I.M. Quddusi, A.C.J.
1. By means of this writ petition, the petitioner Tor Steel Research Foundation in India (in short, TRFI) which established Orissa Sponge Iron and Steel Limited (in short, OSIL) in collaboration with the Industrial Promotion and Investment Corporation of Orissa Limited (IPICOL) which is a wholly State-owned Government of Orissa Undertaking has sought the relief for restraining IPICOL-Opposite party No. 2 from illegal and fraudulent selling, transferring and handing over of their shareholdings in OSIL to any person, party or agency except in accordance with the Articles of Association of the Company.
2. Ordinarily this Court does not interfere with the selling or purchasing of shares but as the petitioner and opposite party No. 2 (IPICOL) are the founder shareholders of the OSIL by entering into an agreement between them for establishing the Company and consented for registration of Memorandum and Articles of Association of the Company OSIL which is binding on both parties, this Court entertained the instant writ petition.
3. The brief facts of the case are that with a view to establish a Sponge Iron and Steel unit in the State of Orissa, the Government of India had issued a letter of intent in favour of IPICOL for establishment of such unit. Upon receipt of the letter of intent, IPICOL negotiated with the petitioner which is a Trust owned and managed by Dr. P.K. Mohanty, a renowned Scientist in the field of Metallurgy and on 28.12.1977 an agreement was entered into between the petitioner and opposite party No. 2 for establishing the Company jointly for the production and marketing of sponge iron and steel billets. Clause 4 of the agreement provided that the petitioner would draft the Memorandum and Articles of Association of the Company which shall be approved by opposite party No. 2 before its registration. The said agreement, inter alia, provided in Clause 11 that the opposite party No. 2 shall have 26% shares and the petitioner shall have 25% shares. Under clauses 15 and 16(iii), a right was conferred in favour of IPICOL to nominate Chairman of the new Company so long as it holds 26% of paid up capital of income. Under Clause 20 of the said agreement, even the produce of the company, i.e., OSIL was required to be offered to each of the promoters in specific proportion before the same could be sold in the mar et. Under Clauses 23,24,25,26,27 and 28 of the agreement, it was dearly agreed that neither of the party shall be entitled to sell their shares in the open market unless the same are also offered to the other party prior to such sale. Clauses 22 to 30 of the agreement mandate the mechanism for the sale of the shares by either of the parties. Clause 22 and 23 are required to be perused which are quoted as under:
22. For a period of 7 years from the commencement of business of the new Company, neither the IPICOL nor the Torsteel Group shall sell or otherwise transfer the whole or any part of their equity shareholdings in the new Company without the prior consent in writing of the other party provided that this restriction shall not apply to sale or transfer made inter se the parties.
23. Any time after the expiry of the period referred to in Clause 22 both the IPICOL as well as the Torsteel Group shall be free to transfer or sell their respective equity shareholdings or any part thereof without the consent of the other party, subject however, to the conditions that the party so transferring or selling the shares shall first offer the same to the other party who will be entitled to accept the offer in whole or in part, in its own name and/or to nominate any other person or persons to accept the same within a time stipulated.
4. In accordance with the Memorandum of Agreement, OSIL was incorporated on 9.4.1979 as a joint venture of TRFI and IPICOL. The Memorandum and Articles of Association is enclosed as Annexure-P/3 to the writ petition. OSIL is the first 100,000 TPA commercial scale coal based sponge iron plant in India and one of the first few in the world. The plant went into commercial production in 1984 with process technology from Asllis Chalmers Corporation of U.S.A. using 80% coal and 20% oil. With increasing crude oil price, use of diesel oil became uneconomical. Further the process demanded high grade of coal, stock of which is depleting worldwide and did not accept Indian coal with high ash content. The process technology was later modified and developed to use 100% coal and patented by OSIL and is now known as OSIL process. It is now recognized as one of the leading coal based Sponge Iron technology in the world and has been adopted for use in projects funded by IDBI, World Bank (IFC) and the German Development Bank. It has its own power plant. OSIL is a Public Listed Company trading in Bombay Stock Exchange and National Stock Exchange. It is a matter of fact that IPICOL has always been a shareholder of OSIL to a substantial extent and presently owns 14,55,999 shares in OSIL. The Company has been managed well and remained as a profit earning unit till 2005. However, due to the link road between Keonjhar District and the Paradip Port being heavily congested due to transportation of iron ore fines for export purposes, OSIL started facing losses because the supply of the basic raw material to the company was stifled. In the year 2002, a mining lease was recommended in favour of OSIL and the central Government on 17.7.2002 approved the same under Section 5(1) of the Mines and Minerals Development and Regulation Act, 1957 (in short, MMDR Act). On 16.5.2007, environmental clearance was granted by the Ministry of Environment and Forest to the Company for its iron ore mine and steel plant. Under the said approval OSIL has to establish/increase its capacity to one