Kerala High Court
Mrs.Annie Koshy vs The Securities And Exchange Board Of on 22 June, 2017
Author: Devan Ramachandran
Bench: Devan Ramachandran
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT:
THE HONOURABLE MR. JUSTICE DEVAN RAMACHANDRAN
THURSDAY, THE 22ND DAY OF JUNE 2017/1ST ASHADHA, 1939
WP(C).No. 32874 of 2009 (D)
----------------------------
PETITIONER(S):
----------------------
MRS.ANNIE KOSHY, MUTHIRAMALA,
KARUKACHAL, KOTTAYAM.
BY ADV. SRI.P.I.DAVIS
RESPONDENT(S):
--------------------------
1. THE SECURITIES AND EXCHANGE BOARD OF
INDIA, OFFICE OF INVESTOR ASSISTANCE AND EDUCATION
BANDRA EAST P.O.,MUMBAI 400 051.
2. THE REGIONAL DIRECTOR, (WESTERN REGION)
MINISTRY OF CORPORATION AFFAIRS, AVEREST 5TH,
FLOOR, 100, MARINE DRIVE, MUMBAI 400 002.
3. M/S.CANFIN HOMES LTD., NO.29/1
1ST FLOOR, SIR M.N.KRISHNA RAO ROAD,, BARAVANAGUDI,
BANGALORE 560 004 REPRESENTED BY ITS MANAGING
DIRECTOR.
4. CANARA BANK LTD. REPRESENTED BY ITS
MANAGING DIRECTOR HAVING ITS HEAD OFFICE AT,
BANGALORE-1.
R1 BY ADV. SRI.N.NAGARESH ,ASST.SOLICITOR GENERAL
BY ADV. SRI.K.M.JAMALUDHEEN
R3 BY ADVS. SRI.P.BENNY THOMAS
SRI.P.GOPINATH
SRI.K.JOHN MATHAI
SRI.E.K.NANDAKUMAR
R4 BY ADV. SRI.P.GOPINATH MENON, SC
THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD
ON 22-06-2017, ALONG WITH WP(C)NO. 6106/2015 , THE COURT ON THE
SAME DAY DELIVERED THE FOLLOWING:
TS
WP(C).No. 32874 of 2009 (D)
----------------------------------------
APPENDIX
PETITIONERS' EXHIBITS
------------------------------------
EXHIBIT P1:- TRUE COPY OF FINANCIAL RESULTS F the 3RD RESPONDENT.
EXHIBIT P2:- TRUE COPY OF REPRESENTATION /COMPLAINT FILED BY
PETITIONER BEFORE 1ST RESPONDENT.
EXHIBIT P3:- TRUE COPY OF LETTER
RESPONDENT(S)' ANNEXURE
--------------------------------------------
ANNEXURE- A TRUE COPY OF THE SHARE PRICES OF THE 3RD RESPONDENT
BETWEEN 01.08.2009 AND 24-11.2009
/TRUE COPY/
PS TO JUDGE
TS
CR
Devan Ramachandran, J.
----------------------------------------------------------------
W.P.(C)Nos.32874 of 2009 & 6106 of 2015
----------------------------------------------------------------
Dated this the 22nd day of June, 2017
JUDGMENT
Initial Public Officer (IPO) or Stock Market Launch is a process through which a privately held company transforms into a public one. It is a kind of public offering in which shares of a company are sold to general public on Securities Exchange for the first time. Most companies undertake an IPO with the aid and assistance of an underwriter or the lead managers.
2. Over time the investor participation, especially of small investors in IPOs has intressed constant rise but being unwittingly chaperoned by corrupt and illegal practices forcing the market regulator Securities and Exchange Board of India (SEBI) to sit up, take notice and to initiate number of reforms in protection of the trusting WPC 32874/09 & 6106/15 2 and often under informed small investor. One such reforms process developed by the SEBI for applying in an IPO is called the 'Applications Supported by Blocked Amount' (ASBA), under which the investors application money in an IPO is protected and preserved until the shares are issued.
3. I have indited the short foreword as above since in these cases the operational realm of the ASBA process along with issues relating to 'General Reserves' and 'Dividends' of a public company have been presented for juristic inspection.
4. The pleadings and reliefs in both the writ petition relate to the investments made by the petitioner/s in Canfin Homes Ltd., a company registered under the provisions of the Companies Act.
5. I am proceeding to dispose of these two writ petitions jointly because resolution of the issues in one case, namely W.P.(C)No.6106/2015, would go a long away WPC 32874/09 & 6106/15 3 in resolving the concerns and apprehensions voiced in the other, namely W.P.(C)No.32874/2009. For the sake of convenience I deem it appropriate to treat W.P.(C)No. 6106/2015 as the lead case and all reference to parties and documents in this judgment will be as obtaining the said writ petition.
