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1994 (4) TMI 235
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.... name of the first respondent in respect of those shares and (b) the direction of the CLB to the company to continue to have the name of the first respondent in its register of members and not in ordering rectification in respect of the shares covered by list B of the Annexure to the CLB order. 2. The second set of appeals, namely, CM. As No. 1412 to 1422 of 1993 have been filed by the 11 investment companies who are also partly aggrieved by the common order of the CLB. All these appeals are directed against a common order of the CLB, common arguments were made and, therefore, I propose to pass a common judgment on all these appeals. For the sake of convenience, Kothari Industrial Corpn. Ltd. who have filed the first set of appeals, will be referred to as the appellants and the 11 investment companies, who have filed the second set of appeals and who are also the respondents before the CLB, will be referred to as the 11 respondent-companies. 3. The facts leading to the filing of the appeals are briefly stated as follows: The 11 respondent companies are distinct corporate entities and they have acquired the shares in the appellant company. They lodged the share with the app....
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...., 1956, and when the names of the first respondent are deleted and are not there on the record date, how they will become entitled in law to right debentures/shares (list A and C). It will be relevant to note that the CLB in its interim Order dated 5-2-1993 observed that the entitlement of the rights flows to the first respondent being the member of the company. As per the interim order in case the decision in the main petition went in favour of the respondent rights debentures could be allotted to them. In other words, if the main petition is not in favour of the first respondent, no rights could be allotted to them even according to the CLB's own interpretation as contained in its interim order dated 5-2-1993. The case of the appellant is that all the instruments which were transferred inasmuch as having not been duly stamped should not have been approved for transfer, but, however, were inadvertently and wrongly approved for the registration at the instance of Mr. D.B. Saxena, Director who functioned as the One-Man Committee pursuant to a resolution of the board of directors of the first respondent passed on 11-1-1974. The appellant company submitted in the company petition that....
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....ies, which were regis- tered in the register of members of the appellant company and which had also received letters of offer. The 11 respondent companies responded by applying for both the rights as well as additional rights prior to the closure of the rights issue on 15-12-1992. It was only at the time of the allotment of the rights shares that the board of directors of the company noticed that the transfers which had taken place during June 1991, June 1992 and September 1992 were void ab initio and illegal for the above said contraventions and it was only thereafter a decision was taken to lodge the company petition before the CLB, on 25-11-1992 for rectification of the register of members by deleting the names of the 11 respondent compa-nies. 7. Along with the 11 company petitions seeking for rectification of the shares register by deleting the names of the 11 respondent companies, the appellant company also prayed for interim orders directing the company not to do any act or deed pursuant to the letter of offer dated 15-10-1992 with regard to the 11 respondent companies and also to restrain the company from allotting any PCDs shares including bonus and rights to the 11 resp....
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....been cancelled and assuming that some of them were not cancelled properly, it did not make the instruments void ab initio and that the provisions of the Indian Stamp Act with regard to the cancellation of the stamps in cases where stamps have been affixed are only directory. In these cases all the instruments of transfer bore correct stamps and the revenue of the State had been duly and fully protected and, accordingly, inasmuch as there was substantial compliance with the provisions of the Indian Stamp Act, the petitions are liable to be dismissed. 10. The appellant company had raised another point before the CLB that all the 11 respondent companies are satellite companies of the Reliance group and that these companies were acquiring shares in the appellant company with ulterior motive which endangers the present management of the appellant company and that had these facts been known to the appellant company at that time when the instrument had been originally transferred, they would not have given effect to the transfer and would have taken recourse to the remedies under section 22 A of the SCRA at the relevant time. The CLB passed its final order on 20-10-1993 after hearing a....
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....der of the CLB. (f)The 11 respondent companies will retain the dividends they have received in the past in respect of the shares covered under the 3 categories, namely, A, B and C and there is no need or obligation for the appellant to refund the same. (g)With regard to the registration of transfer in respect of the shares falling under categories I and III (list A and C) the 11 respondent companies were given a description to lodge the instruments afresh in accordance with and after complying with the provisions of section 108 for consideration by the first respondent company. 11. The CLB came to the above conclusions on the ground that in respect of the shares falling under categories I and HI (list A and C) the instruments had not been duly cancelled in accordance with the provisions of section 108(1) whereas in respect of shares falling under category II (list B) the CLB found that the directions and provisions of section 108 had been complied with and that the first respondent cannot take advantage of its own wrong. No doubt both the contesting parties were not satisfied with the order of the CLB and aggrieved with the order of the CLB the appellants filed CM As. Nos.....
