In the High Court of Bombay s1

Disposition: Writ petition dismissed Search in Case Note: selected Domain

MANU/MH/1065/2003 Company - fraudulent inducement - Equivalent Citation: Sections 55A and 237 of Companies 2003(4)ALLMR15, 2004(1)BomCR663, Act, 1956 - company listed under [2005]125CompCas804(Bom) recognized stock exchange expanded its business by starting new company - IN THE HIGH COURT OF investors of prior company given BOMBAY preferential offer to buy shares of new company - securities of new company Writ Petition No. 1604 of 2003 not listed at stock exchange - investors subsequently alleged fraudulent Decided On: 05.08.2003 inducement - grievances of investors regarding non-payment of dividend Kalpana Bhandari and Ors. and issue of transfer be filed before Vs. Central Government - application of Securities and Exchange Board of company to stock exchange indicates India and Ors. its intention to get listed their securities - nothing to establish breach Hon'ble Judges: of promise with regard to listing of R.M. Lodha and A.S. Aguiar, JJ. securities - remedy may be available either under Contract Act or Counsels: Companies Act - held, no interference For Appellant/Petitioner/Plaintiff: by way of writ possible. Shyam Diwan, Adv., i/b., Dhru and Co. JUDGMENT For Respondents/Defendant: Kumar Desai, Adv., i/b., Maneksha and Sethna R.M. Lodha, J. for respondent No. 1, I.M. Chagla and M.S. Doctor, Advs., i/b., Kanga and Co. 1. The petitioners have sought for reliefs for respondent Nos. 2 and 3 against the first respondent in following terms :- Subject: Company "(a) That this Hon'ble Court be pleased Acts/Rules/Orders: to issue a writ of Mandamus or a writ in Companies Act, 1956 - Sections 55A the nature of Mandamus or any other and 237 appropriate writ, order or direction under Article 226 of the Constitution of India Cases Referred: against the 1st respondent, ordering and State of Uttar Pradesh v. Renusagar directing the 1st respondent to : Power Co., A.I.R. 1988 S.C. 1737

© Manupatra Information Solutions Pvt. Ltd. Page 2 i) forthwith direct the 2nd and/or 3rd Goa represented to its shareholders respondent to withdraw the offer dated that for future expansion and 5th June, 2003 (Exhibit G hereto); diversification projects in the steel related areas, subsidiary company be ii) forthwith direct the 2nd respondent to set up and that is how Sesa Industries cease and desist from making an offer was incorporated. In or around 1993, for acquiring from Sesa Industries made preferential offer investors/shareholders the shares of the to the shareholders of Sesa Goa. This 3rd respondent at a price less than Rs. offer was in respect of 43,83,540 57/- per share (or the appropriate price equity shares of Rs. 10/- each for cash computed on the basis of the principles at a premium of Rs. 12.50 per share. under section 73 of the Companies Act, The petitioners claim to have invested 1956) or such other higher price that in the shares of Sesa Industries under may be determined pursuant to a fair the aforesaid preferential offer. It is valuation of shares conducted after averred that approximately 31000 requiring an independent audit to be small investors such as the petitioners conducted into the accounts of the 2nd invested in the shares of Sesa and the 3rd respondents and the monies Industries. Sesa Industries collected diverted/siphoned off from the 3rd an amount of Rs. 110 million from the respondent be brought back into the 3rd investors. According to the respondent; petitioners, all along Sesa Industries represented that they had intention to iii) forthwith issue all necessary have their securities listed at the Stock directions and orders including the Exchanges. However, the said initiation of investigations and/or representations were false and inquiries into the affairs of the 2nd and fraudulent. Petitioners have alleged 3rd respondents with respect to the that Sesa Goa as well as Sesa charges of unfair and fraudulent trade Industries acted in a fraudulent practices, insider trading and violation of manner, deceived the small investors the regulations pertaining to Registrars and induced them to invest their hard to the issue." earned monies on the basis of material misrepresentations/assurances without 2. The controversy arises in the any intention of performing such following circumstances :- assurances/representations and their actions and omissions are in gross The petitioners are shareholders of the violation of the Companies Act. The 2nd respondent company viz. Sesa petitioners made representation to the Goa Limited (for short 'Sesa Goa'). first respondent viz. Securities & Sesa Goa is the listed company. Its Exchange Board of India (SEBI) and shares are listed on the Bombay Stock requested them to: (i) conduct a full Exchange and National Stock inquiry into the affairs of Sesa Goa Exchange amongst other exchanges. and Sesa Industries and in particular The third respondent viz. Sesa with regard to the fraudulent manner Industries Limited (for short 'Sesa in which the public monies were Industries') is a subsidiary of Sesa collected and thereafter siphoned out; Goa. It is petitioners case that Sesa (ii) pass urgent interim directions and

