BEFORE THE COMPANY LAW BOARD, WESTERN REGION BENCH 

Appearances : N. H. Seervai & Mustafa Safiyuddin for the Petitioner. G. Joshi for the respondent. 

ORDER 

MEHTA, MEMBER 

1. The petitioner named above, alongwith 9 other petitioners, namely, Joshuha Investments (P.) Ltd., Virtuous Finance Ltd., Tejas Kiran Pharmachem Industries (P.) Ltd., Family Investments (P.) Ltd., Viditi Investments (P.) Ltd., Quality Investment (P.) Ltd., Virtuous Shares & Investment (P.) Ltd., Airborne Investments (P.) Ltd. and Dilip Shantilal, have filed these petitions under
section 111A of the Companies Act, 1956 (hereinafter 'the Act') against Ambalal Sarabhai Enterprises Ltd. (hereinafter 'the respondent-company'). The petitioners have prayed for an order against the respondent-company, inter alia, directing to record and register the transfer of 30,17,767 equity shares of the respondent-company in their favour and return the share certificates relating to the said equity shares duly endorsed in their favour. The petitioners have also prayed for directions to rectify the register of members to place their names in the register of members in respect of these 30,17,767 shares. The petitioners have also sought for directions for payment of all dividends that might have been declared in respect of the said shares as well as the bonus, rights and other entitlements in respect of the said shares. Since the subject-matter in a these appeals is the same, all the ten appeals are being disposed of by this common order. 

2. The above referred 10 petitioners lodged the above 30,17,767 equity shares of Rs. 10 each of the respondent-company for effecting the registration of transfers in their name. However, the respondent-company failed and refused to record the registration of transfers of the said shares in favour of the petitioners. The respondent-company vide its letter dated 14th October, 1997 conveyed the company's decision to refuse to register the transfers of the said shares alleging that the petitioners have violated the provisions of Chapters II and III of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (hereinafter 'the Takeover Regulations'), by acquiring more than the stipulated percentage of shares in concert with others. The respondent-company, however, did not give any particulars as regard to the said alleged stipulated percentage of shares that the petitioners alleged to have acquired in concert with others and/or name and identity of persons in concert with whom the shares alleged to have been acquired by petitioners. It is further submitted that the respondent-company has not submitted any concrete evidence as to how the abovenamed petitioners have violated the Takeover Regulations. The respondent-company has not submitted the copy of the Board resolution whereat the said shares were rejected for registration of transfers. 

3. The respondent-company in its reply have submitted that the petitioners were required to comply with the provisions of the Takeover Regulations, as also various provisions of the Securities and Exchange Board of India Act, 1992 ('SEBI Act'). The respondent-company further submitted that they had already registered the transfer of 4.72 per cent of the shares in favour of the petitioners and other companies associated with them. According to respondent-company, any further acquisition of shares, if registered, would exceed 10 per cent limit as is prescribed in regulation 10 of the said Takeover Regulations. The respondent-company also submitted that some of the petitioners have same address and telephone numbers. Further, according to respondent-company, the petitioner-companies are associated with their business rivals. Further, it is submitted that the constituted attorney of the petitioner-company, namely, Mr. Ashok I. Bhuta and one of the proposed associate persons Mr. Ashok R. Bhuta whose shares were not registered is of the same identity. The respondent-company further submitted that they have informed Securities and Exchange Board of India (hereinafter 'the SEBI') about the alleged violation of the Takeover Regulations by the petitioners wherein it has clubbed other entities holding 5,73,706 shares whose transfer has also been refused alongwith the petitioners. 

