1. This is an application filed by Gordon Woodroffe Limited (hereinafter referred to as "GWL") making reference under Section 22A(4)(c) of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as "the SCR Act"), seeking confirmation of this Bench of the decision of the board of directors in their meeting held on May 26, 1992, to refuse the registration of transfer of certain shares in favour of Trident Investment and Portfolio Services Private Limited (hereinafter referred to as "Trident").
2. The facts of the case are that on March 30, 1992, Trident lodged with GWL instruments of transfers in respect of 2,67,725 equity shares constituting 6.84 per cent. of the paid-up capital in GWL for registration in favour of Trident. In all, there were 4,154 transfer deeds involving 8,714 share certificates. Along with the transfer documents, Trident also filed a declaration under Section 187C of the Companies Act, 1956 (hereinafter referred to as "the Act"), indicating therein the name of Tracstar Investment Private Limited as the holder of beneficial interest as absolute owner of these shares. The board of directors of the company considered the transfers in their meeting held on May 26, 1992, and formed an opinion, according to the company, in good faith, to refuse the registration of transfer on the following grounds : (a) the transfer of the said securities is in contravention of the Benami Act ; (b) the transfer of the said securities in favour of Trident is likely to result in such change in the composition of the board of directors of the company which would be prejudicial to the interest of the company and/or public interest.
3. Along with the reference, a copy of the relevant portion of the minutes, of the meeting of the board of directors held on May 26, 1992, marked as annexure "S" was also enclosed. A perusal of the said minutes revealed that the second ground relied on for refusal of registration of transfer was not identical with the one that was shown as passed in the board resolution. According to the board resolution, the second ground was "that the transfer of the said securities in favour of Trident Investment and Portfolio Services Private Limited would not be in the interest of the company". In the meanwhile, affidavits were filed by Sarvshri T. S. Venkatesan, S. Subramanian, Jolly Bhargava, K.Srinivasan and M. Srinivasa Rao, directors of the company, purported to have participated in the said board meeting, stating that ground (b) of the resolution as indicated in the reference did not correspond with the actual resolution passed in the meeting and they have indicated the following as the correct resolution that was passed in respect of (b) part : "That the transfer of these said shares in favour of Trident . . .
is likely to result in change in the composition of the board of directors of the company and such change would be prejudicial to the interest of the company and/or public interest"! 4. In view of the above, these five directors sought for suitable amendment to the main reference filed earlier, to incorporate the correct resolution.
5. The Bench Officer, on receipt of the five affidavits from the five directors as indicated above seeking amendment to the application, issued a notice to the company raising certain objections as per his notice dated August 24, 1992, and in the hearing held on September 2, 1992, we decided that the reference was maintainable as there is no change in the first part in any case, and proceeded to hear the matter on merits.
6. Before we proceed with the case, it is essential to indicate certain background matter in respect of GWL. This company had become a sick company within the meaning of the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), and the Board for Industrial and Financial Reconstruction (BIFR) has framed a scheme for its revival and the company is now in the process of being revived.
Shaw Wallace and Co. Ltd. has, as per the scheme sanctioned by the BIFR in January, 1989, provided large financial assistance in- various forms to this company as indicated in the application for revival of the company. Shaw Wallace and Co. Ltd. (SWC) is reported to be under the control of Shri M. R. Chabaria (MRC). The shareholding pattern in GWL as on February 20, 1992, was as follows : 7. It is claimed that GWL. U.K., is under the control of MRC group and Tracstar under the control of Shri, K. R. Chabaria (KRC). As far as Shoe Specialities Private Ltd. (SSPL) is concerned, some proceedings are pending regarding rival claims to the control of the same. Tracstar purchased the impugned shares from the market and these were lodged by Trident for being registered in its name. Exercising the powers under Section 22A(3) of the SCR Act, the board of directors have refused registration of the shares and accordingly have made the present reference to us in the Company Law Board for confirmation of the refusal.
8. Shri Raghavan, Senior Advocate, appearing on behalf of the company, narrated, in brief, the proceedings before BIFR to indicate how the responsibility of reviving the company was entrusted to the MRC group and stated that in view of the commitment given before the BIFR, Shaw Wallace and Co. (hereinafter referred to as "SWC") has already provided financial assistance of over Rs. 4 crores by way of equity, interest free loans, provision of guarantee, etc. According to him, on May 26, 1992, the board of directors of the company considered, in detail, the registration of shares tendered by Trident and came to the conclusion that the transfer should be refused on two grounds, namely, that the registration would be against the provisions of the Benami Transactions (Prohibition) Act, 1988 (hereinafter referred to as "the Benami Act"), and that the same would be against the interest of the company on account of likely change in the management. In addition to the above two grounds, Shri Raghavan argued that there are two other grounds, which, even though not considered by the board at the relevant time, would have vitiated the registration of transfer on account of non-compliance with the provisions of law. They are, according to him (i) violation of Section 372 of the Companies Act ; and (ii) violation of the provisions of the listing agreement.
9. Explaining in detail the difference between Section 22A(3)(b) and 22A(3)(c) of the SCR Act, Shri Raghavan stated that the board of directors has discretion only in respect of matters falling under Sub-section (3)(c) and, therefore, the decision under Sub-section (3)(c) is justiciable to find out whether the decision is bona fide or not. However, if the transfer suffers from "contravention of any law", the board has no discretion. The word used "may" has to be treated as shall as far as Clause (b) is concerned, he contended. He further argued that the Company Law Board has only two courses of action on a reference made under Section 22A of the SCR Act, i.e., either to direct the company to register the shares or that such shares shall not be registered by the company. In other words, there is no third option and as a matter of fact when there is violation of law, the Company Law Board cannot order registration, even if these violations had not been noticed at the time of the board resolution but were put before the Company Law Board later. In this connection, he relied on the observation of the Company Law Board (Eastern Region), in the case of Sinclair Hotels and Transportations Ltd. v. Pressman Advisory Services (P.) Ltd. [1989] 2 Comp LJ 49 (CLB). "The board of directors of a company have no option in respect of grounds mentioned in sub-clauses (a), (b) and (d) of Section 22A(3)." 10. With these preliminary observations, Shri Raghavan proceeded to argue the case in detail. Taking up the issue relating to violation of the Benami Act, Shri Raghavan stated that Tracstar purchased the shares in question and wanted these shares registered in the name of Trident.
Therefore, according to him, it is obvious that the purchaser and the name in which the shares are sought to be registered are two different persons. In such cases, according to him, two issues have to be considered : (i) from whom the consideration flows and the other (ii) with whom the ostensible title rests. He drew our attention to page 4 of the reply to show that the consideration for purchase of these shares flowed from Tracstar and the declaration under Section 187C filed with the company indicates that the shares are to be registered in the name of the Trident. Therefore, according to him, the benami nature of the transaction is clear and apparent. Once it is a benami transaction the same becomes void as per the Benami Act, he contended.
