TaxTMI 
TaxTMI 
2015 (11) TMI 1075
X X X X Extracts X X X X
X X X X Extracts X X X X
....e involved in the matter. The first suit was filed by M/s. Jute Investment Company Limited on 8th October, 2015 and summon and notice was issued for 12th October, 2015 and on 12th October, 2015, the second suit was filed by M/s. Rameshwara Jute Mills Ltd. M/s. Universal Cables Limited is the defendant No.4 in CS (OS) No.3082/2015 and is defendant No.1 in CS (OS) No.3105/2015 (hereinafter referred as company or defendant No.1 for convenience). 2. The plaintiff has filed the above mentioned suit seeking inter alia the following reliefs: "a) Pass a decree declaring the Letter of Offer/ Abridged Letter of Offer both dated 14th September 2015 issued by Defendant No. 4 as unlawful, null and void ab-initio; b) Pass a decree of Permanent Injunction thereby injuncting the Defendants from proceeding with the Letter of Offer/ Abridged Letter of Offer both dated 14th September 2015 issued by Defendant No. 4; c) Pass necessary order staying the allotment of Right Shares until the existing holding of the Promoter and Promoter Group entities is finally determined; d) Initiate prosecution proceedings against all the Defendants for misleading incorrect and untrue statements in the Le....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... name of plaintiff has not been shown as part of "promoter and promoter group of companies" of the defendant No.4 in the said Letter of Offer. The shareholding of the plaintiff in the defendant No.4, being 59107 shares, has also not been included in the shareholding of the "promoter and promoter group of companies" in the said Letter of Offer. The non-inclusion of the plaintiff in the "promoter and promoter group of companies" of defendant No.4 is deliberate as the other defendants wish to control defendant No.4 in order to deny to the plaintiff the special rights as enjoyed by the promoter of a Company under law and also recognized in the said Letter of Offer. v) The said act of the defendants is contrary to the various provisions of Companies Act, 2013, SEBI (substantial acquisition of shares and takeovers) Regulations 1997 and 2011 and SEBI (issue of capital and disclosure requirements) Regulations, 2009 wherein it mandates that shareholder falling within the category of promoter group is recognized as a special category of shareholder. A promoter has a number of rights and obligations and they play an active role in the affairs of the Company. vi) In paragraph 28 under th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to: (a) to apply for Equity Shares being offered to them pursuant to the Rights Issue to the extent of their Rights Entitlements; (b) to apply directly or through the Promoter Companies for any Equity Shares renounced in their favour; and (c) to apply directly or through the Promoter Companies for any additional Equity Shares in the Rights Issue only to the extent of any unsubscribed portion of the Rights Issue, subject to the applicable law, to ensure that at least 90% of the Rights Issue is subscribed." viii) It is also stated in the plaint that the defendant No.4 is a part of M.P. Birla Group of companies. The defendant No.4 was setup and promoted by Madhav Prasad Birla. Madhav Prasad Birla during his life time and after his death his wife Priyamvada Devi Birla were the promoters of the defendant No.4 and controlled the controlling block of shares in defendant No.4. After the death of Priyamvada Devi Birla, by an order dated 23rd August, 2012 passed by the Division Bench of High Court at Calcutta a committee of Administrators pendente lite has been appointed over the estate of Priyamvada Devi Birla. The said judgment also held that the estate of Priyamvada Devi Birla includes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e lite, holds 0.18% shares in defendant No.1 and such shares are part of promoter and promoter group of Company and have been wrongly excluded from promoter and promoter group of Company in the letter of offer. Some trusts and societies hold 8.02% shares in defendant No.1 and such shares are part of promoter and promoter group of Company and have been wrongly excluded from promoter and promoter group in the letter of offer. Similar holding in other listed companies of the MP Birla Group (BirIa Corporation Limited and Birla Ericsson Optical Limited) have been duly included in the holding of Promoter and Promoter Group and therefore there is no reason to exclude these holding of shares from promoter and promoter group. Amendment to Clause 35 of the listing agreement was applicable to all listed companies in the same manner. It is done with a oblique motive of denying them special rights which are attached to promoter shareholding as recognised in the Companies Act, 1956 and various SEBI Regulations. The special rights have also been recognised in the said letter of offer. Many false and misleading statements have been made in the said letter of offer with the scheme and design of all....