants to this suit. This second suit is concerning a part of the subject-matter of the first suit, viz., unregistered shares disputed therein and which are acquired by the plaintiffs of the second suit. It seeks a declaration that the plaintiffs of the second suit are the beneficial owners of these shares. It is material to note that in the two notices of motion taken out in the first suit, no injunction has been sought with respect to these unregistered shares of defendants Nos. 3, 7 and 8 (plaintiffs of the second suit) though the final prayer in that suit very much covers them. There is, however, an interim prayer with respect to unregistered shares of defendant No. 5 of the first suit in these two notices of motion. The status of these shares of defendant No. 5 of the first suit being similar to the shares acquired by defendants Nos. 3, 7 and 8 (i.e., all of them are unregistered), what will be decided about the unregistered shares of defendant No. 5 in these motions in the first suit would apply in principle to the unregistered shares of defendants Nos. 3, 7 and 8. Notice of Motion No. 184 of 1999 in this second Suit No. 297 of 1999 seeks a restraint on the defendants thereof from preventing the plaintiffs from attending the annual general meeting on December 30, 1998, and exercising voting rights flowing from the concerned shares. This second suit can, therefore, be generally described as a sort of a counter suit. Hence for the sake of convenience, the submissions of the rival parties are considered hereinafter initially in the context of the first suit. Thereafter whenever it is necessary, there is a reference to the second suit and it is so stated specifically.
5. A short business profile of Herbertsonb Limited (Defendant No. 12):
Paragraph 1 of the plaint places on record some information about defendant No. 12-company which is as follows :
(a) Control : It is stated that this company has been for the past many decades a constituent of the United Breweries Ltd. group (known as UB group), which group was initially controlled by one Mr. Vittal Mallya and his family and it is stated that after his demise it is controlled by his son Mr. Vijay Mallya.
(b) Issued and paid-up capital : The issued and paid-up capital of this company is said to be Rs. 9,52,23,230 divided into 95,22,323 equity shares of Rs. 10 each. Para. 3 of the plaint informs that Mr. Vijay Mallya owns 23,71,422 shares in this company representing 24.90 per cent. of the subscribed capital as on March 31, 1997. This ownership is by himself and through companies under his control and/or his nominees.
(c) Activities of the company ; It is further stated that the company was initially a distributor of the products of the UB group. Subsequently, it has also started manufacture of liquor. Mr. F. S. Nariman, senior counsel appearing for the plaintiffs, has filed a short note giving the brief history and business profile of this company wherein it is stated that the company became a listed public limited company in the year 1992.
(d) Products : It is stated that the company launched a whisky by name "Bagpiper" whisky in the year 1976 which is said to be the largest selling whisky in the Indian market with sales in excess of five million cases. It is also stated that the company manufactures other products of liquor under its own brand. The sales/turnover as per the annual account unanimously approved from year to year was of the order of Rs. 219.57 crores in the year 1997-98.
(e) Dividend : The company is stated to have declared the dividend of 20 per cent. in the years 1992-93 and 1993-94 and thereafter for four years beginning from 1994 it has declared the dividend of 25 per cent.
(f) Working capital and reserves : The total working capital of this company from the consortium of banks is Rs. 17 crores. In the year 1997-98 the reserves are stated to be Rs. 25.90 crores.
(g) Work force : The company employs about 500 employees in its distillery at Alwar in Rajasthan and in its 30 branch offices all over India.
6. Interest of the plaintiffs in defendant No. 12-company:
Paragraph 2 of the plaint states that the plaintiffs are the shareholders of defendant No. 12-company for the last several years and they are registered shareholders of 4,23,950 equity shares representing 4.45 per cent. of the subscribed capital. Further, it is stated in para. 8 that the plaintiffs have over the years, invested vast sums of money on distribution, marketing and recently on the production of various products of Herbertsons. As an instance, it is informed that in the State of Tamil Nadu, the plaintiff group has spent an amount of over Rs. 10 crores from 1985-86 onwards to promote and establish the products of defendant No. 12 in the market. It is stated in para. 2 that their association with defendant No. 12 initially commenced with distributing their products in various States including the State of Tamil Nadu, Andhra Pradesh and Kerala, but the relationship between the Mallya family and the Reddy family dates back to a generation and from 1985 onwards the Reddy group has spent huge amounts over setting up and purchasing various distilleries in Madras, Hyderabad, Goa and Kerala for the purposes of production and bottling of liquor exclusively for the UB group including defendant No. 12-company. In paras. 14 and 17 of the plaint, it is stated that the plaintiffs are the valuable holders of rights of property and it is the breach thereof which has led them to file the present suit.
7. Shareholding of defendants Nos. 1 to 11 prior to the acquisition disputed in the suit:
It is stated in para, 3 of the plaint that defendant No. 1 through defendants Nos. 2 and 6 to 10 initially acquired through negotiations some time in December, 1993, in all 22,15,800 shares in defendant No. 12-company aggregating to 26 per cent. of the voting rights. These acquisitions prior to filing of the suit are not disputed or challenged in any manner whatsoever in the present suit. These prior acquisitions however give a foundation to some of the submissions of the plaintiffs with respect to the acquisitions made subsequently which are challenged in the present suit.
8. Disputed acquisitions : Suit No. 3910 of 1997 disputes the acquisition of shares by the following defendants as detailed in paras. 18(i) to (vi) read with paras. 4 and 5 of the plaint :
Acquisitions by conversion of debentures
(i) Defendant No. 2-Airdale Investment and Trading Pvt Ltd.
Acquiring 3,75,000 shares on August 11, 1995, due to the conversion of 75,000 fully convertible debentures purchased on December 14, 1993.
Acquisitions through open market :
(A) Where transfer of shares is effected by defendant No. 12-company,
(ii)
(a) Defendant No. 3 IMFA Holdings Pvt Ltd.
Acquiring 10,39,091 shares (constituting 10.91 per cent, themselves as a block) in December, 1995, Transfer of these shares was initially rejected by the board of directors of defendant No. 12 on January 3, 1996, but subsequently in supersession of the previous resolution the transfer thereof was accepted on May 30, 1996.
(b) Defendant No. 4 Mahameru Trading Company Pvt, Ltd.
Acquiring 4,72,250 equity shares in 1995-96. Transfer accepted in September, 1996.
(B) Where transfer of shares is not effected or registered by defendant No, 12-company.
(iii) & (iv) Defendant No, 5 Shirish Finance and Investment Stated to have acquired further 3,64,750 shares in May, 1997, but the transfer of these shares was rejected by the board of directors of defendant No. 12 on July 17, 1997, for being in violation of SEBI Regulations.
(v) Defendant No. 3 IMFA Holdings Pvt. Ltd.
Acquired further 54,000 shares on October 22, 1997, which constitute 0.56 per cent, of the paid-up capital of defendant No. 12. These shares are not registered as yet.
(vi)
(a) Defendant No. 7 Beethoven Traders Pvt. Ltd.
Acquiring further 1,25,000 shares on December 19, 1998, constituting 1.31 per cent. of the paid-up capital These shares are also not registered as yet.
(b) Defendant No. 8 Darrel Traders Pvt, Ltd.
Acquiring 25,800 shares on December 19, 1997, constituting 9.27 per cent, of the paid-up capital. These shares are also not registered as yet.
9. It is stated in para. 6 of the plaint that through the acquisition of shares referred to in paras. 4(a) to (d) of the plaint, which are the same as the above-mentioned Clauses (i) to (iv) of para. 18 quoted above, defendant No. 1 along with defendants Nos. 2 to 10 acquired a further 20.91 per cent. shares taking the tally of the shareholding of defendants Nos. 1 to 11 to 46.91 per cent. If one adds the acquisitions in paras, (v) and (vi) above to these acquisitions, the percentage of holding of defendants Nos. 1 to 11 goes up to 49.05 per cent.
10. Allegation of concerted and clandestine action :
The above referred acquisition of the shares of defendant No. 12 by defendants Nos. 1 to 11 from time to time is alleged to have been effected in concert with each other in a planned manner to acquire the voting rights "directly or indirectly with others acting in concert with them" as stated in para. 16 of the plaint. The allegation of acting in concert is made in the following manner :
(a) In para. 4(a) of the plaint, it is alleged that the acquisition of shares by converting them from fully convertible debentures (FCDs) was done by defendant No. 2 acting in concert with defendants Nos. 1 and 3 to 11 and the same was done without making a public announcement.
(b) In para. 4(b) of the plaint, the allegation against defendant No. 3 is that it acquired the concerned shares from the open market in concert with defendants Nos. 1, 2 and 4 to 11 without making a public announcement.
(c) The allegation against defendant No. 4, as stated in para. 4(c) of the plaint, is that it acquired the concerned shares in concert with defendants Nos. 1 to 3 and 5 to 11, without any public announcement.
(d) The allegation against defendant No. 5, as stated in para. 4(d) of the plaint, is that the acquisitions were made by it in concert with defendants Nos. 1 to 4 and 6 to 11 without any public announcement.
(e) The allegation against defendant No. 3, as stated in para, (e) of the plaint, is that it acquired the concerned shares in concert with defendants Nos. 1, 2 and 4 to 11 without making a public announcement.
(f) The allegation against defendants Nos. 7 and 8, as stated in para. 4(f) of the plaint, is that the concerned acquisition of shares by them is in concert with defendants Nos. 1 to 6 and 9 to 11 without making a public announcement.
11. It is stated in para. 12 of the plaint that an article which appeared in Economic Times of July 15, 1997, gave the information to the plaintiffs of the disputed acquisitions. Based on that article (exhibit E to the plaint) the plaintiffs caused further inquiries to be made into the purported holding of defendant No. 1. It is further stated in para. 13 that from the declarations filed by defendants Nos. 1 and 11 in particular {and other defendants as well) dated April 17, 1997, it is evident that defendants Nos. 1 and 11 are the persons having control over defendants Nos. 2 to 10 companies. These declarations are filed as required by regulation 6{3) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (hereinafter referred to as "SEBI Regulations of 1997"). These Regulations replaced the earlier mentioned SEBI Regulations of 1994 from February 20, 1997. It is stated in para. 7 of the plaint that the continuing increase in the holdings of the group led by defendant No. 1 acting in concert with defendants Nos. 2 to 11 (defendants Nos. 2 to 10 of which are companies) is an attempt to take over defendant No. 12-company. It is further stated that "this exercise is being conducted through clandestine transactions and constitutes undesirable practices which negate transparency and fair and truthful disclosure in the interest of the public and is contrary to public policy and the policy of the law". The above-referred declarations made on April 17, 1997, under the SEBI Regulations of 1997 are relied upon to infer a prior existing arrangement amongst defendants Nos. 1 to 11. The actual arrangement/ understanding amongst defendants Nos. 1 to 11 would be a matter of evidence, though the aforesaid declarations are relied upon as a prima facie piece of evidence in this behalf.
12. Legal submissions:
It is, therefore, stated in para. 13 of the plaint that the defendants are proposing to acquire the shares referred to in paras. 4(b) and (c) of the plaint in violation of the SEBI Regulations of 1994 (in force from November 7, 1994), and particularly regulations 9 to 11 and the shares mentioned in para. 4(d) being in violation of the SEBI Regulations of 1997 (in force from February 20, 1997). The acquisition of voting rights by conversion of FCDs mentioned in para, 4(a) of the plaint is stated to be in violation of regulation 9(3) of the SEBI Regulations, 1994. It is stated that all these acquisitions are made through the open market without making a public announcement as required by these regulations and, therefore, the acquisition of these shares is void under Section 23 of the Indian Contract Act being contrary to law as well as on account of the penal provisions in the Securities and Exchange Board of India Act (SEBI Act), 1992. It is, therefore, submitted that defendants Nos. 2 to 5 are not entitled to the voting rights in respect of various shares which are mentioned in paras. 4(a) to (d) which are also corresponding to paras. 18(i) to (iv) of the plaint. It is further stated at the end of this para, that if such public announcement or offers, as required by law, were made, the plaintiffs would have given their competitive bid for acquisition of these shares, and that the plaintiffs continue to be ready and willing to do so. In this connection, it is further stated in paragraph 21 of the plaint that the provisions contained in Section 15-H of the SEBI Act (providing for adjudication by the Adjudicating Officer in certain situations), Section 15Y (providing that the civil courts will have no jurisdiction with respect to any matter which an Adjudicating Officer has to decide) and Section 20A (creating a bar of jurisdiction for the civil courts with respect to the orders of the SEBI Board) would have no application in the present circumstances. It is stated that the plaintiffs are seeking reliefs in the nature of declarations and injunction which fall within the jurisdiction of civil courts and are attributes of a court and which are beyond the powers conferred upon the SEBI Board or its Adjudicating Officers. In this connection, it is further stated during arguments that the interpretation of the law as also laying down the parameters of jurisdiction of the authorities under the SEBI Act would also be required in the present matter and the same should fall only within the jurisdiction of a civil court.
13. Cause of action:
Paragraphs 9 and 10 of the plaint state that the annual general meetings of defendant No. 12-company held from year to year were held smoothly until the meeting of the year 1996. However, in the meeting to be held on October 27, 1997, defendants Nos. 2 to 11 intended to dislodge the existing management. It is stated that notices had been given by defendant No. 12-company for seeking the reappointment of three directors who were retiring and also to confirm the appointment of one more director who was appointed as an additional director. The plaintiffs apprehended that defendants Nos. 1 to 11 would exercise their voting power (increased in the above-referred manner) to defeat these resolutions and it is, therefore, that they have been required to move this court. The,y have sought declarations, as stated above, with respect to the illegality of the conversions and acquisitions of shares as mentioned in para. 18 (referred to above) and the rectification of the membership register of defendant No. 12 in prayer Clause 23(b) which clause again refers to Clauses (i) and (ii) of para. 18. Prayer (c) seeks an interim injunction on the voting rights flowing from the disputed acquisitions.
14. The course taken by the present proceeding:
The plaint has been amended twice and the above-referred narration flows from the plaint as it exists now after the two amendments. No written statement has been filed so far though the time to file written statement has expired long back.
15. The first notice of motion bearing No. 3120 of 1997 is concerning the annual general meeting which was to be held on October 27, 1997, and it seeks an injunction on the exercise of voting rights flowing from the shares detailed in paras. 18(i) to (iii) of the plaint. It also prays that the decisions to be taken in the said meeting be made subject to the orders of the court. The affidavit in support of this motion reiterates principally what is stated in the plaint.
16. This notice of motion was first moved before my brother D. G. Deshpande J. on October 23, 1997, when after hearing learned counsel for the plaintiffs as well as the defendants and after considering the facts and circumstances of the case, but without prejudice to the rights of the parties and their contentions, the learned judge granted ad interim injunction in terms of prayer (b)(i) of the motion until November 13, 1997. The said prayer reads as follows :
"(b)(i) In the alternative to prayer (b) above and pending the grant of further ad interim and interim reliefs, it may be ordered and directed that all the proceedings and decisions taken at the annual general meeting of defendant No. 12 scheduled to be held on October 27, 1997, will be subject to orders of this hon'ble court on the present notice of motion."
17. This annual general meeting, which was to be held on October 27, 1997, proceeded peacefully and the resolutions moved were passed unanimously without any opposition, and by show of hands. The annual accounts and other decisions were also approved. The existing management was not disturbed in any manner :
(i) The next annual general meeting of defendant No. 12 was to be held on December 30, 1998. This time the plaintiffs moved the other motion bearing No. 3932 of 1998 again praying that defendants Nos. 1 to 11 be restrained from exercising any voting rights directly or indirectly in respect of the shares detailed in paras. 18(i) to (iii) of the plaint. An affidavit in support of this motion was affirmed by the first plaintiff on December 14, 1998. In this affidavit, it was stated that the earlier annual general meeting of October 27, 1997, was held smoothly, defendants Nos. 2 to 4 and 6 to 10 did not attend the meeting and the resolutions proposed were passed unanimously by show of hands and no one had demanded any poll. The plaintiffs had in the meanwhile become aware of the devices utilised by the defendants. The devices were that through a proprietary concern and/or companies of defendant No. 11, namely M/s. Royal Wines and Tracstar Investments Fvt. Ltd., large sums of money were shown as loans to defendants Nos. 3 to 5 (Rs. 4.13 crores to defendant No. 3, Rs. 1.12 crores to defendant No. 4 and Rs. 1.35 crores to defendant No. 5) from which defendants Nos. 3 to 5 had acquired the shares disputed in paras. 4(b), (c) and (d) corresponding to paras. 18(ii), (iii) and (iv) of the plaint. It was further stated in the supporting affidavit that defendants Nos. 3 to 5 had a nominal paid-up capital of Rs. 4,00,200, Rs. 200 and Rs. 200 respectively. Defendants Nos. 3 to 5 feigned inability to repay the above-referred loans and allegedly offered the entire paid-up capital of these companies, as stated above, in the discharge of the loans of Rs. 4.13 crores, Rs. 1.12 crores and Rs. 1.35 crores. It is, thus, submitted in para. 12 of the affidavit in support of this second notice of motion that these acquisitions of shares of defendant No. 12 were made through defendants Nos. 3 to 5 from the funds of defendant No. 11 who is the uncle of defendant No. 1. In their support, the plaintiffs rely upon the investigation report by the SEBI authorities annexed as annexure O to the affidavit in support. This report, however, bears no date nor any signature and is not on the letter-head of SEBI nor is it disclosed in the affidavit in support as to how the plaintiffs got a copy thereof. In the circumstances, I am refraining from referring to this report or its contents.
(ii) Then, in the affidavit in support of this motion, it is stated in paras. 19 to 22 that BDA Limited (which is a wholly owned subsidiary of defendant No. 12) is having a lot of mismanagement. This BDA Limited is said to be under the control of defendant No. 1. The plaintiffs referred to and relied upon the auditor's report of BDA Limited for the accounting years 1995-96 and 1996-97 and submitted in para. 21 of the affidavit that the reports of the auditors bring out the following major infirmities :
(a) The auditors were unable to obtain information and/or explanations which were required.
(b) The balance-sheet and profit and loss account did not give the information as required by the Companies Act.
(c) The accounts did not reflect a true and fair view of the state of affairs of BDA Limited.
(d) Huge amounts to the tune of Rs. 10 crores were due from a proprietary concern the proprietor of which was a director of this BDA Ltd. (It is submitted that this proprietary concern was Royal Wines). Over Rs. 3 crores were shown as due from private companies in which directors of BDA Limited were directors. Rs. 14.45 lakhs were shown as due from its director and Rs. 66.67 lakhs as cash in hand which could not be verified by the auditors. An amount of over Rs. 4 crores was shown as due from a company which was marketing its products, and Rs. 4.5 crores were shown as expenditure for defending ownership of a distillery. It is submitted that this expenditure was incurred to defend the ownership of defendant No. 1 on a distillery against Shaw Wallace Ltd. It is stated that all these expenses were on account of the companies belonging to the Chhabria group such as Royal Wines and Chhab-ria Marketing Company. It is further stated that as of now defendant No. 12 was in good hands and management thereof was likely to be dislodged in favour of those who had a track record of mismanagement and, therefore, the injunction was necessary.
18. This second motion came up before my brother D. K. Deshmukh J., on December 21, 1998, when counsel for the plaintiffs as well as the defendants were heard. Certain arrangement was arrived at between the parties and it was also agreed that it was not necessary to give any reasons in support thereof. It was agreed that items Nos. 2, 6 and 7 in the notice convening the annual general meeting will be passed unanimously by a show of hands. Item No. 1 would not be opposed by defendants Nos. 1 to 11. The votes cast by defendants Nos. 2 to 5, which were disputed, will be kept separately in a separate cover. An officer of the court was directed to remain present at the time of the meeting and to act accordingly. The relevant para. 2 of the said order dated December 21, 1998, reads as follows :
"2. The parties are agreed that for passing ad interim order in the following terms on this motion, no reasons are necessary to be recorded :
(1) The 61st annual general meeting of Herbertsons Ltd. (defendant No. 12) convened to be held on December 30, 1998, shall be held and that the resolutions in respect of items Nos. 2, 6 and 7 of the notice dated November 30, 1998, convening the said annual general meeting (exhibit A to the affidavit dated December 14, 1998), in support of this motion, shall be passed unanimously by a show of hands and without the requirement of taking any poll. Item No. 11 would not be opposed by defendants Nos. 1 to 11.
(2) That all other items except those set out in Clause (i) above shall be taken up for consideration by the meeting. The poll, if any, on those items shall be taken. The votes cast by defendants Nos. 2 to 5, which are disputed as mentioned in para. 18 of the plaint, shall be kept separately as also all the other votes shall be kept separately, but not counted. The votes shall be kept in separate covers under the seal of the company. The votes, if any, cast by the transferors or their proxies in respect of shares acquired by defendant No. 5 shall be kept in a separate cover.
(3) The meeting shall be held and the voting shall be taken under the chairmanship of the person who is to preside over the meeting, but in the presence of an officer of this court, to be nominated by the prothonotary and senior master of this court.
(4) The separate covers in which the votes are to be kept as indicated above shall be sealed by the chairman of the meeting as also the officer who is to be present at the meeting and at the voting as directed above.
(5) The officer of the court shall deposit the containers/envelopes with the prothonotary and senior master."
19. The aforesaid order was sought to be modified on December 22, 1998, and on hearing learned counsel for both the sides the following sentence was directed to be added as the enct of the first sentence in para. 2 of the order :
"These items include proposed resolutions under Sections 257 and 284 of the Companies Act, 1956."
20. Counter Suit No. 297 of 1997 and Notice of Motion No. 184 of 1999 therein: Defendants Nos. 3, 7 and 8 to the above-referred first suit bearing No. 3910 of 1997 thereafter filed the second suit being Suit No. 297 of 1999. This suit was lodged vide Stamp No. 6264 on December 28, 1998. As stated earlier, defendant No. 12 in the first suit, namely Herbertsons Ltd., and its chairman Mr. Vijay Mallya are the only two defendants in the second suit. The second suit is concerning a part of the subject-matter of the first suit, namely unregistered shares acquired by the plaintiffs of the second suit. It seeks a declaration that the plaintiffs of the second suit are the beneficial owners of those shares. The plaintiffs of the second suit thereafter took out a draft notice of motion therein which was moved before Radhakrishnan J., on December 29, 1998. The motion sought a restraint on the defendants of the second suit restraining them from preventing the plaintiffs in attending the annual general meeting on December 30, 1998, and from exercising the voting rights flowing from the concerned shares. The learned judge on hearing counsel on both the sides, passed an order similar to the one which was passed earlier on the motions in Suit No. 3910 of 1997. This order was also passed by an agreement of the parties and hence no reasons were recorded. Relevant para. 2 of this order reads thus :
"2. The parties are agreed that for passing ad interim order in the following terms on this motion, no reasons are necessary to be recorded :
(1) The votes cast at the 61st annual general meeting of the first defendant-company by the plaintiffs in respect of the suit shares mentioned in prayer (a) of the plaint shall be kept separately, but not counted. The votes shall be kept in separate covers under the seal of the company. The votes, if any, cast by the transferors or their proxies, in respect of the suit shares acquired by the plaintiffs shall be kept in separate covers.
(2) The separate covers in which the votes are kept as indicated above, shall be sealed by the chairman of the meeting as also the officer of the court appointed under order dated December 21, 1998, in Suit No. 3910 of 1997 who is to be present at the meeting and at the voting as directed above.
(3) The said officer of the court shall deposit the containers/envelopes with the ptothonotary and senior master.
(4) The notice of motion to be listed for hearing on February 9, 1999, peremptorily along with Notice of Motion No. 3120 of 1997 and the second notice of motion in the said Suit No. 3910 of 1997. Both sides are agreed that they will go on with the matters and shall not seek any adjournment. All pleadings to be completed well in advance. Counsel appearing for the parties waive service.
(5) All questions including the question of maintainability of suit are kept open to be argued at the hearing of the notice of motion.
(6) The said officer of the court and the parties to act on a copy of this order duly authenticated as true by an associate of this court.
(7) Certified copy expedited."
21. This motion was subsequently numbered as Notice of Motion No. 184 of 1999. It is relevant to note in the context of this motion that when it comes up for hearing before me along with the earlier mentioned two motions in Suit No. 3910 of 1997. Mr. Dada, the learned senior counsel appearing for the plaintiffs in support of Notice of Motion No. 184 of 1999 made a statement on instructions that the plaintiffs of that motion were not pressing the same.
22. This second suit bearing No. 297 of 1999 is filed by companies shortly known as IMF A, Bethovan and Darrel. As far as the dispute regarding 54,000 shares of Imfa is concerned, it was stated that an Appeal No. 22 of 1998 is already filed before the Company Law Board. With respect to the 3,67,750 disputed shares of Shirish (defendant No. 5), this company has already filed Appeal No. 21 of 1998 before the Company Law Board. As far as Beethoven and Darrel are concerned, registration of their shares was rejected by Her-bertsons in December, 1998. Mr. Dada stated that as far as these two companies are concerned, they will file appropriate appeal before the Company Law Board under Section 111A(2) of the Companies Act, in view of the judgment of the Supreme Court in Canara Bank v. Nuclear Power Corporation of India Ltd. [1995] 84 Comp Cas 70. He submitted that these plaintiffs in the second suit will follow their remedy in the Company Law Board, and, therefore, stated that they were not pressing the notice of motion moved in the second suit.
23. Mr. F. S. Nariman, learned senior counsel appearing for the plaintiffs in the first suit, therefore submitted that the order passed by Radhakrishnan J., on December 29, 1998, would no longer survive and that it will also mean that since the plaintiffs of the second suit were no longer pressing for the injunction that they had sought therein, they could be prevented from attending the meeting and their votes which had been segregated, need not be counted at all. Mr. Dada, on the other hand, submitted that merely because the plaintiffs of the second suit were not pressing the motion, it did not mean that the defendants of the motion could do something which was not permissible in law. In my view, Mr. Dada is right in his submission. Merely because the motion is not pressed, it will not mean that the plaintiffs of the second suit could be prevented from attending and voting at the meeting (and their votes being considered) if they are otherwise entitled to the same. However, as noted earlier, the status of the shares, which are concerned in this motion, is the same as that of the shares acquired by defendant No. 5 of the first suit, namely that they are all unregistered (and with respect to the unregistered shares of defendant No. 5 there is a specific reference in paras. I8(iii) and (iv) of the plaint of the first suit). In Notice of Motion No. 3120 of 1997, there is a specific prayer seeking freezing of the voting rights with respect to these shares mentioned in para. 18(iii) of the plaint, and again in Notice of Motion No. 3932 of 1998 there is a specific prayer seeking restraint on exercise of the voting rights available to the shares detailed in paras. 18(i) to (iv) of the plaint. Besides, it has already been directed on December 29, 1998, as agreed amongst the parties that the three motions are to be heard together. In the circumstances, whatever is decided with respect to the shares of defendant No. 5 while deciding the two motions in the first suit, the same will in principle be applicable to these shares about which the motion is not pressed in the second suit. Hence, although this motion in the second suit is not being pressed, whatever will be decided with respect to the shares of defendant No. 5 in the first suit will apply to the shares in this motion also. In the circumstances, the only order on this motion will be that no order is being passed thereon except recording as above.
24. Chamber Summons No. 1153 of 1998:
It is material to note in this context that the affidavit in reply to Notice of Motion No. 3120 of 1997 in the first suit, which was moved as early as on October 23, 1997, for ad interim orders, was filed much later, i.e., on December 21, 1998, by defendant No. 11-M. D. Chhabria. Before filing this reply, the defendants had moved a chamber summons bearing No. 1153 of 1998 seeking further particulars from the plaintiffs to enable them to file an appropriate reply to the notice of motion. An affidavit in reply to the chamber summons was thereafter filed by the plaintiffs opposing the prayers therein. It is the submission of the defendants that the information made available to them through the plaint is a limited one and, therefore, although the reply to the motion was filed on December 21, 1998, in para. 3 thereof it has been specifically stated that the chamber summons for particulars be disposed of prior to the hearing of the notice of motion. It is further stated that the plaintiffs have failed to furnish all the necessary particulars and in the absence of them, it is not possible for defendant No. 11 to file a complete and exhaustive affidavit in reply. The affidavit in reply was, therefore, being filed without prejudice to the aforesaid chamber summons and leave was sought to file a further affidavit after the necessary particulars became available. Inasmuch as the three notices of motion subsequently reached together for hearing before me and were argued at length without the chamber summons being disposed of first, while passing this order, I asked Mr. Bookwala and Mr. Madon, learned counsel appearing for the defendants, as to whether they were pressing for an order on the chamber summons at this stage, and they stated that the motions be decided as of now and that the defendants were not pressing for any order of the chamber summons before the motions being decided. In the circumstances, the only order on the chamber summons at this stage will be that it will be heard and decided at a later point of time either separately or along with the suit.
25. The reply of defendant No. 11 and defendants Nos. 1 to 10: The affidavit in reply of defendant No. 11 affirmed on December 21, 1998, in reply to Notice of Motion No. 3120 of 1997 principally sets out the defence of all defendants Nos. 1 to 11. Para. 1 of the reply states that the plaint fails to disclose any cause of action against any of the defendants and the same is misconceived. It is further stated that the suit was not maintainable and ought to be dismissed in limine on various grounds which are stated therein and which are principally as follows :
(a) It is stated that the plaintiffs were acting in abuse of the process of the court and the suit was filed for subserving the interests of Mr. Vijay Mallya, notwithstanding the fact that he did not enjoy the support of the majority of shareholders of defendant No. 12. It is stated that the suit was filed in collusion with Mr. Mallya, the same was mala fide and was not in the interest of either the shareholders of defendant No. 12 or of defendant No. 12.
(b) The plaint was vitiated by suppressio veri suggestio falsi.
(c) As re'gards the shares purchased by defendant No, 5 (3,64,750 shares) and those purchased by defendant No. 3 (54,000 shares) (which were not registered by defendant No. 12), these defendants had filed appeals under Section 111A(2) of the Companies Act, 1956, before the Company Law Board and which were numbered as Appeals Nos. 21 and 22 of 1998. It is stated that the Company Law Board is a statutory authority with exclusive jurisdiction and hence the present suit was not maintainable.
(d) The plaintiffs had no locus standi and were not in any event entitled in law to the reliefs sought in the suit.
(e) The suit was not a derivative action and was not maintainable in law.
(f) The suit and the applications for interim relief were vitiated by delay, laches, acquiescence and waiver.
(g) This court did not have the jurisdiction to try, entertain and dispose of this suit.
26. Then in para. 2 of the reply, it is submitted that no interim reliefs could be granted on the notice of motion also for similar reasons which were as follows :
(a) The suit itself was not maintainable.
(b) Due to this conduct of the plaintiffs, viz., that they were put up by Herbertsons Ltd. and Mr. Vijay Mallya, they were not entitled for any equitable or interlocutory relief.
(c) It was submitted that at least with respect to 41,03,241 equity shares aggregating to 43.09 per cent., defendants Nos. 2 to 10 were registered owners in respect thereof, and in law they could not be restricted or prevented from exercising any voting rights.
(d) Defendants Nos. 2 to 10 own/hold over 50 per cent. of the equity capital of defendant No. 12, of which 43,09 per cent. is registered and any relief affecting the voting rights flowing from all these shares would be contrary to all canons of corporate democracy.
27. In paras. 6(a) and (b) of the reply, the collusion and collateral purposes of the plaintiffs were placed on record which were as follows :
(a) The plaintiffs have attached the copies of the board minutes which were not easily available to the shareholders.
(b) The plaint itself indicates that the plaintiffs had obtained their information from Mr. Mallya and his officers and this confidential information included :
(i) Copies of statutory disclosures made by defendant No. 11 under the SEBI Regulations of 1997 ;
(ii) Precise details of shareholding of each of the companies under the control of defendant No. 11.
28. Thereafter there are various similar statements made in paras. 6(c) to (g). However, what is stated in paras. 6(h), (i) and (j) is quite serious. In para. 6(h) of the reply, a reference is made to the assessment order dated March 31, 1997, passed by the income-tax authorities with respect to Herbertsons Ltd. for the financial year 1993-94 in which it is stated that there has been siphoning off of funds of Herbertsons Ltd. with the active connivance of the Balaji group (which is another name of the Reddy group). In para. 6(i) of the reply, a reference is made to two invoices of Paramount Distilleries, a group distillery of the plaintiffs, and it is submitted that the price paid for the same product by Herbertsons is inflated when the sale is effected through the Balaji group. In para. 6(j) of the reply, it is placed on record that whereas the plaintiffs are disturbed by the acquisitions by defendants Nos. 1 to 11 they have not referred or challenged the acquisition of 5.2 per cent. of the equity shares of defendant No, 12 by the said Mr. Mallya through the companies under his control.
(i) Thereafter from para. 7 onwards, defendant No. 11 has set out the facts which, according to him, are the true facts concerning all these purchases. In para. 7(2), he has stated that defendants Nos. 2, 6, 7, 8, 9 and 10 purchased 26 per cent. of the total equity capital of Herbertsons on December 14, 1993, on the basis of a negotiated arrangement. These shares were purchased from the Mallya group of companies. It is further stated in para. 7(4) that the said six companies were under the ultimate control of Galan Finvest Pvt. Ltd. (Galan). It is thereafter stated that at the time when the shares of Herbertsons were so acquired by these six companies, 80 per cent. of the share capital of Galan was owned and controlled by defendant No. 1, his wife and daughters and the remaining 20 per cent. were owned by defendant No. 11 and his wife. Thereafter it is stated in para. 7(6) that the acquisition of shares by each of the six companies was less than 5 per cent. of the equity capital of defendant No. 12 and hence the then prevailing listing agreement of the stock exchange, in particular Clause 40A thereof (containing provisions similar to the SEBI Regulations) was not attracted to these purchases. It is further stated that the SEBI Regulations of 1994 came into force much later on November 7, 1994, and on that ground also were not applicable to these acquisitions of 26 per cent. as well as the subsequent conversion of the debentures which were purchased initially on December 14, 1993.
(ii) In para. 8 of the affidavit in reply, it is stated that defendants Nos. 3, 4 and 5 (to whom defendant No. 11 had advanced diverse amounts) had purchased shares of Herbertsons. They, however, failed to repay those amounts and, therefore, the shareholdings of those companies were taken over by defendant No. 11, his wife and/or Seven Star Investments and Trading Pvt. Ltd, (hereinafter referred to as "Seven Star"), a company owned and controlled by defendant No. 12.
(iii) As far as the acquisition of shares by defendant No. 3 is concerned, they had acquired the shares of defendant No. 12 in December, 1995. In para. 9 of the reply, it is stated mat before defendant No. 11 acquired the entire shareholding of defendant No. 3 (as stated above, through the purchase of its shares by Seven Star) the shareholders of defendant No. 3 were one Imtiaz Kheyroolla, Farida Kheyroolla and Ram Raheja, It is further stated that these persons were not related to defendant No. 11 within the meaning of the concept of being "related" as defined under the Companies Act, 1956. It is further stated that it was only on July 29, 1996, that defendant No. 11 became additional director of defendant No. 3 along with three other directors. On that day, the earlier directors including Ram Raheja resigned as directors. Much prior to that date, defendant No. 3 had already acquired the shares of defendant No. 12 to the tune of 10.91 per cent. as stated earlier.
29. Thereafter this reply refers to the correspondence by these defendants with the SEBI from time to time. Thus, it is stated that on December 7, 1995, when IMFA (defendant No. 3) lodged for registration of 10,39,341 shares with Her-bertsons, the same day it wrote to the SEBI informing about this fact and seeking certain clarification. Thereafter, it is stated that although initially on December 16, 1995, the request for registration of these shares was not accepted and was specifically refused on January 3, 1996, the same was later on accepted on May 30, 1996. Then in para. 10, it is stated that defendant No. 3 wrote to the SEBI on August 19, 1996, as per the draft letter provided by defendant No. 12 under the cover of their letter dated August 6, 1996. It is sought to be contended that whatever was being done was being done with full understanding of defendant No. 12 and with their approval. It is also sought to be contended that right from the first day of the acquisition of shares by defendant No. 3, these defendants had entered into correspondence with SEBI, that is from December 7, 1995, onwards. It is, therefore, suggested that what was being done was being done openly. In para. 11 of the reply, it is accepted that on November 22, 1996, the wife of defendant No. 11 acquired 30 per cent. holding of K.R. Chhabria in the capital of Galan, which is a holding company of defendants Nos. 2, 6, 7, 8, 9 and 10. Thereafter, in para. 12 of the reply, it is defendant No. 11 who himself has placed on record that the above-referred Mr. Ram Raheja was called upon by SEBI to show cause as to why proceeding should not be initiated against him for the alleged violation of regulations 6 and 10 in the manner of acquisition of 10,39,141 equity shares of defendant No. 12 by defendant No. 3. That notice is dated October -9, 1996, and is issued invoking the powers of SEBI under Section 24 of the SEBI Act. It is further stated in that para, that Mr. Raheja replied the same by his own letter dated November 19, 1996, and by his advocates' letter dated December 23, 1996, that there has been no violation of the SEBI Regulations of 1994, and that he had already sold off his shareholding in IMFA (defendant No. 3) and had also resigned as its director.
(i) Thereafter in para. 13 of the reply, defendant No. 11 deals with the acquisition of shares by defendant No. 4 (Mahameru). It is stated that before defendant No. 11 acquired the control of Mahameru on February 13, 1997 (when he was appointed as additional director thereof), Mahameru was already the registered shareholder of 4,71,600 shares in defendant No. 12. A further 1,500 shares were acquired by it by August 26, 1997. It is also accepted that on the very day, i.e., on February 13, 1997, a group company of defendant No. 11, namely Seven Star, had purchased the entire shareholding of defendant No. 4. Thereafter in that para., it is explained as to how these 4,71,600 shares were purchased from time to time during the year 1995-96 and as to how different persons unrelated to the family of defendant No. 11 were in charge of defendant No. 4. It is further stated that before defendant No. 11 took over the control of defendant No. 4 through the purchase of Seven Star, the directors of defendant No. 12 had already, i.e., on September 26, 1996, approved the registration of transfer of 4,71,150 shares to the name of defendant No. 4. Thus, it is stated in this reply that as on the date on which either defendant No. 3 or defendant No. 4 acquired the disputed shares, defendant No. 11 was not at all in the picture and that he has taken over these companies much later after the transfer of the shares in their favour was approved by defendant.No. 12. It is, however, relevant to note that the allegation in para. 12 of the affidavit in support of Notice of Motion No. 3932 of 1998 that defendants Nos. 3, 4 and 5 had a nominal paid-up capital of Rs. 4,00,200, Rs. 200 and Rs. 200 only and that they were used as devices has not been specifically denied in this reply though this reply has been affirmed on December 21, 1998, i.e., subsequent to the affidavit in support of Motion No. 3932 of 1998 which is affirmed on December 14, 1998. What is further material to note is that this very affidavit has been adopted as a reply in the affidavit in reply of defendant No. 11 to Notice of Motion No. 3932 of 1998. That affidavit is affirmed later on January 27, 1999, and in para. 3 thereof, this earlier reply has been specifically referred to and it is stated that defendant No. 11 repeats, reiterates, confirms and adopts each and every averment, allegation, submission and contention made in the affidavit in reply to Motion No. 3120 of 1997 also. The status of these companies, viz., that they are very small companies, is not disputed. It is also relevant to note that defendant No. 11 has himself accepted in para. 8 of this reply that diverse amounts had been advanced to these companies and because of their inability to repay them, the companies had been taken over by defendant No. 11.
(ii) Similarly, in para. 14 of the reply, while dealing with the acquisition of 3,64,750 shares by defendant No. 5 (Shirish), it is stated that these acquisitions were made prior to defendant No. 11 purchasing the entire shareholding of defendant No. 5. For that purpose, it is stated in para. 14(a) that the board of directors of Shirish had resolved to purchase shares of Herbertsons on August 22, 1996, and the shares were purchased through various stock exchanges between August 27, 1996, and February 14, 1997. It is only on February 18, 1997, that defendant No. 11 and his wife purchased the entire shareholding of defendant No. 5. Prior thereto, it was one Mr. S. J. Chhabria (a nephew of defendant No. 11) and his wife, who were holding those shares. Thereafter in para. 14{e), it is stated that Herbertsons refused to register these transfers for being in violation of the SEBI Regulations and it is further stated in para. 14(i) that Shirish had filed Appeal No. 21 of 1998 before the Company Law Board under Section 111A(2) of the Companies Act to challenge the said refusal.
30. Legal submissions of defendant No. 11:
Thereafter in para. 15 of the reply, defendant No. 11 has culled out his legal submissions in this behalf, which, in a nutshell, are as follows :
(a) The provisions of the SEBI Regulations of 1997, would not apply to these acquisitions since they are supposed to operate prospectively and they had come into force on February 20, 1997. It is, therefore, submitted that the widening of the coverage, as has been done in the SEBI Regulations of 1997, would not cover the disputed acquisitions which are all prior.
(b) The acquisitions do not violate Clauses 40A and 40B of the Listing Agreement of the Stock Exchange.
(c) The acquisition of shares of defendant No. 12 by defendants Nos. 3, 4 and 5 do not violate any of the provisions of the SEBI Regulations of 1994 for the following reasons :
(i) Defendants Nos. 3, 4 and 5 and the other six companies, namely defendants Nos. 2, 6, 7, 8, 9 and 10 are all unlisted companies and the SEBI Regulations of 1994 do not apply to those companies whose shares are not listed on any stock exchange as per the provision of regulation 3(d) of the SEBI Regulations of 1994. Defendant No. 11 has acquired the shares in these companies which are not listed companies.
(ii) Then again the acquisition of shares by defendants Nos. 3, 4 and 5 does not violate the provisions of Chapters II and III of the SEBI Regulations of 1994, particularly regulation 10 thereof because the regulation provides that "an acquirer, who holds shares 10 per cent. or less", is required to act in a particular manner. Defendants Nos. 3, 4 and 5 did not hold a single share in defendant No. '12 prior to their acquiring the disputed shares and were not on the register of membership of defendant No. 12 as shareholders at any time earlier.
(iii) It is further stated that this interpretation has been accepted by the Securities Appellate Tribunal, Mumbai, in its decision dated August 5, 1998, in the case of Fascinating leasing and Finance P. Ltd. v. SEBI [1998] 30 CLA 206.
(iv) Since defendants Nos. 4 and 5 each had acquired shares which were 5 per cent. in any event regulation 10 (read with regulation 6) would not apply.
(v) There is no concept of "indirect acquisition" of shares of a listed company in the SEBI Regulations of 1994. The takeover of the affairs of defendants Nos. 3, 4 and 5 by defendant No. 11 and thereby controlling the disputed shares in defendant No. 12 indirectly would not, therefore, be hit by the 1994 Regulations. The subsequent report of the Bhagwati Committee dated January 18, 1997, recommending a provision to deal with such situations and the order of the SEBI dated March 6, 1997, in the case of Sesa Goa Ltd., In re [1997] 12 SCL 31 (Bom) are relied upon in support of this submission.
(vi) Defendants Nos. 3, 4 and 5 or the other six companies are not "persons acting in concert" within the meaning of regulation 2(d) of the SEBI Regulations of 1994, and the shareholders of these companies were not "related" within the meaning of Section 6 of the Companies Act.
(vii) The stand taken by defendant No. 3 is accepted by defendant No. 12 inasmuch as defendant No. 3 had written on August 6, 1996, as per the draft reply recommended to it by defendant No. 12.
31. Thereafter in paras. 16 to 18 of the reply, defendant No. 11 has accepted that the SEBI called upon the managing director of defendant No. 3 to show cause as to why prosecution should not be launched under Section 24 of the SEBI Act and for the alleged violation of regulations 6 and 10 of the 1994 regulations and that the same was replied by defendant No. 3 by its advocate's letter dated July 3, 1997. It is further accepted in para. 17 that on April 17, 1997, defendants Nos. 1, 2, 3 and 11 made the necessary disclosures under the SEBI Regulations of 1997.
32. It is recorded in para. 21 of this reply that the shares lodged by defendant No. 4--Mahameru were registered by defendant No. 12 on September 26, 1996.
33. Thereafter, in paras. 15, 26 and 27 of the reply, it is stated that in a meeting held on December 31, 1997, the chairman of the SEBI asked defendant No. 11 to make a public offer in respect of the aforesaid acquisitions to resolve all controversies. Accordingly by his letter dated January 20, 1998, addressed to the SEBI, defendant No. 11 "offered to make public offer" jointly or severally through his companies under regulations 10, 11 and 12 of the SEBI Regulations of 1997 while stating that the offer was without prejudice to the rights and contentions of defendant No. 3. It is, however, stated that defendant No. 12 got perturbed by this stand taken by defendant No. 11 and, therefore, instructed their advocate to call upon the SEBI to issue directions for disinvestment of the shares acquired by defendants Nos. 3, 4 and 5.
