2017 (11) TMI 723 - HC - Companies Law

Court Orders Share Allotment Despite ASBA Non-Compliance

The court directed respondents 4 and 5 to allot the shares applied for by the petitioners using the demand drafts despite non-compliance with the ASBA ... Initial Public Officer (IPO) or Stock Market Launch - Non adherence to ASBA process - allotment of shares - Held that:- On an examination of the contents of the statement filed on behalf of the fourth respondent, it become indisputable that the equity shares applied for by the petitioners under the Rights Issue and the additional shares applied for by them have not been yet alloted and that the amounts expended by the petitioners for application of such shares through demand drafts are also still with the fourth respondent. As also notice that this Court had, while admitting the writ petition on 26.02.2015, directed that the acceptance or non-acceptance of the applications of the petitioners, as per Exhibits PI to P4, shall be subject to the result of the writ petition. Since the petitioners have supported their applications for shares honestly and bona fide through valid demand drafts, it would be unfair and unjust to subject them to a detriment merely because they have not applied under the ASBA process. As already shown above, the ASBA process is intended to the benefit of the petitioners and merely because’ they had not made payment under that process, it would be a paradox that they are refused allotment of shares. This is more so because the petitioners’ action in not applying through ASBA process would not and has not in any manner prejudiced any of the respondents, including respondents 4 and 5. In such view of the matter, it is of the firm opinion that W.P. deserve to be ordered and that the petitioners be allotted the shares applied for by them through Exhibits PI to P4, utilising the amounts paid by them through the demand drafts, which is now stated to be in the refund account maintained by the fourth respondent. Action of the company in transferring such high percentage to the reserves of the company, while not declaring a higher dividend, is in violation of the Companies (Transfer of Profits to Reserves) Rules, 1975 - Held that:- Even though the petitioners may have a case, going strictly by the terms of the relevant provisions, that the company ought not to have transferred such large percentage of its profits to general reserves without enhancing the rate of dividend, such action has only helped the financial condition of the company and has contributed to increase the value of its shares rather exponentially. The petitioners, being the investors, cannot he said to be prejudiced because even though the dividend was not enhanced, the value of their share holding had certainly moved up, even much beyond their expectations. When made this view of mine known to Sri.P.I.Davis, the learned counsel for the petitioners, during the hearing of the writ petitions, he took some time to consult his client and submitted that she is also in affirmation of the fact that the action of the Board of Directors in transferring higher reserves has only helped the company. The learned counsel for the petitioner was therefore, fair in submitting that the petitioner does not intend to continue with the challenge against such action and that this writ petition can thus be closed without any further orders. I think this is a very fair stand taken by the petitioner and I, therefore, close W.P.(C)No. 32874/2009 without any further orders. Direct respondents 4 and 5 to allot to the petitioners the shares applied for by them under the Rights Issue as also the additional shares by accepting the amounts for such purpose provided by them through demand drafts, which is now stated to be in deposit in the current account maintained by the bank as its refund account. The petitioners’ applications, namely Exhibits PI to P4, will, therefore, be taken up and considered by the fourth respondent and eligible shares be alloted in the manner applied for by them, without any further delay and as expeditiously as possible. Issues Involved:1. Application of ASBA process in Rights Issue.2. Transfer of profits to general reserves and declaration of dividends.Issue-wise Detailed Analysis:1. Application of ASBA Process in Rights Issue:The petitioners, existing shareholders of Canfin Homes Ltd., participated in a Rights Issue and submitted applications for shares along with demand drafts totaling Rs. 48,58,953/-. However, their applications were rejected because they did not use the Applications Supported by Blocked Amount (ASBA) process as mandated for amounts exceeding Rs. 2 lakhs, as per the Letter of Offer (Exhibit P5).The ASBA process, developed by SEBI, protects investors by blocking application money in their bank accounts until shares are allotted. Despite this, the petitioners argued that the restriction in the Letter of Offer was unreasonable and unrelated to investor protection.The court acknowledged that while the petitioners did not comply with the ASBA process, they provided the required funds through demand drafts, causing no prejudice to the respondents. The court found it unjust to deny the petitioners the shares merely due to non-compliance with the ASBA process, especially since the funds were available and could be encashed by the respondents.The court directed respondents 4 and 5 to allot the shares applied for by the petitioners using the amounts provided through demand drafts, emphasizing that the ASBA process is intended to benefit investors and should not result in their detriment.2. Transfer of Profits to General Reserves and Declaration of Dividends:The second issue involved the petitioners' challenge to Canfin Homes Ltd.'s practice of transferring over 50% of its profits to general reserves while maintaining a dividend rate of 25% for five years prior to 2009. The petitioners argued that this practice violated the Companies (Transfer of Profits to Reserves) Rules, 1975.The court noted that the declaration of dividends and transfer of profits to reserves are decisions made by the company's Board of Directors. The company justified its actions by stating that maintaining high reserves contributed to its financial health and increased the value of its shares.The petitioners conceded that the company's actions had indeed enhanced the value of their shareholding, and they did not wish to pursue the challenge further. The court, therefore, closed W.P.(C) No. 32874/2009 without further orders.Conclusion:The court allowed W.P.(C) No. 6106/2015, directing respondents 4 and 5 to allot the shares applied for by the petitioners using the demand drafts. The court closed W.P.(C) No. 32874/2009, acknowledging that the company's transfer of profits to reserves had benefited the shareholders. No costs were ordered for either writ petition.