TaxTMI 
TaxTMI 
2004 (7) TMI 695
X X X X Extracts X X X X
X X X X Extracts X X X X
....re listed in the Ahmedabad Stock Exchange, Delhi Stock Exchange, Ludhiana Stock Exchange, Calcutta Stock Exchange and Mumbai Stock Exchange. 4. The company went in for two issues of secured debentures. The first issue opened on 1-9-1999 and the second issue on 1-4-2000. The company wanted to set up a chicken processing plant and wanted to expand its activity in floriculture and steel plant. Each issue was for Rs. 10 crores with a green-shoe option of Rs. 500 lakhs. It was alleged that these debentures were not offered to select group of persons and therefore the offer of debentures was not a private placement but a public offer. Admittedly, two commission agents, who felt aggrieved by perhaps the non-payment of commission or for some other reason best known to them, gave a complaint to SEBI to the effect that funds were collected by the company from the public and requested SEBI to enquire into the matter. 5. The SEBI at Annexure A-1 issued a show cause notice to the company under the heading "Violation of the Provisions of Companies Act, 1956 Notice for Prosecution". The first show cause notice of 25th of September 2000 is marked as Annexure A-1. The allegation in the notice....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d gone in for two public issues of secured debentures or, on the materials before us, whether these issues of secured debentures were, in fact, private placement as claimed by the company? (2) Whether SEBI had the power to issue Guidelines without those Guidelines being laid before Parliament as required under Section 31 of the Securities and Exchange Board of India Act, hereinafter referred to as 'the Act'? (3) Whether SEBI's impugned order survives for consideration in the light of the order of the Supreme Court in Civil Appeal 9738 of 2003 wherein the debenture-holders have been allowed to convert their debentures into preferential shares by consent of the debenture-holders and the company with effect from 1st of April, 2003? (4) Whether there was any grievances from the Debenture-holders? (5) Whether SEBI had power to restrain persons from accessing the securities market prior to the introduction of Section 11(4) of the Act, which was inserted by the Securities and Exchange Board of India (Amendment) Act, 2002 Section 4(d) and came into force with effect from 29-10-2002? 10. First issue to be addressed t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to 50 or more persons, it ceases to be a private placement. The first proviso reads as follows : "Provided that nothing contained in this sub-section shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more," This proviso was not in force when the two debenture issues were made by the company. The first issue was on 1st of September, 1999 and the second issue was on June 1, 2000. The allotments were completed by July, 2000. Therefore, the proviso, which came into force on 13-12-2000 holding that any issue made to 50 or more persons will be deemed to be public issue, was not in force. 13. We are now left with the definition of a 'public issue' before the amendment. Section 67(3) of the Companies Act stipulates in the negative to the effect that no offer or invitation shall be treated as made to the public if the offer or invitation does not result directly or indirectly in the debentures being available for notice by persons other than those receiving the offer or initiation. In other words, no offer shall be treated as being made to public unless it can be shown that directly or indirectl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of SEBI is not paragraphed (it would be advisable for SEBI in future to paragraph the order for the convenience of the readers) we have to necessarily make a reference to the operative portion of the order at pages 9, 10 and 11 of the impugned order by which reasoning SEBI comes to the conclusion that the Debentures are public placement. It reads as under : "The matter of raising funds by TIIL allegedly by way of issue of privately placed debentures was brought to notice of SEBI by Banamali Maji and Ashok Chakraborty or West Bengal. Copies of letter of offer and application form for issue of secured debentures were furnished and advice sought from SEBI in regard to becoming agents of TIIL. Similarly reference was also received from Laxmi Narayan of Agra and I.K. Mishra of Calcutta (forwarded through PMO). Reference were also received from the Dy. Commissioner of Police, Detective Department, Calcutta bringing to SEBI's notice that TIIL was mobilizing public money against issuance of secured debentures and that TIIL had engaged agents for that purpose. The letter also specified names and telephone numbers of certain agents of TIIL such as Shri Amal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Investment Co. Ltd. v. Christopher [1956] 1 WLR 237 (Ch.D.), the Court interpreted the provision in the English Companies Act, 1948, which was similar to Section 67 of the Companies Act, 1956. 21. Section 38(3) of the English Companies Act, 1948 reads as follows: "Subject to the provisions of the next following section, it shall not be lawful to issue any form of application for shares in or debentures of a company unless the form is issued with a prospectus which complies with the requirements of this section : provided that this sub-section shall not apply if it is shown that the form of application was issued either - (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to the shares or debentures; or (b) in relation to shares or debentures which were not offered to the public. ..." [Emphasis supplied] 22. The proviso is more or less the same as in Section 67(3) of the Companies Act, 1956. While interpreting whether the offer was public or private, the English Court pronounced as follows: "It is alleged by the plaintiff company that it is a prospectus to which Section 38 of the Compan....