Going through the provisions of the Benami Act, he further pointed out that whenever law provides a penalty for any act such act becomes unlawful. Mere filing of form under Section 187C does not regularise a benami transaction as the filing of the form is only a matter of disclosure. According to him, Section 7 of the Benami Act reflects the provisions of the Trusts Act and the purpose of benami is also irrelevant to classify a transaction as a benami transaction and, therefore, even if the contention of the respondent that the shares were being registered in the name of Trident only for acting as share brokers/agents, it is a benami transaction, he argued. In this connection, he cited B.K. Holdings (P.) Ltd. v. Prem Chand jute Mills [1983] 53 Comp Cas 367 (Cal) to support his contention that the legality of a transaction should be taken into account before recognising such a transaction and a company is justified in rejecting a transfer on the ground that the transaction was illegal. He also cited Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp Cas 185 (SC) to strengthen his argument that when penalty is provided and the same is prohibited then such a transaction is unlawful and cannot be recognised by the company. He further stated that the object of the Benami Act is to prohibit benami transactions. In a case of benami, as already stated, according to him, the dominant interest and the flow of consideration have to be considered. He also differentiated between a gift and a benami transaction by stating that in a gift both beneficial interest and title are passed on to the transferee. Therefore, according to Shri Raghavan, the registration in the name of Trident would contravene the provisions of the Benami Act and as such the same is covered under Section 22A(3)(b) of the SCR Act and, therefore, the transfer has been rightly refused, under the provisions of a statute and as such the Company Law Board should confirm the decision of the board on this account itself.
11. Regarding the objection that Tracstar has violated the provisions of Section 372 of the Companies Act, Shri Raghavan pointed out that the holding of Tracstar is already 24.91 per cent. and, therefore, any further registration of shares in its name would go beyond 25 per cent.
as stipulated in Section 372 of the Act. This would also make it a Section 43A-company and it will not be covered under the exemption as per Sub-section (14) of Section 372 nor can it avail of the benefit of being an investment company. According to him, a harmonious construction of the provisions of Sections 372 and 43A has to be attempted by which as per the rule of construction the exemption under Sub-section (14) of Section 372 cannot be availed of by a Section 43A-company. Therefore, according to Shri Raghavan, the very purpose of getting the shares purchased by Tracstar in the name of Trident is only to avoid the contingency of coming under Section 372 of the Act. He went to the extent of pressing the point that to attract the provisions of Section 372, the holding of a company need not be more than 25 per cent. at the time of acquisition, once the acquisition itself reaches a percentage beyond 25 per cent. then the provisions of Section 372 are attracted. Any other interpretation that these provisions are applicable only if the holding is already more than 25 per cent., would defeat the very purpose and objective of legislating these provisions, he argued. Therefore, according to Shri Raghavan even though this issue was not one of the issues discussed in the board meeting held on May 26, 1992, since the matter has come to the notice of the Company Law Board it cannot order something which is not permissible under the law ; otherwise it would flout the provisions of the statute, he stated.
12. Shri Raghavan raised another objection that the proposed transfer was in violation of the provisions of Section 40A(a) and 40A(b) of the listing agreement which, with effect from May 30, 1990, is one of the grounds under which registration can be refused under Section 22A of the SCR Act. He brought to our notice that Section 22A of the SCR Act was amended to insert a Sub-section (3)(b) to the effect that the board of directors of a company can reject transfers in case of violation of the provisions of the listing agreement. In the listing agreement, new provisions have been inserted dealing with acquisition of shares, i.e., Clause 40A and Clause 40B. Section 22A(3)(b) of SCR Act reads as follows ; "22A. (3)(b) that the transfer of the securities is in contravention of any law or rules made thereunder or any administrative instructions or conditions of listing agreement laid down in pursuance of such laws or rules." 13. Shri Raghavan after arguing on the above points once again stressed that violation of law cannot be condoned and once there is a prohibition in the law by penalty then the requirement is mandatory. He relied on the decision in Mannalal Khetan's case [1977] 47 Comp Cas 185 by the Supreme Court. He argued that even though the issues regarding violation of Section 372 and the listing agreement have not been considered by the board and, therefore, not pleaded, yet in view of the fact that these provisions are statutory provisions even in the absence of pleadings they could be argued and relied on by counsel. In this connection, he cited Surasaibalini Debi v. Phanindra Mohan Majumdar, AIR 1965 SC 1364, and Scott v. Brown, Doering McNab and Co. [1892] 2 QB 724 (CA) "if the facts given in evidence clearly disclose the illegality, the court is bound to take notice of this fact even if not pleaded by the defendant." Therefore, the non-pleadings of these matters should not stand in the way of the Company Law Board in considering these violations of law. Perhaps, he argued, the board of directors was not aware of the amendment to Section 22A of the SCR Act and as such the ignorance of the board cannot validate an invalid transaction. Therefore, he advocated that the violation of the provisions of Section 372 of the Act and the provisions of clause 40A(a) and (b) of the listing agreement squarely fall within Section 22A(3)(b) of the SCR Act and as such the board could have never given its approval for registration of transfer of the impugned shares.
14. Taking up the issue relating to the second ground on which the board of directors decided to refuse registration of the transfer, Shri Raghavan argued that the minutes enclosed with the reference were only draft minutes and not confirmed minutes. These draft minutes were prepared on May 26, 1992, and were enclosed with the reference on May 28, 1992. He pointed out that the minutes of a particular meeting are confirmed only in the next meeting and it is inconceivable that within two days the minutes could be confirmed and taken on record. He drew our attention to page 51 of the reply to the amended petition to show that the reference was made only on the basis of draft the minutes.
According to him, the minutes were not at all confirmed till June 25, 1992, and he drew support in his argument to the minutes of June 25, 1992, in which there has been discussion on the minutes of May 26, 1992. He drew our attention to the fact that the minutes of June 25, 1992, were approved in the next meeting only on September 15, 1992.
Therefore, according to Shri Raghavan, it is inconceivable and improbable that confirmed minutes were available when the reference was made. He also questioned the letter of Shri Arunachalam dated June 23, 1992, in which he has raised certain queries about the affidavits filed by the five directors seeking amendment to the reference. Shri Raghavan pleaded that no credence should be given to this letter nor can the same be relied upon in the absence of an affidavit from Shri Arunachalatn. He also refuted the allegations by the respondent that it was an afterthought or in consultation with some company law experts that five directors filed affidavits seeking amendment. According to him, it is not necessary that the registration of transfer should bring about a change in the management. It is enough, if in good faith, the board apprehended that there is likely to be a change in the composition of the board of directors and that such a change would be detrimental to the interests of the company. Looking into the great efforts taken by SWC, an MRC company in the revival of the company, one can easily visualise the fate of the company if a change in management takes place. Once SWC decides to call back its loans, etc., from the company, or once outsiders come to know of the non-involvement of SWC in the affairs of the company, the revival process would come to an end and it is definitely detrimental to the company and its 900 odd employees and the public interest. Regarding taking part of the five directors in passing the impugned resolution, who owe allegiance to MRC/SWC, Shri Raghavan argued that it is fallacious to apply the provisions of Section 299/300 of the Act, as according to him, the provisions of these sections are attracted only when one or more directors are interested in a contract or arrangement and it is only about registration of transfer of shares.
