Judgment:
1. These appeals arise out of an order passed in Company Petition No. 202 of 2002 sanctioning a scheme of arrangement between the Respondent Sterlite Industries (India) Ltd( for short 'company') and its shareholders under Section 391 of the Companies Act, 1956. The scheme was presented to the Company Judge on 18th February 2002 after meetings of the equity share holders, secured creditors and unsecured creditors of the company had approved of the scheme at their separate meetings called for the purpose pursuant to order dated 9th January 2002 on Summons for Directions issued by the company. The scheme was sanctioned by the Company Judge after notice 394A of the Companies Act. The drawn up order of the learned Judge shows that the Central Government through the Regional Director, Department of Company Affairs, Maharashtra submitted to the order of the Court. It is recorded in the minutes of the impugned order that the Central Government had no objection to the Scheme.
2. Appeal Lodging No. 520 of 2002 is filed by the Securities and Exchange Board of India (for short 'SEBI'). Appeal Lodging No. 526 of 2002 is filed by the Central Government. Along with the appeals Notice of Motions have been filed for condonation of delay. SEBI has filed a separate Notice of Motion seeking leave to files appeal against the impugned order of the Company Judge. The principal challenge in these appeals is based on Section 77A of the Companies Act introduced by the Company (Amendment) Act, 1999 with effect from 31st October 1998 The scheme is challenged on the ground that the Court has no power to sanction the scheme of this nature under Section 391 of the Companies Act and the company is required to follow the procedure prescribed by Section 77A and SEBI(Buy back of Securities) Regulations, 1998. The scheme is also challenged on the ground that it is unconscionable and unfair to the share holders and violates the provisions of various laws including the Companies Act
3. The Respondent company is a public company limited byshares. It was incorporated in 1975 under the Companies Act, 1956. The company is engaged inter alia in the business of non ferrous metals and mining business notably copper The scheme of arrangement submitted by the company envisages a purchase by the company of not more that 2,79,96,278 equity shares (representing approximately 50% of its issued, subscribed and paid upequity share capital) of the company. The relevant provisions of the scheme in so far as they are material for the purpose of these appeals are reproduced below:
'4.1 The company shall, on a date fixed by the Board following theRecord Date, purchase not more than 2,79,96.278 equity shares(representing approximately 50% (fifty percent) of its issued,subscribed and paid up equity share capital) from the shareholdersexcluding the equity shares of those shareholders from whom thecompany receives a written intimation (In the relevant fromprovided for the purpose) within the stipulated period of theirintention to continue holding the equity shares.
4.3 In case the equity shares required to be purchased by the company as above exceed 2,79,96,278 equity shares (representing 50% ( fifty percent )of the issued, subscribed and paid up equity share capital), the company shall purchase the equity shares on a pro rata basis ,
4.6 Subject to Clause 4.7 in consideration for every 1 (one) equity share purchased by the company in pursuance of Clause 4.1 the company shall within 7 (seven) days from the date of purchase of the equity shares, without any further application, act or deed by theshareholders.
4 8 Upon discharge of the consideration as provided in Clause 4.6 theequity shares purchased in pursuance of Clause 14.1 shall bedeemed to be transferred in the company's name, without any actor deed by the shareholders, including but not limited tosurrendering of share certificates with transfer form and/or sendingappropriate instructions to the Depository participants. On the dateof purchase fixed under Clause 5.1 below, the share certificatesrelating to the equity shares purchased by the Company shall berendered invalid
4. 9. For the purpose of the scheme, the equity shares shall not be traded on the stock exchange for a period commencing from the record date and until the date of discharge of the consideration as provided in Clause 4.6'.
4. The scheme was approved by the share holders in the share holders meeting by overwhelming majority of 95.69% in number and 91.26% in value and unanimously in the meeting of the secured and unsecured creditors. After the scheme was sanctioned the company issued option forms to the share holders along with the cheque for Rs. 100, It seems that a total number of 94,474 shareholders have deposited the cheque or the option forms representing 91.8% equity shares capital of the company. The value of the cheques deposited and realized by the shareholders in response to the option is approximately Rs. 158 crores. Under the scheme option was to be exercised by 21st June 2002. SEBI's appeal was lodged on 19th June 2002. Central Government's appeal was lodged on 24th June 2002.
