Judgment:
1. Shri Chandrika Prasad Sinha of Patna has filed this petition under Sections 237(b), 247, 248 and 250 of the Companies Act, 1956 (hereinafter called "the Act"), against Bata India Ltd., Calcutta (hereinafter called "the company"). The other respondents are : Leader A.G. St. Moritz, Switzerland, c/o. Bata (India) Ltd., Calcutta (respondent No. 2) and Bata (BN) D.V. Amsterdorm, the Netherlands, c/o.
Bata India Ltd., Calcutta (respondent No. 3), Bata India Ltd. is a public company with an authorised capital of Rs. 30 crores. The petitioner is a member of the company holding 140 equity shares as on December 17, 1992 (hereinafter called "the record date"). Respondent No. 2 is a foreign company which holds 40 per cent. of the equity of the company as on the record date and has been the promoter of the company. Respondent No. 3 said to be a 100 per cent. subsidiary of respondent No. 2 did not hold any shares in the company as on the record date. The main issue raised by the petitioner relates to the allotment of additional 47,14,000 equity shares of Rs. 10 each at a premium of Rs. 25 to respondent No. 3 as on the said record date on a preferential basis.
(i) The petitioner received from the company a notice dated June 15, 1992, for an extraordinary general meeting on July 24, 1992, to seek the approval of members for the rights issue of 1.05 lakhs equity shares to the resident Indian members of the company at the issue price of Rs. 30 per share including a premium of Rs. 20 per share.
The notice was deceptive and clandestine inasmuch as a proposal for the issue of additional 47,14,000 new equity shares as reserved shares in favour of a single shareholder, namely, respondent No. 3, at an arbitrarily fixed price of Rs. 35 per share when the prevailing stock market price was around Rs. 250 per share was also included in the proposal. The aforesaid item of the reserved issue did not appear in the notice in the usual form of a separate resolution as per normal practice. The explanatory statement has also been very vague and sketchy. It did not talk of any new projects nor any specific provision of law and no guideline was cited for the purported 100 per cent. reservation. The petitioner sent a written objection in this regard which was not placed before the extraordinary general meeting. Later, on request, a copy of the minutes of the extraordinary general meeting was made available which incorporated the decision to issue 47,14,000 new equity shares as 100 per cent. reserved issue to respondent No. 3 as a nominee of respondent No. 2. However, the minutes did not contain any provision of law/ guidelines in this regard. It was also noted that both the rights issue and the 100 per cent. reserved issue were proposed and seconded by a single motion and were put to vote and declared carried by a show of hands with the requisite majority in one go.
Later, however, a letter dated November 2, 1992, received from the company showed as if separate votes were cast in favour of the rights issue and for the 100 per cent. reserved issue. It is also stated that respondent No. 2 was in control of 99.6 per cent. of the total voting strength present and voting at the extraordinary general meeting. It is the contention of the petitioner that the directors and other persons intentionally managed to avoid the aforesaid proposal of 100 per cent. reserved issue from being placed at the annual general meeting held on June 15, 1992, on which date the notice of the extraordinary general meeting was issued. Thus, the extraordinary general meeting was to be held within a gap of around 37 days after the annual general meeting at a heavy cost to the company with the aim of easily carrying through without any opposition the 100 per cent. reserved issue.
(ii) The newspaper announcement of the issue in the Economic Times, Calcutta, on January 7, 1993, suppressed several material facts and contained false statements as under : (b) the date of despatch of the letter of offer for the rights issue was not true in many cases. The offer to the petitioner himself was despatched on January 12, 1993, as against January 7, 1993, as announced in the newspaper and still he did not receive his copy of the letter, (c) the paper announcement did not disclose the purported issue of 47,14,000 equity shares as 100 per cent. reserved shares, (d) many members could not exercise their right due to the delay resulting in great under-subscription. Consequently, a large chunk of the equity shares which were unsubscribed seems to have been allotted to respondent No. 2, thereby raising the foreign shareholding beyond 51 per cent.
(iii) Since the petitioner did not receive the letter of offer, he requested the company and the Registrar to the issue on January 29 and 30, 1993, for sending a duplicate letter of offer which was not heeded to and the petitioner had to send a plain application with bank draft for the rights shares and additional shares. Though the company allotted 149 shares to the petitioner the share certificates received did not bear the common seal. On pointing out this grave omission the company put the responsibility on the registrar to the issue.