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., December 30, 1955.' Then follows the heading : 'Form of Acceptance and Transfer'. It is addressed to Union-Castle as agents for the new company, and it then states: 'I/We', a blank being left for the name of the shareholder or stockholder to be inserted, 'hereby irrevocably accept the offer made to me/us by the British and Commonwealth Shipping Co. Ltd. (hereinafter called "the new company") and contained in the new company's circular letter (hereinafter called the "offer") dated November 12, 1955 to acquire my/our holding of (blank) ordinary stock in the Union -Castle Mail Steamship Co. Ltd. (hereinafter called "the stock") upon the terms and subject to the condition set out therein'. Paragraph (2) states that the stockholder encloses his stock certificate which is to be held by Union-Castle upon the terms of the offer. Paragraph (3) provides that, subject to the offer becoming unconditional, the signature of the stockholder to the form of acceptance and transfer shall constitute for Union-Castle an execution by the stockholder of an instrument of transfer of the stock to the new company, and the stock holder further undertakes to execute any furt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....panies Act have been defined to mean design, forethought or intention to accomplish a purpose. The Court pronounced as follows : "(8) Mr. H.S. Daobia, learned counsel for the petitioners, has drawn my attention to Section 5(1)(iii) of the Companies Act, 1956. It defines 'private company' which means a company which by its articles restricts the right to transfer its share, if any, limits the number of its members to 50, and lastly prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company. According to Mr. Daobia, offer of shares to any person other than the existing members of the company is tantamount to an invitation to the public to subscribe for shares which is under a statutory ban. My attention has also been drawn to Section 67(3) of the Act which runs as under : 'No offer or invitation shall be treated as made to the public by virtue of Sub-section (1) or Sub-section (2); as the case may be, if the offer or invitation can properly be regarded, in all the circumstances: (a) as not being calculated to result, directly or indirectly, in the shares or debentures bec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s no application to the facts of the present case. A clear reading of Section 76 would indicate that even with respect to a private placement there can be employment of agents on certain stringent conditions. But to simply say that merely because agents were employed the debenture becomes public and the provisions of the Guidelines are attracted, is erroneous. Even with respect to the statement of agents and the letter of the Deputy Commissioner of Police, Kolkata, the learned senior counsel for the respondent submitted that the reference to the letters received from Banamali Majhi/Ashok Chakraborty/Lakshmi Narayan/I.K. Mishra clearly and admittedly shows that these persons had written to SEBI seeking advice "to become agents of the appellant company". In actual point of fact, admittedly these four persons were not the agents of the appellant company at any point of time. They were not investors. They had nothing to do with the debentures in question. They had nothing to do with the two issues. 31. With respect to the letter from the Dy. Commissioner of Police, Kolkata, it appears that on a perusal of the letter the police did not make any complaint against the company or in res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther than to those receiving the offer or invitation. In other words, there must be a design or intention on the part of the company by its conduct which results in a gate crasher accepting the offer or invitation. It must be established -- (a) that there was a calculated offer on the part of the company to bring in an uninvited guest to subscribe to the debenture. (b) that persons other than those receiving the offer or invitation had in fact actually subscribed to the offer. It these two conditions are fulfilled, then no amount of camouflage in the letter of offer can make a public issue into one of a private issue. In this regard, we have given oar anxious consideration to the facts and circumstances of the case emanating from the impugned order. Certainly SEBI could have done a better job by examining during enquiry one or two subscribers to determine whether they were invited or not. That would have been a clinching proof to hold that a public issue was sought to be brought out in the guise of a private issue. The reasons given by SEBI for holding it as a public placement, is, strictly speaking, not in accordance with law. As expressed by us....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cial Gazette;" The power to make Regulations is under Section 30 of the Act. Section 30 reads as follows : "Power to make regulations.