5. Mr. Dada and Mr. Desai learned counsel appearing for SEBI and Central Government respectively submitted that neither the provisions relating to reduction of capital under Sections 100 to 104 nor the provision of Section 391 could be invoked if market price was to be paid to the share holders who may opt to sell their schemes to the company. The company can buy back it equity shares only in accordance with Section 77A of the Companies Act. The non-obstante clause in Section 77A gives overriding effect to the said provision and is a complete code for buy-back of shares. Therefore the company desiring to buy-back it equity shares must follow the procedure under Section 77A and SEBI (Buy-back of Securities) Regulations, 1998. In any event in judicial determination which a company court is required to make under the provisions of Section 100 to 104 read with Section 391 must take into account the norms and safeguards provided by Section 77A and SEBI Regulations. The learned counsel further Submitted that the scheme and in particular Clauses 4.1 to 4.8 treat the silence of the shareholder as on offer Unless there is a positive assent of a shareholder to transfer his shares, no transfer can be treated as valid. The scheme thus violate, Section 108 of the Companies Act, Depositories Act, 1996, SEBI (Depositories and participants) Regulations, 1996, and Bye-Laws framed by the NSDL under the Depositories Act The scheme would also violate SEBI (Disclosure and Investor Protection) Guidelines 2000. It was also submitted that there was no adequate disclosure of material facts. A contention was also raised that the provision in she scheme that the share will not be dealt with on the Stock Exchange between 20th May 2002 and 20th June 2002 is violative of SEBI's circular dated 19th January 1996 and Clause 16 of the Listing Agreement executed between the company and the Stock Exchange. Further as a result of the scheme offered to the public there is likelihood of reduction in the public shareholding less than 25% amounting to violation of Regulation 20(3) and 21(3) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997. The submissions of Mr. Dada and Mr. Desai were adopted by Mr. Diwan, Mr. Rajiv Kumar and Mr. Khera appearing for the interveners.
6. In reply Mr. Chagla appearing for the company raised apreliminary objection to the maintainability of the present appeals. Mr. Chaglasubmitted that neither SEBI nor Central Government could be regarded asperson aggrieved or person adversely affected Dy the order under appeal, TheCompanies Act does not contemplate any notice to SEBI nor any right of appealin conferred on SEBI in the proceedings under Section 391. Merely becauseSection 394A contemplates prior notice to central Government, the section wouldnot in law render such notices as a person aggrieved or a person adverselyaffected by the impugned order. Therefore, even Central Government has noright of appeal. Mr Chagla submitted that even assuming the locus of either SEBI or Central Government to maintain any appeal, no cause, much less sufficient case is made out of condoning the delay in filing the appeal. Mr. Chagla refuted the argument of the appellants that Section 77A lays down the only mode for buying back the shares. He submitted that buy back by a company of its shares was permissible even prior to Section 77A was inserted in the statute book and a scheme or arrangement for buying back shares was permitted provided the provisions of Sections 100 to 104 for reduction of capital under the Companies Act had been followed Introduction of Section 77A does not in any manner alter this position. Section 77A is only an enabling provision which grants companies on easier route for buy back of their shares without having to approach this Court under Section 391 and Section 100 to 104 and without undergoing the rigours of those provisions. In regard to the allegation that scheme provides for negative or deemed consent the counsel submitted that an arrangement under Section 391 is essentially contractual in nature and unless there is illegality or fraud involved in the scheme the court cannot decline to sanction the scheme. He submitted that there is nothing unfair and unjust in the scheme. He emphatically denied that there was any violation of any statutory provisions or regulations or byelaws. He submitted that SEBI and the Central Government consciously stood by and acquiesced in and allowed the scheme to go forward and if the appeals are entertained at this belated stage that would result in grave and irreparable prejudice to the company. According to Mr. Chagla the appeals are completely devoid of any substance.
7. In view of the aforesaid rival contentions following points arise forour consideration
i) Whether the appeals filed by the Central Government and the SEBI are maintainable in law?
ii) Whether the Company Court has power to grant reorganizationscheme under Section 391 read with Sections 100 to 104empowering the company to buy back the shares from the share holders or whether Section 77A is the only mode to buy-back the shares?
iii) Whether the schemes sanctioned by the Company Court is contrary to any provisions of law or is unconscionable and unfair and against the interest of the shareholders?
