TaxTMI 
TaxTMI 
2006 (12) TMI 247
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that the questions of law mentioned in the application will be treated as part of the main appeal. As many as 18 questions of law have been framed by the appellant. 3. The appellant had submitted that the impugned order was perverse, based on no findings/evidence and the conditions pre-requisite to direct investigation under section 237(b) of the Act are not satisfied in the present case. Reliance was placed upon, the two judgments of the Supreme Court in Barium Chemicals v. CLB [1966] 36 Comp. Cas. 639 ; and Rohtas Indus-tries Ltd. v. S.D. Agarwal [1969] 39 Comp. Cas. 781 . 4. Learned Additional Solicitor General appearing for Union of India in his brief argument submitted that an appeal under section 237(b) of the Act is maintainable only on question of law and the findings and decision given by the Company Law Board were findings of fact. No question of law arises. 5. On the basis of submissions made, the following question of law is framed for being answered :- "Whether order dated 20-4-2006, passed by Company Law Board is perverse and whether conditions of section 237(b) of the Companies Act, 1956, are satisfied in the present case?" 6. The appellant was incor....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The paid-up capital of SYIL increased. 11. The appellant was a private limited company but shares of SYIL were listed. In the report given by the Securities and Exchange Board of India (hereinafter referred to as "the SEBI") and as mentioned in paragraph 2(a ) of the order dated 20-4-2006, shares of SYIL were not traded between 13-5-1999, to 9-8-2000. On 13-5-1999, they were last traded for Rs. 2.15 per share. Prior to the said date in 1999, the shares were traded in the range of Rs. 2 to Rs. 7. Therefore, on the date when business purchase agreement dated 15-7-2000, was entered into, the last traded price of the share of SYIL of face value of Rs. 10 each was for Rs. 2.15, i.e., the share was traded at discount of Rs. 7.85 per share. Market value of each share of face value of Rs. 10 on 15-7-2000, was only Rs. 2.15. Shockingly, the shares of SYIL were allotted to the shareholders of the appellant at the premium of Rs. 60 per share, when actually the allotment should have been at a discount. 12. Securities and Exchange Board of India in its report has also pointed out that preferential allotment to the shareholders of the appellant at the premium of Rs. 60 per share for each....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nnexure A." 14. The yearly high-low of the prices is as given below :- Year High (Rs.) Date Low (Rs.) Date 1999 6.4 10-5-1999 2.15 13-5-1999 2000 445.5 27-9-2000 75.55 9-8-2000 2001 315 13-2-2001 199.7 25-1-2001 15. The shares of SYIL prior to acquisition of business undertaking of the appellant and allotment of shares to the shareholders of the appellant, to the extent of 89.35 per cent in volume terms, were held by the following shareholders :- Sl. No. Name of the Shareholders No. of Shares % 1. Virendra Jain 9800 0.44 2. Virendra Jain (jtly.) Rina Jain 1200000 53.57 3. Laxmi Jain 250000 11.16 4. Sushma Jain 300000 13.39 5. Laxmi Jain (jtly.) Satyapal Jain 75450 3.37 6. Anand Jain (jtly.) Sushma Jain 141000 6.29 7. Ankit Jain (jtly.) Virendra Jain 25230 1.13 Total 2001480 89.35 16. It is, therefore, clear that prior to "acquisition of the business undertaking of the appellant", SYIL though a listed company was closely held and almost the entire shareholding was held by the said seven shareholders. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... facts and figures stated above. In paragraph VIII of the petition under section 237(b) it was alleged that the appellant had incurred loss of Rs. 104.77 crores due to transfer of business to SYIL. The question is not whether shares were allotted to appellant or the shareholders of the appellant, but what was the corresponding market value of the shares allotted in lieu of transfer of undertaking by the appellant to SYIL. Admittedly, as per agreement for purchase dated 15-7-1999, the total value of the undertaking was Rs. 110.25 crores and for transfer of the said undertaking shares of face value of Rs. 10 each were allotted in SYIL at a premium of Rs. 60 per share but the market value of these shares as per last quoted price was Rs. 2.15. 20. The above facts are startling by themselves and justify investigation under section 237(b) of the Act into the affairs of the appellant. The above facts are virtually unrebutted and unchallenged. These facts are not new but are duly mentioned and recorded by the learned Company Law Board in its order while referring to the submissions of the parties and its findings. I have only collated them. I have gone into the factual aspects as the ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t" widens the scope of the said provision. Thus, conduct, which is not strictly fraud and misfeasance but conduct which is dishonourable, unprincipled and shameful is also covered by the said sub-clause. The third clause applies when all information in respect of the affairs of the company is not given to its members. 24. For section 237(b ) of the Act to be invoked there should be "circum-stances suggesting" that the conditions mentioned in the three sub-clauses are satisfied. A final, definitive opinion, therefore, is not required at the stage of passing of an order under section 237(b ). The reason is apparent because investigation is still to be conducted. The provision is essentially of an exploratory character. What is to be decided at this stage is whether exploration/investigation is required and should be ordered. The words "circumstances suggesting" cannot be interpreted to mean conclusive proof. Otherwise, the provision will be rendered nugatory and completely toothless. Investigation is not required if facts are already established. At the same time, the Legislature has been careful to use the words "defraud", "fraudulent", "unlawful purposes", "misfeasance", "other ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was bound to cause inconvenience and affect credit worthiness of a company but the provision was reasonable. It was held that the aforesaid provision cannot be regarded as an unreasonable restriction on right of a party to carry on business. Reference in this regard was made to the judgment of the Supreme Court in the case of Raja Narayan Bansilal v. Maneck Phiroz Mistry [1960] 30 Comp. Cas. 644; wherein it has been held as under :- "30. . . . A company is a creature of the statute. There can be no doubt that one of the objects of the Companies Act is to throw open to all citizens the privilege of carrying on business with limited liability. Inevitably, the business of the company has to be carried on through human agency, and that sometimes gives rise to irregularities and malpractices in the management of the affairs of the company. If persons in charge of the management of companies abuse their position and make personal profit at the cost of the creditors, contributories and others interested in the company, that raises a problem which is very much different from the problem of ordinary mis-appropriation or breach of trust. The interest of the company is the interest of sev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ral public and institutions taking the brunt. The complexion of economic fraud has changed dramatically. It has become complex and much more difficult to unravel and uncover. Investigation to uncover frauds once grounds exists are required. In this climate, courts have to tread carefully and strike a fine balance between free market system and enforcement-a natural corollary to liberalization. 