15. In view of the foregoing, Shri Raghavan submitted that at the time when the board took the decision to refuse the transfer, it had enough material to rely on and once it is shown to the Company Law Board that the decision was taken in good faith on sufficient material, the bona fides of the decision should not be questioned. He went a step further to say that in view of the infringement of the provisions of Section 372, contravention of Clause 40A(a) and (b) of the listing agreement and violation of the Benami Act, which are all covered under Section 22A(3) of the SCR Act, even without considering the second ground on which the registration has been refused, the board's decision should be confirmed by the Company Law Board.
16. Shri Gurumurthy, appearing on behalf of the respondent, pointing out the provisions of Section 22A(3), stated that it is the obligation of the company to identify the reasons for refusal and if any of the reasons is covered by Clauses (a) to (d) of this sub-section, there is no option but to refuse the transfer. Stating that Section 22A of the SCR Act came into force in 1985, with the objective that, in the case of listed companies, the powers of the board of directors should be limited in the case of refusal to register transfer of shares. The powers of the board have been curtailed and limited only to certain instances as indicated in the statute itself. Under the circumstances, according to him, it is essential to follow the golden rule of interpretation as propounded by rule in Heydon's case [1584] 3 Co Rep 7a. According to Heydon's rule, four aspects have to be examined : (b) What was the mischief and defect for which the common law did not provide.
(c) What remedy Parliament has resolved and appointed to cure the disease.
17. As per the earlier law, the board of directors had full authority to refuse a transfer and the mischief was the uncontrolled power and the only remedy available was an appeal to the Company Law Board under Section 111. Section 22A of the SCR Act suppresses such uncontrolled power by restricting the right to exercise such powers only in selected instances as provided in that section itself. At the same time no duty has been cast on the board to refuse registration under any circumstances. Even the exercise of such power is subject to confirmation by the Company Law Board. Therefore, taking into consideration the objective of Section 22A of the SCR Act, he argued, the Company Law Board should not confirm decisions of the board of directors to refuse registration of transfer of shares with ulterior motives. With these preliminary words he proceeded to rebut the arguments of Shri Raghavan.
18. The reference of the company on the declaration under Section 187C that the transaction is a benami transaction is absolutely wrong and fallacious, Shri Gurumurthy contended. The purpose of the declaration under this section is only to show that the person in whose name the shares are registered has no beneficial interest in the shares and such contingency can arise in many cases and not necessarily only in a case of benami holding. Such instances could be joint holding of shares, minor and guardian relationship, trust and beneficiary relationship, firm and partnership relationship, bank and client relationship, etc.
In all these cases, there could be divorce between the person in whose name the shares are registered and the real holders of beneficial interest. To conclude that wherever a Section 187C declaration has been filed then it is a benami transaction, is absolutely wrong, he asserted. In the present case, according to him, as has been very correctly pointed out by the respondent, the relationship between Tracstar and Trident is that of a principal and an agent and the shares are to be held by Trident for the benefit of the principal, i.e., Tracstar, and this relationship was created for the purpose of trading in these shares by Trident on behalf of the principal. According to him, more than 4,000 transferors are involved in the present case and most of the shares were transferred through blank transfer forms and till the shares are registered in the name of the transferee, the legal title continues with the transferors and only the beneficial interest is with the transferees. If the contention of the company were to be strictly applied, all these transfers would be treated as benami transactions, which is not the real intent of the Benami Act. Reading from the book on Law of Benami Transactions by Shri C. S. Somanatha Sastry and Ramanathan Iyer, he pointed out that an undisclosed agent need not be a benamidar. "Similarly, it would be a misnomer to call an agent, who has entered into a contract without disclosing the fact that he is an agent, a benamidar of his principal." He also questioned the version of the company that the board, at the time of taking the decision to refuse the registration of transfer relied on the opinion given by Shri Arvind Datar, Advocate, on the ground that at no time this fact was brought to the notice of the Company Law Board nor the opinion expressed presented before the Company Law Board. No reference to this opinion by Shri Datar has been made in the resolution passed by the board to indicate that the opinion to reject the transfer was based on legal advice. He further argued that this particular aspect comes squarely within Section 81 of the Trusts Act which has, of course, been repealed now. He drew our attention to the observation of the Supreme Court in Bhim Singh v. Kan Singh, AIR 1980 SC 727, 732 "two kinds of benami transactions are generally recognised in India. Where a person buys a property with his own money but in the name of another person without any intention to benefit such other person, the transaction is called benami. . . The second case is where a person who is an owner of the property executes the conveyance in favour of another without the intention of transferring the title to the property thereunder. This is also loosely termed as a benami transaction. The difference between the two kinds of benami transactions lies in the fact that whereas in the former case there is an operative transfer from the transferor to the transferee, in the later case there is no operative transfer at all and the title rests with the transferor notwithstanding the execution of the conveyance. One common feature, however, in both these cases is that the real title is divorced from the ostensible title and they are vested in different persons. The question whether a transaction is a benami transaction or not mainly depends upon the intention of the person who has contributed the purchase money in the former case and upon the intention of the person who has executed the conveyance in the latter case. The principle underlying the former case is also statutorily recognised in Section 82 of the Indian Trusts Act, 1882".
Shri Gurumurthy contended that the present transaction between Tracstar and Trident falls under the second category. According to him, the Benami Act deals with title while the board under Section 22A does not have to decide the title. No new legal duty has been cast on the board under Section 22A of the SCR Act. If it were the case, then some penalty would have been prescribed for approval in contravention of the legal duty under some other Act.
19. Citing Nalla Gounder v. Krishnaswami Naicker, AIR 1945 Mad 465, he stated that the registering authority, viz., the company, cannot go beyond the Companies Act and reject the transfer without any such specific stipulation in the statute itself.
20. Referring to para 8 of the reply, Shri Gurumurthy stated that Tracstar bought these shares and wanted the registration in the name of Trident for the simple reason that the shares were to be treated as marketable securities and Trident were to act as agent of Tracstar.