4. In their reply the petitioners denied the allegation made by the respondent-company and requested this Bench to direct the respondent-company to produce the proof. The petitioners also submitted that the respondent-company be put to strict proof to substantiate the averments made about the alleged violation of the Takeover Regulations. It is further submitted that the Board of directors of the respondent-company has not even conveyed any decision of the Board of directors of the respondent-company though the statutory period of 60 days as per the Act and a period of 30 days under listing agreement has expired. It is further submitted by the petitioners that enough time and opportunity was given to the respondent-company to substantiate their allegation about the alleged violation of the Takeover Regulations but they have failed to do so. The petitioners have also denied the claim of being business rivals of the respondent-company and submitted that the said claim is irrelevant to justify the refusal of transfer of shares and is not covered under the provisions of section 111A of the Act. The petitioners have also submitted that in arriving at the conclusion of crossing the limit of 10 per cent prescribed by the Takeover Regulations, the respondent-company has falsely and without any basis included the shares acquired by three private limited companies and three individuals as referred to in Exhibit 'B' to the reply filed by the respondent-company. No reason or proof is given in support of the clubbing of these parties with Sun Pharma group. The petitioners have already admitted that they have acquired 9.37 per cent of the paid-up capital along with the persons acting in concert whose names and addresses are furnished to this Bench and to SEBI. It is further submitted that Mr. Ashok R. Bhuta residing at Samrudhi Apartments, Dadar, Mumbai who is alleged to have acquired 71,350 (0.11 per cent) shares and included in the list of alleged persons acting in concert as per Exhibit B filed by the respondent-company and the person Ashok I. Bhuta, residing at Sriram Apartments, Kandivli (West), Mumbai, who has verified this petition and is duly constituted attorney of the petitioner are not the same persons. It is further submitted that as per the provisions of section 111A, the petitioners are entitled to have shares registered in their name since the respondent-company being a listed company is bound by listing agreement and further after taking into account share transfer provisions of the Act as amended through Depositories Act, 1996 (hereinafter 'the DP Act') which is effective from 20th September, 1995, the listed company has no right to refuse the transfer of shares as the shares are freely transferable. 

5. Shri N. H. Seervai, senior counsel appearing for the petitioners, submitted that Sun Pharma group and its associates have acquired 9.37 per cent of the paid-up share capital of the company between April 1995 to October 1997 of which the respondent-company has registered equity shares to the extent of 4.72 per cent but have refused to register the shares to the extent of 4.65 per cent. In this connection, he reiterated the submissions that as per the provisions of section 111A of the Act, the shares are freely transferable, and refusal has been done for extraneous consideration without disclosing as to how these shares have been acquired in violation of Chapters II and III of the Takeover Regulations. He further submitted that the shares acquired by Sun Pharma group/Dilip Shantilal Sanghvi and others acting in concert are within the permissible limit and not exceeding 10 per cent. In this connection, he further submitted that the Sun Pharma group is fully aware of the provisions of the Takeover Regulations and in fact when it acquired the shares of another company, namely, Gujarat Lyka Organics Ltd., they have fully complied with the provisions of the Takeover Regulations. He further submitted that the respondent-company has informed SEBI vide their letter dated 14th October, 1997 and has further furnished the information sought for by the SEBI vide its letter dated 15th June, 1998. He invited attention to the correspondence between SEBI, respondent and the petitioner attached with the reply of the respondent and submitted that SEBI has been carrying on the investigation in the matter but no action has been initiated by them. It is further submitted that no material has been placed to substantiate allegation as to how company has come to the conclusion that they are acting in concert. He further submitted that this group has nothing to do with three individuals Ashok R. Bhuta, K. P. Bhuta, Mahesh N. Aswani and three private limited companies namely Barkha Finlease Pvt. Ltd., Vadi Finlease (P.) Ltd. and Sunmarg Securities (P.) Ltd. and if the shares lodged by them are excluded then the shares acquired by Sun Pharma group acting in concert with others comes to less than 10 per cent and there is no violation the Takeover Regulations as alleged. 

6. Shri Seervai further submitted that Sarabhai group holds more than 25 per cent of the paid-up capital of the company and why they should be shy of registering the said shares when the same have been acquired within the prescribed limits. He again reiterated that the shares are freely transferable and provisions of section 111A of the Act have been made more emphatic regarding free transferability of the shares than even earlier provisions of section 22A of Securities Contracts (Regulations) Act, 1956 (hereinafter 'the SCRA'). He further submitted that the grounds of refusal are limited to the provisions of section 111A (3) of the Act only, as has been held by Company Law Board in the matter of Estate Investment Co. (P.) Ltd. v. Siltap Chemicals Ltd. [1999] 32 CLA 409 (CLB). He further invited our attention to the Company Law Board, Western Region Benches letter dated 10th February, 1999 asking respondents to produce the resolution of refusal of transfer of shares but the same has not been done. He further submitted that since the shares are freely transferable and have been acquired within the prescribed limits, the respondent-company has refused the registration on extraneous consideration and on wrong assumptions and, therefore, submitted that necessary directions be given for effecting the registration of transfer of shares in favour of the petitioners. He further submitted that SEBI has not initiated any further action and apparently SEBI is satisfied that there is no violation of the Takeover Regulations. 