34. Thereafter the reply contains the denials of various other averments in the plaint and reiteration of the stand of defendant No. 11. It is stated that defendant No. 11 and his companies all throughout have been transparent and that they have not acquired any shares in defendant No. 12 either directly or indirectly in contravention of law or acting in concert or fraudulently or illegally. This affidavit in reply affirmed by defendant No. 11 has been adopted with appropriate additions and/or modifications by defendants Nos. 1 to 10. Defendant No. 1 has, however, while confirming what is stated by defendant No. 11, made some more additional statements and submissions. In para. 7(a) of his reply, he has stated that he was the vice-chairman and whole-time director of defendant No. 12 with effect from April 1, 1995. He was, however, not in any way in control of the board of directors. He had participated in the management of defendant No. 12 from 1992 onwards in which year for the first time he had become director. "He was regularly consulted concerning the management and administration of defendant No. 12". In para. 7(e) of the reply, it is alleged that the funds of defendant No. 12 were being siphoned off with the connivance of the Balaji group, i.e., the plaintiffs. There is also a reference to the income-tax assessment order dated March 31, 1997, in this behalf and that he had written to the managing director of defendant No. 12, Mr. S.D. Lalla on June 13, 1997, making an inquiry about the high prices being paid by defendant No. 12 to the Balaji group. Thereafter he has stated that one of the valuable assets which was being transferred by defendant No. 12 was a brewery known as "Bombay Brewery".
35. Reply of defendant No. 12 :
Defendant No. 12 company filed its reply to this motion through one Mr. A. Raghunathan who has affirmed his reply on February 5, 1999. This defendant first filed a reply to the second Notice of Motion No. 3932 of 1998 on February 5, 1999, and the same is adopted and confirmed by specifically so stating in para. 2 of this affidavit. This affidavit denies the allegation of collusion between the plaintiffs and Dr. Mallya or that the plaintiffs had been put up by defendant No. 12 as alleged. In para. 10, the allegation of siphoning off of funds with the active connivance of the plaintiff group is also denied. In para. 26 of the reply, it is denied that high prices were being given by defendant No. 12 to the Balaji group. In respect of transfer of Bombay Breweries, it is stated that the same was effected way back in 1995 and legitimately after seeking the approval of the shareholders in the annual general meeting of December 16, 1995.
36. Inasmuch as defendant No. 12 has chosen to adopt the reply filed to the Notice of Motion No. 3932 of 1998 it would be advisable to refer to some of the relevant statements made therein. This is a joint affidavit of one Mr. A. Raghunathan, Divisional Vice-President (Finance) and Mr. S. R. Gupte, a director of defendant No. 12 and vice-chairman of the U. B. group. This affidavit in reply to the Notice of Motion No. 3932 of 1998 affirmed on February 5, 1999, by and large supports the plaintiffs and the prayers sought by them. The affidavit however explains in para. 14 as to why defendant No. 12 had initially declined to accept the transfer of shares to defendant No. 3 (IMFA) and subsequently permitted the same. It is stated that the initial refusal as well as subsequent acceptance was on the basis of legal advice received from time to time. In para. 20 of the reply, a reference is made to the accounts of BDA Ltd., a 100 per cent. subsidiary of Herbertsons Ltd., and it is alleged that "these accounts reveal that defendant No. 1 siphoned away from BDA Ltd., an amount in excess of Rs. 180 crores". In para. 36 of the reply, it is contended that defendants Nos. 3, 4 and 5 were essentially "devices put in place to acquire shares in Herbertsons Ltd. with a clear intent of evading the SEBI Regulations". The acquisitions by them were "sham and were never intended to be acted upon". In para. 40 of the reply, it is stated that the offer made by defendants Nos. 1 and 11 to make a public announcement was to acquire a further 20 per cent. shares and thereafter it is stated that had such a public offer been allowed to be made, they would have succeeded in their play of getting defendant No. 12 de-listed since its public holding would have fallen below 20 per cent. of its paid-up capital (which is the minimum requirement for a continued listing on the stock exchanges). Thereafter in paras. 48 and 49 of the reply, there is a reference to an agreement or understanding between the Chhabria group, UB Ltd., and Herbertsons Ltd. entered into in December, 1993. It is stated that that agreement or understanding was arrived at in the presence of many others. The terms and conditions of that agreement are referred to in para. 49. It was provided in the agreement that Chhabria Marketing Ltd., would give a licence to defendant No. 12 to use its trademark "Lord and Master" for a consideration of Rs. 8,35,00,000. Two private companies owned and controlled by defendants Nos. 1 and 11, namely, Trust Securities and Investment Pvt. Ltd. and Mercury Distillery and Breweries Pvt. Ltd. would be sold to defendant No. 12. It was in consideration of the above that it was agreed that defendants Nos. 2, 6, 7, 8, 9 and 10 would acquire 26 per cent. of the issued capital of defendant No. 12. It was, however, further stated that it was clearly understood that the shareholding of the Chhabria group including that of defendants Nos. 1 and 11 shall not be more than 26 per cent. and no further shares in Herbertsons Ltd. shall be issued/purchased by any of them. It is further stated in Clause (viii) of para. 49 that it was expressly agreed that Mr. Vijay Mallya and his nominee directors shall exercise complete control over the management of defendant No. 12.
37. Plaintiff No. 1 has thereafter filed an affidavit in rejoinder on February 5, 1999, denying various allegations which are made in the reply filed by defendants Nos. 1 to 11 and particularly defendant No. 11.
38. Notice of Motion No. 3932 of 1998 :
As far as Notice of Motion No. 3932 of 1998 is concerned, the principal prayers therein are the same as that of Notice of Motion No. 3120 of 1997 except that as stated earlier, now there is a reference specifically to para. 18(iv) of the plaint in the prayer clause. The affidavit in support reiterates and repeats what is stated mainly in the plaint and as stated earlier, para. 12 thereof particularly emphasises that defendants Nos. 3, 4 and 5 were small companies put up as devices mainly to buy the shares of defendant No. 12, their monies came from Royal Wines and Tracstar Investments, companies under the control of defendant No. 11 which amounts were shown as loans and on the ground that they were unable to return the money, the companies were taken over, prior whereto, they had acquired the shares in defendant No.12. Certain correspondence exchanged between the parties is also annexed along with this affidavit.
39. As far as replies to this motion are concerned, as stated earlier, the affidavit of defendant No. 11, dated December 21, 1998, through para. 3 thereof principally adopts his reply filed earlier to Notice of Motion No. 3120 of 1997. The other defendants Nos. 1 to 10 have by and large adopted the affidavit filed by defendant No. 11. Defendant No. 11 has, however, filed one more affidavit in reply to this motion on January 27, 1999, contending that the Chhabria group had in all 43.09 per cent. shares which were registered, and 4,39 per cent. and 1.58 per cent. votes which were unregistered taking the tally to 49.06 per cent. If the proxy votes collected on behalf of the Chhabria group are added to these, the percentage would go to 50.4 per cent. In paras. 6 to 9 of this reply, it is stated that each of the transactions between defendant No. 11 and defendants Nos. 3; 4 and 5 were made on the basis of the evaluation of the capacity of their directors to repay as individuals and not on the basis of the share capital or the net worth of these three companies. Each of these transactions provided for adequate safeguards and in all these transactions, the advice of professional qualified chartered accountants including that of one Mr. A. T. Kukreja was taken. It is stated that promissory notes were executed by these companies for return of the amounts which were so advanced and it is only when they failed to return those amounts, that it was felt advisable to take over those companies. Thereafter in this reply, there is a reference to the third show-cause notice by the SEBI dated January 8, 1999, which was addressed to defendants Nos. 1 and 11 and which is referred to in para. 15 of this affidavit. In para. 16, it is alleged that this notice smacks of mala fides and was issued at the instance of Mr. Vijay Mallya. It is further suggested in para. 16(h) that the SEBI was about to take a particular stand and issue a confirmatory letter regarding the public offer to be made by these defendants, which was altered due to the interference of a high functionary (whose name has been mentioned in that paragraph) as alleged in this sub-para.
40. As far as defendant No. 12-company is concerned, the reply filed by it on February 5, 1999, is already referred to. After these replies were filed, plaintiff No. 1 filed a rejoinder on February 5, 1999, controverting various allegations made in the reply of defendant No. 11 particularly the one made in para. 16(h) of the affidavit of defendant No. 11, dated January 27, 1999, which is specifically denied. This denial is seen in para. 32 of this rejoinder.
41. It is relevant to note that defendant No. 11 has filed a third reply on February 9, 1999, to the above-referred joint affidavit in reply filed by defendant No. 12 in this motion. He has repeatedly and exhaustively dealt with the stand which he has taken from time to time. He has referred to the statement made by Mr. Vijay Mallya before the income-tax authorities which is annexed at annexure D to this third reply to challenge his credentials. Defendant No. 11 has filed two sur-rejoinders dated February 16, 1999, in both the motions.
42. After the orders as referred to earlier were passed, at the initial stage, the officer of this court attended the annual general meeting which was to be held on December 30, 1998, and has filed a report in her capacity as Commissioner. This report is made on January 6, 1999, and along therewith the segregated votes have been placed in a sealed packet as directed earlier.
43. April 20, 1999 : SEBI Act and Regulations:
Having dealt with the pleadings of the parties, it would be advisable to refer to the provisions of the SEBI Act, 1992, and various regulations which are involved in this matter. The Securities and Exchange Board of India Act, 1992 (shortly referred to as "SEBI Act, 1992"), came into force on January 30, 1994. This. Act, amongst others provides for framing of regulations under Section 30 thereof for carrying out the purposes of the Act. Section 15-H provides for penalty for non-disclosure of acquisition of shares and takeover and it states that if any person, who is required under the Act or the rules and the regulations, fails to disclose the aggregate of his shareholding before he acquires any shares of that body corporate, or fails to make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakh rupees. The relevant regulations with respect to substantial acquisition of shares and takeovers were, for the first time, framed in the year 1994 and the same became effective from November 7, 1994. Prior to these regulations coming into force, Clause 40 of the listing agreement (which every listed company had to enter into with the stock exchange) governed the field. It provided for making a public offer for acquisition of shares by any person who sought to acquire 25 per cent. or more voting rights. Subsequently this clause was replaced in the year 1990 by Clauses 40A and 40B. Clause 40A(b) provided that when any person holds securities which in the aggregate carry less than 10 per cent. of the voting right in the company, shall not acquire any securities which, when aggregated with the securities already held by him, shall carry 10 per cent. or more of the voting rights unless he notifies the stock exchanges and fulfils the conditions specified in Clause 40B. The proviso to this sub-clause provided that on an application the SEBI could examine specifically any such person. Clause 40B provided that such a person will have to make a public announcement of the takeover offer. Public announcement was to be made both by the offerer company and the offeree company in the manner as stipulated in that clause. The SEBI Act of 1992 states in its preamble that it is an Act to provide for the establishment of a board which is created for the following three purposes :
(a) to protect the interest of the investors in securities ;
(b) to promote the development of and to regulate the securities market ; and
(c) for matters connected therewith or incidental thereto. Section 3 of the Act provides that the Board shall be a body corporate and it is for the Central Government by notification to establish it. Section 4(2) of the Act provides that the management of the affairs of the Board shall vest in the Board consisting of the members as laid down in the section. Section 4(3) however additionally provides that except otherwise determined by the regulations, the chairman shall also have powers of general superintendence and directions of the affairs of the Board and may also exercise all the powers and do all the acts and things which may be exercised by the Board. Section 11 of the Act deals with the functions of the Board. The provisions of this section which are relevant in this matter are as follows :
"11. Functions of Board.--(I) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the, development of, and to regulate the securities market, by such measures as it thinks fit.
(2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provided for-- . . .
(e) prohibiting fraudulent and unfair trade practices relating to securities markets ;
(f) promoting investors' education and training of intermediaries of securities markets ;
(g) prohibiting insider trading in securities ;
(h) regulating substantial acquisition of shares and takeover of companies . . .".
44. Section 11A of the Act provides for the matters to be disclosed by the companies. Section 11B gives the power to issue directions to the Board and it reads as follows :
"11B. Power to issue directions.--Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary--
(i) in the interest of investors, or orderly development of securities market; or
(ii) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interests of investors or securities market; or
(iii) to secure the proper management of any such intermediary or person, it may issue such directions, --
(a) to any person or class of persons referred to in Section 12, or associated with the securities market; or
(b) to any company in respect of matters specified in Section 11A, as may be appropriate in the interests of investors in securities and the securities market." ..,
45. Section 15E provides for the penalty for failure to observe rules and regulations by an asset management company. Section 15F provides for penalty for default in case of stock brokers. Section 15G provides for penalty for insider trading. Section 15H provides for penalty for non-disclosure of acquisition of shares and takeovers and Section 15H provides for power to adjudicate. Sections 15H and 15H read as follows :
"15H. Penalty for non-disclosure of acquisition of shares and takeovers.--If any person, who is required under this Act or any rules or regulations made thereunder, fails to--
(i) to disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate ; or
(ii) make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakh rupees. 15-I.-Power to adjudicate.--(I) For the purpose of adjudging under Sections 15A, 15B, 15C, 15D, 15E, 15F, 15G and 15H, the board shall appoint any of its officers not below the rank of division chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.
(2) While holding an inquiry the adjudicating officer shall have power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the Sections specified in Sub-section (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections."
46. Section 15K provides for establishment of the Securities Appellate Tribunal and under Section 15T an appeal is provided against the order of the Adjudicating Officer to the Securities Appellate Tribunal. Section 15Y provides that no civil courts shall have jurisdiction to entertain any suit or proceedings in respect of any matter which an Adjudicating Officer is empowered to determine. Thereafter an appeal is provided to the High Court under Section 15Z against the decision of the Securities Appellate Tribunal. As far as the decisions of the Board are concerned, an appeal is provided to the Central Government under Section 20 of the Act and Section 20A provides that no civil court shall have any jurisdiction in respect of any matter which the Board is empowered to decide and that an order passed by the board shall be appealable only as provided under Section 20. Section 24 provides for the offences and Section 26 provides for cognisance of offences by courts. Section 30 gives the power to make regulations and Sub-section (1) thereof provides that the Board may with the previous approval of the Central Government by notification make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act. Under Section 31, these regulations are to be laid before Parliament while it is in session for a period of 30 days and thereafter they become enforceable with or without modifications. Section 32 provides that the provisions of the Act are in addition to and not in derogation of the provisions of any other law for the time being in force. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994: The 1994 Regulations framed under Section 30 of the SEBI Act became enforceable from November 7, 1994. For our purposes, the relevant Chapters are Chapter III which is on takeover and Chapter V which is on investigation. However, before those regulations are considered, it is necessary to refer to some other provisions in these regulations. Thus, for example, definitions of "acquirer", "person acting in concert" and "shares" are relevant which read as follows :
"2.(b) 'acquirer' means any person who acquires or agrees to acquire shares in a company either by himself or with any person acting in concert with the acquirer.
(d) 'person acting in concert' comprises persons who, pursuant to an agreement or understanding acquires or agrees to acquire shares in a company for a common objective or purpose of substantial acquisition of shares and includes--
(i) a company, its holding company, or subsidiaries of such companies or companies under the same management either individually or all with each other ;
(ii) a company with any of its directors, or any person entrusted with the management of the funds of the company ;
(iii) directors of companies, referred to in Clause (i) and his associates ; and
(iv) mutual fund, financial institution, merchant banker, portfolio manager and any investment company in which any person has an interest as director, fund manager, trustee, or as a shareholder having not less than 2 per cent. of the paid-up capital of that company.
(i) 'shares' means share in the share capital of a company carrying voting rights and includes any security which would entitle the holder to receive shares with voting rights."
47. Regulation 3(d) provides that nothing contained in Chapter III (which is on takeover) shall apply to the acquisition of shares in companies whose shares are not listed on any of the stock exchanges. Regulation 4 grants a power to the board to grant exemption which reads as follows :
"4. Power of the Board to grant exemption.--The Board may after considering all the relevant factors, such as family arrangements amongst promoters or re-organisation of the company where more than 10 per cent. of the voting rights of shares are acquired by the existing shareholders of that company or any of its holding company or of a company under the same management, may pass an order of exemption from the provisions of Chapter III after recording the reasons in writing for grant of such exemption."
48. Thereafter Chapter II provides for disclosures of shareholding and regulation 6 provides that any acquirer, who holds 5 per cent. or less than 5 per cent. shares in a company and acquires more than 5 per cent. shares, shall disclose the aggregate of his shareholding in that company to the company and to all the stock exchanges.
49. As far as Chapter III on takeovers is concerned, practically every regulation thereof is relevant for the purposes of deciding these motions and, therefore, all these regulations are incorporated hereinbelow and they read as follows :
"CHAPTER III TAKEOVERS
9. Acquisition of 10 per cent. or more of the shares of any company through negotiation.--(I) Any acquirer, who holds shares carrying ten per cent. or less of voting rights in the capital of the company, shall not through negotiations acquire any further shares, which, when taken together with his existing shareholdings, would carry more than ten per cent. of the voting rights, unless, the acquirer makes a public announcement to acquire shares at a minimum offer price from the other shareholders of the company in accordance with these regulations, or (2) Any acquirer, who on the date of commencement of these regulations, holds snares in a company which carry more than ten per cent. of the voting rights in the capital of the company, shall not acquire any further shares through negotiations unless, the acquirer makes a public announcement to acquire shares at a minimum offer price from the other shareholders of the company in accordance with these regulations.
(3) Where an acquirer acquires securities which would entitle him to more than ten per cent. of the voting rights together with voting rights on shares already held by him, then, such person shall make a public announcement referred to in Sub-regulation (1) at the time immediately before his entitlement to obtain voting rights on such securities.
(4) Nothing in Sub-regulation (2) shall apply to any person, who on the date of the coming into force of these regulations holds shares carrying more than ten per cent. of the voting rights in the capital of a company, if he has already complied with the provisions of Clause (40A) and Clause (40B) of the listing agreement of any stock exchange.
10. Acquisition of 10 per cent. or more of the shares of any company through open market purchases.-- (1) An acquirer, who holds shares carrying ten per cent. or less of voting rights in the capital of the company, shall not acquire any further shares in the company from the open market which when taken together with his existing shareholdings, would carry more than ten per cent. of the voting rights, unless such acquirer makes a public announcement of intention to acquire shares in the open market in accordance with these regulations.
(2) An acquirer who on the date of commencement of these regulations holds shares which carry more than ten per cent. of the voting rights in the capital of the company, shall not acquire any further shares in the company from the open market unless such acquirer makes a public announcement of intention to acquire shares in the open market in accordance with the regulations.
11. Who should make the pubic announcement of offer.--Before making any public announcement of offer referred to in regulation 9 or regulation 10, the acquirer shall appoint a merchant banker holding a certificate of registration given by the board.
12. Public announcement of offer.--A public announcement to be made under regulation 9 or 10 shall be made in at least one national English daily and one vernacular newspaper of that place, where the shares of the company are listed and most frequently traded.
13. Timing of the public announcement of offer under regulation 10. --The public announcement referred to in regulation 9 shall be made not later than four days of either the finalisation of the negotiation, or entering into an agreement or memorandum of understanding to acquire shares, whichever is earlier.
14. Timing of the public announcement of intention under regulation 10.--A public announcement of intention to acquire shares referred to in regulation 10 shall be made either immediately before the acquisition of any shares, which would increase the existing shareholdings of the person making the announcement beyond ten per cent. or in case his existing shareholding is already beyond ten per cent., any time before the person seeks to acquire any shares in order to increase his existing shareholding.
15. Contents of the public announcement of offer.--A public announcement referred to in regulation 9 or 10 shall contain the following particulars, namely :
(i) the object and terms of offer including the price at which the shares are being sought to be acquired ;
(ii) the identity of the ultimate person seeking to acquire shares ;
(iii) details of the existing holdings of the person acquiring shares together with those of persons acting in concert with him ;
(iv) details of shareholdings in respect of which the person acquiring shares has entered into an agreement or memorandum of understanding to acquire the shares ;
(v) intention of acquisition of shares ;
(vi) the record date and the date by which individual letter of offers would be posted to the shareholder and the manner and the date by which the acceptance or otherwise of offer should be communicated ;
(vii) the time and manner of payment of consideration for acquisition of shares ;
(viii) all conditions subject to which the offer is made including the following conditions, namely :
(a) the total number of shares to be acquired from the public, subject to a minimum as specified in regulation 21 ;
(b) the statutory approvals under the Companies Act 1956 (1 of 1956), Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969), and Foreign Exchange Regulation Act, 1973 (46 of 1973), required to be obtained for the purpose of acquiring the shares ; and
(c) approvals to be obtained from shareholders of the company of which the shares are being acquired ;
(ix) such other information in the investors' interest having a bearing on the substantial acquisition of shares.
16. Brochures, advertising material, etc.--(I) The public announcement of offer or any other advertisement circular, brochure or publicity material issued in relation to the acquisition of shares shall contain information essential for the shareholder to make an informed decision on the offer made.
(2) Copies of any advertisement, brochure or document issued to the public under Sub-regulation (1) shall be submitted to the board at least twenty-four hours before its issuance.
17. Letter of offer.--(I) Within fourteen days of the public announcement made under regulation 9 or 10, the acquirer shall through a merchant banker submit the draft of a letter of offer to the board for its approval.
(2) The acquirer shall along with letter of offer referred to in Sub-regulation (1) make payment of a fee to the board of a sum of Rs. 25,000 payable either by cheque or bank draft in favour of the Securities and Exchange Board of India at Bombay.
(3) The merchant banker shall submit a due diligence certificate to the board stating that the statements made in any document, advertisement or brochure issued to the public contains statements, which are true to the best of his or its knowledge.
18. Record date.--(1) The letter of offer shall be sent to all the shareholders of the company whose shares are sought to be acquired and whose names appear on the books of the company as on the record date.
(2) The record date shall be not more than the sixtieth day from the date of the first public announcement.
19. Minimum offer price.--(I) An offer to acquire shares under regulation 9 or regulation 10 shall be made at a minimum offer which shall be--
(a) payable in cash ; or
(b) by exchange of shares if the person seeking to acquire the shares is a body corporate ; or
(c) a combination of (a) and (b) :
Provided that where the agreement or any memorandum of understanding stipulates payment in cash to any class of shareholders, whose shares are being acquired, the remaining shareholders shall also be paid in cash for the shares offered by them for sale of their shares.
(2) For the purposes of Sub-regulation (1), the minimum offer price shall be,
(a) in case of acquisition of shares under regulation 9 the negotiated price or the average of the weekly high and low of the closing prices of the shares as quoted on the stock exchange during the last six months preceding the date of announcement, whichever is higher, provided there has been a market for such shares during that period in that stock exchange ;
(b) in case of acquisition of shares under regulation 10, the highest price paid by the acquirer in the open market or the average of the weekly high and low of the closing prices of the shares as quoted on the stock exchange during the last six months preceding the date of announcement, whichever is higher, provided there has been a market for such shares during that period in that stock exchange ;
(c) where there has been no continuous market in the stock exchange for the shares to be acquired, such average shall be calculated on the basis of weighted average prices quoted in at least one other stock exchange to be determined on the basis of the daily trading volume of such shares in that exchange or in any other reasonable manner with the prior approval of the board ;
(d) in case where the shares of the company are offered in lieu of cash payment, the value of such shares shall be determined in the same manner as mentioned in Clauses (a) and (b) as the case may be.
20. General obligations.--(I) The announcement of public offer to acquire shares shall be made only when the acquirer has every reason to believe that he shall be able to implement the offer.
(2) Within fourteen days of the public announcement of offer, the acquirer must also submit a letter of offer to the board of directors of the company, whose shares are being acquired.
(3) The acquirer shall state the period for which the offer to acquire shares from the other shareholders shall remain open ;
Provided that every such offer shall be kept open for a period of not less than four weeks from the date of the offer.
(4) The directors of the company of which the shares are being acquired shall not sell or enter into an agreement for sale of assets not being sale or disposal of assets, in the ordinary course of business, of the company or its subsidiaries or issue any authorised but unissued securities carrying voting rights during the period, when the offer is open for acceptance unless the approval of the general body of shareholders is obtained.
(5) Every document issued to shareholders or any advertisement published in connection with the offer must state that the directors in case the acquirer, is a company, accept the responsibility for the information contained in the document or advertisement:
Provided that if any of the directors desires to exempt himself from the responsibility of the information in such document or, as the case may be, the advertisement, the document or, advertisement, as the case may be, shall contain a statement to that effect together with reasons thereof.
(6) The company whose shares are being acquired shall furnish to the acquirer within seven days of the request of the acquirer, a list of names of shareholders and of those persons whose applications for transfer of registration is considered valid and accepted by the company.
(7) The company, whose shares are being acquired, shall also inform the persons whose applications for transfer are considered valid within sixty days and also inform about such transfers to the transferor and transferee, so that they have an opportunity to accept the offer.
(8) The letter of offer shall be sent to all the shareholders so as to reach them within ten days from the record date.
(9) Any acquirer who has made any acquisition of shares either by negotiation or through open market purchases shall not make any further public announcement for acquisition of shares in the succeeding six months.
21. Minimum number of shares to be acquired,--(I) Subject to Sub-regulation (2) the offer shall be made to acquire shares from each of the shareholders, such number of shares, which shall not be less than the minimum marketable lot as determined by the stock exchange in which these shares are listed, or the entire holding if it is less than the marketable lot.
(2) The public offer shall be made to the remaining shareholders of the company, to acquire from them an aggregate minimum of 20 per cent. of the total shares of that company.
(3) Where an acquirer holds more than ten per cent. shares at the time of commencement of these regulations and was not required to comply with the provisions of Clause 40A and Clause 40B of the listing agreement, the public offer referred to in Sub-regulation (2) shall be to acquire a minimum of such percentage as would increase his shareholding to at least thirty per cent. of the total shares of that company.
(4) The offer referred to above shall not result in the public shareholding being reduced to less than 20 per cent. of the voting capital of the company.
(5) Where a person seeking to make acquisition of shares by reason of holding securities, which may carry voting rights at a later point of time, the percentage referred to in the Sub-regulations (2) and (3), shall be computed with reference to voting capital of the company including the securities which would carry voting rights.
(6) Where number of shares offered for sale by the shareholders are more than the shares agreed to be acquired by the person making the offer, such person shall subject to Sub-regulation (1) accept the offers received from the shareholders on a proportional basis.
22. Completion of the offer.--The acquirer shall within a period of four weeks from the date of the closure of the offer complete all procedures relating to the offer, including payment of consideration to the shareholders who have accepted the offer.
23. Competitive acquisition.--(I) Any person other than the acquirer making a public announcement may within two weeks of such announcement make a competitive bid for acquisition.
(2) The provisions of this Chapter shall mutatis mutandis apply to the competitive bid made under Sub-regulation (1) :
Provided that the period of offer in the public announcement shall not in any case extend beyond that of the first offer mentioned in Sub-regulation (3) of regulation 20.
24. Revised offer.--No change in the conditions of offer or any amendment to a public offer shall be made unless the person acquiring shares --
(a) obtains the prior approval of the board ;
(b) makes a public announcement in respect of such amendments in the same manner as specified in regulation 12 ; and
(c) sends a communication to each of the shareholders.
25. Withdrawal of offer.--(I) No public offer once made shall be withdrawn except on the happening of an event making it impossible for the person acquiring shares for reasons beyond his control to carry out his offer.
(2) No offer once made shall be withdrawn without the previous approval of the board.
(3) Without prejudice to Sub-regulation (1) a public offer shall be deemed to have been withdrawn if any of the following events occurs--
(i) the death of the acquirer if he is a natural person ;
(ii) the acquirer is adjudged insolvent or is subject to insolvency proceedings ;
(iii) in case of acquirer, being a natural person, he has either become insane or incapable on account of physical disability or otherwise has become incapable of managing his affairs ;
(iv) the acquirer being a company or a body corporate has either received notice or is subject to commencement of winding up proceedings ;
(4) In the event of withdrawal of the offer under any of the conditions, the acquirer shall make a public announcement in the same newspaper in which the announcement of offer was published, indicating reasons for withdrawal of the offer.
(5) Where an offer is withdrawn under Sub-regulation (1) the acquirer shall not make any offer for acquisition of shares in the same company for a period of six months from the date, the offer is withdrawn."
50. Then comes Chapter IV which is on bail out takeovers which are by way of scheme of merger for rehabilitation with which we are not concerned in the present case.
51. Chapter V provides for investigation. Regulation 33 gives the Board the right to investigate and it reads as follows :
"33. Board's right to investigate.--(1} Where it appears to the board so to do, it may appoint one or more persons as investigating authority to investigate and undertake inspection of the books of account, other records and documents of any person who may have acquired or sold securities to any person for any of the purposes specified in Sub-regulation (2).
(2) The purposes referred to in Sub-regulation (1) may be as follows :
(a) to investigate into the complaints received from investors, intermediaries or any other person on any matter having a bearing on the allegations of substantial acquisition of shares and takeovers ; and
(b) to investigate suo motu upon its own knowledge or information, in the interest of securities business or investors interests, for any breach of the regulations."
52. Thereafter regulation 34 provides for the procedure for investigation, including giving of a reasonable notice.
53. Regulation 35 gives the obligations of the person being investigated towards the investigating authority. Regulation 36 provides for submission of the report and regulation 37 provides for communication of finding. Regulation 37 reads as follows :
"37. Communication of findings, etc.--(1) The board shall after consideration of the investigation report communicate the findings to the person concerned to give him an opportunity of being heard before any action is taken by the board on the findings of the investigating authority.
(2) On receipt of the explanation, if any, from the person concerned, the board may call upon the person concerned to take such measures as the board may deem fit in the interest of the securities market and for due compliance with the provisions of the Act, rules and regulations."
54. Regulation 39 provides that the Board may without its right to initiate criminal prosecution give the directions as stipulated therein. Regulation 39 reads as follows :
"39. Directions by the Board.--On receipt of the report under regulation 36, the Board may without prejudice to its right to initiate criminal prosecution under Section 24 of the Act give such directions as it deems fit for all or any of the purposes, namely :
(a) directing the person concerned not to further deal in securities ;
(b) prohibiting the person concerned from disposing of any of the 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 against the person concerned who is an intermediary holding a certification of registration under Section 12 of the Act."
55. Lastly, regulation 40 provides that any person aggrieved by an order of the Board may appeal to the Central Government.
56. Justice Bhagwati Committee Recommendations Leading to Regulations of 1997: The experience of the working of 1994 Regulations led to the constitution of the committee under the chairmanship of the former Chief Justice of India, Mr. P. N. Bhagwati to examine the areas of deficiencies in the existing regulations and to suggest the amendments therein with a view to strengthening them and making them more fair, transparent and unambiguous so as to protect the interests of investors and all the parties concerned in the acquisition process. The committee recommended various amendments in the regulations, particularly with a view to cover the concept of indirect acquisition through acquisition of unlisted investment companies. The committee recommended expansion of the concept of "person acting in concert". The committee recommended that not only acquisition of shares but also voting rights in a company or control over a company, whether the control is exercised directly or indirectly, must also be seen and recommended expansion of definition of "acquirer". The committee also recommended changes in the threshold limit. The committee recommended that the regulating offer as stipulated in the 1994 Regulations may continue but with a provision allowing minimum offer of only 10 per cent. for consolidation of holdings by persons present in control of the company. These are some of the recommendations which are relevant for our purpose. Accordingly new regulations were subsequently framed, namely, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The definition of "acquirer" specifically stated that it included those persons, who directly or indirectly acquired or agreed to acquire the shares or voting rights in the target company. This principle of direct or indirect acquisition is also related to concept of control. The concept of "persons acting in concert" was widened and the threshold limit was altered as stated above. As far as the present motions are concerned, admittedly the initial acquisition of defendant No. 2, namely, the acquisition of convertible debentures are of December, 1993, i.e., prior even to the 1994 Regulations coming into force. The acquisitions of defendants Nos. 3 and 4 are during the period when the 1994 Regulations were in force and the acquisitions of defendants Nos. 5, 7 and 8 are after the 1997 Regulations coming into force. We will therefore have to deal with these Regulations in this context.
57. Appearances:
A large number of judgments and books by reputed authors on law were cited on by learned counsel appearing for the parties. As far as the plaintiffs in Suit No. 3910 of 1997 are concerned, they were led by Mr. F.S. Nariman, senior counsel with Mr. Aspi Chinoy and Mr. J.P. Avasia assisting him. Mr. Rohinton Nariman with Mr. N.H. Seervai and Mr. S.J. Vajifdar appeared for defendant No. 12 and supported the plaintiffs' motion. Mr. Harish Salve, senior counsel with Mr. P.N. Subramaniam appeared for defendant No. 1. Mr. V.R. Manohar, senior counsel with Mr. S.J. Kantawala appeared for defendant No. 3. Mr. S.H. Doctor, senior counsel with Mr. D.D. Madon appeared for defendants Nos. 4 and 5. Mr. R.A. Dada, senior counsel with Mr. Arif Bookwala appeared for defendants Nos. 2 and 6 to 10. Mr. P. Chidambaram, senior counsel with Mr. Subramaniam appeared for defendant No. 11.
58. Since it is the plaintiffs who have moved these motions for the reliefs that they seek, the arguments advanced by counsel for the different parties are being dealt with in this judgment in the order in which the arguments were placed before the court on behalf of the plaintiffs at the outset as well as in the rejoinder (both taken together) and by specifying the particular topics wherever possible. The points raised by the plaintiffs have been dealt with by all counsel appearing for defendants Nos. 1 to 11 in their reply, though some of them have emphasised particular aspects of the controversy. While doing so, some of the judgments cited were common on both sides, although with differing emphasis. The arguments of particular counsel for defendants Nos. 1 to 11 are, therefore, not dealt with in the order in which they addressed me. They are noted on the topics which they emphasised particularly. This has been done to avoid repetition. Wherever possible, I have referred to the relevant authorities cited and discussed the submissions based thereon by giving the emphasised quotations, though it has not been possible to refer to and deal with all of them sheerly due to the large number of judgments cited.
59. Documents relied upon:
Learned counsel appearing on both sides assisted me by relying upon different charts and also giving their propositions in writing whenever necessary. They were allowed to rebut every proposition raised by their opponents without insisting on any technicalities. A large number of documents were tendered by the defendants and a few by the plaintiffs also. They consisted of four huge volumes which are marked as Compilation Nos. I, II, III and IIIA. Whichever of these documents is relevant will be referred to as and when necessary.
60. The show-cause notices:
The three notices given by the SEBI to Ram Raheja, IMFA and thereafter to defendants Nos. 1 and 11 are however necessary to be referred to at this stage itself. Out of these notices, the first two, namely those given to Ram Raheja and IMFA, being dated October 9, 1996, and March 31, 1997, were issued prior to the filing of the suit whereas the third one dated January 8, 1999, issued to defendants Nos. 1 to 11 was issued and served after the filing of the suit.
61. The first show-cause notice issued to Ram Raheja on October 9, 1996, is produced by the defendant at page 45 of Compilation C-I. The subject of the notice reads as follows :
"Show-cause notice under Section 24 of the SEBI Act for non-compliance of regulations 6 and 10 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994."
62. Paragraph 1 of this notice alleges that Mr. Ram Raheja appeared to have acquired over a period of time from October 27, 1994, to November 21, 1995, from the open market 10,39,141 equity shares aggregating to 10.91 per cent. of the voting capital of Herbertsons Ltd. with the intention of taking over the management of the target company. It is alleged that this acquisition is done in concert with the directors of the company, namely Harish R. Raheja, Imtiaz E. Kheyroolla, Chunilal R. Maniar, Ramesh K. Ahuja and Deepak N. Gavlani. Para. 2 of the notice records that by prior letter dated December 7, 1995, Mr. Raheja had written to SEBI that the Regulations of 1994 would have no application to him since he was not holding any share before acquiring the present shares. Para. 3 of the notice rebuts this submission of Mr. Raheja and states that it is noted that the said shares are in excess of 5 per cent. and 10 per cent. of the equity capital of the company in the context of regulations 6 and 10 respectively. It further states that according to regulation 6, any acquirer, who holds 5 per cent. or less than 5 per cent. of the shares and acquires more than 5 per cent. shares by one or more transaction, has to disclose the aggregate of his shareholding to the company and the stock exchanges. The notice further states that the expression "less than 5 per cent. shares in the company" in the context of the regulations would mean holding nil/no shares in a company. It further states that in terms of regulation 2(d), any person who agrees to acquire shares in a company is an acquirer. Thereafter, it states that on a combined reading of the two regulations, it is apparent that an acquirer need not be an existing shareholder of a company. The said para, further states that these acquisitions are made without making a public announcement and hence the person concerned was guilty of violation of the said regulation. Thereafter the notice deals with the subsequent letter of Mr. Raheja dated August 19, 1996, including his submission that if a public announcement is permitted, the residual public holding would go down to less than 20 per cent. and states that the same is no ground for non-compliance with the provisions. The notice therefore informs Mr. Raheja that he is liable to be prosecuted and calls upon him to show cause, failing which the SEBI would be constrained to proceed before the appropriate court of competent jurisdiction.
63. Mr. Raheja subsequently resigned as a director of IMFA (defendant No. 3) and, therefore, the second show-cause notice came to be issued to defendant No. 3 itself on March 31, 1997, a copy of which is provided at page 105 of Compilation C-I. This notice also principally reiterates what was alleged in the earlier notice. It repeats that as per regulation 10, an acquirer, who makes outright acquisitions carrying voting rights of more than 10 per cent. would be required to make a public announcement. It further states that the expression "less than 5 per cent." would obviously include zero/nil shares also. The notice, which is addressed to the managing director of IMFA (defendant No. 3) again calls upon the director to show cause as to why criminal prosecution should not be initiated under Section 24 of the Act for violation of regulations 6 and 10, failing which SEBI would be constrained to initiate criminal prosecution and/or take any action as it thinks fit in the interest of the investors.
64. The third notice is issued to defendants Nos. 1 and 11 on January 8, 1999, and it is at page 309 in Compilation III-A. This notice states that from the material available to the SEBI, defendants Nos. 1 and 11 had acquired 47.48 per cent. shares in Herbertsons Ltd. during the years 1993 to 1997 apparently without making any public offer. Para. 1 of this notice states that defendants Nos. 1 and 11 had acquired some 27.21 per cent. shares of Herbertsons Ltd. prior to notification of the 1994 Regulations. That was done through the devices of different companies which were financed by funds provided by Chhabria Marketing Ltd. Thereafter in this para, it is specifically stated as to how all the concerned six companies are having a common address and were very small companies with very few shareholders and the shareholding pattern of these companies revealed that all these companies held the shares of each other. All of them were subsidiaries of Galan Finvest Pvt. Ltd. Para. 2 of this notice deals with the acquisition of 10.91 per cent. shares by IMFA (defendant No. 3). The notice comments that granting of interest-free loan of Rs. 4.13 crores to such company does not appear to be based on any commercial prudence inasmuch as the paid-up capital of this company in March, 1995, was Rs. 4,00,200 and the total reserves and surplus were only Rs. 3,17,640. The acquisition of shares of this company on account of its failure to repay the interest-free loan is, therefore, criticised. In para. 3 of the notice, the acquisition of 4.97 per cent. shares of Herbertsons Ltd. through Mahameru is commented upon. Mahameru was given Rs. 1.12 crores by Mr, M. D. Chhabria through Seven Star Investment and Trading Co. and inability to return the amount led to takeover of the company. Paras. 4 and 5 of the notice deal with the acquisition of 3.83 per cent. shares by Shirish (defendant No. 5) and as to how it was a company with paid-up capital of only Rs. 200 and yet was given a huge loan of Rs. 1.35 crores leading ultimately to failure to repay the loan and takeover of the small company. Thereafter in para. 6, it is recorded that the loans were given to IMF A, Mahameru and Shirish for purchasing the shares of Herbertsons Ltd. and inasmuch as the borrowers defaulted in repayment of the alleged dues, the shareholding of the companies was taken over by defendants Nos. 1 and 11. This had resulted in defendants Nos. 1 and 11 acquiring the control of shares of Herbertsons Ltd. Then the notice states "it appears that the acquisition of shares is done in a manner to circumvent the provisions of the SEBI (Takeover) Regulations, 1994". Thereafter, the notice states "if the corporate veil of all the companies referred to more specifically above, is lifted, then it appears that the acquisition of the shareholdings in Herbertsons Ltd. is a device to circumvent the provisions of the SEBI (Takeover) Regulations, 1994, and acquire the shares of Herbertsons Ltd. in violation of the said provisions of takeover regulation". The notice, therefore, calls upon the two persons to show cause as to why one or more or all of the actions under Sections 11, 11B and 24 of the said Act and regulations 39 of 1994 regulations read with regulations 44, 45(6) and 47(2a) of the 1997 Regulations be not initiated for the alleged violation.
65. All these notices have been replied to and there has been further correspondence thereto which will be dealt with suitably at a later stage. It is further relevant to note that subsequent to the last notice, further inquiry by the SEBI has started and the representatives of defendants Nos. 1 and 11 are participating therein. The SEBI is seized of the matter and the matter has been adjourned from time to time as per the notes of different dates handed over by Mr. Madon, learned counsel appearing for one of the defendants.
66. It is also material to note that as mentioned by defendant No. 1 in his reply, defendants Nos. 3 and 4 have filed appeals before the Company Law Board with respect to the rejection of their request for registration of their shares and those appeals are pending before the Company Law Board. There is a third proceeding before the Company Law Board, namely, one initiated under Sections 397 and 398 of the Companies Act by defendant No. 2 and others herein against defendant No. 12 being Company Petition No. 17 of 1999 making a grievance of oppression and mismanagement.
67. Question of jurisdiction:
In the light of these other proceedings, which are independently pending, it was submitted amongst other submissions on behalf of defendants Nos. 1 to 11 that as far as the registration or non-registration of shares is concerned, the proper remedy would be to approach the Company Law Board under Section 111A of the Companies Act and that would be the competent forum. As far as the violation of the SEBI Regulations is concerned, it was submitted that it would be the SEBI which would be the correct authority to decide those allegations and in fact SEBI was seized of the proceedings arising out of the notices issued by the SEBI. In ground (g) of the reply of defendant No. 11, a plea was, therefore, raised that this court has no jurisdiction to try and entertain the present proceedings. Paragraph 1(g) of the affidavit in reply of defendant No. 11 to Notice of Motion No. 3120 of 1997 raises the following plea :
"This hon'ble court does not have jurisdiction to try, entertain and dispose of this suit."
68. In view of this ground raised in the reply, Mr. Nariman, learned counsel appearing for the plaintiffs, submitted during the course of his arguments at the outset that he would require a clarification from the defendants Nos. 1 to 11 of the first suit with respect to their stand on jurisdiction. Mr. Nariman wanted a specific statement from the defendants as to whether they were pressing that plea. If that plea was pressed in service, Mr. Nariman submitted that an issue will have to be framed on this point and will have to be decided at this stage itself. This submission was advanced by Mr. Nariman principally because of the aforesaid submission on behalf of the defendants that it was Mr. Vijay Mallya who was behind the plaintiffs and the appropriate remedy for the reliefs was available to the plaintiffs by approaching the Company Law Board through the company. Mr. Nariman submitted that if that issue was being pressed, then he will expect this court to frame the issue only on that aspect and to have it decided as a preliminary issue. Mr. Nariman submitted that this issue cannot be mixed up with any other issue in view of the specific provision of Section 9A introduced in the Civil Procedure Code through an amendment in the State of Maharashtra. Mr. Nariman submitted that otherwise not even a finding can be given on this aspect. He however conceded that at the highest the court may record the submission of rival parties on this aspect while maintaining that no finding whatsoever will be given thereon. If a finding was to be given, an issue will have to be framed and decided.