6. I have heard Sri.P.I.Davis and Sri.P.C.Haridas, learned counsel appearing for the petitioners, Sri.P.Gopinatha Menon, learned Standing Counsel for M/s.Canfin Homes Ltd., and the learned Assistant Solicitor General for the official respondents.
7. The petitioners in W.P.(C)No.6106/15 are existing shareholders of the fourth respondent company, namely M/s.Canfin Homes Ltd. The petitioners say that shares of the company, which a public limited one, is listed for trade in the National Stock Exchange and the Bombay Stock Exchange and that they came out with a Rights Issue to the existing shareholders in the ratio of WPC 32874/09 & 6106/15 4 3:10 with a premium of Rs.440/- per share. The total price per share, therefore, was Rs.450/- and the petitioners say that the shareholders were also entitled to apply for more shares if they had applied for shares already alloted to them. For the purpose of this Rights Issue, the petitioners say that the Company had forwarded to them three Composite Application Forms (CAF) and that they had submitted the same to the Registrars to the issue, namely Karvy Computer Share (P) Ltd., Hyderadad, the fifth respondent herein, for an aggregate number of 10,583 shares on Rights Entitlement and for additional shares, along with four demand drafts drawn from Dhanalakshmi Bank Ltd., aggregating to Rs.48,58,953/-, after excluding DD charges of Rs.10,947/-. According to the petitioners, even though this was received by the Registrars to the issue, they have not issued the shares allegedly for the reason that the petitioners had not applied for the Rights Entitlement and additional shares through the means of WPC 32874/09 & 6106/15 5 ASBA process. The petitioners concede that they were informed by the respondents that as per the Letter of Offer dated 04.02.2015, all applicants, whose application amount exceeds Rs.2 lakhs could participare in the issue only through the ASBA process. The petitioners have produced the Letter of Offer, which has been appended to this writ petition as Exhibit P5. They contend that such restrictions in the Letter of Offer are without any reason and that it has no nexus to the object to be achieved, namely protection of the investors.
8. W.P.(C)No.6106/2015 has been filed by the petitioners seeking to quash the first condition in Exhibit P5 'General Instruction for Investors', incorporated in the abridged Letter of Offer, that the applicants whose application amount exceeds Rs.2 lakhs can participate in the issue only through the ASBA process. The petitioners have also prayed for consequential reliefs against respondents 4 and 5 not to close the rights issue on WPC 32874/09 & 6106/15 6 27.02.2015, as was proposed in Exhibit P5 and to compel respondents 1 to 3, namely, the Officers of the Securities & Exchange Board of India, to recall the Letter of Offer issued by M/s.Canfin Homes Ltd. and to delete the first condition as mentioned above.
9. I notice that a counter affidavit has been filed on behalf of the fourth respondent and according to them, the conditions in the Letter of Offer, namely those contained in Section I - General - Definitions and Abbreviations, which mandate that all applicants, whose application amount exceeds Rs.2 lakhs, shall participate in the issue only through ASBA process is designed to protect them and for nothing else.
10. To understand the controversy in this case, one will have to understand what is meant by ASBA process. This process requires the investor to issue an authorisation to a Self Certified Syndicate Bank (SCSB) to block the application money in the bank account for WPC 32874/09 & 6106/15 7 subscribing to an issue. In other words, if an investor applies though the ASBA process, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalised. What is intended obviously is, therefore, the protection of the investor.
11. This is a process developed by the India's Stock Market Regulator SEBI for applying to an IPO. Under this process an IPO applicant's account does not get debited until shares are alloted to them. The ASBA process facilitates investors bidding at a cut off, with a singular option, to apply through Self Certified Syndicate Banks (SCSBs), in which the investors have bank accounts. SCSBs are those banks which satisfy the conditions laid by the SEBI. SCSBs are authorised to accept applications, verify the same, block the fund to the extent of bid payment amount, upload the details in the web based bidding system of NSE or the BSE and WPC 32874/09 & 6106/15 8 unblock the funds once the basis of allotment is finalised and finally to transfer the amount for alloted shares to the issuer. The investor who applies through ASBA process is completely protected because his application money will remain in his account with SCSBs of his choice and it will get debited from his account only if his/her application is selected for allotment after the basis of allotment is finalised. This is a supplemental process of applying in an IPO through the Book Building route and co-exists with the extant process of using Cheque/Demand Drafts as a mode of payment.
