1. Mrs. Padma Taparia, w/o. Nand Kishore Taparia of Calcutta, has filed this petition on December 8, 1993, under Sections 247 and 250 of the Companies Act, 1956 (hereinafter called "the Act"). The petition relates to the affairs of Assam Brook Ltd., Calcutta (hereinafter called "the company"), in which the petitioner is a shareholder holding 200 equity shares of Rs. 10 each in the issued capital of 19,27,207 equity shares. The prayers in the petition are as follows ; (a) An order for investigation under Section 247 to find out the relevant facts about the shares recorded in the names of respondents Nos., 1 to 17.
(b) An order under Section 250(2) of the Act to restrain the transfer of the shares of the respondents and exercising voting rights in respect of such shares and for further restraint on issue of rights shares to these respondents.
(c) An order under Section 250(3) of the Act restraining exercising of voting rights for a period of three years and further declaring as void any transfer of shares by the respondents.
2. The petitioner has further prayed for interim orders for restraining the company from issuing the rights equity shares to respondents Nos. 1 to 17. The petitioner has also prayed for interim orders under Section 250(2) of the Companies Act, 1956.
The company issued a notice for an extraordinary general meeting on January 6,1992, for increasing the authorised capital from Rs. 2.8 crores to Rs. 8.5 crores and for considering and approving the rights offer of convertible/non-convertible debentures of Rs. 15 crores. The company had decided to raise funds for the purpose of long-term working capital, development of the estates and meeting the purchase consideration of four tea estates in Kerala acquired by the company. A series of litigations and actions by and on behalf of various respondents herein ensued thereafter : (a) The first was a suit by respondent No. 6 in the Calcutta High Court with regard to the notice of the meeting and an injunction was obtained/This order was later vacated at the instance of the company and respondent No. 6 preferred an appeal against the vacation of the order.
(b) Respondents Nos. 8, 14, 15, 16 and 17 obtained interim orders from the Company Law Board, Eastern Bench, for rectification of the share register of the company on the plea that they are transferees of certain shares but the interim orders when contested were vacated. The extraordinary general meeting was held as per schedule on January 6, 1992, and resolution passed with overwhelming majority.
(c) Consequent to the abolition of the office of the Controller of Capital Issues, in June, 1992, the company issued another notice of an extraordinary general meeting for considering the rights offer.
Such extraordinary general meeting became necessary as the approval of the Securities and Exchange Board of India (SEBI) was required for the issue and a fresh mandate was sought from the members of the company. Before the extraordinary general meeting, respondent No. 6 again obtained an order from the Division Bench of the Calcutta High Court restraining the implementation of the resolutions if passed.
Subsequently, the appeal of respondent No. 6 before the Division Bench was dismissed by that Bench.
(d) Two days before the extraordinary general meeting, respondent No. 19 unsuccessfully attempted to restrain the extraordinary general meeting through the Company Law Board, Principal Bench, New Delhi, in certain other proceedings. Just a day before the extraordinary general meeting, respondent No. 19 obtained an ex parte order from the Calcutta High Court stating that no effect should be given to the resolutions, if passed. Subsequently, however, the order was vacated by the Calcutta High Court.
(e) Around the same time respondent No. 15 instituted a suit in the court of the district judge at Alipur and unsuccessfully attempted to restrain the extraordinary general meeting but the refusal order was Upheld by the High Court.
(f) Around the same time respondent No, 9 instituted a suit before the Calcutta High Court for asserting its voting rights in the impending extraordinary general meeting in respect, of 1 lakh equity shares but was unsuccessful in restraining the extraordinary general meeting.
(g) A series of litigations followed after the issue of letter of offer and composite application form in respect of convertible debentures. Respondent No. 1 instituted a suit in the Calcutta High Court and though no substantial interim order was passed, the court did order that in the event of any renouncee applying for allotment the board shall not exercise discretion to reject such renunciation.
Further, respondent No. 1 preferred an appeal against the above said order before the Division Bench and obtained an order on December 21,1992, for appointment of joint special officers to collect the money in relation to the tights issue. An adverse publicity was also caused by respondent No. 1 and dealings in the stock exchange were also affected consequently. The company, however, obtained an order of stay from the Supreme Court through a special leave petition against the appointment of joint receivers.
(h) Oh December 29, 1992, respondent No. 1 again obtained an ex parte interim order from the Division Bench of the Calcutta High Court restraining the company from giving any effect to the extension of the Closure date of the letter of Offer. Respondent No. 1 also communicated the order to the company's bankers to the prejudice of the company without communicating the order to the company.