restrain Sesa Goa from making the listed on recognised Stock Exchange. proposed mala fide offer of The learned Counsel in this regard purchasing shares of Sesa Industries referred to (a) statutory from small investors at Rs. 30/- per meeting/meetings at Sesa Goa share and pass further interim Industries; (b) Chairman's Speech in the directions appointing an investigating first Annual General Meeting of Sesa authority; (iii) ensure that if at all the Industries for the year 31st March, 1994; Sesa Goa is allowed to make a (c) Chairman's speech in the second voluntary offer for purchasing the annual general meeting of Sesa shares of the minority investors, the Industries for the year 31st March, 1995; same should be at a price not less than (d) Chairman's statement in the third the base price which is presently Rs. annual general meeting of Sesa 57/per share (Rs. 22.5 being the Industries for the year 31st March, 1996; application money plus 15% interest (e) Chairman's statement in fourth from November 1993 till date). The annual general meeting of Sesa petitioners have set up the case that Industries for the 31st March, 1997; (f) Sesa Goa and Sesa Industries are one letter dated 26th April, 1999 from Sesa entity and corporate veil ought to be Industries; (g) Director's report/annual lifted. In this connection, the details of report of Sesa Industries for the year the Board of Directors, Registered 31st March, 2000; (h) Director's Office, auditors, solicitors and bankers report/Annual report of Sesa Industries of both the companies viz. Sesa Goa for the year 31st March, 2001 and (i) and Sesa Industries have been set up. Director's report/Annual report of Sesa Industries for the year ended 31st March, 3. Mr. Shyam Diwan, the learned 2002. He submitted that though the test Counsel appearing for the petitioners applied by SEBI that the intention of any extensively referred to the averments company to get its shares listed is made in the writ petition, the provisions manifested when it makes an application of SEBI Act, 1952, SEBI (Prohibition of to a recognised Stock Exchange may be Fraudulent and Unfair Trade Practices proper test but it cannot be said that is relating to Securities Market) the only test. He would urge that there Regulations 1955, SEBI (Prohibition of may be other facts indicating the Insider Trading) Regulations, 1992 and intention of the company to get its the relevant provisions of the Companies securities listed on any recognised Stock Act. The thrust of the contention of the Exchange and the facts obtaining in learned Counsel for the petitioners is that respect of Sesa Industries do indicate the SEBI has jurisdiction to examine and their intention of getting securities listed look into the diverse grievances raised on any recognised Stock Exchange. The by the petitioners that the proposed offer learned Counsel submitted that due to (Exhibit "G") amounted to fraudulent commonality of the members of Board and unfair trade practices relating to of Directors of the Sesa Goa and Sesa securities market and insider trading in Industries, the Directors had price securities. According to the learned sensitive information but these people Counsel the material placed before SEBI never disclosed the said information to was sufficient to indicate that Sesa the petitioners or other shareholders and Industries intended to get its securities thus, a clear case of insider trade practice