Regarding question (i)
8. First, we will take up the issue of maintainability of the appeal by theSEBI. The Companies Act does not provide for any notice being issued to the SEBI prior to any order being passed under Section 391 or Section 394 of the Companies Act. Even the Securities & Exchange Board of India Act, 1992 does not contemplate any notice to the SEBI or any right of appearance by SEBI in proceedings before this Court in its company jurisdiction including proceedings under Section 391. Section 394A provides for notice to the Central Government and further provides that the court shall take into consideration the representation, if any made to it by the Central Government before passing any order under law of these sections. On plain reading of the provisions of the Companies Act we are unable to appreciate how SEBI would get right ofstatutory appeal under Section 391(7) of the Companies Act. Mr. Dada, however, submitted that by virtue of the provisions contained in Section 55A of the Companies Act, SEBI has been empowered to administer the provisions of the sections specified in Section 55A including Sections 77 and 77A. Under Section 621 of the Companies Act SEBI is the appropriate authority to take steps for prosecution of any offences in regard to matters in respect of which it is the authority for administration. SEBI was, therefore, a necessary party to the proceedings and ought to have been heard before any order was passed. Mr. Dada also submittedthat under Section 11A and 11B of SEBI Act. SEBI is the guardian to protect the interest of investors and it is the statutory duty of SEBI to take up any cause where investors interest has been adversely affected and when the SEBI has come to court with specific grievance that the scheme has affected the interest of the investors/ shareholders the court has discretion to grant leave to SEBI to file the appeal.
9. We are afraid we cannot accede to the submission of Mr. Dada. Under Section 55A. SEBI has been empowered to administer the provisions of sections specified in Section 55A in so far as they relate to issue of securities, transfer of securities and non-payment of dividend. Merely because the SEBI has been empowered to administer the provisions of Section 77 and 77A, it does not give SEBI any locus in a petition under Section 391 or Section 394. The right to notice under Section 391 proceedings remains with the Central Government under Section 394A The SEBI has not right of notice nor does it have any right to appear in the proceedings under Section 391 and 394A of the Act.
10. In Ucal Fuel Systems Ltd and anr 1992 (73) Company Cases 63, the Madras High Court has held that the fact that the Ministry of Industry had to approve transfer of the Letter of Intent did not mean that the Ministry of Industry had to be impleaded or issued notice. The provisions of Section 394A of the Companies Act did not require any such notice to be served. While considering an application under Section 394A of the Act, the Court has to give a notice to the Central Government and shall take into consideration the representation having been made by it and there is no need to implead the Industries Department. This decision lends support to our view that SEBI has no right of notice of proceedings under Section 391 or Section 394 of the Companies Act.
11. In so far as the appeal filed by the Central Government isconcerned, we feel that the case of the Central Government stands on a differentfooting. Section 394A was inserted in the Companies Act with the object toenable the Central Government to study the proposal and raise such objectionsas it thinks fit in the light of the facts and information available with it and alsoplace the court in possession of certain facts which might not have beendisclosed by those who appear before it so that the interest of the investingpublic at large may be fully taken into account by the court before passing itsorder. A more liberal approach is required to be adopted in the background ofobjective of the legislature in enacting Section 394A. The Central Governmenthas the statutory duty and interest to see that the interest of the investing publicshould be protected and that laws are not violated. Section 394A enjoins theCourt to take into consideration the representation, if any, made to it by theCentral Government before passing any orders under Section 291 or 394. If thedecision of the company court, according to the Central Government is contraryto the law or it is of the opinion that sanctioning of the scheme of arrangementwould adversely affect the interest of the investing public at large the CentralGovernment can be said to be aggrieved person to safe guard the interest of theinvesting public and can maintain an appeal under Section 391(7).