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te arising out of the Issue will be subject to the jurisdiction of the appropriate court(s) in Madhya Pradesh only." It is stated that the Courts in Madhya Pradesh only have jurisdiction. 8. The second objection is raised that the present suit is not maintainable as the present challenge to validity of the Letter of Offer would lie before the Securities & Exchange Board of India (hereinafter referred to as "SEBI") and the mechanism provided under the Securities & Exchange Board of India Act , 1992 (hereinafter referred to as SEBI Act) in view of the reason that the Draft Letter of Offer was submitted before the Securities & Exchange Board of India as mandated by law and only after receiving observations from SEBI and making necessary compliances to the satisfaction of SEBI, the said Letter of Offer dated 14th September, 2015 was issued. Thus, by challenging the said offer on behalf of the plaintiff, who sought to challenge the satisfaction expressed by SEBI with the same and such a challenge could only be made under the SEBI Act or the applicable regulations issued under the said Act. The plaintiff has not even made SEBI a party to the present suit. 9. Thirdly, it is submi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to be made under Sub Clause (a),(b),(c), (d), (e) of the same. So far as clauses (a) to (c) are concerned the Board has no discretion whatsoever. With respect to sub clause (e) it may appear that the board has a discretion but in fact on a strict construction of the said sub clause, it would be apparent that no discretion vests with the Board inasmuch as the allotment of equity shares has to be done in consultation with the designated stock exchange and further it is stipulated that it will not be a preferential allotment. The said basis of allotment has been approved by both the stock exchanges i.e. BSE Limited and the National Stock Exchange of India Limited having nationwide terminals. During the course of hearing, it was informed that the question of exercise of discretion in the present case does not arise as the issue was over-scribed at the stage of (a) to (c), the subsequent stage has not arrived. Thus, the grievance of the plaintiffs has become infructuous. 11. It is also alleged that the basis of allotment set out in the Letter of Offer is the usual practice followed in such rights issues and letters of offer. In all listed companies the similar process of basis of al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sted on 27th November, 2015. 15. On the other hand, on behalf of both the plaintiffs it is stated that several false and misleading statements have been made in the impugned Letter of Offer dated 14th September, 2015 with the scheme and design of allotting higher number of additional shares to the "Promoter and Promoter Companies" and thereby have the total holding of "Promoter and Promoter Companies" much beyond the ceiling limit of 75% holding of all promoter and promoter group entities imposed by Securities and Exchange Board of India. The said Letter of Offer includes many false and misleading statements. The same are referred as under: (i) The shareholding of the "Promoter and Promoter Group" of defendant No. 1 has been wrongly shown as 52.55% as against 60.93%. (ii) The plaintiff holds 0.11% shares in defendant No. 1 and such shares are part of promoter and promoter group of defendant No. 1 and have been wrongly excluded from "Promoter and Promoter Group" of defendant No. 1 in the letter of offer. (iii) Late Priyamvada Devi Birla, now her estate represented by Administrators pendente lite, holds 0.18% shares in defendant No. 1 and such shares are part of promoter ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to act. Further, Regulation 2(1)(za) of the ICDR Regulations defines "promoter" to include persons in control of the issuer. Regulation 2(1)(zb) defines "promoter group" in a wide manner to include several connected entities. The defendant No. 1 has in fact not complied with such definition. The said exercise is not permissible and in this regard the legal framework prescribed under the SEBI law bars such re-classification of promoters as public. The SEBI document dated 23rd June, 2015 provides only three circumstances under which such re-classification is permissible. None of the said circumstances exist in the present case. 18. It is argued on their behalf that the misrepresentation with regard to the correct status of "promoter and promoter group" of the defendant No.1 Company vide the impugned Letter of Offer has resulted in ousting the plaintiff and certain other entities (including the estate of PDB) from the said category thereby clearly resulting in grave prejudice to the plaintiff and such entities. On account of such malafide and illegal exclusion, instead of the total percentage holding of the "promoter and promoter group" of the defendant No. 1 Company being 60.93% i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... rights issue, the defendant No. 1 has sought to allot shares only to a specific group of shareholders, thereby effectively undertaking a preferential allotment without complying with Section 62(1)(c) of the Companies Act and specific regulations and guidelines of Securities and Exchange Board of India for issue of shares on preferential basis. The Rights Issue is in contravention of the Companies Act and SEBI Regulations and hence illegal. 