(iv) The letter of offer also contained several untrue and misleading statements as also suppressed several material particulars : (a) the letter is dated November 3, 1992, but it contains a reference to the Reserve Bank of India's approval obtained on November 26, 1992 ; (b) there is no information about the approval by the Secretariat for Industrial Approvals ; (c) there is no information regarding vetting of the letter by SEBI ; (d) there is no disclosure as to compliance with the guidelines of the Central Government, SEBI and the erstwhile Controller of (Capital) Issues especially in respect of reserved issues, issue price and preferential allotment ; (e) the company and the board did not comply with the terms and conditions of the guidelines of the SEBI dated June 11, 1992, and June 17, 1992, those of the Central Government issued, vide Press Note No. 17 of 1991 and later revised, vide Press Note No. 13 of 1992 of the Ministry of Industry and also of the Ministry of Finance regarding the valuation of the shares ; (f) the net worth of equity shares had been shown in the letter of offer as Rs. 35.16 per share whereas in the annual report for 1991 it has been mentioned as Rs. 41.75 per share. The company has got the valuation done by a valuer but such fact is not mentioned in the letter of offer ; (g) the cost of project said to be appraised by the SBI Capital Market Ltd. involves a foreign exchange outgo of over Rs. 9.55 crores but the total issue to respondent No. 2 and its nominee to be subscribed in foreign currency was Rs. 29.1 crores and no expansion was also envisaged. On the other hand, the explanatory statement justifies the fund requirements as for on going expansion and modernisation, working capital, augmentation of long-term resources without indicating any requirement for an export-oriented undertaking or for other new schemes and without indicating any foreign exchange requirement ; (h) the highlights in the letter of offer stated that the entire proceeds are earmarked for modernisation, expansion programme and for setting up a 100 per cent. export-oriented undertaking. However, the details in the letter of offer do not envisage any expansion or the setting up of a 100 per cent. export-oriented undertaking ; (i) no letter of intent or licence for an export-oriented undertaking project was obtained but the full money has been collected, the implementation schedule showed that most of the projects/schemes will be completed by 1993 and a few by 1994 ; (j) the opening para of the letter of offer states as if the 100 per cent. reserved offer is in accordance with Section 81 but the notice of the extraordinary general meeting does not contain such a statement ; (k) there is conflict between the letter of offer and the notice for the extraordinary general meeting with regard to the holding by respondent No. 2 and respondent No. 3 ; (l) the letter of offer also appears to contain tall claims and inflated estimates with regard to land and cost of construction. The turnover is estimated to be doubled by 1995 though the additional capacity contemplated by the export oriented undertaking project is only 1 million pairs per annum against the present position of around 34 million ; (v) The annual report for the year 1992 published on March 12, 1993, appears to contain contradictory and misleading statements regarding the 100 per cent. reserved issue. For instance, the directors' report described the 100 per cent. reserved issue as "special rights issue". Yet another reference to this issue describes it as a special issue to the company's foreign shareholder though actually the issue was made to respondent No. 3 which was not a shareholder.
In yet another place this issue has been described as a rights issue.
(vi) The company and its directors/officers failed to supply to the petitioner in spite of the repeated requests information regarding the statutory compliance with Section 81(1A) of the Act and regarding terms and conditions of various regulations and guidelines of the Central Government and the SEBI while taking the decision to make the reserved issue. They have also failed to supply the copy of the prospectus in spite of the repeated requests which indicate that no such prospectus was issued. The company has also failed to reply to the letter dated February 13, 1992, of the petitioner in this regard. The petitioner's visit to the office of the Registrar of Companies, West Bengal, showed that no returns, documents of 1992 were placed on the record and as such no inspection could be carried out.
3. Consequent to the reserved issue huge wrongful gains have accrued to respondent No. 3 by virtue of heavy under-pricing of shares against the current market price resulting in heavy losses to the company and to small scattered shareholders. This is prejudicial to the company and to the public interest.
(a) The issue and allotment of 100 per cent. reserved shares to respondent No. 3 is with the intent to defraud the members, for unlawful purpose and oppressive of the members. The same is also prejudicial to the members, the company, the nation and public interest.
(b) The members of the company have not been supplied with information in regard to the issue and allotment of the 100 per cent. reserved shares.
(c) Several untrue, false and misleading statements with suppression of material facts by the company/its officers and directors in the newspaper announcement, letter of offer, notice of the extraordinary general meeting, the minutes of the extraordinary general meeting and the annual reports of 1991 and 1992 and other relevant records have been made in regard to the 100 per cent. reserved issue.
(d) There have been contravention of the provisions of Sections 81(1), 81(1A), 56, 70 and other relevant provisions of the Act and of the terms and conditions of various guidelines of SEBI, Industry Ministry, Finance Ministry of the Government of India.
(e) The persons concerned with the management have been guilty of fraud, misfeasance, malfeasance and other misconduct.
