2005 (8) TMI 373 - SC - Companies Law

Supreme Court: RBI Can Direct Investment Firms, Bonus Shares from Revaluation Reserves

The Supreme Court upheld the authority of the Reserve Bank of India to issue directions to an investment company, emphasizing stability and depositor ... Authority and power of the Reserve Bank of India challenged - issue of bonus shares - Held that:- Appeal dismissed. The Companies Act specifically permits utilization of reserve arising from revaluation of assets for purpose of issuing fully paid up bonus shares. When the law so permits, Article 182 authorizes the company to issue Bonus shares out of reserves arising from revaluation of capital assets. Thus, even though the interpretation given by the High Court on Article 182 is not correct, still the final conclusion that Article 182 does not prohibit issuance of Bonus shares is correct and requires no interference. As submitted on behalf of the Respondents that the Company had complied with the directions and had been granted time of 7 years to regularize its accounts. Thus it is not necessary for us to go into this controversy as it will always be open to the Reserve Bank of India to take such action as is available to it in law, if it feels that its directions were not complied with. Issues:1. Challenge against the authority of the Reserve Bank of India to issue directions to an investment company.2. Dispute regarding the issuance of Bonus Shares out of Revaluation Reserve by the respondent company.3. Interpretation of Article 182 of the Articles of Association of the Company regarding the issuance of fully paid up shares.Analysis:Issue 1:The judgment involved a challenge against the authority of the Reserve Bank of India to issue directions to an investment company. The Supreme Court upheld the authority of the Reserve Bank of India to issue directions, emphasizing the need for stability, accountability, and security for depositors. The Court held that the directions were valid and essential for the company's operations and the protection of depositors' interests.Issue 2:The dispute centered around the respondent company's decision to issue Bonus Shares out of Revaluation Reserve. The appellant challenged this issuance on grounds related to SEBI guidelines, Department of Company Affairs Circular, and Article 182 of the Articles of Association. The Court clarified that SEBI guidelines did not apply to the respondent company and that the Circular from the Department of Company Affairs was advisory in nature, not mandatory. The key contention revolved around the interpretation of Article 182, specifically regarding the availability of funds for dividends and the issuance of fully paid up shares. The Court analyzed the provisions of Article 182, considering the interplay between dividends, bonus shares, and reserves arising from the revaluation of assets. Ultimately, the Court concluded that the respondent company was entitled to issue Bonus Shares from the Revaluation Reserve.Issue 3:Regarding the interpretation of Article 182, the Court delved into the language of the provision and the implications of issuing bonus shares from different reserves. The Court analyzed the Companies Act provisions, the definition of dividends, and the permissibility of utilizing reserves from asset revaluation for issuing fully paid up bonus shares. Despite discrepancies in the interpretation of Article 182, the Court affirmed that the provision did not prohibit the issuance of Bonus Shares from reserves arising from asset revaluation. The Court also addressed the compliance issue with the Reserve Bank of India's directions, stating that any non-compliance would be subject to the Reserve Bank's legal actions.In conclusion, the Supreme Court dismissed the appeal, upholding the respondent company's right to issue Bonus Shares out of the Revaluation Reserve, based on the interpretation of Article 182 and the permissibility under the Companies Act.