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 process. In another issue, the court acknowledged the company's practice of transferring profits to reserves, benefiting shareholders, and closed the case without further orders.

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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.

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