(i) On December 31, one Ashok Kumar Singh claiming himself to be a public interest litigant obtained an ex parte order in a writ petition restraining the Unit Trust of India, Life Insurance, Corporation of India and the National Insurance Company from making any investment in the company's FCDs.
(j) Thereafter, the company filed three special leave petitions before the Supreme Court against the orders dated December 21, 29 and 31 of the Calcutta High Court as referred to above. The Supreme Court set aside all the three orders.
(k) After necessary compliances the cornpany duly extended the closure date of the rights issue up to February 8, 1993. However, on February 3, 1993, respondents Nos. 1 and 20 again obtained an ex parte interim order in a writ petition from the Calcutta High Court stating that no final invitation or allotment be issued by the company without the leave of the court. On February 8, this order was varied granting liberty to the company to make allotment in terms of the order dated December i6, 1992, of the Calcutta High Court.
4. It is the contention of the petitioner that all the aforesaid legal proceedings were engineered by respondent No, 18 to destablise the management of the company and take over the same. All the legal proceedings were coincidentally initiated through the same group of lawyers. It is the contention of the petitioner that the respondents who initiated legal proceedings are inter-connected and the petition also sets out the nature of the inter-connection through annexure "B" where the details are sat out.
5. It is further stated by the petitioners that certain acquisitions have already taken place and such transfer is likely to bring about a change in the composition of the board and such a change would be prejudicial to the public interest. It is also stated that before the transfers the public was holding 44.47 per cent, of the shares and subsequent to the transfers the public holding stood reduced to 31.10 per cent, and respondent No. 18 and other respondents are now controlling about 13.37 per cent The change in the board of directory as a result of transfer is likely and such a change would be prejudicial to public interest. The inter-connection between the various respondents, it is averred, is also evident from the proceedings of the general meetings of the company in which same of the respondents have been representing one another and voted against each and every resolution. It is further alleged, that respondent No. 10 misrepresented and induced the company to register one lakh shares in its name as if they were holding the shares as a security for a credit facility obtained by an existing shareholder. On the other hand, the 'fact is that the shares were acquired by another company of respondent No. 18 but the same was concealed. According to the petition, the facts clearly suggest that the shares are held by benamis without making proper declaration under Section 187C of the Act and hence it is, a fit case for investigation by the Central Government under Section 1870. It is also clear from the legal proceedings that the respondents were acting in concert to, destablise the management of the company and the intention appears to be to prevent the company from raising funds for acquiring four tea estates in Kerala and for expansion of business activities of the coppany. The above concerted activities of the respondents are prejudicial to the company and it had to spend some considerable sum of money on legal proceedings and it has also resulted in colossal amount of interest liability due to non-availability of funds on time. The development and expansion programme of the company were also delayed and thwarted. It is also contended that the acquisition of shares by some of the respondents has been made out of loans from nationalised banks advanced for other purposes. Funds obtained for business purposes from the banking sector have been mis-utilised for cornering the shares of the company which is against public interest.
6. In conclusion the petitioner has stated that there are good reasons to find out the facts about the shares held by the respondents and that such facts cannot be found put unless the restrictions under Section 250(2) of the Act are imposed. It is further stated that a calculated and deliberate attempt to acquire and corner the shares for a take over of the management has been made by the respondents by acting in concert. As such it is a fit case where investigation must be directed by the Company Law Board.
7. Replies were filed mainly by respondent No. 21 (the company), respondent No. 10 (Hongkong Bank Agency (P,) Ltd.), respondent No. 11 (Hongkong and Shanghai Banking Corporation Limited) which provided financial accommodation to respondent No. 9 on the security of one lakh share's and which is alleged to have misrepresented and got registered these shares in its name and respondent No. 9 (Sonawala Exports Limited) which claims title in respect of one lakh shares. The company in its reply has confirmed the facts as contained in the petition. It has also favoured the Company Law Board passing such orders as it may deem fit and proper to protect and safeguard the rights and interests of the company.