(i) recommendation to the Central Government for a thorough investigation under Section 237(b) of the Act into the affairs of the company especially in regard to the 100 per cent. reserved issue ; (ii) the declaration under Section 247 of the Act that the affairs of the company ought to be investigated ; (iii) an order under Section 250 to impose restrictions for three years in respect of the reserved shares with regard to transfer, exercise of voting rights, issue of rights/bonus shares, payment of dividend, capital or otherwise. Alternatively to declare that the decision of the board of directors and of the extraordinary general meeting and all other acts done as a consequence with regard to the 100 per cent. reserved shares as null and void and that those shares be issued and allotted to the existing members of the company.
4. The company was directed to file its reply to the petition before March 31, 1994. However, the company sought further time and filed its reply only on July 1, 1994.
5. The company raised preliminary objections with regard to the maintainability on the ground that : (i) the petitioner has instituted proceedings in the Patna District Consumer Forum ; (ii) the shareholding of the petitioner is an insignificant percentage. Thus, he has no locus standi to file the petition and to claim the reliefs particularly when no other shareholder of the company has made any complaint. Thus, the petition is motivated/and there is a collateral purpose. The petitioner has attempted to put pressure on the company to meet his unjustified and unreasonable demands ; (iii) the provisions of Section 237 cannot be invoked as the Company Law Board is not the Central Government ; (iv) as regards Section 247(1A) there are no proceedings pending before the Company Law Board. No case has been made out under Section 250(3) and/or (4) and as such the provisions of Sections 247, 248 and 250(1) and (2) cannot be invoked ; (v) on a consideration of the matters alleged in the petition and the provisions of Sections 237(b), 247, 248 and 250, the Company Law Board has no jurisdiction to entertain or adjudicate upon the petition ; (vi) it is evident that the petitioner is aware of all the facts.
Thus, there is no ground for any order of investigation ; (vii) further the transaction referred to in the petition are past concluded transactions. Moreover, the petition is barred by delay, acquiescence, waiver and estoppel ; (viii) the petitioner has not come with clean hands as he has suppressed material facts. The vast majority of correspondence has been deliberately and wilfully suppressed by the petitioner.
6. The company has also prayed that the preliminary objections be decided and for this purpose hearing be held at Calcutta since the petitioner is also from the Eastern Region.
7. As regards the merits, the company has stated that the allotment of additional 47,14,000 equity shares in favour of respondent No. 3 has been duly passed at the extraordinary general meeting. The petitioner also has obtained the benefit of the resolutions passed at the extraordinary general meeting and he has subscribed to rights shares at Rs. 30 per share (including Rs. 20 premium) and as such he cannot have a grouse.
8. The allegation that para 2(b) of the notice of the extraordinary general meeting was deceptive or clandestine is denied. The allegation that the price fixed is arbitrary is also denied. The company pointed out that the petitioner has raised no objection with regard to the price fixed for the rights shares, i.e., Rs. 30 per share, but has questioned only the price fixed in respect of the reserved shares, i.e., Rs. 35 per share. According to the company, the pricing of shares of the company had to take into account not only the interest of the existing shareholders who subscribed to the shares but that foreign investment should also be forthcoming. Thus, the stock market price is not the only consideration for the pricing of the shares. It has also denied that the impugned resolution in para 2(b) is not in any usual form as per normal practice. There is no prescribed form for such resolutions. It is also denied and disputed that the explanatory statement has been vague or sketchy or did not contain material particulars. It is not necessary to state the total financial requirement or foreign exchange or cost of the project or items of manufacture to be stated in the explanatory statement. The explanatory statement is as per the provisions of law and no one is misled, In fact, the petitioner has applied for shares on the basis of the resolution and the explanatory statement.
9. With regard to the letter dated July 13, 1992, of the petitioner to the company the same has been duly replied to on August 7, 1992. The petitioner has suppressed this reply. The question of placing the letter at the extraordinary general meeting does not arise and there is no such obligation on the part of the company. The allegation regarding the minutes of the meeting having been clandestinely or deceptively inserted has been denied. There is also no particular form for such resolutions. The company has further stated that at the extraordinary general meeting, the chairman took great pains in explaining to the members present the need for issuing reserved shares to respondent No.3. The chairman also replied to all questions put by the persons present. Though more than 600 members were present, the petitioner did not attend the meeting and as such these allegations are untenable. The resolution was passed with the requisite majority by a show of hands and out of 636 shareholders who attended the extraordinary general meeting only four voted against the resolution.
10. The allegation that the directors avoided to place the proposal of 100 per cent. reserved issue before the annual general meeting was denied.
11. According to the company, on the date of the annual general meeting in June, 1992, at 9 a.m. the proposal was approved by the board and the annual general meeting was held at 10.30 a.m. Still the matter was brought to the notice of the shareholders present at the annual general meeting. This fact was also reported in a number of newspapers on the very next day. The fact that respondent No. 2 holds 99.6 per cent. of the value of the shares is immaterial since the voting at the extraordinary general meeting took place by a show of hands.
