Delhi High Court
Shri Prem Seth And Others vs National Industrial Corporation Ltd. ... on 17 May, 1994
Equivalent citations: ILR1995DELHI500, AIR 1994 DELHI 285, (1994) 15 CORLA 117, (1994) 3 COMLJ 205, (1994) 29 DRJ 531, (1999) 96 COMCAS 575
JUDGMENT
1. I have heard arguments for disposing of this application.
2. The prayer made in this application is that the respondents be restrained from issuing 20,05,000 shares.
3. The petitioners, who are four in number and are share holders of the respondent No. 1 company, have brought a petition under Section 397/398 read with Section 151 of the Companies Act seeking certain reliefs and in the alternative have sought winding up order under Section 434 read with Section 439 of the Companies Act.
4. Vide elaborate judgment dated February 2,1993, it was held that the petition under Section 397 and 398 of the Companies Act is not maintainable and the matter regarding prayer of winding up was directed to be dealt with separately. The petition for winding up has yet not been admitted and the same is at the show cause stage.
5. Learned counsel for the petitoner/ applicant has contended that the respondent No. 1 company has sought to issue fresh right shares in violation of the provisions of Section 81 of the Companies Act and secondly, in fact there is no genuine need for raising any capital for which necessity could arise for issuing of the fresh right shares which would only faith about Rs.50,00,000/- to the company. It is argued that the holding of the petitioners is sought to be diluted by resorting to issuance of aforesaid right shares.
6. Learned counsel for the respondent, on the other hand, has argued that there is no question of any dilution of the share holding of the petitioners inasmuch the shares are being offered for subscription at par by way of rights to the existing ordinary shareholder in the ratio of 1 ordinary share against each ordinary share held by them. Admittedly, there are about 19,95,000/- shareholders and out of the proposed 20,00,000 shares 19,95,000 shares would be given to the existing shareholders in the ratio of 1 share to ordinary share against each ordinary share held by the shareholder. The remaining 10,000 ordinary shares are to be issued again to the existing shareholders in proportion of additional shares applied by them. So it, is contended on behalf of the company that there is no proposal to dilute the shareholding of any person inasmuch as if the existing shareholders exercise their option to accept the right share then their ratio of their existing shareholding would not get diluted in any manner, it is also contended on behalf of the respondent No. 1 company that the necessity, for issuing the fresh shares had arisen on account of the fact that the company is in dire need of additional funds for working capital inasmuch as the cost of raw material has substantially increased because of decontrol policy introduced by the Government in respect of molasses. The price of the said raw material has shot up from Rs. 14/- per quintal to Rs. 250/- per quintal with consequential increase in excise duty and sales tax, which is again 20% each. It is emphasised that now only 1/4th of the quantity required by the respondent company would be available at control rate which is also gone up from Rs. 14/- per quintal to Rs. 70/- per quintal. It is emphasized this decontrol has become effective with effect from 1st April, 1994 although policy of the decontrol was announced in Nov. 1993 but the Government was liberal enough to allow the control prices to remain in force for three months to enable the companies to execute their existing orders. It is emphasised that the company has the requirement of raw material in order to meet the huge order received from the State Government, para military, civil and defense services. That order is to the tune of Rs. 2/-crores. It is then contended by learned counsel for the respondent that earlier the company had proposed to increase the shareholding by issuing right of the value of only Rs. 8/- lakhs or so but at that time neither the Government policy had changed with regard to the supply of molasses nor the company had received any such huge order and negotiations for obtaining the aforesaid order took place in early March, 1994 and thereafter, the company thought it fit to issue shares in question in order to make available funds for which no interest is liable to be paid, whereas the company had already secured loans and huge amount of interest every year is being paid, which amount is increasing every year.
7. Learned counsel for the petitioner has made reference to Nanalal Zaver v. Bombay Life Assurance Co. Ltd. wherein it has been held that it is well settled that in exercising their powers whether general or special , the directors must always bear in mind that they hold a fiduciary position and must exercise their powers for the benefit of the company and for that alone and that the Court can intervene to prevent the abuse of a power whenever such abuse is held proved, but it is equally settled that where directors have a discretion and are bona fide acting in the exercise of it, it is not the habit of the Court to interfere with them. It may be noticed that when the company is in no need of further capital, directors are not entitled to use their power of issuing shares merely for the purpose of maintaining themselves and their friends in management over the affaris of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholder.