million tons per annum of steel. For such expansion huge investments are required. The company was therefore looking at a strategic partner who could assist the company to reach the required capacity. The iron ore deposit which is approved in favour of OSIL is proven to contain 56 million tons of iron ore.. After the approval of said iron ore mines in favour of OSIL there has been an upsurge in its shares, which are traded on Bombay Stock Exchange and National Stock Exchange. It is the further case of the petitioner that apart from the iron ore mining lease, OSIL had also been granted a coal block wherein 16% of the said Block is allotted to OSIL and 47% to the Bhushan Steel Group. Petitioner's allegation is that seeing the opportunity to make huge profits, IPICOL in an illegal manner sold substantial percentage of the total Shares Capital in OSIL upto February, 2009, thus, reducing its own holding in the company. Though the petitioner made a grievance opposite party No. 2 did not pay any heed to the same. The petitioner thereupon approved the sale. However, opposite party No. 2 was required to comply with the Articles of Association of the Company which mandate that prior to the sale of any shares by IPICOL, the same would have to be offered to the petitioner, the co-promoter. Petitioner contends that this stipulation in the Article of Association of the Company is not only a protection for the petitioner but also a protection of public interest because otherwise IPICOL having a huge share in the company can suddenly tilt the balance in favour of a third party outsider resultantly affecting the managerial powers of the petitioners. Though the petitioners have always been ready and willing to purchase the shares, held by IPICOL and expressed their willingness by way of a letter dated 23.2.2009, the arbitrary action of IPICOL which is a Government concern in proposing to sell the shares in contravention of the Articles of Association of the Company is adversely affecting the legal rights of the petitioners which toiled hard for the company since long to manage and run the company. On 7.2.2009 an offer was made by a Company known as Bhushan Power and Steel Ltd. along with persons acting in concert for the purchase of the 52 lacs shares of OSIL @ Rs. 300/- per share according to the Securities Exchange Board of India Substantial Purchase of Shares and Takeover Regulations (hereinafter referred to as the Takeover Code.). It is the further case of the petitioner that it entered into an agreement with Mounteverest Trading and Investment Ltd. Along with persons acting in concert as a Strategic partner to help the company to enhance or increase the capacity of the company to at least one million tons of a steel per month which requires an infusion of at least Rs. 1500 crores. In order to achieve this strategic partnership, it was agreed by the petitioner and its associates to sell a part of the shareholding to M/s. Mounteverest Trading & Investment Ltd. This was executed with the due approval of opposite party No. 2 and approved by the Board of OSIL in which opposite party No. 2 is duly represented through its nominee Directors which includes the Chairman and Managing Director of opposite party No. 2 and the petitioner.. Since opposite party No. 2 had approved the petitioner's proposal of including M/s. Mounteverest Trading & Investment Ltd. into the management of OSIL along with opposite party No. 2, the application of the Articles of Association of OSIL to the extent that certain shares could be sold to the said company stood approved by opposite party No. 2, The said company thereupon filed a public offer with the SEBI to purchase 61 lacs shares constituting 20% of emerging voting capital from general public @ Rs. 310/- per share. Allegation of the petitioner is that on 27.2.2009 one company named Bhushan energy Ltd. and other persons acting in concert filed its public officer as contained in Annexure-P/8 with the SEBI for purchase of 61 lacs shares @ Rs. 325/ - from the general public. Case of the petitioner is that this group just like the Bhushan Power and Steel Ltd. Group is rank outsiders and are only interested in taking over the Company in a hostile manner. The further case of the petitioner is that opposite party No. 2 presently holds 14.55,999 number of equity shares of OSIL which is almost 7.25% of the total paid-up capital consisting of 2.00 crore shares of the Company. Petitioner apprehends that opposite party No. 2 may sell its shares to Bhushan Energy Ltd. or its associate concerns and the effect of such sale by opposite party No. 2 will be in clear breach of the terms of Articles of Association of OSIL. The net impact of such sale, according to the petitioner, would be that the petitioner who has been a joint venture partner since three decades with opposite party No. 2 would be displaced by the new party in a hostile manner. Contention of the petitioner is that in view of the authoritative pronouncement of the Hon'ble apex Court that Articles of Association are binding on the Company and its shareholders and that the shares being moveable property are regulated by the Articles of Association opposite party No. 2 which is a government concern must act rationally in the interest of the public and in accordance with law. It cannot be allowed to deal with its shares except in accordance with the Articles of Association. The petitioner is associated with OSIL along with the opposite party No. 2 since last 32 year and after grant of mining lease now when the actual time has come for the company to grow, opposite party No. 2 in order to make some profit is seeking to sell its shareholding in the company to private parties. Therefore, it may be restrained from doing so. Hence, this writ petition.
