BEFORE THE COMPANY LAW BOARD - WESTERN REGION BENCH 

N. H. Seervai and Shyam Mehta for the applicants. 

Sudipto Sarkar, Rahul Chitnis and B. G. Saraf for the respondent. 

ORDER 

The order of the Bench was delivered by 

C. R. MEHTA (Member). - Six appellants who have lodged a certain number of shares as detailed below for registration of transfer in their favour, with M/s. Blossom Industries Limited (company) have filed six appeals under section 111A of the Companies Act (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 sub-mitted 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 lodgment nor did they communicate any notice of refusal of transfer of shares in their favour. It is further sub-mitted 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 Companies Act. 

The respondent-company in their reply dated July 9, 1998, submitted that Bhaktawar Construction Company Private Limited and five other persons who have filed these appeals belong to the "Bakhtawar group". It is further submitted that the transferees are closely associated with the Bakhtawar group and together with the existing shareholding owned and under the control of the said group, exceeded the prescribed percentage under the SEBI Take Over Code. 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 Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. It is submitted that the applicants cannot acquire shares which entitle them to exercise 10 per cent. or more of the voting rights in the respondent-company unless the applicants make a public announcement to acquire the shares of the respondent-company as per the Take Over Regulations. But the applicants have not complied with the mandatory legal requirements of the said regulations. 

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 sub-mitted 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 the prescribed period of limitation. The applicants ought to have filed these appeals under section 111A within two months from the date of lodgment 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 the promoters' quota and public issue, including the shares covered in the present six appeals are in violation of the Take Over Code at the relevant time. This is a clear case of intentional violation of the provisions of the Take Over 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 Take Over Code at the relevant point of time. 

The applicants in their rejoinder dated August 5, 1998, have submitted that the defences of the respondent-company are merely an afterthought. 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 Take Over Code. 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 Take Over Code and have further sub-mitted that they are not exceeding 10 per cent. of the voting rights and hence the Take Over Guidelines are not violated as alleged. It is further submitted that the respondent-company is, fully aware that the shares at items Nos. 3 and 7 are merely given to the appellants as security for moneys advanced at the instance of the holders of the shares to Blossom Breweries Limited as explained in detail in,-an arbitration claim made by Associated Breweries and Distilleries Private Limited, a company having the same directors as the appellants herein. 

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 was there any response to the reminders given in respect of the shares lodged. He further submitted that pursuant to sub-section (2) of section 111A of the Companies Act, 1956, the shares are freely transferable. He further submitted that there has been complete silence in respect of the letters dated December 8, 1997, with which the second lot of the shares was lodged and the reminder given on February 7, 1998, in respect of the earlier lot lodged. He further submits that the silence on the letters with which the shares have been lodged and 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 Companies 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 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 the 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 sub-mitted 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 Take Over Code 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 said Code. He invited attention to regulation 10 of the Take Over Regulations of 1997 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 Sr. Nos. 3 and 7 of exhibit 1 of the 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 powers of attorney lodged by the petitioners have not been registered by the respondent-company. Hence, the question of acquiring 13 lakhs shares and/or exercising voting rights in connection therewith does not arise. In respect of item No. 7 of exhibit 1 relating to 26 lakhs shares 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 Take Over Regulations of 1997. He further submitted that the respondents are aware that the 13 lakhs shares have been pledged with the applicants as a security only and they being in lock-in period cannot be transferred. 

Shri Sarkar, counsel appearing for the respondent-company, invites attention to exhibit 1 attached with the respondent-company's reply wherein the details of the shares' and voting rights acquired by the Bakhtawar group and the others acting in concert have been indicated and sub-mitted 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 the 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 the share capital of the company in 1994. The said group further acquired 13 lakhs 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 SEBI (Substantial Acquisition of Shares and Take Overs) Regulations, 1997, 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 10 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 an irrevocable power of attorney and having lodged it with the company for registration the Bakhtawar group is already in a position to exercise voting rights in respect of these shares and taken together with the earlier holding they are in a position to exercise voting rights in excess of 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 Take Over 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 S. P. S. International Ltd. v. Vijay Remedies Ltd. [1998] 93 Comp Cas 547; [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 the 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 and 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 take over the company, a new line has been adopted that these shares were given as security for the loans advanced. He invited attention to the share-holders' agreement dated October 6, 1994, the memorandum of contract of sale made on September 29, 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 irrevocable powers of attorney for exercising their voting rights. Thus it is a clear case of acquisition of shares and voting rights, which exceed more than 10 per cent. of the share capital in the company and which cannot be acquired without compliance with the various requirements of the Take Over Regulations, 1997. As the appellants have failed to act according to the said Take Over Regulations, the company is within its rights to reject the transfer or the registration of these shares which are the subject-matter of these appeals. 