8. In this very judgment it was also laid down by the Supreme Court while giving interpretation to Section 105C of the previous Companies Act, which is para materia with Section 81 of the present Companies Act and it was held that the directors have a discretion in the matter of the increase of the capital when it says "when the directors decide to increase capital of the company" it means that it is within their absolute discretion to take the decision whether to increase the capital or not. It is also within their discretion to say to what limit and to that extent they will increase the capital and it also for them to decide how many shares and of what value they will issue and once that decision has been taken only then Section 105C comes into operation.
9. It is quite evident that while issuing the right shares, in case the petitioners exercised their right to obtain the aforesaid right share, the percentage of their shareholding would not be diluted in any manner.
10. In Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., the Supreme Court has again emphasised at page 816 of the judgment that it is necessary to clear a misunderstanding in regard to the power of directors to issue shares. It is not the law that the power to issue shares can be used only if there is need to raise additional capital. It is true that the power to issue shares is given primarily to enable capital to be raised when it is required for the purposes of the company but that power is not conditioned by such need.
11. As far as the law is concerned, it is quite evidence that the directors of the company act in fiduciary capacity and if they in their discretion decide to issue shares for purposes of raising the funds, the only question for decision is whether the issuance of the shares for the purposes of raising funds is in the interest of the company.
12. The learned counsel for the petitioners has drawn my attention to the annual return and accounts of the company for the year ending 31st March, 1993, copy of which is annexed as Annexure-C filed along with the application, which shows that the company had sales of about 22, 28, 42, 956 in the current years i.e. up by 14 crores or so from the previous year and the company had about Rs. 1,52,70,603 as reserve funds. By merely raising of Rs.50,00,000/- by issuing right shares the company would not be having any material effect for carrying on its business. Learned counsel for the petitioners has argued that no material has been placed by the respondent company before this Court to show as to how much financial expenditure would be for purchasing the raw material molasses keeping in view the increase in the price of the said raw material. He has also argued that it is not shown by the company as to how much raw material in a year is required by the company and what would be its investment for purchasing the said raw material in a particular year.
13. The aforesaid balance sheet of the company also shows that on molasses and other raw material the company incurred expenditure of Rs. 2,46,77,888/-, on previous prices, which was up by about 41 lakhs from the previous year. The company has also placed on record an invoice dated 27th April, 1994, showing that the company had made purchases of molasses at the rate of Rs. 250/-per quintal and a total value in respect of such purchases is Rs. 1,75,1014/-. So it is quite evident that the company had to now incur huge expenses for purchasing the raw material of molasses in this financial year. The said balance sheet of the company also shows that the company is already paying Rupees. 77,30,982/- as interest which is up by about Rs. 3,00,000/- from the previous year. The company has about Rs. 2,37,00,000/- cash credit loan and about Rs. 23,76,000/-medium term loan and Rs. 24,96,000/- as terms loan on molasses and then Rupees. 5,00,000/- on another term loan of Rupees. 7,08,000/- and about Rs.2,33,00/- as cash loan and about Rs. 45,00,000/- as loan from other sources than bank.
14. Could it be said that in view of this picture of the company when the company had in its discretion thought it proper to raise Rs. 50,00,000/- by issuing right share, the company had acted in any mala fide manner. It is not possible to accept the bald contention of the learned counsel for the petitioners that for raising the funds for the working capital no company had any legal right to raise such funds by issuance of shares and funds for working capital must be raised only by raising loans from the banks. It is not disputed before me that raising of funds by issuance of the shares would not involve any payment of interest while by raising bank loans, the company had to pay interest at quite a high rate of 21% p.a. or so.
15. In view of the above discussion, I find that there is no mala fide act on the part of the company in trying to raise the funds by issuance of right shares in question. The mere fact that the company had earlier tried to raise funds by issuance of right shares in 1993, does mean that the present decision of the company in issuing the right shares is actuated by any ulterior motives and is not bona fide exercise of the discretion in the interest of the company. I find no merit in this application, which I, hereby dismissed.
16. Application dismissed.