12. With regard to the allegation of publication of false and misleading statements, the company has stated that the document referred to by the petitioner is not an announcement of the rights issue at all. The publication referred to is the announcement relating to the posting of letters of offer based on information from the Registrars to the issue. It is also denied that the petitioner could not make the application due to failure to post the letter of offer.
The Registrar to the issue has ensured that the letter of offer along with the composite application forms were despatched to the shareholders by registered post on January 7, 1993. The postal journal clearly disclosed this fact and the computer print out also shows that the address was correctly recorded. However, in the case of bulk posting the date stamp could also be subsequent to the date of actual posting.
13. The allegation that the issue of 47,14,000 reserved shares was suppressed is also denied. The allegation of under subscription of rights issue and the allotment of a major portion of the unsubscribed shares to respondents Nos. 2 is also denied. The unsubscribed portion was offered only to the resident Indian shareholders and were allotted accordingly on the basis of approval by the Calcutta Stock Exchange.
Thus, the allegation of foreign shareholders holding in excess of 51 per cent. does not arise. It is further stated that the entire shareholding of respondents Nos. 2 and 3 has the approval of the Reserve Bank of India as well as the FIPB of the Government of India.
In any case the petitioner has not suffered any prejudice on this account. In fact, the petitioner applied for additional shares which were also allotted out of the unsubscribed portion. In fact the petitioner's request for sending a duplicate letter of offer did not go unheeded as alleged. Actually, the original letter sent by the registered post was not returned and delivered to the company. However, on receiving a request for a duplicate set it was sent by courier on February 12, 1993, which was returned with the remark "improper address". Even then the company on receiving an application from the petitioner on a plain paper took immediate steps for acceptance of his application.
14. Due to the voluminous nature of the issue the full impression of common seal might not have fallen on some certificates. The allegation of negligence has been denied. The company has stated that it has replied to the various letters of the petitioner, copies of which were also annexed to the reply. However, the petitioner has demanded Rs. 30,000 as compensation for the alleged mental agony.
15. As regards the publication of false and misleading statements in the letter of offer, it is stated that the letter of offer was approved by the SEBI and such letter was placed at the board meeting on November 3, 1992. While doing so the space for the Reserve Bank of India approval letter and date was kept blank which was due to be filled up after the receipt of such letter which was obtained on November 26, 1992. The discrepancy in the dates, therefore, is adequately explained.
With regard to the contention of the petitioner regarding absence of reference to approval from the FIPB, the SEBI as well as compliance with the guidelines, the letter of offer was actually approved by the SEBI and no grievance can be made by the petitioner in this regard. The reserved price was specified to the FIPB and was approved by the board as well as by a special resolution of shareholders. This is in accordance with a relevant guidelines.
16. The allegation of non-compliance with the SEBI guidelines of June 11, 1992, and June 17, 1992, was denied. It is asserted that all the guidelines as were applicable to the said issue have been complied with. As regards the net worth of the equity shares as shown in the letter of offer as Rs. 35.16 whereas in the annual report the book value per share is Rs. 41.75, it is stated that the book value cannot be expected to remain constant and at the relevant time it was Rs. 35.16. As regards the discrepancy in the cost of projects, it is stated that there was no inconsistency between the explanatory statement and the letter of offer. At the time of providing the explanatory statement for the extraordinary general meeting, i.e., on June 15, 1992, the appraisal details made by SBI Capital Market Ltd. was not available. As and when further details were available the same were reflected in the letter of offer. The explanatory statement was not an offer document and it has set out the details available at the relevant time. With regard to the allegation that the 100 per cent. export-oriented undertaking has not been approved, the company has stated that actually it has the approval of the SIA. It is further stated that there is no inconsistency between the highlights and detailed contents in the letter of offer. With regard to the grievance that the company has collected the full amount of the shares at one go whereas the capital expenditure was staggered, it is stated that the company has the power to collect the entire rights issue money at one go. The challenge in the letter of offer with regard to the reserved issue that it has been approved under Section 81 whereas there is no such mention of Section 81 in the minutes of the extraordinary general meeting, this is justified as the entire resolution relating to issue and allotment of shares was made pursuant to Section 81. The discrepancy in the total shareholding of Bata Shoe Organisation as pointed out by the petitioner is also denied as the combined shareholding of respondents Nos. 2 and 3 has been rightly stated as 51 per cent. after the issue. The allegation of tall claims and inflated estimates has been denied as the projects have been appraised by SBI Capital Market Ltd. and they are based on reasonable assumptions.
