BEFORE THE COMPANY LAW BOARD, WESTERN REGION BENCH 

Appearances : N. H. Seervai & Shyam Mehta for the Applicants. Sudipto Sarkar, Rahul Chitnis & B. G. Saraf for the Respondent. 

ORDER 

C. R. MEHTA 

1. Six appellants who have lodged certain number of shares as detailed below for registration of transfer in their favour, with Blossom Industries Ltd. (hereinafter 'the company') have filed six appeals under section 111A of the Companies Act, 1956 (hereinafter 'the Act') alleging that the company has not taken any action to register these shares. 


Since the matters involved in these appeals are similar, all these appeals are being disposed of by this common order. The petitioners have submitted that they had lodged these shares along with duly executed and stamped transfer deeds with the respondent-company (as detailed above) for registering the transfer of the respective shares in their names, but the respondent-company did not transfer these shares in their names in spite of expiry of 60 days from the date of lodgement nor did they communicate any notice of refusal of transfer of shares in their favour. It is further submitted that the act on the part of the respondent is mala fide, arbitrary and without sufficient cause. Hence they have filed these appeals under section 111A of the Act. 
 
2. The respondent-company in their reply dated 9th July, 1998 submitted that Bakhtawar Construction Co. (P.) Ltd. and five other persons who have filed these appeals belong to 'Bakhtawar group'. It is further submitted that transferees are closely associated with Bakhtawar group and together with the existing shareholding owned and under the control of the said group, exceeded the prescribed percentage under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (hereinafter 'the Takeover Regulations'). Accordingly, it was decided by the Board of directors of the respondent-company not to effect the transfer of the shares lodged and forming part of these appeals till legal advice was obtained in the matter. It is further submitted that the five individual appellants are 'persons acting in concert' as defined in the Takeover Regulations. It is submitted that the applicants cannot acquire shares which entitles them to exercise 10 per cent or more of the voting rights in respondent-company unless the applicants make a public announcement to acquire the shares of the respondent-company as per the Takeover Regulations. But the applicants have not complied with the mandatory legal requirements of the said Regulations. 

3. It is further submitted by the respondent-company that the said Bakhtawar group have taken out Judges Summons No. 154 of 1998 wherein they were seeking an order that any transfer of the shares of the respondent-company shall be void and have further submitted that the applicants are in the habit of making different and contradictory prayers with a view to mislead the court. The respondent-company has further submitted that the said investment is not a genuine investment and the applicants have filed frivolous litigations against the respondent-company. It is also submitted that the arbitration matters are going on against the respondent-company and that the further acquisition of shares is nothing but for the purpose of enhancing the strength of the shareholding for fighting litigation and to harass the respondent-company. It is further submitted that the applicants were not required to wait for refusal of the company to file appeals within prescribed period of limitation. The applicants ought to have filed these appeals under section 111A within two months from the date of lodgement of shares and as such these appeals should be dismissed. It is submitted that all the acquisition of shares beyond the original allotment out of promoters' quota and public issue, including the shares covered in the present six appeals are in violation of the Takeover Regulations at the relevant time. This is a clear case of intentional violation of the provisions of the Takeover Regulations by the Bakhtawar group for personal gains. It is further submitted that the appellants are fully aware of the requirements of law at the time of acquisition of shares but opted not to follow the requirements of the Takeover Regulations at the relevant point of time. 

4. The applicants in their rejoinder dated 5th August, 1998 have submitted that the defences of the respondent-company are merely an after thought. It is now only for the first time in these proceedings the various defences are raised which were never communicated earlier to them. It is further submitted that it is not within the jurisdiction of the respondent-company to determine who are the persons acting in concert and that their holding exceeds 10 per cent or it will amount to a breach of the Takeover Regulations. The obligation to make the open offer, etc., is on the acquirer and there is no obligation or duty on a company to refuse the transfer of shares on the said ground. The applicants have further submitted that they had given notice to the respondent-company for having acquired the shares in excess of 5 per cent as required by the Takeover Regulations and have further submitted that they are not exceeding 10 per cent of the voting rights and hence the Takeover Guidelines are not violated as alleged. It is further submitted that the respondent-company is fully aware that the shares at item Nos. 3 and 7 are merely given to appellants as security for moneys advanced at the instance of the holders of the shares to Blossom Breweries Ltd. as explained in detail in an arbitration claim made by Associated Breweries & Distilleries (P.) Ltd., a company having the same directors as the appellants herein. 