8. The reply of respondent No. 10 states that the Company Law Board has no jurisdiction to entertain the petition, It is also stated that there is no cause of action against respondent No. 10 and the petition is devoid of material particulars, vague and misleading. It is further stated that the condition precedent for invoking the provisions of Section 250(1), (3), (4) and for grant of relief under Section 250(2) have not been satisfied. The petitioner is a holder of 200 equity shares and does not appear to be involved in any manner with the management and administration of the company. As regards the one lakh shares, since it is the subject-matter of a suit in which respondent No, 9 is claiming title, the Company Law Board should not entertain the present petition in connection with the said one lakh shares. As regards the allegations against respondent No, 10 that it is acting in collusion or conspiracy with respondent No. 18, the same is denied. All general allegations applied to the whole list of the respondents cannot be applied in the case pf respondent No. 10 and the same has to be rejected. The respondents have also brought out the facts with regard to the pledge of the shares by respondent No. 9 and a financial accommodation provided by Hongkong Bank against which the shares were pledged. It is also stated that on liquidation of the liabilities by respondent No. 9, the shares were returned to them but the company had sought to delete the name of respondent No. 10 from its register of members on false and frivolous allegations. It is contended that respondent No. 10 has always acted bona fide in the matter and the action of the company in deleting the name of respondent No. 10 was wholly unwarranted, A similar reply has been filed by respondent No.9. The substantial reply on maintainability and merits has been filed by respondent No. 9 which was claiming ownership of one lakh shares of the company. The preliminary objections raised by respondent No. 9 are as follows : (a) The provisions of Section 247 can be invoked by the Central Government and not by the Company Law Board.
(b) The jurisdiction under Section 250(1) can be exercised by the Company Law Board only if there is a reference by the Central Government in connection with any investigation under Section 247 or 248 or 249 of the Act or on a complaint made by any person in this behalf. Since there is no reference there cannot be a complaint for which a reference is a pre-condition.
(c) Section 250(2) can be invoked only after invoking the provisions of Section 250(1) as it cannot be an independent provision.
(d) The conditions precedent to be specified for invoking the provisions of Sections 250(1) and 250(2) have not been satisfied as no particulars or details have been furnished in the petition as to what are the relevant facts required to be found out.
(e) The conditions precedent for invoking the provisions of Section s 250(3) and 250(4) are also not specified. There are no particulars of shares in respect whereof transfer is likely to take place and by reason of such" likely transfer there is likelihood of change in the composition of the board of directors.
(f) Respondent No. 9 presently holds 900 shares in the company and is entitled to registration of further one lakh shares and the total of these shares is still less than even 5 per cent, and as such the petition under Section 250(3) or (4) is totally misconceived.
(g) The petition is a gross abuse of the process of law as it clearly shows that it has been filed at the instance of the company.
This is evident from the full particulars of litigations involving the company as disclosed in the petition while the petitioner is not a party to such litigation. As such the petitioner is not a bona fide litigant. There are no competent proceedings before the Company Law Board and in such circumstances the provisions of Section 247(1A) cannot be invoked.
(j) The petition has been filed with a collateral purpose to frustrate and/or delay the registration of one lakh shares in favour of respondent No. 9.
(k) Respondent No. 9 sought adjudication on the preliminary objections first. It is also stated that the name of respondent No. 10 was wrongfully deleted by the company in respect of one lakh shares. It has also refrained from any comments with regard to allegations against other respondents. It is also stated that the company wrongfully did not issue any letter of offer for rights convertible debentures in favour of respondent No. 9 thereby denying legitimate right to get the convertible debentures. The reply further states that respondent No. 18 is in no way concerned with respondent No. 9 and it is denied that respondent No. 9 is a nominee or stooge or henchman of respondent No. 18 or has colluded or conspired with him. On the other hand, it is the contention of respondent No. 9 that respondent No. 18 and Shri S. Rampuria, managing director of the company, are brothers-in-law and they have jointly set up the petitioner to find an excuse to stall the registration of one lakh shares. It is stated that both Rampurias and Sethias are hiding behind the scene to wrongfully usurp the one lakh shares purchased by respondent No. 9 with a novel scheme of delaying registration. The suggestion of collusion since the same advocates are common is stated as wholly irrelevant. The inter-connections of respondent No. 9 with some of the respondents has been denied and disposed 6f as irrelevant and immaterial. The apprehension of a likely change in the board of directors is devoid of material particulars, vague and misleading. As regards the prejudice to the public interest consequent to reduction in the spread of holding it is stated that respondent No. 9 is also a part of the public and its investment cannot be treated as shares acquired by respondent No. 18. The instances of proxy or authority having been given to represent certain persons is immaterial. The respondent has also denied/that due to legal proceedings initiated by it, the company was seriously prejudiced. The allegation of planting of false and frivolous news has also been denied. The reply also denies that shares were acquired out of loans or advances from various banks or that the acquisition is prejudicial to the public interest. The allegation of benami has also been denied. As such there is no justification for any investigation in the matter.