7. Shri Gaurav Joshi, advocate appearing for the respondent-company, submitted that upto July 1997 Sun Pharma group in concert with the others acquired 4.72 per cent of the equity shares of the respondent-company and they have been duly registered by the company. He further submitted that one of the petitioners by its letter dated 7th August, 1997 received by the respondent-company on 22nd September, 1997 informed that they have acquired shares exceeding 5 per cent while they were required to intimate the company within four working days of the same but it was done much later and no details as to which persons and companies acting in concert acquired these shares have been furnished. He further submitted that full details as to how the group has acquired more than 5 per cent and even the dates have not been given as to when they exceeded the limit of 5 per cent. He further submitted that large number of shares were lodged between 5th September, 1997 and 15th September, 1997 aggregating to 5.53 per cent but the Sun Pharma group did not furnish the list of the persons acting in concert who have acquired these shares and in the absence of such details the company cannot move unless and until enquiry is made. Under the circumstances the respondents wrote to the SEBI that these shares have been acquired through the same brokers and lodged by the same persons. In this connection, he invited our attention to the correspondence attached with the reply of the respondent-company from where it would be seen that letters of lodgement are identical and that led the company to believe that these persons are acting in concert. Shri Joshi further emphasised that these shares were lodged by the same individuals belonging to Sun Pharma group by hand delivery and these could not have happened but for the fact that they are acting in concert. He further submitted that the SEBI is already seized of the matter and investigated the same and till such time SEBI's investigation is completed these appeals should be kept in abeyance. He further submitted that let the enquiry by SEBI be over and petitioner should not be shy of SEBI enquiry. He further submitted that in support of the contention that SEBI has closed its enquiry, no proof has been placed on record. Shri Joshi further submitted that as per the proviso to section 111A (2) of the Act, the respondent-company is within its right to refuse to register the transfer of shares, if there are sufficient reasons. He further submitted that Sun Pharma group being the competitor and having regard to the financial position of the respondent-company, which has not declared any dividend for the last several years, no prudent investor would just acquire more than 10 per cent share capital of such company. These shares have been acquired by a group which is a business rival, for ulterior motive and submitted that these are the sufficient grounds for refusal to register the transfer of the shares in the interest of the company, and respondent-company has right to do so, as has been held in various decided cases. In this connection, he placed reliance on following decided cases : Nathu Singh v. Punjab Cooperative Bank Ltd. [1991] 6 CLA 40 (CLB), Ramchandra Vinyak Khare v. Aphali Pharmaceuticals Ltd. [1995] 3 Comp LJ 108 (CLB), E. M. Muthappa Chettiar v. Salem Rajendra Mills Ltd. [1955] 25 Comp Cas 283 (Mad.), Kinetic Engineering Ltd. v. Unit Trust of India [1994] 15 CLA 419/AIR 1995 Bom. 194 and Bajaj Auto Ltd. v. N. K. Firodia AIR 1971 SC 321. He further submitted that Board of directors have taken the decision in the interest of company and for a sufficient cause and, therefore, Company Law Board (hereinafter 'the CLB') should not over rule the Board of director's decision merely because the CLB would not have come to the same conclusion. 

8. Shri Seervai in his reply submitted that the law has changed after the aforesaid cases have been decided with the insertion of section 22A of the SCRA and thereafter with the promulgation of DP Act whereby the Act has also been amended, thereby the shares of a public company have become freely transferable. He further submitted that the Takeover Regulations is meant to protect the shareholders and not the company He further submitted that there is no bar in acquisition of the shares under the Takeover Regulations; but in doing so, one is required to follow certain procedure laid down in the Takeover Regulations. He further emphasised that keeping in view, the basic concept of free transferability of shares, the company's management should not be allowed to misuse these regulations for ulterior motive to prevent such investors whom they consider inconvenient, by refusing to transfer the shares under the garb of the Takeover Regulations. He invited our attention to regulation 44 of the Takeover Regulations reproduced hereunder : 

"The Board may, in the interests of the securities market, without prejudice to its rights to initiate action including criminal prosecution under section 24 of the Act give such directions as it deems fit including - 

(a) directing the person concerned not to further deal in securities 

(b) prohibiting the person concerned from disposing of any of the securities acquired in violation of these Regulations; 

(c) directing the person concerned to sell the shares acquired in violation of the provisions of these Regulations; 