12. Mr. Chagla, urged that merely because the Central Government isentitled to statutory notice does not clothe it with a right of appeal. He submittedthat the Central Government merely discharges its duty of appearing before theCompany Court to assist it at the stage of grant or refusal of sanction undersection 391. The Central Government cannot be said to be have been aggrievedby the order ultimately passed by the Company Court and would have no right ofappeal therefrom and the Central Government could not be said to be interestedin the impugned order after it is passed. He referred to the decision of theSupreme Court in Adi Pheroze Gandhi v. H.M. Seervai, Advocate general of Maharashtra : [1971]1SCR863 . He also referred to the decision of the division bench in Motilal Kanji and Co. v. Natwarlal M Jhaveri (1932) 2 comp cas 64 and the decision of the learned single Judge of this court (Nain J) in M G. investment v. New Shorrock Spinning and Manufacturing CO (1972) 42 Com Cas 145
13. In Adi Pheroze Gandhi's case question which fell for consideration was whether the appeal filed by the Advocate General of Maharashtra before the Bar Council of India was competent. The majority view was that the Advocate General of Maharashtra was not competent to file appeal to the Bar Council of India. In that case the disciplinary committee of the State Bar Council was satisfied that there was no reason to hold Adi Pherozshah Gandhi guilty of professional misconduct or other misconduct. The Advocate general of Maharashtra filed an appeal before the Bar Council of India. The appellant objected- to the locus standing of Advocate General before the Bar Council of India. The objection was overruled and the appeal filed by the Advocate General was accepted by the disciplinary committee of the Bar Council of India. The disciplinary committee of the Bar Council of India held the Advocate Adi Pherozeshah Gandhi guilty of misconduct and suspended him from practice for one year. The Advocate preferred an appeal under Section 38 of the Act to the Supreme Court. In view of majority decision, the appeal filed by Adi Pherozeshah Gandhi was accepted by the Supreme Court on the ground that the Advocate General of Maharashtra was incompetent to file an appeal.
14. In Bar Council of Maharashtra v. N.V. Dabholkar etc. : [1976]1SCR306 the Supreme Court considered its earlier decision in Adi Pherozeshah Gandhi's case The question before the Supreme Court was whether the StateBar Council is a person aggrieved to maintain an appeal against the decision ofits disciplinary committee. The court after referring to its earlier decision in AdiPherozeshah Gandhi's case held that the appeal was competent. Theobservations made by the court in paras 27 to 30 are pertinent:
'27. In finding out the meaning of the words 'person aggrieved by an order made by the disciplinary committee of the Bar Council of India'. Two features are to be kept in the fore-front. First, there is no lis in proceedings before the disciplinary committee. When the disciplinary committee exercises the power to reprimand the advocates, or suspend the advocatefrom practice or remove the name of the advocate, the committee doesnot decide a suit between the parties. The Bar Council in placing a matter before the disciplinary committee does not act as prosecutor in a criminal case. A complainant who prefers a complaint against an advocate is not like a plaintiff in a civil suit. The complaint is examined by the Bar Council in order to find out whether there is any reason to believe that any advocate has been guilty of misconduct. The Bar Council may act on its own initiative op information which has come to its notice in the course of its duties. Second, there is no party to the disciplinary proceedings. It is because the Bar Council, the Attorney General, the Advocate General, as the case may be, all act in protecting the interests of advocates, the interests of public. In so acting there is no conflict between the advocate and any other person. The reason is that it is professional conduct, professional etiquette, professional ethics, professional morality, which are to be upheld, transgression of which results in reprimanding the advocate or suspending him from practice or removing his name from the roll.
30. The Bar Council is 'a person aggrieved' for these reasons. First, the words 'person aggrieved' in the Act are of wide import in the context of the purpose and provisions of the state. In disciplinary committee there is no lis and there are no parties. Therefore, the word 'person' will embrace the Bar Council which represents the Bar of the State. Second, the Bar Council is 'a person aggrieved' because it represents the collective conscience of the standards of professional conduct and etiquette. The Bar Council acts as the protector of the purity and dignity of theprofession. Third, the function of the Bar Council in entertaining complaints against advocates is when the Bar Council has reasonable belief that there is a prima facie case of misconduct that a disciplinary committee is entrusted with such inquiry. Once an inquiry starts the Bar Council has no control over its decision. The Bar council may entrust it to another disciplinary committee or the Bar Council may make a report to the Bar Council of India. This indicates that the Bar Council is all the time interested in the proceedings for the vindication of discipline, dignity and decorum of the profession. Fourth, a decision of a disciplinary committee can only be corrected by appeals as provided under the Act. When the Bar Council initiates proceedings by referring cases of misconduct todisciplinary committee the Bar Council in the performance of it functionsunder the Act is interested in the task o/ seeing that the advocatesmaintain the proper standards and etiquette of the profession. Fifth, the Bar Council is vitally concerned with the decision in the context of the functions of the Bar Council. The Bar Council will have a grievance if the decision prejudices the maintenance of standards of professional conduct and ethics.'