69. Mr. Nariman referred to and relied upon a judgment of a Division Bench of this court concerning this very section in the case of Meher Singh v. Deepak Sawhny [1998] 4 All MR 536; [1998] 3 Mah. LJ 940. That judgment refers to the statement of objects and reasons for adding Section 9A which in turn refers to an earlier judgment in the case of Institute Indo/Portuguese v. Borges , wherein this court had taken a view that the city civil court need not go into the question of jurisdiction while granting interim relief. This had resulted in injunction being granted without going into the question of jurisdiction and had led to grave abuse of the process of law. That led to the insertion of this Section 9A as stated in the Statement of Objects and Reasons. In para. 10 of the said judgment, the courts observed as follows :
"Section 9A is a departure from the procedure established for deciding the preliminary issue as prescribed under Order 14, Rule 2 of the Civil Procedure Code. On many occasions, it is not always proper to pass an order of hearing the preliminary issue with regard to maintainability of a suit at the time of final hearing of the suit. If such issue is decided at an earlier stage, rights of the parties can be crystallized. As stated earlier, Section 9A is a departure from the procedure prescribed under Order 14, Rule 2 of the Code of Civil Procedure for achieving that object. For determination of the preliminary issue, which may be a mixed question of law and facts, the parties are required to lead evidence. Without permitting the parties to lead evidence the issue of jurisdiction cannot be finally determined. If it was to be decided only for prima facie purpose for granting interim relief, then there was no necessity of adding Section 9A in the Civil Procedure Code. Secondly, on the basis of prima facie determination without proper adjudication, in our view, suit cannot be disposed of. The plaintiff cannot be non-suited on the basis of the averments made in the plaint or in the written statement. If the issue is a pure question of law, then it may be decided without recording evidence, but if it is a mixed question of law and fact, then parties should be permitted to lead evidence on the facts of the case. Question of jurisdiction, even if it is a mixed question of law and fact, it is required to be decided first. For deciding the said issue, the parties are entitled to lead evidence, oral as well as documentary, as that issue is required to be tried and adjudicated finally by the court. The determination of the said issue is not only for the limited purpose of granting interim relief or vacating interim relief. It is true that this procedure requires piecemeal determination of the suit, but that cannot be avoided because of the mandate of Section 9A."
70. Mr. Nariman then relied upon a judgment of a single judge of this court in the case of Ignatius D'Cunha v. Father Denis [1993] 2 Mah. LJ 1441. In that case, the trial judge did not frame any preliminary issue with respect to jurisdiction but the application for temporary injunction as well as the application for deciding the question of jurisdiction were disposed of together. In para. 5 of that judgment, the learned single judge observed "the nature of evidence which a party would be required to place before the court when the court is considering a question of granting or refusing interim relief under Order 39 would be totally different from the nature of the evidence which it would require to place before the court when the court is to consider question of jurisdiction". Hence in para. 8 of the judgment, the learned judge held that it would be always desirable that both the questions are not heard together.
71. In view of the insistence of Mr. Nariman on the basis of the aforesaid authorities, Mr. Chidambaram and Mr. Doctor appearing for the defendants pointed out that their plea was not one of ouster of jurisdiction. Section 9A of the Civil Procedure Code (as included in Maharashtra) contemplates what is known as ouster of jurisdiction. They submitted that the defendants were only insisting that the discretion to exercise jurisdiction may not be exercised looking to the fact that the concerned disputes would appropriately be tried either by the Company Law Board or by the SEBI. The submission of the defendants was that the jurisdiction of the civil courts with that of the authorities concerned was a somewhat overlapping and concurrent jurisdiction. The judgments of the Supreme Court from Dhulabhai v. State of Madhya Pradesh, , onwards were referred to by both learned counsel. In that context, Mr. Nariman also drew my attention to a letter on behalf of the defendants written by their advocates to the SEBI requesting it to defer the determination inasmuch as the High Court was seized of the matter. That letter dated January 22, 1999, is placed at page 487 in volume III-A of the compilation. Mr. Nariman therefore submitted that in case the defendants were raising the issue of jurisdiction, then in his view the issue will have to be framed and on which he may have to consider whether evidence should be recorded. Alternatively, the defendants must agree that they were not pressing the issue in the manner in which it was worded in para. 1(g) of the above-referred affidavit in reply of defendant No. 11.
72. In view of the objection raised by Mr. Nariman and after due deliberations and instructions, the defendants filed a joint affidavit of defendant No. 1 and defendant No. 11 affirmed on March 16, 1999, stating therein that for the reasons contained therein, Clause G of para. 1 was not being pressed. The said affidavit of defendant No. 1 reads as follows :
"1. I say that I have filed an affidavit dated December 21, 1998, in reply to Notice of Motion No. 3120 of 1997. In that affidavit in reply, in Clause G of paragraph 1 have stated as under :
'G. This hon'ble court does not have jurisdiction to try, entertain and dispose of this suit'.
2. Similarly, in the affidavit to oppose grant of ad interim relief filed by me in Notice of Motion No. 3932 of 1998 also dated December 21, 1998, in paragraph 1A, I have stated as under :
'1A. I submit that this hon'ble court does not have jurisdiction to entertain, try and dispose of this suit'.
3. In connection with the above submissions in the said affidavits, I wish to clarify and state as under :
4. If the company had filed the present suit, the defendants could and would have contended that the jurisdiction of this hon'ble court was ousted. Defendants would have relied on Ammonia Supplies Corporation (P.) Ltd. v. Modern Plastic Containers Pvt. Ltd. , read with Section 111A(2) and (3).
5. However, it is Mr. Reddy (plaintiffs) a shareholder who has filed the suit alleging violation of his civil rights. Such a suit can be filed before a civil court (which has territorial and pecuniary jurisdiction). In answer, the defendants urge, among other grounds that--
(i) At an interlocutory stage :
(a) that this hon'ble court should not in exercise of its discretion, grant any interim relief to Mr. Reddy (plaintiffs) since there is another forum which could be moved by the company for rectification of the register ; and
(b) that as Mr. Reddy (plaintiffs) is only a name lender for the company and no civil rights of Mr. Reddy are infringed, no relief should be granted to him.
These are some factors amongst others which the court should consider while exercising its discretion in refusing the interim relief.
(ii) As the trial of the suit:
That Mr. Reddy (plaintiffs) does not have any civil right to oppose registration or to have the register rectified and hence his suit should be dismissed.
In the light of the above, the submissions contained in ground G of paragraph 1 and in paragraph 1-A of my two aforementioned affidavits both dated December 21, 1998, are not pressed."
73. Whether prima facie case is required to be made out by the plaintiffs: Having obtained the above clarification, Mr. Nariman submitted that at the interlocutory stage what the court had to examine principally was whether there were serious issues to be tried and that the court was not required to go into a detailed inquiry in the manner in which it is sought by the defendants herein. The interlocutory application was required to be decided on affidavits or otherwise as stated in Order 39, Rule 1 of the Civil Procedure Code and principally what the court has, to see is that the application was not frivolous or vexatious. Mr. Nariman however submitted that serious questions of law or matters which were required to be decided on evidence were not expected to be gone into and decided at the interlocutory stage. What the court had to see was the balance of convenience and to protect, if established by the facts, the last undisputed status as existing between the parries as laid down by the Supreme Court in Dorab Cawasji Warden v. Coomi Sorab Warden, . The court had to see the balance of convenience for that purpose and as to whom irreparable injury will be caused. The defendants very much dispute this proposition canvassed by Mr. Nariman. Learned counsel appearing for the defendants and particularly Mr. Doctor emphasised that the complainant had to make out a prima facie case to justify an interlocutory order. Merely because serious issues were raised, an interim order cannot be passed in favour of the plaintiffs if he fails to make out a prima facie case in their favour.
74. It therefore, becomes material to go into this question as to whether as a proposition of law, the plaintiffs, are required to make out a prima facie case based on legal rights to entitle them for an interim injunction. To justify his submission, Mr. Nariman referred to the leading judgment of House of Lords in the case of American Cyanamid Co. v. Ethicon Ltd. [1975] 1 All ER 504. That was a case involving an action for infringement of right of patent. The House of Lords observed at page 509 in that judgment as follows :
"The object of the interlocutory injunction is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial; but, the plaintiff's need for such protection must be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated under the plaintiff's undertaking in damages if the uncertainty were resolved in the defendant's favour at the trial. The court must weigh one need against another and determine where 'the balance of convenience' lies."
75. This very passage quoted above is referred to and quoted by the Supreme Court with approval in para. 9 of its judgment in the case of Wander Ltd. v. Antox India (P.) Ltd. [1990] Suppl. SCC 727, which was also a case under the Trade and Merchandise Marks Act, 1958. The Supreme Court has, however, not given a specific reference to this judgment of House of Lords in the case of American Cyanamid Co, v. Ethicon Ltd. [1975] 1 All ER 504 though the above quotation is reproduced in para. 9 of that judgment.
76. In American Cyanamid Co.'s case [1975] 1 All ER 504, the House of Lords further observed at page 510 as follows :
"The use of such expression as 'a probability', 'a prima facie case', or 'a strong prima facie case' in the context of the exercise of a discretionary power to grant an interlocutory injunction leads to confusion as to the object sought to be achieved by this form of temporary relief. The court no doubt must be satisfied that the claim is not frivolous or vexatious; in other words, that there is a serious question to be tried.
It is no part of the court's function at this stage of the litigation to try to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend nor to decide difficult questions of law which call for detailed argument and mature considerations. These are matters to be dealt with at the trial. One of the reasons for the introduction of the practice of requiring an undertaking as to damages on the grant of an interlocutory injunction was that 'it aided the court in doing that which was its great object, viz., abstaining from expressing any opinion upon the merits of the case until the hearing'."
77. The above judgments, namely American Cyanamid Co.'s case [1975] 1 All ER 504 (HL) and Wander Ltd. v. Antox India (P.) Ltd. [1990] Suppl. SCC 727, were again referred to in a subsequent Supreme Court judgment in the case of Power Control Appliances v. Sumeet Machines Pvt. Ltd. . Paras. 34 and 35 of that judgment refer to this earlier judgment. Mr. Nariman also referred to and relied upon another judgment of the Supreme Court in the case of Dorab Cawasji Warden v. Coomi Sorab Warden, , in this behalf.
78. Mr. Doctor, learned counsel appearing for defendants Nos. 4 and 5, submitted that the proposition in American Cyanamid's case [1975] 1 All ER 504 (HL) was no longer a valid proposition even in England and was not accepted by Indian courts as well. He referred to a judgment of the Court of Appeal in the case of Hubbard v. Vosper [1972] 1 All ER 1023 which was decided prior to American Cyanamid's case [1975] 1 All ER 504 (HL) and a judgment subsequent thereto by the Chancery Division in the case of Series 5 Software Ltd. v. Clarke [1996] 1 All ER 853. In Hubbard v. Vosper [1972] 1 All ER 1023 (CA), Lord Denning MR in para, on remedies (at page 1029) observed as follows :
"In considering whether to grant an interlocutory injunction, the right course for a judge is to look at the whole case. He must have regard not only to the strength of the claim but also to the strength of the defence, and then decide what is best to be done. Sometimes it is best to grant an injunction so as to maintain the status quo until the trial. At other times it is best not to impose a restraint on the defendant but leave him free to go ahead.... The remedy by interlocutory injunction is so useful that it should be kept flexible and discretionary. It must not be made the subject of strict rules."
79. In the subsequent judgment in the case of Series 5 Software Ltd. v. Clarke [1996] 1 All ER 853 (Ch D), the earlier judgment of Court of Appeal in the case of Hubbard v. Vosper [1972] 1 All ER 1023 was referred to. At page 865 of the judgment, the principles were laid down in the following passage :
"Accordingly, it appears to me that in deciding whether to grant interlocutory relief, the court should bear the following matters in mind. (1) The grant of an interlocutory injunction is a matter of discretion and depends on all the facts of the case. (2) There are no fixed rules as to when an injunction should or should not be granted. The relief must be kept flexible. (3) Because of the practice adopted on the hearing of applications for interlocutory relief, the court should rarely attempt to resolve complex issues of disputed fact or law. (4) Major factors the court can bear in mind are (a) the extent to which damages are likely to be an adequate remedy for each party and the ability of the other party to pay, (b) the balance of convenience, (c) the maintenance of the status quo, and (d) any clear view the court may reach as to the relative strength of the parties' cases."
80. Thereafter in the judgment, it was held that there was no significant inconsistency between the earlier judgments in the case of F Hoffmann-La Roche and Co AG v. Secretary of State for Trade and Industry [1974] 2 All ER 1128 (HL) and American Cyanamid's case [1975] 1 All ER 504 (HL).
81. Coming to the judgments in Indian cases, particularly the one in the case of Dorab Cawasji Warden v. Coomi Sorab Warden, , Mr. Doctor submitted that the said judgment was essentially in the context of Section 44 of the Transfer of Property Act, 1882. The provision required the dwelling house of the joint family to remain joint and, therefore, the injunction to prevent the transferee of a share in the dwelling house of the joint family from taking possession was essential. Mr. Doctor submitted that though the judgment does lay down the circumstances wherein mandatory injunction is to be given (particularly in para. 14 thereof), it cannot lead to a blanket proposition canvassed on behalf of the plaintiffs that merely because serious issues were raised, the injunction should follow.
82. Mr. Nariman had given a list of important issues which arise in the matter. The serious questions to be tried, according to Mr. Nariman, are as follows :
(1) Whether an acquisition in violation of the SEBI Regulations would be void ?
(2) Whether a transfer of shares in the register of members in violation of provisions of law would be entertained ?
(3) Whether apart from the statutory violations, the plaintiffs had in common law the right to seek rectification of the share register ?
(4) Whether the plaintiffs had a legal personal right to maintain the suit ?
(5) Whether the post facto public offer could be made to cure the illegalities committed by the defendants or whether any such post facto offer should include such disputed shares also ?
(6) What should be the interpretation of various regulations, particular Regulations 6 and 10, the expression "holds" under Regulation 10 and as to whether indirect acquisitions are covered under the concerned regulations ?
(7) What should be the correct interpretation of "persons acting in concert" ?
(8) Whether the plaintiffs should be denied the relief on account of the alleged improper conduct on their part or any delay or any improper motive ?
83. With respect to various serious questions raised by Mr. Nariman, Mr. Doctor submitted that assuming that any such questions were raised, the plaintiffs must make out a prima facie case, otherwise the result of it would be that merely because some questions are raised, automatically interim relief will have to be granted to the plaintiffs. He submitted that the court would be reduced to a rubber stamp on any such interim application being made and serious issues being raised. In my view, apart from the controversy as to what is the position currently existing in England, as far as the Indian courts are concerned, what is laid down by the Supreme Court in United Commercial Bank v. Bank of India, , in para. 50 holds good (page 210): "No injunction could be granted under Order 39, rules 1 and 2 of the Civil Procedure Code unless the plaintiffs establish that they had a prima facie case, meaning thereby that there was a bona fide contention between the parties or a serious question to be tried. The question that must necessarily arise is, whether in the facts and circumstances of the case, there is a prima facie case and, if so, as between whom? In view of the legal principles applicable, it is difficult for us to say, on the material on record, that the plaintiffs have a prima facie case. It cannot be disputed that if the suit were to be brought by the Bank of India, the High Court would not have granted any injunction as it was bound by the terms of the contract. What could not be done directly cannot be achieved indirectly in a suit brought by the plaintiffs". Thereafter in para. 51, the Supreme Court further observed "even if there was a serious question to be tried, the High Court had to consider the balance of convenience". Thus, as seen in the above-cited judgment of the Chancery Division in Series 5 Software Ltd. v. Clarke [1996] 1 All ER 853, there was no significant inconsistency between the earlier judgment in the case of F Hoff-mann-La Roche and Co AG v. Secretary of State for Trade and Industry [1974] 2 All ER 1128 (HL) and American Cyanamid's case [1975] 1 All ER 504 (HL), and the propositions which should govern the grant of interlocutory injunction were laid down in the earlier paragraph of that judgment at page 865. Later on, in that judgment, the Chancery Division observed (p. 866): "there is nothing inherently unfair in a court here expressing at least a preliminary view based on written evidence". Similarly, as held in UCO Bank's case, at the interlocutory stage, the court had to see whether there was a bona fide contention between the parties or a serious question to be involved. In England as well as in India, it appears that the proposition in American Cyanamid's case [1975] 1 All ER 504 (HL) as placed therein no longer holds good. The bona fide contention between the parties has to be gone into by the court. To this extent, the submission of Mr. Doctor is well taken and this court will have to examine the defence of the defendants prima facie so as to decide whether the plaintiffs are entitled to the interim reliefs that they have prayed for. In fact, in a subsequent judgment in the case of Gujarat Bottling Co. Ltd. v. Coca-Cola Co. , the Supreme Court has crystallised the law with respect to various aspects to be examined at the interlocutory stage, which very much includes examination of the question as to whether the plaintiffs have a prima facie case. In para. 43 of that judgment, the court observed as follows (page 651 of Comp Cas) :
"The grant of an interlocutory injunction during the pendency of legal proceedings is a matter requiring the exercise of discretion of the court. While exercising the discretion, the court applies the following tests--(i) whether the plaintiff has a prima facie case; (ii) whether the balance of convenience is in favour of the plaintiff; and (iii) whether the plaintiff would suffer an irreparable injury if his prayer for interlocutory injunction is disallowed. The decision whether or not to grant an interlocutory injunction has to be taken at a time when the existence of the legal right assailed by the plaintiff and its alleged violation are both contested and uncertain and remain uncertain till they are established at the trial on evidence. Relief by way of interlocutory injunction is granted to mitigate the risk of injustice to the plaintiff during the period before that uncertainty could be resolved. The object of the interlocutory injunction is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial. The need for such protection has, however, to be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated. The court must weigh one need against another and determine where the 'balance of convenience' lies. In order to protect the defendant while granting an interlocutory injunction in his favour the court can require the plaintiff to furnish an undertaking so that the defendant can be adequately compensated if the uncertainty were resolved in his favour at the trial."
84. Thus, in the light of what is stated above, this court will have to go into the submissions of the rival parties as appearing from their plaint and affidavits to find out as to whether the plaintiffs have made out a prima facie case to justify the interlocutory reliefs that they have sought.
85. Whether the interpretation of SEBI Regulations and deciding the breaches thereof was a matter exclusively within the jurisdiction of SEBI and outside that of the civil court.
86. There is however one other legal aspect raised by the defendants which will have to be gone into before one goes into the prima facie merits of the rival contentions. It had been submitted on behalf of the defendants that the plaintiffs have no legal right to claim the kind of relief that they were seeking in the present suit. It was submitted that they neither had such a right in common law nor in any statute. As far as the right in common law is concerned, it was principally submitted that it was available to the shareholders of a company if they themselves were aggrieved by any particular action on the part of the company concerning their own shares. It was submitted that there was no right in common law as such to disturb the acquisition of shares made by third parties at the instance of someone who had no stake in those shares. (This submission will be looked into later on in detail). However, alternatively and by way of preliminary objection, it was submitted that as far as the rights based in statute are concerned, if there was any such alleged breach of the SEBI Regulations in the light of the interpretation canvassed by Mr. Nariman, it was a matter to be looked into by the authorities concerned, namely, the SEBI and that this court had no jurisdiction to look into it and in any case this court was not expected to go into the issues which would be competently looked into by the SEBI. The judgment of the Supreme Court in the case of Supreme Court Bar Association v. Union of India, , was relied upon in this behalf by Mr. Dada. It was submitted by Mr. Dada that just as in Supreme Court Bar Association v. Union of India, , in the event of this court holding that the plaintiffs do have a statutory right to make a competitive bid as claimed by them, the proper forum would be to go to the SEBI and to lodge the grievance over there. Whether there was any breach of the Regulations of the SEBI or as to what should be the interpretation of the concept of "acting in concert" or "holding the proportionate shares", etc., were all questions within the realm of jurisdiction of the SEBI and it had sufficient powers to give the necessary directions under the regulations. The case of the plaintiffs is that the acquisitions made by the defendants are bad and, therefore, they should be directed to disinvest the same. As against that, the case of the defendants is that firstly whether the concerned regulations apply is itself a doubtful proposition. Even if they apply, whether there is any breach of the particular regulations in the facts of the case is another difficulty and thereafter also it would be for the SEBI to decide as to what remedial measures ought to be adopted. It was very much conceivable that the SEBI may go for post-facto announcement which is the remedy canvassed by the defendants. It is, therefore, submitted by Mr. Dada that the principles in the judgment of Supreme Court in Bar Association's case, , would squarely apply. In an earlier judgment of the Supreme Court had held that the concerned advocate Mr. V. C. Mishra was guilty of contempt of court and the court had exercised its powers under Article 142 of the Constitution read with Section 38 of the Advocates Act in a summary procedure to suspend his licence to practise. That earlier judgment in the case of Vinay Chandra Mishra, In re was in terms overruled in this later judgment in Supreme Court Bar Association v. Union of India, . As far as the order holding the advocate guilty of contempt and the exercise of powers in that behalf was concerned, the Supreme Court did not disturb the finding of guilt arrived at in the earlier judgment. However, when it came to the order of punishment of suspension of his licence debarring the advocate concerned from carrying on his profession, the Supreme Court in para. 44 of the judgment observed as follows (p. 1908) :
"Punishing a contemner advocate, while dealing with a contempt of court case by suspending his licence to practise, a power otherwise statutorily available only to the Bar Council of India, on the ground that the contemner is also an advocate, is, therefore, not permissible in exercise of the jurisdiction under Article 142. The construction of Article 142 must be functionally informed by the salutary purposes of the article, viz., to do complete justice between the parties. It cannot be otherwise. As already noticed in a case of contempt of court, the contemner and the court cannot be said to be litigating parties."
87. Thereafter in para. 45 of the judgment, the court observed as follows (page 1909) :
"Indeed this court is not a court of restricted jurisdiction of only dispute settling. It is well recognised and established that this court has always been a law maker and its role travels beyond merely dispute settling. It is a problem solver in the nebulous areas but the substantive statutory provisions dealing with the subject-matter of a given case, cannot be altogether ignored by this court, while making an order under Article 142. Indeed, these constitutional powers cannot, in any way, be controlled by any statutory provisions but at the same time these powers are not meant to be exercised when their exercise may come directly in conflict with what has been expressly provided for in a statute dealing expressly with the subject."
88. Mr. Dada emphasised these observations to contend that when the Supreme Court had all the powers to do complete justice under Article 142, still the power itself led the court to set the limits for itself within which to exercise those powers, viz., that while exercising its powers ordinarily it should not disregard a statutory provision governing a subject. Thereafter in the above-referred para, the court also emphasised that the powers are not meant to be exercised when the exercise may come directly in conflict with what has been provided in a statute dealing expressly with the subject. It was therefore submitted that when breach of the SEBI Regulations was involved and when the SEBI possessed the adequate powers, this court ought not to exercise its discretion in a civil suit in such a way as to fetter or reduce the powers that are available to the SEBI or to affect the orders that the SEBI would pass.
89. Mr. Nariman, on the other hand, submitted in this behalf that what the plaintiffs were seeking was not a direction or an order which was within the jurisdiction of the SEBI. Mr. Nariman accepted that the propositions laid down in Supreme Court Bar Association v. Union of India, , were undoubtedly very relevant. He however stressed the fact that the earlier judgment of the Supreme Court had been reviewed since under the earlier judgment the Supreme Court had contemplated to do something which was within the jurisdiction of the Bar Council of India. He submitted that the Supreme Court undoubtedly laid down that the powers under Article 142 are not meant to be exercised when their exercise may come directly in conflict with what has been expressly provided in another statute. The court has however in the very paragraph clearly stated, as quoted above, that the Supreme Court was not a court of restricted jurisdiction and that it has always been a law maker. Thereafter the court specifically observed (p. 1909) "indeed these constitutional powers cannot in any way be controlled by any statutory provisions". Similarly in para. 81 of the judgment (as in AIR), the court observed (page 1918) "to the extent, this court makes the statutory authorities and other organs of the State perform their duties in accordance with law, its role is unexceptionable but it is not permissible for the court to take over the role of the statutory bodies or other organs of the State and perform their functions". Mr. Nariman submitted that what was being canvassed on behalf of the plaintiffs was to let the SEBI exercise the powers within its jurisdiction, but what is that power is something which this court will have to lay down. The SEBI undoubtedly had the powers to pass appropriate orders including that of directing disinvestment of shares or to permit post-facto announcement if deemed appropriate. However, in his submission, in the facts of the present case certain questions had arisen regarding the interpretation of the SEBI Act and the regulations which required elucidation of law. What were the powers of the SEBI, and as to what should be the correct interpretation of the SEBI Regulations were issues which were clearly within the jurisdiction of this court. In fact, the regular courts alone were expected to clarify the parameters of jurisdiction of the Tribunals constituted under various laws.
90. In this behalf, Mr. Nariman relied upon a judgment of the Supreme Court in State of Tamil Nadu v. State of Karnataka [1991] Suppl. 1 SCC 240. It was a case concerning the Cauvery Water Tribunal set up under the Inter-State Water Disputes Act, 1956, under which the Tribunal is given complete protection under Article 262 of the Constitution of India. In fact, Mr. Nariman submitted that this was one Tribunal which could be stated to be the most powerful Tribunal amongst the various Tribunals. This is because Article 262(2) specifically declares that notwithstanding anything in the Constitution, Parliament may by law provide that neither the Supreme Court nor any other court shall exercise jurisdiction in respect of any such dispute or complaint as is referred in Sub-clause (i) of Article 262 which provides that Parliament may by law provide for the adjudication of any dispute or complaint with respect to the use, distribution or control of waters of or in any inter-State river or river valley. Section 11 of the Inter-State Water Disputes Act, 1956, also specifically removed the jurisdiction of the Supreme Court by providing that notwithstanding anything contained in any other law, neither the Supreme Court nor any other court shall have or exercise jurisdiction in respect of any water dispute which may be referred to a Tribunal under this Act. Thus, as can be seen, River Water Tribunal is a very powerful Tribunal as compared to other Tribunal which would come within the sweep of Article 136 and against whose orders appeal would lie to the Supreme Court. In spite of this being the position, in the aforesaid judgment the Supreme Court did exercise jurisdiction in a controversy which was raised by the appellants with respect to an interim order that they had sought; The controversy raised by the appellants was that they had moved an application before the Tribunal for grant of interim relief on the ground of certain emergency till the final disposal of the dispute, and the Tribunal, according to the appellants, had wrongly held that it had no jurisdiction to entertain the application. The question raised in the appeal before the Supreme Court was whether the Tribunal had rightly held that it had no jurisdiction to entertain such applications. The Supreme Court accepted that inasmuch as the dispute referred by the Central Government to the Tribunal under the Act related to the controversy covered under the Inter-State Water Disputes Act, 1956, it had no jurisdiction to decide the merits of that dispute. Yet the Supreme Court declared in para. 12 of the judgment (page 245 of [1991] Suppl. 1 SCC): "the Tribunal is a statutory authority constituted under the Act made by Parliament and this court had jurisdiction to decide the parameters, scope, authority and jurisdiction of the Tribunal. It is the judiciary, that is the courts alone that have the function of determining authoritatively the meaning of the statutory enactment and to lay down the frontiers of jurisdiction of any Board or Tribunal constituted under the statute". In that judgment, the Supreme Court quoted with approval the observations of Francis Bennion from his book Statutory Interpretation, wherein he observed (p. 245) :
"It is the function of the court alone to declare the legal meaning of an enactment. If anyone else (such as the draftsman of the provision) purports to lay down what the legal meaning is the court will tend to react adversely, regarding this as an encroachment upon its constitutional sphere."
91. The court also quoted with approval the earlier judgment in the case of Sanjeev Coke Manufacturing Co. v. Bharat Coking Coal Ltd., , wherein the court had held (p. 254):
"no one may speak for Parliament and Parliament is never before the court. After Parliament has said what it intends to say, only the court may say what Parliament meant to say. None else".
92. Mr. Nariman therefore submits that the questions which are raised by the plaintiffs in the present suit require the laying down of frontiers of jurisdiction of the SEBI. He submits that what measures the SEBI should adopt, or what order ought to be passed by the SEBI in this or any other case are undoubtedly matters within the jurisdiction of the SEBI. He however formulated some of the questions regarding the ambit and scope of the regulations which require determination by this court as follows :
(1) Whether the acquisition of more than 10 per cent. shares would not violate the SEBI Regulations merely because such acquirer did not, prior thereto, hold any share in the company ?
(2) Whether having regard to the true purpose of the regulations, it was permissible under the 1994 Regulations for the SEBI to validate the acquisition of shares purported to be acquired in breach of Regulation 10 by merely directing an ex-post facto public offer which would permit acquisition of further shares ?
(3) What is the correct interpretation of the concept of "acting in concert" ?
(4) Are indirect acquisitions covered under these regulations ?
(5) What is the correct connotation of the verb "holds" in regulation No. 10 ?
93. Mr. Nariman submitted that the approach taken by the Securities Appellate Tribunal in the case of Fascinating Leasing and Finance P. Ltd. v. SEBI [1998] 30 CLA 206 (SAT) (Bom) (which is said to be binding on the SEBI) is prima facie contrary to what should be the correct interpretation of this regulation. Whether Regulation 10 prohibited any indirect acquisition of shares in the target company, is again a question required to be gone into due to a prima facie incorrect construction placed thereon by the Appellate Authority of the SEBI in Sesa Goa's case [1997] 12 SCL 31 (Bom) to the contrary. However, as in the River Water Dispute case and more so in the present case, Mr. Nariman submitted that there were concepts which required elucidation. There were controversies with respect to concepts such as acting in concert, holding of the necessary shares, etc. This is something which was certainly within the jurisdiction of this court. On the other hand, Mr. Dada and Mr. Doctor submitted that this can be done by the SEBI itself while resolving the controversy referred to it.
94. In my view, the aforesaid submission of Mr. Nariman is well taken. It is true that the SEBI while resolving the dispute before it in exercise of its jurisdiction in a given case may have to arrive at the decision on these points as well, but it will not have the force of an authoritative pronouncement. And it certainly cannot mean that this court ought not to exercise its lawful function to lay down the frontiers of jurisdiction of the SEBI or interpretation of various concepts which are used in the SEBI Act and regulations. This is not something like an actual exercise of the powers vested in another competent authority under a particular statute. If this court interprets the concepts involved and lays down the frontiers of jurisdiction of the SEBI, that would be within its powers and something which is expected of this court. Prima facie, therefore, it cannot be said that merely because this is an area in which the SEBI can take a decision while deciding the merits of a case before it, this court cannot go into and decide these issues involving interpretation. Therefore if the plaintiffs' suit is otherwise competent and maintainable, it will be within the function of this court as a court of unlimited jurisdiction to declare the legal meaning of the relevant provisions of the SEBI Act and 1994 Regulations. In fact, as held in Cauvery Water Tribunal's case State of Tamil Nadu v. State of Karnataka [1991] Suppl. 1 SCC 240, (headnote) "courts alone that have the function of determining authoritatively the meaning of statutory enactments".
95. Plaintiffs' case alleging breaches of particular regulations by defendants Nos. 1 to 11 and interpretation thereof:
Then coming to the particular breaches of the regulations, Mr. Nariman submitted that in the facts of the present case, the grievance of the plaintiffs is that undoubtedly all the disputed shares were acquired without making any public announcement. Even if we keep aside debentures, which were purchased prior to the 1994 Regulations coming into force, defendants Nos. 3, 4 and 5 had acquired the disputed shares from the open market without a prior public announcement. The disputed shares were purchased from October 27, 1994, to February 14, 1997, and it is his submission that these acquisitions would squarely fall under the mischief of Regulation 10. These shares, which were purchased by defendants Nos. 3, 4 and 5 and thereafter by defendants Nos. 7 and 8, were purchased from the open market and when taken together with the earlier holding of the group, they undoubtedly carry more than 10 per cent. of the voting rights. Mr. Nariman submitted that the story of the defendants that these defendants Nos. 3, 4 and 5 had an independent existence is difficult to swallow. They were, at all material times, financed by the Chhabria group of companies for buying these shares. Although they were microscopically small companies and on their failing to repay the loan, the companies themselves were taken over, Mr. Nariman submitted that such an indirect device cannot be permitted while interpreting the particular regulation. As against that, the defendants pressed into service the judgment of the Appellate Authority of the SEBI dated March 6, 1997, in the case of Sesa Goa Ltd., In re [1997] 12 SCL 31 (Bom), wherein the indirect acquisition of shares of a listed company was held to be outside the jurisdiction or purview of these regulations. Mr. Nariman pointed out that the show-cause notice issued to IMFA (defendant No. 3) dated March 31, 1997, speaks of acquiring 10 per cent. or more shares as violative of these regulations. On the other hand, the defendants relied upon another decision of the SEBI in the case of Fascinating leasing and Finance P. Ltd. v. SEBI [1998] 30 CLA 206 (SAT) (Bom) which held that if an acquirer did not hold any shares earlier, he would not come within the mischief of Regulation 10. The indirect acquisitions were not specifically covered in the 1994 Regulations and, therefore, the regulations were amended as per the recommendations of the Bhagwati Committee. It is submitted on behalf of the defendants that if something is not specifically spelt out in a regulation, it cannot be read as existing at the relevant point of time. On the other hand, Mr. Nariman submitted that a purposive interpretation will have to be given to the particular clause. He relied upon the judgment of the Supreme Court in the case of Mohamed Quasim Larry v. Muhamed Samsuddin, . That was a case under the Payment of Wages Act, 1936. The earlier definition of "wages" as incorporated in Section 2(vi) of the Act initially did not specifically cover wages fixed by an award. They were sought to be included by a specific amendment brought in by the Payment of Wages (Amendment) Act, 1957. The question before the court was as to whether the term "wages" as it existed earlier included wages fixed by an award in an industrial dispute between the employer and the employees. In short, the court was to decide as to whether remuneration payable under the award was already included in the definition as it stood before this amendment and the court answered it in the affirmative. The apex court went into the aspect as to how awards are made and held that "the amendment has merely clarified what in our opinion was included in the unamended definition" (last sentence in para. 5 of the report in AIR). In this connection, Mr. Nariman relied upon another judgment of the Supreme Court in the case of Baldev Krishna Sahi v. Shipping Corporation of India Ltd., . That was a case under Section 630 of the Companies Act which makes officers of a company liable for wrongfully withholding the company's property. It was canvassed before the Supreme Court that the section did not include former officers of the company. The court held that having regard to the object of the section and its purpose, the term must be held to include its former officers also. Thus it is seen that even while dealing with the provisions involving penal consequences, the court adopted a purposive approach. Mr. Nariman pointed out in this connection that even in a case under the SEBI Act, the Central Government has taken a purposive approach in the case of Fawn Trading (P.) Ltd. v. SEBI in its order dated 15th January, 1999. This approach was necessary to advance the remedy and to suppress the mischief.
96. Mr. Nariman, therefore, submitted that what the Bhagwati Committee has specifically proposed and was brought in by the 1997 Regulations was something already in-built in Regulation 10. If Regulation 10 is interpreted to mean that it operates only against someone who holds some shares, then all those who do not hold any shares and at one go acquire more than 10 per cent. shares would be outside the scope of these regulations. That could not be said to be the intention of Regulation 10 as originally drafted. It was no doubt true that Regulation 10 was specifically amended to make certain things clear. That however would not mean that such an interpretation was not available while interpreting Regulation 10 as it stood before amendment. Similarly, although it is true that in the definition of "acquirer" amended in 1997, the words "directly" or "indirectly" are specifically brought in, it cannot mean that such an acquisition was not covered under the definition as it stood earlier when it included the persons with whom the acquirer was acting in concert. If these concepts and regulations are not read purposively, it would be very easy to defeat them. Mr. Nariman submitted that the judgments in the case of Sesa Goa and fascinating Leasing and Finance P. Ltd. v. SEBI (1998] 30 CLA 206 (SAT) (Bom) do not lay down the correct propositions of law and it was therefore necessary for this court to lay down the frontiers of jurisdiction of the SEBI in this behalf. On the other hand, it was submitted by the defendants that those judgments were binding on the SEBI with respect to which Mr. Nariman pointed out that the judgment in the Fascinating Leasing and finance P. Ltd. v. SEBI [1998] 30 CLA 206 (SAT) (Bom) had arisen from the order of an Adjudicating Officer, a hierarchy distinct from that of the SEBI. But even so assuming that those judgments will have a persuasive force for the SEBI, it cannot certainly be denied to the plaintiffs to canvass in this court that the interpretation which was adopted in the two cases was defeating the policy underlying the regulations. Mr. Nariman submits that transparency is one of the objects sought to be attained under the regulations. All those persons who hold 5 per cent. or more shares were required to disclose the aggregate of their shareholding to the company under Regulation 6. Similarly if Regulation 10 required a person acquiring more than 10 per cent. of shares to make a public announcement of his intention to acquire those shares in the open market, transparency was very much writ large on this regulation also. Mr. Nariman submitted that this was necessary because the idea was to give the best price to the shareholders and, therefore, under Regulation 19(2)(b) irrespective of the acquisition of shares under Regulation 10, the offered price will have to be the highest price paid by the acquirers in the open market as arrived at the weekly closing price of the stock exchange during the last six months preceding the date of announcement. Mr. Nariman submits that this is a provision made in the interest of the investors so that they get the best price. This has to be read along with the provisions for competitive acquisition made in Regulation 23 which permits a competitive bid to be made by a person other than the concerned acquirer. The idea is that the competitive investors would get the better price. Mr. Nariman submitted that in the absence of an opportunity to compete, the market would remain tight and the investors would suffer.
97. Acting in concert:
As far as acting in concert is concerned, Mr. Nariman submits that it is something about which actual evidence is normally difficult to come by. He relied upon a judgment of the Supreme Court in the case of CIT v. East Coast Commercial Co. Ltd. , in the context of Section 23A of the Indian Income-tax Act, 1922, wherein the question was whether Kedia family had acted in concert to control the affairs of the concerned company. In the facts of that case, there was no evidence of any overt act showing that they were acting in concert and thereby constituted and acted as a block. The Supreme Court allowed the appeal against the judgment of the High Court holding that its approach was erroneous and in para. 14 observed as follows (p. 457) :
"... if the members of the Kedia family formed a block and held more than 75 per cent. of the voting power, it was not necessary to prove that they actually exercised controlling interest. It is the holding in the aggregate of a majority of the shares issued by a person or persons acting in concert in relation to the affairs of the company which establishes the existence of a block. It is sufficient, if having regard to their relation, etc., their conduct and their common interest, that it may be inferred that they must be acting together : evidence of actual concerted acting is normally difficult to obtain, and is not insisted upon."
98. In the present case, Mr. Nariman submitted that the entire financing of defendants Nos. 3, 4 and 5 was either through Chhabria Finance Co. or through Mr. Ram Raheja. Mr. Ram Raheja is said to be the husband of sister of Kishore Chhabria, defendant No. 1. The defendants submit that Mr. Ram Raheja does not come within the definition of the concept of a relative as defined under Section 6 of the Companies Act and, therefore, financing done through Mr. Ram Raheja cannot be said to be through a person acting in concert. As against that, Mr. Nariman points out that what should be noted is that Regulation 2(1)(d), which defines "persons acting in concert" firstly mentions the persons who are comprised in that concept and thereafter it states that it includes the persons who are mentioned subsequently in that definition. Thus the definition of "a person acting in concert" is an inclusive definition. Then in Sub-clause (i) the companies which are subsidiaries or companies under the same management (either individually or all with each other) are included in the concerted companies. Thereafter Sub-clause (iii) includes the directors of companies referred to in Sub-clause (i) and his associates in this definition. Thereafter in the Explanation the term "associate" is explained in two Sub-clauses A and B. "The relatives" mentioned in Section 6 of the Companies Act are included in Clause (A), whereas the director or his relatives whether individually or in the aggregate holding more than 2 per cent. of the paid up equity capital of such company are included in Sub-clause (B). "Such company" would mean the concerted company referred in Sub-clause (iii). Therefore inasmuch as Ram Raheja was holding substantial interest (9 per cent. in IMFA--defendant No. 3), he would certainly fall in the definition of a "person acting in concert". Mr. Nariman therefore submitted that there was undoubtedly a prima facie case made out by the plaintiffs that the defendants were acting in concert and were in breach of Regulation 10 when it comes to the acquisition of defendants Nos. 3, 4 and 5.
99. Negative wording implying mandatory requirement:
The next submission of Mr. Nariman is that when the regulation is worded in a negative language that the acquirer shall not acquire any further share unless a particular method is adopted, the wording will have to be given its due force. Breaches of these regulations invite penal actions and, therefore, it is submitted that when such negative covenants are provided with consequent deterrents the provisions ought to be read as mandatory provisions. He submitted that breaches can only lead to a direction, to disinvest such shares which was contemplated by the SEBI. Mr. Nariman submitted that any other interpretation including a post facto permission to make a public announcement would lead to a permission to regularise the purchases, which, in his submission, are void being in breach of Regulation 10. This submission of Mr. Nariman is on the footing that Regulations 9 and 10 contemplate purchases of shares in three parts. The first part is one which the acquirer has already purchased. It is at the time of the second lot of purchases that the acquirer is told that by virtue of those purchases if his holding is going to be more than 10 per cent. he shall have to make a public announcement of offer. This public announcement will undoubtedly lead him to buy some more shares which is the third lot as provided under Regulation 21 (2), namely that he shall offer to buy from the public an aggregate minimum of 20 per cent. of the total shares of that company. He has to buy this third lot in competition with any party which may give a competitive bid on his making the public offer. In the event, the public announcement is not made (in spite of the likelihood of one's shareholding going above 10 per cent. due to these purchases in the second lot), there is no occasion for a third party to give a competitive bid and the purchases of this second part would get tainted and would be void.
100. The submission of the defendants is that as far as the second lot of acquisitions under Regulations 9 and 10 is concerned, it is something which is either acquired through negotiations or from market and this provision is done to facilitate the takeover. The submission of the defendants is that further 20 per cent. shares are to be bought in the third lot and thus this is a kind of exit opportunity for those shareholders who do not want to remain with the company. It is, therefore, contended that the second lot of the purchases cannot be tainted merely because Regulations 9 and 10 have a negative covenant. The public announcement contemplated under Regulations 9 and 10 could be interpreted to mean a post facto announcement so that the defects of not giving a prior announcement could be cured and the market as well as the investors will benefit. The defendants submit that any other interpretation would create umpteen number of difficulties inasmuch as an order of disinvestment would lead to a number of complications and dampening effect on the share market. In their view, it would be for the SEBI to decide what order should be made and it is not that merely because there was a breach of Regulations 9 and 10 that, ipso facto, the acquisitions ought to be tainted or that there ought to be an order of disinvestment. As against their submission, Mr. Nariman pointed out that assuming that there could be a post facto announcement, it should also cover the second lot of purchases by the persons concerned. Otherwise it would mean that even though there is a breach of Regulations 9 and 10, the second lot of purchases would go scot-free and over and above these shares in the second lot, the persons in breach would be permitted to acquire further 20 per cent. shares. On this submission of Mr. Nariman, the defendants submit that even so there would be nothing wrong in an approach of that kind because what is more important is the interest of the investors and not as to who should be in control of the company. Although Chapter III is named as "takeovers", the submission of the defendants is that principally the SEBI Act and regulations are for the benefit of the investors and every order to be passed by SEBI will have to be in the interest of the investors and the regulations will also have to be read and interpreted in the interest of the investors, the defendants submit that the regulations are not meant for protecting or safeguarding the companies or their existing managements. The object of the regulations is to bring in more investment and to protect the investors and not to protect the existing managements. As against that, as stated earlier, in the submission of Mr. Nariman, the protection of investors as also transparency in the transactions is an equally important objective to be attained through these regulations. Clandestine acquisitions are not acquisitions which are supported under the regulations. If that was not so, there was no need to provide a negative covenant by using the expression "unless" in Regulations 9 and 10 to provide that at the time an acquirer goes for the second lot of share purchase if his holding goes beyond 10 per cent. he shall have to make a public announcement. All these competing submissions on rival sides require a careful consideration and learned counsel on both the sides have relied upon a number of authorities in support of their submissions to canvass as to what should be the correct approach towards these regulations in the facts of the present case.
101. April 21,1999:
Mr. Nariman submitted that the SEBI had all throughout maintained that the acquisitions made by the defendants were in breach of the regulations and this was reflected in the three notices that were given from time to time. It cannot be said that the SEBI had changed its stand or had suggested that post facto announcement be made as claimed by the defendants. In this behalf, the defendants submitted that the notes from the files of SEBI indicated that at a later point of time, the authorities concerned had almost decided to approve post facto announcement. They also relied upon a report made by one Mr, Gupta of the SEBI in this behalf. Mr. Nariman pointed out that the handwritten note relied on by the defendants indicated that it was a kind of noting on a file and the earlier papers from that file were not being produced. That apart, inasmuch as both these documents are not coming from a proper custody nor are these authenticated documents issued on the letter-heads of the authority concerned, I cannot but refrain from referring to them. I have already refused to look into annexure O to the affidavit of the plaintiffs in support of their motion for the same reason. (See last three sentences of para.