5. Shri S.K. Padhi, learned Senior Counsel appearing for the IPICOL-opposite party No. 2 has submitted that Section 13 of the Securities Contracts (Regulation) Act, 1956 (hereinafter called the Act, 1956) provides that any contract entered into between members of a recognized stock exchange or recognized stock exchanges in such State or States or area or through or with such member shall be illegal and this provision has been made applicable in the State of Orissa vide notification dated 5th June, 1989 by the Central Government. However, he concedes that the notification has been issued much after the date of registration of the Memorandum of Association of OSIL. However, in paragraph 23 of the counter affidavit filed on behalf of IPICOL it has been stated that the Board of Directors of IPICOL is yet to take any decision on the matter of selling shares of OSIL and any time the Board of IPICOL so decides, IPICOL would sell through the Bombay Stock Exchange (BSE) where the shares of OSIL is listed. If the petitioner is willing to buy back shareholding of IPICOL, it can do so for which IPICOL has no reservation. In this connection sub-para (ix) of paragraph 31 of the counter affidavit filed on behalf of the opposite party No. 2 is liable to be perused which is quoted as under:
(ix) Thus IPICOL has so far divested 17,92,964 number of shares of which 14,66,100 numbers (81.8% of total number sold by IPICOL) in favour of TRFI and balance 3,26,864 Nos. (18.2%) where sold in BSE which could also have been bought by TRFI if they were so interested.
The petitioner if at all interested in buying shares of OSIL held by IPICOL can easily do so through BSE. Petitioner in its letter dated 23.2.2009 had confirmed its willingness to purchase .IPICOL shareholding in OSIL at a price linked to the imminent public offer (which is market driven). Therefore, present contention of petitioner to restrain IPICOL from selling its share is ill conceived and the contention of the petitioner is misleading.
The above averments in the counter affidavit shows the intention of IPICOL that it will sell its share in OSIL in the Stock Exchange by passing the agreement arrived at between IPICOL and TRFI
6. Before proceeding further Section 13 of the Act, 1956 is liable to be perused which is reproduced hereunder:
13. Contracts in notified areas illegal in certain circumstances. If the Central Government is satisfied, having regard to the nature or the volume of transactions in securities in any State or States or area, that it is necessary so to do, it may, by notification in the Official Gazette, declare this section to apply to such State or area, and thereupon every contract in such State or States or area which is entered into after the date of the notification otherwise than between members of a recognized stock exchange or recognized stock exchanges in such State or States or area or through or with such member shall be illegal;
Provided that any contract entered into between members of two or more recognized stock exchanges in such State or States or area, shall:
(i) be subject to such terms and conditions as may be stipulated by the respective stock exchanges with prior approval of Securities and Exchange Board of India;
(ii) require prior permission from the respective stock exchanges if so stipulated by the stock exchanges with prior approval of Securities and Exchange Board of India.
The language used in the above quoted Section 13 is that the Central Government may by notification in the official gazette declare that section to apply to such State or area, and thereupon every contract in such State or States or area, which is entered into after the date of notification otherwise than between the members of a recognized stock exchange or recognized stock exchanges in such State or States or area or through or with such member shall be illegal. Therefore, from the language it is clear that the contract entered into after the date of notification issued under Section 13 otherwise than between members of a recognized stock exchange or recognized stock exchange in such State or States or area or through or with such member shall be illegal. Nothing has been said therein about the contract entered into between the parties prior to the date of notification. In the instant case the petitioner entered into the contract with IPICOL on 28.12.1977 by Memorandum of Agreement and, therefore, this section would not be applicable in their case, Further, IPICOL itself admits in its counter affidavit, as already mentioned above, that TRFI purchased 81.8% of total number of shares sold by IPICOL in 2007.