15. In the light of the decision in N.V. Dabholkar's case and in the background in which Section 394A was introduced in the Companies Act we are unable to accept the submission of Shri Chagla that the Central Government has no right of appeal under Section 391 of the Act. Two other decisions relied upon by Mr. Chagla have no bearing on the issue of maintainability of appeal by Central Government in Motilal Kanji & Co. case the division bench held that an appeal would not lie under Section 202 of the Indian Companies Act. 1913 at the instance of the Appellants who are neither creditors nor contributors and who have no present interest in the company but only a prospective interest to be appointed secretaries and agents if the company is made to stand on its legs as a result of the modified scheme. The bench held that unless a person shows thathe has got an interest which is adversely affected by the decree of the lower court, or has an interest in the subject matter which is under litigation, he has noright to appeal. In M.G. Investment's case the question was whether the Central Government could be joined as party to the proceedings under Section 391. The learned counsel appearing for the Central Government argued before the Company Judge that the Central Government should be joined as party to the company petition. The ground stated for that application was that important issues were involved and if the Central Government were made party to the petition they would have a right of appeal against the orders on this petition which, according to the ld counsel they would not have if they appear merely pursuant to the notice under Section 394A of the Companies Act. The learned Judge held that there is no jurisdiction to add the Central Government as a party to the proceedings. The decision of the single Judge has no applicability to the issue involved before us. Thus the appeal filed by the Central Government is clearly maintainable in law.
Regarding question No. (ii):
16. Before we take up this question we would briefly refer to the relevant provisions of the Companies Act Section 77 puts restriction on purchase of its own shares by a company. The section reads as follows :-
'77(1) No Company limited by shares, and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of Section 110 to 104 or Section 402.
2. 3
4.
5) Nothing in this section shall affect the right of a company to redeem any shares issued under Section 80 or under any corresponding provisionin any previous companies law.'
17. The reason for the restriction on purchase of its own shares by a company is that such purchase either amounts to 'trafficking' in its own shares,thereby enabling the company, in an unhealthy manner to influence the price of its own shares on the market or it operates as a reduction of capital which can only be effected with the sanction of the Court, and in the manner laid down by sections 100 to 104 Prior to introduction of Section 77A the only exceptions tothe general principle that the company cannot buy its own shares were (i)purchase resulting in reduction of capital with the sanction of the court under Sections 100-104: (ii) redemption of redeemable preference shares under Section80 : (iii) purchase under an order of court in a scheme of arrangement oramalgamation under Sections 391-394, subject to compliance with Sections 100-104 and (iv) purchase under an order of Company Law Board to purchase shares of minority shareholders under Section 402(b) (See Companies Act by A Ramaiya (15th Edn) at page 962-963).
18. Thus the company could purchase its shares prior to introduction of Section 77A provided the scheme or arrangement therefore had been sanctioned under Sections 100 to 104. Section 100 does not prescribe the manner in which the reduction of capital is to be effected. Nor is there any limitation or the power of court to confirm the reduction except that it must be first satisfied that all the creditors entitled to object to the reduction have consented or have been paid or secured. Reference in that behalf may be made to Punjab Distilling Industries Ltd. v. Commissioner of Income Tax, Punjab, (1965) Com Cas 641 Hindustan Commercial Bank Limited v. Hindustan General Electrical Corporation (1960) 30 Comp Cas 367 .
19. It is well settled that under Section 391 of the Companies Act, thecourt is invested with very wide powers to approve or sanction any scheme ofamalgamation, arrangement, compromise or reconstruction. The court has powerto sanction all matters which for their effectuation require a special procedure to be followed under the Companies Act. The only exception to this is the special procedure to be followed under Section 101 for reduction of capital since rule 85 of the Companies (Court) Rules, 1959 specifically enjoins the following of a special procedure prescribed for reduction of share capital In Re: Maneckchowk & Ahmedabad . (1970) 40 Company Cases 819 D.A. Desai J., as he then was, has held that Section 391 of the Companies Act is a complete Code However, in view of rule 85 of the Companies (Court) Rules, 1959, whenever a scheme of arrangement proposed under Section 391 involves a reduction in the share capital of the company, the procedure prescribed under Section 100-102 of the Companies Act and the Rules relating to the reduction of the capital shall have to be complied with. He went on to hold that reduction of capital can be sanctioned as part of a scheme of compromise and arrangement by a common order under Section 391 subject to requirements of Sections 100-102 being complied with. The decision in Maneckchowk and Ahmedabad .'s case was followed by this court in Vasant Investment Corporation Ltd. v. Official Liquidator Colaba Land And Mill Co. ltd. (1981) 51 Com Cas 20 and Re: PMP Auto Industrial Ltd. (1994) 80 Com Cas 289.