27. Other contentions raised by the appellant with reference to section 237(b) of the Act and the impugned order directing investigation may now be noticed. It was submitted by the appellant that separate proceedings were initiated under different enactments, the object and purpose being to investigate into the affairs of the appellant. Reference was made to the report given by SEBI, investigation done by CBI and proceedings under section 209A of the Act and it was submitted that investigation under 237(b) should not be permitted as there was duplicacy of proceedings and therefore harassment. This argument has to be rejected. Each authority has been conferred specific power under respective statutes. They examine and investigate with reference to the purpose and object of the enactment. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the reply filed by the appellant before the Company Law Board, expenditure of more than Rs. 7.26 crores, it was stated was normal and ordinary general business expenditure. It was further stated that the appellant-company was dealing with software technology and developing software and, therefore, consultancy fee was required to be paid. The reply is devoid of material particulars and relevant details with regard to nature and type of software developed, price of software, the parties to whom software was sold, etc. It is interesting in this regard to refer to some of the vouchers and bills, which have been enclosed by the appellant in support of the contention that it was genuinely developing and/or selling software. Two invoices were raised allegedly by the appellant against Jai Prakash Industries Ltd. dated 17-11-1999 and 4-12-1999, for Rs. 5,15,50,000 and Rs. 5,35,00,000. The bills do not specifically state the type of software purchased and thereafter sold to Jai Prakash Industries Ltd. It refers to some agreement dated 16-6-1999, but the said agreement was/is not placed on record. 30. Similarly, there were alleged transactions between the appellant and Padmini Technologie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o state here that there are allegations against Padmini Technologies Ltd., also, that it was manipulating and involved in the share market scam along with Ketan Parekh Group. It may be relevant to state here that Padmini Technologies Ltd. was also a shareholder to the extent of 77,06,000 shares (or 17.72 per cent in value terms) in the appellant-company. 32. Allegation was also made in the petition that Padmini Technologies Ltd. had incurred a huge loss on the sale of the shares of the appellant-company. The appellant had denied this and relied upon Annexure F to the reply filed before the Company Law Board. Perusal of Annexure F shows that 27,06,000 shares held by Padmini Technologies Ltd. in the appellant were transferred to M/s. Ankur Cultivators (P.) Ltd. for consideration of Re. 1 only. These shares had been purchased by Padmini Technologies Ltd. for Rs. 38,17,80,000. The shares allotted to Padmini Technologies Ltd. in SYIL, in the reply filed by the appellant before the Company Law Board, were described as bonus shares. The reply affidavit on behalf of the appellant has been filed by none other than Mr. Vivek Nagpal, who was also a controlling director in Padmini Technolog....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ketan Parekh Group of Companies. These companies were also selling clients of Broker-Credit Suisse First Boston India Securities (P.) Ltd. The said broker along with some other brokers as per the SEBI report had created artificial market in certain scrips and assisted, abetted and indulged in market manipulations in entities connected with Ketan Parekh Group. 37. Learned counsel for the respondent during the course of arguments had relied upon the closure report submitted by Central Bureau of Investigation in case No. RC 7(E)/2003 in the case of the appellant and some other individuals. This FIR was registered on the basis of complaint made by Unit Trust of India Growth Fund. As per the closure report, allegation made by Unit Trust of India Growth Fund was that it was cheated. It was alleged that UTI Growth Fund had applied for allotment of shares in the appellant-company through private placement by paying premium of Rs. 120 per share. It was alleged that the Equity Research Cell, a Department of Unit Trust of India, had not recommended subscription by private placement and as per the estimate, the moderate rate of each shares of the appellant was Rs. 30 to Rs. 36 per share. I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....A company is a separate and distinct entity in law. It is an artificial person. Shareholders are entitled to dividend but are not owners of the property owned by and belonging to the company. The shareholders cannot also claim right in consideration received by the company on sale of its property. This has to be understood in light of the agreement between Unit Trust of India Growth Fund and the appellant-company. SYIL was not a party to the said agreement. Therefore, transaction between the appellant and SYIL to allot shares to the shareholders of the appellant and not allot any shares to the appellant on transfer of the business undertaking, appears to be unusual. As a result of the transfer of the undertaking minus all the liabilities, the appellant was merely reduced to a shell company with the understanding that application will be filed to get its name struck off from the office of Registrar of Companies. By allotting shares to the shareholders of the appellant in SYIL, the appellant got over the terms agreed upon with Unit Trust of India not to issue any equity or preference shares, change the capital structure, etc., without its approval. At the same time, SYIL had the adva....