7. In the counter affidavit it has been stated that though in the year 1995 the petitioner was offered to buy back 16, 78,000 numbers of IPICOL shareholding in OSIL at a price worked out in accordance with clauses 22 to 27 of the Joint Sector Agreement which clauses were incorporated into Clause 39 of the Articles of Association of OSIL, the petitioner without honouring its commitment, forwarded a legal opinion that the contract for sale and purchase of shares entered into between the petitioner and IPICOL was violative of Section 13 of the Securities Contracts (Regulation) Act, 1956. In our view, the aforesaid opinion is not correct so far as it relates to OSIL. The Articles of Association of the company was entered into prior to enforcement of Section 13 within the area. Once the Articles of Association which is the charter of a Company is there all members of the Company are bound by the same and all authorities including the Registrar of Companies cannot be allowed to take a stand contrary to such Articles of Association.
8. Shri S.K. Padhi, learned Senior Counsel for the IPICOL has submitted that in the past the petitioner had sold its shareholding in OSIL in the open market violating Clause 39 of the Articles of Association. If it was done by the petitioner in the past, IPICOL should have challenged the same if it felt aggrieved by that and the same cannot be considered at this stage when the facts and circumstances of that transfer are not the subject matter of challenge in this writ petition. Further if a wrong has been committed once, it cannot be repeated again by any one on the ground that once such wrong has been committed.
9. Clause 39 of the Articles of Association of the Company reads as under:
39. Without prejudice to the powers conferred by Article 38 herein above, no registration of transfer of shares held by the IPICOL or the Torsteel Group shall be made by the Board unless the Board is satisfied that the transfer is in accordance with the following terms and conditions:
(a) For a period of 7 (seven) years from the commencement of business of the Company, neither the IPICOL or the Torsteel Group shall transfer the whole or any part of their equity shareholdings in the Company without the prior consent, in writing of the other party provided that this restriction shall not apply to transfer made inter se the parties.
(b) At any time after the period of 7 (seven) years from the commencement of business of the Company, both the IPICOL as well as the Torsteel Group shall be free to transfer their respective equity shareholdings or any part thereof without the consent of the other party, subject, however, to the condition that the party so transferring its shares shall first offer the same to the other party who will be entitled to accept the offer in whole or in part in its own name and/or to nominate any other person or persons to accept the same within the stipulated period.
(c) If in pursuance of the foregoing sub-clauses (a) and (b) the IPICOL and the Torsteel Group transfer any shares inter se the price to be paid by the transferee for the shares transferred shall, unless mutually agreed upon between the IPICOL and the Torsteel Group, be determined by working out an average of:
(i) The assessed value of the said shares determined by the auditors of the Company or any other mutually agreed upon firm of Chartered Accountants (who for this purpose shall act as experts and not as arbitrators) on the basis of net worth of the Company as on the date of the offer, and
(ii) The mean price of the shares ruling on the Stock Exchanges of Calcutta and Bombay (if the shares are quoted therein) for the three months preceding the date of offer.
(d) If, however, the party, receiving the offer of sale, either refuses the said offer or does not exercise its option to purchase the shares so offered in terms of Sub-clause (b) above within 90 (ninety) days from the date of receipt of the offer, the party wishing to transfer its shares shall be free to transfer the shares to any third party or parties. For this purpose, any refusal of the said offer shall remain effective for a period of six month from the date of offer.
(e) In the event of acceptance of the offer of sale, the sale shall be completed and full payment of the price therefore made within six months of the date of acceptance of the offer but before the registration of the transfer of shares by the Board, unless otherwise agreed between the parties.
(f) In the event of default in payment of the price of the shares the party selling the shares may (after giving notice of not less than 30 days to the other party) sell the shares to a third party or parties at the risk and responsibility of that other party.
(g) In respect of sale of shares under clause 22 and 23 interest shall be payable on the price of the shares between the date of the offer and the actual payment to the party selling the shares. However, the party transferring the shares shall be entitled to the proportionate dividend that may be declared in respect of the period for which the shares are actually held by the transferror, since the expiry of the previous accounting period even though such dividend may be declared after the completion of the same.
In fact the aforesaid clause of the Memorandum of Association provides to the extent that there shall be inter se transfer of shares only if the other partner is ready to purchase at the assessed value of the said shares determined by the auditors of the Company or any other mutually agreed upon firm of Chartered Accountants on the basis of net worth of the company as on the date of the offer and the mean price of the shares ruling on the Stock Exchanges of Calcutta and Bombay (if the shares are quoted therein) for the three months preceding the date of offer.