24. It is submitted that there has been no delay on the part of the plaintiff in approaching this Court as the plaintiff is not represented on the Board of Directors of the defendant No. 1 and therefore, no notice of such board meeting was given to the plaintiff. It is submitted that in the Postal Ballot Notice, the defendant No. 1 had not provided at all the terms and conditions of the Rights Issue. The price of the Rights share has also not been provided in the said Notice. The said Notice as well as the explanatory statement is vague and lacking in material particulars. The Defendant No. 1's contention that the Rights Issue has been approved by 99.16% of the shareholders is of no consequence as the shareholders who were present and voti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Issue. 30. The dispute between the parties is not merely a breach of the Regulations framed by SEBI, but also allegations of fraud committed by the defendant No. 1 Company and its Board of Directors. Therefore, Section 15Y of the SEBI Act is not a bar to the present suit. Arguments on behalf of the defendants 31. Apart from various objections raised in the reply about the maintainability of the suit and interim application, it is argued on behalf of the defendants that after filing of the instant suit, the plaintiff had applied for equity shares to the extent of its rights entitlement (29,553 nos. of shares of a value of Rs. 15,07,203/-) in the Rights Issue under Letter of Offer dated 14th September, 2015 in terms of clause (a) of the basis of allotment mentioned in page 148 of the Letter of Offer. The process of allotment of equity shares under the rights issue has been completed on 20th October, 2015 itself on the basis of allotment approved by BSE. The plaintiff was eligible for additional shares under the said rights issue but did not applied for the same as provided in clause (c) of the basis of allotment. The plaintiff now cannot raise any objection as regards the b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... set out in the present Letter of Offer is the usual practice followed in such rights issues and letters of offer. In all listed companies the similar process of basis of allotment is followed. Defendant No.2 who is the Registrar of the present Letter of Offer had issued letter dated 13th October, 2015 setting out the process of basis of allotment. The offer has been fully subscribed and in fact oversubscribed in stage (a)(b) and (c) itself - special rights of a promoter company, if any, would have only come after exhaustion of stage (e). The plaintiffs were entitled to apply for additional share at stage (c) but have chosen not to apply. 36. On behalf of the plaintiffs it is submitted that 52.55% of shareholding in the company is shown to be held by promoters & promoters Companies whereas total shareholding of Promoters & Promoters Companies should have been shown as 61.12%. Following categories excluded from promoter & promoter Companies, namely, (a) 8.02% held by trust & societies, (b) 0.18% of Late Smt. Priyamvada Devi Birla's estate., (c) 0.26% of plaintiff in CS(OS) No. 3082/2015 and 0.11% of plaintiff in CS(OS) No.3105 of 2015. In reply to the submissions of the learned S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ghts price determined as per regulations and there is no infirmity with the same. 39. With regard to argument that as to why the object is repayment of promoter loan and not loans of bank or third parties, in reply it is submitted that the defendant No.1 has not taken any loans from third parties. The only borrowing from the Bank is from State Bank of India. The same is only for regular working capital, which is renewable every year. The Bank is fully aware of the purpose of the rights issue including objects of the rights issue and letter of offer and has given its consent for the rights issue vide its letter dated 20 April 2015 for bringing rights issue. 40. The bank by its letter dated 14th October, 2015 while renewing the working capital credit facility has put a covenant stating that increased working capital facility would be released subject to completion of rights issue thus any injunction would directly impact defendant No.1's working capital and result in losses. It is submitted that the objects of the Issue was clearly and explicitly set out in the Letter of Offer dated 14th September, 2015 and as contained under Internal Risks disclosure No. 1, No. 13 and No. 17 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e pre-requisite for applying under clause 'c' is that one must be an Eligible equity shareholder. An Eligible equity shareholder is defined at Page No.5 of documents filed with the Plaint as Section I - General definitions and abbreviations and as per definition of eligible equity and shareholders/eligible shareholders means:- "Equity shareholders whose names appear on the register of members of our Company or on the list of register of beneficial owners of our Company maintained by the Depositories as at the end of business hours on the Record Date i.e. September 18,2015." 