5. Shri N. H. Seervai, advocate appearing for the petitioner-company, submits that the company has failed to communicate its decision and no reply has been furnished to the applicants nor there was any response to the reminders given in aspect of the shares lodged. He further submitted that pursuant to sub-section (2) of section 111A of the Act, the shares are freely transferable. He further submitted that there has been complete silence in respect of the letters dated 8th December, 1997 with which the second lot of the shares was lodged and the reminder given on 7th February, 1998 in respect of earlier lot lodged. He further submits that the silence on the letters with which the shares have been lodged, with the reminders given itself shows that there is a lack of sufficient cause for the purpose of refusal to transfer the shares. He further submitted that since the respondent-company is a listed company and pursuant to the provisions of section 111A (2) of the Act, the shares are freely transferable, necessary directions may be given to the respondent-company to record the registration of the transfer of shares involved in these six appeals. He further submitted that the various false pleas have been taken by the respondent-company that the above applicants are acting in concert for which no satisfactory evidence has been placed. He further submitted that the reliance placed on Collector of Daman's order in sales tax proceedings that he has restrained the company from transfer of shares is not correct. He submitted that the administrative tribunal has already restrained the parties from giving effect to the said order. He further submitted that the company is in the habit of making false and misleading pleas and dropping the same. He further submitted that the respondent-company has cleverly not indicated which of the regulations of the 'Takeover Regulations are violated. The acquisition of more than 5 per cent of shares of the paid-up capital of the respondent-company has already been notified as required under regulation 6 of the Takeover Regulations. He invited attention to regulation 10 of the Takeover Regulations and submitted that the petitioners are not acquiring the shares which along with an earlier holding carries more than 10 per cent of the voting rights of the capital of the company, if the items at serial Nos. 3 and 7 of Exhibit 1 of respondent-company's reply are excluded. He submitted that so far as item No. 3 of the Exhibit 1 is concerned the relevant shares are in lock-in period and cannot be transferred. Further power of attorney lodged by the petitioners has not been registered by the respondent-company. Hence, the question of acquiring 13 lakh shares and/or exercising voting rights in connection therewith does not arise. In respect of item No. 7 of Exhibit 1 relating to 26 lakh shares are concerned, they have not been lodged with the company and the agreement for acquisition of those shares was not at all implemented. In view of the aforesaid position, he submitted that even with the registration of the present shares which are subject-matter of these six appeals the applicants would be acquiring less than 10 per cent of the share capital or voting rights in the company and thus here is no violation of the Takeover Regulations. He further submitted that the respondents are aware that 13 lakh shares have been pledged with the applicants as a security only and they being in lock-in period cannot be transferred. 

6. Shri Sarkar, counsel appearing for the respondent-company, invites attention to Exhibit 1 attached with the respondent-company's reply wherein the detail of the shares and voting rights acquired by Bakhtawar group and the other acting in concert have been indicated and submitted that it would be seen therefrom that the said group is in a position to exercise the voting rights to the extent of 35.58 per cent in the company. He further submitted that originally Bakhtawar group acquired 3 per cent shares in 1993 and thereafter 0.01 per cent in 1994. Thus, making their holding to the extent of 3.01 per cent in share capital of the company in 1994. The said group further acquired 13 lakh shares which constituted 8.90 per cent and thus taken together their earlier holdings, the total holdings and the voting power of the said group would be exceeding 10 per cent. He invited attention to regulation 10 of the Takeover Regulations, which stipulates that "no acquirer shall acquire shares or voting rights, which taken together with shares or voting rights, if any, held by him or by persons acting in concert with him, entitle such acquirer to exercise ten per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations" and submitted that even though these 8.90 per cent shares which are in lock-in period but by acquiring irrevocable power of attorney and having lodged with company for registration Bakhtawar group is already in a position to exercise voting rights in respect of these shares and taken together earlier holding they are in a position to exercise voting rights in excess 10 per cent of the share capital of the company and as such further acquisition of the shares which are subject-matter of these appeals cannot be registered as the company has not acquired these shares in accordance with the Takeover Regulations. He further submitted that there is no bar on the transfer of shares within the lock-in period amongst the promoters as it does not apply to transfer amongst the promoters inter se. In this connection he placed reliance on SPG International Ltd. v. Vijay Remedies Ltd. [1998] 30 CLA 113 (CLB). He further submitted that in the case of sale of shares as soon as the seller hands over the certificate and blank transfer deeds and buyer accepts them and gives the seller the cheques, the goods become ascertained goods, the sale is complete and the property passes on to the purchaser as held in Maneckji Pestonji Bharucha v. Wadilal Sarabhai & Co. AIR 1926 PC 38, and submitted that in this connection once the certificate along with the blank transfer deed has been given, the property has passed on to the purchaser and it is immaterial as to whether the shares have been registered in their favour or not. He further submitted that having failed in their attempt to takeover the company, a new line has been adopted that these shares were given as security for the loans advanced. He invited attention to the shareholders agreement dated 6th October, 1994 memorandum of contract of sale made on 29th September, 1994 and the irrevocable powers of attorney given by the parties and submitted that in none of these documents through which the appellants have acquired the shares or voting rights or transferors have agreed to sell their shareholding, it is indicated that these shares have been acquired by them as security for the loans advanced. He further submitted that the perusal of these documents would clearly establish that the parties concerned have sold their shareholding and have also given the irrevocable powers of attorney for exercising their voting rights. Thus, it is a clear case of acquisition of shares and the voting rights which exceeds more than 10 per cent of the share capital in the company and which cannot be acquired without compliance of the various requirements of the Takeover Regulations. As the appellants have failed to act according to the said Takeover Regulations, the company is within its rights to reject the transfer or the registration of these shares which are subject-matter of these appeals. 