10. On January 6, 1995, we heard the parties on the interim orders as prayed for in the petition after due notice to all concerned. After hearing we passed an interim order dated January 27, 1995, restraining respondents Nos. 1 to 17 from transferring any shares covered in the petition and also the company from registering any transfers of those shares if lodged till the final disposal of the petition. Liberty was also given to all the parties to approach us in case of any need. In addition to certain routine interim applications, two substantial applications, namely, C. A. Nos. 79 and 178 of 1995 by the company and by respondent No. 9 respectively were filed. The first application was for impleading Vasundhara Holdings Limited, having its office, 8 Camac Street, Calcutta, praying that it should also be similarly restrained as that party has acquired 15,000 shares in the company which constituted a part of the holdings of respondent No. 14, namely, Montane Constructions (P.) Ltd., Calcutta. Since the entire holding of Montane Construction (P.) Ltd. is restrained from transfer, according to the company a similar order is required to be passed against Vasundhara Holdings Limited also. The next application from respondent No. 9 was for vacation of our interim order dated January 27, 1995, staying further transfer of shares. It is stated that since the Eastern Bench of the Company Law Board has ordered registration of one lakh shares lodged by respondent No. 9, the interim order should be vacated to this extent. We decided to hear the parties on both the above applications along with the main petition. Accordingly, the final hearing was held on September 20, 1995.
11. Dr. A. M. Singhvi, senior advocate appearing on behalf of the company, explained the background of various litigations during the past two years and stated that it is the same set of persons who have been working in concert. He also stated that the rights issue of the company offered to the respondents has been renounced to the extent of about two lakh shares to the other respondents. He further submitted that the inspection report under Section 209A of the Act carried out as per orders of the Regional Director may also be taken into account by the Company Law Board in arriving at a conclusion. He strongly supported the petitioner's case for an investigation into the ownership of the shares.
12. Shri Sudipto Sarkar, senior advocate, appearing on behalf of respondent No. 9, made the following three preliminary observations, namely : (i) no relief can be granted under Section 247 of the Act by the Company Law Board as the provisions contained therein can be invoked only by the Central Government and the powers are vested solely and wholly in the Central Government, (ii) Admittedly, no case has been made out under Section 250(3) and (4) of the Act. On their own showing in the petition, the subject shares are much less than. 25 per cent, of the paid-up capital of the company. Respondent No. 9 whom he is representing owns less than 5 per cent. The management of the company has not experienced any difficulty in passing resolutions in general meetings as per admissions in the petition itself. According to the petition, the subject shares constitute only 13.37 per cent, of the paid-up capital (para VI, cc page 22)-The annexures to the petition also show that the respondents have not acted in concert. Further, according to the petition, the management itself holds more than 35 per cent besides the substantial holding by financial institutions (page 55 of the petition). In such circumstances, following the decision of the Company Law Board in Molins of India's case (C. P. No. 13/14/25 of 1990), the petition is liable to be dismissed, (iii) No order can be passed by the Company Law Board under Section 247(1A) of the Act when no case is made out under Section 250(3) and (4) of the Act as decided by the Company Law Board in Alaknanda Manufacturing and Finance (P.) Ltd. v. Bahubali Services Limited [1993] 3 Comp LJ 423 ; [1996] 86 Comp Cas 291 (CLB). Elaborating further he said that the power conferred under Section 250(1) can be exercised only if either a reference is made by the Central Government or a complaint made by any person in this behalf. According to him, the words "in this behalf" used in Section 250(1) mean, there should be already a reference from the Central Government under Sections 247 to 249 in connection with relief under Sections 248 and 249. Since there is no reference and there is no complaint in connection with any such reference, the condition precedent for invoking Section 250(1) is wholly absent. He further stated that the provisions under Section 250(2) of the Act are in aid of and ancillary to Section 250(1) of the Act. So long as a substantive case under Section 250(1) has not been made out, the ancillary provisions cannot be invoked. He further stated that the petition has been filed with collateral object and improper motive. The complete particulars of litigations involving the company as contained in the records of the company could not have been provided without the active involvement of the company. The petitioner is, therefore, not a bona fide litigant whereas the company is the actual litigant. This is also evident from the delay on the part of the company to register one lakh shares belonging to respondent No. 9 already directed to be registered as per orders of the Eastern Bench of the Company Law Board. The company is further litigating even on the order under Section 634A passed by the Eastern Bench. Therefore, he sought for dismissal of the petition.
13. Arguments were advanced on behalf of the petitioner by Shri Harish Salve, senior advocate. He stated that the provisions of Section 247/250 of the Act have to be interpreted in the backdrop of three important factors, namely : (a) these are enabling provisions conferring inquisitorial powers on the Company Law Board to act in public interest and should, therefore, not be construed narrowly and pedantically ; (b) the provisions have undergone amendments and hence they cannot to be understood as being limited to their original context ; and (c) the overall endeavour of the Legislature is to confer powers of enquiry on the Company Law Board to pass orders to protect the status quo in the course of enquiry.