Relying on Section 88 of the Trusts Act, he stated that once an agent acquires, in the course of agency, any shares, then he holds the same for the benefit of the principal. It is not that for the purpose of preventing coming under the mischief of Section 372 and Section 45A of the Act, Tracstar wanted these shares to be registered in the name of Trident. He also relied on Government Circular No. 5/75(8)/80/75-CL.V, dated March 31, 1975, to show that even the Government is aware that there can be various types of relationships other than of benami nature between the legal owner and the persons who has beneficial interest in the shares. According to him, the relationship of principal and agency between the Tracstar and Trident has been clearly admitted in the company suit in Madras High Court. In this connection, he cited the judgment in LIC of India v. Escorts Ltd. [1986] 59 Comp Cas 548 dealing with blank transfers to stress that "title to get on the register" and "the full property in shares in a company" are two recognised concepts and that the declaration under Section 187C only brings out the relationship of agent and principal. It is for the petitioner to establish, by exclusion, the benami nature of the transaction and not just by relying on the declaration under Section 187C. The Company Law Board cannot in any case conduct a roving enquiry to find out whether the transactions are benami transactions or not and once a finding is given by the Company Law Board that the transactions are benami, prosecution is inescapable. In this connection he cited the case of Barium Chemicals Ltd. [1966] 36 Comp Cas 639 (SC) to stress the point that no opinion can be expressed without going into details on all available facts. Therefore, according to him, the refusal to register on the ground of violation of provisions of the Benami Act should not be confirmed.
21. Referring to the provisions of Section 372 of the Act violation of which would give right to the board of directors to refuse registration under Section 22A(3)(b) of the SCR Act, Shri Gurumurthy stated that until and unless the holding of Tracstar is in excess of 25 per cent.
in GWL. at the time of investment in further shares, Tracstar cannot become a 43A company. Its holding was only 24.9 per cent. In this connection, he relied on the circular of the Department of Company Affairs No. 48(50)CL.V/6, dated February 12, 1962. Tracstar has not become a deemed public company and even if it is assumed that it is a deemed public company, the exemptions provided under Section 372(14) exempt even such companies as Section 372(4) is applicable only in the case of a public limited company, per se. In view of this, he prayed that the Company Law Board should not consider this argument of the company at all.
22. Taking up the issue relating to violation of listing agreement, Shri Gurumurthy argued that Clauses 40A(a) and 40A(b) of the listing agreement are not provisions of any law or rules as contemplated in Section 22A(3)(b). This is purely an agreement between the stock exchange and the company and therefore in no way enforceable against the buyer of shares. He further stated that as per recent SEBI guidelines, these provisions are applicable only when either of the parties to a transaction is a listed company. According to him, neither Tracstar nor any of the transferors is a listed company. Even assuming that these provisions are applicable, he pointed out that Clause 40A(a) and Clause 40A(b) will not apply to Tracstar as it already holds more than 5 per cent. and 10 per cent. as stipulated in these clauses.
According to him, Clause 40A(a) would be applicable only to a company which holds less than 5 per cent. shares and its holding is likely to go beyond 5 per cent. due to further acquisitions. In the same way, the provisions of Clause 40A(b) will be applicable only when further acquisition of shares takes the voting power of an investing company beyond 10 per cent. of the voting strength of the invested company.
Therefore, Shri Gurumurthy argued that in view of the holding of Tracstar being about 25 per cent. at the time of acquisition of the impugned shares, these two clauses of the listing agreement are not applicable. Accordingly, he stressed that by ordering transfer of the shares in favour of Trident, the Company Law Board will not be directing something unlawful to be done. He further stated that in the absence of pleadings in respect of these two new grounds, these objections should not be taken cognizance of by the Company Law Board and should be straightaway rejected. This is more so because the respondents have not been given an opportunity for refuting these allegations in their reply and therefore on application of natural justice, these additional pleas should be rejected. Even otherwise, according to Shri Gurumurthy, neither the violation of the provisions of Section 372 nor the provisions of listing agreements can be construed to fall within the meaning of "law or rule" under the provisions of Section 22A(3)(b) of the SCR Act.
23. Regarding the resolution of the board of directors that registration of the transfers was being refused on the plea of likely change in the management which would be prejudicial to the interest of the company, Shri Gurumurthy stated that his objection is that having made a reference, there was no justification for the directors to go back to the board to make amendments in the resolution. His argument on this proceeded as follows. The transfer forms were submitted to the company on March 30, 1992, at which time the Chabria family as a whole held 62 per cent. of the paid-up capital in GWL.
24. The split in the family took place in April, 1992, on account of which KRC Group came to control 37 per cent. of the shares in GWL and the MERC group 25 per Cent. He further stated that these percentages were indicated in the petition filed before the Company Law Board in May, 1992, under Section 247 of the Act which percentages were also confirmed in the affidavit of Shri Srinivasa Rao dated May 23, 1992, which had the approval of the board of GWL and as such the board was fully aware of the 37 per cent. holding of the KRC group. From this, it is clear that when the board took the decision to refuse registration, it had the full knowledge that the holding of KRC was more than the holding of MRC. According to him, even assuming that the MRC group had control over 12.73 per cent. shares held by SSPL, its total holding would be 37.63 per cent. (24.90 per cent. GWL, UK + 12.73 per cent. by SSPL) as against KRC holding of 31.75 per cent. (24.91 per cent. of Tracstar + 6.84 per cent. of the impugned shares). In this situation, Shri Gurumurthy pointed out, that the MRC holding was definitely more than the KRC holding and as such registration of the transfer of the impugned shares cannot result in change in the board of directors. In the other situation, if the SSPL shares were treated as under the control of the KRC group, then even without the impugned shares, the KRC holding would be more than 37 per cent. as against 24.9 per cent.
under the control of the MRC group.
25. He complained that there is nothing in the board resolution to indicate as to how the board came to a decision that there was likelihood of change in management with the transfer of the impugned shares in favour of Trident and as a matter of fact, the issue relating to change in management was never discussed in the board meeting nor any resolution as alleged by the applicant passed in the meeting held on May 26, 1992. Even though it is alleged by the applicant that in the board meeting held on May 26, 1992, amendments were made to the draft minutes of May 26, 1992, a perusal of the minutes book would show gross manipulations with a mala fide intention of showing something which has not actually taken place. According to him, the act of tampering with the minutes book itself shows that the claim of having done something under good faith is false and has to be straightaway rejected.
Concluding his arguments Shri Gurumurthy prayed that neither of the reasons on which the board refused registration was valid and, therefore, the opinion of the board of directors should not be confirmed. Likewise, the other two arguments put forth by Shri Raghavan regarding infringement of the provisions of Section 372 and the provisions of the listing agreements should also be rejected as not maintainable.