10. It is profitable to mention here that by letter dated February 23, 2009, the petitioner intimated the Managing Director of IPICOL as under:
ToShri A.K. Meena, IAS, Managing Director, IPICOL,Bhubaneswar.Dated February 23, 2009.Dear Sir,Kindly refer to our discussion on February 20, 2009, when you had expressed that IPICOL may want to further disinvest their equity holding in OSIL at a price linked to the imminent public offers. TRFI confirms its willingness to purchase this equity either directly or through its nominee.
TRFI however wishes that IPICOL should retain one percent of OSIL's equity and continue to be the Chairman of its board.
With best regards,
Sd. P.K. Mohanty
Trustee.
11. In the case of V.B. Rangaraj v. V.B. Gopalkrishnan and Ors. : (1992) 1 SCC 160, the Hon'ble Supreme Court has held that the Articles of Association are binding on the company and its shareholders and that the shares being movable property are regulated by the Articles of Association and are transferable like any other movable property and the restriction which is not specified in the Article would not be binding either on the Company or on the shareholders.
In the case of Ontario Jockey Club Ltd. v. Samuel Mc Bride AIR 1928 PC 291 it was held as under:
That restrictions may be placed upon a shareholder's right of transfer of shares cannot be questioned. The cases are numerous in which such restrictions have been upheld. Shares are prima facie transferable. A restriction which precludes a shareholder altogether from transferring may be invalid but a restriction which does no more than give a right of pre-emption is valid.
(emphasis supplied).
12. This Court has never intended that opposite party No. 2 IPICOL which is a 100% Government owned Company should be put to loss by restraining it to sell its shares. But the question for consideration before this Court was that when the founder shareholders of OSIL came into contract by way of Articles of Association of the Company binding themselves regarding inter se transfer of shares, would it be proper for IPICOL to sell its shares bypassing the above contract without intimation to its other partner of the contract to sell its shares and would it not be illegal. Further OSIL was founded by TRFI in collaboration with IPICOL and its status came to the extent that it was registered in the Bombay Stock Exchange and whether such a prestigious and reputed company should be allowed to be taken over by outsiders and in such an illegal way. Selling of its entire shareholding by IPICOL in OSIL amounting to 7.28% would mean that the petitioner would be out of management of OSIL in breach of their right established during the last about 32 years and all the money and energy spent by the petitioner would be wasted due to the action of the IPICOL in breach of conditions in Clause 39 of the Memorandum of Association of OSIL.
13. In view of our conclusions, we are of the opinion that there is no restriction in selling the shares of IPICOL in OSIL in Bombay Stock Exchange provided there is no offer from the side of the petitioner to purchase the shares at the mean price of the shares ruling on the Bombay Stock Exchange, as mentioned in Clause 39 of the Articles of Association, quoted earlier.
14. Therefore, we dispose of this writ petition with the following directions:
(i) Pursuant to the offer dated February 23, 2009 of the petitioner quoted in the body of this judgment, opposite party No. 2 shall offer the transfer of shares which it chooses to transfer at the price determined by working out an average of the assessed value of the said shares determined by the auditors of the Company or any other mutually agreed upon firm of Chartered Accountants who will act as experts on the basis of net worth of the Company as on the date of offer and the mean price of shares ruling on the Bombay Stock Exchange for three months preceding the date of the offer as mentioned in Sub-clause (C) (ii) of clause 39 of the Memorandum of Association of OSIL;
(ii) On receiving the offer of IPICOL the petitioner within ninety days from the date of receipt of the offer in accordance with Sub-clause (b) of Clause 39 of the Articles of Association shall exercise its option to purchase the shares. In case of refusal or non-exercise of option within ninety days from the date of receipt of offer, opposite party No. 2 IPICOL shall be free to transfer the shares to any third party or parties and in case of acceptance of the offer of sale of shares of IPICOL by the petitioner, the sale shall be completed and full payment of price shall be made within six months from the date of acceptance of the offer but before registration of the transfer of shares by the Board; and
(iii) In case of default in making payments of the price of the shares by the petitioner, opposite party No. 2 shall be free to sell the shares to third party or parties after giving notice of not less than thirty days to the petitioner, at the risk and responsibility of the petitioner.
There would be no order as to costs.
Sanju Panda, J.
15. I agree.