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....tore such dividends to the original members from whom they got shares in the event of rectification being ordered; and (iv )to what reliefs the parties are entitled. 13/14. Point No. 1: Thiru K. Parasaran, the learned senior counsel appearing for the 11 respondent companies commenced the arguments first and put forth the following proposition to contend that the petitions filed by the appellant company before the CLB were not maintainable in law and on fact or on equity and that the appellants were not entitled to rectification of their share Register by deleting the names of the 11 respondent companies. (i)Any question relating to the transferability and registration of transfer of listed securities of the companies that is listed companies is only governed by section 22 A which was inserted by amendments made in 1985 with effect from 17-1-1986. (ii) The company can have a discretion to refuse the registration only on the ground mentioned under section 22A(3) and it cannot resort to any other grounds not mentioned therein; (iii )Section 22A(3) of the SCRA does not mandate but, on the other hand, gives discretion to the company to refuse to register the transfer, if ....
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....ication of register as contained in section 111 of the Companies Act, nor can the said section override the provisions of the company law which has been held to be mandatory. Any violations of section 108 of the Companies Act and the provisions of section 12 of the Indian Stamp Act are ab initio illegal and are void ab initio. 18. There is sufficient cause for a rectification of the shares register for non-compliance of the provisions of section 108 of the Companies Act read with section 12 of the Indian Stamp Act on the facts and circum-stances of the case. 19. The CLB which rectified the register in respect of A and C shares should also rectify the shares falling under list C. 20. The provisions of the Companies Act and the SCRA should be harmoniously construed in respect of rectification of the list of members who hold securities in 'C listed companies. There is no equity in favour of the 11 respondent companies inasmuch as they have violated the mandatory requirements of law and as such they are not entitled to continue as members of the appellant company. 21. Before proceeding to hear the rival contentions, it is necessary to consider the legislative background bot....
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....of securities without assign- ing any reason. Though there is a provision for appeal against such refusal to the CLB, it placed an undue burden on an aggrieved person who often happens to be merely an investor. The present position is also not conducive to the free marketability of listed securities and healthy growth of the capital market. Unrestricted transferability is particularly neces- sary for securities of public limited companies which are listed on the stock exchanges. 23. It is proposed to incorporate a new section, namely, section 22A in the SCRA of 1956 and also make necessary consequential amendments in the Act to provide for free transferability of the listed security with adequate safeguards against undesirable take-over bids or destabilisation of man-agements. Under the proposed provision, companies would be entitled to refuse registration of transfer in certain circumstances only, namely, the instrument of transfer is not proper or has been duly not stamped and executed or the transfer is in contravention of any law or is likely to result in change in the composition of board of directors in such a way that it would be prejudicial to the interest of the compani....
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....gistration and in any other case should make a reference with the CLB and forward copies of such references to the transferor and transferee. In other cases mentioned in section 22(4)(c) it could only mean the three conditions in section 22A(3), namely, clauses (b), (c) and (d). Clause (b) of section 22A(3) deals with the power to refuse registration of the transfer on the ground that the transfer of security is in contravention of any law or rules made there under or any administrative instructions. In any of these cases, it is mandatorily required to intimate the transferor and the transferee and even the CLB in terms of section 22A(6) is obliged to hear the reference only after giving reasonable notice to the company and also the transferor and the transferee concerned and giving them a reasonable opportunity to make their representations. 24. Mr. K. Parasaran, the learned senior counsel for the 11 respondent companies, submitted that the SCRA, being a special statute governing the free transferability and registration of transfer of listed securities of companies, should be given widest amplitude in respect of the transfer of securities of listed companies and should obvious....
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....ach its decision and seek to nullify the transfer of shares which it had effected which would defeat the very concept of the object of free transferability of the security of the listed companies. It is further contended that even if a company has proceeded to register and recognise the transfer, it could still seek to impeach it only by making a reference under section 22A(4)(c) and that should also be made within a period of two months from the date on which the instruments of transfers were lodged and that could also be done only by giving notice to the transferor or transferee. On the other hand Mr. Vedantham Srinivasan, the learned counsel for the appellants company, contended that section 108 alone should be the guiding factor and that the company has got every discretion and the listed companies like other companies have no discretion to effect registration if the instrument of transfer does not comply with the requirements of section 108 and even if the instruments have been accepted and the shares transferred or registered quite contrary to section 108, then the company would be entitled to removal of names of members, whose names were entered contrary to section 108, auto....