26. Replying to the arguments of Shri Gurumurthy, Shri Raghavan once again cited the decision in the Supreme Court case, i.e., Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp Cas 185 to reiterate that the board has to take cognizance of violation of law which makes the transaction void and illegal. He cited Palmer to indicate that a transfer is incomplete till the same is registered in the members' register and the transferee becomes a legal owner only after the transfer is effected by way of entry in the members' register. The declaration under Section 187C is to find out the true ownership of the shares and the disclosure is obligatory. He, therefore, argued that when the board took a decision regarding benami nature of the transfer it was a bona fide decision on the basis of legal opinion obtained. It is not incumbent on the board first to make an enquiry to establish that the transaction was really a benami transaction and then take a decision on registration. What the board did was to come to a prima facie conclusion on the basis of a declaration under Section 187C and the legal opinion obtained on the same. He also refuted the contentipn of Shri Gurumurthy that the term "law or rule" has to be construed in a restricted manner. Violation of any law when it comes to the knowledge of the board has to be taken cognizance of and acted upon. Once the board is aware of the declaration under Section 187C that there is a divorce between the legal ownership and the beneficial interest, the board need not go for further probing. Referring to the circular cited by Shri Gurumurthy, Shri Raghavan contended that the circular only states that if irregularity has already taken place, the company need not be asked to disinvest. It does not mean that the company can commit the irregularity. He further stated that the entire listing agreement has a binding force on all the parties dealing with the shares of listed companies and there is no stipulation that one of the parties in a transaction of shares should be a listed company. He pointed out that the amendment to Section 22A(3)(b) is so elaborate that it covers even administrative instructions or conditions of listing agreement and therefore the argument of Shri Gurumurthy in this regard should be rejected. As far as the opinion formed by the board of directors is concerned, even assuming that the grounds have not been specifically mentioned in the resolution, all the directors of the board were aware of the disputes between the two Chabria groups. Five directors held the same view and such a concerted opinion cannot be easily brushed aside.
He further stated that at no time the company recognised any percentage holding by any group. The affidavit by Shri Srinivasan in the proceedings under Section 247 before the Company Law Board cannot be treated as a statement of fact. It was nothing but a statement of suspicion because of which an investigation was sought under Section 247. Summing up the arguments, Shri Raghavan prayed that the Company Law Board should confirm the opinion formed by the board of directors to reject the transfer of shares both on the grounds stated in the board resolution and on the two additional grounds adduced during the hearings.
27. Shri Gurumurthy, intervening, questioned the very claim of bona fides and act of good faith as claimed by the petitioner. Citing Kailas Sizing Works' case, AIR 1969 Bom 127, Shri Gurumurthy pleaded that "in order to act in good faith, a person must act honestly. A person cannot be said to act honestly unless he acts with fairness and uprightness".
In the present case, he contended that the refusal was mala fide and with ulterior motive and as such the application should be dismissed.
28. In all, four grounds have been taken up before us by the petitioners for seeking our confirmation of the board's decision to refuse registration of the impugned shares. Of these four grounds, two were considered by the board and passed as resolutions while the other two even though were not discussed by the board of directors, have been put forth during the arguments.
29. Before we proceed with the decision of the board of directors rejecting the registration of transfers, it is essential to look into whether the resolution which was passed itself was valid as per the provisions of the Companies Act. One of the contentions raised regarding the validity of the resolution is that the resolution was passed by a group of directors who owe allegiance to MRC and as such they are interested directors as envisaged under Section 299/300 of the Act. It is contended that if they are interested directors then the resolution cannot be given effect to. In this connection, it is worthwhile to note that Section 299 of the Act imposes an obligation on the part of a director to disclose the nature of his interest or concern if he is in any way whether directly or indirectly concerned or interested in any of the contract or arrangement or proposed contract or arrangement entered into or to be entered into by or on behalf of the company and in case he fails to disclose such interest he will be punishable with a fine which may extend to Rs. 5,000. As per Section 300 of the Act, the presence of such director shall not count for the purpose of forming a quorum at the time of any such discussion or vote and if he does vote, his vote shall be void. Therefore, it is apparent from Section 300, that, if the directors who had voted on the impugned resolution were interested then the resolution having been passed only with their voting in favour of the same, has to be treated as void. The question, therefore, arises for determination is whether the five directors who allegedly owed allegiance to MRC in view of their being employees/consultants of SWC were interested directors within the provisions of either Section 299 or 300.
30. This is a case of registration of transfer of shares of GWL in the name of Trident in which Tracstar holds beneficial interest. In other words, there are three parties involved, viz., the transferors who are the present members, the transferee-Trident and the beneficial owner-Tracstar. The five persons are directors of GWL. As per Section 299, even assuming that the registration is an "arrangement", disclosure by these persons as directors regarding their interest, has to be construed with reference to either Tracstar, Trident or the transferors. There is no allegation that those directors hold more than 2 per cent shares in either Trident or Tracstar. The only contention is that they are the employees/consultants of SWC which is under the control of MRC. Of the eight directors who were present on May 26, 1992, when the impugned decision was taken, three directors, namely, Shri A. Arunachalam, nominee of B1FR, Shri KRC and Shri Krishna-rao abstained from voting leaving the other five directors who consented to the passing of the resolution.
31. It is an admitted fact in this case that the five directors who voted for the resolution owe allegiance to MRC. The question is whether they can be construed as "interested directors", when they considered the registration of these transfers on the ground that the apprehended change in the composition of board of directors will affect the present board. In this connection, it is relevant to refer to Section 22A(3)(c) of the SCR Act according to which a board of directors may refuse registration of transfer if "the transfer of security is likely to result in such change in the composition of the board of directors . .
." The decision to refuse registration on the ground of likely change, in other words, would ensure continuation of the present board. This means that everyone in the present board would be deemed to be interested in the resolution. If the interpretation of "interested directors" would mean a situation like this, then irrespective of whether the five directors in question belong to the MRC group or not, does not make any difference. However, such interpretation of "interested directors" in a 22A(3)(c) decision, on the face of it, looks far-fetched and absurd. Therefore, according to us as long as the board of directors who participate in a voting do not have any interest either as transferor or transferee or a beneficial holder, as in the instant case, then the decision cannot be construed to fall within the ambit of either "contract" or "arrangement" as contemplated under Section 299/300 of the Act. Otherwise, in all cases of refusal to register under Section 22A(3)(c) the entire board should be deemed to be interested in the refusal which is obviously not the spirit behind the provisions of law. What is actually intended under these sections is dealings between two or more parties in which the company is a party and the director has a direct or indirect personal pecuniary interest.
Stretching anything beyond the scope of these sections is not warranted. We, therefore, hold that the resolution is not vitiated by the participation of the five directors in voting. In this connection we would like to observe that even though this point had been mentioned in the annexure 'S' to the application and also in the reply to the petition, there were no arguments by either of these parties on this point. In these circumstances, we hold that the resolution was validly passed.
32. The first ground for rejection, as per the reference, relates to the transfers having violated the provisions of the Benami Act. Shri Guru-murthy raised a preliminary objection in invoking the infringement of the Benami Act as a ground for refusal on the contention that the term "contravention of any law" used in Sub-section (3)(b) of Section 22A does not mean each and every law in force. According to him, it is restricted only relating to transfer of shares and nothing more. We are unable to agree on this issue with Shri Gurumurthy as, according to us, "any law" will definitely mean a law that is in force. If the intention of the Legislature were to be that "any law" would mean only those relating to company law or such related laws then a specific mention could have been easily made in the sub-section itself.