(d) taking action against the person concerned.", 

and submitted that if the shares acquired in violation of the Takeover Regulations the SEBI has sufficient powers to take not only criminal prosecution but can also give necessary directions for disposing of such securities, directing the person concerned to sell the shares acquired in violation of the provisions of the Takeover Regulations. He further submitted that even if SEBI is examining the matter why the investors should suffer merely be cause the company has chosen to make a reference and submitted that the company should be directed to register the transfer of shares and later on if SEBI comes to the conclusion that there is a violation of the Takeover Regulations, then pursuant to sub-section (3) of section 111A of the Act the CLB can direct the respondent-company to rectify its register of members. He further submitted that this is a fit case for ordering the registration of the transfer of shares as the respondent-company has failed to place any material evidence as to how three individuals and three companies who have acquired the shares are acting in concert with the petitioner. 

9. We have considered the various averments made by the parties and find that Sun Pharma group has admitted that they along with others acting in concert have acquired 9.37 per cent of the shares of the respondent-company. The respondent-company's case is that the petitioners have acquired shares in excess of 10 per cent ceiling prescribed at the relevant time and thus acquisition is in violation of the Takeover Regulations. The difference between the petitioners having acquired 9.37 per cent shares and respondent-company alleging of their acquiring more than 10 per cent of shares is on account of respondent-company clubbing the shares acquired by six parties identifying them as the persons acting in concert with Sun Pharma group on the plea that the shares have been acquired through same broker and have lodged at the same time and by the same persons. They have not been able to place any material beyond this to substantiate the allegation that these six entities/persons are acting in concert with the petitioners. The petitioners have emphatically denied that these six entities/persons are in any way connected with them. Of the six entities, we note that three are private limited companies having their registered offices at Panipat and New Delhi. They being corporate bodies registered under the Act, they are required to file various documents under the Act including shareholding pattern, names of the directors, etc., with Registrar of Companies and same are available for inspection to the public. In our view, respondent-company ought to have collected the basic information about the directors and the shareholding pattern, etc., to substantiate the allegation. It would have enabled them to come to a firm conclusion whether these three private limited companies are in any way connected with the said Sun Pharma group who have also acquired most of the shares through investment companies incorporated under the Act. Likewise for the three individuals, namely, Mr. Ashok R. Bhuta, Shri K. P. Bhuta and Shri Mahesh N. Aswani, it has not collected any particulars as to how they are connected with the Sun Pharma group. The respondent-company's contention is that these shares have also been acquired at the same time and have been lodged by the same persons. The respondent-company should have acted more responsibly and ought to have collected some more relevant information/particulars by making enquiries before forming any opinion. The respondent-company has not taken the pains to collect any further information and they have merely on the plea that these shares have been purchased through same brokers during the same period and have been lodged by the same persons, assumed that these parties are also acting in concert with Sun Pharma group. The share broker who operates on the stock exchange may deal in the shares of a company for several clients at the same time. Therefore, merely on this ground it would not be proper to assume that all those who have acquired the shares through same broker are acting in concert. Further, the name of the individual who lodged the shares have not been disclosed and on what basis it has been presumed that they belong to Sun Pharma group. In our opinion, from the material placed on record, it is not possible to agree with the company's contention that these three private limited companies and three individuals named earlier have also acquired these shares acting in concert with Sun Pharma group. If the shares acquired by these six parties are excluded, then the shares acquired by the Sun Pharma group in the share capital of the respondent-company would come to 9.37 per cent, i.e., below 10 per cent ceiling prescribed under the Takeover Regulations. We do find some force in the argument of Shri Seervai that the company cannot be permitted to misuse the provisions of the Takeover Regulations for the ulterior motive to prevent such investors who may be inconvenient to the management in the garb of the violation of the Takeover Regulations and to defeat the basic concept of free transferability of the shares as enshrined in law. 

10. Shri Joshi has also submitted that the company has a right to refuse the registration of transfer of shares if there is a sufficient cause of doing so and in this connection he has referred to various decided law cases cited earlier. After the aforesaid law cases have been decided, the law has been changed. This Board has examined the provisions of section 111A of the Act in the case of Estate Investments Co. (P.) Ltd. case (supra) wherein it was observed : 

'16. Thus, proviso to sub-section (2) deals with pre-registration issues, while sub-section (3) deals with post-registration issues. Further, it is also clear from the provisions of this section that (1) the shares of public company are freely transferable, (2) in case there is a refusal to transfer without sufficient cause, the transferee may apply to the CLB, (3) in case the CLB finds that the company has refused without sufficient cause, the CLB shall direct the company to register the transfer. Therefore, when a company refuses to register transfer, the CLB has to examine whether such refusal is with sufficient cause or not and if it finds that the refusal is without sufficient cause, then the CLB is bound to direct the company to register the transfer. 