17. With regard to the allegation of contradictory and misleading statements in the annual report of 1992, the company has stated that there are no contradictory and misleading statements because of the description of the issue to respondent No. 3 as reserved issue or special rights issue or rights issue. The company has confirmed that the rights issue proceeds which includes the reserved issue are being used as stated in the letter of offer and no question of directors revealing any further facts in their report arises.
18. With regard to the allegation of failure to supply information to the petitioner, it is stated that all the information to which the petitioner is entitled as a shareholder has been provided. The company is not required to furnish all the information as stated in his petition. The question of supplying a prospectus or a statement in lieu of the prospectus does not arise as the issue was a rights issue. There was no question of the company replying to the petitioner against his letter dated April 8, 1993, on this account. With regard to the main contention of benefiting respondent No. 3 by underpricing the shares while denying this allegation the company has stated that no wrongful gain in the form of rights shares or bonus shares or dividends has resulted to respondent No. 3 or in raising the foreign shareholding over 51 per cent. According to the company, no loss or injury has been caused to small or scattered shareholders or to the nation as alleged.
According to the reply, the company has also benefited because of cheap foreign exchange available for modernisation and diversification. With regard to the pricing against the book value per share of Rs. 31.16 at the relevant time, shares were offered to respondent No. 3 at a price 25 per cent. higher than the price offered to the existing shareholders. The price in the reserved issue was reasonable and approved by the shareholders as well by FIPB and as such no grievance can be made on this score.
19. The company has also stated that the petitioner has given a false declaration in para 6 that he has not filed any application, writ petition or suit on the matters covered by this petition. The petitioner having failed to get any relief in other proceedings has now sought to institute the present proceedings. The intention behind it is only to harass the company to meet the unjust and unlawful demands of the petitioner. According to the reply, the petition is speculative, harassing and is a gross abuse of the process of law and is liable to be dismissed. The company has also prayed that the petitioner should be directed to deposit a sum of Rs. 10 lakhs towards the cost of this frivolous litigation. The reliefs prayed for are beyond the scope of the petition and statutory provisions. The reply is concluded with a statement that if orders as prayed for are passed the company and its shareholders will be gravely prejudiced and will suffer irreparable loss, damage and injury.
20. Since as a Tribunal normally we do not separately adjudicate on preliminary issues, we have considered the whole matter including the preliminary issues. Before proceeding to examine the facts presented before us we deal with the preliminary objections raised on behalf of the company. There are 8 grounds of objection, namely : (ii) The provisions of Section 237 cannot be invoked before the Company Law Board as it is not the Central Government.
(iv) The transactions under reference are past concluded transactions and cannot be reopened.
(v) The petitioner has not come with clean hands as he has suppressed material facts.
(vi) There are no proceedings before the Company Law Board to invoke Sections 247, 248 and 250.
(vii) The Company Law Board has no jurisdiction under the various Sections referred to above.
21. We have carefully perused all the above grounds and have come to the conclusion that the petition is maintainable. The power to form an opinion regarding investigation under Section 237(b) is an exclusive jurisdiction conferred on the Company Law Board and as such no other forum including the District Consumer Forum or authority including the Central Government can exercise this power. This is clear from the wording of Section 237(b) and, therefore, needs no further elaboration.
As regards the other objection that the petitioner is aware of all the facts and that they relate to past concluded transactions, these grounds cannot obviously be valid. An investigation can be ordered only on the basis of facts which may constitute past transactions and a petitioner can come with a better petition only if he is familiar with the facts. The objection that the petitioner has not come with clean hands is not also relevant because the power under Section 237(b) is a suo motu power and the Company Law Board is not concerned with the conduct of the petitioner in the exercise of this jurisdiction but with the relevance of the information placed before it. As regards the objection relating to exercise of jurisdiction under Sections 247, 248 and 250, the scope of the present petition in which opinion is to be formed is limited to the affairs of the company and that too with the allegations of fraud, misfeasance or misconduct. There are no grounds relating to change of management under Section 250(3) or (4) or with regard to the benami ownership of the shares. As such, our jurisdiction in this case shall be confined to Section 237(b) only. No case under Section 247, 248 or 250 is made out.
22. With regard to the objection of locus standi of the petitioner because of his insignificant shareholding, we are very much convinced that the petitioner is well within his rights to make this petition.