14. According to Shri Salve, the petition has to be understood as relevant not only while dealing with a reference made by the Central Government under Section 247 but also independently as a complaint made by any person in this behalf. In other words, an independent inquiry power has been conferred on the Company Law Board on relevant facts being brought to its notice by a complainant. The Company Law Board has to form its own opinion that there is good reason to find out the relevant facts and if it is so convinced then restrictions under Section 250(2) are called for. In other words, Section 250(1) is comprehensive enough and confers the requisite powers on the Company Law Board.
15. Shri Salve also attempted to link a complaint under Section 250(1) with the power under Section 247(1A) to order an investigation.
According to him, on a complaint under Section 250(1) and on the Company Law Board being satisfied that there is good reason to find out the relevant facts about any shares an independent proceeding can be initiated. Thereupon, not only can the Company Law Board impose restrictions under Section 250(2) but it can also declare that the affairs of the company ought to be investigated. Since the words "in the course of any proceedings before it" occur under Section 247(1A) such expression should not be read restrictively to exclude the consideration of a complaint under Section 250(1). The legislative intent appears to be to create a quasi-judicial forum which could hear complaints which might alert them against covert changes in beneficial interest and to equip such authority with inquisitorial powers so that public interest is not put into jeopardy. These powers are like police powers, meant to unearth covert acquisitions of shares.
16. In addition he stated that the petitioner has also expressed the apprehension of prejudicial take over under Section 250(3) and (4).
According to him, the facts have to be found out when there is likelihood of change in management, particularly when there is, emphasis on absolute transparency these days. If the Company Law Board is satisfied prima facie that there appears to be a concerted effort to acquire a block qf shares which effort can be well correlated to various litigations launched against the company, then to find out the true facts as to who are the people interested, the restrictions have to be imposed.
17. Distinguishing the present case from two other cases decided by the Company Law Board, namely, Alaknanda Manufacturing and Finance (P.) Ltd. v. Bahubali Services Limited [1993] 5 CLJ 423 ; [1996] 86 Comp Cas 291 (CLB) and Molins of India Engineering Ltd. v. Foster Consultants and Investments (P.) Ltd. (C. P. No. 13/14/25 of 1990), Shfi Salve stated that in the first case since the transfer of shares took place with the approval of the Company Law Board, intervention by recourse to the provisions of Section 250(3) and (4) was not warranted. In the second case, the Company Law Board held that the transfer had already taken place and the alleged predator had kept the shares in suspense for nearly, 11/2 years before the lodgment but the delay in lodgment does not necessarily vitiate the transfer already made. Hence, the situation was different in those two cases. In the present case, according to Shri Salve, the respondents and some other shareholders have been opposing various resolutions in the past. The respondents have also started sustained multifarious litigations which is clearly beyond the means of individual shareholders and one of the litigations went right up to the Supreme Court. The petitioner has also been able to show the inter-connections between various respondents. This clearly indicates mala fide intentions of the respondents and that they are acting in concert. On these facts, the Company Law Board can pass orders under Section 250(2), (5) and (4) and also an enquiry under Section 247(1A) may be ordered finally. He also cited the decision of the Company Law Board in Gammon India's case [1992] 74 Comp Cas 123 that transfer of shares which had taken place by acquisition with indirect financing by banks is against public interest. The present case also reflects an identical situation. He, therefore, prayed for passing an order under Section 250(2) in the first instance and, thereafter suitable orders may be passed under Section 250(3) and (4) as well for investigation.
18. We have carefully gone through the pleadings and heard learned counsel. The issues to be examined in this case are (a) whether the petition could be entertained independently under Section 250(1)(b), whether a case has been made out by the petitioners under Section 250(3) or 250(4) and (c) whether the petitioner is entitled to any relief.
19. As regards the first issue, though the petition at the threshold apparently did not contemplate as if it is a complaint as referred to in Section 250(1) of the Act, Shri Salve, senior advocate, persuasively argued that it is an inquisitorial jurisdiction conferred upon the Company Law Board to find out the relevant facts about certain shares as and when a complaint is lodged. His argument was that a member of a company who is interested in the affairs of the company can seek the assistance of the Company Law Board through a complaint to ascertain relevant facts about the shares of his company. On the other hand, Shri Sarkar, senior advocate, pointed out that a complaint should be in relation to an investigation under Sections 247, 248 or 249 for which a reference is made by the Central Government to the Company Law Board.