20. The impact of Section 77A which was introduced by the Companies (Amendment) Act, 1999 will have to be considered in the light of the afore stated provisions as interpreted by the Courts. Section 77A was introduced pursuant to the Report of the Working Group which was set up to suggest reforms to theCompanies Act. It would be useful to refer to paras 3.9 and 3.10 of the report which read as under -
'3.9 There is an erroneous belief that the sole reason for buyback is to block hostile takeovers. In this connection it is pertinent to list thefive reasons why the Bank of England favoured the making of law to allow companies to repurchase their shares, of which blocking takeovers was only one :
a) to return surplus cash to shareholders
b) to increase the underlying share value
c) to support share price during periods of temporary weakness
d) to achieve or maintain a target capital structure.
e) To prevent on inhibit unwelcome take over bids.
3.10 Almost all OECD countries allow companies to buyback shares subject to certain regulations. Unfortunately, Section 77 (read with Section 100) of the Act prevents buyback. In today's context, the Group strongly believes that this section is antiquated, and goes against the long term interests of corporate sector growth and shareholders value. Hence, the Group recommends that:
The new Act should provide for buy back of shares subject to certain provisions ......'
21. Section 77A alongwith Section 77AA and Section 77B have been introduced pursuant to the Working Committee's Report to provide for buy-backof its own shares by the company subject to safeguards specified therein. Section 77A in so far as it is material for our purpose reads as follows :
'77A(1) Notwithstanding anything contained in this Act, but subject to the provisions of Sub-section (2) of this section and Section 77B, a company may purchase its own shares or other specified securities (hereinafter referred to as 'buy-back') out of -
i) its free reserve ; or
ii) the securities premium account; or
iii) the proceeds of any shares or other specified securities ;
Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
(2) No company shall purchase its own shares or other specified securitiesunder Sub-section (1), unless -
a) the buyback is authorised by its articles ;
b) a special resolution has been passed in general meeting of the company authorising the buy-back
Provided that nothing contained in this clause shall apply in any case where -
a) the buyback is or less than then percent of the total paid up equity capital and free reserves of the company ; and
b) such buy back has been authorised by the Board by meansof a resolution passed at its meeting ;
Provided further that no offer of buy back shall be made within a period of three hundred and sixty five days reckoned from the date of the preceding offer of buyback, if any ;
Explanation For the purposes of this clause, the expression 'offer Of buy back means the offer of such buy back made in pursuance of the resolution of the Board referred in the first proviso ;
(c) the buyback for less than twenty five per cent of the total paid upcapital and free reserves of the company;
Provided that the buyback of equity shares in any financial year shall not exceed twenty five per cent of its total paid up equity capital in that financial year.
(d) The ratio of the debt owned by the company is not more than twice the capital and its free reserves after such buyback ; Provided that the Central Government may prescribe a higher ratioof the debt than that specified under this clause for a class or classes of companies
Explanation :- For the purposes of this clause, the expression 'debt' includes all amounts of unsecured and secured debts ;
(e) all the shares or other specified securities for buy back are fullypaid up ;
(f) the buy back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf:
(g) the buy back in respect of shares of other specified securities other than those specified in Clause (f) is in accordance with the guidelines as may be prescribed
(3) The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by explanatory statement stating -
a) a full and complete disclosure of all material facts ;
b) the necessity for the buy back ;
c) the class of security intended to be purchased under the buy-back
d) the amount to be invested under the buy-back ; and
e) the time limit for completion of buy-back.
(4) Every buyback shall be completed within twelve months from thedate of passing the special resolution (or a resolution passed by the Board) under Clause (b) of Sub-section (2). (5) ......