--(1) The Board may, by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely :-- (a) the times and places of meetings of the Board and the procedure to be followed at such meetings under Sub-section (1) of Section 7 including the quorum necessary for the transaction of business; (b) the term and other conditions of service of officers and employees of the Board under Sub-section (2) of Section 9; (c) the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which such matters shall be disclosed by the companies under Section 11A; (d) the conditions subject to which certificate of registration is to be issued, the amount of fee to be paid for certificate of registration a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Act. We have no difficulty in understanding the power of the Central Government or the SEBI Board, as the case may be, to issue 'Rules' and 'Regulations' respectively. But can SEBI create a new class of procedure, which is ultimately punitive in nature without authority of law. The closest parallel to 'Guidelines' where some judicial pronouncement is available in the form of case law is that of 'circulars' under the Income-tax Act. We have, therefore, perused the Income-tax Act. It appears that a 'circular' is not defined in the Income-tax Act just as 'Guidelines' are not in the SEBI Act. The Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 597, 7 Taxman 13 pronounced that circulars are binding on Income Tax Authorities and further they are in the nature of contemporanea expositio and are legitimate aid in construction of law. It was further held that contemporanea expositio and hence, Circulars, must be clearly wrong before they are overturned. Under Central Excise law, the Supreme Court in Paper Products v. CEC AIR 1999 SC 3341, pronounced that CBEC Circulars are binding on excise authorities. In CCE v. Usha Martin Industri....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (3) Hukam Chand v. Union of India [1972] 2 SCC 601. (4) Atlas Cycle Industries Ltd. v. State of Haryana [1979] 2 SCC 196. Therefore, even assuming that the 'Guidelines' are 'regulations', we do not think it is necessary to hold that the Guidelines have no force in law merely because they have not been laid before Parliament since there is a saving clause in Section 31 itself. We accordingly reject the contentions of the appellants that these Guidelines cannot be a subject-matter of an enquiry since they have not been placed before the Parliament. In passing, we would like to add that a time has come to define guidelines in the Act and to end this controversy once and for all. Issuance of such guidelines in conformity with the provisions of the Act will be beneficial to SEBI and to the investor public for the efficient management of the securities market. SEBI must be empowered in the Act to issue guidelines from time to time. This power will enable SEBI to take action for violations of the guidelines in accordance with law as is being done for violation of the Regulations in accordance with law. We will have it at that: 40. Mr. De....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the order of the Delhi High Court and the Delhi High Court requested a retired High Court Judge to determine whether the debentures could be converted into preferential shares. The retired High Court Judge submitted a report and pursuant to which the High Court passed the following order : "Notice. Mr. Bhatnagar accepts notice on behalf of the defendant. By way of present application plaintiff prays that a decree be passed against the defendant in the light of the order dated 29th May, 2003 wherein the defendant had agreed that it would be bound by the result of the meeting held in terms of the said order. The plaintiff has filed the present suit against the defendant for declaration and permanent injunction. Vide order dated 29th May, 2003 this Court directed that a meeting of all the debenture holders be held to decide whether debentures are to be converted to preference shares. With the consent of the parties justice S.N. Kapoor (Retd.) was requested to convene a meeting of the debenture holders of the defendant company. A meeting of all the debenture holders was held under the Chairmanship of Justice S.N. Kapoor (Retd.) where only 7 debenture holders were repr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sposed of." The order of the Supreme Court appears to have covered both the debenture issues and in view of the conversion from debentures to preferential shares, the order of SEBI asking the company to refund the amount to debenture-holders has become unenforceable since it appears to be the desire of the debenture-holders to convert their holdings into preferential shares. In that view of the matter, there is common ground, both on behalf of the appellants and the respondent, that the order of SEBI in so far as directing the company to refund the money is unenforceable and is accordingly set aside as SEBI and this Tribunal are respectfully bound by the orders of the Supreme Court. 43. The next question to be answered by this Tribunal is whether there were any grievances by the debenture-holders, which were not redressed by the company either before the SEBI or while the matter was before us. We have given our anxious consideration of this matter. Although we have held that it is not possible to hold that the debentures are a public placement, we are of the view that as a court of equity we would be justified in directing the company to redress all grievances from the date o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e debenture-holders till the cut off date of 1st of April, 2003 (Supreme Court order), the appellants shall redress the grievances, if any, brought to their notice. 46. The appellants have also suffered an adverse order directing them not to access the market for a period of five years. This order was passed on 25th of March, 2003. This order has been in force for nearly one year and four months. We feel in the facts and circumstances and for the reasons stated above, this period shall be treated as the period of ban already undergone. We accordingly reduce the period mentioned in the impugned order from five years to the period already undergone by the appellants. 47. The last question that arises for consideration is whether SEBI has power to restrain persons from accessing the securities market prior to the introduction of Section 11(4) of the Act w.e.f. 29-10-2002. It was vehemently submitted by the senior counsel, Sri S.K. Kapur, that the provisions of Section 11(4) of the Act conferring upon the Board the power to take measures mentioned therein were inserted into the Act by Section 4(d) of the Securities and Exchange Board of India (Amendment) Act, 2002 with effect fro....