We have to consider passing orders under Section 250(2) imposing restrictions only if the substantive matter in the petition falls within our jurisdiction, i.e., under Section 250(1).
20. In order to establish whether the matter falls under Section 250(1), Shri Salve has strenuously attempted to convince us that a complaint can stand independently under Section 250(1). The sub-section, as it stood prior to the 1988 amendment, had given the power to impose restrictions on voting rights, etc., on the basis of an open ground. The Sub-section prior to the amendment stood as follows : "Where it appears to the Central Government whether in connection with any investigation under Sections 247, 248 or 249 or otherwise that there is good reason to find out the relevant facts about any shares . . ." "Where it appears to the Company Law Board, whether on a reference made to it by the Central Government in connection with any investigation under Sections 247, 248 or 249 or on a complaint made by any person in this behalf that there is good reason to find out the relevant facts about any shares (whether issued or to be issued) and the Company Law Board is of the opinion that such facts cannot be found out unless the restrictions specified in Sub-section (2) are imposed, the Company Law Board may, by order, direct that the shares shall be subject to the restrictions imposed by Sub-section (2) for such period not exceeding three years as may be specified in the order".
22. Going through the history of this Section , it is found that the powers of the Central Government were widened by the amendment in 1960 with the use of the words "or otherwise" which means that the Central Government had a very wide field to impose restrictions so long as it appears to that Government that there is good reason to find out the relevant facts about any shares. This amendment in 1960 was based on the specific recommendations of the joint committee.
23. The notes on clauses with regard to the amendment in 1988 make it explicit that the object of the amendment was to transfer the present power to impose restrictions from the Central Government to the Company Law Board. While doing so as per the notes there does not appear to be any intention to abridge that power. However, the substitution of the words "or otherwise" by the words "or on a complaint made by any person in this behalf" have to be interpreted in the context, in which these words are used. As Shri Salve has suggested the legislative intent appears to be to transfer the power to impose restrictions from the Central Government to the Company Law Board. However, the substitution of the words "or otherwise" is not supportedby any notes on clauses.
All the same the new words "or on a complaint made by any person in this behalf" has to be read as an abridgement of the power to confine it only on a complaint by any person. The words inserted have to be interpreted in the context in which the amendment was made. The words in this behalf cannot be read to mean in connection with a reference under the Central Government, but has to be read with the legislative intent.
24. If the interpretation is attempted without this background it may appear as if the complaint should be in connection with the reference by the Central Government. This will, however, convey no meaning since there should be no cause for complaint when the Central Government itself has made a reference to the Company Law Board under sections 247/248 and 249. As such the complaint contemplated obviously has to be with reference to "situations" in which a reference could be made by the Central Government as well. In our view, this is the most appropriate interpretation of the amendment in 1988. According to Shri Salve, the Legislature has conferred on the Company Law Board inquisitorial jurisdiction to prevent such situation as contemplated in Sections 247 to 249. We are in full agreement with this interpretation.
In that case, the Company Law Board could exercise the powers under Section 247(1A) which is again a specific power conferred to make a declaration that the affairs of the company ought to be investigated as regards the members of the company. Thus, as regards the first question we are of the opinion that an independent complaint under Section 250(1) is entertainable. This also answers the question of jurisdiction raised by respondents Nos. 10 and 11.
25. Having already accepted that a complaint can be filed under Section 250(1) independently, we have to see whether the conditions as per clause (a) or (b) of Section 247(1A) are satisfied.
26. As regards the second issue, the threshold questions in respect of Section 250(3) and (4) are : whether there has been transfer of shares or whether there is a likely transfer of shares. Once this is established it is necessary to examine whether as a consequence there is a likely change in the management of the company. In the present case, all the impugned shares have been already transferred meaning thereby ownership has already passed and, thereafter, annual general meetings were also held.Alaknanda Manufacturing and Finance (P.) Lid. v. Bahubali Services Ltd. [1993] 3 Comp LJ 423; [1996] 86 Comp Cas 291 (CLB). What really distinguishes the present case from the other case is that here the company is actively supporting the petition whereas in that case the company was vehemently opposing it. In the present case also, the petition has not set out any details relating to the likely further transfers. All the same we have proceeded to examine whether there is a likely change in the management of the company since this ground is common under Section 250(3) and (4) of the Act.
28. To answer this question of likely change in the management it is necessary for us to apply certain crucial tests as we did in some other earlier cases, namely: (i) the inter-connection, if any, between these parties, (ii) the percentage of shareholding of the parties complained against, (iii) the apparent intentions as may be evident from their conduct, and (iv) the voting pattern in the immediately preceding general body meetings.
