Delhi High Court
M/S The Rameshwara Jute Mills Ltd vs M/S Universal Cables Limited & ... on 16 November, 2015
Author: Manmohan Singh
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment pronounced on : November 16, 2015
+ I.A. No.21503/2015 in CS(OS) 3082/2015
M/S JUTE INVESTMENT COMPANY LTD ..... Plaintiff
Through Mr.Kapil Sibal, Sr.Adv.,
Dr.A.M.Singhvi, Sr.Adv. and
Mr.Rajiv Nayar, Sr. Adv. with
Ms.Misha Rohatgi Mohta,
Ms.Gunika Gupta & Ms.Aayushi
Sharma, Advs.
Versus
IDBI CAPITAL MARKET SERVICES LIMITED & OTHERS
..... Defendants
Through Mr.Amit Mahajan, Adv. for D-1.
Mr.P.Chidambaram, Sr. Adv. with
Mr.Ankur Chawla, Ms.Megha Gupta
& Ms.Kanika Singh, Advs. for D-4.
Mr.A.S.Chandhiok, Sr. Adv. with
Mr.Ankur Chawla, Ms.Kanika
Singh, Ms.Shweta Kakkad,
Ms.Monika Tyagi, Ms.Megha
Gupta & Ms.Mallika Mendhiratta,
Advs. for D-5.
+ I.A. No.21723/2015 in CS(OS) 3105/2015
M/S THE RAMESHWARA JUTE MILLS LTD ..... Plaintiff
Through Dr.A.M.Singhvi, Sr.Adv. and
Mr.Sandeep Sethi, Sr. Adv. with
Mr.Neeraj Chaudhari & Mr.Prashant
Sanghi, Advs.
versus
CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 1 of 52
M/S UNIVERSAL CABLES LIMITED & OTHERS ... Defendants
Through Mr.P.Chidambaram, Sr. Adv. with
Mr.Ankur Chawla, Ms.Megha Gupta
& Ms.Kanika Singh, Advs. for D-1.
Mr.Amit Mahajan, Adv. for D-4.
Mr.A.S.Chandhiok, Sr. Adv. with
Mr.Ankur Chawla, Ms.Kanika
Singh, Ms.Shweta Kakkad,
Ms.Monika Tyagi, Ms.Megha
Gupta & Ms.Mallika Mendhiratta,
Advs. for D-5.
CORAM:
HON'BLE MR.JUSTICE MANMOHAN SINGH
MANMOHAN SINGH, J.
1. By way of this common order, I propose to decide the two
applications filed by the two respective plaintiffs in the suit for
declaration and permanent injunction being common issue 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 Letter of Offer and Abridged Letter of
Offer."
3. In the interim applications the plaintiffs have sought inter alia an
interim order restraining the defendants from proceeding any further
with the Rights Issue under the impugned Letter of Offer dated 14th
September, 2015 in any manner during the pendency of the suit.
4. Let me now deal with the merit of the case. Main facts in
CS(OS) No.3082/2015 as per the plaint are follows :
i) The plaintiff is a part of the promoter & promoter group of
defendant No.4-M/s Universal Cables Limited and holds 59107
equity shares (being 0.26%) in the said defendant who is the
Lead Manager to the Rights Issue proposed by defendant No.4.
The said company is engaged in the business of manufacturing
of Cables and Capacitors. The equity shares of the defendant
No.4 Company are listed on BSE Limited and National Stock
Exchange of India Limited.
ii) The defendant No.5 is the Chairman of the defendant No.4
Company and engaged in day-to-day affairs of the defendant
No.4 Company. Defendant No.6 is the Manager and the Chief
Executive Officer of the defendant No.4 Company. The
defendant No.7 is the Manager and Chief Operating Officer of
the defendant No.4 Company. The defendant No.8 is the Chief
Financial Officer of the Defendant No.4 Company. Defendant
Nos. 9 to 14 are the Directors of the defendant No.4 Company.
Defendant No.3 is the Compliance Officer and Company
Secretary of the defendant No.4 Company. The defendant No.2
is the Registrar and the Share Transfer Agent to the Rights
Issue.
iii) In or about third week of September, 2015 the plaintiff came to
know that defendant No.4 had issued a Letter of Offer offering to
issue 1,15,65,127 equity shares of the face value of Rs.10/- and
at issue price of Rs. 51/- each to its shareholders, including the
plaintiff, in the ratio of 1 share against the existing 2 shares. The
said Letter of Offer did not disclose all material facts and would
not enable a shareholder to take an informed decision as to
whether or not to subscribe to the said Letter of Offer. In the said
Letter of Offer the names of various companies falling under
"promoter and promoter group of companies" of the defendant
No.4 has been specified to be holding a total shareholding of
52.55%.
iv) Though the plaintiff, has at all material times, been a part of
promoter/promoter group of the defendant No.4. But the 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 the heading "Risk Factors" of the said
Letter of Offer, the special rights and powers to be enjoyed by
the promoters and which has now been purported to be denied
to the plaintiff, has been recognised. Paragraph 28 of the Letter
of Offer has been reproduced herein below:
"28. Our Company may continue to be controlled by its
Promoters and Promoter Companies following this
Issue and our other shareholders may not be able to
affect the outcome of shareholders' voting.
After the completion of this Issue, our Promoters and
Promoter Companies will collectively hold atleast
52.55% of the fully diluted post-Issue equity capital.
Further, if our Promoter and Promoter Companies
acquire the additional and renounced shares, their
shareholding will further increase. Consequently, our
Promoters may exercise substantial control over us
and have the power to elect and remove a majority of
our Directors and/or determine the outcome of
proposals for corporate action requiring approval of
our Board of Directors or shareholders, such as
lending and investment policies, revenue budgets,
capital expenditure, dividend policy and strategic
acquisitions. Our Promoters will be able to influence
our major policy decisions and any wrong decision on
their part could adversely affect your investment in the
Equity Shares.'"