© Manupatra Information Solutions Pvt. Ltd. Page 4 was made out. He also narrated facts 2003. By the further affidavit dated 29th which in his opinion per se reflect July, 2003 it is pointed out that Sesa Goa fraudulent and unfair Act on the part of has changed the Registrar to the offer the Sesa Goa and Sesa Industries. In and appointed M/s. Karvy Consultants support of his contention of lifting the Limited which is duly registered with corporate veil, the learned Counsel relied SEBI under the SEBI (Registrars to an upon the judgment of the Supreme Court issue and Share Transfer Agents) Rules, in State of U.P. and others v. Renusagar 1993. They have sought to set up the Power Co. and others, case that petitioners have not come to MANU/SC/0505/1988 : this Court with clean hands and AIR1988SC1737 . suppressed the material facts. In this connection, they have referred to the 4. The petition is stoutly opposed by the earlier writ petition filed by some other respondents. SEBI in its affidavit have shareholder (Ms. Krishna Bajaj) being set up the case that Sesa Industries is not Writ Petition No. 1280 of 1999 and the listed. They have not made any rejection of the said writ petition by this application to any recognised stock Court on 17th June, 1999. They have exchange for getting their securities also set up the case that the offer made listed manifesting their intention to have by Sesa Goa dated 5th June, 2003 clearly their securities listed at the recognised sets out the reasons for the inability to stock exchange. In the circumstances it list the securities of Sesa Industries on has no jurisdiction in the matter. recognised Stock Exchange. According According to SEBI, the grievance of the to them, the said offer is in fact made in petitioners can be redressed under good faith in order to provide the section 55-A of the Companies Act shareholders with an exit route if they through Central Government as section wish to avail of the same. They have 55-A inter alia provides that in all cases denied having siphoned off the money or in which SEBI is unable to regulate the committed any fraud or used any unfair provisions relating to issue and transfer means. They have raised the plea that for of securities may be administered by the enforcement of contractual rights Central Government. They have pointed through extraordinary jurisdiction is out that the petitioners in fact have vide misconceived. their letter dated 17th June, 2003 requested the department of Company 6. Mr. Iqbal Chagla, the learned Senior Affairs to invoke their powers under Counsel for Sesa Goa and Sesa Companies Act, 1956 for carrying out Industries and Mr. Kumar Desai, the special audit and investigation into the learned Counsel for SEBI argued on the affairs of the Sesa Goa and Sesa lines set up by the said respondents in Industries. their respective reply affidavits.

5. On behalf of Sesa Goa and Sesa 7. We reflected over the matter. Though Industries initially two separate the learned Counsel for petitioner affidavits were filed on 15th July, 2003. worked very hard, to an extent Thereafter, further affidavit was filed on unnecessary, to persuade us to entertain 21st July, 2003 and then yet another the writ petition, however, we hardly further affidavit was filed on 29th July, found the case fit for invocation of extra

© Manupatra Information Solutions Pvt. Ltd. Page 5 ordinary jurisdiction for the reasons non-payment of dividend under the which we indicate hereinafter. First, various provisions referred to in section there is substance in the submission of 55-A for the companies other than listed SEBI that as Sesa Industries is not listed public companies and the public company nor have they made any companies which intend to get their application to any recognised Stock securities listed on any recognised stock Exchange manifesting intention of exchange in India. Such power is vested getting their securities listed and, in the Central Government. Sesa therefore, they have no jurisdiction in Industries is admittedly not a listed the matter. company on any recognised Stock Exchange. The question is whether SEBI 8. Section 55-A of the Companies Act erred in its opinion that Sesa Industries provides thus--- is not even covered under section 55- A(b) of Companies Act. It is the case of "55-A. The provisions contained in SEBI that Sesa Industries' intention to sections 55 to 58, 59 to 81 (including get its securities listed is not manifested sections 68-A, 77-A and 80-A), 108, as it has not made any application to 109, 110, 112, 113, 116, 117, 118, 119, recognised stock exchange under Rule 120, 121, 122, 206, 206-A and 207, so 19 of Contract (Regulation) Rules, 1957. far as they relate to issue and transfer of The approach of SEBI cannot be faulted. securities and non-payment of dividend Even the learned Counsel for the shall,--- petitioners did not dispute that the criteria applied by SEBI is not irrelevant. (a) in case of listed public companies; However, the learned Counsel for the petitioners submitted that every year the (b) in case of those public companies Chairman in his speech in the annual which intend to get their securities listed general meeting, expressed company's on any recognised stock exchange in intention to have their shares listed at the India; be administered by the Securities recognised stock exchanges. The and Exchange Board of India; and intention is always a question of fact and unless the opinion of regulatory body on (c) in any other case, be administered by this aspect is palpably perverse and the Central Government." grossly erroneous, it would not be proper for this Court in extraordinary 9. It would be, thus, seen that the jurisdiction to interfere with such provisions contained in various sections opinion of regulatory body. Moreover as noted in section 55-A so far as they not a single resolution of the Board of relate to issue and transfer of securities Directors has been placed on record by and non-payment of dividend, SEBI has the petitioners to indicate that the Board powers (i) in case of listed public of Sesa Industries took decision to have companies and (ii) in case of those their securities listed at the recognised public companies which intend to get stock exchanges. Besides that the their securities listed on any recognised yardstick applied by SEBI that by stock exchange in India. In other words making an application to recognised SEBI does not have power in relation to stock exchange, the intention of the the issue and transfer of securities and company to have its securities listed at