22. The opening words of Section 77A viz. 'Notwithstanding anythingcontained in this Act, but subject to the provisions of Sub-section (2) of this section and Section 77B, a company may purchase its own shares or otherspecified securities....' Shows that Section 77A is a facilitating provision whichenables the companies to buy back their shares without having to approach thecourt under Section 391 and Sections 100-104 subject to compliance with the provisions of Sub-sections (2), (3) and (4). Prior to the introduction of Section 77A, the only manner in which a company could buy back its share., was by following the procedure set out under Section 100-104 and Section 391 which required the calling of separate meetings of each class of shareholders and creditors as well as (if required by the Court) the drawing up of a list of credits of the company and obtaining of their consent to the scheme for reduction. The legislative intention behind introduction of Section 77A is to provide an alternative method by which a company may buy back upto 25% of its total paid up equity capital in any financial year subject to compliance with Sub-sections (2), (c) and (4). It does not supplant or take away any part of the pre-existing jurisdictions of the Company Court to sanction a scheme for such reduction under Sections 100-104 and Section 391.
23. The submission of the appellants that the non-obstante clause in Section 77A gives precedence to that section over the provisions of Sections 100-104. Section 391 is misconceived. The non-obstante clause in Section 77A namely 'notwithstanding anything contained in this Act...' only mean that notwithstanding the provisions of Section 77 and Sections 100-104, the company can buy back its shares subject to compliance with the conditions mentioned inthat section without approaching the court under Sections 100-104 or Section 391. There is nothing in the provision of Section 77A to indicate that the jurisdiction of the court under Section 391 or 394 has been taken away or substituted. It is well settled that the exclusion of the jurisdiction of the Court should not readily be inferred, such exclusion should be explicitly or clearly implied. There is nothing in the language of Section 77 that gives rise to such an inference We are. therefore, inclined to hold that Section 77A is merely an enabling provision and Court's powers under Sections 100-104 and Section 391 are not in any way affected. The conditions provided in Section 77A are applicable only to buy-back of shares under Section 77A. The conditions applicable to Sections 100-104 and Section 391 cannot be imported into or made applicable to a buy-back under Section 77A Similarly, the conditions for a buy-back under Section 77A cannot be applied to a scheme under Sections 100-104 and Section 391 The two operate in independent fields.
24. It is not disputed before us that reduction in the capital can be effected under Sections 77 read with Sections 100-104 and 391 even in the case of buy-back of shares. However, it is contended that the optional sale by the Shareholders would not amount to arrangement or reorganisation of the capital and would not therefore cover Section 391 read with Section 100 of the Companies Act We are unable to accede to this contention as even in cases where capital is reduced by optional sale reduction results after the option is exercised to the extent of the shares cancelled. This is as equally a reduction of capital as in the case of compulsory cancellation of shares. We do not see anydistinction between the two on the aspect of the reduction. The wordarrangement is of wide import and is not restricted to a compulsory purchase oracquisition of shares There is no reason as to why a cancellation of shares and the consequent reduction of capital cannot be covered by Section 391 read withsection 100 merely because a shareholder is given an option to cancel or to retain his shares. In view of the foregoing discussions, the objection of the appellants based on Section 77A must be rejected.
Regarding question (iii)
25. The principal attack against the scheme sanctioned by the Company Judge is that the scheme treats the silence of shareholders as an offer. It is contended that this is contrary tot he well established principles of transfer ofshares. It is also contended that this violates various provisions of various laws such as Companies Act, Depositories Act, and SEBI and NSQL Regulations. On behalf of the company, it was vehemently contended that the Central Government should not be allowed to raise this contention for the first time in appeal, when the scheme has been substantially implemented and no objection was raised to the scheme before the learned Company Judge. It is submitted that when the shareholders have of the terms of offer and of the acceptance by passing the required resolution, it does not fall within the province of the company court to sit in judgment over that commercial wisdom and to interfere with that decision. An order of a court requiring transfer or cancellation has never been subject to the procedural requirement of even the Companies Act, let alone Bye-laws made by the NSDL. In fact, the NSDL Bye-laws themselves provide a transaction or to take any other action in order to give effect to the order or judgment of a court. A number of decisions have been cited by both sides in support of their respective contentions. We feel that it would be highly unjust to allow the Central Government to raise an objection of this nature at the appellate stage. The draft order of the learned company Judge records that the Central Government has submitted to the order of the court. The learned Judge specifically recorded in the minutes of order that the Central Government has noobjection tot he scheme. As indicated earlier a vast majority of shareholders have exercised their option in accordance with the scheme. The value of the cheques deposited and realised by the shareholders in response to the option is more than Rs 158 crores. In these circumstances, in our opinion it would be wholly inequitable to entertain this objection at such belated stage Although we are not inclined to accept the submission that a deemed or negative consent should not be permitted, we wish to make it clear that our order should not be understood to mean that we have approved such a provision. We have been told that several such schemes containing provisions of deemed or negative consent have been filed before the Company Judge. It will be open for the Central Government to raise objection to such schemes and if such objection is raised we are sure that the learned Company Judge will deal with the same in accordance with law.