17(i) above). That was also a copy of a document from the SEBI which was not an authenticated document. It was suggested by the defendants that it was because of the pressure brought by the chairman of the SEBI Committee that SEBI had changed its stand which it was about to take in favour of the defendants. I am not prepared to accept this submission inasmuch as neither SEBI nor the former chairman of the Committee are before the court and hence no inference can be drawn merely by production of a letter written by the former chairman of the SEBI Committee.
102. Mr. Nariman submitted that just as the protection of the investors was one of the objectives of the regulations, so was transparency in the dealings. That was necessary in the interest of the large section of the small investors. As has been seen earlier, under Regulation 6, an acquirer, who holds 5 per cent. or less than 5 per cent. shares and acquires more than 5 per cent. shares, is required to make disclosure of his shareholdings to the company. The provisions of Regulations 9 and 10 were in the same line requiring public announcement. He submitted that Chhabrias were admittedly having 26 per cent. of the shares lawfully acquired prior to the disputed shares and hence they could not have acquired any further shares without making any public announcement. If the element of transparency is not given its due significance, it would lead to any number of such holders of large number of shares to surreptitiously increase their shareholding without making a public announcement and this would certainly be to the detriment of the investors. The disputed shares were admittedly acquired in the open market without making public announcement and were admittedly from a common source of funds. That ought to lead one to the inference as in the Kedia family case CIT v. East Coast Commercial Co. Ltd. , that the persons concerned were acting in concert and were covered under the mischief which was sought to be suppressed under the regulations. Mr. Nariman pointed out that from time to time the SEBI had sought for information and the documents with respect to the source of funds. This could be seen from the SEBI's letter dated May 8, 1998. The information sought for was not given to the SEBI but was submitted much later in this court including the information that the decisions to invest monies in defendants Nos. 3, 4 and 5 companies were made on the advice of the chartered accountant one Mr. A.T. Kukreja. Incidentally, this Mr. Kukreja apart from being the auditor of defendant No. 3 was admittedly a director of two of the other group companies, namely Darrel and Stingray (defendants Nos. 8 and 9 herein).
103. Mr. Nariman submitted that the conjunction "with" used in the definition of "acquirer" given in Clause 2(b) of the regulations indicated the causal connection and would also include the meaning "acquiring through". He placed reliance on the definition of the term "with" as defined at page 58 of Words and Phrases, Paramount edition, volume 46. Therein the term "robbery with firearms", has been interpreted to mean robbery through firearms, thereby requiring the presence of firearms. Similarly, in his view, the acquisitions made through other companies were the acquisitions of the principal acquirer. He submitted that the three SEBI notices not having been challenged specifically, it was not permissible for the defendants to challenge their legality in a collateral manner in the present proceedings. He relied upon the observations of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. in this behalf (see ). He submitted that the plea of the defendants that SEBI notices were abandoned could not be accepted inasmuch as, as recently as on January 20, 1998, defendant No. 11 himself in his letter to the chairman of the SEBI (at pages 220, 221 of volume C-I) recorded as follows :
"However I understand that SEBI is not satisfied with all the explanations given so far in relation to these acquisitions and that the directions issued vide SEBI's letter dated May 21, 1996, needs to be complied with."
104. Mr. Nariman therefore submitted that a prima facie case of the violation of regulations has been made out and hence a direction in the same manner as in the case of M.Z. Khan decided by the Delhi High Court is necessary, (see M.Z. Khan v. SEBI per Anil Dev Singh }., in [1999] 19 SCL 253 ; [2001] 107 Comp Cas 141 (Delhi).) That was also a case where the SEBI had instituted an inquiry and Delhi High Court held that the fact of institution of the inquiry by the SEBI showed that there was a prima facie case of the violation of the takeover code by the concerned companies (see para. 12 of the judgment supra at page 265). In that case, the acquirer was already the controlling group and hence there was no occasion of freezing the voting rights. Still the court passed interim orders restraining the sale of the disputed shares in the target company to prevent an irrevocable alteration of the status quo with respect to the shareholding in the facts of the case as can be seen from para. 17 of the that judgment (supra).
105. To advance his submission that the wording in Regulations 9 and 10 was a mandatory requirement, Mr. Nariman relied upon the judgment of the Supreme Court in Mannalal Khetan v. Kedar Nath Khetan . That was a case under Section 108 of the Companies Act and a dispute had been raised that the transfer of shares in the company's register had been made illegally and without authority because no proper instruments of transfer duly stamped and executed were delivered to the respondent-company. The relevant part of Section 108 as it then stood reads as follows :
"108. A company shall not register a transfer of shares .... unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee .... has been delivered to the company along with the certificate relating to the shares or debentures or if no such certificate is in existence along with the letter of allotment of the shares or debentures : "
106. In para. 16 of the judgment, the court observed that (p. 191 of 47 Comp Cas): "negative language is worded to emphasise the insistence of compliance with the provisions of the Act (see State of Bihar v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga, )... Negative words are clearly prohibitory and are ordinarily used as a legislative device to make a statutory provision imperative". In para. 17 of that judgment, the Supreme Court referred to the judgment in the case of Raza Buland Sugar Co. Ltd. v. Municipal Board, Rampur, , wherein various tests had been laid down to find out whether a provision was mandatory or directory and which were (i) the purpose for which the provision has been made, (ii) its nature, (iii) the intention of the Legislature in making the provision, (iv) the general inconvenience or injustice which may result to the person from reading the provision one way or the other, (v) the relation of the particular provision to other provisions dealing with the same subject, and (vi) the language of the provision. Thereafter the court observed (p. 191 of 47 Comp Cas): "prohibition and negative words can rarely be directory. It has been aptly stated that there is one way to obey the command and that is completely to refrain from doing the forbidden act. Therefore, negative, prohibitory and exclusive words are indicative of the legislative intent when the statute is mandatory. (See Maxwell on Interpretation of Statues 11th edition page 362 .... and Bhikraj v. Union of India, )". The court therefore held the words "shall not register" as containing a mandatory direction. Thereafter in paras. 21 and 22, the court observed as follows (p. 192 of 47 Comp Cas) :
"21. If anything is against law, though it is not prohibited by the statute but only a penalty is annexed, the agreement is void. In every case where a statute inflicts a penalty for doing an act, though the act be not prohibited, yet the thing is unlawful, because it is not intended that a statute would inflict a penalty for a lawful act.
22. Penalties are imposed by statute for two distinct purposes : (1) for the protection of the public against fraud, or for some other object of public policy ; (2) for the purpose of securing certain sources of revenue either to the State or to certain public bodies. If it is clear that a penalty is imposed by statute for the purpose of preventing something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void, even though the penalty imposed is not enforceable."
107. Similar is the approach of the Privy Council in the case of Moti Chand v. Ikran Ullah Khan, AIR 1916 PC 59, wherein the Privy Council laid down some of the guidelines with respect to the approach the courts ought to take with respect to a legislation like the tenancy law (Agra Tenancy Act in that case). The Judicial Committee observed in that matter as follows :
"The policy of the Act is not to be defeated by any ingenious devices, arrangements, or agreements between a vendor and a vendee for the relin-quishment by a vendor of his 'sir' land or land which he has cultivated continuously for twelve years at the date of the transfer ; for a reduction of purchase money on the vendor's failing or refusing to relinquish such lands ; or for the vendor being liable to a suit for breach of contract on his failing or refusing to relinquish such lands. All such devices, arrangements, and agreements are in contravention of the policy of the Act and are contrary to law and are illegal and void, and cannot be enforced by the vendee in any civil court or in any court of revenue."
108. In McDowell and Co. Ltd. v. Commercial Tax Officer , while dealing with the interpretation of Andhra Pradesh General Sales Tax Act in the context of tax evasion, the Supreme Court observed in para. 45 as under (p. 171) :
"Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges."
109. As far as the responsibility of the court in such matters is concerned, the Supreme Court observed in para. 18 of that judgment which was pressed into service by Mr. Nariman and which reads as follows (p. 161) :
"18. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation as was done in W.T. Ramsay Ltd. v. Inland Revenue Commissioners [1979] 3 All ER 213 ; [1982] AC 300 (HL) ; Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] STC 30 (HL) and Furniss (Inspector of Taxes) v. Dawson [1984] 1 All ER 530 (HL), to expose the devices for what they really are and to refuse to give judicial benediction."
110. Mr. Nariman also pressed into service the observation of a Division Bench of this court in Dinkarrao Ganpatrao Kothare v. Narayan V. Mandlik, 24 Bom LR 449, 460, where in the context of contract for sale of land, the court observed that something which cannot be done directly cannot be permitted to be done indirectly. At page 460, the court observed "... the law in England and India is substantially the same with regard to the enforcement of the contract. The only difference is that in England the owner of the equitable interest is considered as the owner of the property contracted to be conveyed. But no such result can follow from a contract creating an executory interest. If such a contract purports to do by indirect means what the law forbids to be done directly it is void and the principle is the same in India as in England". The same approach has been taken by the Supreme Court in the case of U. P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P.) Ltd. [1989] 65 Comp Cas 283, wherein in the context of an irrevocable bank guarantee, an injunction had been issued to restrain the bank from performing the bank guarantee and that was sought to be justified on the ground that it was not sought against the bank but against the appellant. The court negatived the contention by observing "in the instant case, the learned judge has proceeded on the basis that this was not an injunction sought against the bank but this was an injunction sought against the appellant. But the net effect of the injunction is to restrain the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly" (at page 293 of the report).
111. Submission on behalf of defendants Nos. 1 to 11.
112. The aforesaid submission of Mr. Nariman was countered by Mr. Doctor appearing for defendants Nos. 4 and 5. Mr. Nariman had relied upon the above-referred judgment in the case of Mannalal Khetan v. Kedar Nath Khetan . Mr. Doctor referred to para. 19 of that judgment and emphasised that all that was laid down was that if a contract was made to do a prohibited act, the same would be unenforceable. He submitted that the question as to whether the contracts entered into in the present case were for doing prohibited acts was itself a doubtful proposition and in his submission no such prohibited acts had been indulged into by the defendants. Assuming without accepting that such was the state of affairs, Mr. Doctor contended that all that the said judgment laid down was that such contracts would be unenforceable. He however submitted that the transfers themselves would not become void merely because the contracts were unenforceable. Mr. Doctor submitted that Section 23 of the Contract Act applies only to executory contracts and not to the transfers which were already concluded and acted upon in pursuance of such contract. He relied upon the judgment of the Supreme Court in the case of B. O. I. Finance Ltd. v. Custodian and Sajan Singh v. Sardara Ali [1960] AC 167 ; [1960] 2 WLR 180 in this behalf. In Sajan Singh's case [1960] AC 167 ; [1960] 2 WLR 180, the respondent/plaintiff had acquired a title to a lorry which transaction was illegal under the relevant regulations, yet he was held entitled to succeed against the other party to the illegality in detenu and in trespass. The transaction between the plaintiff and the defendant, though an illegal one, was nevertheless fully executed and carried out. The House of Lords (per Lord Denning) held that on that account it was effective to pass the property in the lorry to the plaintiff. The court observed (p. 176 of AC) :
"there are many cases which show that when two persons agree together in a conspiracy to effect a fraudulent or illegal purpose-and one of them transfers property to the other in pursuance of the conspiracy-then, so soon as the contract is executed and the fraudulent or illegal purpose is achieved, the property (be it absolute or special) which has been transferred by the one to the other remains vested in the transferee, notwithstanding its illegal origin . . . ."
113. The said judgment was referred to with approval by the Supreme Court in the case of B.O.I. Finance ltd. v. Custodian In para. 46, the court observed (p. 100) "Even if it be assumed that the agreements were not severable, and they were composite agreements, even then the ready leg having been performed, the position in law is that the illegality of the agreements cannot affect the transfers which had already taken place."
114. Mr. Doctor submitted that in the two cases, namely B. O. I. Finance Ltd.'s case [1997] 89 Comp Cas 74 (SC) and Sajan Singh's case [1960] AC 167; [1960] 2 WLR 180 what is to be noted is that those cases were filed by the parties to the transaction and yet the contracts were not avoided. In the instant case, the parties who had transferred their shares to defendants Nos. 3 to 5 were not aggrieved by those transfers and had not challenged those transfers. The suit was by an absolute third party and the transferors were not even joined as party defendants. The shares disputed in the present matter were already transferred and registered, particularly 10,39,091 shares purchased by defendant No. 3 (IMFA) and 4,72,250 shares purchased by defendant No. 4 (Mahameru). In a case like this, the only option available at the highest was to go for a post facto permission to make the public announcement and the question of prosecution for the alleged breaches could be looked into subsequently. Mr. Doctor again stressed that it was only because of the intervention of the plaintiffs and the former chairman of the Committee of SEBI on their behalf that SEBI was changing its stand. He submitted that once the title in the shares had passed into the hands of the concerned defendants, SEBI cannot direct them to disinvest these shares. He, therefore, submitted that if the prayer that acquisitions were void could not be granted, which was prayer (a), consequently prayer (b) for rectification of share register could not be granted. The alternative submission of Mr. Doctor was that prayer (b) itself could not be granted independently in view of the provisions of Section 111A of the Companies Act and if prayer (b) could not be granted, there was no question of granting prayer (a). This alternative submission as to whether prayer (b) could independently be granted or not would be looked into later on when submissions on Section 111A are gone into. Mr. Doctor also relied upon the judgment of the House of Lords in the case of Tinsley v. Milligan [1994] 1 AC 340 in this behalf, wherein Lord Browne-Wilkinson observed (at page page 369 of the report) "it is said that the property lies where it falls, even though legal title to the property was acquired as a result of the property passing under the legal contract itself".
115. With respect to the purposive approach towards interpretation, Mr. Doctor relied upon the judgment of the Supreme Court in Rao Bahadur Ravulu Subba Rao v. CIT , wherein in the context of the Income-tax Act, the court observed in para. 10 of the judgment that to bring about true interpretation one had to see (p. 612) :
"the character of the legislation, the scheme of the statute and the nature of the right conferred by Section 26A".
116. Mr. Manohar, who appeared for defendant No. 3, submitted with respect to Regulation 10 that the deficiencies in the 1994 Regulations were sought to be cured by the 1997 Regulations by bringing in indirect acquisition. He referred to the judgments of the Supreme Court in Howrah Trading Co. Ltd, v. CIT and Balkrishan Gupta v. Swadeshi Polytex Ltd. ; to emphasise as to what constitutes "holding of shares". He submitted that Regulation 10, as it existed in 1994, had three ingredients, firstly, one had to hold certain number of shares, secondly, thereafter one had to acquire further shares and, thirdly, the action had to be in concert with somebody. Mr. Manohar submitted that defendant No. 3 was not a listed company and hence when read with Regulation 14, Regulation 10 did not apply to defendant No. 3. Besides, defendant No. 3 was not holding any share prior thereto so as to be hit by Regulation 10. As far as 54,000 shares, subsequently purchased by defendant No. 3 are concerned, he submitted that they were purchased in the year 1997 after the 1997 Regulations came into force and under Regulation 11(1) of the 1997 Regulations, the acquisitions up to 2 per cent. were not hit. He submitted that 54,000 shares would be just 0.56 per cent. which would mean permissible acquisitions. He also submitted that defendants Nos. 3 to 5 could be considered as related companies when one considers the definition ''of being related" under the Companies Act. Learned counsel relied upon the judgment of Lord Denning in the case of Seaford Court Estates Ltd. v. Asher [1949] 2 All ER 155 (CA), wherein it was observed that "the role of the court while interpreting was only to erase the creases and not to weave a new fabric". It was submitted that the interpretation which was sought to be placed by Mr. Nariman, namely to bring in indirect acquisition to widen the definition of "holding" to include those who were not holding any shares would amount to weaving a new fabric in the language of Lord Denning. In Seaford Court Estates Ltd. v. Asher [1949] 2 All ER 155 (CA), Lord Denning observed at page 164 of that report as follows :
"A judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out ? He must then do as they would have done. A judge must not alter the material of which the Act is woven, but he can and should iron out the creases."
117. With respect to the authorities referred to by Mr. Doctor, Mr. Nariman submitted that the judgment in B. 0. /. Finance Ltd.'s case [1997] 89 Comp Cas 74 (SC) did not disturb the proposition laid down in Mannalal Khetan's case , cited earlier, that illegality of a transaction can certainly be established. In Tinsley v. Milligan [1993] 3 All ER 65 (HL) ; [1994] 1 AC 340, he referred to the observation of Lord Browne Wilkinson at page 375, (at p. 90 of All ER) wherein he stated "a party to an illegality can recover by virtue of a legal or equitable property interest, if but only if he can establish his title without relying on his own illegality". As far as Sajan Singh's case [I960] AC 167; [1960] 2 WLR 180 is concerned, Mr. Nariman pointed out that even in that case the plaintiff, who had acquired the legal title, was held entitled to succeed against the party to the illegality in detenu and trespass. He emphasised that this fact was also noted by the Full Bench of the Kerala High Court in Krishna Menon v. Narayana Ayyar, . That was a case where there was no provision making a contract of partnership in contravention of Section 22 of the Cochin Abkari Act expressly void. Yet the court held that the agreement was calculated to defeat the object of enactment and it would be void under Section 24 thereof corresponding to Section 23 of the Indian Contract Act. Thereafter in para. 10 of the judgment it has been recorded as follows (p. 24) :
"Lastly it was argued that the appellant should be allowed return of his properties. But Sajan Singh v. Sardara Ali [1960] AC 167 ; [1960] 2 WLR 180 is against the contention and the appellant cannot still be treated as the owner of the properties."
118. Mr. Doctor, on the other hand, submitted that what is seen from B. O. I finance Ltd.'s case [1997] 89 Comp Cas 74 (SC) is that illegality of an agreement cannot affect the transfer which had already taken place. With respect to this submission that the contract of transfer of shares between the transferors of defendants Nos. 3 and 4 and these two defendants is already executed. Mr. Nariman submitted that what the plaintiffs were concerned with was the consequence of this contract. He submitted that Regulation 10 was primarily concerned with takeover and it formed a part of the chapter which was titled as "takeover". He submitted that the plaintiffs were not concerned as to whether the transferors like defendants Nos. 3 and 4 should get their dividends on the shares which were transferred to them. What they were concerned with were the voting rights flowing therefrom and in the context of the regulations, that part of the contract had not been executed as well. He further submitted that Regulation 20(4) of the regulations also indicates that the substantial acquisition is inextricably linked with the takeover. This is because the regulation provides that the directors of the company, of which the shares are being acquired are prohibited from selling or disposing of assets except in the ordinary course of the business during the offer period. This is however subject to a further exception of approval of the shareholders being granted in the general body. Thus this is a kind of provision which requires the directors of the company to maintain a status quo once they were notified that bulk shares have been acquired and are being acquired for the purposes of takeover of the company. The idea behind this provision is that just as the incoming party is required to have transparency, the existing directors of the company are also expected to follow some norms of the game and this will mean that, as stated above, they will maintain the status quo. If such a provision was not there, the effect would have been that on the one hand the incoming party would have notified and made public announcement, whereas on the other the existing directors would have proceeded to take steps by divesting shares or by other method to defeat the public announcement made by the incoming party. The idea is to see to it that there are no clandestine operations on either side. Mr. Nariman submitted that it is necessary that both these provisions ought to be read as inter-linked and the party concerned ought to be insisted upon that they observe the inter-link failing which the voting rights flowing from the acquired shares will have to be curtailed at the instance of whichever is the aggrieved party.
119. The right to vote:
It is true that holding of a share in a company is holding of a property which is a movable property, yet it is not a property which is without any restraint. Mr. Nariman points out that the Companies Act itself provides that in certain contingency, the acquisition of shares is restricted as also the transfer thereof. This is seen from Sections 108A, 108B and 108C of the Companies Act itself. But over and above these provisions, Section 108D retains a power in the Central Government to direct the companies not to give effect to certain transfers as mentioned therein and not to permit the nominees or proxies of the transferors from exercising voting rights. Section 108D provides in sub-clause (1) thereof as follows :
"108D. (1) Where the Central Government is satisfied that as a result of the transfer of any share or block of shares of a company, a change in the controlling interest of the company is likely to take place and that such change would be prejudicial to the interests of the company or to the public interest, that Government may direct the company not to give effect to the transfer of any such share or block of shares and : -
(a) Where the transfer of such share or block of shares has already been registered, not to permit the transferee or any nominee or proxy of the transferee, to exercise any voting or other rights attaching to such share or block of shares ; and
(b) Where the transfer of such share or block of shares has not been registered, not to permit any nominee or proxy of the transferor to exercise any voting or other rights attaching to such share or block of shares."
120. Basically the right to vote is a statutory right given under Section 87 of the Companies Act to the persons who are originally on the register. If the transfer of shares to any person is in contravention of any of the provisions of the SEBI Act and the regulations made thereunder, the company can be directed to rectify the register even under the provisions of Section 111A(3) of the Act, though that power is retained to the Company Law Board. The Company Law Board is also given the power to suspend voting rights during the pendency of the inquiry under sub-section (4) of Section 111. Thus, the violation of the provisions of the SEBI Regulations is a ground on which the right to vote can be curtailed as provided in the Act itself. Mr. Nariman therefore submits that there is nothing sacrosanct as such with respect to right to vote which is undoubtedly an important ingredient of holding this property in shares. He drew my attention in this behalf to a Constitution Bench judgment in Cha-ranjit Lal Chowdhury v. Union of India, . That was a case where the petitioner was undoubtedly precluded from exercising his right of vote during the election of directors so long as the statutory directors continued to manage the affairs of the company. Yet while examining this restraint on the right of vote in the context of article 19(1) of the Constitution, the Supreme Court observed in para. 60 as follows (p. 57) :
". . . even if it is conceded for argument's sake that the disabilities imposed by the impugned legislation amount to restrictions on proprietary right, they may very well be supported as reasonable restraints imposed in the interests of general public, viz., to secure the supply of a commodity essential to the community and to prevent a serious unemployment amongst a Section of the people. They are, therefore, protected completely by clause (5) of article 19."
121. The provisions of the very Act, namely, the Solapur Spinning and Weaving Co. (Emergency Provisions) Act, 1950, again came to be considered by the Supreme Court later in the case of Dwarkadas Shrinivas v. Sholapur Spinning and Weaving Co. Ltd. . In that case, the Supreme Court looked into the Act from the approach of article 31 of the Constitution and held the same to be void. The court however distinguished the earlier judgment Charanjit Lal Chowdhury v. Union of India, , and left the observations referred to earlier undisturbed. Mr. Nariman therefore submitted that the purchase of these shares and the resultant takeover arising out of the voting in a particular manner are two parts of the contract and it is the latter part which is yet to be completed. This being the position, it cannot be said that the contract of purchase of shares by defendants Nos. 3 and 4 is already acted upon and is no longer subsisting. Therefore, in his submission, the provisions of Section 23 of the Contract Act would still apply.
122. Considering the rival submissions made by learned counsel on both sides, in my view, ultimately it will all depend on how one looks at the objectives of the regulations and the kind of mechanism they have sought to create for the purposes of implementing the regulations. Thus if Regulations 9 and 10 expect a particular conduct from the incoming party and if the regulations are worded in a negative manner, in the event they are not read to give full effect to their simple meaning, the regulations will be rendered redundant. If the public announcement part is taken away as a necessary requirement in Regulations 9 and 10, the result of it would be that without making the announcement, shares will be purchased in bulk and the SEBI will be requested that if at all there is any grievance, post facto announcement be permitted. It is seen very often that when shares are purchased in bulk and particularly with a view to takeover the company, the result thereof is to dislodge the existing management. This is not something which any existing management is likely to appreciate unless it is prepared to make an exit. This being so, more often the incoming parties are likely to buy such shares by different devices which would not be easily known. It is only to avoid such things from happening and to bring in transparency in these transactions that this provision has been made which is in the interest of the investors, the incoming party as well as the existing management. Everybody is put to notice that particular purchases are being made and if corporate democracy requires free transferability (which I will deal with later on separately) and the right to vote, it equally requires transparency and openness in the functioning of the company and its takeover. Democracy, corporate or otherwise, implies an open system. It implies knowledge, information and availability of equal opportunity to everybody concerned. If that is not something to be read in these regulations, then it is better that no such regulations are passed. The fact that some of these difficulties are sought to be taken care of in the subsequent regulations by making specific provisions, need not deter the court from looking into the regulations as they existed when drafted in the year, 1994. Mr. Chidambaram, learned counsel appearing for defendant No. 11, submitted that the 1994 Regulations are no longer in force. Even so, when a controversy is raised with respect to the approach that one should adopt pertaining to these regulations and which is something which goes to the root of this matter, one will have to deal with problems as they are raised herein. In the circumstances, in my view, as the regulations stand, and if there is a breach of regulations and particularly Regulation 10 as in the present case, the party concerned cannot say that he will not suffer the consequences thereof. Whether there is prima facie a breach of the regulations or whether the same is brought out by the pleadings on record is another aspect which would be dealt with separately.
123. Whether the plaint is defective and what standard of proof should be applied while examining as to whether there is an action in concert on the part of the defendants :
Mr. Manohar, learned counsel appearing for defendant No. 3, submitted that the plaint in the present suit is devoid of any particulars in respect of the alleged illegalities committed by defendant No. 3 as well as the other defendants in the matter of acquisition of shares of defendant No. 12. The interim prayer is supposed to be in aid of the main prayer and hence the reliefs claimed have got to be set up and justified in the plaint itself. The entire suit is principally based on violation of the SEBI Regulations of 1994 and unless there is an allegation of fraud supported with particulars as required under Order 6, Rule 4 of the Civil Procedure Code, the plaintiffs cannot make their case good. Besides, unless the plaintiffs state clearly as to what they are alleging, the defendants will face all the difficulties in defending the proceedings. This is apart from the fact that it would be against the principles of natural justice. Mr. Manohar submitted that when an action in concert is alleged, it implies an element of conspiracy or fraud which will require a meeting of minds. It is, therefore, necessary under the provisions of Order 6, Rule 4 of the Civil Procedure Code that the nature of the agreement and its particulars such as the date, time, the parties between whom it was entered into and the place where it was entered into, etc., will have to be pleaded so as to constitute a valid pleading so that the relief can be granted. He submitted that a positive and precise case has to be made out and that very case is to be put and one is not permitted to substitute and prove something else. He further submitted that fraud and conspiracy are like any other charge in a criminal proceeding and it has to be established beyond reasonable doubt and finding as to fraud cannot be based on suspicion and conjectures. Mr. Manohar relied upon a series of judgment in this behalf starting from Privy Council judgment in Bal Gangadhar Tilak v. Shriniwas Pandit, 17 Bom LR 527 wherein the Privy Council observed as follows (at the bottom of page 545) :
"Under the contract law of India, as well as by ordinary principles, coercion, undue influence, fraud and misrepresentation, are all separate and separable categories of law. It is true that they may overlap or may be combined. But in the present case it is impossible to discover what ground or grounds are really taken up. There is a well known rule of pleading expressed in the frequently quoted language of Lord Selborne in John Wallingford v. Mutual Society [1880] 5 AC 685 (HL) that-
'With regard to fraud, if there be any principle which is perfectly well settled, it is that general allegations, however strong may be the words in which they are stated, are insufficient even to amount to an averment of fraud of which any court ought to take notice'.
The law of India is in no way different from this, and it has been decided over and over again, e.g., in Gunga Narain Gupta v. Tiluckram Chowdhry [1888] LR 15 IA 129."
Mr. Manohar then relied upon the observations of the Supreme Court in the case of Bishundeo Narain v. Seogeni Rai, , wherein in paras. 25 and 27 the Supreme Court observed as follows (pp. 283, 284) :
"25. It is also to be observed that no proper particulars have been furnished. Now if there is one rule which is better established than any other, it is that in cases of fraud, undue influence and coercion, the parties pleading it must set forth, full particulars and the case can only be decided on the particulars as laid. There can be no departure from them in evidence. General allegations are insufficient even to amount to an averment of fraud of which any court ought to take notice, however, strong the language in which they are couched may be, and the same applies to undue influence and coercion, (see Order 6, Rule 4 of the Civil Procedure Code).
27. We will deal with the case of coercion first. It will be seen that the plaintiffs' case regarding that is grounded on the single allegation that their father was threatened with death. When all the verbiage is cleared away, that remains as the only foundation. The rest and in particular the facts set out in paras. 8 to 12 about the ferocious appearance of Firangi Rai and his allegedly high handed and criminal activities and his character, are only there to lend colour to the genuineness of the belief said to have been engendered in Ghu-ghuli Rai's mind that the threat of death administered to him was real and imminent. But as regards the threat itself, there is not a single particular. We do not know the nature of the threat. We do not know the date, time and place in which it was administered. We do not know the circumstances. We do not even know who did the threatening. Now when a court is asked to find that a person was threatened with death, it is necessary to know these particulars, otherwise, it is impossible to reach a proper conclusion."
In the same line of propositions, Mr. Manohar cited the following judgments :
(1) Bijendra Nath Srivastava v. Mayank Srivastava ;
(2) Svenska Handelsbanken v. Indian Charge Chrome [1993] 6 JT 189; [1994] 79 Comp Cas 589 (SC) (paras. 45 and 46) ;
(3) Omar Salay Mohamed Sait v. CIT ;
(4) Varanasaya Sanskrit Vishwavidyalaya v. Rajkishore Tripathi, ;
(5) Abubakar Abdul Inamdar v. Harun Abdul Inamdar, and (6) D.M. Deshpande v: J.K. Kadam .
In the context of fraud/Mr. Manohar specifically relied upon the judgment in the case of A.L.N. Narayanan Chettiyar v. Official Assignee , where the observations are quite relevant for the purposes of criminal as well as civil procedure. In that matter, sale was sought to be set aside on the ground of fraud at the instance of the official assignee. In the last para, (on page 95) the court observed :
"There are other difficulties in the plaintiffs' way which have been sufficiently considered in the judgments of the High Court. Fraud of this nature, like any other charge of a criminal offence whether made in civil or criminal proceedings, must be established beyond reasonable doubt. The High Court were justified in holding that the trial judge's finding was largely based on suspicion and conjecture."
With respect to Order 6, Rule 4 of the Civil Procedure Code, Mr. Manohar emphasised observations of a single judge in para. 9 in the case of Asghar Ali v. Chidda :
"Rule 4 of Order 6 of the Civil Procedure Code is based on the principle that a charge of fraud, undue influence, etc., is a charge of a quasi- criminal nature. Whenever, it is alleged that a transaction is vitiated on account of fraud or undue influence, an insidious and unworthy conduct is attributed to the person who is said to be guilty of fraud and undue influence. The policy of law, therefore, is that the person charged with a fraud or undue influence, etc., should be apprised of its particulars so that the said party may be in a position to rebut those particulars. If no particulars are furnished to the party charged with such conduct, he is put at a disadvantage and is unable to meet the case sought to be established by the party making the charge. In the case of Bharat Dharma Syndicate Ltd. v. Harish Chandra , it was observed :
'Before parting this case their Lordships desire to call attention to the great difficulty which is occasioned both to person charged with fraud or other improper conduct, and to the Tribunals which are called upon to decide such issues, if the litigant who prefers the charges is not compelled to place on record precise and specific details of those charges. In the present case the petitioner ought not to have been allowed to proceed with his petition and seek to prove fraud, unless and until he had, upon such terms as the court thought fit to impose, amended his petition by including therein full particulars of the allegations which he intended to prove. Such cases as the present will be much simplified if this practice is strictly observed and insisted upon by the court, even if as in the present case, no objection is taken on behalf of the parties who are interested in disproving the accusations'."
124. Thereafter Mr. Manohar pointed out a number of contradictions in the plaint. He pointed out that opening part of para. 4 of the plaint essentially makes an allegation against defendant No. 1 and not against defendant No. 11. It alleges that between May, 1995, and May, 1997, defendant No. 1 through defendants Nos. 2 to 5 has acquired shares in contravention of law as detailed in sub-paragraphs of para. 4. Thereafter para. 4(a) makes an allegation that defendant No. 2 has acted in concert with defendants Nos. 1 and 3 to 11 on December 14, 1993, to acquire 75,000 fully convertible debentures. Mr. Mano-har pointed out that defendant No. 4-company was not in existence in December, 1993. It was born on February 2, 1994. Similarly, defendant No. 5 was born on August 19, 1996. This being the position, how could they be acting in concert on December 14, 1993 ? Similarly in para. 4{b), the allegation is that defendant No. 3 had acted in concert in December, 1995, with defendants Nos. 1, 2 and 4 to 11. They acquired further shares in Herbertsons. As seen above, defendant No. 5 was not in existence when these acquisitions were made in December, 1995. The allegation in para. 4(c) of the plaint is that defendant No. 4 acted in concert in September, 1996. As against that, the submission of the defendants is that defendant No. 4 purchased the shares much prior thereto from November 11, 1995, to August 10, 1996. The allegations against defendant No. 5 in para. 4(d) are that in May, 1997, it acquired further 3,64,750 shares in concert, whereas in fact it has acquired those shares from August 27, 1996, to February 14, 1997. Mr. Manohar submitted that the common understanding must precede such disputed purchases. Here the purchases are made on such dates which are prior to the companies (that are supposed to be acting in concert) being even born or when the concert is alleged to have taken place. That apart, the SEBI Regulations of 1994 have themselves come into force on November 7, 1994, then how could the acquisitions of debentures made on December 14, 1993, be hit by these regulations ? He further submitted that particulars of persons who acted in concert, are necessary inasmuch as the companies ultimately act through individuals and unless those particulars are given, how could the defendants meet the case of the plaintiffs. This is because as per the plaint the conspiracy was going on from December 14, 1993, till May, 1997, i.e., over a period of three years. Mr. Manohar relied upon the approach of the Supreme Court in Kehar Singh v. State (Delhi Admn.), , and submitted that unless precise particulars and proof are available, no conspiracy can be agitated.
125. Then Mr. Manohar submitted that whereas the fraudulent conduct was thus alleged in paras. 4,10 and 14 of the plaint, in the affidavit in support of the motion there were no specific allegations. As against that, the allegation in para. 12 of the affidavit in support of the second motion was that the transaction was sham and bogus. Mr. Manohar submitted that both these allegations could not co-exist. A transaction cannot be sham and bogus and at the same time conspiratory.
126. April 22, 1999:
In this connection, Mr. Manohar referred to a judgment of a Full Bench of the Nagpur High Court in the case of Vinayak Shamrao v. Moreshwar Ganesh Padhe, AIR 1944 Nagpur 44, wherein Bose J. observed as follows (page 52) :
"What he (i.e. Pollock J.) did was to hold that the appellate court had not realised the difference between a real and a sham transaction and that though its finding purported to uphold the finding of the first court to the effect that the transaction was sham his reasoning indicated that he had not the distinction in mind. In this I am of opinion the learned judge was justified. The lower appellate court says in the passage I have quoted that the transaction was bogus and liable to be set aside under Section 53 of the T. P. Act. Now a bogus transaction is one which is not intended to have legal effect. It is a pretence and has no actual legal existence. Consequently there is nothing to set aside. Only real transactions intended to have effect can be set aside. Section 53 of the T. P. Act speaks of fraudulent transfers and so indicates that it is dealing with real transactions and not sham ones : see as to this Nathusa Pasusa Lad v. Munir Khan, AIR 1943 Nagpur 129 ; [1943] ILR Nagpur 42, 55. Therefore, when the learned judge of the lower appellate court in one and the same breath holds that the transaction is bogus and at the same time says it can be avoided under Section 53 of the T. P. Act, either he is not clear in his mind as to what bogus means or he is mistaken in thinking that bogus transactions either can or are required to be set aside ; or he did not realise that Section 53 does not apply to sham transfers. It is impossible to discover from the rest of the judgment which of these three misapprehensions the learned judge had in mind."
127. Mr. Manohar then referred to and relied upon the observations of the Court of Appeal in the case of Snook v. London and West Riding Investments Ltd. [1967] 1 All ER 518 (in the last para, at page 528), and those of the Supreme Court in para. 30 in the case of Sree Meenakshi Mills Ltd. v. CIT , which are to a similar effect.
128. Mr. Doctor also laid emphasis on this aspect, namely that on one hand the plaint alleges in para. 14 thereof certain fraudulent acts on the part of the defendants and thereby seeks a declaration in prayer (a), on the other hand in the affidavit of defendant No. 12 in reply to the second motion, it was stated that the transactions were sham and were not to be acted upon. Mr. Doctor submitted that the transfers were undoubtedly meant to be acted upon and it was none of the business of the company to say anything contrary to their own acts. But that apart, if that was the plea, the submission of Mr. Doctor was that the suit was not maintainable. This is because if the transfers were not to be acted upon, there was no cause of action. Similarly, plaintiff No. 1 has also called the said transaction as sham in para. 12 of his affidavit in support of Notice of Motion No. 3932 of 1996. Mr. Doctor also submitted that being sham and bogus and being illegal are two different things. In his view, the plaintiffs were not clear as to what they were maintaining and were taking contradictory pleas from time to time. He referred to the judgment of the Supreme Court in Vinod Kumar Arora v. Smt. Surjit Kaur, , to canvas that a cause of action is a bundle of facts which the plaintiffs must prove. The court observed (p. 2183): "... the pleadings of the parties form the foundation of their case and it is not open to them to give up the case set out in the pleadings and propound a new and different case". Mr. Dada also supported the aforesaid contention of Mr. Manohar and Mr. Doctor by stating that the plaint was lacking in particulars of the allegations. He pointed out that the plaint had been amended twice and in spite of that it was insufficient in facts. He referred to the judgment of the Supreme Court in the case of Union of India v. Pandurang Kashinath More . In that matter, in spite of time being granted to mend the pleadings, the opportunity was not availed of. The court observed in para. 10 (p. 633): "it is well known that when an improper conduct is alleged it must be set out with all particulars". The court quoted with approval the observations in John Wallingford v. Mutual Society [1880] 5 AC 685, 697 (HL) which are to the following effect (page 633 of AIR 1962) :
"With regard to fraud, if there be any principle which is perfectly well settled, it is that general allegations, however strong may be the words in which they are stated, are insufficient even to amount to an averment of fraud of which any court ought to take notice."
129. Thereafter in para. 11 it is stated that (p. 633):
"in the absence of the particulars all that the opposite side could do would be simply to deny that there had been discrimination . . . ."
130. As against the aforesaid submissions on behalf of the defendants, Mr. Nariman, learned counsel appearing for the plaintiffs, relied upon a Constitution Bench judgment of the Supreme Court in the case of Gulabchand v. Kudilal, , wherein in the context of allegation of fraud in a civil case, the Supreme Court made a distinction in the matter of the criterion applicable and the appreciation of evidence in criminal cases as against the civil cases. The observations of Woodroffe J. in Weston v. Peary Mohan Dass [1913] ILR 40 Cal 898, were pressed into service before the Supreme Court, wherein the learned judge has observed as follows (p. 1737 of AIR 1966) :
"And speaking for myself where, whatever be the form of the proceeding, charges of a fraudulent or criminal character are made against a party thereto, it is right to insist that such charges be proved clearly and beyond reasonable doubt, though the nature and extent of such proof must necessarily vary according to the circumstances of each case."
131. The learned judges referred to the definitions of "proved", "disproved" and "not proved" in Section 3 of the Indian Evidence Act and in terms held that Woodroffe J., was wrong in insisting that such charges must be proved clearly and beyond reasonable doubt. In para. 11, the Supreme Court observed as follows (p. 1738) :
"It is apparent from the above definitions that the Indian Evidence Act applies the same standard of proof in all civil cases. It makes no difference between cases in which charges of a fraudulent or criminal character are made and cases in which such charges are not made. But this is not to say that the court will not, while striking the balance of probability, keep in mind the presumption of honesty or innocence or the nature of the crime or fraud charged. In our opinion, Woodroffe J., was wrong in insisting that such charges must be proved clearly and beyond reasonable doubt."
132. Again in para. 13, the Supreme Court observed as follows (p. 1738) :
"We are unable to agree with these observations. As we have said before, the fact that the party is alleged to have accepted bribe in a civil case does not convert it into a criminal case, and the ordinary rules applicable to civil cases apply. Learned counsel has not been able to cite any other authority to show that there is any such well settled proposition as stated by Meredith J."
133. Mr. Manohar had canvassed that the allegation of concerted action must be proved beyond reasonable doubt and relied upon the judgments in the case of A.L.N. Narayanan Chettiyar v. Official Assignee and Svenska Handelsbanken v. Indian Charge Chrome [1993] 6 JT 189 ; [1994] 79 Comp Cas 589 amongst others. Another judgment in this line is one in the case of Union of India v. Chaturbhai, . The judgment in the case of Svenska Handelsbanken [1993] 6 JT 189 ; [1994] 79 Comp Cas 589 (SC) and the one in Union of India v. Chaturbhai, , are judgments by two judges. As against that, Mr. Nariman relied upon the judgment of the Supreme Court in the case of Bhagwati Prasad v. Chandramaul, , and the judgment of a Constitution Bench in Gulabchand's case, , which is a judgment of five judges. It had overruled the observations of Woodroffe J., in Weston v. Peary Mohan Dass [1913] ILR 40 Cal 898 favouring the contrary view. Mr. Nariman also relied upon the judgment of the Supreme Court in the case of Dastane v. Dastane, , which is a judgment of three-judge Bench. In para. 25 thereof, the court held that proof beyond reasonable doubt is proof by a higher standard which generally governs criminal trials or trials involving inquiry into issues of a quasi-criminal nature. It is wrong to import such considerations in trials of a purely civil nature. He also pointed out that the same view is subsequently followed by the Supreme Court in the case of Shobha Rani v. Madhukar Reddy . Mr. Nariman pointed out that the judgment of the Supreme Court in Gulabchand's case, was not considered in subsequent judgments like Svenska Handelsbanken's case [1993] 6 JT 189 ; [1994] 79 Comp Cas 589 (SC) referred to by Mr. Manohar. Mr. Nariman referred to the judgment of the Supreme Court in the case of Poolpandi v. Superintendent, Central Excise , wherein the Supreme Court followed the earlier judgment of a Constitution Bench in preference to a subsequent one. He also referred me to the Supreme Court judgment in the case of General Manager, Telecom v. A. Srinivasa Rao , wherein the Supreme Court had held that the judgments in the case of Sub-Divisional Inspector of Post, Vaikam v. Theyyam Joseph and Bombay Telephone Canteen Employees' Association v. Union of India , as not laying down the correct law since they were in direct conflict with the judgment by a Bench of seven judges in Bangalore Water Supply and Sewerage Board v. A. Rajappa case on the concept of "industry" . The Supreme Court had held . :
"it is needless to add that it is not permissible for us, or for that matter any Bench of lesser strength, to take a view contrary to that in Bangalore Water Supply and Sewerage Board's case or to bypass that decision so long as it holds the field".
134. Mr. Manohar was fair enough to accept that the law as laid down by the Supreme Court in Gulabchand's case, , held the field as far as the Indian courts are concerned. He, however, emphasised that part of the above observations that while striking the balance of probability, keep in mind the presumption of honesty or innocence or the nature of the crime or fraud charged. He submitted that even if one has to apply the standard of probability, the plaintiffs have to make out the case as disclosed in their pleadings. Mr. Nariman thereafter referred to the observations of the Supreme Court in the case of CIT v. East Coast Commercial Co. Ltd. , which was particularly in the context of acting in concert with respect to the complaint under the Income-tax Act and the Supreme Court has held that (p. 457): "it is sufficient, if having regard to their relation, etc., their conduct and their common interest, that it may be inferred that they must be acting together, evidence of actual concerted action is normally difficult to obtain, and is not insisted upon". The submission of Mr. Nariman was that it would be Order 6, Rule 10 of the Civil Procedure Code which would govern the field. He submitted that the plaintiffs were pressing into service the inference that should be drawn with respect to meeting of minds and the fraudulent intention of the defendants. That was not something within the knowledge of the plaintiffs. The plaintiffs have given the particulars to the extent that were available to them, but lack of very precise particulars in this set of facts cannot lead to the plaint being rejected by applying the strict standard of Order 6, Rule 4 of the Civil Procedure Code.