The said Letter of Offer seeks to deprive the plaintiff of its
special rights as promoter as recognized in law as well as the
Letter of Offer. The plaintiff being part of promoter and promoter
group of defendant No.4 should have been consulted with prior
to the defendant No.4 coming to a decision of issuing Rights
Issue. Issue of Rights Issue of a Company is an important policy
decision of the Company and a promoter of a Company has a
important role in matters of, inter alia, policy of the Company.
vii) The plaintiff has not been consulted in the decision making
process of the said Rights Issue but has also been denied the
opportunity which was given to the other promoters of the
defendant No.4 Company as provided in page 14 of the
Abridged Letter of Offer issued by the defendant No.4. The
relevant extract has been reproduced here as under:
"Participation in the Issue by our Promoters and
Promoter Companies.
Our Promoters and Promoter Companies have intended
by their letters dated from May 16, 2015 to May 25,
2015, severally 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 controlling
block of shares in M.P. Birla Group of companies, including the
defendant No.5.
ix) The shares of Priyamvada Devi Birla, which are now held by the
Administrators pendente lite, has also not been included in the
promoter and promoter group of defendant No.4 in the said
Letter of Offer. Such omission in the Letter of Offer would
hamper a shareholder in deciding as to whether or not to
subscribe to the said Rights Issue. The true depiction of the
promoter of a Company is a vital relevant information for a
shareholder in order to decide whether to subscribe to the Rights
Issue.
x) From paragraph 1 under the heading "Risk Factor" of the said
Letter of Offer, the Rights issue has been issued mainly for the
purpose of repaying the existing loans of the defendant No.4 to
its promoter and promoter companies and not for creation of any
assets of the defendant No.4. Using of proceeds of a Rights
Issue for the purpose of repayment of loans of a promoter and
promoter group of the Company and not for repayment of loans
of third parties is not a justifiable reason for issuance of Rights
Issue. The issue price of Rs. 51/- fixed in the said Letter of Offer
is without any basis and in fact is a very high and unattractive
price and will not lead to offset the losses being suffered by the
defendant No.4.
xi) The territorial jurisdiction is invoked by stating that the Letter of
Offer and Rights Issue, both Abridged and Full, have been
issued by the defendant No.4 within the territorial jurisdiction of
this Court. Some of the defendants also reside/carry on their
work within the territorial jurisdiction of this Court
xii) The prayer is sought to 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 and
to injunct the defendants from proceeding with the Letter of
Offer/Abridged Letter of Offer both dated 14th September 2015
issued by defendant No.4.
5. In the second suit being CS (OS) No. 3105/2015, in addition to
the averments made in the first suit, it is submitted that the plaintiff
holds 25,152 equity shares holding 0.11% in the defendant No.1.
The holding of the plaintiff has wrongly been shown in the Letter of
Offer. The other following averments are made:
a. 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 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 allotting higher number of additional shares to the
promoter and promoter group and thereby have the total holding
of promoter and promoter group (including the hidden holding of
such excluded entities) much beyond the ceiling limit of 75%
holding of all promoter and promoter group entities imposed by
Securities and Exchange Board of India. Reduced holding of
shares of the promoter and promoter group has purposely been
reflected in the said letter of offer for the purpose of changing the
Company from a public limited to company to a closely held
company, which is illegal. It is done in well-planned manner in de
facto control of the company.
6. Replies on behalf of the Company to the application under
Order 39 Rule 1 and 2 CPC filed by the plaintiffs have been filed.
Common pleas are raised on behalf of the defendants who have
denied the case of the plaintiffs. It is alleged that the plaintiffs have
approached this Court at the belated stage. The plaintiffs cannot
plead the case of third parties. It is done by them in order to scuttle
the process. The plaintiffs were aware about all the facts for the last
many years. They just kept quiet. They did not assert their rights as
claimed by them now. At least at this stage the plaintiffs are not
entitled for interim injunction as prayed for. Various contentions are
raised in the reply. They submit that the suit itself is not maintainable
and once the suit is not maintainable, the question of passing of any
interim order does not arise.
7. The first objection raised by them is about the lack of territorial
jurisdiction to entertain the present suit in view of the reason that
Schedule VIII, Part E, clause 5, sub-clause XV of ICDR Regulations
lists the regulatory and statutory disclosures that are mandated by
law to be made in rights issue. Point G(3) of the same provides as
under:
"(3) Disclaimer in respect of jurisdiction: A brief paragraph
mentioning the jurisdiction under which provisions of law
and the rules and regulations are applicable to the letter
and offer."
In compliance of the said statutory mandate, the letter of offer
dated 14th September, 2015 at page 126 of the documents filed with
the plaint provides as under:
"Disclaimer with respect to jurisdiction
This letter of Offer has been prepared under the
provisions of Indian Laws and the applicable rules and
regulations thereunder. Any dispute 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 submitted that the plaintiff's main contentions in
CS(OS) No.3082/2015 are that they are a part of promoter and
promoter group of the Company. It is contended that the plaintiff is not a
promotor as per plaintiff's own admission, as the promoter is required
to submit a disclosure as a promoter of a company in terms of
Regulation 30 of Securities & Exchange Board of India (Substantial
Acquisition of Shares & Takeovers) Regulations to the stock
exchange and to registered office of the company. The plaintiff
Company was filing/authorised filing of the said disclosure under then
prevailing regulations as a promoter of Company till the financial year
ending on 31st March, 2011 but thereafter the plaintiff Company
stopped filing the requisite disclosure. Thus, the plaintiff company
itself chose to stop showing itself as a promoter of the Company. In
the absence of the plaintiff submitting the mandatory disclosure and
after waiting for a reasonable period, the company filed its
shareholding pattern in September, 2013 and the Plaintiff was not
shown as Promoter and Promoter Group Company. No objection was
raised by the plaintiff nor any query/objection raised by the regulator or
the stock exchange till date. From the said period, in every quarterly
shareholding pattern filed by the Company, the plaintiff is not shown as
part of Promoter or Promoter Group Company. The aforesaid
shareholding patterns have been available on the website of the stock
exchanges since 2013 but no objection was raised. Further, there is no
prayer seeking any declaration that the plaintiff company is a part of
Promoter & Promoter Group of Company or that its removal as part of
Promoter & Promoter Group of Company is invalid and the only relief
sought is with regards to the letter of offer.