29. The petition proceeds to establish inter-connections as if respondent No. 18, namely, Shri Ranjit Singh Sethia, is the hand behind the entire group of the respondents though he does not hold any shares himself. Through annexure "B" to the petition certain links between some of the respondents we're sought to be established. Even hereby respondents Nos. 3, 4, 5, 7 and 17 are admittedly not connected with any of the respondents or with respondent No. 18. Respondents Nos. 10 and 1.1, namely, Hongkong Bank Agency (P.) Ltd. are not connected with any of the respondents, they being independent foreign companies operating in India and they do not hold any shares now. The inter-connections between 1, 2, 13 and 15 are only to this, extent that they are members of a forum known as "Assam Brook Minority Shareholders Protection Committee" or were present in the previous annual general meeting, on a common cause. It is also necessary to record here that these parties between themselves hold just about 6,000 shares constituting roughly 0.3 per cent, of the capital of the company. As such, no relationship or connections have been established in respect of the above respondents.
30. As regards others, namely, respondents Nos. 6, 8, 9, 12, 14, 16 and 19, the only relationship which could be significantly noticed is that respondent No. 12 is stated to be related to the daughter-in-law of respondent No. 18. On this exclusive ground alone no prima facie opinion could be formed. Even this relationship between respondents Nos. 12 and 18 is not recognised as "relationship" within the meaning of Section 6 of the Act. If this relationship is to be considered then the counter-allegation of respondent No. 9 that respondent No. 18 is the brother-in-law of Shri R. S. Rampuria, managing director of the company, and that both of them are acting together to stall the registration of one lakh shares in the name of respondent No. 9 also carries weight. Though we are not considering any petition of respondent No. 9 as such, this relationship is of course a closer one than the one alleged by the petitioners. Apart from this there is no other direct relationship established between the various individual respondents and as such the inter-connections based on relationship does not create any impact to warrant a prima facie opinion towards takeover of management.
31. As regards the corporate holdings, namely, that of respondents Nos.
6, 9 and 14, the links sought to be established is through respondent No. 12, who, as already stated, is indirectly linked to respondent No.18. In other words, no other convincing inter-connection between the respondents is established through the corporate holdings. It is also not argued that the corporate bodies are under the same management.
This extent of corporate holdings is not unusual in a listed company of this size.
32. As regards the percentage holding of the respondents including the shares to be registered, admittedly they constitute nearly 13 per cent.
As against this, the management holding is about 35 per cent, with substantial holding by financial institutions. Though there is an allegation of reduction in public holding, what constitutes public is a moot question. Given the shareholding pattern as it is, per se a threat to the management cannot be perceived. Even the corporate holdings put together constitute only about 10.2 per cent.
33. The percentage shareholdings referred to so far have been reckoned on the basis of the paid-up capital of the company consisting of 19,27,207 equity shares. However, according to the reply filed by the company, the paid-up capital has gone up to 43,37,877 shares subsequently. This is as a consequence of the rights shares subsequently allotted. As per a statement filed by the company along with its reply, out of a total of 42,183 fully convertible debentures offered to the 17 respondents only 525 debentures were subscribed by them and 17,400 debentures were renounced and the rest of the debentures, namely, 24,258, have neither been subscribed by them nor renounced by them. In other words, these debentures have gone unsubscribed. It is a matter of common knowledge that if all the rights are subscribed then only the respondents would be able to maintain their percentage. With the lapse of 24,258 right debentures their percentage holding would obviously go down substantially. At the rate of four shares per debenture, 97,032 shares were left unsubscribed by the respondents. Consequent to the subscription to a part of the rights by the respondents their percentage with reference to the new paid-up capital would work out to only about 6 per cent. If the objective of the respondents is to take over the management, these shares would not have been voluntarily given up by them.
34. Despite the lack of conviction with regard to the inter-relationship and the percentage holdings by the respondents' holdings, we have still examined whether the parties have acted in concert to acquire the management of the company. It may be true that there had been some consistent opposition to the proposals of the management primarily with regard to the issue of convertible debentures to the extent of Rs. 15 crores. The intention behind this objection, however, cannot be attributed to a motive for taking over the management. This could not be established even prima facie which is the requirement of Section 250(3) and (4). Though all the management resolutions were opposed by these persons, litigations and representations to financial institutions all relate exclusively to the issue of convertible debentures only. There has also not been any candidature for directorship. It appears that the management is irked by the consistent opposition to the debenture issue and probably suspicion was aroused. Mere opposition at the general body meetings to proposals of the management regarding certain matters cannot per se be considered as an attempt to take over the total management. There could be various reasons for stalling resolutions of general body meetings including even at the worst one prompted by competitors to prevent expansion of the company's activities. If we go by mere opposition to the management resolutions as prima facie indication of threat to the management, every listed company's shareholding may need to be investigated. Countering the management proposals is healthy democratic practice in corporate governance so long as it is not misplaced and such practice should be encouraged. However, misuse of such rights and cornering of shares in a clandestine manner to unseat the management of a company stand on a different footing. Shareholders' consciousness of their rights is on the increase with the development of the equity cult. There is possibility of misuse of such rights conferred. However, righteous use and misuse have to be clearly distinguished by any forum which examines the issues involved.