This aspect has been dealt with by the Delhi High Court in V.V. Purie v. E. M. C. Steel Limited [1980] 50 Comp Cas 127 (Delhi) wherein Justice S. Ranganathan (as he then was), after dealing with the observations of the same court in Delhi Flour Mills Co. Ltd., In re [1975] 45 Comp Cas 33, has elaborated on the parties who can seek investigation under Section 237(b) of the Act which is an analogous provision (at page 140) : "There is ample scope for the invocation of Section 237 by persons whose rights are infringed or affected and whose interests need to be protected or safeguarded by an investigation--a creditor who is unable to move the Central Government under Section 235 ; member or members who, though aggrieved, are unwilling to move the Central Government or unable to fulfil the requirements of Section 236 and hence unable to move the Central Government ; members who approach the Central Government under Sections 235 and 237(b) and are aggrieved by the rejection of their applications ; a company which wants an investigation but is unable to have a special resolution passed. These are some illustrations of persons who would be able to move the court under Section 237(a). It is, therefore, not as if the scope of the remedy enacted by this provision would be unreasonably curtailed or would become illusory by reading into the section an implied limitation to exclude persons having no manner of interest or concern with the company, from availing of it." 23. A member of a company has an interest in the affairs of the company arid he can seek a remedy by invoking these provisions so long as he could establish that there are sufficient circumstances suggesting the need for an investigation. In our view, therefore, the petition cannot be disposed of as not maintainable.
24. A member of a company is well within his rights to bring to the knowledge of the Company Law Board, the various circumstances for invoking the provisions of Section 237(b). In fact a petition under Section 237(b) is not to be treated on par with a litigation. It is a suo motu power in which the Company Law Board is to form an opinion as to whether there are circumstances which suggest the need for a deeper probe into the affairs of a company based on the information available before it. The limited role of a petitioner in this case is to bring the relevant information containing the circumstances which may suggest to the Company Law Board so as to form an opinion whether an investigation is warranted. Since, Section 10E(5) of the Act provides that the Company Law Board in exercise of its powers and discharge of its functions shall be guided by the principles of natural justice we have given liberty to both the petitioner and the company to make their written submissions and also heard them in the matter. We are also simultaneously conscious of the fact that a petition under this section should not be a misuse of the Company Law Board. The mere fact that a shareholder is feeling dissatisfied about the way in which the affairs of the company are being conducted is not enough to make an order of investigation. (Kumaranunni v. Mathrubhumi Printing and Publishing Co.
Ltd. [1983] 54 Comp Cas 370 (Ker)).Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Cas 639 has laid down two clear propositions for consideration before passing an order under Section 237(b) : (1) the existence of circumstances suggesting that the company's business was being conducted as referred to in Sub-clause (1) or the persons mentioned in Sub-clause (2) are guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members - (2) the authority concerned (in the present case the Company Law Board) on considering the circumstances may form the opinion that an investigation is warranted. The first proposition, namely, the circumstances as stated above are narrated in Section 237(b) as (a) circumstances which suggest that the company's affairs are being conducted with the intent to defraud creditors, members or any other persons, or for a fraudulent or unlawful purpose or oppressive of members, (b) circumstances suggesting that the persons concerned in the formation or management have been guilty of fraud, misfeasance or misconduct towards the company or members, (c) circumstances suggesting that the members of the company have not been given all the relevant information. It is now necessary for us to examine the material placed before us as to whether the circumstances narrated in the petition suggest any of the acts referred to under Section 237(b).
26. The present case relates to the allotment of 47,14,000 equity shares to respondent No. 3 which is a 100 per cent. subsidiary of respondent No. 2 at a price of Rs. 35 per share (including a premium of Rs. 25) in order that respondent No. 2 is able to hold 51 per cent. of the equity of the company. In this connection the questions raised by the petitioner are (a) whether the directors have fraudulently, deceptively and mala fide made this allotment and in doing so has extended a substantial monetary benefit by offering the shares at Rs. 35 per share whereas at that time the market price of the share was about Rs. 250. In this connection, it is necessary to also note that the company approved simultaneously to the resident Indian shareholders rights shares at Rs. 30 per equity share in the ratio of one share for each share held. Whether in order to achieve this alleged fraudulent objective they intentionally issued a deceptive misleading notice, failed to disclose ; and made contradictory statements in the letter of offer for rights issue to the members thereby compromising the interest of the company, collected more foreign exchange than required for the project, made amendment to the draft resolution contained in the notice by offering the shares to respondent No. 3 instead of to respondent No.2 and in general not properly disclosed the facts regarding the reserved issue to the members of the company. It is also alleged that the company avoided getting the approval of the members in the annual general meeting held in the month of June, 1992, but held a separate extraordinary general meeting immediately thereafter at a heavy cost and the company also did not place on record any return/document relating to the reserved issue with the Registrar of Companies. It is further alleged that the formal letter of offer has been put up to the board for approval before getting it vetted by the SEBI and before fixing the record date, etc.