10. The alleged grievance of the plaintiff in the suit is that by not
showing the plaintiff as a promoter in the Letter of Offer, who has been
deprived of the special rights without any basis. No prejudice has been
caused to the plaintiff. Firstly the plaintiff is not a Promoter or part of
Promoter Group of Company. Assuming that the plaintiff is a
Promoter, even then no special rights and privileges are granted or
are available to a Promoter under the letter of offer, as the basis of
allotment has been done on the basis adumbrated in the letter of offer
which provides the order in which the allotment is 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
allotment is followed. Defendant No.2 who is the Registrar of the
Letter of Offer had issued letter dated 13th October, 2015 setting out
the process of basis of allotment.
12. It is stated that in view of conduct of the plaintiffs themselves
they are not entitled to any discretionary relief as the plaintiff was
aware as far back as September 2013 about its non inclusion as
part of Promoter & Promoter Group of Company in the
shareholding pattern filed by the Company with the stock
exchange. Since then, in every quarterly shareholding pattern filed
by the Company the plaintiff was not shown as part of Promoter or
Promoter Group Company of the Company. The said shareholding
pattern has been available on the website of Stock Exchanges since
2013 but no objection was raised. With regard to the letter of offer,
the plaintiff was aware as far back as June 2015 about the terms of
the offer when the same was put on the website of SEBI.
13. Even as per plaintiffs' own averment it was aware of the offer in
the second or third week of September but despite the same chose to
file the suit only on 8th October, 2015 knowing fully well that the
closing date of the rights issue is 14th October, 2015 when the main
process was to be completed by 15th October, 2015. The practice of
approaching the court at the last minute in case of rights issues has
been deprecated by the Supreme Court of India in Morgan Stanley
Mutual Fund vs. Kartik Das, reported in (1994) 4 SCC 225.
14. The plaintiff in the first suit has not disclosed that an application
had been filed on 5th October, 2015 before the High Court of Calcutta in
the Testamentary proceedings pending there with regard to the estate of
Smt.Priyamvada Birla. The said fact has been concealed from this Court
in order to get an ex-parte interim order. The relevant extract of the
prayer clause in the aforesaid application has been reproduced herein
below:
(a) Leave be given to serve a copy of the instant
application on Universal Cables Limited;
(b) Set aside and/or quash the impugned rights issue by
Universal Cables Limited;
(c) Injunction restraining Harsh Vardhan Lodha causing
Universal Cables Limited or Universal Cables Limited
from proceeding with the rights issue dated 14th
September 2015
(d) ...."
In the aforesaid application, which was mentioned on 5th
October, 2015 by the plaintiff and now the same is listed 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 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.
(iv) Some companies, trusts and societies hold 7.84% (i.e.
8.02% - 0.18%) 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 impugned Letter
of Offer. Similar holding of the estate of Late Priyamvada
Devi Birla and the aforesaid companies, trusts and societies
in other listed companies of the M P Birla Group (Birla
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 by the defendant No. 1 from promoter and
promoter group.
Submissions on behalf of the Plaintiffs
16. It is argued on behalf of the plaintiffs that the exclusion of
shareholders from the "Promoter and Promoter Group" of company
has been made with the malafide intention and motive of denying
them special rights which are attached to promoter shareholding as
recognized in the Companies Act, 1956 / Companies Act, 2013 and
various SEBI Regulations and such special rights have also been
recognized in the said impugned letter of offer vide clause 28 under
the head 'Internal Risks' . The same is done in the impugned Letter
of Offer 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 Group"
(including the hidden holding of such excluded entities) much beyond
the ceiling limit of 75% holding of all promoter and promoter group
entities imposed by Securities and Exchange Board of India. It is
also submitted that certain other entities have been excluded from
category of "Promoter" and "Promoter Group" in the impugned Letter
of Offer deliberately, illegally and with malafide intent and in complete
derogation of the law.
17. Counsel for the plaintiffs has referred the definition of
"promoter" in Section 2(69) of the Companies Act, 2013, the term
"promoter" includes a person who has direct or indirect control over
the affairs of a company, or in accordance with whose advice,
directions or instructions the board of directors of the company is
accustomed 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% is falsely represented to be a mere 52.55%
without any basis i.e. a reduction by 8.38%.
19. It is stated that in the year 1999 in the Letter of Offer for Rights
Issue, issued by the defendant No. 1, it has acknowledged that it was
promoted by Late Shri M.P. Birla and after his death, Late Smt.
Priyamvada Devi Birla had been acting as Chairman of the
Defendant No. 1. The status declared in the said Letter of Offer of
1999 with regard to "promoters", therefore, is sought to be completely
changed in the impugned Letter of Offer without any basis.
20. The defendant No. 1 company has nowhere explained the
reasons for excluding the plaintiff and other entities from the category
of Promoter. It has violated its obligation under Regulation 57(2)(b) of
the ICDR read with Schedule VIII, Part E (5)(VI)(C), to make true and
accurate disclosures as to the details of shareholding of the
promoters and the promoter group.
21. The contention of the defendants is that the plaintiff has been
excluded from the "Promoter and Promoter Group" as the plaintiff had
stopped making disclosure as a promoter of the defendant No. 1
under Regulation 30 of the SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations after 31st March, 2011 and therefore, the
defendant No. 1 has not shown the plaintiff as a "Promoter or a
Promoter Group" company since September, 2013 does not have
any merit.