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....e various decisions rendered by the Supreme Court and the High Court, I am of the opinion that the appellant company is not entitled to the relief of rectification of register of shares both in the light of section 22A of the SCRA and based on the principles of equity, justice and fairness. If the transactions like in the present case are allowed to be impeached, then that would lead to a nebulous situation which would defeat or affect the very object behind the SCRA and would create instability and distur- bances in the stock market which would not be conducive to the free transferability of listed securities. Mr. K. Parasaran, the learned senior counsel, pointed out that there is a vital distinction between section 22A(3) of the SCRA and section 108 of the Companies Act, even though both the provisions deal with the same subject. Section 22A(3) confers a discretion on the company in the matter of registration or transfer of the securities on any of the grounds mentioned therein including the ground, namely, that the instrument of transfer is not proper or has not been duly stamped and executed or that the certificate relating to the security has not been delivered to the company ....
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....stability and disastrous result in the Stock Market which would not be conducive to public interest. 28. However, Mr. Vedantham Srinivasan, the learned counsel for the appellant companies strongly relied upon the decision of the Supreme Court in Mannalal Khetan 's case (supra) to argue that section 108 has been held to be mandatory. As I have already found, section 108 of the Companies Act which imposes a mandatory requirement obliging the company not to register a transfer of share by using the expression 'shall' will not apply in respect of shares of listed companies because for the very same grounds which are mentioned in section 108 in respect of transfer of shares or securities of listed companies in spite of the expression 'shall' the word 'may' has been used in the SCRA. Secondly the decision of the Apex Court in Mannalal Khetan's case (supra) was rendered on 25-11-1976 long prior to the coming into force of section 22A of the SCRA at least 9 years before it was done and is, therefore, distinguishable as not appli- cable in the light of the subsequent statutory changes in respect of transfer of shares of listed companies. Mr. Vedantham Srinivasan, the learned counsel for ....
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....even during the relevant period prior to the registration and the defects after having been complied with the instruments were accepted and shares were transferred. If that is so, it is not clear as to how the appellant company could not have noticed these mistakes and in spite of it, it proceeded to register and now considerable time having been lapsed and when even dividends have been paid in respect of shares it would be justifiable for it to seek for rectification merely on an allegation that the respondent companies have acquired the shares at the instance of Reliance group. If such a twist is given, the complexion itself changed and it would go to show that the appellant company under the guise of rectification has come with some other purpose. It has also filed the petitions after having received monies in respect of the rights PCDs and additional rights PCDs the issue of which closed on 15-12-1992, and ultimately after the closure of issue after having received the monies from 11 respondent companies for allotment, it has come before the CLB seeking for rectification. It would have been totally a different story, had the appellant company found those defects even prior to r....
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....uments were not duly stamped. But it is a case where the company has given effect to the transfers and not a case where the board of directors had refused to act on the ground that the instruments of transfer were not duly stamped even at the time when the Board was taking up for consideration the question of transferability of the shares. It was held on facts that there was no proper lodgement of the documents relating to the transfer of shares and the transfers had not become effective as against the company to enable the transferees to question the proposed amendment to the articles of association. Here is the case where the transfers have become effective and where the company which was a wrong doer is seeking to take advantage of its own wrong is to greatly prejudice the rights of third parties. Secondly the Kerala High Court decision has also not taken into account the effect of the amendment brought about in section 22A of the SCRA and in terms of section 22A itself the board of directors of the company could refuse to register the transfers if the instruments, are not duly stamped and should inform the transferor and the transferee about its opinion, formed in good faith an....