© Manupatra Information Solutions Pvt. Ltd. Page 6 recognised stock exchange is manifested (i) that the business of the company is cannot be said to be unreasonable. In the being conducted with intend to defraud circumstances SEBI's stand that it has no its creditors, members or any other jurisdiction in the matter cannot be said persons, or otherwise for a fraudulent or to be without basis. unlawful purpose, or in a manner oppressive of any of its members, or that 10. Even if Sesa Industries is not a listed the company was formed for any public company nor is held to have fraudulent or unlawful purpose; intend to get their securities listed on any recognised stock exchange in India, the (ii) that persons concerned in the various provisions referred to in section formation of the company or the 55-A relating to issue of transfer of management of its affairs have in securities and non-payment of dividend connection therewith been guilty of in relation to the said company is clearly fraud, misfeasance or other misconduct administered by the Central Government towards the company or towards any of and the petitioners can always apply to its members; or the Central Government for the various grievances raised before us. Not only (iii) that the members of the company that, section 237 of the Companies Act have not been given all the information provides for investigation in the with respect to its affairs which they company's affairs by the Central might reasonably expect, including Government in the manner provided information relating to the calculation of therein. Section 237 reads thus--- the commission payable to a managing or other director, (***) or the manager, "237. Without prejudice to its powers of the company." under section 235, the Central Government--- As a matter of fact, the petitioners themselves, have, made an application to (a) shall appoint one or more competent the Central Government requesting them persons as inspectors to investigate the to invoke their powers under the affairs of a company and to report Companies Act for carrying out special thereon in such manner as the Central audit and investigation into the affairs of Government may direct, if--- Sesa Goa and Sesa Industries. Surprisingly and for the reasons best (i) the company, by special resolution; or known, the petitioners have not impleaded Central Government as party (ii) the Court, by order, declares that the respondent in the present writ petition, affairs of the company ought to be presumably because the petitioners feel investigated by an inspector appointed that the Central Government would act by the Central Government; and on the application made by them in the near future. Be that as it may, it appears (b) may do so if, in the opinion of the to us that the grievances raised by the (Company Law Board) there are petitioners in the writ petition though are circumstances suggesting--- not within the powers of SEBI can be adequately looked into by the Central Government.

11. Moreover, the primal grievance of 12. The said writ petition came to be the petitioners, as we see, is that Sesa dismissed by the Division Bench of this Goa must offer the petitioners price not Court on 17th June, 1999 by the less than Rs. 57/- per share for acquiring following order:--- the shares of Sesa Industries from the petitioners and other investors. Some of "CORAM: M.B. GHODESWAR & B.N. the shareholders similarly situated with SRIKRISHNA, JJ. that of petitioners filed a writ petition being Writ Petition No. 1280 of 1999 DATE: 17TH JUNE, 1999 before this Court earlier. Inter alia, the prayers made therein were: P.C.:

"(a) ...... "1. The crux of the case sought to be made out by the petitioner is that the 2nd (b) that this Hon'ble Court may be respondent company (whose shares are pleased to issue a writ of mandamus or already listed on the Stock Exchange) any other appropriate writ order or had privately issued circulars to its direction in the nature of mandamus; shareholders regarding the issue of shares of the 1st respondent-company (i) immediately calling upon respondent with a promise that the shares of the 1st No. 1 and respondent No. 2 to refund the respondent would be listed on the Stock said moneys of the petitioner as invested Exchange at Mumbai after about 12 to by the petitioner in the said shares of 18 months. This contingency failed to respondent No. 1, with interest thereon, take place. The petitioner made by buying back the said shares of the complaints to the 3rd respondent---The petitioner at a rate so decided by this Securities and Exchange Board of India Hon'ble Court after taking into (SEBI). The SEBI has ignored the consideration the original issue price of complaints. The petitioner seeks a writ respondent No. 1 and the interest loss of mandamus against the SEBI to carry caused to the petitioner for holding onto out its duties. the shares of respondent No. 1 ever since; 2. Mr. Samdani, learned Counsel appearing on behalf of the petitioner, has (ii) ...... taken us to the provisions of the Securities and Exchange Board of the (iii) ...... India Act, 1992 (for short, the "SEBI Act") and the regulations made therein. (iv) directing respondent No. 3 to initiate Even assuming that there is a breach of necessary action against respondent No. the promise to list the securities of the 1 and respondent No. 2 for committing 1st respondent on the Mumbai Stock gross violations of the provisions of Exchange, we are not prima facie SEBI Act, 1992 and Companies Act, satisfied that it would, by itself, amount 1956 and for defrauding and misleading to a dereliction of a statutory duty of the the members of the investing public." SEBI as a watchdog of investors under the SEBI Act.

3. In our view, the petitioner may have world wide industrial recession, his remedy either under the Contract Act particularly in the steel industry. The or under the provisions of the company had also taken the opinion of a Companies Act, but we see no failure in leading merchant banker on the discharge any statutory duties on the part disability of listing its shares after taking of the SEBI. No relief can be granted in into consideration various relevant exercise of our powers under Article 226 factors in the context of the original of the Constitution of India. Hence, proposal. Furthermore it was advised rejected." that it would not be practical to successfully make a new issue or divest 13. It is true that at the time the Writ part of the promoter holding to facilitate Petition No. 1280 of 1999 was filed the listing of the company's shares in the letter of offer dated 5th June, 2003 larger interest of existing shareholders. issued by Sesa Goa and now under Hence the shares remain unlisted till challenge before us had not seen the date. light of the day and obviously, the said letter was not under challenge but the (g) The company is of the view that the effective prayer for bring back of shares recovery of the capital market on a large of Sesa Industries by Sesa Goa at a scale basis may take some more time. reasonable rate is identical in both Listing of the shares of the company matters. For the reasons on which the would have provided an exit route to the earlier Writ Petition No. 1280 of 1999 shareholders, but unfortunately it has not came to be rejected, justify rejection of been possible so far to do so. Therefore, the present writ petition as well. with a view to provide an exit opportunity to the shareholders, SIL has 14. In the light of the aforesaid requested the acquirer to make this offer discussion, we do not deem it necessary and the acquirer has agreed to the same." to go into the diverse aspects raised by the learned Counsel for the petitioners If the petitioners feel that the said offer regarding the lifting of the corporate veil is not for their benefit, they may not the allegations of insider trade practices, accept the same and not follow the exit fraudulent and unfair action of Sesa Goa route suggested by the offerer. and Sesa Industries. Suffice it to say, Ultimately it is pure commercial dealing. however, that letter dated 5th June, 2003 is voluntary letter of offer made by Sesa 15. In the circumstances, we are of the Goa. It is for the petitioners to accept the considered view that no case for same or reject outright. There is no invocation of writ jurisdiction is made compulsion on the part of the offerer out. Writ petition is dismissed. upon the petitioners to accept the said offer. The offer has been made inter alia for the reasons: © Manupatra Information Solutions Pvt. Ltd. "(e) The Company has been unable to list its shares by reason of the difficulties mentioned above and also due to the weak state of the capital market and also