It is submitted that the plaintiff is a Promoter company by virtue
of the definitions of 'Promoter' as contained in the SEBI Regulations
and the Companies Act. So long as the plaintiff meets the
requirement of the law for being a promoter, the plaintiff cannot be
excluded from the category of Promoter and Promoter Group.
22. The modus operandi of valuing the share value with regards to
the Rights Issue at a high price of Rs.51/- is with an objective of
ensuring that the public at large and most of the other shareholders
are dissuaded to participate in the same and as a consequence of
which the so called Promoters would seek the benefit thereof. There
is no justification emanating from the records for pegging the price at
Rs. 51/-, it is essential to note that such fixation of the price was
within the domain of the defendant No. 1 Company and its Board of
Directors/ Rights Issue Committee and there is no approval required
by an independent statutory agency.
23. In the garb of a 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 voting represent only
about 65% of shareholders out of which over 60% is controlled by the
promoters and promoter group. Thus, support for such resolution by
public shareholders was negligible and certainly not over 99% as
contended by the defendant No. 1 Company.
25. It is submitted that on receipt of the impugned Letter of Offer,
the plaintiff immediately collected the necessary information and
consulted its legal advisors in relation to the filing of the suit.
Thereafter, the suits were filed during 2nd week of October 2015. It is
submitted that there has been no undue delay in approaching this
Court. It was only on 7th September, 2015 that SEBI noted
compliances made by the defendant No.1 on the comments on the
Letter of Offer by SEBI.
26. On behalf of plaintiffs it was denied that the plaintiffs have not
been shown as part of "Promoter and Promoter Group Companies"
since September 2013. The defendant No. 1 never informed the
plaintiffs that it was being reclassified as "public shareholder" as the
plaintiffs had failed to make disclosures as required under Regulation
30.
27. With regard to the objection of territorial jurisdiction, it is argued
that the cause of action has arisen within the territorial jurisdiction of
this Court in as much as the impugned Letter of Offer / Abridged
Letter of Offer have been issued from New Delhi. The impugned
Letter of Offer/ Abridged Letter of Offer has been signed on 14th
September, 2015 in New Delhi. The meeting of Board of Directors of
the Company in which the issue of shares was approved was held on
31st March, 2015 in New Delhi.
28. The meeting dated 7th September, 2015 of Rights Issue
Committee of the defendant No.1 was held at New Delhi. In the said
meeting, the Rights Issue Committee had approved the terms of the
proposed Rights Issue inter alia, issue price, entitlement ratio, record
date etc. Therefore, substantial part of cause of action arose in New
Delhi. The defendant No. 1 is carrying on business from New Delhi.
Further, the defendant No. 9 is also a resident of New Delhi.
29. The said disclaimer clause of territorial jurisdiction at Satna, MP
does not confer exclusive jurisdiction in the Courts at Satna, MP as
the impugned Letter of Offer confers jurisdiction on Courts at Satna
only in relation to disputes in relation to subscription of shares by a
particular shareholder pursuant to the Rights 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 basis of
allotment of shares.
32. The basis of allotment adopted at Page 148 of the Letter of
Offer is the standard practice and is in compliance with the law. It is
submitted that the allotment of additional equity shares to all the
eligible shareholders were made on equitable basis having due
regard to the number of equity shares held by them on the record
date fixed for the purpose of Right Issue in consultation with the
designated Stock Exchange i.e BSE Limited . After taking into
account allotment to be made under (a) to (d) as stated on basis of
allotment if there is any unsubscribed portion, the same is deemed to
be "unsubscribed."
33. It is submitted that all the shares in respect of the rights issues
were subscribed under clauses (a) to (c). Clauses (d) and (e)
therefore became inoperative. All the shareholders of the company
whether be promoters or public shareholders or the plaintiff were able
to exercise their rights equally under clauses (a) to (c). Thus, the
shareholders have suffered. The basis of allotment has been approved by
the designated Stock Exchange of the Company for the purpose of Rights
Issue i.e. BSE Limited by its letter dated 20th October, 2015.
34. It is submitted on behalf of the defendants that the case of the
plaintiff is that they have been deprived of the special rights that
would accrue to it as a Promoter Company in the rights issue. The
said objection is without any basis as no prejudice has been caused
to the plaintiffs on the reasons that assuming the plaintiff is a
Promoter Company, even then no special rights and privileges are
granted or are available to a Promoter Company under the Letter of
Offer. The basis of allotment has been done on the basis
adumbrated in the Letter of Offer at running page 151 of the
documents filed with the plaint which provides the order in which the
allotment is 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. Pertaining to sub clause (e) it may appear
that the board has discretion but in fact on a strict construction of the
said sub clause. 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 it is also stipulated that it will not be a
preferential allotment.
35. The basis of allotment 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 Senior Advocate on behalf of
the plaintiffs, it is argued that 52.55% Shareholding of Promoter &
Promoter Companies is rightly shown. The three categories stated by
the plaintiff are not Promoter & Promoter Companies of defendant
No.1 and therefore the same are not being shown. With regards to
8.02% share held by Trust & Societies it is submitted that firstly they
are not a party to the suit, plaintiff has no locus standi to espouse
their alleged cause. Secondly, Note (b) at Page 38 clearly states that
the said parties were removed from Promoters & Promoter
Companies as far back as 2006 and no objection to the same raised
till date. Pertaining to 0.18% of Late Smt. Priyamvada Devi Birla it is
submitted that firstly, the Administrator pendent lite of Late Smt.
Priyamvada Devi Birla is not a party to the suit, plaintiff has no locus
standi to espouse their alleged cause. Secondly, Late Smt.