45. The said definition includes both promoters and non-promoters. The same has also been clarified at the 'Options available to eligible shareholders' at page 135 of documents which have been filed with the plaint which reads as under :- "If the Eligible Equity shareholders applies for an investment in equity shares then Eligible Equity shareholder can: - Apply for its Rights Entitlement of Equity Shares in full; - Apply for its Rights Entitlement of Equity Shares in part; - Apply for its Rights Entitlement of Equity Shares in part and renounce the other part of Equity Shares; - Apply for i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ium of Rs. 41/- per share. 48. Break-up of applications received in the rights issue as per details supplied on behalf of the plaintiffs are as follows : Total No. of Shares issued in the Rights Issue 11565127 Promoter Group Holding (Admitted) 52.55% Excluded (Trusts,Society, Estate) 8.02% Excluded (June Investment) 0.26% Excluded (Rameshwara) 0.11% 60.94% Promoters' Entitlement in the Issue 7047788 60.94% Shares Applied by Shareholders out of Entitlement Promoters' entitlement being higher than total shares applied - It is assumed that all shares applied are by the Promoters only. 7047590 60.94% Shares applied by Renouncees out of entitlement (Presumed to be all by Promoter Group) 1831280 15.83% Additional shares applied by shareholders (Presumed to be all by Promoter Group) 4833825 Shares allotted proportionately to applicants. 2686257 23.23% Hence,100% issue i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Allotted to Renouncees 0 (d) Total Shares Allotted (a+b+c) 1,15,65,127 50. It is a matter of fact that the ex-parte order was not granted in the matter. Both parties made their submissions on 19th and 20th October, 2015. Learned Senior Counsel appearing on behalf of the plaintiff had made his rejoinder arguments on 20th October, 2015 in the morning session. After lunch counsel for the defendants had replied to the rejoinder argument wherein additional points were raised. The arguments in both the matters are common. Due to Dussehra holidays, the Courts were closed between 21st October, 2015 to 27th October, 2015. Thus, counsel for the plaintiff was pressing for interim order of status quo as he apprehends that the process of allotment of shares may likely to be completed, however, counsel for the defendant No.1 was opposing the said request. The suggestion was also made that let the matter be taken up after holidays for further hearing and for passing the orders in the applications. The matters went up to 4:30 pm. Due to official work after 4:30 pm, it was informed to the parties that the interim order of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tatus quo order. The plaintiff submitted that the defendants have acted in hurried manner as they were expecting status quo order from the Court. The act of the defendants was with the motive to negate the effect of the order passed by the Court. 54. As far as the contempt applications filed by the plaintiffs are concerned, the same would be considered as per merit. However, at present, this Court's main concern is whether the plaintiffs are entitled to the interim injunction in view of the averment made in the plaint and the documents placed on record. It appears that plaintiffs have also raised the grievance of the third party who is not before the Court. It is a commercial dispute between two set of parties, the right of third party cannot be decided. They are at liberty to initiate separate action if so derived. Let me now deal with the submissions of both the parties. 55. It is now to be considered whether on the date of filing of the suit, the plaintiffs were entitled for injunction or not. 56. The first objection of the defendants is that the plaintiff is not a promoter of defendant No.1. Admittedly, the plaintiff in the first suit alleged that he is a part of promo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it has not shown defendant No.1 as a promoter company while showing M/s Jute Investment Company as a part of promoter or Promoter Companies. 60. The objection of the defendants is that the challenge to validity of the Letter of Offer about alleged non disclosures would lie before the Securities & Exchange Board of India and the mechanism provided under the Securities & Exchange Board of India Act, 1992. There is a force in the submissions of the defendants as in September, 2013 whey they were not shown as promoters of the company, the plaintiffs could have approached the SEBI by raising their grievances when there was discussion about the Letter of Offer or issue of rights issue. It came in the picture on 31st March, 2015. The plaintiffs at that point of time only had jurisdiction before SEBI but the same did not happen. There was no impediment at that time on the part of the plaintiffs to approach the SEBI. 61. As per regulation 6 of the SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009 no issuer can make a rights issue unless it files the draft offer document with SEBI and incorporate changes therein, if any, suggested by SEBI. As per regulation 57(2)(b),....