33. The board of directors came to the conclusion that the transaction was a benami transaction on the basis of the declaration filed under section 187C of the Companies Act as per which a person whose name is entered in the register of members, if not holding any beneficial interest in those shares, has to make a declaration to the company specifying the name and other particulars of the persons who hold beneficial interest in such shares. In the present case, the shares are sought to be registered in the name of Trident.
34. Trident has filed a declaration to the effect that the nature of beneficial interest of Tracstar was "as absolute owner". It is also stated in that declaration that "shares are registered in the name of asset management company for managing the asset". According to the minutes of the board of directors dated May 26, 1992 (at annexure 3), it is apparent that the board considered the opinion of Mr. Arvind Datar, Advocate, dated September 18, 1992 (a copy of which was produced before us by the respondents), in which he had opined that the transfer filed by Trident is liable to be rejected as it is apparently the benamidar of Tracstar and such a transfer would violate the provisions of the Benami Act and hence it falls squarely within Section 22A(3)(b) of the SCR Act. In other words, when the board took the decision to refuse the transfer as contravening the provisions of the Benami Act, they did have a legal opinion before them, whether the same is correct or not. Therefore, the decision of the board "in good faith" as far as this objection is concerned cannot be questioned.
35. However, even if the formation of the opinion by the board of directors is in good faith, since the rejection is based on the alleged violation of the provisions of law, it becomes necessary to examine whether any declaration under Section 187C has to be treated as signifying a benami transaction. Shri Raghavan has pointed out the two ingredients of benami transactions, i.e., the source of funds and the resting of legal title which, according to him, in the present case do not lead to a single person but two persons, namely, Tracstar for the source of funds and Trident for legal litle. It is a general legal proposition that in a benami transaction it is the intention of the parties which is of paramount importance. While according to Shri Raghavan the registration in the name of Trident is to escape coming under the mischief of Section 372 of the Act, according to Shri Gurumurthy it was for the purpose of easily marketing the shares by an asset management company, namely, Trident. The intention has to be gathered in the presence of such a dispute from the available evidence.
It is an admitted fact that Tracstar provided funds for acquisition of these shares, that the interest of Tracstar is to use the holdings for voting purposes. It is also seen from the letter of Trident dated April 2, 1992, addressed to Tata Consultancy Services, Madras, requesting them to issue one consolidated certificate for the entire lot of impugned shares. Normally, an asset management-company which has been chosen for the purpose of easy marketability of shares would not ask for a consolidated certificate for such a large number of shares.
However, it is seen from the agreement between Trident and Tracstar that the relationship between principal and agent subsists between the two parties. Therefore, even though per se benami nature is visible, yet we are conscious of the fact, as rightly pointed out by Shri Gurumurthy, that the relationship of agent and principal as also the trustee relationship cannot be completely ruled out.
36. With coming into existence of the Benami Transactions (Prohibition) Act, transactions attracting Section 187C have not been ruled out. As pointed out by Shri Gurumurthy, the relationship of principal and agent can still hold good. We are also not inclined to accept the allegation of Shri Raghavan that this has been done to escape from the provisions of Section 372 of the Act in view of the fact that the declaration makes it that Tracstar are absolute owners. For reckoning the acquisition of shares both direct and indirect acquisition (through agent) will have to be taken into account for the purpose of Section 372. In view of the above, the rejection on the ground that the acquisition is in violation of the Benami Act does not hold good.
37. In regard to the second ground indicated in the reference on which the registration has been refused, there has been a lot of arguments both written as well as oral. As a matter of fact, the company even made an application for amendment of the petition on this issue. It is an admitted fact that there is a family feud including on the control of GWL between the two groups of Chabarias. It is also an admitted fact that SWC which is under the control of MRC has been actively involved in the rehabilitation of GWL. It is also an admitted fact that while the MRC group has done everything possible to retain the control over GWL, the KRC group is trying to gain control of the same. This issue has been the main theme of two petitions involving mainly the MRC and KRC groups before the Principal Bench of the Company Law Board under Sections 247 and 250 and under Section 597/398 of the Companies Act.
Under these circumstances, one has to look at the disputes relating to the wording of the second resolution in the context of Section 22A(3)(c).
38. The relevant portion of the minutes filed with the reference as annexure 'S' is as follows : "Mr. M.S. Srinivasarao declared that the proposed transfer in the name of the Trident Investment and Portfolio Services Pvt. Ltd. should not be approved for each of the following reasons : . . .
(b) He considered in good faith that it would not be in the interest of the company to register the shares in favour of Trident . . ." Mr. K. Srinivasan, T.S. Venkatesan, Jolly Bhargava and Subramanian also concurred with the above views of Shri M. S. Srinivasarao. Mr.
T. S. Venkatesan suggested that in view of the rehabiliation scheme, such a change is not in the interest of the company." 39. As per the minutes, after some discussion, a resolution to the following effect was passed : "B. That the transfer of the said securities in favour of Trident Investment and Portfolio Services Pvt. Ltd. would not be in the interest of the company." 40. By an amendment application, the above five directors who voted in favour of the resolution as contained in the minutes as per annexure 'S' to this reference, pointed out that annexure 'S' contained only the draft minutes which did not reflect the correct resolution (b) and the actual resolution should be "the transfer of the said shares in favour of Trident ... is likely to result in a change in the composition of the board of directors of the company and such a change would be prejudicial to the interest of the company and/or public interest." There has been a lot of controversy on the amended resolution.
According to the chairman of the meeting Shri Arunachalam, it is stated by the respondent, that the resolution as indicated in annexure 'S' was the correct resolution. According to the company, annexure 'S' was only the draft minutes which did not bring out the correct resolution and the affidavit of the five directors as to the correct resolution should be taken cognizance of. The company also relied on the minutes of the board meeting held on June 25, 1992, in this regard. According to Trident, the minutes of the meeting dated May 26, 1992, have^been tampered with in the minutes book, as according to it, the minutes book contained the proceedings as per annexure 'S'. Therefore, under these controversies, the following issues emerge regarding the authenticity of the impugned resolution 'b' : (3) Is the board of directors competent to incorporate amendments to an earlier resolution on a later date 41. Before we answer these issues, we have to record that other than the five directors who voted in favour of the resolution, the other three directors including the chairman who were present on May 26, 1992, did not choose to file any affidavit nor chose to make any representation in the present proceedings before us. The same is the position with seven directors who did not participate in the voting in the board meeting held on June 25, 1992, in respect of the amendments to the above resolutions. Under the circumstances, we have not had the benefit of the versions of these directors as to what happened in these two meetings. We have to perforce base our decision on the documents filed before us.
42. Regarding the first issue whether annexure 'S' is only the draft minutes, we refer to para 2 of the letter of Shri Arunachalam dated June 23, 1992, annexure 4 to the amended application in which he has written "annexure 'S' itself was based on the first draft received from you on the morning of May 27, 1992, wherein you have on para 7 clearly indicated only two reasons." From this, in addition to the version of the five directors that annexure 'S' contained draft minutes, it is clear that even the independent chairman's version is the same that it was based on first draft minutes. It shows that there are more than one draft minutes and, therefore, that annexure 'S' cannot be a copy of the final minutes.