Priyamvada Devi Birla herself was not a promoter of defendant No.1
and thus no question of her administrator pendent lite being
promoters and thirdly, the issue of Late Smt. Priyamvada Devi Birla's
estate is pending before the High Court of Calcutta. An application
has already been moved by one of the parties therein with regards to
the impugned letter of offer and the same is listed on 27th November,
2015. With regards to the shareholding of the plaintiffs in the two
suits, the same has rightly not been included in the shareholding of
Promoter & Promoter Companies of defendant No.1 as they are not
Promoter & Promoter Company as already stated herein above.
37. With regard to allegation on behalf of the plaintiff that the Share
price in the letter of offer is very high, it is argued that share price for
letter of offer is to be determined keeping in mind the provisions of
Regulation 10 (4) (b) of Takeover Regulations. The share price for
the letter of offer was determined keeping in view the provisions of
the said Regulation - reference may be had to Auditor's Certificate
dated 7th September, 2015.
38. On the basis of the said computation and after being satisfied
with the same, the Lead Manager in terms of Regulation 54(5) of
ICDR Regulations has at page 38 of letter of offer stated that:
"5. The ex-rights price of the Equity shares as per
regulation 10(4)(d) of the Takeover Regulation is Rs.
57.33."
Therefore, the share price of Rs. 51/- is much below the ex-
rights 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 of the copy of Full
Letter of Offer filed by the plaintiff with the suit. There is no irregularity
or illegality in utilizing the issue proceeds for repayment of existing
loans and Clause 5(vii)(H) of Schedule VIII(Part) E of ICDR
Regulations specifically permits such utilization.
41. With regard to objection that under Section 62 of Companies
Act if there has to be a preferential allotment it requires a special
resolution, in reply it is submitted that there is no preferential
allotment - basis of allotment that has been adopted is the standard
practice and it is mentioned in the letter of offer that the basis of
allotment at Clause (b), (c), (d) will not be a preferential allotment.
There is no challenge to the basis of allotment in the plaint. Even,
there can be no challenge to the same in the absence of stock
exchange as allotment is done under these clauses in consultation
with the designated stock exchange. The rights issue was approved
by a special resolution and thus the objection is without any merit.
42. In rejoinder arguments, learned Senior Advocate appearing on
behalf of the Plaintiffs has also made additional submissions with
regard to interpretation of clause 'c' of basis of allotment at page 151.
It was argued that a promoter could not apply under clause 'c' of
basis of allotment.
43. In reply learned Senior Counsel appearing on behalf of the
defendants submitted that the said submissions are beyond
pleadings and the same should not be considered and a decision
cannot be based on grounds outside the pleadings of the parties.
Reliance is placed on Union of India v. Ibrahimuddin reported as
(2012) 8 SCC 148 (para 77).
44. Clause (c) of the Basis of Allotment provides that:
"c) Allotment to the Eligible shareholders, who having
applied for all the Equity Shares offered to them as part
of the Issue, have also applied for additional Equity
Shares. The Allotment of such additional Equity Shares
will be made as far as possible on an equitable basis
having due regard to the number of Equity Shares held
by them on the Record Date, provided there are any
unsubscribed Equity Shares after making full allotment
in (a) and (b) above. The Allotment of such additional
Equity Shares will be at the sole discretion of the Board
in consultation with the Designated Stock Exchange, as
a part of the Issue and will not be preferential
allotment."
The 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 its Rights Entitlement in full and apply for
additional Equity Shares;
- Renounce its Rights Entitlement in full."
Also at page no. 158 of Letter of Offer states that the CAF form
could be liable to be rejected if the instructions contained in the Letter
of Offer are not followed
46. From the conjoint reading of all the aforesaid provisions that all
eligible equity shareholders can apply for additional shares under
category 'c' of the basis of allotment, whether they are promoter or
non-promoter. There is a force in the submissions of the defendants
that the specific plea was not taken by the plaintiff in its plaint.
47. The following are the relevant dates and events which are
necessary to be referred for the purpose of deciding the two interim
applications filed by the plaintiff:
Date Particulars
31.03.2015 The object of the letter of offer
was set out in the Board
Resolution dated 31.03.2015.
The said Resolution was put
up for voting by postal ballot to
the shareholders.
The postal ballot form was
also sent to the plaintiff on 8th
April 2015.
13.05.2015 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.
29.05.2015 Draft Letter of Offer Submitted
to SEBI, BSE and NSE.
30.05.2015 Notice issued to the
shareholders of the company
including the plaintiff about
proposed rights issue
published in various
newspapers.
19.09.2015 Certificate Issued by
Defendant No.2 certifying that
the Abridged letter of offer has
been dispatched to all the
shareholders of Defendant
No.4 including the plaintiff.
20.09.2015 Notice published in various
newspaper informing issue
open and close date.
08.10.2015 When the first suit was filed by
M/s. Jute Investment
Company Ltd.
12.10.2015 When the second suit was
filed by M/s. The Rameshwara
Jute Mills Ltd.
15.10.2015 Summary of provision basis of
allotment.
20.10.2015 Allotment was approved by
BSE Ltd. and as per
defendant, lead Manager and
the Registrar to the Issue gave
instructions to all banks for
fund transfer from Escrow
account to company account
to proceed for allotment of
shares and in the Board
Meeting, it was decided to
approve allotment of
1,15,65,127 equity shares of
the face value of Rs.10/- at an
issue price of Rs. 51/- per
equity share including
premium 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 11565127
the Rights Issue
Promoter Group Holding 52.55%
(Admitted)
Excluded (Trusts, Society, 8.02%
Estate)
Excluded (June Investment) 0.26%
Excluded (Rameshwara) 0.11%
60.94%
Promoters' Entitlement in the 7047788 60.94%
Issue
Shares Applied by 7047590 60.94%
Shareholders out of Entitlement
Promoters' entitlement being
higher than total shares applied
- It is assumed that all shares
applied are by the Promoters
only.