135. It is true that there are many formalities expected when one comes to the particulars in the plaint. However, it cannot be ignored that the plaintiffs have sought to rely upon the declaration made by defendants Nos. 1 to 11 themselves which are annexed to the plaint. They are relying upon the show-cause notices which are issued by the SEBI firstly to Ram Raheja, then to defendant No. 3 and then to defendant No. 1 and Herbertsons. They have filed the suit on the basis of whatever information they could get from defendant No. 12-company. Notwithstanding the long standing relation between the plaintiffs and Mallya family, that fact alone cannot be pressed against the plaintiffs contending that they ought to have given more particulars. In a case like this, one cannot have any strict evidence as to when the meetings were held between the persons concerned, at what place and as to how the planning was done, as sought by Mr. Manohar. That will have to be a matter of inference to be drawn from the documents which are on record and which would be placed on record during the trial. It cannot, therefore, be said that the plaintiffs are so bad in particulars that the defendants did not know as to what is the case pleaded by them. Mr. Nariman referred to the judgment of the Supreme Court in the case of Bhagwati Prasad v. Chandramaul, , where the court observed in para. 10 as follows (p. 738) :
"If a plea is not specifically made and yet it is covered by an issue by implication and the parties knew that the said plea was involved in the trial, then the mere fact that the plea was not expressly taken in the pleadings would not necessarily disentitle a party from relying upon it if it is satisfactorily proved by evidence. The general rule no doubt is that the relief should be founded on pleadings made by the parties. But where the substantial matters relating to the title of both parties to the suit are touched, though indirectly or even obscurely, in the issues and evidence has been led about them, then the argument that a particular matter was not expressly taken in the pleadings would be purely formal and technical and cannot succeed in every case. What the court has to consider in dealing with such an objection is did the parties know that the matter in question was involved in the trial, and did they lead evidence about it ? If it appears that the parties did not know that the matter was in issue at the trial and one of them has had no opportunity to lead evidence in respect of it, that undoubtedly would be a different matter."
136. The same is the approach of the Supreme Court in Ram Sarup Gupta v. Bishun Narain Inter College, , wherein the court held that substance of the pleadings should be considered and it is not desirable to place undue emphasis on form. He then referred to a judgment of a Division Bench of this court (per Chagla C.J.,) in Dinbai Lady Dinshaw Petit v. Dominion of India, , wherein it was held that when the allegation relates to the state of mind or intention of the other party, it is sufficient to state the same as material fact though the circumstances from which it can be inferred may not be said. In para. 8 the court observed (p. 76) :
"... when such an allegation is made, the party alleging the fraud is in possession of the particulars of the fraud practised upon him. Fraud in such a case is an objective fact known to the party complaining of it, and in such a case the law requires that particulars of such an objective fact must be given. Similar is the case with breach of trust, wilful default, or undue influence or misrepresentation, all covered by the provisions of Order 6, Rule 4. But when a party is complaining of a state of mind of the other party and making a grievance of that state of mind, it is impossible to expect that party to give particulars of something which is subjective as far as the other party is concerned, and the law has taken notice of this difficulty and has provided by Order 6, Rule 10, that wherever it is material to allege malice, fraudulent intention, knowledge or other condition of the mind of any person, it shall be sufficient to allege the same as a fact without setting out the circumstances from which the same is to be inferred."
137. He further referred in this behalf to the judgment of the Supreme Court in CIT v. East Coast Commercial Co. Ltd. , and submitted that where the transactions speak for themselves and furnish internal proof of a well thought of design, there need not be an insistence on further particulars and documents.
138. The defendants had contended that plaint was not clear as to what was the cause of action and relied upon authorities in support. Mr. Nariman pointed out that all these authorities were in cases which were finally heard and decided. In the present matter, we are still at the stage of deciding an application for interim relief where one has to decide it on affidavits as required by Order 39, Rule 1 of the Civil Procedure Code. Mr. Nariman submitted that the so-called deficiencies in the plaint cannot be read against the plaintiffs if it can be shown that the defendants had understood what the plaintiffs were saying. He referred me to the affidavit of M.D. Chhabria in reply to the first notice of motion, and paras. 7, 10 and 15 thereof, to contend that M.D. Chhabria had understood the contention of the plaintiffs and their allegations that the defendants had acted in concert and that they had acquired shares in excess in violation of the law. He drew my attention to the reply of K.R. Chhabria and particularly para. 12 thereof to make the same submission.
139. In the circumstances, it is not possible to say that the plaint is defective or is lacking in particulars. The defendants have understood the case of the plaintiffs and they are protesting too much. The plaintiffs have given particulars that could become available to them. When the plaintiffs were making an allegation of concerted action, they are complaining of a state of mind of defendants Nos. 1 to 11 and could not be expected to give particulars of something which is not within their own knowledge. They have made allegations with particulars based on notices given by the SEBI and they will be entitled to insist for the inference based thereon. The dicta of Chagla C.J., in Dinbai's case, , making a distinction between the provisions of Order 6, Rule 4 and Rule 10 of the Civil Procedure Code, is quite apt and applies with full force in the facts of the present case. The plaintiffs cannot be expected to give the particulars of time, date and place where the defendants arrived at the concerted design or as to which of the directors of these companies had entered into this conspiracy. This is a civil suit, wherein an inference based on probabilities is pressed into service. Whatever particulars are necessary to lay the foundation have to be given and they are given in the facts of the present case as required, and then an inference is sought to be pressed into service which is permitted by Order 6, Rule 10 of the Civil Procedure Code. The plaint cannot, therefore, be faulted as defective on this ground of the alleged lack of particulars. Similarly as far as the standard of proof is concerned, as held in Gulab-chand's, case, , this being a civil suit, the ordinary rules applicable to civil cases will apply and it cannot be converted into a criminal case. One will have to strike the balance and decide the matter on probabilities although keeping in mind the presumption of honesty or innocence and the nature of fraud or concerted action alleged.
140. Interpretation of Mr. Manohar as to whether the use of negative language makes the transaction void ?
141. Mr. Manohar then submitted that the provisions in the concerned regulations were quasi-criminal. Mr. Nariman had argued that in view of the use of negative mandatory language in the regulations, the transactions will have to be considered as void. With respect to that submission, Mr. Manohar submitted that the consequence that the transaction in breach of the regulations would be void was not specifically provided in the regulations. He, therefore, submitted that in the absence of there being a specific consequential provision, the mere use of negative mandatory language would not itself make the transaction void. He drew my attention to Regulation 4 which provides for exemption from the entire relevant Chapter III concerning the takeovers. He pressed Regulation 37(2) in service to submit that even in the event of any investigation, the explanation of any such person in breach can be entertained. He submitted that the moment there is a power to exempt from penal provisions, the argument of voidness would no longer survive. He relied upon the judgment of the Supreme Court in the case of G.S. Lamba v. Union of India, . That was a matter concerning Indian Foreign Service and the conflict between the promotees and the direct recruits. In para. 25 of the judgment, the court noted that the language of the concerned Rule 13(1) was mandatory, but there was a provision to relax under Rule 29(a). Hence, in para. 27, the court observed as follows (p. 1033) :
"Therefore assuming there was failure to consult the Union Public Service Commission before exercising the power to relax the mandatory quota rule, and further assuming that the posts in Integrated Grades II and III were within the purview of the Union Public Service Commission and accepting for the time being that the Commission was not consulted before the power to relax the rule was exercised yet the action taken would not be vitiated nor would it furnish any help to Union of India which itself cannot take any advantage of its failure to consult the Commission. Therefore, it can be safely stated that the enormous departure from the quota rule year after year permits an inference that the departure was in exercise of the power of relaxing the quota rule conferred on the controlling authority. Once there is power to relax the mandatory quota rule, the appointments made in excess of the quota from any given source would not be illegal or invalid but would be valid and legal as held by this court in N.K. Chauhan v. State of Gujarat ."
142. He then relied upon the judgment of the Supreme Court in the case of Banarsi Das v. Cane Commissioner U.P., . In that case also, there were a mandatory provision and penal consequences. The Supreme Court quoted the relevant paragraph of Maxwell on Interpretation of Statutes in para. 18 to observe that the whole scope and purpose of the statute under consideration has to be seen and then in para. 22 observed as follows (p. 1425) :
"In the present case the form prescribed set out a number of conditions and these have all been incorporated in the agreement which has been executed by the society. In other words the form has been used. There is no deviation from the prescribed form except in respect of the three defects which we have mentioned earlier. We have pointed out that the failure to execute the agreement in the form is made an offence but no other consequence is indicated if the form is not followed. The utmost that can be said is that if the form which was used included conditions which were at variance with the conditions in the prescribed form a contract might not have resulted. But we need not express any opinion on this, because in this case the terms as stated in the prescribed form are the terms in the form used. We have pointed out that no consequence attaches to the failure to observe the form except punishment by fine and Section 18(2) is capable of being read as directory. Even if it be read as mandatory we have shown already that the failure of the appellant to sign the form is not a matter of which he can take advantage regard being had to his own conduct."
143. In this context he lastly relied upon the judgment of the Supreme Court in the case of Punjab Beverages (P.) Ltd. v. Suresh Chand, , wherein the Supreme Court had to consider whether the contravention of Section 33(2)(b) of the Industrial Disputes Act, 1947, made the dismissal order void particularly when a penalty was provided for such a contravention. The Supreme Court held otherwise as can be seen in paras. 7 and 12 of the judgment (pages 349 and 353 of 52 FJR) :
"We must, therefore, construe Section 33 not as if it were standing alone and apart from the rest of the Act, but in the light of the next following Section 33A and if these two sections are read together, it is clear that the legislative intent was not to invalidate an order of discharge or dismissal passed in contravention of Section 33, despite the mandatory language employed in the section and the penal provision enacted in Section 31(1). (para. 7).
The very fact that even after the contravention of Section 33 is proved, the Tribunal is required to go into the further question whether the order of discharge or dismissal passed by the employer is justified on the merits clearly indicates that the order of discharge is not rendered void and inoperative by such contravention." (para. 12)
144. Mr. Manohar then submitted that in view of the fact that the provision concerned was quasi-criminal in nature, it had to be read strictly. He relied upon the judgment of the House of Lords in the case of London and North Eastern Railway Co. v. Berriman [1946] AC 278, wherein at page 295 the court observed as follows :
"Where penalties for infringement are imposed it is not legitimate to stretch the language of a rule, however, beneficent its intention, beyond the fair and ordinary meaning of its language. I quote and adopt the words of Alderson B.: the rule of law, I take it, upon the construction of all statutes .. . . is, whether they be penal or remedial, to construe them according to the plain, literal and grammatical meaning of the words in which they are expressed, unless that construction leads to a plain and clear contradiction of the apparent purpose of the Act, or to some palpable and evident absurdity'."
145. In the same report at page 313, the court observed :
"If there are two reasonable constructions we must give the more lenient one. That is the settled rule for the construction of penal Sections".
146. Mr. Manohar then relied upon the judgment of the Supreme Court in the case of Tolaram Relumal v. State of Bombay , wherein the Supreme Court also reiterated the same proposition and referred to the above judgment at pages 164 and 165 :
"'The question that needs our determination in such a situation is whether Section 18(1) makes punishable, receipt of money at a moment of time when the lease had not come into existence, and when there was possibility that the contemplated lease might never come into existence. It may be here observed that the provisions of Section 18(1) are penal in nature and it is a well settled rule of construction of penal statutes that if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty. It is not competent to the court to stretch the meaning of an expression used by the Legislature in order to carry out the intention of the Legislature. As pointed out by Lord Macmillan in London and North Eastern Railway Co. v. Berriman [1946] AC 278, 295, 'where penalties for infringement are imposed it is not legitimate to stretch the language of a rule, however beneficent its intention, beyond the fair arid ordinary meaning of its language'.
If the Legislature intended to make receipts of money on executory agreements punishable, the section would have read as follows : 'receives any fine, premium or other like sum or deposit or any consideration other than the standard rent in respect of the lease or an agreement of lease of the premises, such landlord or person shall be punished'."
147. In this context, he further relied upon the judgment of the Supreme Court in the case of Union of India v. Rai Bahadur Shree Ram Durga Prasad (P.) Ltd. , wherein the Supreme Court cautioned against stretching the meaning of the expression given by the Legislature beyond an ordinary meaning and relied upon the above-referred two judgments at page 753.
148. Mr. Manohar's submission on Regulation 10:
Mr. Manohar then submitted that the concerned Regulation 10 of 1994 had been specifically changed in 1997. He submitted that what the plaintiffs were trying to do was to ignore the words "who holds shares carrying ten per cent. or less of voting rights in the capital of the company", which occur in Regulation 10(1), and wanted to add the words "if any" existing in the new regulations into Regulation 10(1) of 1994. Regulation 10(1) of 1994 reads as follows :
"10.(1) An acquirer (who holds shares carrying ten per cent. or less of voting rights in the capital of the company) shall not acquire any further shares in the company from the open market which when taken together with his existing shareholdings would carry more than ten per cent. of the voting rights, unless such acquirer makes a public announcement of intention to acquire shares in the open market in accordance with these regulations."
149. The plaintiffs want to read the regulation by deleting the bracketed portion above and by adding the words "if any". It would then read as under :
"10(1) An acquirer shall not acquire any further shares in the company from the open market which when taken together with his existing shareholdings if any would carry more than ten per cent. of the voting rights, unless such acquirer makes a public announcement of intention to acquire shares in the open market in accordance with these regulations."
150. Mr. Manohar submitted that it is only if such a course is permitted that the plaintiffs can succeed in the present motion.
151. Mr. Manohar drew my attention to the observations of Lord Denning in the case of Seaford Court Estates Ltd. v. Aster [1949] 2 All ER 155 (CA) which were further elucidated by the Supreme Court in para. 11 of Union of India v. Sankalhand Himatlal Seth, as follows (page 2337) :
"The normal rule of interpretation of a statute is that the words used by the Legislature are generally,a safe guide to its intention. Lord Reid in Westminster Bank Ltd. v, Zang [1966] AC 182; [1967] 37 Comp Cas 123 (HL) observed that (page 134) : no principle of interpretation of statutes is more firmly settled than the rule that the court must deduce the intention of Parliament from the words used in the Acf. Applying such a rule, this court observed in S. Narayanaswami v. G. Panneerselvam, : that 'where the statute's meaning is clear and explicit, words cannot be interpolated'. What is true of the interpretation of an ordinary statute is not any the less true in the case of a constitutional provision, and the same rule applies equally to both. But if the words of an instrument are ambiguous in the sense that they can reasonably bear more than one meaning, that is to say, if the words are semantically ambiguous, or if a provision, if read literally, is patently incompatible with the other provisions of that instrument, the court would be justified in construing the words in the manner which will make the particular provision purposeful. That in essence is the rule of harmonious construction. In M. Pentiah v. Muddala Veeramallappa, , this court observed 'where the language of a statute, in its ordinary meaning and grammatical construction leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the essence . . .'. But, if the provision is clear and explicit, it cannot be reduced to a nullity by reading into it a meaning which it does not carry and, therefore, 'courts are very reluctant to substitute words in a statute or to add words to it and it has been said that they will only do so where there is a repugnancy to good sense'. In the view which I am disposed to take, it is unnecessary to dwell upon Lord Denning's edict in Seaford Court Estates Ltd. v. Asher [1949] 2 All ER 155 (CA) (at p. 164): that when a defect appears in a statute, a judge cannot simply fold his hands and blame the draftsman, that he must supplement the written word so as to give force and life to the intention of the Legislature and that he should ask himself the question how, if the makers of the Act had themselves come across the particular ruck in the texture of it, they would have straightened it out. I may only add, though even that does not apply, that Lord Denning wound up by saying, may be not by way of recanting, that 'a judge must not alter the material of which the Act is woven, but he can and should iron out the creases'."
152. He drew my attention to the following observations of the Privy Council in the case of Crawford v. Spooner [1846] 6 Moore PC 1. (at page 9): this is what the Privy Council has held :
"Their Lordships are clearly of opinion, that the judgment of the court of Bombay cannot stand. The construction of the Act must be taken from the bare words of the Act. We cannot fish out what possibly may have been the intention of the Legislature ; we cannot aid the Legislature's defective phrasing of the Act; we cannot add, and mend and by construction, make up deficiencies which are left there. If the Legislature did intend that which it has not expressed clearly ; much more, if the Legislature intended something very different; if the Legislature intended something pretty newly the opposite of what is said, it is not for judges to invent something which they do not meet with in the words of the text (aiding their construction of the text always, of course, by the context); it is not for them so to supply a meaning, for, in reality, it would be supplying it; the true way in these cases is, to take the words as the Legislature have given them, and to take the meaning which the words given naturally imply, unless where the construction of those words is, either by the preamble or by the context of the words in question, controlled or altered ; and, therefore, if any other meaning was intended than that which the words purport plainly to import, then let another Act supply that meaning and supply the defect in the previous Act."
153. The judgment was quoted with approval by the Supreme Court in the case of Nalinakhya Bysack v. Shyam Sunder Haldar, of the report. Both these judgments are again referred to and quoted with approval subsequently by the Supreme Court in para. 14 of a recent judgment in the case of P.K. Unni v. Nirmala Industries, ,
154. With respect to allegations against the defendants, Mr. Manohar emphasised the discrepancies in the conduct of the plaintiffs themselves. Mr. Nariman had emphasised that the companies, which were taken over by defendant No. 11, were all small companies with a very small capital. Mr. Manohar, therefore, submitted that investment companies by their very nature are very often small companies with small capital, but that itself should not make one suspicious. In that context, he pointed out that as seen from para. 43(iii) of joint reply affidavit of M/s. Reghunathan and Gupte on behalf of the company (at page 192 of Motion No. 3932 of 1998), the United Breveries of Mallya Group sold 26 per cent. shares in Herbertsons to those very small companies which were referred to as Rs. 200 worth companies. Besides, it is an undisputed position that Herbertsons purchased the trademark "Lord and Master" from Chhabria Marketing Ltd. by paying Rs. 4.5 crores for that purpose as the non-competing consideration. In fact, the total consideration of the transaction was in the range of Rs. 8.35 crores. This Chhabria Marketing Ltd. was a Rs. 70 crores worth company. With respect to the allegation that these companies were given loans without interest, Mr. Manohar submitted that though no interest amount was mentioned in the loan transactions, returns were agreed as indicated in the chartered accountant's report. He emphasised that the fact that loans and finances were given was not disputed by the plaintiffs as can be seen from Mr. Reddy's affidavit. He further emphasised that it was not the plaintiffs' case that these transactions of the investment companies were their solitary transactions or that they were floated only for these transactions. Mr. Manohar submitted that in fact they were having other transactions as well. He further submitted that if defendants Nos. 3 to 5 had any collusion with defendant No. 11, it was inconceivable that defendant No. 11 would take over those companies even before throwing out Vijay Mallya from the management of Herbertsons. He could have very well permitted the shares to lie and park with defendants Nos. 3 to 5 who obviously would have voted in favour of defendant No. 11.
155. Then turning to the declaration made in April, 1997, Mr. Manohar submitted that the declarations will have to be read with the letter dated April 2, 1998, which explained the stand of the defendants. Those declarations were made within two months of the 1997 Regulations coming into force. They will have to be read in that context. Mr. Manohar emphasised the dicta of the Supreme Court in Prem Ex-Servicemen Tenants Co-operative Society v. State of Haryana, , which states that the statements to be considered as admissions under Section 21 of the Evidence Act must be read in their context. Besides, if one looks at the declarations, all that they stated were the names of the directors of the concerned company. Mr. Manohar therefore categorised these declarations as innocent declarations and that nothing much should be made out of them.
156. With respect to Regulation 10, Mr. Manohar drew my attention to the report of the Committee on substantial acquisition of shares and take over which was constituted by the SEBI under the chairmanship of Mr. Justice P.N. Bhagwati (retd. CJI). He drew my attention to paragraphs 3, 7 to 10, 15 and 20 of that report and submitted that these paragraphs clearly indicate that 1997 Regulations were drafted to improve upon and to remove the deficiencies in the 1994 regulations. The 1997 regulations sought to bring in the indirect acquisitions which were not covered earlier. Mr. Manohar referred to the judgments of the Supreme Court in Howrah Trading Co. v. CIT and Balkrishna Gupta v. Swadeshi Polytex Ltd., , to emphasise as to what constitutes holding of a share. On that background, he submitted that Regulation 10 as it existed in 1994 had three ingredients. Firstly, one had to hold certain shares, secondly thereafter one had to acquire further shares and then that action has to be in concert with somebody else. Mr. Manohar submitted that defendant No. 3 was not a listed company and hence Regulation 10 did not apply to defendant No. 3. Besides, defendant No. 3 was not holding any share earlier so as to be hit by Regulation 10. He thereafter submitted that 54,000 shares which were purchased by defendant No. 3 during February 27, 1997, and August 1, 1997, were not yet registered. They were purchased after the 1997 Regulation came into force. Under Regulation 11(1) of the 1997 Regulations, acquisition up to 2 per cent. was not hit and these 54,000 shares would be just 0.56 per cent.
157. Then Mr. Manohar submitted that it would be wrong to say that defendants Nos. 3 to 5 were in any way related companies. Such a concept was not defined under the regulations and if one turns to the Companies Act, the relation was defined under Section 6 read with Schedule 1A thereof. Even Mr. Raheja did not fall in that concept vis-a-vis Mr. M. D. Chhabria, leave aside any of the directors of defendants Nos. 3 to 5, Mr. Manohar,' therefore, submitted that under Section 111A(5) read with Sub-section (6) thereof, a transferee was entitled to vote. A free transferability of shares was coupled with right to vote and hence the right of defendant No. 3 should not be curtailed in any manner whatsoever.
158. It is not possible to accept the above submission of Mr. Manohar concerning the negative mandatory language of regulation 10. He has relied upon the judgment of the Supreme Court in the case of G.S. Lamba v. Union of India, , which was a service matter and the proposition in that matter is in the context of relaxing the service quota. The proposition, viz., that once there is a power to relax the mandatory quota rule, the appointments made in excess of quota will not be illegal is for recognising the reality of break down of quota in the area of service promotions. The proposition is evolved to see to it that persons promoted due to service exigencies are not unnecessarily made to suffer for no fault of theirs. The proposition made in that context can certainly not be imported while dealing with the mandatory requirement of public advertising provided in the regulation governing purchases of shares leading to takeover of a company and which regulation is not observed by an interested party acting clandestinely. Similarly, the decision in the case of Banarsi Das v. Cane Commissioner U.P., , relied upon by Mr. Manohar is essentially dealing with a situation arising out of failure to execute an agreement in the prescribed form to be given to the Cane Commissioner and then what is important is that as the court holds, the failure to sign the form was sought to be used to the advantage of the party which did not conform the necessary form and the same was frowned upon. Similarly the judgment in the case of Punjab Beverages (P.) Ltd. v. Suresh Chand, , is entirely on a different context of the Industrial Disputes Act wherein it is laid down that although there may be a contravention of Section 33 of that Act, the Tribunal is permitted to go into the question of illegality of the order of discharge or dismissal and, therefore, the discharge or dismissal is not made void merely because of the contravention of Section 33. It is just not possible to import the proposition given in that judgment while interpreting the present regulations, the purpose of which is quite different. The judgments relied upon by Mr. Manohar governing quasi-criminal cases and the principles of interpretation concerning penal provisions pressed by him into service otherwise have their own place and authority. However, as far as the present case is concerned, we are as of now in the realm of a civil dispute and the consequences of breach of these regulations for the purposes of takeover of a company and how it is to be prevented if it is illegal. We have not yet reached the stage of the prosecution for those breaches. As against this submission of Mr. Manohar, the reliance by Mr. Nariman on the judgment of the Supreme Court in Mannalal Khetan v. Kedar Nath Khetan is absolutely apt inasmuch as it is a judgment in the context of transfer of shares under Section 108 of the Companies Act. When the Supreme Court has given the guidelines as to how negative words used in the context of the Companies Act are to be interpreted, there is no reason for us to look elsewhere.
159. Mr. Nariman, on the other hand, submitted that the term "holds" in regulation 10 cannot be restricted only to a registered shareholder, but it would also cover a purchaser of shares which had not been lodged or transferred. In fact, in the second suit filed by the defendants, in para. 18 they have taken the same stand. He however submitted that independent of that, a member may be a holder of shares but a holder may not be a member. This wider approach was adopted by the Supreme Court in the case of World Wide Agencies P. Ltd. v. Margaret T. Desor [1990] 67 Comp Cas 607. The court has approved the judgment of a single judge of the Calcutta High Court in Kedar Nath Agarwal v. Jay Engineering Works Ltd. [1963] 33 Comp Cas 102, wherein the court held (headnote) :
"There is a material difference between the provisions of the older Companies Acts and regulations and those of Section 81 of the Act of 1956. Previously where increase of capital was proposed by issue of further shares such shares had first to be offered to the 'member'. The Act of 1956 prescribes that they shall be offered to the persons who at the date of the offer are 'holders' of the equity shares of the company. A 'member' may be a 'holder' of shares, but a 'holder' may not be a 'member'. A person whose name is on the register may have sold his shares and from the moment his property in the share has passed to his purchaser he ceases to be a 'holder' of those shares. Under Section 81 such a person is not entitled to accept offers of new shares or to exercise any right of renunciation."
160. Mr. Nariman then submitted that regulation 2(2) of the SEBI Regulations requires us to refer to the Companies Act in difficulty. Section 81(l)(a) of the Companies Act, which deals with this situation, does not define the word. In the circumstances, he submitted that the proper course will be to adopt the approach taken by the Supreme Court in the case of World Wide Agencies P. Ltd, v. Margaret T. Desor [1990] 67 Comp Cas 607.
161. The defendants had referred to the SEBI Committee Report to contend that what was brought in by the 1997 Regulations was not included in the earlier regulations. Mr. Nariman submitted that such Committee Reports cannot be used to interpret the statutes and regulations ; that is the responsibility of the court. He referred to the observations of Bennion in his commentary on Statutory Interpretation. Bennion has been subsequently quoted with approval by the Supreme Court in State of Tamil Nadu v. State of Karnataka in an inter State river water dispute, reported in [1991] Suppl. 1 SCC 240. In that case, in the context of the Cauvery Water Disputes Tribunal, the Supreme Court held (p. 245) : "it is the judiciary, i.e., the courts alone that have the function of determining authoritatively the meaning of a statutory enactment and to lay down the frontiers of jurisdiction of any body or Tribunal constituted under the statute". Then the court quoted with approval the following observations of Francis Bennion on pages 53 and 548 (p. 245) :
"Under the British Constitution, the function of determining authoritatively the meaning of a parliamentary enactment is entrusted to the judiciary. In the words of Richard Burn they have the exposition of Acts, which must not be expounded 'in any other sense than is truly and properly the exposition of them'. This is but one aspect of the court's general function of applying the relevant law to the facts of the case before it. The starting point is, therefore, to consider this function.
It is the function of the court alone to declare the legal meaning of an enactment. If anyone else (such as the draftsman of the provisions) purports to lay down what the legal meaning is the court will tend to react adversely, regarding this as an encroachment upon its constitutional sphere."
162. Mr. Nariman therefore rightly submitted that the report of the Justice Bhag-wati Committee could not be pressed into service to decide as to what should be the interpretation of the 1994 Regulations. They will have to be interpreted purposefully by looking into the objective for which they are made. Regulation 10 will have to be held mandatory and the term "holds" will have to be interpreted to cover those purchasers of shares whose shares have not been lodged or transferred.
163. It is not possible to accept the submission of Mr. Manohar that the fact that certain provisions were specifically made in the 1997 Regulations to widen their coverage, clearly establishes that the coverage under the 1994 Regulations was a narrow one. Now, in this connection, it cannot be lost sight of that these regulations are for the benefit of the shareholders, companies and society at large and hence while interpreting them one will have to adopt the purposive approach as done by the Supreme Court in Mohamed Quasim Larry v. Muhamed Samsuddin, , on the Industrial Disputes Act. Indirect acquisitions cannot be read as outside the 1994 Regulations or else the regulations will be frustrated. Similarly, for the same reason as far as the concept of "persons related" or "persons acting in concert" is concerned. I am inclined to accept the inclusive interpretation canvassed by Mr. Nariman and recorded earlier. The approach of the Supreme Court in the Kedia family case reported in CIT v. East Coast Commercial Co. Ltd. , is instructive in this behalf.
164. Derivative action:
Then comes the question as to whether the present suit is filed by way of a personal action or whether it is a derivative action and secondly whether the plaintiffs have a right to maintain an action for rectification of the register, which does not disclose the correct picture of the company's membership. In this behalf, Mr. Nariman all throughout maintained that the action of the plaintiffs was a personal action and was not by way of a derivative step. As against that, the defendants maintain that the nature of the plaint was in fact in the interest of the company and on behalf of the other shareholders and it was in that manner only that it could be considered as permissible as an exception to the rule in Foss v. Harbottle [1843] 2 Hare 461, wherein it was laid down that normally an individual shareholder cannot bring an action into courts to complain of an irregularity as distinct from illegality. He submitted that when illegality is pleaded by the plaintiff, a personal action was permissible. There is of course the second aspect of this controversy as to whether in what circumstances and for what kind of rights such an action can be maintained and whether it is still available after the recent amendments to the company law in Sections 111 and 111A.
165. Three aspects of the present controversy on the basis of company law: Thus, there are three aspects of this particular controversy, namely, (1) whether the kind of correction as sought by the plaintiffs through a suit with respect to third party shares is available as a common law right; (2) whether the remedy is still available after the recent amendments in Sections 111 and 111A of the Companies Act ; (3) whether the suit can be maintained for rectification as a personal action.
166. Relevant provisions of Companies Act and the legislative history thereof: Before I deal with the aforesaid aspects, it is desirable to refer to the relevant sections with respect to the rectification of company's register and particularly the manner in which they have been amended from time to time. As can be seen from the legislative history of the Companies Act, the earlier provisions, namely Section 23 of the Companies Act of 1857, Section 34 of the Companies Act of 1866, and Section 58 of the Companies Act, 1882, dealing with rectification were partly retained and partly altered in the Companies Act of 1913. Section 38 of the Companies Act of 1913, gave a power to the court to rectify the register at the instance of the aggrieved person or any member of the company. An application was to be filed for this purpose and under Sub-section (3) of Section 38 on an application being made, the court could decide the question relating to title also, though, however, in the proviso thereof, it was provided that when any questions of law were raised, the court may direct the issue to be tried. This Section 38 in the Act of 1913 reads as follows :
"38. Power of court to rectify register.--(I) If-
(a) the name of any person is fraudulently or without sufficient cause entered in or omitted from the register of members of a company ; or
(b) default is made or unnecessary delay takes place in entering on the register the fact of any person having ceased to be a member, the person aggrieved or any member of the company, or the company may apply to the court for rectification of the register.
(2) The court may either refuse the application or may order rectification of the register and payment by the company of any damages sustained by any party aggrieved, and may make such order as to costs as it in its discretion thinks fit.
(3) On any application under this section the court may decide any question relating to the title of any person who is a party to the application to have his name entered in or omitted from the register, whether the question arises between members or alleged members, or between members or alleged members on the one hand and the company on the other hand; and generally may decide any question necessary or expedient to be decided for rectification of the register :
Provided that the court may direct an issue to be tried in which any question of law may be raised, and an appeal from the decision on such an issue shall lie in the manner directed by the Code of Civil Procedure, 1908 (18 of 1908), on the grounds mentioned in Section 100 of that Code."
167. The right of the person aggrieved or for that matter of any member of the company was retained when the Act No, 1 of 1956 came into force. A suitable modification in Section 155 of the Act was effected. Under Section 111 of the Act, the power of the company either to register or refuse to register a member was retained. These two sections in the Act of 1956, namely sections 111 and 155, read as follows :
"111. Power to refuse registration and appeal against refusal.--(1) Nothing in sections 108, 109 and 110 shall prejudice any power of the company under its articles to refuse to register the transfer of or the transmission by operation of law of the right to any shares or interest of a member in, or debentures of, the company.
(2) If, in pursuance of any such power, a company refuses to register any such transfer or transmission of right, it shall, within two months from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as the case may be.
If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.
(3) The transferor or transferee, or the person who gave intimation of the transmission by operation of law, as the case may be, where the company is a public company or a private company which is a subsidiary of a public company, appeal to the Central Government against any refusal of the company to register the transfer or transmission, or against any failure on its part, within the period referred to in Sub-section (2), either to register the transfer or transmission or to send notice of its refusal to register the same.
(4) An appeal to the Central Government under Sub-section (3) shall be made :
(a) in case the appeal is against the refusal to register a transfer or transmission, within two months of the receipt by him of the notice of refusal ; and
(b) in case the appeal is against the failure referred to in Sub-section (3), within two months from the expiry of the period referred to in Sub-section (2).
(5) The Central Government shall, after causing reasonable notice to be given to the cpmpany and also to, the transferor and the transferee or, as the case may require, to the person giving intimation of the transmission by operation of law and the previous owner, if any, and giving them a reasonable opportunity to make their representations, if any, in writing, by order, direct either that the transfer or transmission shall be registered by the company or that it need not be registered by it; and in the former case, the company shall give effect to the decision forthwith.
(6) The Central Government may, in its order aforesaid, give such incidental and consequential directions as to the payment of costs or otherwise as it thinks fit.
(7) All proceedings in appeals under Sub-section (3) or in relation thereto shall be confidential, and no suit, prosecution or other legal proceedings shall lie in respect of any allegation made in such proceedings, whether orally or otherwise.
(8) In the case of a private company which is not a subsidiary of a public company, where the right to any shares or interest of a member in, or debentures of the company, is transmitted by a sale thereof held by a court or other public authority, the provisions of Sub-sections (3) to (7) shall apply as if the company were a public company :
Provided that the Central Government may, in lieu of an order under Sub-section (5), pass an order directing the company to register the transmission of the right unless any member or members of the company specified in the order acquire the right aforesaid within such time as may be allowed for the purpose by the order, on payment to the purchaser of the price paid by him therefor, or such other sums as the Central Government may determine to be a reasonable compensation for the right in all the circumstances of the case.
155. Power of court to rectify register of members.--(1) If,--
(a) the name of any person is, without sufficient cause, entered in or omitted from the register of members of a company ; or
(b) default is made, or unnecessary delay takes place, in entering on the register the fact of any person having become, or ceased to be, a member ;
the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register.
(2) The court may either reject the application or order rectification of the register, and in the latter case, may direct the company to pay the damages, if any, sustained by any party aggrieved.
In either case, the court in its discretion may make such order as to costs as it thinks fit.
(3) On an application under this section, the court-
(a) may decide any question relating to the title of any person who is a party to the application to have his name entered in or omitted from the register, whether the question arises between the members or alleged members, or between members or alleged members on the one hand and the company on the other hand ; and
(b) generally may decide any question which is necessary or expedient to decide in connection with the application for rectification.
(4) From any order passed by the court on the application, or on any issue raised therein and tried separately, an appeal shall lie on the grounds mentioned in Section 100 of the Code of Civil Procedure, 1908 (Act V of 1908)-
(a) If the order be passed by a District Court, to the High Court;
(b) If the order be passed by a single judge of a High Court consisting of three or more judges to a Bench of that High Court."
168. Thereafter with effect from May 31, 1991, by the Amendment Act No. 65 of 1960, Sections 111 and 155 were amended as follows :
Section 27. Amendment of Section 111 of the principal Act.--(a) in Sub-section (2), for the words 'if, in pursuance of any such power, a company refuses', the words 'if a company refuses, whether in pursuance of any power under its articles or otherwise', shall be substituted ;
(b) after Sub-section (4), the following sub-section be inserted, namely : '(4A) Every appeal under Sub-section (3) shall be made by a petition in writing and shall be accompanied by such fee not exceeding fifty rupees as may be prescribed by the Central Government'.
(c) in Sub-section (5), for the word 'forthwith', the words 'within ten days of the receipt of the order' shall be substituted ;
(d) after Sub-section (5), the following sub-section be inserted, namely :
'(5A) Before making an order under Sub-section (5) on an appeal against any refusal of the company to register any transfer or transmission, the Central Government may require the company to disclose to it the reasons
- for such refusal, and on the failure or refusal of the company to disclose such reasons, that Government may, notwithstanding anything contained in the articles of the company, presume that the disclosure, if made, would be unfavourable to the company'.
(e) after Sub-section (8), the following sub-section shall be inserted, namely :
'(9) If default is made in giving effect to the order of the Central Government within the period specified in Sub-section (5) or to a direction of that Government given under the proviso to Sub-section (8), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees, and with a further fine which may extend to one hundred rupees for every day after the first during which the default continues'.
169. Section 36. Amendment to Section 155 of the principal Act.--(a) in Sub-section (1), for Clause (a), the following clause shall be substituted, namely :
'(a) the name of any person-
(i) is without sufficient cause, entered in the register of members of a company, or
(ii) after having been entered in the register, is, without sufficient cause, omitted therefrom, of
(b) after Sub-section (4), the following sub-section shall be inserted, namely :
(5) The provisions of Sub-sections (1) to (4) shall apply in relation to the rectification of the register of debenture holders as they apply in relation to the rectification of the register of members'."
170. On January 17, 1986, the Securities Contracts (Regulation) (Amendment) Act, 1985 (40 of 1985) came into force which inserted new Section 22A to emphasise free transferability and registration of shares and making provision with respect to the circumstances wherein transfer of shares may be declined. Under Sub-section (3)(c) thereof, the power to decline transfer of shares on the ground of its likely change in composition of the board of directors was specifically provided. There was also a provision for a reference to the Company Law Board. The said Section 22A, which came into force on January 17, 1986, reads as follows :
"22A. (1) In this Section, unless the context otherwise requires :
(a) 'company' means a company whose securities are listed on a recognised stock exchange ;
(b) 'security' means security of a company, being a security listed on a recognised stock exchange but not being a security which is not fully paid up or on which the company has a lien ;
(c) all other words and expressions used in this section and not defined in this Act but defined in the Companies Act, 1956 (1 of 1956), shall have the same meanings as are assigned to them in that Act.
(2) Subject to the provisions of this section, securities of companies shall be freely transferable.
(3) Notwithstanding anything contained in its articles or in Section 82 or Section 111 of the Companies Act, 1956 (1 of 1956), but subject to the other provisions of this section, a company may refuse to register the transfer of any of its securities in the name of the transferee on any one or more of the following grounds and on no other ground, namely :
(a) that the instrument of transfer is not proper or has not been duly stamped and executed or that the certificate relating to the security has not been delivered to the company or that any other requirement under the law relating to registration of such transfer has not been complied with ;
(b) that the transfer of the security is in contravention of any law ;
(c) that the transfer of the security is likely to result in such change in the composition of the board of directors as would be prejudicial to the interests of the company or to the public interest;
(d) that the transfer of the security is prohibited by any order of any court, Tribunal or other authority under any law for the time being in force.
(4) A company shall, before the expiry of two months from the date on which the instrument of transfer of any of its securities is lodged with it for the purposes of registration of such transfer, not only form, in good faith, its opinion as to whether such registration ought not or ought to be refused on any of the grounds mentioned in Sub-section (3) but also-
(a) if it has formed the opinion that such registration ought not to be so refused, effect such registration ;
(b) if it has formed the opinion that such registration ought to be refused on the ground mentioned in Clause (a) of Sub-section (3), intimate the transferor and the transferee by notice in the prescribed form about the requirements under the law which has or which have to be complied with for securing such registration ; and
(c) in any other case, make a reference to the Company Law Board and forward copies of such reference to the transferor and the transferee.
(5) Every reference under Clause (c) of Sub-section (4) shall be in the prescribed form and contain the particulars and shall be accompanied by the instrument of transfer of the securities to which it relates, the documentary evidence, if any, furnished to the company along with the instrument of transfer, and evidence of such other nature and such fees may be prescribed.
(6) On receipt of a reference under Sub-section (4), the Company Law Board shall, after causing reasonable notice to be given to the company, and also to the transferor and the transferee concerned and giving them a reasonable opportunity to make their representations, if any, in writing by order direct either that the transfer shall be registered by the company or that it need not be registered by it.
(7) Where on a reference under Sub-section (4), the Company Law Board directs that the transfer of the securities to which it relates -
(a) shall be registered by the company, the company shall give effect to the direction within ten days of the receipt of the order as if it were an order made on appeal by the Company Law Board in exercise of the powers under Section 111 of the Companies Act, 1956 (1 of 1956) ;
(b) need not be registered by the company, the company shall, within ten days from the date of such direction, intimate the transferor and the transferee accordingly.
(8) If default is made in complying with the provisions of this section, the company and every officer of the company who is in default shall be punishable with fine which may extent to five thousand rupees.
(9) If any reference made under Clause (c) of Sub-section (4) of this section, any person makes any statement-
(a) which is false in any material particulars, knowing it to be false ; or
(b) which omits any material fact knowing it to be material, he shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine.
(10) For the removal of doubts, it is hereby provided that nothing in this section shall apply in relation to any securities the instrument of transfer in respect whereof has been lodged with the company before the commencement of the Securities Contracts (Regulation) Amendment Act, 1985."
171. Thereafter with effect from May 31, 1991, the entire Section 111 was substituted by a new section by the Amendment Act No. 31 of 1988. The new Section 111 reads as follows :
"111. Power to refuse registration and appeal against refusal--(1) If a company refuses, whether in pursuance of any power of the company, under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any shares or interest of a member in, or debentures of, the company, it shall, within two months from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal.
(2) The transferor or transferee, or the person who has intimation of the transmission by operation of law, as the case may be, may appeal to the Company Law Board against any refusal of the company to register the transfer or transmission, or against any failure on its part within the period referred to in Sub-section (1), either to register the transfer or transmission or to send notice of its refusal to register the same.
(3) An appeal under Sub-section (2) shall be made within two months of the receipt of the notice of such refusal or, where no notice has been sent by the company, within four months from the date on which the instrument of transfer, or the intimation of transmission, as the case may be, was delivered to the company. (4) If-
(a) the name of any person-
(i) is without sufficient cause, entered in the register of members of a company, or
(ii) after having been entered in the register, is without sufficient cause, omitted therefrom ; or
(b) default is made, or unnecessary delay takes place, in entering in the register the fact of any person having become, or ceased to be a member (including a refusal under Sub-section (1)), the person aggrieved, or any member of the company, or the company, may apply to the Company Law Board for rectification of the register.
(5) The Company Law Board, while dealing with an appeal preferred under Sub-section (2) or an application made under Sub-section (4) may, after hearing the parties, either dismiss the appeal or reject the application, or by order-
(a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within ten days of the receipt of the order ; or
(b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.
(6) The Company Law Board, while acting under Sub-section (5), may at its discretion, make-
(a) such interim orders, including any orders as to injunction or stay, as it may deem fit and just;
(b) such orders as to costs as it thinks fit; and
(c) incidental or consequential orders regarding payment of dividend or the allotment of bonus or rights shares.
(7) On any application under this section, the Company Law Board -
(a) may decide any question relating to the title of any person who is a party to the application to have his name entered in, or omitted from, the register ;
(b) generally, may decide any question which it is necessary or expedient to decide in connection with the application for rectification.
(8) The provisions of Sub-sections (4) to (7) shall apply in relation to the rectification of the register of debenture-holders as they apply in relation to the rectification of the register of members.
(9) If default is made in giving effect to the orders of the Company Law Board under this section, the company and every officer of the company who is in default shall be punishable with fine which may extend to one thousand rupees, and with a further fine which may extend to one hundred rupees for every day after the first day after which the default continues.
(10) Every appeal or application to the Company Law Board under subsection (2) or Sub-section (4) shall be made by a petition in writing and shall be accompanied by such fees as may be prescribed.
(11) In the case of a private company which is not a subsidiary of a public company, where the right to any shares or interest of a member in or debentures of, the company is transmitted by a sale thereof held by a court or other public authority, the provisions of Sub-sections (4) to (7) shall apply as if the company were a public company :
Provided that the Company Law Board may, in lieu of an order under Sub-section (5), pass an order directing the company to register the transmission of the right unless any member or members of the company specified in the order acquire the right aforesaid within such times as may be allowed for the purpose by the order, on payment to the purchaser of the price paid by him therefor or such other sum as the Company Law Board may determine to be a reasonable compensation for the right in all the circumstances of the case.
(12) If default is made in complying with any of the provisions of this section, the company and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.
(13) Nothing in this section and Sections 108, 109 or 110 shall prejudice any power of a private company under its articles to enforce the restrictions contained therein against the right to transfer the shares of such company." By that very Amendment Act No. 31 of 1988, Sections 155 and 156 of the principal Act were omitted. Then by the Depositories Ordinance No. 11 of 1995, which came into force on September 20, 1995, a new Sub-section (14) was added to Section 111 whereby the provisions of Section 111 were restricted only to the private companies. This added Sub-section (14) which reads as follows :
"(14) In this section 'company' means a private company and includes a private company which had become a public company by virtue of Section 43A of this Act."
172. Then an entirely new Section 111A was included to govern the field of public companies. This new section provided for rectification of register on transfers in certain manner. Section 111A reads as under :
"111A. Rectification of register on transfer.--(1) In this section, unless the context otherwise requires, 'company' means a company other than a company referred to in Sub-section (14) of Section 111 of this Act.