35. We have also examined the voting pattern in the previous general body meetings of the company. Admittedly, all the resolutions in the general body meetings were carried with overwhelming majority. The voting pattern is a field test of the relative strength of the two groups and overwhelming majority indicates the confidence of the shareholders in the management of the company.
36. In view of the above, it is very difficult for us to concede even prima facie that there is an attempt to dislodge the management.
Accordingly, as regards the second issue we conclude that no case has been made out under Section 250(3) or (4) of the Act needing our intervention. Consequently, no order for freezing voting rights on this count could be passed.
37. Having accepted that the petition lies under Section 250(1) but not under Section 250(3) and (4) we have now to see whether relief could be considered under Section 250(2). For this purpose, we have to see whether any good reason including under Section 247(1A) or (b) exists for freezing voting rights and ordering investigation. In this connection, as suggested by Dr. A. M. Singhvi, senior advocate, on behalf of the company, we have the benefit of the inspection reports made available to us by the Regional Director (Eastern Region). The limited inspection to ascertain the facts about allegations made in the complaint was confined to seven companies which include respondents Nos. 4, 6, 8, 9 and 14. From a perusal of these inspection reports, it is evident that all these shares were held by the respective respondent companies in their own name and they had the necessary funds to make the investment. The source of the money for the investments has also been established. As such there is no room to come to a prima facie conclusion that there is any indication of a benami holding and as such there is no good reason for investigating into the membership of the company under Section 247(1A). The inspection report has dealt with this matter in detail and a further investigation will, in our opinion,' be a repetitive exercise.
38. Apart from the objective of the complaint which has been dealt with so far, with regard to the genuineness of the complaint the contentions of respondent No. 9 are very valid. The petitioner is the holder of just 200 shares and has not been entrusted with the affairs of the company in the past in any way. However, the petitioner has been able to set out a blow by blow account of the various litigations and other actions of the respondents and has also been able to set out the steps taken by the company to counter such actions. No satisfactory counter could be provided by the petitioner or the company. In fact, there was no rejoinder by the petitioner on record. On the other hand, the active support of the company to the petition indicates as if the whole petition has been instigated by the company. This apprehension of ours is based on the history of protests and litigations by shareholders and others during the past three years countenanced by the company. The prolonged litigation with regard to the transfer of one lakh shares belonging to respondent No. 9 and the active support rendered by the company to the petitioner in this proceeding. Of course, the petitioner and the company were represented by a separate counsel probably because such a ground of common counsel was taken by the petitioner herself against the respondents in respect of other litigations. We are, therefore, not convinced with the genuineness of the petition and to us it looks obvious that the company itself has filed the petition by taking the position of a respondent. Even if the petition has been filed by the company in the background of the present case, it would not have been considered by us for reliefs as, in our opinion, a listed company, keeping in view the present day norms of absolute free transferability, cannot sustain such a litigation. Since the case relates to a listed company we have also taken into account the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994. These regulations provide for transparency relating to substantial acquisition of shares by "persons acting in concert" meaning thereby persons, who pursuant to an agreement or understanding, acquire or agree to acquire shares in a company for a common objective. Though dislodging the management has not been specifically spelt out in these regulations it can be easily inferred that the threshold limit for a challenge to the management is a holding of at least 30 per cent, because any acquisition of shares beyond 10 per cent, leads to compulsory acquisition up to 30 per cent.
Of course, for reckoning the percentage, acquisition by all persons acting in concert has to be taken into account. In the present case, even "acting in concert" has not been 'established. Further, the holding is much below even 10 per cent. Thus, clearly there is no good reason for our ordering an investigation. If further acquisitions do take place an alternative remedy is also available to the petitioner and the company.
39. In view of the above, we consider that the circumstances contemplated to declare investigation under Section 247(1A) are completely absent in this petition. Therefore, the petition is dismissed and consequently our order dated January 25, 1995, also stands vacated. No order as to costs.