43. As regards the second issue whether these minutes were entered in the minutes book, it is essential to further refer to para 2 of Shri Arunachalam's said letter, which pointed out "these reasons were left untouched by me in the second draft which was finalised in my house at about 11.55 p.m...." From this, it is clear that another draft has been finalised by Shri Arunachalam. If there were a second draft, then the question that arises is whether the first draft was entered in the register or the second draft. It is also necessary to refer to the minutes of the meeting held on June 25, 1992, according to which, good amount of discussions took place regarding the correct version of the resolution passed in regard to item 'b' in the meeting held on May 26, 1992. The minutes also indicate some discussion as to "what would be the proper procedure to correct the draft minutes and such correct version as approved by the board can only be considered through minutes and, therefore, there was no need of first recording the minutes as per the draft circulated and then recording an amendment." These versions in these minutes of June 25, 1992, have not been disputed by any one and as such have to be taken as correct. If this is so, obviously the board would not have discussed about recording the draft minutes, if it has already been recorded. Thus, the apprehension of the respondent, that the minutes as per annexure 'S' to the minutes have already been entered in the minutes book and the present minutes were fabricated minutes does not seem plausible. Therefore, the second issue has to be answered in the negative. While coming to this conclusion, we have also taken into account that one should be more concerned about the substance of resolution rather than its form.
44. Regarding the third and the fourth issues, it is necessary to refer to Section 193(1) of the Act, according to which, the minutes of the proceedings of the board of directors will have to be recorded within 30 days from the date of such meeting in the minutes book and the same is to be signed by the chairman of the said meeting or the chairman of the next succeeding meeting. As per Ramaiya's Guide to the Companies Act, 12th edition, page 856, "if a dispute arises as to the correctness of a statement, motion or resolution recorded in the minutes, it may be necessary to put the matter to vote in order to determine how the minutes should read. If the correction involves a revision of the minutes of the previous meeting, the proper procedure is for the minutes of the current meeting to record the corrections so made." 45. To establish whether the corrections are warranted, reference may be drawn to the first para of page 4 of annexure 'S' to the reference.
"Shri S. Subramaniam also concurred with the above views of Mr.
Srinivasa-rao. Mr. T. S. Venkatesan suggested that in view of the rehabilitation scheme, such a change (emphasis* by us) is not in the interest of the company." The wording of this particular paragraph has not been questioned by any one including the independent chairman, Shri Arunachalam. The words "such a change" cannot find a place just like that unless otherwise likely change in the management has been discussed. In the absence of such a discussion, the appearance of these words in this paragraph, according to us, not only is unwarranted but also misleading. The board of directors meeting held on June 25, 1992, which considered the confirmation of the minutes of May 26, 1992, did discuss the corrections to the resolution at 'b' and passed suitable resolutions approving the corrections/amendments to the draft minutes including the resolution 'b'. In other words, necessary legal formalities have been complied with in correcting the minutes which formed the basis for the application for amendment to the application.
Therefore, according to us, the board is competent to correct the minutes of the earlier meeting and in view of the fact that amendment sought is to incorporate the correct resolution as approved by the board we adopt the amended resolution as the one that was passed in the meeting held on May 26, 1992. In this connection, we have also noted the provisions of Section 194 of the Act according to which the minutes shall be the evidence of the proceedings recorded therein.
46. Having decided on the correct version of the resolution, two further issues arise for, consideration : (a) whether the registration of transfer in the name of Trident is likely to result in change in the composition of the board of directors ; (b) and if so, whether it is detrimental to the interest of the company/public interest.
47. As far as issue (a) is concerned, as we have already indicated, both Chabria groups are interested in having control of the company. No doubt, neither the draft minutes as per annexure 'S' nor the amended minutes indicate the basis for holdings of respective parties on which the board came to the conclusion about likely change, yet two scenarios as stated by Shri Gurumurthy are possible. In the first scenario, the holdings of the groups are MRC 37.63 per cent. and KRC 24.91 per cent.
It is the contention of the respondents that in this situation the registration of the impugned shares in the name of Trident (6.84 per cent.) will take the controlling interest of Tracstar only to 31.75 per cent. and, therefore, there is no likelihood of change in the composition of the board of directors. We are not in a position to accept this proposition for the simple reason that for likely change it does not mean that the acquisition of shares by one group should have taken its holding either equal to or more than the holding of the group having a control. In this connection, it is relevant to quote from the order of the Company Law Board (Northern Bench) in Appeal No. 4 of 1990-CLB in the matter of MOI Engg. Ltd. "We have to arrive at a conclusion under Section 22A of the SCR Act as to whether there is a 'likelihood' of a change in the composition of the board of directors.
A 'likelihood' obviously is not a situation of a certainty. If one has to wait up to the acquisition of 51 per cent. of the shares then it is not a case of 'likelihood' but of certainty. A 'likelihood' means the situation may or may not take place. We have to interpret the possibility." No doubt, the acquisition of 51 per cent. and above of the shares of a company would certainly ensure control over the company but when the acquisition is less than 51 per cent. and when the public holding is as large as 30 per cent. odd, one has to look into the intention of the parties. As long as there is an intention to gain control and further acquisition by one group narrows the margin considerably, then the threat is real and apparent. It is an admitted position not only from the contentions of the parties in these proceedings but also as indicated in the pleadings, in various proceedings before us, that there had been an ongoing fight over the control of GWL and as such we have to examine the issue in this context. As long as there is an intent to gain control, and further acquisitions by one group narrows the margin of difference consideration, then the threat is apparent and real. It is clear that from a gap of nearly 13 per cent. between the MRC holding and the KRC holding, the acquisition of 6.84 per cent. would narrow the margin to 7 per cent. This narrow margin is to be viewed in the context of a large public holding of nearly 32 per cent. So in this scenario we have no doubt that the board of directors was right in coming to a conclusion that the registration of the impugned shares in favour of Trident was likely to result in a change in the composition of the board of directors. In the other scenario also, as stated by Shri Gurumurthy, if the MRC holding is only 24.9 per cent. and the KRC holding is 37.64 per cent., consequent to the KRC's claim of 12.5 per cent. held by SSPL, the margin of difference of 13 per cent. would be widened to nearly 20 per cent. if the shares are transferred in the name of Trident. The MRC group was having on the date of board decision, the control of the board of directors. Even in the annual general meeting held after filing of the present application, the MRC group continued on the board with the SSPL holding support of MRC. In the absence of further details of the voting pattern made available to us, we do not, at this point of time, know about the support that the MRC group and the KRC group got from the public holding of 32 per cent. shares. According to us, in view of the fact that MRC is already in the control of the company, even assuming that his group shareholding is less than the holding of the KRC group, any further acquisition by the KRC group would pose a potential threat to the change in the composition of the board of directors. Therefore, according to us, in both the scenarios, the board of directors was justified in apprehending a change in the composition of the board of directors in the event of registration of transfer in favour of Trident.