(2) Subject to the provisions of this section, the shares or debentures and any interest therein of a company shall be freely, transferable.
(3) The Company taw Board may on an application by a depository company, participant or investor or the Securities and Exchange Board of India within two months from the date of transfer of any shares or debentures held by a depository or from the date on which the instrument of transfer or the intimation of transmission was delivered to the company, as the case may be, after such inquiry as it thinks fit, direct any company or depository to rectify register or records if the transfer of the shares or debentures is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992), or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986).
(4) The Company Law Board while acting under Sub-section (3), may at its discretion make such interim order as to suspend the voting rights before making or completing such enquiry.
(5) The provisions of this section shall not restrict the right of a holder of shares or debentures, to transfer such shares or debentures and any person acquiring such shares or debentures shall be entitled to voting rights unless the voting rights have been suspended by an order of the Company Law Board.
(6) Notwithstanding anything contained in this section, any further transfer, during the pendency of the application with the Company Law Board of shares or debentures shall entitle the transferee to voting rights unless the voting rights in respect of such transferee have also been suspended.
(7) The provisions of Sub-sections (5), (7), (9), (10) and (12) of Section 111 shall, so far as may be, apply to the proceedings before the Company Law Board under this section as they apply to the proceedings under that section."
173. Thereafter by the Depositories Related Laws (Amendment) Ordinance No. 5 of 1997, Section 111A was further amended with effect from January 15, 1997, by adding a proviso to Sub-section (2) and by substituting Sub-section (3). These alterations read as follows :
Addition to Sub-section (2) :
"Provided that if a company without sufficient cause refuses to register transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the Company Law Board and it shall direct such company to register the transfer of shares."
174. Substitution of Sub-section (3) by the following ;
"(3) The Company Law Board may, on an application made by a depository company, participant or investor or the Securities and Exchange Board of India, if the transfer of shares or debentures is in contravention of any of the provisions, of the Securities and Exchange Board of India Act, 1992 (15 of 1992), or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), or any other law for the time being in force, within two months from the date of transfer of any shares or debentures held by a depository or from the date on which the instrument of transfer or the intimation of the transmission was delivered to the company, as the case may be, after such inquiry as it thinks fit, direct any depository or company to rectify its register or record."
175. The result of all these amendments, additions and alterations under Section 111 is that now we have one mechanism for private companies whereas there is a different mechanism and arrangement with respect to public companies under Section 111A with which we are more concerned in the present case.
176. Whether right of rectification through a suit is a common law right:
Mr. Nariman submitted that these provisions, as they stood from time to time, have come to be interpreted by courts on different occasions and it has been specifically held all throughout that the right to seek rectification of a company's register was a common law right. He submitted that the fact that a certain remedy to approach the civil court was provided under Section 155 on an earlier occasion under the law as it then stood, and that it is not so specified now need not mean that a suit by a member of a public company was barred because that was a right which existed prior to Section 155 and it was founded on law of contract with its origin in common law. The earliest judgment which he referred to in this context was T.A.K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. . In that case, the respondent-company had refused to register the shares purchased by the appellant. The question before the court was as to whether the plaintiff-appellant was entitled to enforce his rights by way of a suit as against the procedure which was provided under the Act. In that matter, the Division Bench observed at pages 572 and 573 as under :
"The principle would undoubtedly appear to be that if the new enactment is such that certain new rights unknown previously to law are created by the new statute and certain remedies are provided for the infringement of such rights, it must logically follow that it was the clear intention of the Legislature that such remedies should be enforced only in the manner and by following the procedure indicated. No doubt it is open to the Legislature even in other cases to take away any subsisting general right of suit and provide a special remedy instead, but it must be done by express provision and such a general right is incapable of being taken away merely by implication."
177. The judges of the Division Bench then referred to two earlier judgments. In Manilal Brijlal Shah v. Gordhan Spinning and Manufacturing Co., [1917] 18 Bom LR 982 in similar circumstances a petition under Section 38 was regarded as proper. In Ramesh Chandra Mitter v. Jogini Mohan Chatterjee [1920] 47 Cal 901, it was observed "in a simple case where an immediate rectification is essential, it may be desirable to apply under that section ; but if the case is at all complicated, an action should be brought". Srinivasa Ayyangar J., then in this leading judgment observed (at page 573 of AIR 1928 Mad) on behalf of the Division Bench as follows :
"I respectfully agree entirely with those observations. If the principle is that the provisions contained in and the procedure prescribed by a certain enactment are exhaustive and it should be open to parties to seek for such reliefs in regular actions only in cases where the enactment can be said to create entirely a new sphere of rights and obligations, it becomes important to discuss the question in this case whether the Indian Companies Act must, having regard to its true nature, be regarded as an Act creating such a new sphere or as merely legislating for or regulating certain rights recognised under the common law. It seems to me that the true and correct view would be to regard it only as of the latter kind.
By the terms of Section 4 the Act declares as illegal any association or partnership consisting of more than ten persons formed for the business of banking and any company, association or partnership of more than twenty persons formed for the purpose of carrying on any other business. It is clear that the scope of the Act is regulative and it is concerned only with making provisions in respect of rights and obligations which would have existed apart from the Act. In all such cases the true principle is that though remedies are provided in the enactment, the general right of suit cannot be considered as taken away merely by reason of such provision and except by express enactment. The objection, therefore, that the appellant-plaintiff had no right of suit must be overruled."
178. This question came up before this court in Killick Nixon Ltd. v. Dhanraj Mills Pvt. Ltd. [1983] 54 Comp Cas 432, wherein a Division Bench in an order in appeal from an interlocutory application held that a member was entitled to apply for rectification of register under Section 155. Subsequently the question again came up in the case of Om Prakash Berlin v. Unit Trust of India (No. 2) before a single judge of this court (Bharucha J.) (as he then was in this court) which judgment is reported in [1983] 54 Comp Cas 469. The learned judge expressed that he was entirely in agreement with the reasoning of the Division Bench. He referred to an earlier judgment in the case of Rao Saheb Manilal Gangaram Sindore v. Western India Theatres Ltd. [1963] 33 Comp Cas 826 (Bom). In that case, J. C. Shah J. (as he then was in this court) held (p. 828) :
"Now it is clear to my mind that even for the relief contemplated by Section 155 of the Companies Act, 1956, a suit would be a primary remedy under the general law. The relief which is contemplated by that section is one which would be available at common law as well.... The provision made in Section 155 of the Companies Act, 1956, for a procedure by way of an application is only a provision for a summary procedure. The object of this provision is not to whittle down or abrogate the procedure by way of a suit for getting the relief contemplated by that Section."
179. Mr. Nariman then referred to another judgment of a single judge of this court (per K.K. Desai J.) in Jayashree Shantaram Vankudre v. Rajkamal Kala-mandir Private Ltd. [1960] 30 Comp Cas 141. In that matter, the court held that complicated questions of fabrication and forgery were involved. The court took the view that a petition under Section 155 was not the correct remedy therefor but a suit would be the proper remedy. The court observed that (p. 144) "filing a suit for rectification is not unknown and is generally resorted to where rights of third parties are concerned". In the case of Jayashree Shantaram Vankudre v. Rajkamal Kalamandir (P.) Ltd. [1960] 30 Comp Cas 141 (Bom), the court referred with approval to an earlier judgment in the case of Matheran Steam Tramway Co. v. B.N. Lang [1931] 1 Comp Cas 206 (Bom) wherein a suit was preferred to a summary action. The court quoted with approval the following observations from volume VI of Halsbury's Laws of England (p. 142 of 30 Comp Cas):
"The application may be made by the person aggrieved.... It may be by motion or summons or by action commenced by writ. If the court thinks that the case, by reason of its complexity or on the ground that there are matters requiring investigation or otherwise, could more satisfactorily be dealt with by an action, the court will decline to make an order on a motion, without prejudice to the right of the applicant to institute an action for rectification. An action may, without any direction by the court, be instituted for rectification of the register, a course which should be followed where there is much complexity, or where other relief is required."
180. In this connection, the following observations of Bharucha J. (as he then was in this court) in Om Prakdsh Berlia's case [1983] 54 Comp Cas 469 at page 502 of the report are of particular significance :
"In my view, every shareholder of a company has an individual right and interest in seeing that the share register of the company reflects the true position. Upon the share register rests each shareholder's right to receive his due share of the company's profits by way of dividend, his right to exercise his vote and to have it correctly assessed as against the votes of other rightful shareholders, and his right to acquire new shares in the company pro rata with other rightful shareholders. An entry in the register which is bad or illegal affects these rights of the individual shareholder. He is thereby prejudiced and aggrieved.
The right to rectify was recognised at common law and was translated into the statutes, English and Indian. (The provisions of Section 116 of the English Companies Act, 1948, provide to any member of the company the right to apply for a rectification of the company's share register). The statutes do not create any new right in the member.
In England, as in most High Courts in India, it is recognised that the procedure of rectification made available by the Companies Act is a summary procedure and that the petitioner may, in the court's discretion, if the matter be a complex one, be referred to a suit. It would be anomalous if a shareholder, who can maintain a petition under Section 155 of the Indian Companies Act or Section 116 of the English Act, is directed to file a suit because the matter is complex, and is then told that he is not entitled to maintain the suit because he is not a person aggrieved."
181. Similarly of particular significance is the judgment of M. Jagannatha Rao J. (as he then was in Andhra Pradesh High Court) in the case of Avanthi Explosive (P.) Ltd. v. Principal Subordinate Judge, Tirupathi [1987] 62 Comp Cas 301. In that matter the very question was raised by canvassing before the learned judge that if the rights of the second respondent concerned were creatures of the company law, then the remedy in that law alone had to be followed. The learned judge referred to the judgment of the Supreme Court in the case of Premier Automobiles Ltd. v. Kamalakar Shantaram Wadke, , arising under the Industrial Disputes Act, 1947. Reliance was also placed on a well known passage in the case of Wolverhampton New Waterworks Co. v. Hawkesford [1859] 6 CB (NS) 336 which was also referred to before the Supreme Court in Premier Automobiles Ltd.'s case, . Thereafter the learned judge posed a question as to whether the rights and obligations in question in that particular case owed their very creation to the Companies Act or whether they were traceable to a basic contract which had come to be statutorily regulated. The learned judge went into the historical background of the amendments to the company law and finally held that the right to file a suit was a common law right available to the parties.
182. Mr. Chidambaram, learned counsel appearing for defendant No. 11, submitted that these cases do not lead the plaintiffs any further. They were all cases which are related to the plaintiffs' own shares in respect of which the plaintiffs in each of these matters had a property right. Even in Om Prakash Berlia's case [1983] 54 Comp Cas 469 (Bom), the real complaint was that by introduction of 43,700 new shares the proportionate holding of the plaintiff would have gone down and in a sense there also the plaintiff was asserting a personal right. Mr. Chidambaram submitted that the said judgment of the learned single judge in Om Prakash Berlia's case [1983] 54 Comp Cas 469 (Bom) was no longer the good law in view of the same being overruled by a Division Bench in Unit Trust of India v. Om Prakash Berlia [1983] 54 Comp Cas 723 (Bom). Mr. Nariman however pointed out that the said appeal was allowed on other aspects of the matter and not with respect to the finding given by the learned single judge with respect to maintainability of the suit for the reasons given by him. Mr. Chidambaram submitted that once a judgment is overruled, it was no longer good. He relied upon the ratio of the judgment of the Supreme Court in Gojer Brothers (P.) Ltd. v. Shri Ratanlal Singh, , wherein the Supreme Court held as follows (pages 1382 and 1384) :
"10. The juristic justification of the doctrine of merger may be sought in the principle that there cannot be, at one and the same time, more than one operative order governing the same subject-matter. Therefore the judgment of an inferior court, if subjected to an examination by the superior court, ceases to have existence in the eye of law and is treated as being superseded by the judgment of the superior court. In other words, the judgment of the inferior court loses its identity by its merger with the judgment of the superior court.
18. The fundamental reason of the rule that where there has been an appeal, the decree to be executed is the decree of the appellate court is that in such cases the decree of the trial court is merged in the decree of the appellate court. In course of time, this concept which was originally restricted to appellate decrees on the ground that an appeal is a continuation of the suit, came to be gradually extended to other proceedings like revisions and even to proceedings before quasi-judicial and executive authorities."
183. Mr. Nariman, on the other hand, submitted that this judgment was on doctrine of merger which was relevant for ascertaining as to which was the final executable order, and had nothing to do with precedents. He pointed out that this position had been clarified in State of Orissa v. Krishna Stores , wherein para. 13 the court observed (page 252) :
In the case of State of Madras v. Madurai Mills Co. Ltd., , this court, however, observed that the doctrine of merger was not a doctrine of rigid and universal application. The application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provision conferring the appellate or revisional jurisdiction. Basically, therefore, unless the appellate authority has applied its mind to the original order or any issue arising in appeal while passing the appellate order, one should be careful in applying the doctrine of merger to the appellate order."
184. That apart, Mr. Nariman submitted that the judgment in Gojer Brothers (P.) Ltd.'s case, , could not be cited as a proposition that even if a part of the judgment of a trial court is not reversed, that would not be binding as a proposition of law. What we are concerned with here is as to whether the observations of Bharucha J. (as he then was in this court) with respect to individual shareholder's right in having a correct register of members any longer holds the field. Mr. Nariman in this behalf referred to a judgment of a Division Bench of the Gujarat High Court in Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality, . That was a case wherein Bharuch Municipality had sought to levy house tax on the basis of capital value of land and building and that was challenged, Earlier in Municipal Commissioner v. Gordhandas Hargovandas , a Division Bench of the Bombay High Court had upheld the competency of the State Legislature to levy such tax when the rule provided for a levy of a rate. An appeal was preferred therefrom to the Supreme Court, wherein the Supreme Court had held by a majority of four versus one that a rate was a levy on beneficial occupation and it included only a levy based on annual letting value and could not take within its purview a levy based on capital value. This point was not argued in the High Court. The appeal was allowed on this point and the majority judges did not deal with the question of competence and kept the question open. (Patel Gordhandas Hargovindas v. Municipal Commissioner, ). Thereafter the Municipality of Bharuch had levied the tax based on the capital value of the land under the rule which provided for levy of a tax. The Gujarat Assembly also had enacted a validating Act. This levy by the Bharuch Municipality was challenged in the High Court. On behalf of the Municipality, reliance was placed on the judgment of the Bombay High Court in Gordhandas Hargovandas's case , to defend it being within the legislative competence. It was contended by the petitioner that the decision of the High Court in Gordhandas Hargovandas's case had no legal existence at all since it was reversed by the Supreme Court. The High Court, however, held in Shri Prithvi Cotton Mills Ltd.'s case, that the earlier decision, which had been reversed, continued to constitute a binding principle on the question of legislative competence. This decision of the Gujarat High Court in Shri Prithvi Cotton Mills Ltd.'s case, was challenged in the Supreme Court and the Supreme Court dismissed the appeal. It expressed no view on the decision of the Division Bench in Prithvi Cotton Mills Ltd. v. Broach Borough Municipality, . The Division Bench of the Gujarat High Court took a view that part of the judgment which is not overruled by the superior court would continue to remain intact and binding on subordinate and co-ordinate Bench. The court observed in para. 12 (on page 136) as follows :
"Mr. Nanavati tries to justify this submission by propounding the principle that, when a decision of one court is reversed in appeal by another court, then, the decision of the appellate court gets substituted to the decision of the other court and the decision so reversed has no legal existence. We are unable to agree that any such principle is applicable for determining the binding nature of a decision of a court. The principle, undoubtedly, applies vis-a-vis decrees of the higher and the lower courts. It may apply to the decisions of the same two courts on the identical questions. But, it is difficult to uphold the contention that any such principle is applicable in regard to a part of the judgment solemnly pronounced by a court which has not been overruled and kept expressly open by the appellate court. The binding nature of a decision arises from the fact that the point of law raised and considered therein has been decided by the court concerned and it is obvious that so long as that decision remains intact it is binding on all courts and Tribunals which are subordinate or co-ordinate to the court recording the decision."
185. Mr. Nariman, therefore, submits that the proposition of Bharucha J. (as he then was in this court) in Om Prakash Berlin's case [1983] 54 Comp Cas 469 holds good as far as this court is concerned inasmuch as the maintainability of the suit on that behalf was not disturbed by the Appeal Bench though the appeal had been allowed on other points.
186. Mr. Nariman submitted that the remedy of a suit being available in complicated matters had been accepted by the Supreme Court in the case of Public Passenger. Service Ltd. v. M.A. Khader . In that case also, it was canvassed that remedy under Section 155 was a special remedy and the courts below should have refused the relief in exercise, of their discretion. The Supreme Court observed in para. 8 of that judgment as follows (page 6) :
"... now, where by reason of its complexity or otherwise the matter can more conveniently be decided in a suit, the court may refuse relief under Section 155 and relegate the parties to a suit. But the point as to the invalidity of the notice dated January 20, 1957, could well be decided summarily, and the courts below rightly decided to give relief in the exercise of the discretionary jurisdiction under Section 155. Having found that the notice was defective and the forfeiture was invalid, the court could not arbitrarily refuse relief to the respondents."
187. The above observations of the Supreme Court subsequently came to be considered in a recent judgment in Ammonia Supplies Corporation P. Ltd, v. Modern Plastic Containers Pvt. Ltd. . The question before the court amongst others was as to whether remedy under Section 155 was a summary remedy. In para. 11 of the judgment, the court noted that various High Courts including the Bombay High Court, as in the case of Rao Saheb Manilal Gangaram Sindore v. Western India Theatres Ltd. [1963] 33 Comp Cas 826, had held that the remedy was of a summary nature. In para. 12, the court noted that on the other hand, the contrary view was taken by other High Courts including the Gujarat High Court and the Kerala High Court. Thereafter it was canvassed before the Supreme Court that the decision in Public Passenger Service Ltd. v. M.A. Khader was per incurium. This submission was subsequently negatived by the court by observing as follows in paras. 12 to 14 of the judgment (p. 319 of 94 Comp Cas) :
"In order to resolve this conflict as aforesaid the Delhi High Court in the case of the petitioner-company relying on Public Passenger Service Ltd.'s case held that the jurisdiction of the court under Section 155 is summary in nature.
In Public Passenger Service Ltd.'s case , this court held if, by reasons of its complexity or otherwise the matter can more conveniently be decided in a suit, the court may refuse relief under Section 155 and relegate the parties to a suit.
Learned counsel for the appellant initially made a feeble submission as aforesaid to hold that the decision in Public Passenger Service Ltd.'s case is per incuriam. We have no hesitation to reject such a submission. This issue was directly there and was considered with respect to the interpretation of Section 155 and was a case not under 1913 Act but 1960 Act; hence by no stretch of imagination it could be said that the said decision is per curiam."
188. Learned counsel appearing for the defendants tried to impress upon me by relying on different passages from the judgments of the Supreme Court in Ammonia Supplies Corporation P. Ltd. v. Modern Plastic Containers Pvt. Ltd. , to contend that the Supreme Court had taken now a different view. They also relied upon the observations of my Brother Rebello J. in National Insurance Co. Ltd. v. Glaxo India Ltd. (unreported judgment dated February 16, 1999, in Company Appeal No. 8 of 1998 in Petition No. 14 of 1995) (since reported in [1999] 98 Comp Cas 378 (Bom)) to the effect that the judgment in the case of Public Passenger Service Ltd. 's case [1966] 36 Comp Cas 1 (SC) will have to be read in the context of the observations in the case of Ammonia Supplies Corporation Pvt. Ltd. v. Modern Plastic Containers Pvt. Ltd. [1994] 79 Comp Cas 163 (Delhi) [FB]. In Ammonia Supplies Corporation Pvt. Ltd. v. Modern Plastic Containers Pvt. Ltd. what happened was that on a reference being made, a Full Bench of the Delhi High Court by its decision dated October 11, 1993 (per Sabharwal J., as he then was in that court) held that the jurisdiction under Section 155 was discretionary and summary in nature and that the remedy of suit for adjudication of dispute relating to the title to shares was not barred. The decision rendered thereafter (on May 16, 1994), on the matter being relegated, was carried in appeal to the Supreme Court. The Supreme Court had partly interfered with this subsequent order of the single judge of the Delhi High Court by observing in the facts of that case that instead of relegating the parties to a suit, it would have been better if the learned judge had himself exercised the jurisdiction inasmuch as he was functioning as a company judge in that matter and that jurisdiction was available to him under Section 446 of the Companies Act. As far as the observations of the Full Bench of the Delhi High Court are concerned, they were left totally undisturbed by the Supreme Court. The ratio of the judgment is in para. 31 where it was held as follows (p. 328 of 94 Comp Cas) :
"There is nothing under the Companies Act expressly barring the jurisdiction of the civil court, but the jurisdiction of the 'court as defined under the Act exercising its powers under various sections where it has been invested with exclusive jurisdiction, the jurisdiction of the civil court is impliedly barred. We have already held above the jurisdiction of the 'court' under Section 155 to the extent it is exclusive, the jurisdiction of civil court is impliedly barred. For what is not covered as aforesaid, the civil court would have jurisdiction."
189. Thus, it is clear, as recorded in the judgments in T.A.K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. ; Avanthi Explosive (P.) Ltd. v. Principal Subordinate Judge, Tirupathi [1987] 62 Comp Cas 301 (AP) ; Rao Saheb Manilal Gangaram Sindore v. Western India Theatres Ltd. [1963] 33 Comp Cas 826 (Bom) and Om Prakash Berlia v. Unit Trust of India (No. 2) [1983] 54 Comp Cas 469 (Bom), the remedy of seeking rectification of company's register by way of filing of a suit is a right recognised in common law and translated into the statutes. That would be available where the matter can be more conveniently decided in a suit by reason of its complexity or otherwise as held by the apex court in Public Passenger Service Ltd.'s case [1966] 36 Comp Cas 1 and confirmed in Ammonia Supplies Corporation P. Ltd. v. Modern Plastic Containers Pvt. Ltd. [1998] 94 Comp Cas 310 (SC). It is also clear from the observations of Bharucha J. in Om Prakash Berlia's case [1983] 54 Comp Cas 469 (Bom) quoted above that this right is available to see to it that the share register reflects the true composition, and the shareholder cannot be told that he is not an aggrieved person vis-a-vis an entry in the register which is bad or illegal. This is so, since it affects his rights (i) to receive his due share in the profit by way of dividend ; (ii) his right to exercise his vote ; and (iii) to have it correctly assessed against the votes of other rightful shareholders.
190. What is the change brought about by Section 111A ?
191. Then comes the question as to whether Section 111A as subsequently amended and its scheme brings about any change over and above the position as it existed earlier. Mr. Chidambaram, learned counsel appearing for defendant No. 11, submitted that free transferability was the objective in bringing about the amended position as it exists now. He said that the policy of the law now is as follows :
(a) Shares of a public limited company are freely transferable and the registration of transfers is mandatory under the proviso to Section 111A(2).
(b) The right to seek rectification of the register was a statutory right inasmuch as the company itself was a creature of the statute. Five categories of persons and entities are given a right to apply for rectification to the Company Law Board and by necessary implication no other person has such a right. The Company Law Board is empowered to issue the direction to the company to effect rectification under Section 111A(3). This will again mean by implication that no other authority can issue any such direction.
(c) Even when registration of shares is in dispute, the shareholders or further transferees are entitled to voting rights unless the voting rights are expressly suspended by an order of the Company Law Board, (Section 111A(6)).
(d) Parliament has now made a deliberate departure. Earlier Section 38 of the Companies Act 1913, and Section 155 of the Companies Act, 1956, allowed the members of the company to seek the rectification of the membership register. This right is not available in the statute in respect of shares held by a third party in a public company. That right to apply for rectification is now available only to five specified categories of persons/entities. It is available with respect to one's own shares. That does not include a category like the plaintiffs which is a party objecting to purchase and transfer of shares by a third party.
(e) This right of rectification is now available only by filing a proceeding before the Company Law Board and by no other device.
192. Mr. Chidambaram submitted that the entire objective behind these provisions was to remain in tune with the idea of free enterprise which was now gaining ground in this country. Free enterprise requires free transferability of shares and when the Legislature makes a deliberate departure, addition and omission, the court should take note of the same and give effect to the change brought about by Parliament. He relied upon the judgments of the Supreme Court in Board of Revenue v. Arthur Paul Benthall, and Labour Commissioner, Madhya Pradesh v. Burhanpur Tapti Mills Ltd. . In Board of Revenue's case, , the court observed (pages 38, 39) :
"When two words of different import are used in a statute in two consecutive provisions, it would be difficult to maintain that they are used in the same sense . . ." (para. 4).
"It is not without significance that the Legislature has used three different words in relation to the three sections, 'transaction' in Section 4, 'matter' in Section 5 and 'description' in Section 6."
193. In Labour Commissioner, Madhya Pradesh v. Burhanpur Tapti Mills Ltd. , the court was concerned with two provisions of the C. P. and Berar Industrial Disputes Act as to whether the words describing a strike as "rendered illegal" are the same as "held illegal" and the court held that when different phraseology had been used, (page 1689): "the conclusion is irresistible that this was done deliberately". He then referred to the decision of the Court of Appeal Guardians of the Parish of Brighton v. Guardians of the Strand Union [1891] 2 QB 156. The court was concerned with the use of words "pauper" and "person" at different places by changes brought about in the Divided Parishes Act, 1876, and Lord Esher M. R. observed at page 167 :
"In the present case we find a change of expression in the statute, a change which was noticed in the judgment of the Divisional Court, and which enables us, not to add anything but, to construe a word used in the Act and to expand its meaning. Now, Sections 34 and 35 of the Act are made applicable to a 'person', an expression which in Section 36 is altered to 'pauper'; and it is a of construction that where in the same Act of Parliament, and in relation to the same subject-matter, different words are used, the court must see whether the Legislature has not made the alteration intentionally, and with some definite purpose ; prima facie such an alteration would be considered intentional."
194. Mr. Chidambaram submitted that until the decision in Ammonia Supplies Corporation P. Ltd. v. Modern Plastic Containers Pvt. Ltd. [1998] 94 Comp Cas 310 (SC), the relevant law was as provided under old Section 155 and the aggrieved party could either file a petition for rectification or if there were complicated questions involved, file a suit. Mr. Chidambaram submitted that the remedy of filing a suit was no longer available and the changes brought in by statute ought to be read in the correct perspective. Even if there was no specific bar as such against filing of a suit in the concerned context, it will have to be read into the provision.
195. Mr. Nariman, in this connection, referred to two judgments of the Supreme Court. Firstly, State of Tamil Nadu v. Ramalinga Samigal Madam, and then Raja Ram Kumar Bhargava v. Union of India . In the judgment in State of Tamil Nadu's case, , the court was concerned with the question as to whether the remedy of filing civil suit was available in spite of certain procedure made available under the revenue law and after referring to the judgments starting from Dhu-labhai v. State of Madhya Pradesh , the Supreme Court held that ouster of jurisdiction has to be specifically provided for. In Raja Ram Kumar Bhargava's case , the question was as to whether a suit for recovery of interest on refund of excess tax was maintainable. At page 756 (para. 9) amongst others, the Supreme Court referred to earlier judgments in Dhulabhai's case and Premier Automobiles Ltd. v. Kamalakar Shantaram Wadke, and observed (page 261 of ITR):
"Generally speaking, the broad guiding considerations are that wherever a right, not pre-existing in common law, is created by a statute and that statute itself provided a machinery for the enforcement of the right, both the right and the remedy having been created ;uno flatu and a finality is intended to the result of the statutory proceedings, then, even in the absence of an exclusionary provision, the civil courts' jurisdiction is impliedly barred. If, however, a right pre-existing in common law is recognised by the statute and a new statutory remedy for its enforcement provided, without expressly excluding the civil courts' jurisdiction, then both the common law and the statutory remedies might become concurrent remedies leaving open an element of election to the persons of inherence."
196. Mr. Nariman submitted that as is seen from a series of judgments and particularly the one in Om Prakash Berlia's case [1983] 54 Comp Cas 469 (Bom), it has been held that the right to seek rectification of the register is a common law right. In Om Prakash Berlia's case [1983] 54 Comp Cas 469 (Bom), it has been held to be a right available when certain additional shares were being given to third parties. Thus, if it was a common law right and for which now a new statutory remedy has come to be provided by an approach to the Company Law Board without excluding the civil courts' jurisdiction, then both the remedies would be available to a litigant with a right to elect.
197. Mr. Dada, learned counsel appearing for defendants Nos. 2 and 6 to 10, submitted that the 1997 Regulations have come subsequent to the insertion of Section 111A of the Companies Act and, therefore, if at all the regulations create any impediment on the right to vote, their provisions ought to be read down to be in conformity with the provisions of Section 111A. This submission of Mr. Dada presupposes that free transferability is a new concept introduced when these amendments were brought into the company law. To emphasise this submission, learned counsel for defendant No. 1, Mr. Salve relied upon the judgment of the Supreme Court in V. B. Rangara] v. V. B. Gopalakrishnan , wherein at page 456, Sawant J., referred to Pennington's Company Law, sixth edition page 753 and observed (page 207 of Comp Cas) :
"Dealing with 'restrictions on transfer of shares' in Pennington's Com-pany Law (sixth edition) at page 753, it is stated that shares are presumed to be freely transferable and restrictions on their transfer are construed strictly and so when a restriction is capable of two meanings, the less restrictive interpretation will be adopted by the court."
198. Mr. Nariman, however, referred me to the relevant observations from Pen-nington's Company Law, wherein it is noticed that reliance was placed on an old judgment as in Smith Knight and Co., Weston, In re [1868] 4 Ch. App 20 for the proposition that shares are freely transferable. Again in this connection, what is to be noted is that the words "free transferability" were introduced in 1986 in the company law by Section 22A(2) of the Securities Contracts (Regulation) Act, 1985 l, and yet under the law, as it existed prior to 1995, members' right to seek rectification of other's share was expressly recognised under Section 111 as it then stood. That was also the position under Section 155 until 1991 when it was deleted. As seen above, in spite of there being the provision of free transferability, the Central Government has retained the power to restrain the voting rights in certain situation under Section 108D of the Companies Act. These provisions existed earlier with respect to the MRTP undertakings and now they are available to all those undertakings which fall under Section 108D from September 27, 1991. Thus, what is seen is that free transferability is as such not a new concept and is coupled with certain restrictions. There is, therefore, no reason to read down the provisions in the 1997 Regulations or to read the 1994 Regulations in such a manner that free transferability alone is permitted whatever may be the circumstances or other objectives under the regulations such as transparency, competition and participation.
199. It has come to be recognised, as seen earlier, way back in Charanjit Lal Chowdhury v. Union of India, , that right to vote of a member of a company is a statutory right and in that case it was curtailed under the Ordinance under Which the management of Solapur Spinning and Weaving Mill was taken away and it was held not violative of Aritlce 19 of the Constitution. A right given by a statute can always be curtailed by the statute in a suitable way and for permissible reasons. In the context of industrial law, although an employer has a right to hold a property and the right to property includes a right to close down the industry when deemed necessary, the particular facets of this right of the employer to close the industry, to retrench employees, etc., have come to be regulated by specific provisions under Sections 25M, 25N and 25-O of the Industrial Disputes Act, 1947, specifically introduced for this purpose. In Papnasam Labour Union v. Madura Coats Ltd. [1995] 1 JT 71, such curtailment of the right for a limited period was held to be justified in para. 19 of that judgment. In the facts of the present case, therefore, if a party makes out a case that shares have been acquired in breach of the provisions, the wording of which is negative and mandatory, the consequences will have to follow.
200. It is true that under Section 111A a remedy has been provided by way of a necessary application to the Company Law Board to five categories of entities and persons. Third parties or other members are not specifically mentioned in this Section 111A(3). Mr. Nariman submitted that nothing new has come up in these provisions except an emphasis in these amendments on free transferability. Under Section 111A(3), a right to object to the transfer of shares in contravention of provisions of the SEBI Act and regulations is provided but it is available to only the specified five entities/persons. The absence of such a provision now will only mean that the other members will not have an approach to the Company Law Board. Can it, however, mean that the access, which they otherwise had all throughout to the civil court, is no longer available now under the law ? The answer was in the negative when Ammonia Supplies Corporation P. Ltd.'s case [1998] 94 Comp Cas 310 was decided by the Supreme Court, and in my humble understanding, in spite of the changes in Section 111A, the answer will continue to be in the negative and the remedy by way of filing of a civil suit cannot be said to be taken away. This is because as held long back by the Supreme Court right from the judgment in Dhulabhai's case , the court should go slowly when it comes to ouster of jurisdiction of the civil courts and the remedies which are available to the citizen.
201. Whether the plaintiffs have any legal right to sue:
It was canvassed by Mr. Chidambaram and other learned counsel appearing for the defendants that the right to rectify a register of a company is a statutory right and now available only to certain categories of people on certain grounds as specified under Section 111A of the Companies Act. It was submitted by them that even if there is any breach of any provision, now the wording of Section 111A made it necessary that the company had no option but to transfer the shares and if aggrieved, all that it could do was to appeal to the Company Law Board to get such members removed from the register. It was submitted by Mr. Chidambaram and others that in any case in the meanwhile the voting rights shall continue to be available to such persons.
202. As against that, Mr. Nariman submitted that this submission implies that even if the enrolment of any shareholder is in complete violation of law, he will be entitled to remain thereon and such persons will have the right to vote until the register is rectified. Mr. Nariman submitted that the prevention is better than a cure and the provisions of Sections will have to be read to see as to whether any prevention was provided or not.
203. As far as the right to move the civil court for rectification of the register is concerned, Mr. Nariman submitted that if one looks to the 1994 Regulations, it was clear that the shareholders were given a right to complain to the SEBI under regulation 33(2)(a). The shareholders were also given a right to give a public bid and to receive the highest price when offered by successful bidder. In the circumstances, Mr. Nariman submitted that the plaintiffs did have a stake or a locus as members of the company. He stated that, that was particularly necessary in view of the SEBI's own letter to IMFA dated May 21, 1996, that defendants were violating the regulations as can be seen in compilation I at page 121.
204. In this context, Mr. Nariman drew my attention to the observations of the Supreme Court in para. 15 in the case of Smt. Ganga Bai v. Vijay Kumar, , and submitted that the plaintiffs' right to sue was not taken away by any statute or any provision specifically. He submitted that unless any such specific provision is made, the right to sue cannot be taken away. The Supreme Court observed in the aforesaid matter as follows (page 1129) :
"There is a basic distinction between the right of suit and the right of appeal. There is an inherent right in every person to bring a suit of a civil nature and unless the suit is barred by statute one may, at one's peril, bring a suit of one's choice. It is no answer to a suit, howsoever frivolous the claim, that the law confers no such right to sue. A suit for its maintainability requires no authority of law and it is enough that no statute bars the suit. But the position in regard to appeals is quite the opposite. The right of appeal inheres in no one and, therefore, an appeal for its maintainability must have the clear authority of law. That explains why the right of appeal is described as a creature of statute."
205. Grounds on which the suit can be entertained:
Then comes the question that if such a suit can lie, what should be the grounds on which such a suit can be entertained for rectification. Mr. Nariman in this connection submitted that the grounds which are available under Section 111A(3) which were originally contained in Section 38 and Section 155 will be available to the plaintiffs. They will be so available under the clause of "sufficient cause" which existed under the proviso to Section 111A(2). Mr. Nariman submitted that even additional grounds would be available but, in any case, his case was of violation of the Regulations of SEBI which was a specifically provided clause under Section 111A(3). Mr. Nariman submitted that on superficial reading of Section 111A(2) proviso, it can be argued that all those appeals have got to be entertained. Mr. Chidambaram had submitted that now under Section 111A(2), shares are made freely transferable and the proviso thereto provides that if a company refuses to transfer shares without sufficient cause, the Company Law Board is duty-bound to direct the registration of transfer. Mr. Nariman, however, pointed out that Section 111A(2) proviso cannot mean that the Company Law Board has to allow all the appeals seeking registration of transfer of shares, whatever may be the facts. It can reject it for sufficient cause. Now Section 111A(7) refers to other clauses of Section 111 which are saved and made available under Section 111A. One such clause is Clause (7) which is with reference to title. Mr. Nariman, therefore, submitted that if there is no valid title, or if a title is sought to pass in contravention of the SEBI Regulations, the company has a right to reject the application for transfer. It cannot mean that it must first entertain the transfer and then go in appeal to the Company Law Board as canvassed by Mr. Chidambaram. Such a construction cannot be placed on Section 111A(2) proviso. Mr. Nariman submitted that this ground will also be available to a litigant whose right under a common law as a member is preserved as declared by the Supreme Court as recently as in Ammonia Supplies Corporation P. Ltd. 's case . Mr. Nariman in this context referred to me the order of the Company Law Board, Western Region, Mumbai, in the case of Estate Investment Co. Ltd. v. Siltap Chemicals Ltd. [1999] 96 Comp Cas 217 (CLB); [1999] 32 CLA 409. In para. 17 of the said judgment, the Company Law Board has discussed as to what sufficient cause would mean under the section. Mr. Nariman drew my attention to those observations for my approval. Mr. Nariman in this context also referred to section 9 of the Act to submit that Section 9 restricts the right of a member and it is made subject to the articles and memorandum of association. Now those grounds are further subjected under Section 111A(3) to some further restrictions. In any case, the submission of Mr. Nariman is that the ground of violation of the SEBI Regulations is specifically provided and is available to the plaintiffs in their suit.
206. Whether the amendments create mandatory transferability of shares:
Then comes the next question as to whether the new amendments create a complete and mandatory transferability of shares as submitted by Mr. Chi-dambaram. Mr. Nariman in this context referred me to the observations of the Supreme Court in para. 84 in the case of Life Insurance Corporation of India v. Escorts Ltd. . In that para., the Supreme Court held that (page 617) : "... a shareholder has an undoubted interest in a company, an interest which is represented by his shareholding. Share is movable property".
Thereafter the Supreme Court has held as under (page 618) :
"Where the transfer is regulated by a statute, as in the case of a transfer to a non-resident which is regulated by the Foreign Exchange Regulation Act, the permission, if any, prescribed by the statute must be obtained. In the absence of the permission, the transfer will not clothe the transferee with the right 'to get on the register' unless and until the requisite permission is obtained. A transferee who has the right to get on the register, where no permission is required or where permission has been obtained, may ask the company to register the transfer and the company who is so asked to register the transfer of shares may not refuse to register the transfer except for a bona fide reason, neither arbitrarily nor for any collateral purpose. The paramount consideration is the interest of the company and the general interest of the shareholders. On the other hand, where, for instance, the requisite permission under the FERA is not obtained, it is open to the company and, indeed, it is bound to refuse to register the transfer of shares of an Indian company in favour of a non-resident."
207. Mr. Nariman submitted that if the interpretation of Mr. Chidambaram is accepted, it would run contrary to the aforesaid observations of the Supreme Court and foreign companies could walk in and buy majority shares and it would be without any competitive bid as required by the law. Mr. Nariman drew my attention in this behalf to the observations of the Supreme Court in paras. 68 and 69 in the case of N. Parthasarathy v. Controller of Capital Issues , wherein even before the coming into operation of the regulatory code of 1994, the Supreme Court had disapproved the cornering of the shares and clandestine transactions entered into surreptitiously by holding, that it would be against public policy and illegal and void under Section 23 of the Contract Act. In paras. 68 and 69, the Supreme Court observed as under (page 685) :
"We cannot subscribe to the contention raised by Dr. Singhvi that there was nothing wrong or illegal even if the action of the Reliance Group was to corner or purchase all the shares of L&T, and even if done through intermediaries or surreptitiously cannot become illegal. If that is the law laid down by the Calcutta High Court in Babulal Choukhani v. Western India Theatres, , we disapprove it.
It is no doubt correct to say that any person or company is lawfully entitled to purchase shares of another company in the open market, but if the transaction is done surreptitiously with a mala fide intention by making use of some public financial institutions as a conduit in a clandestine manner, such a deal or transactions would be contrary to public policy and illegal."
208. Mr. Nariman also pressed into service a judgment of the Chancery Division in the case of Transatlantic Life Assurance Co. Ltd., In re [1979] 3 All ER 352, wherein the Chancery Division has held that where the acquisition of shares was effected without the consent of the treasury and which was necessary under the law, the same was vitiated.
209. Whether the present suit is a personal action or a derivative action :
Mr. S. H. Doctor, senior advocate, who appeared for defendants Nos. 4 and 5, submitted to begin with that the motive of the plaintiffs behind the litigation was not a democratic one, but was to perpetuate the management of a minority company. He referred to the percentage of voters' loyalty as indicated in the affidavit of Mr. M.D. Chhabria in support of Notice of Motion No. 3932 of 1998 at page 146. Mr. Doctor submitted that it clearly shows that but for the segregation of votes it was done at the instance of the plaintiffs, the defendants had a clear majority and the objective in seeking the segregation of votes and the injunction in the present suit was to perpetuate the minority shares. Mr. Doctor further submitted that the segregated votes ought to be permitted to be counted. However, the plaintiffs were not satisfied with that limited order which was passed on December 21, 1998, and it was, therefore, only that they got the show-cause notice issued from the SEBI on January 8, 1999. Mr. Doctor submitted that it was with this ulterior motive that they got the chairman of the SEBI Committee Report of 1997 to write to the Law Officer of SEBI by way of an interim measure. But for this intervention, the SEBI had in fact decided earlier to permit a subsequent announcement by the defendants as can be seen from their chairman's internal noting. Not only that but the newspaper report which was annexed to the plaint at page 46 also indicated that the learned functionary had intervened and advised the SEBI to function in a particular manner. Mr. Doctor criticised this conduct on the part of the plaintiffs and the manner in which the SEBI succumbed to these pressures. He submitted that this was not expected from a high functionary like the former chairman of the SEBI Committee nor was it expected from the SEBI which was supposed to function as an independent authority.
210. Then commenting at para. 8 of the plaint, Mr. Doctor submitted that it showed the ulterior motives of the plaintiffs. It clearly showed that the plaintiffs have not filed the suit either as shareholder nor have they filed the suit as a derivative action on behalf of the company. It clearly showed that they have filed it to threaten if there was a change in the management. In fact, as can be seen from paras. 9 and 10 of the plaint, during 1995 and 1996 the plaintiffs clearly say that they have no cause of action because the defendants did not disturb the then management and thereby the plaintiffs were happy. But as can be seen from para. 10 of the plaint, the plaintiffs decided to file the suit only because the defendants decided to dislodge them because of the rejection of the shares in favour of Shirish. Mr. Doctor, therefore, submitted that the commercial interest of the plaintiffs are sought to be made the basis of the plaint to deny them voting rights to the majority of the shareholders. This cannot be permitted.
211. Mr. Doctor submitted that in fact there was a clear collusion between the plaintiffs and the management of the company. Para. 12 of the plaint states that on inquiries, the plaintiffs came to know about the illegalities of the defendants. It was, therefore, that the defendants took out Chamber Summons No. 1153 of 1998 for seeking particulars about these inquiries. In para. 9 of their reply, the plaintiffs stated that they got the information orally. In the circumstances, Mr. Doctor asked as to how all such information can be obtained orally. The information consisted of the precise shareholding of various defendants and the documents in support thereof. How could all this information can be gathered orally. Obviously the statement was not a true one and it was made to hide the collusion between the plaintiffs and the company, but for which the plaintiffs would not have got the entire information to file the suit. Similarly, the defendants' attorney specifically asked information by sending a notice to the plaintiffs and the reply of the plaintiffs' attorney was that the information will be given in evidence. This refusal to give them the particulars and to hide them merely show that they were hand in glove with the company.
212. Mr. Doctor pointed out that the plaintiffs were undoubtedly happy with the existing management and they had no cause of action against the company. It was not in that sense a personal action. But as clearly stated by them, it was an action in personal interest for their commercial purpose. This could not be styled even as a derivative action which is supposed to be on behalf of the body of shareholders on the company who could not act on their behalf in their protection. He relied upon a judgment of the Chancery Division in the case of Towers v. African Tug Co. [1904] 1 Ch D 558. Mr. Doctor submitted that the only right which a shareholder had was to receive dividends and to vote in the general body meeting of the company. In the present case, the plaintiffs had admittedly received dividends as can be seen at page 567 of the compilation of documents. Apparently, therefore, the plaintiffs were filing the suit in support of the Mallyas and in support of the existing management. The Chancery Division observed at page 567 thus :
"If it be the fact, as I think it is, that these plaintiffs knew of all that had been done, received their dividends with knowledge of all the facts, and then brought this action with the money still in their pockets, ought they to be allowed to bring this action, which, as I have pointed out, is, to my mind, an action such as they can bring in consequence of their personal interest in the matter ? I think not. I think that an action cannot be brought by an individual shareholder complaining of an act which is ultra vires if he himself has in his pocket at the time he brings the action some of the proceeds of that very ultra vires act. Nor, in my opinion, does it alter matters that he represents himself as suing on behalf of himself and others. I think that the reason which requires us to say he ought not to bring such an action equally requires us to say that he ought not to be the peg upon which such an action is to be hung for the benefit of others."