Shares applied by Renouncees 1831280 15.83%
out of entitlement (Presumed to
be all by Promoter Group)
Additional shares applied by 4833825
shareholders (Presumed to be
all by Promoter Group)
Shares allotted proportionately 2686257 23.23%
to applicants.
Hence, 100% issue is 11565127 100.00%
subscribed by the Promoters
only.
49. Summary of provisional basis of allotment (subject to disclaimer
mentioned below) as on 15th October, 2015 are as under :
Summary of provisional basis of allotment No. of No. of Shares
Shares
Shares offered (Issue Size) 1,15,65,127
Shares to be allotted 1,15,65,127
1. Shares applied by Shareholders out of 70,47,590
Entitlement
Less : Shares rejected on Technical Reasons 0
Shares Accepted 70,47,590 (a)
2. Shares applied by Renouncees out of 18,31,280
Entitlement
Less : Shares rejected on Technical Reasons 0
Shares Accepted 18,31,280
Entitlement due to fractional rounding off for
hold=1
Less : Shares rejected on Technical Reasons 0
Shares Accepted 2 (b)
Entitlement due to fractional rounding off for
hold>1
Less : Shares rejected on Technical Reasons 0
Share Accepted 85 (b)
5. Total Shares Accepted 88,78,957 (a+b)
6. Balance Shares available for allotment for 26,86,170
additional applied
7. Additional shares applied by Shareholders 48,33,825
Less : Shares rejected on Technical Reasons
Fraction as above
Balance Additional Shares Applied 48,33,738
Total Additional Shares allotted to 26,86,170 (c)
Shareholders
8. Additional shares applied by Renouncees 974
Less : Shares rejected on Technical Reasons 0
Total Additional Shares Allotted to 0 (d)
Renouncees
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
status quo if any would be passed in the evening.
51. The following order was passed after the official work:
"The common issue is involved in both the matters.
Learned counsel for the parties have already made their
submissions on 19th October, 2015 and today as well.
No further hearing is required. The parties to file the
written submissions by 30th October, 2015. The orders
will be pronounced on 16th November, 2015.
In the meanwhile, the SEBI shall maintain the status quo
with regard to allotment of shares (if already not allotted)
till the pronouncement of orders.
Dasti, under the signatures of the Court Master."
52. The order was released on 21st October, 2015 in the morning.
On 29th October, 2015 the defendants filed the applications, being
I.A. No.22910/2015 in CS (OS) No.3082/2015 and I.A.
No.22906/2015 in CS (OS) No.3105/2015, for
modification/clarification of order dated 20th October, 2015. It was
informed to the Court that the Summary Basis of Allotment was
approved by BSE Ltd. at around 5:30 pm on 20th October, 2015 and
between 6:30 to 8:00 pm, the Lead Manager and the Registrar to the
issue gave instructions to all the banks including lead banker for fund
transfer from Escrow account to company account to proceed for
allotment of shares. Pursuant to the said summary basis of allotment
the Rights Issue Committee of the Board of Directors held its meeting
at 7:30 pm approving the allotment of equity shares in dispute. The
following order was passed on 30th October, 2015:
"The orders in the interim applications were reserved on
20th October, 2015. The abovementioned fresh
applications have been filed by the defendants for
modification of the order dated 20th October, 2015. At
this stage, it is clarified to the extent that the order dated
20th October, 2015 was released by the Court in the
morning of 21st October, 2015 at 10.30 a.m. Learned
counsel for the defendants, however, says that it was
received by his office at 2.00 p.m. The rest of the prayers
would be considered at the time of passing the orders.
Both parties have not filed the written submissions. They
submit that the same would be filed by 2nd November,
2015.
Dasti, to both the parties under the signatures of the
Court Master."
53. On 2nd November, 2015, the plaintiff filed applications under
Order XXXIX Rule 2A read with Section 151 CPC for violation of the
status 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 promoter and promoter Companies of
defendant No.1, whereas in fact, the plaintiff is not a promoter or
promoter Company as per plaintiff's own admission.
57. It cannot be denied that a promoter or promoter Company is
required to submit a disclosure as a promoter or promoter Company
of a company in terms of Regulation 30 of Securities & Exchange
Board of India (Substantial Acquisition of Shares & Takeovers)
Regulations to the stock exchange and to registered office of the
company. It was not disputed that the plaintiff was filing the said
disclosure under then prevailing regulations as a promoter company
of defendant No.1 till the financial year ending on 31st March, 2011
but thereafter the plaintiff Company stopped filing the requisite
disclosure. The defendant No. 1 who filed its shareholding pattern in
September 2013 and admittedly the plaintiff was not shown as
Promoter and Promoter Company.
58. No objection was raised by the plaintiff nor any query was
raised by the regulator or the stock exchange till date. The
shareholding patterns have been available on the website of the
stock exchanges since 2013. It is argued on behalf of the defendants
that defendant's obligation is contingent on the plaintiff fulfilling their
obligation as specified in the aforesaid Regulations. Counsel for the
plaintiff has handed over a SEBI circular of 2015 with regards to the
manner in which a promoter or a promoter company can be
reclassified. In reply, it is argued that the plaintiff was removed as
promoter company in 2013 and the same circular is applicable w.e.f.
2nd September 2015. Even otherwise in the plaint no prayer was
made seeking any declaration that the plaintiff company is a part of
Promoter & Promoter Company of Defendant No.1 or that its removal
as part of Promoter & Promoter Company of Defendant No.1 is
invalid. Therefore, the argument of the plaintiffs is without any force.
59. It is apparent from the record that the Shareholding Disclosures
of the Plaintiff filed on Quarterly basis are available on its Company
website (Rameshwara Jute Mills Company Limited) from quarter
ending September, 2013. In such quarterly disclosures since
September 2013, 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. Furthermore, in the
Annual Report of 2014-2015 filed by the plaintiff, 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), the Letter of Offer shall contain disclosures as specified in
Part E of Schedule VIII to the ICDR Regulations. Further in terms of
Regulation 9 draft of the document filed with SEBI shall be made
public for comments and advertisement shall be given in the
newspaper.