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....ote that while constru- ing the statutes, to find out whether the expressions used are mandatory or directory, one has to examine the statute in its entirety and make a careful comparison. Sometimes the expression 'shall' could even be construed as directory and sometimes the expression 'may' could also be construed as mandatory. But where the statute uses both the expressions 'may' and 'shall', the Supreme Court has held that the expression 'may' can only be construed to mean 'may' and 'shall' can be construed as 'shall'. Section 22A(3) uses the expression only 'may' whereas section 22A(4) uses the expression 'shall'. A company even though has discretion to refuse transfer of any of its securities on any one of the grounds mentioned above in sub-section (3) of section 22A, the CLB should in such a case, be moved before the expiry of two months from the date on which the instrument of transfer was lodged as would be evident from section 22A(4). In this connection reference may also be made to the judgment of the Supreme Court in Labour Commissioners. Burhanpur Tapti Mills Ltd. AIR 1964 SC 1687 at 1689 wherein in para 9 the Supreme Court has held that it has to be noticed that on re....
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....n the instrument of transfer being duly stamped. Therefore, I am of the opinion that the provisions contained in the Indian Stamp Act should not be used to see through or interpret the provisions of the SCRA. This is a case where the company itself has proceeded to act upon and register through its One-Man Committee. This was also not a case where there have been no stamps affixed at all. Stamps have in fact been affixed and the instruments of transfer are in possession of the company. There is no question of loss of revenue to the State. The Supreme Court in the case of Hindustan Steel Ltd. v. Dilip Construction Co.Ltd. AIR 1969 SC 1238 has taken the view that the Indian Stamp Act is a fiscal measure enacted to secure revenue for the State on certain classes of instrument. It is not enacted to arm a litigant with a weapon of technicality to meet the case of the appellants. The stringent provisions are conceived to secure the interest of the revenue. Once the object of revenue is secured according to law, the parties basing the claim on the instruments will not be defeated on the ground of initial defects in the instrument. Here the object of securing revenue for the Government has....
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....f two months after registration. It is further held in the said decision that the main purpose of section 22A was to ensure free transferability of shares of listed companies and for that purpose the power of the company to refuse registration was circumscribed only to four hundred. In Jagatjit Industries Ltd. v. Mohan Meakins Ltd [1991] 2 Comp. LJ 288 (Delhi), it was held that a decision to convey refusal of registration did not require a reference to the CLB as violation relating to registration or transfer which are capable of being rectified as prescribed in various related statutes. But, however, in this case the company did not give any opportunity to the transferor and the transferee to rectify the defects to ensure free transferability of securities which was the object behind section 22A. But it is clear from the said decision that distinction will have to be made in respect of proceedings initiated under section 111 of the Companies Act and section 22A of the SCRA which would apply to listed companies. In Diamond Carbon Graphite Products v. Parsh J. Shah [1992] 2 Comp. LJ 194 the CLB considered the decision of the board of directors of the petitioner company which confirm....
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....n the case of Jai Narain Ram Lundia v. Surajmull Sagarmull AIR 1949 FC 211 wherein the Court has held that as a matter of law in cases of transfer of shares of a company, it is the vendor by whom the stamp duty is payable. The same is the effect of the decision of the Punjab High Court in the case of G.R. Parry v. Union of India [1962] 32 Comp. Cas. 145. Therefore, I am of the view that equitably the matter does not warrant a discretion to be exercised in favour of the appellant company, because if at this stage rectification is done, that would amount to unsettling various transfers that had taken place long back and that would also create confusion and instability in the stock market. In this connection, it is pertinent to note the observation of this Court in the case of T.V. Somasundaram Pillai v. Official Liquidator [1967] 37 Comp. Cas. 440 wherein the Court has held that unless an applicant establishes a just case or equity, the company court would not exercise its discretion to rectify the register. In consid- ering an application for rectification the Court has always had regard to the lapse of time and to any fact and circumstances indicating acquies- cence in the existing....
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....uct of the appellant company and Mr. Saxena in the present case appears to be mala fide. Reliance upon section 108 appears to be only a clear after thought which is done only to protect the present management at the cost of the respondent companies. Having failed to approach the CLB by seeking to make a reference and having failed to intimate the transferor and the transferee and not making the transferor as parties before the CLB, it appears that the appellant companies have violated and have not complied with the provisions of section 22A and they could justify their action which could be done only in appropriate proceedings, but, however, they cannot take advantage their own wrongs or defaults and seek to impeach the transactions which would affect the very free transferability of securities as embodied under the SCRA. 38. Point No. 2- The above point has already been answered and in the light of the abovementioned reasons, the appellant-company is not entitled to the relief of rectification of register of members for the deletion of the 11 respondent companies in view of their conduct and in the light of section 22A of the SCRA and on equitable considerations as referred to.....