17. Even though the term "sufficient cause" has been interpreted in various manner with reference to section 111, now in view of this term having been used in section 111A, the same has to be examined with reference to the provisions of this section. As we have already pointed out, proviso to sub-section (2) relates to pre-registration issues, while sub-section (3) relates to post-registration issues. In case of post-registration, the register of members can be ordered to be rectified only on three grounds, i.e., if the transfer is in contravention of the provisions of the Securities and Exchange Board of India Act, 1992 (hereinafter 'the SEBI Act') or Regulations thereunder, provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter "the SICA") or any other law for the time being in force. In other words, statute itself has restricted the grounds on which a register can be rectified after registration or transfer. The term "sufficient cause" as used in the proviso to sub-section (2) has, therefore, to be seen with reference to ground under which register can be rectified after registration. Under these circumstances, only when a company refuses to register the transfer of shares on the grounds that transfer is in violation of the provisions of the SEBI Act or Regulations thereunder, provisions of the SICA or any other law for the time being in force, such refusal could be considered to be with sufficient cause. Refusal on any other ground in respect of the public company cannot be considered to be a sufficient cause for such refusal.' [p. 421] 

11. Having regard to the aforesaid position the scope of refusing to register the transfer of shares on sufficient cause is available only on limited grounds incorporated in sub-section (3) of section 111A of the Act. In sub-section (3) of section 111A there are only three grounds, i.e., if the transfer is in contravention of the provisions of SEBI Act or Regulations thereunder; provisions of Sick Industrial Companies (Special Provisions) Act, 1985 or any other law for the time being in force. In view of the aforesaid position, the respondent-company's contention that the petitioner group is a business rival or the investment has been made for mala fide purpose cannot be made a legitimate ground for refusing to register the transfer of shares. The only ground available in this case and which has been invoked by the company is violation of the regulations relating to takeover. The company has alleged that these shares have been acquired in violation of the Takeover Regulations. However, as discussed earlier, it is not possible for us to concur with the company's contention of the alleged violation of the Takeover Regulations in view of the inadequate material on the basis of which registration of transfer of hares has been refused. Hence, there is no merit in the respondent-company's submission that there exists sufficient cause to refuse the registration of transfer of these shares. 

12. The company has also taken the plea that we should not proceed in deciding these appeals as the SEBI is examining the matter. The matter is pending before the SEBI since the respondent-company made a reference somewhere in October 1997 and the further information/clarification sought for by them have been provided by the respondent-company and the petitioners from time to time but so far no action has been initiated. In this case, after the hearing was concluded, Crawford Bayley & Co., advocates and solicitors, vide their letter dated 8th May, 1999, forwarded a copy of SEBI's letter dated 5th May, 1999 wherein it is indicated that they are examining the matter. SEBI is seized of the matter since October 1997 and it is not known how much more time it will take. In our opinion, the investors should not be allowed to suffer when there are sufficient provisions under section 111A (3) to rectify the situation. Further, if after examination/investigation SEBI comes to the conclusion that the shares have been acquired in violation of the Takeover Regulations then under regulation 44 of the Takeover Regulations they are also empowered to give necessary directions to take remedial measures. In view of this we are not inclined to keep these appeals in abeyance, particularly, having regard to the fact that material placed before us is found to be inadequate to form an opinion of alleged violation of the Takeover Regulations. Further, if these appeals are allowed, the shareholding would go only upto 9.37 per cent which would be below 10 per cent ceiling prescribed at that time under the Takeover Regulations. 

13. On the basis of available material placed before us, we do not agree with the respondent-company's contention that these 10 petitioners acting in concert with others have acquired more than 10 per cent of the share capital of the respondent-company and thus, there is a violation of the Takeover Regulations. Accordingly, these appeals are allowed and the respondent-company is directed to register the transfer of the shares involved in these 10 appeals within one month from the receipt of this order. 

14. There would be no orders as to cost.