62. In the present case, it is not disputed fact that the draft letter of
offer was submitted with SEBI on 29th May, 2015 advertisement given
in the newspaper on 30th May, 2015 and the same was available on
the SEBI website on 2nd June, 2015. The plaintiff has not filed its
objections or made any comment on the alleged non disclosures or
wrongful disclosures. It is a matter of fact that 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. They have taken no steps in this
regard.
63. Under Section 11A of the SEBI Act, SEBI is empowered to
regulate or prohibit the issue of prospectus, offer documents etc. The
expression 'offer document' as defined in Regulation 2(1)(x) of ICDR
Regulations includes Letter of Offer. Thus, the relief claimed by
Plaintiff falls squarely within the ambit of Section 11A and 11B of the
Act, SEBI is the appropriate forum for the same.
64. The plaintiff has not even made SEBI a party to the present
suit. As per Section 15A if any person fails to furnish any documents,
return or report to the Board or fails to file any return or furnish any
information, books or other documents within a specified time period
he shall be liable to penalty to an extend of Rs.1 lac. SEBI is an
adjudicating authority and has ample powers and separate
mechanism to grant all the reliefs prayed for by the plaintiffs. Under
Section 15 T appeal remedy is provided to the as the same is
maintainable before SAT and thereafter, under Section 15 Z before
the Supreme Court.
65. Section 15Y and Section 20A of the SEBI Act have excluded
the jurisdiction of civil court in respect of matters falling within the
domain of SEBI, SEBI's adjudicating officer or SAT.
Section 15Y of Securities & Exchange Board of India Act, 1992 reads
as under:
"15Y No civil court shall have jurisdiction to entertain any
suit or proceeding in respect of any matter which an
adjudicating officer appointed under this Act or a
Securities Appellate Tribunal constituted under this Act is
empowered by or under this 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 the appealable remedy lies before SEBI where no
shareholding limit is needed to seek redressal of the alleged
grievances raised by the plaintiff. The allegation of false
misrepresentation and fraud as alleged if any ought to have come in
the picture after 31st March, 2015 when the process was started first
time.
68. No doubt the plaintiffs were the part of promoter or promoter
group of the defendant No.1. It is the plaintiffs to be blamed who
were not vigilant from the year 2011 and at least from September
2013 when their names were not mentioned in the list of promoter
and promoter group. They did not initiate any remedy thereof which
was available. The question now before this Court is whether at this
stage where the entire process has gone into and shares are allotted,
the Court first declare them as part of the promoter and promoter
group and then set-aside the letter of offer by declaring that letter of
offer and abridged letter of offer are unlawful, null and void ab-initio
when the plaintiffs themselves were sleeping over their rights and
remedies available to them couple of years prior to date of such
documents, though there is a force in the submissions of plaintiffs
that they are entitled to raise their claim for promoters. The
grievance of the plaintiffs still can be raised by the plaintiffs. But it is
doubtful that at this stage the said claim is decided when
the shares have already been allotted once the plaintiffs
either were not interested since the year 2011 and from September,
2013 when their names were not shown and still they did not take
any steps.
69. In the case of N. Jagan and another v. Investment Trust of
India Ltd. in O.S.Appeals Nos. 39 of 42 of 1995, decided on 3rd April,
1995 by the High Court of Madras, refusal of injunction in case of
alleged grievance of high share price was upheld and it was held as
under:
"Two resolutions passed by the company at the
extraordinary general meeting held on May 9, 1994. O.A.
No. 592 of 1994 in C.S.No.705 of 1994 and O.A. No. 591
of 1994 in C.S. No.1006 of 1994 are for injunction
restraining the defendant from giving effect to resolutions
Nos. 1 and 2 passed at the said meeting in any manner
or acting in pursuance thereof O. As. Nos. 1006 and
1007 of 1994 are for injunction restraining the defendant
from issuing 21,79,000 equity shares of Rs.10 each at a
premium of Rs.30 per share to 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 & Promoter Company of defendant
No.1 in the shareholding pattern filed by Defendant No.1 with the
stock exchange. The defendant No.1 then in every quarterly
shareholding pattern filed the Plaintiff has not been shown as part of
Promoter or Promoter Company of defendant No.1. The aforesaid
shareholding pattern has been available on the website of Stock
Exchanges since 2013 but no objection was raised. The Resolution
approving the rights issue was passed on 31st March, 2015.
Thereafter, the said resolution was put up for vote to the
shareholders by a postal ballet and the plaintiff chose not to cast its
vote. The plaintiff was aware as far back as June 2015 about the
terms of the offer when the same was put on the website of SEBI.
72. Even as per plaintiff's own averment it was aware of the offer in
the second or third week of September but despite the same
chose to file the Suit only in second week of October, 2015 knowing
fully well that the closing date of the rights issue is 14th October,
2015.
73. Last minute in case of rights issues has been deprecated by
the Supreme Court of India in Morgan Stanley Mutual Fund (supra).
Para 40 and 42 read as under:
"40. Today the corporate sector is expanding. The
disgruntled litigants indulge in adventurism. Though, in
this case we have come to the conclusion
that the District Consumer Forum will have no
power to grant injunction yet in general cases it
becomes necessary to evolve certain venue
restrictions.
42. As far as India is concerned, the residence of the
company is where the registered office is located.
Normally, cases should be filed only where the
registered office of the company is situate. Courts
outside the place where the registered office is located, if
approached, must have regard to the following.
Invariably, suits are filed seeking to injunct either the
allotment of shares or the meetings of the Board of
Directors or again the meeting of general body. The
Court is approached at the last minute. Could injunction
be granted even without notice to the respondent which
will cause immense hardship and administrative
inconvenience. It may be sometimes difficult even undo
the damage by such an interim order. Therefore, the
court must ensure that the plaintiff comes to court well in
time so that notice may be served on the defendant and
he may have his say before any interim order is passed.