213. The court held in that case that in a case like mis, where the plaintiff was acting as a peg for the benefit of others, all personal objections against the individual plaintiff must be gone into and considered before relief can be granted. Mr. Doctor, therefore, submitted that the defendants are entitled to point out as to how the plaintiffs were acting as agents of the company not for the welfare of the majority of the shareholders but for their own personal aid and for the benefit of the Mallya Group and the defendants were entitled to point out the personal objections against the individual shareholder. They have got to be considered before it is decided to grant any relief to such plaintiffs. Mr. Doctor then relied upon the judgment of the Court of Appeal in the case of Nurcombe v. Nurcombe [1985] 1 All ER 65 ; 1 WLR 370, wherein the court cautioned that the derivative action should not be permitted to be misused for individual purpose. At page 376, the court observed thus (page 69 of All ER) :
"It is pertinent to remember, however, that a minority shareholder's action is in form nothing more than a procedural device for enabling the court to do justice to a company controlled by miscreant directors or shareholders. Since the procedural device has evolved so that justice can be done for the benefit of the company, whoever comes forward to start the proceedings must be doing so for the benefit of the company and not for some other purpose. It follows that the court has to satisfy itself that the person coming forward is a proper person to do so. In Cower Modern Company Law, fourth edition (1979), the law is stated, in my opinion correctly, in these terms, at page 652 :
'The right to bring a derivative action is afforded the individual member as a matter of grace. Hence, the conduct of a shareholder may be regarded by a court of equity as disqualifying him from appearing as plaintiff on the company's behalf. This will be the case, for example, if he participated in the wrong of which he complains'."
214. Again at page 377, the court observed thus (page 70 of All ER) :
"My understanding of these judgments is that the court is entitled to look at the conduct of a plaintiff in a minority shareholder's action in order to satisfy itself that he is a proper person to bring the action on behalf of the company and that the company itself will benefit. A particular plaintiff may not be a proper person because his conduct is tainted in some way which under the rules of equity may bar relief. He may not have come with 'clean hands' or he may have been guilty of delay."
215. Later on, the court quoted with approval the earlier cited observations in Towers V. African Tug Co. [1904] 1 Ch D 558.
216. Then, Mr. Doctor relied upon the judgment of the Court of Appeal in the case of Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2) [1982] 1 All ER 354, wherein the court held at page 355 as follows :
"Although the proper plaintiff in an action in respect of a wrong done to a company was prima facie the company itself, exceptionally a minority shareholder could bring a derivative action where the wrong done to the company amounted to fraud and the wrongdoers were themselves in control of the company and, thus, able to prevent the company from suing; but when such an action was brought by a minority shareholder the question whether in fact the company was controlled by the alleged wrongdoers should first be determined before the derivative action itself was allowed to proceed."
217. Later, in the judgment, the Court of Appeal discussed that, as laid down in the leading case of Foss v. Harbottle [1843] 2 Hare 461, an individual shareholder cannot bring an action into courts to complain of an irregularity (as distinct from illegality) in the conduct of the company's internal affairs provided that the irregularity is one which can be cured by a vote of the company in general meeting. The derivative action is an exception to this general rule. The idea behind this principle is that if the minority shareholders are denied this right, their grievance eould never reach the court because the wrongdoers themselves being in control would not allow the company to sue. Hence, what is accepted is that it must be a genuine action on behalf of the aggrieved minority in the interest of the company and the credentials of the concerned minority will have to be gone into. In a case like this, the action must be against the management of the company to throw it out and not to tolerate as it was canvassed in East Pant Du United Lead Mining Co. Ltd. v. Merryweather [1864] 2 Hem and M 254, 257 ;
"If a minority of a company were allowed to file a bill in the company's name, charging fraud against some of the majority, and alleging that those persons were not to be considered as shareholders or entitled to vote, and thus endeavouring to turn their minority into a majority so as to acquire the right to use the name of the company, any company's affairs might be made the subject of litigation upon allegations of fraud which might be entirely false ; and yet, as this could not be proved till the hearing, irremediable mischief might be done in the meantime."
218. Mr. Doctor submitted that as can be seen, the plaint clearly says that the plaintiffs decided to move the court because of the attempt to get the shares of Shirish (defendant No. 5) registered. That indicated the attempt to dislodge the present management on the part of the defendants. According to the plaintiffs, the shares of Shirish were rightly rejected but it was at that stage that the plaintiffs decided to file the suit. Similar is the stand of the company, as can be seen from the affidavit of Mr. Raghunathan in support of the second notice of motion at page 162, wherein Mr. Raghunathan has stated thaf on July 17, 1997, the transfer of shares in favour of Shirish was rejected because of (i) the illegality disclosed through the declarations of M.D. Chhabria and K.R. Chhabria made on April 17, 1997, and (ii) because of the breaches of the SEBI Regulations 1994-97. Mr. Doctor pointed out that this statement and stand is not correct inasmuch as much thereafter in the board meeting of August 26, 1997, a transfer of 850 shares to Mahameru (defendant No. 4) and 250 shares to IMFA (defendant No. 3) was permitted. That was after the rejection of shares sought to be transferred on behalf of Shirish. This can be seen at page 438 of the compilation. Hence, Mr. Doctor submitted that the declarations of April 17, 1997, upon rejection of shares of Shirish was not at all the real ground. The real intention was to obstruct the majority from exercising its rights and to perpetuate the minority group. This very thing was specifically there in Merry weather's case [1864] 2 Hem and M 254, 257 and that was sought to be achieved through the present suit.
219. Mr. Salve, learned counsel appearing for defendant No. 1 supported the above submission by relying upon Barrett v. Duckett [1995] 1 BCLC 243 wherein the Court of Appeal held that a shareholder would be allowed to bring a derivative action on behalf of a company where the action was brought bona fide for the benefit of the company for redressal of wrongs to the company for which no other remedy was available and not for an ulterior purpose. Conversely, if the action was brought for an ulterior purpose, or if another adequate remedy was available, the court would not allow the derivative action to proceed.
220. Mr. Nariman pointed out that it was open to the shareholder to initiate a personal action. He made it clear that the action by the plaintiffs was not a derivative action on behalf of the other shareholders of the company. He submitted that many allegations were made against the plaintiffs with respect to the alleged improper invoicing on their part as the distributors of Herbertsons and, therefore, the income of Herbertson being increased correspondingly by the Assessing Officer. Mr. Nariman submitted that the said order of the Assistant Commissioner of Income-tax had been challenged by Herbertsons. But that was a different matter. Assuming without conceding that the plaintiffs were in any way tainted, Mr. Nariman submitted that the doctrine that in a derivative action one should approach the court with clean hands is held to be having the exception, namely that of a personal action. He relied upon the following passage from Palmer's Company Law, 24th edition 1987 at page 978 :
"The derivative action is subject, however, to the doctrine of clean hands. As an equitable invention, the derivative action cannot be used to do injustice. The principle has been applied in cases of acquiescence by the plaintiff shareholder in the wrongdoing of which he later complains and in cases where the plaintiff has been regarded as the puppet of outsiders whose interests are opposed to those of the company. The requirement of clean hands does not apply to the personal action."
221. He emphasised the observations of the Supreme Court in the case of Public Passenger Service Ltd.'s case [1966] 36 Comp Cas 1 in para. 9 thereof, which are to the following effect (page 6) :
"Counsel for the appellant points out that the respondents are the trade rivals of the appellant and are anxious to cripple its affairs, and the appellate court recorded the finding that the respondents were acting mala fide and prejudicially to the interests of the appellant and their conduct in taking various proceedings against the appellant is reprehensible. Counsel then relied upon the well known maxim of equity that he who comes into equity must come with clean hands' and contended that the courts below should have dismissed the applications as the respondents did not come with clean hands. This contention must be rejected for several reasons. The respondents are not seeking equitable relief against forfeiture. They are asserting their legal right to the shares on the ground that the forfeiture is invalid, and they continue to be the legal owners of the shares. Secondly, the maxim does not mean that every improper conduct of the applicant disentitles him to equitable relief. The maxim may be invoked where the conduct complained of is unfair and unjust in relation to the subject-matter of the litigation and the equity sued for. The unwarranted proceedings under Sections 402 and 237 of the Companies Act, 1956, and other vexatious proceedings started by the respondents have no relation to the invalidity of the forfeiture and the relief of rectification and are not valid grounds for refusing relief."
222. Mr. Nariman, therefore, submitted that as observed in Palmer's Company Law, the requirement of clean hands does not apply to personal action and again, as observed by the Supreme Court, one who comes to court must come with clean hands does not mean that every improper conduct of the applicant disentitles him to equitable relief. The maxim can be invoked where the conduct complained of is unfair and unjust in relation to the subject-matter of the litigation. Mr. Nariman submitted that what the plaintiffs were aggrieved was the violation of the takeover regulations and the clandestine manner in which the shares were being cornered by the defendants. The plaintiffs' conduct is to be seen in that context and there is nothing to be blamed as far as the plaintiffs are concerned.
223. In this context, Mr. Nariman referred me to a judgment of the Chancery Division in the case of Mutter v. Eastern and Midlands Railway Co. Ltd. [1988] 38 Ch D 92. In that matter, the defendant-company had declined to give copies of the debenture stock register to the plaintiff. The trial court had decided in his favour. In appeal, it was contended that he did not have such a right under the statute, he was not a bona fide shareholder but a nominee of a rival company and there was a want of candour in his affidavit. Lindley J., held that there was want of candour in his affidavit and yet he was not guilty of such misrepresentation or deceit as to disentitle him to the relief to which he would otherwise be entitled. He also referred me to the another judgment of the Chancery Division in the case of Mosely v. Koffyfontein Mines, Ltd. [1911] 1 Ch D 73. In that case, the plaintiff who was a director of the company at the relevant time had originated the alteration in the articles and subsequently he wanted to contend that the resolution altering the article and increasing the capital was ultra vires. Relying upon the earlier judgment in the case of Towers v. African Tug Co. [1904] 1 Ch D 558, it was stated that it was impermissible. In that case, the plaintiff had with full knowledge received a dividend and still wanted to have a remedy against the directors to refund to the assets of the company the amount which had been wrongfully abstracted from the capital. In Mosely's case [1911] 1 Ch D 73 what was sought was a prevention of the wrong in future. Cozens Hardy M. R. observed as under (page 77) :
"This appeal raises two points, one of which is of general importance, and the other of which is only of importance as affecting the construction of the articles of this particular company. The first point, which, as I say, is of general importance, is this. The plaintiff commences his action suing on behalf of himself and all other shareholders against the company and the directors, and he seeks to restrain an intended issue of a very large number of shares, which the plaintiff says are not authorised to be issued by the defendant-company or the directors at the present time. Mr. Upjohn takes a preliminary objection to this effect. He says, 'you, the plaintiff, were a moving party to the passing of the resolutions which authorised this issue. You, yourself, have taken certain shares under an earlier issue made in pursuance of those resolutions, and there is a personal exception to your position as plaintiff, and, whatever other shareholders might do, you at least cannot restrain the company from issuing these shares, even on the assumption that the issue is improper' ; and for that proposition Mr. Upjohn cites the case of Towers v. African Tug Co. [1904] 1 Ch D 558 which it is necessary for me to deal with. Now what was Towers v. African Tug Co. [1904] 1 Ch D 558 ? That was a case in which the directors had paid dividends out of capital, and the plaintiffs in that case sought, not an injunction or anything with reference to the future, but a personal order upon the directors to refund to the assets of the company the amount which had been wrongfully abstracted from the capital. The company retaliated by saying : 'You, the plaintiffs, yourselves received this dividend with full knowledge of all the facts, and, by way of counter-claim, we ask that you will repay to the company the dividend which you have wrongfully received'. That was an action in which, but for extraordinary circumstances, the company itself would have been the proper and the only proper plaintiff. I may observe that in the counter-claim the company recovered judgment against the plaintiffs in respect of these very dividends that they had in their pockets, and it is only under exceptional circumstances that anybody but the company is allowed to take proceedings to sue the very persons alleged to be liable to the company, whether in a fiduciary character as directors or in any other character. It is only under very exceptional circumstances that a plaintiff suing on behalf of himself and all other shareholders in a representative character is allowed to seek relief which properly or under any ordinary circumstances could be enforced by the company itself. In a case of that kind it was said in Towers v. African Tug Co. [1904] 1 Ch D 558 that a plaintiff who had himself with full knowledge received a dividend, and still had it in his pocket, was not a person who could be allowed under the peculiar procedure of the court to claim a remedy against the directors, which remedy prima facie ought to be enforced by the company, but, so far as I am aware, that doctrine has no application at all to a case where relief is not sought in respect of the past, but where what is sought is an injunction to restrain a wrong-doing in the future ; and, indeed, it would be a little short of shocking to say that a person who, it may be, in good faith, with knowledge of the facts, but in ignorance of the law years ago, did take a step which he now finds was improper, and who, as it may be, received shares or money in years gone by in respect of that transaction, is disabled from saying to the court that what this company proposes to do in future is illegal and improper and asking the court to restrain them from doing it. In the decision in the case of Towers v. African Tug Co. [1904] 1 Ch D 558 (a decision to which I was myself a party, and which I see no reason whatever to question, if it were open to question) there is nothing, in my view, which has any bearing on the rights of a plaintiff suing not in a peculiar and irregular manner for the company or on behalf of the company, but suing in his own individual right as an individual shareholder seeking to restrain its future actions. There is nothing in that case, so far as I am aware, or in any other authority, and certainly nothing in principle, which prevents a plaintiff from saying 'a wrong may have been done in the past--that is a matter with which we have nothing to do here--but you shall not do this wrong again in the future'. In my opinion, there is nothing in the preliminary objection taken by Mr. Upjohn, assuming as I do the accuracy of all the facts which he opened on this point, which prevents us from considering this appeal."
224. A similar view is taken by a Division Bench of this court in the case of Sul-leman Somji v. Bank of Bombay 31 BLR 319. In that case, it was contended that the sole object of the appellant in seeking inspection was to cause annoyance to the bank officials. However, as can be seen at page 332 of the report, the Division Bench held "and even if it be that the appellant has some indirect motive of the kind suggested, it cannot affect his legal right, if he makes out that right independently of the motive". Mr. Nariman pointed out that similar is the approach of our Supreme Court in the case of Dr. Kashinath G. Jalmi v. Speaker , wherein the Supreme Court observed that (although in the context of a writ petition) where questions of lawful authority to occupy a public office are involved, such propositions are not to be dismissed merely on the ground of laches at the admission stage without examining the contention in it. In para. 34, the court observed as follows (page 717) :
"In our opinion, the exercise of discretion by the court even where the application is delayed, is to be governed by the objective of promoting public interest and good administration ; and on that basis it cannot be said that discretion would not be exercised in favour of interference where it is necessary to prevent continuance of usurpation of office or perpetuation of an illegality."
225. Mr. Nariman, therefore, submitted that where the defendants were trying to corner the shares and capture power in the company in gross violation of the takeover regulations, the concern of the court ought to be directed to the likely usurpation of this public office, unimpressed by the other improprieties (if any) on the part of the plaintiffs. That by itself would not disentitle the plaintiffs from canvassing their submissions. In this context, Mr. Nariman pointed out that the plaintiffs had at no point of time consented nor were they parties to any of the resolutions whereby the illegal transfer of shares to IMFA and Mahameru was sanctioned by the respondent-company on May 30, 1996, or thereafter. The plaintiffs were not even directors of the respondent-company nor were they present or have voted in favour of the aforesaid resolution which is sought to be challenged by the plaintiffs in the present case. Mr. Nariman referred me to the allegations made by M.D. Chhabria in paras. 8, 9 and 10 of the affidavit in reply to Notice of Motion No. 3120 of 1996. Even in that affidavit, Mr. Chhabria had not alleged that the plaintiffs in any way were party to the resolutions which the plaintiffs were seeking to declare as void.
226. Conduct of defendants prior to filing of the suit:
Mr. Nariman drew my attention to the conduct of the defendants. This was in the context of the allegation of the defendants that the plaintiffs have faulted the efforts of IMFA, K.R. Chhabria or M.D. Chhabria to make a public offer even ex post facto. As far as the period prior to the suit is concerned, it can be seen from the letter dated December 7, 1995, that IMFA wrote to the SEBI contending that the 1994 Regulations were not applicable to it and it sought clarification from the SEBI. IMFA also wrote to the Bombay Stock Exchange about non-applicability of Clauses 40A and 40B of the Listing Agreement. On January 10, 1996, the SEBI wrote to IMFA with respect to clarification sought (vide letter dated December 7, 1995), and in that requested IMFA to give notice of acquisition giving date of acquisition, number of shares acquired, name of broker, etc. The letter also sought clarification about the persons behind IMFA along with details of acquisition of any persons acting in concert with them. IMFA replied on January 24, 1996, giving the names of its directors and three shareholders (Ram Raheja 40,000 shares, I. Khairulla 10,000 shares, and F. Khairulla 10,000 shares) and specifically stated "we have acted on our own and we have not acted in concert with any other person in the above transactions nor has any person acted in concert with us". It was, however, added in that letter that "on inquiry we are informed that two of our directors, namely Ram Raheja and Harish Raheja, are also nominee directors (in some other companies) who have been holding shares of Herbertson for some time past. However, the names of the companies were not mentioned in that letter. In response to this letter of IMFA, the SEBI wrote back on May 21, 1996, referring to earlier correspondence and stated that "upon the examination of facts of the case and legal opinion forwarded by you (i.e., IMFA), it was the view of the SEBI that provisions of the regulations were applicable". In the last paragraph, the SEBI advised "you are therefore, advised to comply with the provisions of the regulations immediately, failing which appropriate action would be initiated against you".
227. It is also material to note that in response to IMFA's letter to the Bombay Stock Exchange dated December 7, 1995, the Bombay Stock Exchange replied on February 12, 1996, that Clauses 40A and 40B of the listing agreement were mandatory and IMFA should comply with them. What is surprising is that Imfa wrote back to stock exchange on February 20, 1996, that without prejudice to their stand, they were proceeding to comply with Clause 40B as directed. Again on February 23, 1996, they wrote to the stock exchange that they were releasing the advertisement in the newspaper announcing the acquisition of shares. What is material to note is that no such offer was ever made to public. There is no explanation in any of the affidavits as to why such representation was made to the stock exchange.
228. As far as the SEBI is concerned, IMFA carried on its correspondence with it further. It is relevant to note that they wrote a letter on August 19, 1996, to the SEBI as per the draft of Herbertson requesting an exemption under regulation 4 of Chapter III of the takeover regulations. The SEBI did not accept any of the submissions of IMFA and ultimately on October 9, 1996, issued the first showcause notice to Ram Raheja of Imfa under Section 24 of the SEBI Act for (a) non-compliance with regulation 6 which requires disclosure to the company and stock exchange of aggregate holding above 5 per cent. and for
(b) breach of regulation 10. The show-cause notice clearly stated as follows :
"It prima facie appears that you have violated the provisions of regulations 6 and 10 in not having made the public announcement before making the substantial acquisition of shares and are, thus, liable to be prosecuted for the violation of the said regulations under Section 24 of the SEBI Act."
229. In the same letter, the SEBI turned down the request of IMFA for exemption under regulation 4. The SEBI stated that the contention that the residual public holding will go down to less than 20 per cent. was no ground for non-compliance. It further stated that in previous cases, the SEBI had allowed the acquirer to disinvest within a period of six weeks. Mr. Nari-man submitted that this would be an aspect on which evidence will have to be sought from the SEBI,
230. Ram Raheja replied to this notice of the SEBI on October 19, 1996, that he had ceased to be a director of IMFA from June 29, 1996. M.D. Chhabria took over the management of the company. Hence, Mulla and Mulla wrote on December 23, 1996, again on behalf of Ram Raheja stating that he had no intention of either taking control or taking part in the management of Her-bertson, and that he had purchased the shares only by way of investment. In view of reply of Ram Raheja that he was no longer a director, the SEBI sent second show-cause notice now addressed to the managing director of Imfa on March 31, 1997, again initiating prosecution under Section 24 for breaches of regulations 6 and 10. That letter specifically stated that the transactions from October 27, 1994, to November 21, 1995, were with an intention to take over the management of the target company in violation of regulations 6 and 10 of 1994 Regulations. This second show-cause notice was replied by Mulla and Mulla on behalf of IMFA stating that a genuine investor should not be penalised. Thereafter, Mulla and Mulla forwarded two legal opinions to the SEBI in July, 1997, in support of their submissions.
231. Based on the aforesaid chain of events, Mr. Nariman submitted that whatever that is stated above has come on record of the court only fronrthe correspondence produced by the defendants which correspondence is entirely prior to the filing of the suit and of which the plaintiffs were not at all aware. It is clear that the Bombay Stock Exchange as well as the SEBI were insisting on a prior announcement and Imfa (with the support of Herbertson) was trying to thwart the public announcement by relying on legal opinion. Imfa at some point of time stated to stock exchange on February 23, 1996, that it was ready to release the advertisement. A copy of that letter was also forwarded to the SEBI along with Imfa's letter dated February 23, 1996, to the SEBI. Yet no announcement was made at any point of time. As far as the SEBI is concerned, its stand was clear that the prior announcement was necessary and that there was breach of regulations 6 and 10 on the part of IMF A, and, therefore, show-cause notices were given first to Ram Raheja and then to the managing director of IMF A. There is no official document produced on record from proper custody showing any decision/communication from the SEBI to the contrary any time thereafter. They have never asked for any subsequent announcement nor have the defendants given any other prior or subsequent announcement.
232. Conduct of the defendants subsequent to the filing of the suit;
Mr. Nariman pointed out that whereas Suit No. 3910 of 1997 was filed in October, 1997, to challenge the acquisitions of the defendants, and particularly those of Imfa which company was facing the show-cause notices issued by the SEBI (and which were subsisting) did not care to challenge them. It was for the first time in September, 1998, that the defendants took out chamber summons for particulars and for the first time they filed their reply on December 18, 1998. The writ of summons had been served on the defendants within the time stipulated for that and the written statement was expected to be filed by April 16, 1998, as per rule 74 of the High Court (O. S.) Rules. The same has not been filed as yet. Mr. Nariman submitted that the documents which were sought by the SEBI right from 1995-96 were not made available to them leaving SEBI helpless, but they are being produced for the first time now in court, including some of the documents of SEBI itself. Mr. Nariman submitted that if the defendants are aggrieved by filing of the suit or prayers made therein, they were expected to move with clean hands and quickly. There was gross delay on their part in this behalf.
233. That apart, as far as the SEBI is concerned, it was in the know of filing of the suit though it has not been joined as a defendant therein. Mr. Nari-man tendered a photocopy of the letter dated December 4, 1997, which showed that the papers and proceedings of Suit No. 3910 of 1997 were forwarded to the SEBI by the attorneys of the plaintiffs. In that letter it has been specifically stated that "it is our clients' grievance in that suit that had a public announcement been made prior to the acquisition of the said shares, our clients would have made competitive bid. This right of our clients has been denied. In the suit, our clients have averred that they were prepared to make a competitive bid as they have substantial interest apart from in Herbertsons. Copies of the plaint and proceedings in that suit are annexed. These copies also include an ad interim order of the High Court dated October 3, 1997. In the circumstances, it is imperative that our clients are given an opportunity of being heard before you take any decision in the investigation before as decision which you take is likely to affect our clients legally and otherwise."
234. Mr. Nariman then-drew my attention to the note of the meeting which K. R. Chhabria had with the chairman of the SEBI on December 31, 1997. This noting has been produced at pages 338-340 of compilation ffl-A, and it is supposed to be a copy of the internal record of the SEBI. It is not stated as to how this record is obtained by the defendants though at page 131 of his reply to Notice of Motion No. 3922 of 1998 Mr. Chhabria has stated that he has received these internal documents. Mr. Nariman submitted that apart from the fact that it is a photocopy of a document which is not coming forward through proper custody, it is not a complete document also. The documents produced in such a manner and which are incomplete ought not to be taken cognizance of by the court. Mr. Nariman submitted that the entire case of the defendants is built on this document. Mr. Nariman pointed out that this note begins by saying "discussed", and then there is certain noting. If it is a noting beginning with the word "discussed", it has to be a discussion on some statement, report, communication or representation. That document is not produced. Besides; on the rear side of the document, it appears as if there were certain further statements thereon and they have not been photocopied. The tenor of the document is that according to the director of the SEBI, a subsequent announcement can be made. Thereafter there appears a letter of Mr. M. D. Chhabria to SEBI dated January 20, 1998, which is at page 220 of the compilation C-l, which states that according to his understanding, the SEBI was not satisfied with the explanation given and the SEBI wants its letter of May 21, 1996, to be complied with. The letter further states "in order to settle the matter to the satisfication of the SEBI, I have now decided without prejudice to my earlier stand to make the public offer which will be made jointly and/or severally by the companies under my control under regulations 10, 11 and 12 of the Takeover Code, 1997". The letter further states that he was going ahead with the appointment of merchant banker and seeks a confirmation from the SEBI that they were in agreement with the above. The SEBI does not give any such confirmation at any point of time. Thereafter there are series of letters dated March 16, 1998, and April 2, 1998, again seeking this confirmation. The SEBI however did not give any such confirmation. On the other hand, on May 8, 1998, the SEBI wrote to M. D. Chhabria asking for full details of acquisition by three companies, including terms and conditions of loan, rate of interest, time for which loan was given, securities, pro-note collateral furnished against this loan and other details. In para. 5(f), the SEBI specifically asked as to how and at what point of time did M.D. Chhabria reach the conclusion that promoters of IMF A, Mahameru and Shirish, would not be able to repay the loan. The SEBI also asked for details of various steps taken by Chhabria to recover this amount from the above companies. It also sought complete correspondence in this behalf. Mr. M. D. Chhabria replied on May 28, 1998, wherein he stated "the position was confirmed through mutual discussion and since the erstwhile owners of IMF A, Mahameru and Shirish sold all their shareholding in these companies to me and my nominees, no further steps were considered necessary and, therefore, not taken". No papers containing the advice given by chartered accountant Kukreja were made available to the SEBI along with these papers. In Mr. Chhabria's letter, there was no mention whatsoever that there was to be a return of 25 per cent. or 22.5 per cent. per annum to either M.D. Chhabria or to Royal Wines. All these documents of the chartered accountants are subsequently produced in the court and never made available before. Mr. Nariman therefore submitted that such documents will have to be taken with a pinch of salt. , The defendants have also relied upon a report annexed in their compilation which is made by one Mr. Gupta to the SEBI which is at pages 476-486 and therefrom it is seen that page 483 is incomplete and that there was something in between which is not made available to the court. This is also a document which is not coming from proper custody and which is incomplete and on which reliance is sought to be placed. Mr. Nariman submitted that apart from the noting dated December 31, 1997, and Mr, Gupta's report which suggested ex post facto announcement, there was nothing in the record on which the defendants could lay hand. However, what is important is that whereas the defendants were asking the SEBI to confirm as to whether a subsequent announcement can be made, the SEBI never gave any such communication either officially stating that such announcement can be made or confirming in reply to Chhabria's letter that such an announcement be made. What is further interesting to note is that after the decision of SEBI's Appellate Tribunal in the case of Fascinating Leasing and Finance P. Ltd. v. SEBI [1998] 30 CLA 206 (SAT) (Bom) (decided on July 16, 1998), Mr. M. D. Chhabria withdrew his offer of public announcement, which is what he ultimately wrote to the SEBI on November 22, 1998. Thus, the unilateral offer made by him on January 20, 1998, was withdrawn by him on November 22, 1998, allegedly on the basis of non-confirmation by the SEBI when the SEBI had never informed him that any such offer be made or that they would confirm it. The reference to the case of Fascinating Leasing and Finance P. Ltd, v. SEBI [1998] 30 CLA 206 (SAT) (Bom) and its effect on the stand of the defendants can be seen from an opinion sought by the defendants of a former Solicitor General which is produced in the compilation. The querists had specifically asked a question therein as to whether it is advisable to go ahead with the public advertisement after the judgment in the case of Fascinating Leasing and Finance P. Ltd. v. SEBI [1998] 30 CLA 206 (SAT) (Bom). Mr. Nariman therefore submitted that the case of the defendants that their public offer was thwarted by the plaintiffs has no basis, although they tried to contend so in their affidavit in reply. Mr. Nariman further submitted in this context that what is relevant is that under regulation 14, such an offer has to be made in advance before acquisition and there is no provision for a subsequent announcement and assuming without conceding that any such interpretation is possible, no such announcement was ever suggested by the SEBI nor has the same been given by the defendants and that there was no impediment against the same.
235. Mr. Nariman submitted that from the record produced by the defendants it is clear that the SEBI had given a show-cause notice first to Ram Raheja and then to IMFA for violation of regulations 6 and 10 which were prior to filing of the suit. The note filed by M D. Chhabria to the SEBI on July 22, 1997 (which is also prior to the filing of the suit), dearly shows involvement of the Chhabrias in the loan given to IMFA, Mahameru and Shirish, by which the shares of Herbertson were acquired (at page 197 of compilation of documents I). It also shows the action in concert. Though the SEBI asked for particulars of loan, these particulars were not given. Even in March and May of 1998, when specific queries were made in that behalf, none of the supporting documents of chartered accountant Kukreja were produced to the SEBI. In the light of all these circumstances, the SEBI was ultimately constrained to issue the show-cause notices to M. D. Chhabria and K. R. Chhabria on January 8, 1999, alleging an action in concert in breach of the takeover code vis-a-vis the control of Herbertson.
236. Conduct of SEBI:
With respect to the conduct of SEBI, Mr. Nariman pointed out that certain aspects thereof were undoubtedly unsatisfactory. However, by and large, it can be said that it was consistent in the stand it had taken. It had all throughout maintained that a prior public offer before acquisition was necessary under the Takeover Code. Mr. Nariman conceded that it was unfortunate that an attempt to influence the SEBI was made by tendering opinions of persons who at one time held high judicial offices. He, however, pointed out that it was the defendants who gave the opinion in this behalf for the first time on May 21, 1996, and then on July 16, 1997, and thereafter on July 21, 1997. Mr. Nariman accepts that the plaintiffs have also obtained such an opinion in September, 1997, but he maintains that it was with a view to taking the decision of filing a suit which was filed in October, 1997. On coming to know that the defendants had tendered the opinions to the SEBI, the plaintiffs also found themselves helpless and gave one such opinion and forwarded the opinion obtained on September 11, 1997, on December 31, 1997, and later on forwarded another opinion on February 10, 1998. Mr. Doctor had criticised the author of the opinion dated February 10, 1998, by alleging that he had tried to interfere in the decision making by the SEBI. Mr. Nariman, on the other hand, pointed out that as can be seen not less than three opinions were forwarded by the defendants to the SEBI much earlier. That apart, the defendants were producing photo copies of the notings from the files of the SEBI as also their reports and giving incomplete texts thereof. Mr. Nariman submitted that this shows as to how and who had better access and influence on SEBI. That apart, he maintains that the stand of SEBI with respect to public announcement was all throughout very clear. He pointed out that it was because of the complaint lodged by the plaintiffs that not merely the defendant but Mr. Vijay Mallya was also given a notice for the acquisition made by him. This can be seen from the affidavit of Mr. Reddy at page 90. Thus, the finding of SEBI is also against Mr. Vijay Mallya.
237. Order unless set aside remains valid:
Mr. Dada submitted that it was not known whether the investigating officer had done any investigation before issuing the notices. He therefore submitted that they were contrary to regulations 33 to 37 of the 1994 Regulations. They were illegal and mala fide. Issuance of notices cannot mean that the SEBI had taken a prima facie view. Mr. Nariman therefore submitted that what is to be noted is that there were two show-cause notices, first to Ram Raheja dated October 9, 1996, and then the second one to IMFA dated March 31, 1997, issued by the SEBI which were both prior to the filing of the suit. The plaintiffs were not aware of the same and the notices have been placed on record by the defendants themselves. There is a third show-cause notice dated January 8, 1999, which is issued subsequent to the filing of the suit. Mr. Nariman submitted that the defendants have not cared to challenge any notices, and so long as these notices hold the field, they could not be wished away. They were notices issued by a competent authority and unless they were challenged appropriately by filing a writ petition, it would not be open to anyone to go behind them and question them. He relied upon the observations of the Supreme Court in the case of Life Insurance Corporation of India v. Escorts Ltd. , in para. 84, wherein the Supreme Court observed as follows (p. 619) :
"As we said earlier, under the scheme of the Act, it is the Reserve Bank of India that is constituted and entrusted with the task of regulating and conserving foreign exchange. If one may use such an expression, it is the 'custodian--general' of foreign exchange. The task of enforcement is left to the Directorate of Enforcement but it is the Reserve Bank of India and the Reserve Bank of India alone that has to decide whether permission may or may not be granted under Section 29(1) of the Act. The Act makes it its exclusive privilege and function. No other authority is vested with any power nor may it assume to itself the power to decide the question whether permission may or may not be granted or whether it ought or ought not to have been granted. The question may not be permitted to be raised either directly or collaterally. We do not, however, rule out the limited class of cases where the grant of permission by the Reserve Bank of India may be questioned, by an interested party in a proceeding under Aritlce 226 of the Constitution, on the ground that it was mala fide or that there was no application of the mind or that it was opposed, to the national interest as contemplated by the Act, being in contravention of the provisions of the Act and the rules, orders and directions issued under the Act. Once permission is granted by the Reserve Bank of India, ordinarily it is not open to anyone to go behind the permission and seek to question it."
238. Similar are the observations of the Supreme Court in the case of Shiv Chan-der Kapoor v. Amar Base, , in the context of the Delhi Rent Control Act, wherein in paras. 22 and 23, the Supreme Court observed as follows (page 333) :
"There is another aspect of the matter. The Controller's permission when granted to create a limited tenancy under Section 21 of the Act is presumed to be valid unless declared otherwise. It is, therefore, for the person assailing its validity to get such a declaration from a proper forum in a proper proceeding. Unless this is done, the order remains enforceable. The duty is clearly on the tenant himself to raise the plea of invalidity and unless the order is declared invalid at his instance, its enforceability cannot be doubted.
In Wade's Adminsitrative Law, sixth edition at pages 351-353, there is an illuminating discussion of this topic. It has been pointed out that 'void' is meaningless in an absolute sense ; and 'unless the necessary proceedings are taken at law to establish the cause of invalidity and to get it quashed or otherwise upset, it will remain as effective for its ostensible purpose as the most impeccable of orders'. In the words of Lord Diplock, 'the order would be presumed to be valid unless the presumption was rebutted in competent legal proceedings by a party entitled to sue."
239. In the case of State of Punjab v. Gurdev Singh , in the context of dismissal from service, the Supreme Court observed as follows (page 5) : "In the instant cases, the respondents were dismissed from service, May be illegally. The order of dismissal has clearly infringed their right to continue in the service and indeed they were precluded from attending the office from the date of their dismissal. They have not been paid their salary from that date. They came forward to the court with a grievance that their dismissal from service was no dismissal in law. According to them the order of dismissal was illegal, inoperative and not binding on them. They wanted the court to declare that their dismissal was void and inoperative and not binding on them and they continue to be in service. For the purpose of these cases, we may assume that the order of dismissal was void, inoperative and ultra vires, and not voidable. If an Act is void or ultra vires it is enough for the court to declare it so and it collapses automatically. It need not be set aside. The aggrieved party can simply seek a declaration that it is void and not binding upon him. A declaration merely declares the existing state of affairs and does not 'quash' so as to produce a new state of affairs.
240. But none the less the impugned dismissal order has at least a de facto operation unless and until it is declared to be void or nullity by a competent body or court. In Smith v. East Elloe Rural District Council [1956] AC 736, 769 ; [1956] 1 All ER 855 (HL), Lord Radcliffe observed (All ER page 871) :
'An order, even if not made in good faith, is still an act capable of legal consequences. It bears no brand of invalidity on its forehead. Unless the necessary proceedings are taken at law to establish the cause of invalidity and to get it quashed or otherwise upset, it will remain as effective for its ostensible purpose as the most impeccable of orders'.
241. A propos to this principle, Prof. Wade states (see Wade Administrative Law, sixth edition, page 352): 'the principle must be equally true even where the "brand" of invalidity is plainly visible ; for there also the order can effectively be resisted in law only by obtaining the decision of the court/ Prof. Wade sums up these principles (Ibid.) :
'The truth of the matter is that the court will invalidate an order only if the right remedy is sought by the right person in the right proceedings and circumstances. The order may be hypothetically a nullity, but the court may refuse to quash it because of the plaintiffs lack of standing, because he does not deserve a discretionary remedy, because he has waived his rights, or for some other legal reason. In any such case the "void" order remains effective and is, in reality, valid. It follows that an order may be void for one purpose and valid for another; and that it may be void against one person but valid against another'."
242. Of particular interest, is the judgment of the Supreme Court in the case of Tayyabbhai Mohammedbhai Bagosarwala v. Hind Rubber Industries (P.) Ltd. [1997] 2 MLJ 1. In that case, it had come to be held that the civil court has no jurisdiction over a particular matter. However, before the issue of jurisdiction was decided under Section 9A added to the Civil Procedure Code by the Maharashtra Amendment, the court had granted an ad interim order, which was within the power of the court under Sub-rule (2) thereof. It was alleged that the ad interim order was valid and thereby there was contempt. The Supreme Court referred to the judgment in the case of Shiv Chander Kapoor v. Amar Rose, and held "the interim orders so passed are orders within jurisdiction when passed and effective till the court decides that it has no jurisdiction to entertain the suit".
243. Mr. Nariman, therefore, submitted that when the three show-cause notices were holding the field and were not challenged at any time by the parties or persons to whom they were issued, the court was not expected to go behind those notices. The SEBI was the authority which was endowed with the powers to take the necessary decision. Having arrived at its prima facie opinion, not once but thrice, the civil court was not expected to go into the rationale behind the same and substitute its own opinion for that of the appropriate authority as also observed by a Constitution Bench in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 (SC) judgment cited above. This was particularly so when the matter was at the stage of show-cause notice, and the defendants were expected to file their reply. When the plaintiffs, who had no remedy or access in the Company Law Board, have filed a suit for rectification of the register and to seek an injunction in the meanwhile, the defendants cannot be heard to point out that there was no basis to the notices issued by the SEBI.
244. Appropriate protection and order:
Mr. Nariman was fair enough to state that it was possible that at a later point of time, this court may take a view that prayer (a) of the plaint seeking voiding of the acquisition of shares should be appropriately dealt with by the SEBI and, therefore, may decline to grant that relief. Mr. Nariman submitted that it is also possible that consequent to the show-cause notice dated January 8, 1999, issued by the SEBI, it may hold that these acquisitions were void in which case prayer (a) in the present suit may become redundant. He however, submitted that prayer (b), which was for rectification of the register, will always survive. Whether the SEBI can do that or not, the plaintiffs can certainly seek that relief in this court and as has been held right from T. A. K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. , that the common law right of shareholders based on their contract with the company is not abridged. He therefore submitted that under the judgment of the Supreme Court in Mannalal Khetan v. Kedar Nath Khetan , the suit will survive for rectification and if during the pendency thereof, the acquisitions which were prima facie illegal were allowed to be acted upon, the relief will be rendered negative as held by the Supreme Court in Dorab Cawasji Warden v. Coomi Sorab Warden, , the last uncontested status is required to be maintained till the disposal of the case. In the present case, that has to be in the context of the taking over of the management. He therefore submitted that the injunction as sought was necessary. As far as developments subsequent to the filing of the suit are concerned, it is a moot question as to, to what extent it can be considered by the time the application for interim relief comes to be decided or by the time the suit comes to be heard and decided. There are judgments to canvass either of the propositions that they should be considered or they may not be considered. Mr. Nariman submitted that in either case, as far as the present proceedings are concerned, there are two show-cause notices prior to the suit and one subsequent which are both pending.
245. This however does not mean that the transferors of the shares from whom they were bought by the defendants should be left in the lurch. They have got to be protected. In fact as rightly pointed out by Mr. Salve and as held by the Supreme Court in State of Rajasthan v. Associated Stone Ind. Ltd., , if one party to a contract is asked to discharge the advantage received by him under a void contract, so too the other party to the void contract may askhim to restore the advantage received by him. It is possible that the SEBI may make necessary order in their protection which is probably within its domain. However, inasmuch as a number of possibilities may come up subsequently, the plaintiffs were prepared to deposit the entire price of the shares in court so that in the event any disinvestment was directed or any harm was likely to be caused to the transferors who were not before the court, they will be taken care of. He therefore offered to deposit an amount of Rs. 15,22,65,422.50 to cover all disputed acquisitions. Mr. Nariman relied upon a passage from Chitty on Contracts, 25th edition to make a distinction between executory and completed contracts. He submitted that in the context of the present shares, the acquisition indicated the executory part whereas voting would indicate the completed part of the transaction. It is the latter part which was illegal and which was sought to be injuncted. The defendants will in the meanwhile continue to receive the dividends and can participate in all other decision-making except when it comes to taking over of the management.
246. Conduct of plaintiffs on allegation of collusion :
With respect to the allegation of the defendants that the plaintiffs were the friends of Vijay Mallya, Mr. Nariman submitted that the plaintiffs were never disputing that. In fact, the plaintiffs admitted that in para. 2 of the plaint. However, he denied that the plaintiffs were put up by Vijay Mallya. They have filed the suit of their own in the interest of protecting the integrity of the company. With respect to the concept of collusion, he relied upon the judgment of the Supreme Court in Rupchand v. Roshuvanshi, to contend that collusion in judicial proceedings will require a dishonest purpose to be intended behind it. Dealing with the affidavit of M.D. Chhabria, and particularly para. 6 thereof, he submitted that whatever documents the plaintiffs had relied upon were official papers or statutory documents which they have obtained from the company and there was nothing improper in that. In fact, it was the defendants who were relying upon the confidential papers of the SEBI and which were illegally and, in any case, improperly procured. Mr. Nariman submitted that even if the plaintiffs are close to Vijay Mallya, they cannot be prevented from raising the issue of illegality.
247. On the other hand, the earliest document in the compilation produced by the defendants is the letter dated August 31, 1998, which is at page 1 of volume II. It shows that K.R. Chhabria was invited by Vijay Mallya to join Herbertson. This was also admitted by K.R. Chhabria in his affidavit in para. 7 at page 46 in reply to the notice of motion in Suit No. 3120 of 1997. Mr. Nariman pointed out that K.R. Chhabria as well as the plaintiffs had come in Herbertson on the footing that the UB Group of Vijay Mallya retains the control and he remains the chairman. It is the defendants who are now subsequently having second thoughts.
248. On page 17 of the reply in ground (h), there was a reference to the assessment order against the company dated March 31, 1997, and to the allegations of siphoning off of funds. In this connection, Mr. Nariman referred to K.R. Chhabria's letter dated June 13, 1997, which is at page 132 of compilation I, which is supposed to allege siphoning off of funds by the Balaji group of companies. What is material to note is that neither that letter nor any letter thereafter protests or makes any grievance against the so-called alleged siphoning, In fact, thereafter on October 27, 1997, the accounts of the company are passed in annual general meeting. K.R. Chhabria did not protest the passing of the accounts in any way. Similarly, on December 30, 1998, again accounts were passed and K.R. Chhabria did not protest. The reason given for this non-protest in the joint affidavit of Ganguly and Chhabria at page 49 in the second suit is that K.R. Chhabria did not proceed further in the matter because of the assurance given by Mallya and, therefore, he did not attend the annual general meeting. Mr. Nariman submitted that this reason is unconvincing because in the letter dated December 31, 1997 (at page 245), Mr. Mallya had clearly stated that the truce between the parties was over and they were at war. In spite of that, in the reply of K.R. Chhabria he has stated that the discussions were without prejudice. Mr. Nariman asked as to why they should be without prejudice and why there was no reference to siphoning off of funds if that was so. He then referred to the disputed role of Balaji which is at page 132 in compilation I, where the price per case comes to Rs. 996 in Andhra Pradesh. As against that, the bill of Patna was shown to contend that the Andhra Pradesh bills were inflated. Mr. Nariman pointed out that in the Andhra Pradesh bill, excise amount was included and if similarly that amount is included in the Patna bills, the amount per case would come to Rs. 1,090.83. Thus, in fact there was neither siphoning off nor overcutting in Andhra Pradesh.