48. Regarding the second issue whether such a change would be detrimental to the interest of the company, the admitted fact is that SWC which is under the control of MRC, has extended substantial financial assistance in various forms to GWL. No doubt the KRC group claims that they would also be in a position to undertake the revival of the company in case they gain control of the management, one has to look at the situation on the date when the board took the decision to refuse registration, on which date the active involvement of SWC in the revival of the company was evident in all respects. Any change of control from the MRC group would definitely estrange SWC from the revival process and as a matter of fact adversely affect further process of revival if it were to call back its financial assistance.
Accordingly, we are of the view that the board's apprehension about the interest of the company being affected by the likely change in the board of directors was well-founded.
49. Accordingly, taking all aspects as discussed above, into account, we hold that the opinion of the board based on the latter part of the resolution, as amended at (b) deserves to be confirmed.
50. Both counsel presented their arguments on the two issues covered under the reference as well as on the two issues which, even though not in the reference, were put forward by Shri Raghavan. According to Section 22A(4)(c) of the SCR Act, the board of directors will have to make a reference to the Company Law Board in case they form in good faith, their opinion to refuse the registration of transfer under the provisions of Sub-section (3) of Section 22A, and as per Sub-section (6), the Company Law Board, after hearing the parties, may direct either that the transfer shall be registered by the company or that it shall not be registered by it. Therefore, in a reference under Section 22A, the main concern of the Company Law Board should be to deal with the matter as contained in the reference. But Shri Raghavan put forth two additional points relating to non-compliance with the provisions of the listing agreement and with the provisions of Section 372 of the Companies Act, which according to him, if proved would act as a bar on the Company Law Board to direct registration inasmuch as the Company Law Board cannot so order when the provisions of law have been violated and counsel for both the parties have argued on these two points.
51. Even though, in view of our decision to confirm the decision of the board to refuse registration, we need not have to go into these two issues, yet, as elaborate arguments took place on these two points, we thought it fit to give our findings on the same. Both Shri Raghavan and Shri Gurumurthy argued for and against these issues which according to them arc not in the pleadings. Perhaps, both of them had not been briefed that these points have, in fact, been pleaded even though not very elaborately. In para (k) on page 15 of the application, reference has been made regarding violation of Sections 49, 292, 370 and 372 of the Companies Act and on page 16 there is a reference to non-compliance with Clause 40B of the listing agreement. In its reply, the respondent has also dealt with the first issue on page 36.
52. Regarding the violations of the provisions of Section 372, even though arguments were advanced regarding the status of Tracstar whether it would become a Section 43A-company on registration of the impugned shares, it is seen from the shareholding pattern in Tracstar that BDA Ltd. holds 40 per cent. of the shares in Tracstar. As per the provisions of Section 43A(1) when more than 25 per cent. of the paid-up share capital of a private limited company is held by one or more bodies corporate being public companies, the private company becomes a deemed public company. Therefore, there need be no dispute regarding the status of Tracstar that it is a Section 43A-company. The questions, therefore, that arise in respect of violation of Section 372 are : (i) whether the provisions of these sections are applicable to a Section 43A-company ; and (ii) will these provisions be applicable only for acquisition after reaching a percentage of 25 as contended by Shri Gurumurthy or even when the acquisition goes beyond 25 per cent. from a lesser figure as contended by Shri Raghavan. As regards the first issue, the exemption from application of Section 372 is restricted only to those instances as indicated in Sub-section (14) thereof. As per Clause (b) of this sub-section, a private limited company, unless it is a subsidiaiy of a public company it is exempted from application of provisions of Section 372. There is no specific mention about non-application to a Section 43A-company. However, it is clear from para 7 of Circular No. 48(50)-CL.IV/81, dated January 9, 1962, that the provisions of Section 372 are applicable in the case of a deemed public company under Section 43A. We are also of the view that "private limited company" as used in this sub-clause would mean only a private limited company simpliciter and not a Section 43A-company. Therefore, we hold that Tracstar is subject to the provisions of Section 372.
53. Regarding the second issue, it is an admitted fact that Tracstar has paid the consideration for the impugned shares. At the time of lodgment of the impugned shares for registration in the name of Trident, Tracstar was already holding 24.9 per cent. shares in GWL. As per Section 372 and the rules made thereunder, a body corporate shall not invest in more than 25 per cent. of the paid-up share capital of another company unless previously approved by the Central Government.
As per Section 374 of the Act, penalty has been provided for contravention of the provisions of Section 372. In Sub-section (4) of Section 372, vide amendment with effect from April 17, 1989, the words "unless further it is approved" were substituted by the words "unless previously approved" in connection with the Central Government approval. This read with the words "investing company shall not make any investment" at the beginning of Sub-section (4) makes it amply clear that previous approval of the Central Government was mandatory.
This principle of mandatory nature of the negative words used in Section 108 has been laid down in Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp Cas 185 (SC).
54. From the above, it is clear that when prior approval of the Government is not taken for investment beyond the prescribed limit, and when penalty is also provided under Section 374, the acquisition has to be treated as void and ineffective. In the present case, since Tracstar already holds 24.9 per cent. shares in GWL, the acquisition of the impugned shares which would take the holding of Tracstar beyond 25 per cent. of the paid-up capital of GWL, clearly violates the provisions of law especially when penalty has been provided for infringement.
Therefore, we are in agreement with the contention of Shri Raghavan that Tracstar's acquisition of the impugned shares is in contravention of the provisions of Section 372.
55. The other issue relates to infringement of the provisions of Clauses 40A(a) and 40A(b) of the listing agreement. In this respect, we are generally in agreement with the contention of Shri Gurumurthy.
These clauses came into effect on May 30, 1990, by which time Tracstar was already holding more than 10 per cent. of the shares in GWL. While the wording of clause 40A(a) is not so clear as to whether the notification to the stock exchange is necessary only if the present holding is less than 5 per cent. and further acquisition takes the holding beyond 5 per cent., the provisions of Clause 40A(b) are very clear. According to us, these provisions would become applicable only when a person who acquires the shares in a company holds less than 10 per cent. of the voting rights in the company, he shall not acquire further shares if such acquisition would carry the voting rights beyond 10 per cent. without notifying the same to the stock exchange.
Therefore, Clause 40A(b) is not applicable in the case of acquisition of the impugned shares by Tracstar as it already holds more than 10 per cent. voting rights in GWL.
56. In the end, as we have indicated in earlier paras, while we do not confirm the decision of the board as per ground (a) of the resolution, we confirm the decision of the board of directors as per ground (b) of the amended resolution "that the transfer of the said security in favour of Trident Investment and Portfolio Services Pvt. Ltd., is likely to result in change in the composition of the board of directors of the company and such a change would be prejudicial to the interests of the company and public interest." 57. Accordingly, we direct that the transfer of the shares need not be registered by the company.