26. On a scrutiny of the detailed reply submitted by the company, along with an affidavit, it is found that at the time of issue to respondent No. 3 there were no guidelines in force issued by SEBI with regard to the pricing of the issue. With the abolition of the office of the Controller of Capital Issues a company was required to abide by the directions of the SEBI which is the regulating authority in respect of listed shares. With the concept of free pricing as it was prevalent at the relevant time it was only required to comply with the provisions of Section 81(1A) of the Act, that is to obtain the approval of the shareholders by a special resolution. In the present case the shareholders have approved not only the reserved issue to respondent No. 3 but also the rights issue to the resident Indian shareholders at a premium of Rs. 20 per share as against a premium of Rs. 25 chargeable on the reserved issue. It should also be kept in mind that as an existing shareholder respondent No. 2 itself could have subscribed to 40 per cent. of the rights issue which has not been offered to it.
Apart from this act of management, the other circumstances pointed out are purely in the nature of technical lapses in disclosure in connection with this allegation, namely, (a) not quoting any provisions of the Act in the explanatory statement, (b) clubbing the rights issue and 100 per cent. reserved issue as a single resolution, (c) giving one explanatory statement to two different proposals, (d) not disclosing material facts, and (e) modifying the resolution from the draft as contained in the notice. In addition non-disclosure of the approvals of the FIPB, the SIA, the SEBI, etc., have also been alleged. It should be noted that the complaint is not really the failure to obtain approvals but the non-disclosure of such approvals. The fact, however, remains that approvals were obtained. In our view all these matters are in the nature of possible violations of the Companies Act which may be considered as relevant circumstances suggesting a fraud or deception.
However, it should also be noted that there are relevant provisions in the Act by which appropriate authorities can initiate action if violations are established and as such it is not appropriate to consider these matters as instances fraudulent or deceptive. Such a decision has been already given by the Bombay High Court in Hariganga Cement Limited v. Company Law Board [1988] 64 Comp Cas 603, where even the instance of the chairman of the company alleged to have increased his voting power by benami holding the court held that such acts can be taken care of by other relevant provisions of the Act and cannot constitute circumstances under Section 237(b) for forming an opinion. A Division Bench of the Delhi High Court in Modi Industries Ltd. v. Union of India [1982] 52 Comp Cas 589 has held that where there are various other authorities and alternative provisions of law to take care of such acts of the managements, investigation should not be resorted to.
In the present case before us the lapses pointed out are purely technical in nature. As such we do not hold these technical lapses as pointed out by the petitioner as relevant circumstances warranting an investigation.
27. As regards the allotment to a party, viz., respondent No. 3, the nominee of respondent No. 2 at a lower price than the market price, a somewhat identical situation was found in Rohtas Industries Limited v.S.D. Agarwal [1969] 39 Comp Cas 781 (SC) wherein a company is alleged to have disposed of certain investments, i.e., shares at a lesser price than the market price. The Supreme Court came to the conclusion that in order to consider such a situation there should be adequate material with regard to the actual price, the market price, the possibility that such a market price could be obtained, etc. Though that case relates to sale of investments in which full details were not available before the Central Government for coming to a conclusion, in the present case complete details are available with regard to the party to whom the shares were allotted the price, the relevant market price around that date and consequent differential. Still, what is most important is that this is a single transaction and that too put through within the provisions of law. Apart from obtaining the approval of the members by a special resolution, being an allotment to a nonresident, the approval of the Reserve Bank of India and the Government of India in the Foreign Investment Promotion Board (FIPB) is required to be obtained. Thus the transaction has come under the close scrutiny of various governmental bodies which have cleared the case. Apart from this the project for modernisation and expansion has also got the clearance from the Secretariat of Industrial Approvals, another Government agency. If there had been anything objectionable regarding the pricing of the shares, the approvals could not have been given.
28. From the facts presented in reply on oath by the company it is evident that there is full transparency in the transaction and all the details were made available. The need for invoking Section 237(b) would arise only when the tip of an iceberg is seen and the circumstances warrant that a deeper probe is necessary to bring about the full facts.
The probe should not be a fishing expedition and should be such that the authority (in the present case the Company Law Board) should be able to convince itself that by making a probe it can result in a prosecution under Section 242 or a winding up under Section 243 or proceedings under Sections 397 and 398 or proceedings under Section 244 for recovery of damages or property misapplied on account of misfeasance or mismanagement or would result in launching criminal proceedings against any person who can be convicted. In the present case, the entire allegation refers to a single transaction about which complete details are available ; as such there is no scope for obtaining further details at all in the matter. Since there is complete transparency, there is no scope for ferreting out any further facts which can bring about any consequential action as contemplated under Section 242, 243, 244, 397 or 398 and hence the question of forming an opinion for investigation does not arise at all. The petitioner could have been well justified if without complying with the provisions of law an exclusive benefit was granted only to the foreign shareholding company. In a shareholders' democracy through the mechanism prescribed by law if the proposal has been approved overwhelmingly, any court will hesitate to intervene. There is no evidence of exercise of a brute majority when the voting was taken by show of hands as evidenced by the minutes which is the conclusive evidence of proceedings at the meeting.