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

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 SEBI Take Over 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 SEBI Take Over 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 Take Over Code and as such the company is within its rights not to register the shares in favour of the applicants as it is violative of law. 

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 with the company for registration of transfer of shares, in their favour but later in their rejoinders the 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 refers 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 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. 

We have perused exhibit 1 attached with the reply of the respondent-company wherein the position of the shares or voting rights acquired by the Bakhtawar group from time to time has been detailed out. The major portion of the present shares which are the subject-matter of these appeals have been lodged somewhere in December, 1997, and a few individual shareholders have lodged their shares in December, 1996. As per regulation 10 of the Take Over Code of 1997, 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 the 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 lakhs shares have not been lodged for transfer in their favour, as they are in the 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 the Bakhtawar group's shareholding and voting power to the extent of 11.91 per cent. The applicants are contending that the 13 lakhs shares which constituted 8.9 per cent. are in the 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, the applicants are in a position to exercise the voting rights in respect of these shares and for the purpose of regulation 10 of the Take Over Code, 1997, these shares are to be taken into consideration. In the instant case, though the 13 lakhs shares which constituted 8.90 per cent. of the share capital are in the lock-in period and have not been lodged with the company for registering the transfer but irrevocable powers of attorney have been obtained and lodged with the company and thus the "Bakhtawar group" is in a position to exercise voting rights in respect of these shares. In view of this, the 13 lakhs 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 10 per cent. and are required to comply with the requirements of the regulations of the Take Over Code for further acquisition of shares for the purpose of considering these appeals. A plea has been made that the irrevocable powers of attorney lodged with the company have been not 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 the respondent-company cannot deny 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 for determining the holdings of the Bakhtawar group. Thus, it is clear that the 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 the subject-matter of these appeals. 

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. 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 items Nos. 1 to 3 of exhibit 1, their holding would stand at 10,91,000 shares and if is added to that the subsequent fresh acquisition as detailed at items Nos. 4 to 6 of the said exhibit, it would come to 19,46,500 shares which would be in excess of the 10 per cent. ceiling prescribed in regulation 10 of the Take Over Code of 1997. Thus, we hold that the acquisition of further shares and or voting rights the acquirers are required to comply with the Take Over 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. Pvt. 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 the Bakhtawar Construction Company, 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 the Bakhtawar group. It was up to the applicants to have fully controverted that these persons are not acting in their concert, for the purpose of acquiring these ares or voting rights. Under the circumstances, we are inclined to hold that these five individuals are also acting in concert with the Bakhtawar group. 

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 Take Over Regulation and the company has no role to play. We have gone through the Regulations and note that certain obligations have been cast on the board of directors of the target company. Sub-section (6) of regulation 23 provides that "upon fulfilment of all obligations by the acquirers under the regulations as certified by the merchant banker, the board of directors of the target 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, when an acquirer or a person has lodged shares with the target company for transferring them in his name and if the target company knows from its records that if such transfers are given effect to, the aggregate holding of the acquirer will exceed 10 per cent. can the company refuse to register the transfer until the acquirer or the other person has made an offer to the shareholders of the target company, pursuant to the Take Over Regulations. The provisions of sub-section (2) of section 111A reads 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 transfer 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 the 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 and the Company Law Board can direct for rectification of register of members or other record if any transfer of shares has taken place, which is in violation of the SEBI Act or Regulations made thereunder or the 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 Take Over Code and sub-sections (2) and (3) of section 111A of the Companies Act, it would appear that the board of directors of a company will be within its rights to reject a 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 Take Over 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 Take Over Regulations, there is 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 the subject-matter of these appeals. Accordingly, these appeals are dismissed No orders as to costs.