BEFORE THE COMPANY LAW BOARD, WESTERN REGION BENCH, MUMBAI 

N. H. SEERVAI and MUSTAFA SAFIYUDDIN, instructed by M. M. LEGAL VENTURE, for the petitioners. 

GAURAV JOSHI, Advocate, instructed by CRAWFORD BAYLEY & CO., for the respondent. 

ORDER 

Date of hearing : 6.5.99. 

C. R. MEHTA - The petitioner named above alongwith nine other petitioners, namely, (1) Joshuha Investments (P) Ltd., (2) Virtuous Finance Ltd., (3) Tejas Kiran Pharmachem Industries (P) Ltd., (4) Family Shares & Investment (P) Ltd., (5) Viditi Investments (P) Ltd., (6) Quality Investment (P) Ltd., (7) Virtuous Shares & Investments (P) Ltd., (8) Airborne Investments (P) Ltd. and (9) Dilip Shantilal, have filed these petitions under section 111A of the Companies Act, 1956 (hereinafter referred to as the Act') against Ambalal Sarabhai Enterprises Ltd. (hereinafter referred to as '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 shares 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 name 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 all these appeals is the same, all the ten appeals are being disposed of by this common order. 

2. The above referred ten petitioners, during the period April, 1997, to 9 October, 1997, 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 14.10.1997 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 SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997, by acquiring more than the stipulated percentage of shares in concert with others. The respondent company, however, did not give any particulars as regard the said alleged res 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 above named petitioners have violated the SEBI Takeover Code. 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 SEBI Takeover Regulations, 1997, as also various provisions of the SEBI Act. The respondent company further submitted that they had already registered the transfer of 4.72% 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% limit as is of the said Takeover Regulations. The respondent company of the petitioners have same address and telephone to the 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 SEBI about the alleged violation of SEBI 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 counter 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 SEBI 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 Companies 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 SEBI 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 Companies Act. The petitioners have also submitted that in arriving at the conclusion of crossing the limit of 10% as prescribed by SEBI 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 Exh. '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% of the paid up capital alongwith 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%) shares and is included in the list of alleged persons acting in concert as per Exh. '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 Companies Act as amended through Depositories Act, 1996, which is effective from 20 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 only 9.37% 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 4.27% but have refused to register the shares to the extent of 4.65%. In this connection, he reiterated the submissions that, as per the provisions of section 111A of the Companies 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 SEBI Takeover Regulations, 1997. 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%. In this connection, he further submitted that the Sun Pharma Group is fully aware of the provisions of SEBI Takeover Code, 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 said Code. He further submitted that the respondent company have informed SEBI vide, letter, dated 14 October, 1997, and have further furnished the information sought for by the SEBI vide its letter, dated 15.6.1998. 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 the 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 (P) 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 come to less than 10% and there is no violation of SEBI Takeover Regulations, 1997, as alleged. 

6. Shri Seervai further submitted that Sarabhai Group holds more than 25% of the paid up capital of the company and why should they 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 Companies Act have been made more emphatic regarding free transferability of the shares than even earlier provisions of section 22A of the Securities Contracts (Regulation) Act. He further submitted that the grounds of refusal are limited to the provisions of section 111A (3) of the Companies Act only, as has been held by Company Law Board in the matter of Estate Investment Company (P) Ltd. v. Siltap Chemicals Ltd. (1999) 1 Comp LJ 314 (CLB) : (1999) 32 CLA 409 CLB. He further invited our attention to the Company Law Board, Western Region Bench letter, dated 10.2.1999 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 refuse 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 SEBI Takeover Code. 

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% 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 7.8.1997 received by the respondent company on 22.9.97 informed that they have acquired shares exceeding 5% shares 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% and even the dates have not been given as to when they exceeded the limit of 5%. He further submitted that large number of shares were lodged between 5.9.1997 and 15.9.1997 aggregating to 5.53%; 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 Companies Act, the respondent company is within its rights 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% 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 : 

(1) Nathu Singh and others v. Punjab Cooperative Bank Ltd. (1996) 3 Comp LJ 74 (CLB). 

(2) Ramachandra Vinayak Khare and Others v. Aphali Pharmaceuticals Ltd. (1995) 3 Comp LJ 108 (CLB). 

(3) E. M. Muthappa Chettiar v. Salem Rajendra Mills Ltd. (1955) 25 Comp Cas 283 (Mad). 

(4) Kinetic Engineering Ltd. v. Unit Trust of India (1995) 3 Comp LJ 79 (Bom) : AIR 1995 Bom 194. 

(5) 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 the company and for a sufficient cause and, therefore, the Company Law Board (CLB) should not overrule the Board of directors' 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 Securities Contracts (Regulation) Act, and thereafter, with the promulgation of Depositories Act whereby the Companies Act has also been amended, thereby the shares of a public company have become freely transferable. He further submitted that the SEBI Takeover Code 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 Code; but in doing so, one is required to follow certain procedure laid down in the said Code. 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 said regulations. He invited our attention to regulation 44 of the said Takeover Code reproduced hereunder : 

"The Board may, in the interests of the securities market, without prejudice to its right 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 are acquired in violation of the said Takeover Code, 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 Code. He further submitted that even if SEBI is examining the matter why the investors should suffer merely because 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 Takeover Code, then pursuant to sub-section (3) of section 111A of the Companies Act, the Company Law Board 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% of the shares of the respondent company. The respondent company's case is that the petitioners have acquired shares in excess of 10% ceiling prescribed at the relevant time and thus acquisition is in violation of the Takeover Code. The difference between the petitioners having acquired 9.37% shares and the respondent company alleging of their acquiring more than 10% 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 been 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 Companies Act, they are required to file various documents under the Companies 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 Companies 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 the same broker 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%, i.e., below 10% ceiling prescribed under the Code. We do find some force in the argument of Shri Seervai that the company cannot be permitted to misuse the provisions of SEBI Takeover Code for the ulterior motive to prevent such investors who may be inconvenient to the management in the garb of the violation of Takeover Code 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 had examined the provisions of section 111A of the Act in the case of Estate Investment Co. (P) Ltd. v. Siltap Chemicals Ltd. (1999) 1 Comp LJ 314 (CLB) : (1999) CLA 409 CLB wherein it was observed [at page 326 of Comp LJ] : 

"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 Company Law Board, (3) in case the Company Law Board finds that the company has refused without sufficient cause, the Company Law Board shall direct the company to register the transfer. Therefore, when a company refuses to register transfer, the Company Law Board 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 Company Law Board 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 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 could be considered to be a sufficient cause for such refusal." 

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 Companies 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 petition 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 regulations relating to SEBI Takeover Code. The company has alleged that these shares have been acquired in violation of the said Code. However, as discussed earlier, it is not possible for us to concur with the company's contention of the alleged violation of SEBI's Takeover Code in view of the inadequate material on the basis of which registration of transfer of shares 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 8.5.99 forwarded a copy of SEBI's letter, dated 5.5.99 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 SEBI Takeover Code, then under regulation 44 of the said Code, 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 said Takeover Code. Further, if these appeals are allowed, the shareholding would go only upto 9.37% which would be below 10% ceiling prescribed at that time under the Code. 

13. On the basis of available material placed before us, we do not agree with the respondent company's contention that these ten petitioners acting in concert with others have acquired more than 10% of the share capital of the respondent company and, thus, there is a violation of SEBI Takeover Code. Accordingly, these appeals are allowed and 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.