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act." Further Section 20 A of Securities and Exchange Board Act 1992 reads as follows: "No order passed by the board [or the Adjudicating officer] under this Act shall be appealable except as provided in [Section 15 T or] section 20 and no civil court shall have jurisdiction in respect of any matter which the Board [ or the adjudicating officer ] is empowered by, or under, this Act to pass any order and no injunction shall be granted by any court or other authority in respect of any action taken in pursuance of any order passed by the Board [or the Adjudicating Officer] by, or under this Act]. 66. In Kesha Appliances (P) Limited v. Royal Holdings Services Ltd., (2005) 65 SCL 293 (Bom), it was held by the High Court of Bombay that the jurisdiction of the civil court is barred by virtue of the provisions of Section 15Y and Section 20A of the SEBI Act. 67. There is no force in the submission of the plaintiff that they cannot go to the Company Law Board as the shareholding is less than 10% as....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the equity shareholders on rights basis as announced by them in the letter of offer. The learned single Judge has found that a prima facie case has not been made out to grant injunction as prayed for by the plaintiffs, particularly because the general body has passed the resolutions at the extraordinary general meeting. He has held that the plaintiffs have no right to dictate terms to the company to fix the value of the share at a particular rate and, therefore, they are not entitled to get any order for interim relief. In that view, the learned Judge has dismissed all the four applications before him." 70. There is no force in the submissions. Learned Senior Counsel has argued that most of the issues/objections raised by the plaintiffs are of technical in nature which could have been taken by the plaintiffs before SEBI, if they had. The same cannot be determined after completion of entire process particularly in the interim application. The plaintiffs had enough time to raise the same before appropriate authority and not before this Court at this stage. Delay and Laches 71. The plaintiff was at least aware from September 2013 about its non inclusion as part of Promoter &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....easons set out in the preceding paragraphs of our judgment in relation to the fact which should weigh with the court in the grant of ex parte injunction and the rulings of this Court must be borne in mind." 74. With regard to objection raised on behalf of the plaintiff that the object for which the rights issue is being made is not justifiable i.e. repayment of loans of Promoter and Promoter Companies and it was argued that some of these loans are not even due till 2017, it was submitted that the object of the letter of offer was set out in the Board Resolution dated 31st March, 2015. The said Resolution was put up for voting by postal ballot to the shareholders. In the postal ballot form sent to shareholders the object of the letter of offer is clearly disclosed at page 175 of the documents filed with the reply. The postal ballot form was sent to the plaintiff at page 181 of documents filed with reply. The plaintiff chose not to vote. 99.97% of the valid votes cast on the resolution by the shareholders voted in favour of the said resolution. Report of postal ballots is filed. SEBI raised a query on the object of the issue vide its interim observations dated 23rd June, 2015. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ever issued with regard to the letter of offer from marketing office at Delhi and the same were issued only from the registered office of defendant No. 1 located at Satna, Madhya Pradesh. The plaintiff has alleged that the letter of offer has been issued by defendant No. 1 within the territorial jurisdiction of this Court. The said averment is not correct as the Letter of offer was issued and dispatched to the shareholders by defendant No.2 from Mumbai and submitted with SEBI by defendant No.4 in Mumbai and submitted by defendant No.1 to the stock exchanges from Satna, Madhya Pradesh. Thus, no part of cause of action to file the present suit arose within the territorial jurisdiction of this Court. Assuming though denying that any part of cause of action arose in Delhi, even then in view of the categorical jurisdiction clause, only the Courts in Madhya Pradesh would have jurisdiction to entertain the suit, assuming the same is maintainable. 79. It is settled law that even where courts in two places may have jurisdiction, an exclusive jurisdiction clause in favour of one of the two places ousts the jurisdiction of the other. Swastik Gases Pvt. Ltd. v. Indian Oil Corporation Ltd, ....