26. It appears that 2,584 option forms out of 1,44,252 have been received undelivered. Mr. Chagla has made a statement that in respect of these undelivered option forms, shareholders would be allowed to retain their shares. Mr. Chagla further stated that the company has received around 143 complaints alleging that the shareholders have encashed the cheques through inadvertence or error and even those shareholders will be allowed to retain their shares provided they return the money within two months. Further, in respect of shares held by the shareholders who have neither returned the option forms nor encashed the cheques forwarded by the company, Mr. Chagla made the following offer
'In respect of shares held by the shareholders who have returned theoption form and not encashed the cheques forwarded to them by therespondent no. 1 the shares shall be purchased by the respondent and cancelled as per the order of the Company Judge dated 10th April 2002.
The respondent company shall keep in trust for such shareholders a sum of Rs. 100 per share plus five debentures of Rs.10 each to be dealt within the following manner
a) If the share holder is desirous of obtaining the shares, the sum ofmoney and debentures so retained shall be paid over as price ofthe shares to a seller identified by the respondent who shall transferto such shareholder an equivalent number of shares as the numberheld by him on the record date. The option shall be available for aperiod of four months from June 21, 2002.
b) If the shareholder elects to receive the consideration and in anycase after the expiry of three months from June 21, 2002. If theshareholder has not elected to receive the shares till that period,the sum of money and debentures will together with the net incomeif any accrued thereon be handed over to the shareholder as andwhen required by him.
The respondent shall within four weeks publish public advertisement of the aforesaid offer in Indian Express in English and Maharashtra Times in Marathi in Bombay and Lokmat Times in English and Lokmat in Marathi at Aurangabad '
27. In view of the fact that the scheme has been substantially implemented and the fact that the Union of India/ Regional Director has not raised any objection before the ld Company Judge, we are inclined to accept the statement made by Mr Chagla as indicated above
28. Certain other objections were raised on behalf of the appellants. It was stated that the information which was material to the scheme was not disclosed to the court at the time of passing of the impugned order. According to the appellants the company should have disclosed earlier resolution of the shareholders for buyback under Section 77A of the Act. Similarly disclosure inrespect of Indian Aluminum Company Limited (INDAL) and the pendency of the writ petition filed by the company in the Delhi High Court sought to have been disclosed. It is pointed out by Mr. Chagla that the contention is incorrect on facts because annual report of the company for the year 2000-01 had detailed information and the report was annexed to the company petition of the company It forms part of the material of these proceedings, therefore there is no substance in the allegation that there was suppression of facts.
29. SEBI has also submitted that the provision for stoppage oftransaction in the Stock Exchange amounts to violation of SEBI circular dated19th January 1996 and Clause 16 of the listing agreement executed between the company and the Stock Exchange. It appears that the suspension of trading in Sterlite shares from 13th May 2002 rather than from the record date of 20th May 2002 was fixed by the Mumbai Stock Exchange itself. It is pointed out that the subsequent circular dated 18th January 2000 removes even the requirement for SEBI approval for the suspending scrips for more than three days. Be that as it may. when the scheme, has already been effected and substantially implemented ft would not be proper to interfere with the order of the learned Company Judge on the alleged ground of violation of listing agreement. It was also argued that the SEBI (Disclosure and Investors Protection) Guidelines 2000 in respect of issue of debentures were violated. We have gone through guidelines have been substantially complied with by the company. The debentures are rated as AA and rating was disclosed in its letters sent to the shareholders The Western Indian Trustee and Executor Company Limited have been appointed as trustees This fact was also disclosed in the option letter sent to the shareholders Thus there is no merit in the contention that there is non compliance of the guidelines. Lastly, it was contended that cheques have been issued along with Option Forms, though it was provided in the scheme thatpayment would be made after the Option Forms are received from theshareholders. Even assuming that there was irregularity in sending the cheques along with Option Forms, in our opinion, this would hardly constitute a ground for setting aside the scheme.
30. In the result appeals as well as notice of motions are dismissed. No order as to costs.