7. Mr. Seervai in reply submitted that Takeover Regulations, 1994 was promulgated for the first time on 4th November, 1994 and thus there cannot be any violation of the said regulations in acquiring of the shares prior to that date. He further submitted that present acquisition of shares is covered directly by the Takeover Regulations which came into force in February 1997. He further submitted that latter code does not take into account inter se transfers amongst promoters and as such there is no violation of the Takeover Regulations. 

8. In reply to Mr. Seervai's submissions, the advocate, appearing for the respondent-company, submitted that when the shares have been lodged for transfer, one has to see whether these shares have been acquired in accordance with the Takeover Regulations and it is abundantly clear that the petitioners were already in a position to exercise the voting rights in excess of 10 per cent and if they acquire further shares or voting rights it has to be in accordance with the Takeover Regulations. In the instant case since the applicants have failed to give public notice as per those Regulations, the acquisition of these shares is in violation of the Takeover Regulations and as such the company is within its rights not to register shares in favour of the applicants as it is violative of law. 

9. We have considered the various averments made by the parties. We note that in the original appeals, it has been contended that they have purchased the shares and have lodged them with the company for registration of transfer, in their favour but later in their rejoinders applicants have taken the plea that these shares have been pledged with them as a security and have placed reliance on various agreements entered into amongst the parties. We have gone through these documents which were placed on record during these proceedings and note that none of these documents refer to the terms and conditions on which the loans have been granted, when it was repayable and when the cause of action has arisen for getting the pledged shares registered in their favour. It is, therefore, not possible for us to come to the conclusion that these shares are pledged and as there is a failure on the part of the respondents to repay the loans advanced, and accordingly they are seeking registration of these shares. Thus, we will proceed with the assumption that the shares have been acquired by purchase for which agreements have been entered into from time to time. 

10. We have perused the Exhibit 1 attached with the reply of the respondent-company wherein the position of the shares or voting rights acquired by Bakhtawar group from time to time has been detailed out. The major portion of the present shares which are subject-matter of these appeals have been lodged somewhere in December 1997 and few individual shareholders have lodged their shares in December 1996. As per regulation 10 of the Takeover Regulations which came into force in February 1997, "no acquirer shall acquire shares or voting rights which taken together with the shares or voting rights if any, held by him or by persons acting in concert with him, entitle such acquirer to exercise ten per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations'. The position in 1997 before the shares which are subject-matter of present appeals have been lodged, the Bakhtawar group had already acquired the following shares and voting rights : 

From the aforesaid position, it is clear that though 13 lakh shares have not yet been lodged for transfer in their favour, as they are in lock-in period, however, irrevocable powers of attorney have been obtained from the transferor and lodged with the company for registration. Thus, all the aforesaid three acquisitions take Bakhtawar group's shareholding and voting power to the extent of 11.91 per cent. The applicants are contending that the 13 lakh shares which constituted 8.9 per cent are in lock-in period and not registered in their name and, therefore, they should be excluded for calculating their total shareholding in the company. The respondent-company's contention is that irrevocable powers of attorney have been obtained from the transferor in respect of these shares and, therefore, applicants are in a position to exercise the voting rights in respect of these shares and for the purpose of regulation 10 of the Takeover Regulations, these shares are to be taken into consideration. In the instant case though 13 lakh shares which constituted 8.9 per cent of the share capital are in lock in period and have not been lodged with the company for registering the transfer, irrevocable powers of attorney have been obtained and lodged with the company and thus 'Bakhtawar group' is in a position to exercise voting rights in respect of these shares. In view of this, 13 lakh shares will have to be taken into consideration for the purpose of determining whether they have acquired the shares or voting rights in excess of the 10 per cent an are required to comply with the requirements of the Takeover Regulations for further acquisition of shares for the purpose of considering these appeals. A plea has been made that irrevocable powers of attorney lodged with the company have not been registered with the company and as such they are not in a position to exercise the voting rights in respect of these shares. In our view it is immaterial whether the irrevocable powers of attorney have been registered with the company or not. The fact of the matter remains that by obtaining these irrevocable powers of attorney the Bakhtawar group is in a position to exercise voting rights and respondent-company cannot prevent them from exercising voting rights merely on the plea that these powers of attorney have not been registered by them. Thus, these shares will have to be taken into consideration. Thus, it is clear that Bakhtawar group are holding or exercising voting rights to the extent of 11.91 per cent at the time of their lodging the shares which are subject-matter of these appeals. 