12. It is ineluctable that the process of ASBA was visualised and operationalised by SEBI to protect the investor because this allows the investor's money to remain in his own bank account till the share are alloted after the IPO. This is obvious because it is only after such allotment that the money gets debited and it also eliminates the need for refunds on shares which are not WPC 32874/09 & 6106/15 9 alloted. It does not require too much of expatiation to understand that the whole process is intended for the benefit of the investor more than anything else. The corollary benefit to the issuer and its Registrar would be that the process of refund in case shares are not alloted could also be eliminated.
13. In the case at hand, however, it is ironic is that what is intended to be for the benefit of the investor has now boomeranged against them as a detriment. The petitioners had applied for the Rights Issue offered by the fourth respondent and had remitted the funds required, namely Rs.48,58,983/-, through demand drafts drawn from a bank enclosed with their applications. As far as the fourth respondent - the issuer of the rights and the fifth respondent - the Registrars to the issue are concerned, the entire amount required for the allotment of the shares in the names of the petitioners have been made available to them through the demand drafts.
WPC 32874/09 & 6106/15 10 Normally therefore, nothing should have prevented allotment of the issue and the shares applied for by the petitioners. However, because of the specific term in Exhibit P5, that all applicants whose application amount exceeds Rs.2 lakhs can participate in the issue only through the ASBA process, their demand drafts were not accepted and allotments were also refused. This is very ironic and as I have already recorded above, what was meant to be for protection finally presented itself to be a great detriment.
14. There is no doubt that going by the specific terms of Exhibit P5, the petitioners are obligated to apply under the ASBA process. However, they applied with demand drafts in lieu of the said process. This has caused no prejudice whatsoever either to the fourth respondent or to the fifth respondent because the money for the issuance of shares was made available to them by the petitioners through such demand drafts. It is only that the WPC 32874/09 & 6106/15 11 petitioners did not follow the requirement in Exhibit P5 in its letter but had followed it in its spirit. In any event of the matter, by not following the ASBA process and in applying on the strength of demand drafts, if any one could be prejudiced, it can only be the petitioners since if the allotment had not been made in their favour, the amounts used by them to purchase the demand drafts would have remained blocked for long periods of time until the same had been refunded to them. I am, therefore, of the firm view that even though the petitioners have not complied with the specific manner under which the funds are to be provided for the issue as per Exhibit P5, since they have provided the funds through demand drafts, which could have been encashed by respondents 4 and 5 without any impediment, it would not be justified forensically or ethically to deny them such shares.
WPC 32874/09 & 6106/15 12
15. Once I have thus come to the view that the petitioners are entitled to allotment of shares and that they cannot be denied such shares merely because they have not followed the ASBA process, the question would be how and in what manner this Court can grant relief to them. Fortunately, from the statement filed on behalf of the fourth respondent, I see that shares applied for by the petitioners have not been considered for basis of allotment by the respondents and that the additional shares were also not considered for allotment. The statement also says that the amounts paid by the petitioners, namely Rs.48,58,983/- through demand drafts, excluding the demand draft charges of Rs.10,947/-, have been kept in a separate bank account (current account) opened for the purpose of the Rights Issue. The fourth respondent further says that the additional shares applied for by the petitioners were also not considered for basis of allotment and that no such WPC 32874/09 & 6106/15 13 additional shares have been alloted. According to them, the refund of the amount of Rs.1,07,750/- was by means of Refund Order Nos.10691 to 10693, which is now lying in the Rights Issue refund account with the HDFC Bank account.
16. Thus, the fourth respondent asserts that after refund of Rs.1,07,750/- as mentioned above, the balance available in the refund account is Rs.47,51,403/- (excluding the demand draft charges of Rs.10,947/- borne by the Company) is kept in the Rights Issue account of the Bank. The statement further says that the Board of Directors of the Company, at their 164th meeting held on 09.03.2015, has resolved that allotment of 10,583 number of equity shares of the Rights Issue be kept in abeyance pending final decision of this writ petition.
17. On an examination of the contents of the statement filed on behalf of the fourth respondent, it become indisputable that the equity shares applied for by WPC 32874/09 & 6106/15 14 the petitioners under the Rights Issue and the additional shares applied for by them have not been yet alloted and that the amounts expended by the petitioners for application of such shares through demand drafts are also still with the fourth respondent. I also notice that this Court had, while admitting the writ petition on 26.02.2015, directed that the acceptance or non- acceptance of the applications of the petitioners, as per Exhibits P1 to P4, shall be subject to the result of the writ petition.