All the approvals prescribed by law have been obtained. Nothing is hidden from the shareholders to be brought out by an investigation. As such there are no circumstances existing for us to form an opinion regarding investigation.
29. Since the non-furnishing of information with respect to the affairs of the company as may be reasonably expected by the shareholders has also been alleged, we have examined this issue as contemplated in Section 237(b)(iii) in detail.
30. The company in its reply stated that the petitioner has not disclosed the vast majority of correspondence between the petitioner shareholder and the company. For instance, the petitioner's letter dated July 13, 1992, containing objections with regard to the reserved issue with request that the letter should be read at the meeting was actually replied to on August 7, 1992, by the company. This reply was suppressed by the petitioner. A shareholder cannot make an objection that his letter has not been read out at the general body meeting.
Further, the company has also sent a copy of the minutes of the meeting as desired by the petitioner. It is also evident from the petition that there was further correspondence in the month of September, 1992, namely, a letter dated September 15, 1992, which was replied to by the company on September 21, 1992, containing certain clarifications on the industrial policy of the Government of India permitting 51 per cent.
foreign equity shareholding. We also noticed further that the company has provided information with regard to the votes cast on the various resolutions. In another letter dated November 2, 1992, in which certain discrepancies with regard to the votes on resolutions as compared to the minutes have been pointed out by the petitioner. There has also been subsequent correspondence in March, 1993, as admitted by the petitioner himself. It was further noticed that due to the letter of offer for rights issue not reaching the petitioner shareholder the company accepted the petitioner shareholder's application on plain paper and made the allotment to him. Thus, it is clear that the channel of communication between the company and the shareholder was clear and continuous. Consequently, there is no scope for us to hold that circumstances exist under Section 237(b)(iii), namely, non-providing of information by the company to the shareholders.
31. In the final analysis, we find that there are no circumstances which exist for us to form an opinion that there is need for an investigation into the matter. As observed by the Division Bench of the Delhi High Court in Modi Industries Limited v. Union of India [1982] 52 Comp Cas 589 (headnote): "Since the existence of the circumstances is a condition fundamental to the making of an opinion, if questioned it has to be provided at least prima facie. The court has to see whether the Government has in the affidavit shown the existence of circumstances leading to such tentative conclusions. If it has, the action cannot be questioned, because the inference is to be drawn substantively and even if the court would not have drawn a similar inference that fact could be irrelevant. But, if the circumstances pointed out are such that no inference of the kind stated under Section 237(b) can at all be drawn the action would be ultra vires the Act and void". In the present case, therefore, the question of the second proposition of forming an opinion itself does not arise as no circumstances as contemplated exist at all.
32. We are also conscious of the fact that an order of investigation of a public company has got its adverse consequences on the goodwill and the business of the company. Hence, courts have been extremely cautious in forming an opinion with regard to investigation. As observed by the Division Bench of the Delhi High Court in the case referred to above, "in interpreting Section 237(b) the adverse effect of the investigation on the company cannot be ignored. The section is an in road on the powers of the company to carry on its trade or business and, thereby an infraction of the fundamental right guaranteed to its shareholders under Article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of general public".
33. In the present case we are convinced that the circumstances narrated by the petitioner do not indicate even on a prima facie basis as instances of fraud, oppression, misfeasance or misconduct on the part of the management of the company. The instances relate to a single transaction which is within the governmental policy rules and regulations and procedures established. There has also been absolute transparency of the whole transaction and as such there is nothing further to ascertain in respect of the matter. There has also been perfect communication between the petitioner shareholder and the company and all relevant information has been provided even though the company is strictly not obliged to provide it. As such, the circumstances not existing to form an opinion with regard to investigation, we cannot declare that the affairs of the company ought to be investigated.
34. While disposing of this matter we would like to record our recognition of a very relevant issue raised by the petitioner with regard to the pricing of issues while implementing the policy of the Government permitting foreign equity participation up to 51 per cent.
for diversification and expansion. It has been, however, subsequently realised by the concerned authorities that while implementing this policy an unfair and unintended benefit could be reaped by an unfettered pricing of the issue. As such the pricing of similar issues to foreign equity shareholders have come to be regulated by relating the issue price to the market price. The petitioner has done well to highlight this anomaly in implementing the policy, as well as a number of technical lapses which is an indication of the emerging investor consciousness in the corporate sector, and the need for more vigilance in legal compliances by companies.