11. During the course of hearing it was also submitted that the voting rights in respect of 6,60,000 shares have been frozen by the Company Law Board (hereinafter 'the CLB'). Full details were not placed before us as to under what circumstances and in what proceedings these voting rights have been frozen. However, it is seen that even if these 6,60,000 shares are taken out from the present holding of 17,51,000 shares, as detailed in item 1 to 3 of Exhibit 1, their holding would stand as 10,91,000 shares and if added to that subsequent fresh acquisition as detailed at items 4 to 6 of the said Exhibit, it would come to 19,46,500 shares which would be in excess of 10 per cent ceiling prescribed in regulation 10 of the Takeover Regulations. Thus, we hold that acquisition of further shares and/or voting rights the acquirers are required to comply with the Takeover Regulations. In these appeals we are concerned with the registration of transfer of shares involved in these six appeals, viz., by Bakhtawar Construction and five individuals. So far as the five individuals are concerned, it has been alleged that they are acting in concert with Bakhtawar Construction Co. (P.) Ltd., though denied by the applicants, but having regard to the submissions of the respondent-company that these individuals are directors, chartered accountants, tax advisors or have witnessed various transfer deeds lodged by Bakhtawar Construction Co., no material has been placed on record to controvert the aforesaid contentions. Some proximity has already been indicated on account of various relationships these individuals are having with Bakhtawar group, it was upto the applicants to have fully controverted that these persons are not acting in their concert, for the purpose of acquiring these shares or voting rights. Under the circumstances we are inclined to hold that these five individuals are also acting in concert with the Bakhtawar group. 

12. Now the question under consideration is whether the company is within its rights to reject the transfer of these shares on this ground. It was pleaded that the duty is cast upon the acquirer to make a public announcement under the Takeover Regulations and the company has no role to play. We have gone through the Takeover Regulations and note that certain obligations have been cast on the Board of directors of the targeted company. Sub-regulation (6) of regulation 23 provides that "Upon fulfilment of all obligations by the acquirer under the Regulations as certified by the merchant banker, the Board of directors of the targeted company shall transfer the securities acquired by the acquirer, whether under the agreement or from open market purchases, in the name of the acquirer and/or allow such changes in the Board of directors as would give the acquirer representation on the Board or control over the company". In view of the aforesaid provision the question arises that when an acquirer or a person has lodged shares with the target company for transferring them in his name and if a target company knows from its records that if such transfers are given effect to, the aggregate holding of acquirer will exceed 10 per cent, can company refuse to register the transfer until the acquirer or the other person has made an offer to the shareholders of the targeted company, pursuant to the Takeover Regulations. 

The provisions of sub-section (2) of section 111A read as under : 

"Subject to the provisions of this section, the shares or debentures and any interest therein of a company shall be freely transferable : 

Provided that if a company without sufficient cause refuses to register transfers of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the Company Law Board and it shall direct such company to register the transfer of shares." 

It will be noticed that aforesaid provisions allow the Board of directors to reject the transfer of shares 'for sufficient cause'. Further sub-section (3) of section 111A which relates to rectification of register of members states that the CLB can direct rectification of register of members or other record if any transfer of shares has taken place, which is in violation of Securities and Exchange Board of India Act, 1992 or Regulations made thereunder or Sick Industrial Companies (Special Provisions) Act, 1985 or any other law for the time being in force. On the basis of the combined reading of the provisions of regulation 23 of the Takeover Regulations and sub-sections (2) and (3) of section 111A of the Act, it would appear that the Board of directors of a company will be within its right to reject the transfer of shares which will have the impact of increasing the aggregate holding of the acquirer to more than 10 per cent unless the provisions of the Takeover Regulations are complied with as it would be violative of law and that would be sufficient cause to refuse to register the transfer of shares. In the instant case as the shareholding and/or voting rights would be in excess of the 10 per cent and are being acquired without following the procedure laid down in the Takeover Regulations, there is a sufficient cause not to register the transfer of shares and hence no directions can be issued to the respondent-company for registration of shares which are subject-matter of these appeals. Accordingly, these appeal are dismissed. No orders as to cost.