18. In view of the factual factors as recorded above and since the petitioners have supported their applications for shares honestly and bona fide through valid demand drafts, it would be unfair and unjust to subject them to a detriment merely because they have not applied under the ASBA process. As I have already shown above, the ASBA process is intended to the benefit of the petitioners and merely because they had not made WPC 32874/09 & 6106/15 15 payment under that process, it would be a paradox that they are refused allotment of shares. This is more so because the petitioners' action in not applying through ASBA process would not and has not in any manner prejudiced any of the respondents, including respondents 4 and 5.
19. In such view of the matter, I am of the firm opinion that W.P.(C)No.6106/2015 deserve to be ordered and that the petitioners be alloted the shares applied for by them through Exhibits P1 to P4, utilising the amounts paid by them through the demand drafts, which is now stated to be in the refund account maintained by the fourth respondent.
20. Before I issue final orders in this case, it will be now necessary to consider the contentions of the petitioner in W.P.(C)No.32874/2009. I see that the petitioner in the said writ petition is the second petitioner in W.P.(C)No.6106/2015. The essential challenge in these WPC 32874/09 & 6106/15 16 writ petitions is that even though Canfin Homes Ltd. had been posting better results in the past years, it has not increased its dividend from 25% for the five years prior to 2009, when the said writ petition was filed. The hypostasis of the petitioners' claim is that even though the dividend has not been enhanced, more than 50% of the profits has been transferred to the general reserves. The petitioner alleges that the action of the company in transferring such high percentage to the reserves of the company, while not declaring a higher dividend, is in violation of the Companies (Transfer of Profits to Reserves) Rules, 1975. The learned counsel for the petitioner fairly conceded when this writ petition was heard that transfer of amounts into the general reserves, even though the dividend not having been raised, can only add to the financial health of the company. He concedes that over the years the value of the shares of the company has escalated exponentially which also WPC 32874/09 & 6106/15 17 fortifies the fact that the company's action in maintaining a high reserve has helped it its long run.
21. The declaration of a proper dividend by a company under Section 205 of the Companies Act and transfer of profits to reserves under the Companies (Transfer of Profits to Reserves) Rules, 1975 are matters and decisions which are to be taken by the Board of Directors of the company. I notice that the company had taken decisions at the relevant time to transfer 50% or so of its profits to general reserves by maintaining the dividend at the rate of 25% in furtherance of an intention to create large reserves for the better financial health of the company.
22. The company has filed a statement wherein they say that the Board of Directors and the share holders had passed necessary resolutions before declaration of dividend in the relevant year. They maintain that there is nothing in the Rule prohibiting the WPC 32874/09 & 6106/15 18 company to transfer to their reserves, a higher percentage of the profits than that is compulsorily required under the Rules.
On an examination of the relevant and vital factors involved in this case, I see that even though the petitioners may have a case, going strictly by the terms of the relevant provisions, that the company ought not to have transferred such large percentage of its profits to general reserves without enhancing the rate of dividend, such action has only helped the financial condition of the company and has contributed to increase the value of its shares rather exponentially. The petitioners, being the investors, cannot be said to be prejudiced because even though the dividend was not enhanced, the value of their share holding had certainly moved up, even much beyond their expectations. When I made this view of mine known to Sri.P.I.Davis, the learned counsel for the petitioners, during the hearing of the writ petitions, he took some WPC 32874/09 & 6106/15 19 time to consult his client and submitted that she is also in affirmation of the fact that the action of the Board of Directors in transferring higher reserves has only helped the company. The learned counsel for the petitioner was therefore, fair in submitting that the petitioner does not intend to continue with the challenge against such action and that this writ petition can thus be closed without any further orders. I think this is a very fair stand taken by the petitioner and I, therefore, close W.P.(C)No. 32874/2009 without any further orders.
In the conspectus of my observations and the view in the above two writ petitions, it follows that W.P.(C)No. 6106/2015 deserves to be allowed.
I, therefore, direct respondents 4 and 5 to allot to the petitioners the shares applied for by them under the Rights Issue as also the additional shares by accepting the amounts for such purpose provided by them through demand drafts, which is now stated to be in deposit in the WPC 32874/09 & 6106/15 20 current account maintained by the bank as its refund account. The petitioners' applications, namely Exhibits P1 to P4, will, therefore, be taken up and considered by the fourth respondent and eligible shares be alloted in the manner applied for by them, without any further delay and as expeditiously as possible. Since this writ petition has been pending before this Court for the last more than 2= years, it is only apposite and idoneous that respondents 4 and 5 complete this process within a period of two months from the date of receipt of a copy of this judgment. It is so ordered.
In the peculiar facts and circumstances of this case, I make no order as to costs in both the writ petitions and direct the parties to suffer their respective costs.
Devan Ramachandran, Judge tkv