The reasons 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 same was duly replied to by
defendant No.1 vide its reply dated 6th July, 2015. Subsequently,
SEBI noted compliance vide its letter dated 7th September,
2015.
75. The plaintiff has also not disclosed that an application had been
filed on 5th October, 2015 before the High Court of Calcutta in the
Testamentary proceedings pending there with regards to the estate
of Late Smt. Priyamvada Devi Birla. The said
application is listed for 27th November, 2015. The relevant extract of
the prayer clause in the aforesaid application has been reproduced
herein below:
(a) Leave be given to serve a copy of the instant
application on Universal Cables Limited;
(b) Set aside and/or quash the impugned rights issue
by Universal Cables Limited;
(c) Injunction restraining Harsh Vardhan Lodha causing
Universal Cables Limited or Universal Cables Limited
from proceeding with the rights issue dated 14th
September 2015.
76. The other important aspect is about lack of territorial jurisdiction
to entertain the present suit as raised on behalf of the defendants.
Admittedly, Schedule VIII, Part E, clause 5, sub-clause XI (G)of ICDR
Regulations lists the regulatory and statutory disclosures that are
mandated by law to be made in rights issue. The same provides as
under:-
"(3) Disclaimer in respect of jurisdiction: A brief
paragraph mentioning the jurisdiction under which
provisions of law and the rules and regulations are
applicable to the letter and offer."
77. The Letter of Offer dated 14th September, 2015 at page 125 of
the documents filed with the plaint provides as under:
"Disclaimer with respect to jurisdiction
This letter of Offer has been prepared under the
provisions of Indian Laws and the applicable rules and
regulations thereunder. Any dispute arising out of the
Issue will be subject to the jurisdiction of the appropriate
court(s) in Madhya Pradesh only."
78. It is the case of defendants that only Courts in Madhya Pradesh
have jurisdiction as the registered office of defendant No. 1 is located
at Satna, Madhya Pradesh. A challenge to the rights issue or such
like shall lie before the Court within whose territorial jurisdiction the
registered office of the company is situated. All communications,
including the communications with regards to the impugned letter of
offer, were issued from registered office of defendant No. 1. No
communication was 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, (2013) 9 SCC 32 (paras 31-33); ABC
Laminart Pvt. Ltd. & Anr. v. A.P. Agencies, Salem AIR SC 1239,
(paras 12, 15, 16 and 18), M/s. Hanil Era Textiles
Ltd. vs. M/s Puromatic Filters (P) Ltd., AIR 2004 SC 2432 (para 7).
80. The written statements in the matter are yet to be filed. The
issue of territorial jurisdiction would be considered after filing of
written statements. However, prima facie it is doubtful whether this
Court has got the territorial jurisdiction because of the reason that
even if many courts have jurisdiction like in the present case as per
versions of the Court, an exclusive jurisdiction clause would prevail to
other places.
81. The decisions referred by the plaintiffs do not help the case of
plaintiffs in view of facts and circumstances of the present case as
the same are materially different.
The present case does not fall in any of the exceptions carved
out in the case of Whirlpool Corporation v. Registrar of Trade
Marks, Mumbai & Ors., (1998) 8 SCC 1, namely; - enforcement of
any fundamental rights or violation of principles of natural justice or
where proceedings are without jurisdiction or vires of an act is
challenged.
The case of Midas Hygiene Industries P. Ltd. and Anr. v.
Sudhir Bhatia & Ors., (2004) 3 SCC 90, which was sought to be
relied by the plaintiff to state that delay and laches do not come in the
way of grant of an injunction. It is submitted that no such general
propositions can be drawn from the said case specially as the
Supreme Court in the said case has itself made it clear that it is only
dealing with grant of injunction in infringement of trademark or
copyright and thus the present case being of neither category, the
aforesaid judgment is of no assistance.
In the case of Smt.Premvati & Ors. vs. Smt. Bhagwati Devi &
Ors., (2007) (ILR) 7 Delhi 39, the issue was whether in view of
Section 397 to 407 of the Companies Act, the jurisdiction of the Civil
Court is ousted and the suit of the plaintiff therein is not maintainable.
The Court in that case held that because the shareholders in that
case do not have the necessary voting strength to proceed under any
of these Sections thus a suit would be maintainable. It is respectfully
submitted that is not the case in the present suit where the remedy
available with the plaintiff is to go before the SEBI which is the
adjudicatory authority and the plaintiff is not barred by any lack of
voting strength in this regard as was the case in the judgment cited
by it.
82. For the aforesaid reasons, no prima facie case is made out by
the plaintiffs. The balance of convenience also lies in favour of the
defendants. If any order is passed, the defendants would suffer
irreparable loss and injury. Third parties right has already been
created. The plaintiffs are not entitled to an injunction as prayed for.
However, the plaintiffs are at liberty to take appropriate remedy by
amending the plaint by seeking the declaration to become promoter
or part of promoters group of the company and to seek damages as
per law. The same would be decided as per its merit. As far as two
interim applications, being I.A. No.21723/2015 and I.A.
No.21503/2015 are concerned, the same are dismissed.
Status quo order passed on 20th October, 2015 is
vacated. I.A. No.22910/2015 and I.A. No.22906/2015 are also
disposed of in view of clarification already made in paras 50 and 52
of this order.
It is clarified that the observation made in the order are
tentative and shall have no bearing when the suits would be decided
after trial.
83. No costs.
CS(OS) 3082/2015 & I.A. No.23407/2015 (U/o 39 R 2A by plaintiff)
& CS(OS) 3105/2015 & I.A. No.23406/2015 (U/o 39 R 2A by
plaintiff)
List on 8th January, 2016 for further proceedings.
(MANMOHAN SINGH)
JUDGE
NOVEMBER 16, 2015