249. Then Mr. Nariman referred me to the assessment order wherein there are certain observations against the plaintiffs. Mr. Nariman submitted that the order can be read against Herbertson, but the observations cannot be read against the plaintiffs because they were not heard when those observations were made. He referred to a Division Bench judgment of the Gujarat High Court (per Ahmadi J., as he then was in that court) in Ishwarlal and Brothers v. CIT , wherein the court held that such observations would be against principles of natural justice.
250. Then coming to the allegation that the plaintiffs were not saying anything against Vijay Mallya, Mr. Nariman pointed out that as can be seen from the record, it is because of the complaint of the plaintiffs that a notice had been given to Vijay Mallya. That can be seen from the documents on record.
251. Whether transferors are necessary as parties :
Mr. Nariman submitted that the dispute was between the plaintiffs and the persons or the companies which had illegally acquired shares in violation of law. The transferors of the shares were not in the picture. If necessary, the transferees will suffer the penal consequences for breach of regulation 24(1) of the SEBI Regulations. As far as the transferors are concerned, they will not suffer any penal consequences and as far as civil consequences are concerned, assuming without conceding that there would be any, he submitted that even the plaintiffs are prepared to deposit an amount of over Rs. 15 crores in the court to safeguard their interest. He submitted that the prohibition was against the acquisition of substantial shares in violation of the SEBI Regulations when made before the announcement. Even the show-cause notice also stated it and that is how regulation 14 will have to be read. The only exception to this can be regulation 4 under which there can be exemption from Chapter III. He relied upon the following passage from Chitty on Contracts, 1983 edition at page 623 which reads as follows :
"Statute : one party only affected. Statutes which prohibit certain contracts often impliedly recognise, for example by punishing only one of the parties, that the parties are not equally at fault, and, therefore, on their true construction only one of the parties to the contract is prevented from suing upon it. Accordingly, when 'the policy of the Act in question is to protect the general public or a class of persons by requiring that a contract shall be accompanied by certain formalities or conditions, and a penalty is imposed on the person omitting those formalities or conditions, the contract and its performance without those formalities or conditions is illegal, and cannot be sued upon by the person liable to the penalties. But the other party to the contract is not deprived of his civil remedies because of the criminal default of the guilty party."
252. In the aforesaid passage from Chitty, the case of Anderson v. Daniel [1924] 1 KB 138 (CA) has been referred to and relied upon. The said judgment has been followed by a Division Bench of this court in Sundarabai Sitaram Narangikar v. Manohar Dhondu Khandalgaonkar [1932] 35 Bom LR 404.
253. Mr. Nariman then submitted that the disputed contract in the present case had two parts ; the first part was buying the shares and the second part was using them to take over the company. The second part of the contract was not yet over and it is the first part which is said to be invalid. He referred to the judgment of the House of Lords in Sajan Singh v. Sardara Ali [1960] AC 167; [1960] 2 WLR 180 and submitted that, that was a case where both the parties were in pari delicto. Both had entered into an illegal transaction which was duly executed and carried out. It was in this situation, that in an action in detinue the plaintiffs succeeded but could not throw over the transfer. That was followed in B. O. J. India Finance ltd. v. Custodian , by the Supreme Court where also the Reserve Bank directions were not meant to be followed for others. In that case, only one party was pari delicto as in this case. In Sundarabai's case [1932] 35 Bom LR 404 there was completed transaction. In our case, the transaction is not completed as yet. The transaction in our case will have to be split into two parts and inasmuch as the second part is not yet completed, the proposition in Mannalal Khetan's case , will still hold the field. To advance this proposition, Mr. Nariman also referred to a Full Bench judgment in Krishna Menon v. Narayana Ayyar, where Sajan Singh v. Sardara Ali [1960] AC 167; [1960] 2 WLR 180 (HL) was referred to and followed in the correct perspective. He also referred to a judgment of the Supreme Court in the case of Kuju Collieries v. Jharkhand Mines Ltd., , to contend that the contract would be void vis-a-vis the defendants. In para. 8 of the judgment, the Supreme Court observed as follows (page 1894) :
"A person who, however, gives money for an unlawful purpose knowing it to be so, or in such circumstances that knowledge of illegality or unlawfulness can as a finding of fact be imputed to him, the agreement under which the payment is made cannot on his part be said to be discovered to be void."
254. He also referred to the observations from Mulla's Contract Act, 11th edition on Section 23 to similar effect. He then relied upon the judgment of the Supreme Court in Luxmi Tea Co. Ltd. v. Pradip Kumar Sarkar [1989] Suppl. 2 SCC 656 ; [1990] 67 Comp Cas 518, wherein in para. 15 in the context of an application under Section 155 of the Companies Act, the court specifically held that a transferor was not a necessary party to that application unless the transfer was disputed by him.
255. Transfer ability, role of Company Law Board and SEBI :
(i) The submission of Mr. Dada was that under Section 111A of the Companies Act, free transferability had been provided for the shares and if anybody was aggrieved, his remedy was to the Company Law Board.
(ii) He referred to the judgment of the Supreme Court in the case of Canara Bank v. Nuclear Power Corporation of India Ltd. [1995] 84 Comp Cas 70, wherein the court held that the Company Law Board was performing the functions that were performed by the courts of civil judicature. The Board may as well make interim orders and those orders were appealable. The court observed that "it cannot be said to be anything other than a court".
(iii) Alternatively, in the event of there being any violation of the SEBI Regulations, the remedy was to approach the SEBI for taking appropriate measures. The direction of the SEBI, however, cannot be that the disputed shares be directed to be disinvested. Similarly, this court also cannot give any such declaration. It would be against the spirit of the statute. Mr. Dada referred to Section 22A(3)(c) of the Securities Contracts Regulation Act, 1956, and pointed out that under that erstwhile section, a likely change in the composition of board of directors was a ground on which a company could refuse registration of transfers. That section was deleted from September 20, 1995, to bring about complete transferability.
256. The alternative submission of Mr. Dada was that the plaintiffs' remedy was to go to the SEBI and the SEBI had sufficient power. In this behalf, he drew my attention to an unreported judgment of a Division Bench of this court in Writ Petition (Lodging) No, 2125 of 1998, decided on November 6, 7, 1998, since reported, in Ramrakh R. Bohra v. SEBI [1999] 96 Comp Cas 623 concerning the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995. Mr. Dada drew my attention to the observations made in para. 18 of the judgment wherein the court had upheld the SEBI order directing the concerned brokers not to undertake any fresh business. The court termed those directions as "interim measures" and held them to be fully justified. In para. 20, the court noted that these directions are under Section 11B of the SEBI Act.
257. Mr. Dada also drew my attention to the judgment of a single judge of the Delhi High Court in the case of M.Z. Khan v. SEBI [1999] 19 SCL 253 ; [2001] 107 Comp Cas 141 (concerning Shri Vishnu Cement Ltd.). In that case, the 1997 Regulations were under consideration and SEBI had issued certain directions and those directions were left undisturbed by the Appellate Authority. In para. 13 of that judgment, the court had observed that SEBI had powers to pass interim orders before and during the inquiry or investigation to effectuate the purpose of the SEBI Act and the regulations. The court observed that both under Sections 11 and 11B, the duties cast on the Board are to protect the interest of the investors in securities and to promote and regulate the securities in market. The court observed that the power of the SEBI is of a very wide nature and is not hedged in by any restrictions and it will embrace the power to issue interim orders. In para. 13 of the judgment, the court also observed that (p. 154): "the determination of these questions will not be made by this court sitting in writ jurisdiction when such determination lies in the domain of the authorities mentioned in the regulations". In this context, he also drew my attention to the unreported judgment of a Division Bench of the Gujarat High Court in LPA No. 236 of 1997 decided on December 29, 1998, in the case of SEBI v. Alka Synthetics Ltd. since reported in [1999] 95 Comp Cas 772 where also the court held that for any breach of the SEBI Regulations, appropriate orders can be passed by the SEBI.
258. Mr. Dada then pointed out that the registration of shares to the defendants was being challenged on the basis of the agreement between the Mallyas and the Chhabrias. He submitted that such agreement is void and unenforceable. He relied upon the judgment of the Supreme Court in the case of V.B. Rangaraj v. V.B. Gopalakrishnan . The court referred to the earlier judgments in the leading cases of Shanti Prasad Jain v. Kalinga Tubes Ltd. , and observed in paras. 6 and 9 as follows (page 205 of 73 Cornp Cas) :
"Whether under the Companies Act or Transfer of Property Act the shares are, therefore, transferable like any other movable property. The only restriction on the transfer of the shares of a company is as laid down in its articles, if any. A restriction which is not specified in the articles, is, therefore, not binding either on the company or on the shareholders. The vendee of the shares cannot be denied the registration of the shares purchased by him on a ground other than that stated in the articles."
259. Mr. Dada submitted that any such agreement cannot be a ground for denial of transferability, but in any case the party concerned was either expected to go to the SEBI or to the Company Law Board and not to file a civil suit.
260. Mr. Dada then also drew my attention to the fact that Section 11B of the SEBI Act, 1992, which provides for issuing necessary directions and Section 15H of the SEBI Act which regulates takeovers, were not there in the original Act and were brought in by way of amendment on January 25, 1995. He, therefore, submitted that the 1994 Regulations will have to be considered as effective only thereafter.
261. He then submitted that if there is any violation of any of the SEBI Regulations, no order can be made which would amount to violation of the rights made available under the company law. These rights included free transferability of the shares and voting rights. Mr. Dada drew my attention to regulation 39 and submitted that it implied that the title in the shares is not to be disturbed by any such order.
262. Mr. Dada also drew my attention to regulation 33(2)(a) which provides for investigation by the SEBI into illegal takeovers. Besides, he pointed out that if there is any illegality in the purchase in violation of the regulations, that can be cured by directing a competitive bid which is to be held within two weeks from the public announcement. If the SEBI directs such a competitive bid after rinding that there was any breach in the purchases, the announcement and competitive bid can be gone into at that stage. In the meanwhile, however, the voting rights should not be disturbed. He referred to the judgment of a Division Bench of this court in the case of Premier Automobiles Ltd. v. G.R. Sapre [1979] 39 FLR 440, wherein in the context of the illegality of a lock-out under the Maharashtra Registration of Trade Unions and Prohibition of Unfair Labour Practices Act, 1971, the Division Bench observed "that the illegality involved in this process is not absolute, or incurable is also evident from Subsection (5) of Section 25". He pressed for a similar approach assuming that there is any breach in not giving a public announcement.
263. Similarly, he referred to Punjab Beverages (P.) Ltd. v. Suresh Chand, , wherein the Supreme Court held in para. 7 thereof that for finding out whether an order of dismissal was in violation of Section 33(2)(b) of the Act, the whole of the statute is to be looked into and the court held that despite the mandatory language employed in Section 33 and the penal provision enacted in Section 31(1), the legislative intent was not to invalidate an order of discharge or dismissal passed in contravention of Section 33.
264. Mr. Dada then drew my attention to the fact that the allegation against defendant No. 7 was concerning 1.3 per cent. shares whereas the one against defendant No. 8 was concerning 0.27 per cent. Both these acquisitions were from September to December, 1998. He, therefore, submitted that these acquisitions would be covered under the 1997 Regulations and not the 1994 Regulations, and under regulation 11 of the 1997 regulations, those who were going above 10 per cent. were permitted to go up up to 2 per cent. He, therefore, submitted that even their purchases cannot be said to be invalid.
265. The above submissions of Mr. Dada are noted amongst other reasons also for the different emphasis that he has laid on different aspects of those controversies though some of his submissions have been dealt with earlier in a different way. Mr. Dada's submissions were principally that the plaintiffs ought to go either to the Company Law Board or to the SEBI. As far as the approach to the Company Law Board is concerned, as noted earlier in this judgment, the plaintiffs do not have an access to that authority under Section 111A(3) of the Companies Act. They, however, have a right in the common law to seek rectification of the company's register if it is not correctly maintained because on that depends their proportionate return on their shares. That right has not been taken away by this new provision which is in a way a substitute to the remedy which was available earlier under Section 155 of the Companies Act. Alteration of the nature of the remedy cannot mean taking away the substantive right which the plaintiffs had. Besides, as also observed earlier, one has to be always slow in inferring any such ouster unless that is so specifically mentioned. The judgment in Canara Bank v. Nuclear Power Corporation of India Ltd. [1995] 84 Comp Cas 70 (SC) cited by Mr. Dada has also to be seen in its context. The question before the court was as to whether the Company Law Board should be construed as covered within the concept of "civil court" within the meaning of Section 9A of the Special Court Act, 1992. That Section 9A provides that the special court will exercise the jurisdiction and powers which are exercisable by any civil court for the persons notified under that Act. The question was not whether the Company Law Board excludes the jurisdiction of the civil courts in complex matters. It is in this context that the court observed (page 95) :
"Now, under Section 111 of the Companies Act as amended with effect from May 31, 1991, the Company Law Board performs the functions that were, theretofore, performed by courts of civil judicature under Section 155. It is empowered to make orders directing rectification of the company register, as to damages, costs and incidental and consequential orders. It may decide any question relating to the title of any person who is a party before it to have his name entered Upon the company's register, and any question which is necessary or expedient to decide. It may make interim orders. Failure to comply with any order visits the company with a fine. In regard to all these matters it has exclusive jurisdiction (except under the provisions of the Special Court Act, which is the issue before us). In exercising its function under Section 111 the Company Law Board must, and does, act judicially. Its orders are appealable. The Company Law Board, further, is a permanent body constituted under a statute. It is difficult to see how it can be said to be anything other than a court, particularly for the purposes of Section 9A of the Special Court Act."
266. As far as Mr. Dada's submission that the plaintiffs ought to go to SEBI is concerned, it has its own limitations. Presently it is only the investigation by the SEBI which is going on in view of the show-cause notices issued by the SEBI. During the course of that investigation, the SEBI may come to its own conclusion which could be to the satisfaction of the plaintiffs as well. However, the plaintiffs' submission with respect to the breach of the SEBI Regulations requires elucidation of various concepts involved in those regulations. As seen earlier, some of the determinations of the SEBI in this behalf on some of the concepts involved have not been very satisfactory and it will have to be for the civil court to lay down the correct interpretation thereof. Mr. Nariman therefore submits that if the purchases of the disputed shares are tainted for being clandestine and in breach of these regulations, the plaintiffs cannot be prevented to approach the civil court to seek an injunction restraining the votes based on these tainted shares. The submission of Mr. Dada that the civil court is not expected to do what is within the jurisdiction of the SEBI does have some force. The court will have to take that care while deciding the matter finally and will have to remain conscious as to what direction it ought to give so as not to enter the realm of the SEBI. The next submission of Mr. Dada is that the defects, if any, can be cured subsequently and one can go for post facto public announcement as against its own limits. Now, in this connection, firstly, defendants Nos. 1 to 11 are not sure nor are they ready that the disputed shares be submitted for a post facto announcement. They want to digest those acquisitions and then go for further 20 per cent. shares which they propose to do through public announcement. The moot question is with respect to these disputed shares which are already acquired in breach of the regulations. None of counsel appearing for defendants Nos. 1 to 11 have accepted that these shares can be put into the hotchpotch for post facto announcement. This is because their submission is that they are already validly acquired and it is the purchases of these shares which are sought to be invalidated through the first prayer in the suit seeking a declaration that those purchases are void. Then there is also a question as to what happens to the voting rights based on these shares. Assuming that the plaintiffs have an access to the SEBI even in respect of these shares, the creation of an authority dealing with such a situation without taking away the access to the civil court will only mean that the plaintiffs have two remedies and it will be for them to elect as to where they ought to go.
267. Mr. Chidambaram, learned counsel for defendant No. 11 had, amongst others, referred to and relied upon a number of orders passed by the SEBI in different disputes. Thus, in the case of Macmillan India Ltd. the acquirer H.M. Publishers Holding Ltd. was directed by the SEBI to make a post facto offer while making it clear that this does not mean condonation of the violation by the acquirer. But the case of Hilton Rubbers Ltd. was not a case wherein the SEBI directed to make a public offer after crossing the threshold limits under the 1997 Regulations. Similarly in the case of Saurashtra Cement Ltd. the public offer of the Autoriders Group, which were acquirers, was not in issue. Similarly, Sterlite Industries Ltd. was not a case where the SEBI directed it to make post facto offer nor were the cases of Sterling Horticulture and Research Ltd. and Morgan Stanley Mutual Fund v. Karthick Das [1994] 81 Comp Cas 318 (SC). In Hikal Chemicals Industries Ltd., the SEBI did direct the acquirer to make a post facto offer under the 1997 Regulations. But that was not a case of acquisitions in the open market in violation of the 1997 Regulations. Similarly, in Shree Vishnu Cements Ltd. also it was not a case of the acquirer acquiring shares in excess of the limit stipulated. In Sibar Finance Ltd., the promoters already held 40 per cent. shares and one of the directors picked up 9.54 per cent. shares from the open market. While approving company's rights issue, the SEBI directed the promoters to make a post facto public offer for 20 per cent. equity capital. None of these cases are cases of direction for disinvestment of the disputed shares which is required to be noted as canvassed by Mr. Nariman.
268. There is yet another controversy with respect to the unregistered shares. It was submitted by the defendants that now even the transferees, who have not come on the register, have a right to vote unless their right to vote is sus pended by a specific order of the Company Law Board under Section 111A(5).
In Howrah Trading Co. Ltd. v. CIT , the Supreme Court had examined this aspect in the context of the law as it then stood and held that only the person who was on the register of the com pany had a right to vote. Now, however, after the introduction of Section 111A(5) normally a transferee could have a right to vote. However, if the transfer is challenged and an appropriate case of breach of regulations is made out, such right can be curtailed by the civil court. In spite of the approach which is now emphasised in the amended Section 111A, when the transfers are under challenge and particularly the effect thereof on takeovers is involved, what applies to the disputed registered shares would also apply to the disputed unregistered shares.
269. Concluding comments of Mr. Salve:
(1) Mr. Salve, learned counsel, has led defendants Nos. 1 to 11 and he concluded the arguments on their behalf. Having noted that the plaintiffs were asserting that their suit was for vindication of their private rights and that it was not a derivative action nor was it a suit for a public cause, Mr. Salve submitted that, therefore, it must follow :
(a) the cause of action must lie within the private rights available to the plaintiffs either in common law or statute ;
(b) the relief claimed must have nexus with such a private right or rights ;
(c) the strict rules of pleadings, evidence, burden of proof, etc., applicable to civil suits would apply to such a suit.
(2) A shareholder of a company has a private right, inter alia, to receive dividends, to participate in the management by voting at general meetings, (the right to vote being a statutory right available to all members under Section 87 of the Companies Act), to participate in the distribution of assets at the time of winding up of the company, etc. (for a discussion on all the rights of a shareholder, Palmers Company Law, volume 1, page 7034 relied upon).
(3) The plaintiffs assert that the Takeover Code confers upon them a right to make a competitive bid where there is a takeover bid, and consequently they have the right to maintain the present suit. In this context, it is submitted that,
(a) The present suit is not to assert any such rights to offer a competitive bid.
The prayers in the plaint are to :
(i) declare the purchase to be void, and
(ii) consequently to either direct a rectification (where the company has registered the transfer) or to reaffirm a refusal of registration (where the company has declined to register of the transfer).
There is no relief claimed which would result in the plaintiffs being aided or facilitated in the exercise of their right to a competitive bid,
(b) A competitive bid is also a bid to take over the management of the company. The plaintiffs have not even stated that they were persons who were inclined to take over the management of the company on the contrary the plaintiffs have asserted that the present management should not be disturbed. Such a plea is inconsistent with the right to a competitive bid,
(c) Interim injunction on voting rights has absolutely no relevance to the right to a competitive bid,
(d) The plea that the plaintiffs had a right to a competitive bid, and were desirous of exercising any such right is clearly an afterthought--the conduct of the plaintiffs shows that they took all steps necessary to thwart a public offer, and at no stage have they ever stated in their correspondence with the SEBI that they were anxious to make a competitive bid to take over the management of the company,
(e) The right to a competitive bid is founded not in common law but based upon the provisions of the Takeover Code. It is not an indefeasible right, e.g., the SEBI may prohibit a person (who had acquired shares without complying with the provisions of the Code) from disposing of such shares in such an event there would be no question of making any competing bid.
(4) The Takeover Code is a complete code unto itself. Any rights arising out of this code particularly based on allegations of breach of the code have to be dealt with in the manner provided for by the code. The SEBI has been conferred under regulations 37 and 39, far-reaching powers to deal with all possible situations which may arise on a purchase of securities in violation of the provisions of the Code. It is submitted that :
(a) No civil suit would lie to seek any direction in relation to a matter upon which the SEBI has to take a decision. (Supreme Court Bar Association v. Union of India relied).
(b) The SEBI has to decide the matter keeping in view the interest of shareholders and the interest of the securities market and public interest. A suit for private rights particularly one seeking reliefs inconsistent with the powers of the SEBI under regulations is misconceived.
(c) The basic foundation for the relief in the plaint is the prayer for declaring the purchase to be void. Such a relief if granted would negate the exercise of powers by the SEBI under regulation 39.
(5) The suit does not seek a permanent injunction against exercise of voting rights--the prayer for freezing the voting rights is an interlocutory prayer as a step in aid of the final prayer for the declaration that the acquisition of shares is void, and the consequential relief by way of rectification of the register of members. A declaration that the acquisition of shares is void would undoubtedly interfere with the exercise of discretion by the SEBI under regulation 39.
(6) An application for permanent injunction, under Section 38 of the Specific Relief Act can be granted to protect or preserve the rights of the plaintiffs. Assuming without conceding that the plaintiffs have a right to competitive bid, the exercise of voting rights does not in any manner affect this right of the plaintiffs.
(7) A suit cannot be filed for enforcement of a law generally. In any event, the right being asserted by the plaintiffs is a statutory right. The statute which confers this right sought to be asserted by the plaintiffs itself provides a mechanism to deal with its infraction and creates an authority endowed with the discretion to pass appropriate orders which would further the object of the statute. It is submitted that in such a circumstance, a court of equity in a suit for permanent injunction would not exercise its powers particularly when the relief sought is something not expressly dealt with by the statute and, therefore, something which is not contemplated by the statute.
(8) The prayers in the suit are really in one sense interlocutory in nature. The plaintiffs pray for declaration that the transfers to the defendants are void and that the register of members be rectified wherever such transfers have been registered. It does not further pray that the shares be registered in the name of the original transferors--such a prayer would require impleadment of the transferors in any event. It also does not seek any further declaration in relation to the rights per se between the defendants and the transferors. In reality what the suit seeks is an interlocutory protection pending the final decision by the SEBI. It is settled that no injunction would be granted in such a suit. (Siskina (Owners of Cargo Lately Laden on Board) v. Distos Compania Naviera S.A. [1979] AC 210 (HL) relied.) (9) The following propositions of company law are well settled :
(a) Shares are movable property and transferable as such like any other movable property. (V.B. Rangaraj v. V.B. Gopalakrishnan ).
(b) A transfer of title between the transferor and transferee is effective from the date of the transfer. Further, such transfer is effective against the company from the date of registration. However, in so far as the transferors and transferees are concerned, the transaction is complete at the time of transfer. (Life Insurance Corporation of India v. Escorts Ltd. .
(c) There is no common law requirement for any transparency or disclosure in relation to purchase of shares--the decision of the Supreme Court Larsen and Toubro Ltd. v. Indian Express Newspapers Bombay Ltd. has no relevance to the present controversy. That case related to the sale of shares by a public sector company to a private company--the principles of law laid down in that case relate to the sale of assets and asset management by a public sector company.
(10) It is, therefore, submitted by Mr. Salve that the purchase of shares even in contravention of the Code would not be void inter alia for the following reasons :
(a) The consequence of a law which operates only on the conduct of a party and not upon the transaction or the property, would not be to invalidate the transaction between a delinquent party and an innocent party. Any infraction of such a law would, however, render the delinquent party to action. An acquisition of shares by any person would not affect the innocent transferor to protect whose rights, the Code has been enacted.
(b) For the breach of a statutory obligation such as the Code, in the first place the consequences should be found within the law. If the result of an acquisition in contravention of the Code was to render the acquisition itself void, the Code would certainly have made express provision therefor. It is inconceivable that a Code which has been drafted in such detail--and now revised by an expert committee--would be silent in relation to such an important matter.
(c) The consequence suggested would be inconsistent with the powers of the SEBI under regulation 39. The SEBI surely cannot direct a delinquent acquirer to sell shares if his purchase in the first instance is itself void ab initio. A fortiori, the SEBI cannot prohibit a delinquent acquirer from selling shares if the initial purchase is itself void ab initio.
(11) In order to establish a prima facie case which would justify the grant of an interim injunction against exercise of voting rights, the plaintiffs must satisfy the court that the purchaser of the shares prima facie does not have any title whatsoever to the shares. It is only when the court is satisfied on that count that the question of grant of an interim injunction against voting rights would arise. Otherwise, the injunction would be contrary to Section 87 of the Companies Act, 1956.
(12) If the purchase of shares is not void, then until the SEBI makes any order requiring the defendants to disinvest, there is no legal basis for questioning their right to hold these shares and exercising all statutory rights available to the holders of such shares. Besides, it is not necessary that the SEBI make an order directing a disinvestment of the shares--the SEBI may equally direct a public offer as it had proposed earlier. Therefore, there is no legal basis for seeking an injunction of the voting rights at present.
(13) There are two submissions of Mr. Dada which are required to be noted along with these submissions. Firstly that any person without any legal right or locus cannot come to a court of law and ask for interpretation of law of statutes. This is not a public interest litigation but a regular civil suit to determine civil rights. Secondly the judgments of the Appellate Authority of the SEBI in different cases such as Sesa Goa Ltd., In re [1997] 12 SCL 31 (Bom) would bind the SEBI and any change in the settled law would lead to reopening of old matters and would result in criminal proceedings being lodged. This should not be done ; more so without hearing the SEBI.
270. With respect to these submissions of Mr. Salve and Mr. Dada, having noted what are the rights of a shareholder of a company including the right to vote under Section 87 of the Companies Act, it has got to be noted that a shareholder does have an interest in having the true and correct picture in the company's register. That is his right flowing from membership of the company, the right based in contract and in common law as held from time to time. The remedy for that has also been held to be one by filing suit in different matters including the leading Om Prakash Berlia's case [1983] 54 Comp Cas 469 (Bom). As far as the submission with respect to transparency is concerned, the SEBI Regulations require the intending purchaser to follow a transparent procedure. As far as that responsibility is concerned, it has been provided under Section 111A(3) of the Companies Act that breach of the SEBI Regulations would be a ground to approach the Company Law Board. That would also be one of the factors to be pressed into service by a plaintiff who is disputing the correctness of the company's register by filing a suit where he is agitating the erroneous entries obtained on the basis of clandestine purchases. Once it is held that a shareholder has a right in having the purity and the correctness of the register, it follows that the manner in which the illegal purchases and entries, are made could always be a ground to press into service. As far as the grievance of Mr. Salve with respect to competitive bid is concerned, it is no doubt true that the plaintiffs do not want to oust the management of the company. In fact, they very much clearly support the same. However, in the event the management is likely to be ousted by the takeover, it is their case that they would like to join in that bid and compete. That submission is very much made in the plaint and it cannot be said to be an afterthought. There is no inconsistency in the support to the present management and saying at the same time that if it is to be disturbed and to be handed over to the group of defendants Nos. 1 to 11, the plaintiffs would like to intervene and give a competitive bid. As far as the SEBI Takeover Code being a complete code, as stated earlier, the plaintiffs have a right to elect. They may approach the SEBI or they may in a suit like the present one agitate their grievances. It is possible that some of the consequential directions flowing from prayer (a), namely, the declaration of the purchases of the shares being void, could be within the realm of the SEBI and hence while passing the final appropriate orders, the court will have to be careful. But that would not make the raising of that submission along with prayer (b) a misjoinder of the causes of action. Prayer (b) would at all times be a prayer maintainable in a civil suit and the plea of the purchasers being tainted is connected therewith and if not raised, it could be contended that the plaintiffs have not taken the grounds which were otherwise available to them along with the ground supporting the rectification of register. It cannot be said that this is a suit for enforcement of the law generally. The plaintiffs are asserting their rights as shareholders of the company and it cannot be said that the suit is essentially in the nature of an interlocutory suit only. Prayer (b) is a substantive prayer which is otherwise maintainable in a suit at the final hearing and connected interim prayers can be sought for seeking the injunction. All that the plaintiffs have to point out is that the concerned shares are tainted. They have made out a prima facie case. They are seeking to prevent the consequences of these purchases which consequences through votes are yet not completed. Prima facie these purchases are bad. Pending the final determination thereon, the preventive order can certainly be sought. In the present case, the plaintiffs have made out a case on the facts that defendants Nos. 1 to 11 are related companies and individuals and that they have acquired shares in breach of the mandatory requirements of Section 10 of the 1994 Code without making a public announcement. They have made out a more than prima facie case on the facts as well as in law.
271. With respect to the two submissions of Mr. Dada that the present matter is not a public interest litigation and it is a private one, there is no difficulty in accepting that. At the same time, the points which are of public concern can certainly be pressed into service in a litigation which is concerning a public limited company. Mr. Salve has relied upon the commentary of Weinberg on Takeover and Mergers to show what is the purpose behind such provisions in the U.K. In this connection, we cannot ignore the realities in India and the fact that unless these preventive mechanisms are strictly interpreted, Indian companies would come in difficulty as canvassed by Mr. Nariman. It is true that there are various other preventive mechanisms as canvassed by Mr. Salve. That, however, does not mean that the present mechanism ought not to be read strictly. For quite some time, the Supreme Court has told us earlier in Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla and recently in Kilpest (P.) Ltd. v. Shekhar Mehra [1996] 87 Comp Cas 615 that we cannot ignore the conditions of Indian society. In Shekhar Mehra's case [1996] 87 Comp Cas 615, the Supreme Court noted the observations in Hind Overseas (P.) Ltd.'s case and observed as follows (page 620) :
"This court observed that although the Companies Act was modelled on the English statute, the Indian law was developing on its own lines and making significant progress. Where the words used in both the Indian and English statutes were identical, English decisions might throw light and their reasons might be persuasive, but the proper course was to examine the language of the statute and ascertain its true meaning. It was apposite, having regard to the background, conditions and circumstances of the present Indian society and the needs and requirements of the country that a somewhat different treatment be adopted. The courts would have to adjust and adapt, limit or extend the principles derived from English decisions, entitled as they were to great respect, suiting the conditions of Indian society and the country in general, always, however, with one primary consideration in view that the general interests of the shareholders should not be readily sacrificed at the altar of squabbles of directors for power to manage the company."
272. The Supreme Court in Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. has in fact stated in para. 4 (page 136 of Comp Cas): that "it is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs". That dictum will apply here as well.
273. Lastly, with respect to the submissions of Mr. Dada on decisions of the authority of the SEBI, I have already said that those determinations prima facie appear to be contrary to the intentions behind the regulations and it is for the civil court to make the authoritative pronouncement with respect to such provisions as held by the Supreme Court in the cases cited above.
274. Having stated this, out of the various prayers made by the plaintiffs, the interim prayer with respect to the debentures purchased in December, 1993, is something which cannot be entertained.
275. Mr. R.A. Dada appears for defendants Nos. 2 and 6 to 10, the allegation against which companies appears in paras. 3 and 4(a) of the plaint. The allegation is that in December, 1993, they acquired 26 per cent. of the shares by negotiations. It is further alleged that they acquired by negotiations some debentures on December 14, 1993, and they were converted later on into shares on August 11, 1994. The first submission of Mr. Dada is that as far as the purchase of shares in December, 1993, is concerned, it would not be hit even by the 1994 Regulations. Similarly with respect to debentures converted into shares, he submitted that debentures prior to 1994 were fully convertible debentures and in that connection he referred to Section 2(12) and Section 81(1)(iii) of the Companies Act. He submitted that if the debentures were fully convertible when purchased, the allegation relates back to 1993 though the conversion has been made in 1994. In that view of the matter, this conversion will also not be hit by the 1994 Regulations. Mr, Dada, therefore, submitted that regulations 9 and 10 will not apply to 3,75,000 FCDs bought on December 14, 1993. This submission of Mr. Dada will have to be accepted.
276. It is true that in earlier judgments of the Supreme Court in the cases of Larsen and Toubro Ltd. v. Indian Express Newspapers Bombay Ltd. and Life Insurance Corporation of India v. Escorts Ltd. , there were observations against clandestine purchases and attempts to take over, but there were no specific regulations making any provision in that behalf. The plaintiffs are making a grievance with respect to the breach of the 1994 Regulations. This grievance of the plaintiffs, therefore, cannot be stretched to a point of time prior to the 1994 Regulations coming into force. In the circumstances, in any case, the prayer in the two motions with respect to the convertible debentures purchased in December, 1993, is difficult to sustain.
277. In the facts and circumstances of the case and in the light of the narration of issues and discussion thereon, as mentioned above, on the points raised before me, my findings are as follows:
(a) It is difficult to accept the submission of Mr, Nariman that merely because serious questions are raised, an interim injunction can be claimed. It can only be claimed when a. prima facie case is made out by the plaintiffs. Examination of the prima facie case of the plaintiffs would involve examining the prima facie defence of the defendants also. On this issue, the law laid down by the Supreme Court in Gujarat Bottling Co. Ltd. v. Coca-Cola Co. [1995] 84 Comp Cas 618 holds the field.
(b) As far as 3,75,000 equity shares, which became available to defendant No. 2 by virtue of acquisition of 75,000 fully convertible debentures on December 14, 1993, are concerned, these purchases are prior to the regulations coming into force and hence as far as the voting rights which flow therefrom and against which an injunction is sought in terms of the submission in para. 18(i) of the plaint are concerned, there will not be any such injunction.
(c) As far as 10,39,091 equity shares purchased by defendant No. 3 and 4,72,250 equity shares purchased by defendant No. 4 are concerned, they are referred to in para. 18(ii) of the plaint. Similarly 3,64,750 unregistered equity shares acquired by defendant No. 5 are referred to in para. 18(iii). With respect to all these shares, the plaintiffs have made out a prima facie case to justify the injunction as sought by them that they are purchases in excess and in breach of the mandatory requirement of prior public announcement provided in the regulations. Hence the plaintiffs will be entitled to an interim order as detailed below with respect to the shares referred to in paras. 18(ii) and (iii) of the plaint.
278. Then comes the question as to how the interim order ought to be worded because there arises the question of balance of convenience and appropriate orders. The defendants have all throughout submitted and pointed out that but for any interference on behalf of the plaintiffs, they would almost be in a controlling situation if there is no injunction as sought by the plaintiffs. On the other hand, it is the case of the plaintiffs that if the injunction as sought is not granted, it will result in a situation that whereas the court may hold that the plaintiffs have a prima facie case and finally decide in favour of the plaintiffs, in the meanwhile defendants Nos. 1 to 11 will gain control. The plaintiffs have relied upon a number of financial irregularities on the part of defendant No. 1 who is in control of BDA Ltd. which is a wholly owned subsidiary of defendant No. 12. It is, therefore, submitted by them that if in the interregnum no injunction as sought for is granted, the affairs of defendant No. 12-company will suffer further. As against that, Mr. Salve, learned counsel appearing for defendant No. 1, submitted that the plaintiffs will continue to get their dividend in the meanwhile and if they finally succeed, the management will again go back to the group which the plaintiffs are espousing to support. Mr. Salve submitted that the plaintiffs were essentially the distributors of defendant No. 12 and their business would not be affected merely because there is a change in management. He submitted that what is to be seen is that the interest of the plaintiffs is to be protected and not of someone else whom the plaintiffs are trying to support. Mr. Salve submitted that under Section 38 of the Specific Relief Act read with Order 39 of the Civil Procedure Code, injunction can be granted to protect or preserve the rights of the plaintiffs and to maintain the status quo. What the plaintiffs were seeking was a right to make a competitive bid. There was no reason to freeze the votes in the meanwhile and the plaintiffs can certainly give their competitive bid if they want to give it in the meanwhile. Mr. Salve submitted that the balance of convenience has to be judged not with reference to the right of the present management to continue in office, but with respect to the private rights asserted by the plaintiffs. Mr. Salve, therefore, submitted that any interim order to be passed should provide for adequate representation to the plaintiffs on the board of directors and preferably with an independent chairman so that the interest of the defendants is also adequately protected. This is because there is every possibility that in the meanwhile the existing management may tamper with the assets and properties of defendant No. 12-company and by the time the suit is decided, the entire purpose of obtaining these shares to take over the management of defendant No. 12 would be frustrated.
279. Mr. Dada, learned counsel appearing for defendants Nos. 2 and 6 to 10, referred me to the judgment of Dhanuka J., dated February 15, 1995, on Notice of Motion No. 2646 of 1994 in Suit No. 3535 of 1994 Ramesh Narang v. Rama Narang [1995] 2 Bom CR 7 wherein the learned judge had appointed a retired judge of this court as the administrator of the company concerned. Mr. Nari-man, on the other hand, pointed out that Mr. Mallya, the chairman of defendant No. 12-company, is very much the second defendant in the second suit and no allegations of malfunctioning have been made against him. He also referred me to an order passed by the Company Law Board in proceedings under Sections 397 and 398 of the Companies Act. In those proceedings also, an independent chairman has been sought, yet in that matter, by an order passed on March 19, 1999, the Company Law Board directed that no prejudicial decisions be taken by the board of directors and that for every board meeting there shall be seven days' notice and that there shall be no disposal of any assets/investments (other than in the normal course of business) except with the approval of the board as included in the agenda and that no items other than the agenda items shall be discussed and decided in the board meeting. He further pointed out that the Central Government had appointed Mr. Mallya as the executive chairman of this company by an order dated December 8, 1998, for a period of five years though that order is under challenge in a petition filed by defendant No. 11 herein, in the Delhi High Court being Writ Petition No. 629 of 1999. Mr. Nariman submitted that with a view to protect the interest of the plaintiffs if the court so desires no policy decision, particularly concerning sale of assets, merger or amalgamation, etc., passed by the board and if objected to by the plaintiffs, shall be implemented for a certain period, or that it may be provided that no general meeting be called without prior application to this court until some further appropriate orders are passed. Mr. Seervai, learned counsel appearing for defendant No. 12, expressed his agreement to this suggestion. Mr. Nari-man also offered to deposit an amount of Rs. 15,22/65,422.50 so as to cover the financial losses, if any, in case any order of disinvestment comes to be passed at a later point of time whereby defendants Nos. 1 to 11 would receive such amounts less than what they have put in in purchasing the disputed shares. The defendants of course are not interested in any such monetary protection inasmuch as their principal submission is that on the basis of the free transferability, their voting rights should not be injuncted and at the highest a protective mechanism be provided in the management of defendant No. 12-company.
280. The order in these motions is being passed on the footing that the plaintiffs do have a prima facie right to maintain the present suit to seek the declaration that the acquisition of the disputed shares is void being in breach of the concerned regulation. It is also on the footing that the civil court does have the jurisdiction to interpret the provisions of the statute and the SEBI Regulations so as to lay down the correct interpretation and the frontiers of jurisdiction of the statutory authorities concerned. This is coupled with the prima facie view that this exercise by this court should not be extended beyond that inasmuch as what is within the jurisdiction of the SEBI will have to be done by the SEBI alone. Now, if at the end of the trial the disputed acquisitions are held to be bad, the court can give the declaration as sought for. The second prayer for rectification of the company's register is otherwise also maintainable in a civil court in common law. The direction for rectification will mean removal of the names of the disputed members. The consequential decision on disinvestment will, however, have to be arrived at after considering all aspects, including a hearing to the SEBI, in which case the actual order of disinvestment could be passed by the SEBI, or the SEBI may as well direct a post facto public announcement which will, however, include the disputed shares also.
281. The SEBI is already looking into the notice which it has issued. It is possible that the SEBI may in exercise of its own powers in the meanwhile and for the purposes of exercising those powers interpret the regulations concerned to the extent it becomes necessary for discharging its functions and for deciding the notices. As stated earlier in this order, the function to interpret the parameters of jurisdiction will, however, in the strict sense remain with the civil court and it is not reduced or taken away by any such exercise on the part of the SEBI and the view to be taken by this court shall prevail over any view taken by the authorities of the SEBI.
282. The shareholders concerned will, therefore, be entitled to all their rights until their names are removed from the register. But the right to vote on the basis of their shareholding can, however be restricted by this court and/or by the SEBI in view of the decision taken in the order passed above.
283. In the circumstances, having held that the plaintiffs have made out a prima facie case with respect to the disputed acquisitions in paras. 18(ii) and (iii) and having heard counsel on both the sides with respect to appropriate order to be passed, in my view, it would be proper, that defendants Nos. 1 to 11 and their power of attorney and proxy holders ought to be restrained and they are hereby directed and restrained from exercising voting rights, directly or indirectly, in so far as they pertain to the shares detailed in paras. 18(ii) and (iii) of the plaint. This will, however, be with a rider that any policy decision to be taken by the board of directors on items such as sale of assets, amalgamation, merger, etc., if objected to by defendants Nos. 1 to 11 in writing, will not be implemented for a period of eights weeks from the date on which the decision is communicated to the defendants. Any objection in this behalf will be furnished to defendant No. 12 within two days from the date of meeting and in no case any decision in the meeting will be implemented for a period of four days from the date of the meeting. This is subject to the earlier embargo of eight weeks. Similarly, the statement of Mr. Seervai, the learned advocate for defendant No. 12, is recorded that no general meeting will be held except with prior application to this court until the SEBI decides the notices before it and/ or until further orders.
284. As a consequence of the above order, a part of those votes which have been segregated, namely, those which pertain to the shares covered under para. 18(i), will have to be counted as valid votes while deciding the disputed items on the agenda of the meeting of December 30, 1998. That will be done by the scrutinizers appointed by the chairman of defendant No. 12-company in the presence of one representative of the plaintiffs, one representative of defendant No. 12 and two persons to represent defendants Nos. 1 to 11 together as well as the court officer who has already been appointed. The scrutinizers will then make their report to the chairman who will declare the result on that basis.
285. As far as the votes of the shareholders who are covered under paras. 18(ii) and (iii) of the plaint are concerned, their votes will be excluded while arriving at the result.
286. Notices of Motion Nos. 3120 of 1997 and 3932 of 1998 are, therefore, made absolute in part on terms as above. Parties will bear their own costs of these proceedings.
287. As far as Notice of Morion No. 184 of 1999 in Suit No. 297 of 1997 is concerned, in view of the statement made by Mr. Dada on behalf of the plaintiffs, as recorded earlier, the said motion is not being pressed and hence there will not be any order thereon. This is, however, with a clarification that since the status of those shares is the same as that of those in para. 18(iii) of Suit No. 3910 of 1997, it will be expected of the chairman of the meeting to adopt a similar approach, viz., that those votes will be excluded.
288. The Commissioner has made her report which shows that she had to put in a good amount of work during vacation as detailed in her report. The plaintiffs, defendants Nos. 1 to 11 and defendant No. 12 each will pay an amount of Rs. 3,000 to the Commissioner. The amount to be paid within one week. The officer who has done the work as the Commissioner will attend at the time of scrutiny and the additional charges for that attendance will be paid by defendant No. 12 quantified at Rs. 1,000.
289. Mr. Bookwala requests that the proceedings before the SEBI be heard and decided within a certain specified time. Inasmuch as the SEBI is not before me, it would be difficult to know as to what is the pressure on its time and within how much time it normally disposes of such a matter. Looking to the urgency on the side of the defendants, the SEBI will see to it that the notices are decided expeditiously.
290. Liberty to the parties to apply in case of urgency.
291. Mr. Bookwala seeks stay of this order for a period of 12 weeks with a view to tile an appeal, if so advised. Looking to the number of issues in this matter as also the voluminous record, the request is granted and this order will remain stayed until July 15, 1999.
292. All the observations made while deciding these motions are on a prima facie basis. As far as the other authorities are concerned, it will be open to them to take their decision so long as they are acting within the four corners of the law.
293. Before I part with all the three motions, I would like to record my deep appreciation for the assistance rendered by all learned counsel in the matter including the juniors who were assisting them.
294. Accordingly, the three motions stand disposed of.
295. Parties to act on a copy of this order authenticated by the personal secretary of this cpurt.
296. Certified copy expedited.