Company Appeal No. 17 of 2007 · High Court · 2009

Order

These three appeals can be commonly dealt with as they arise out of the same proceedings. For convenience sake, the parties are referred in the same manner as they are referred to by the Company Law Board. The appellants in Company Appeal No. 6 of 2008 are the petitioners before the company law board. The petitioners alleging certain acts of oppression and mismanagement of the affairs of the 2nd respondent company, at the instance of the 1st respondent, have invoked the provisions of Sections 111- A, 237, 397, 398 r/w Sections 402, 403 and 406 of the Companies Act and sought for (1) removing the 1st respondent from the post of Joint Managing Director of the company (2) to direct respondents 1, 3 to 7 to sell their shares in favour of the company and to order for corresponding reduction of the share capital of the company (3) to direct the company to rectify the register of members and to reduce the number of equity shares held by the respondents 1, 3 to 7, to the extent they were acquired in violation of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and to order for investigation into the affairs of the company.

The 2nd respondent company was apparently promoted by the 1st petitioner for carrying on business of software and training. The 1st petitioner’s father was the Chairman of the Company till his demise. Subsequently, the 1st petitioner succeeded him as Chairman-cum- Managing Director of the company. The 1st petitioner has sold majority of his shares in order to meet certain of his pressing financial commitments. It is the case of the petitioners that the 1st respondent who was appointed as Joint Managing Director is solely entrusted with the powers of running the day to day affairs of the company and consequently he had complete access and control over the records and books of accounts and other registers of the company.

The 1st respondent has also been taking all important decisions with regard to the business of the company. The allegation relating to mismanagement of the affairs of the company at the hands of the 1st respondent is projected by pointing out that a sum of Rs.15 lakhs of the company has been lent to another company by name M/s. Yemmem Agro Mills Private Limited, wherein the 1st respondent is a Director and a Member. The later company has not repaid the debt and it had now mounted to Rs.27.5 lakhs. Thus, the 1st respondent caused prejudice to the interests of the share holders of the 2nd respondent company. The 1st respondent has also availed huge sums of money aggregating to Rs.1.05 crores on behalf of the company at a higher rate of interest from parties related to him by way of unsecured loans without either the express knowledge or consent of the Board of Directors of the company and thus exposed the interests of the share holders of the company.

It is also further alleged that huge sums of money of more than Rs.6 crores has been invested in M/s. Mercury Outsourcing Management Limited, without securing any return to the company. It is also further alleged that exorbitant amounts have been spent on unproductive foreign travel and trips and thus caused the 2nd respondent company unnecessary and avoidable expenditure. It is further alleged that over a period of time, the 1st respondent in a concerted action resorted to acquisition of shares of the company and thus kept on increasing substantial quantities of shares so as to illegally gain control over the company. The 1st respondent has also acquired shares in the names of his wife, brother, father, mother and sister-in-law and in the process has violated the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, henceforth referred to as `Takeover Regulations’.

It is further alleged that the 1st respondent made an unholy attempt of removing the 1st petitioner as the Chairman of the company by convening illegally an extraordinary meeting of the shareholders. The 1st respondent has pointed out that he along with the 1st petitioner and few others, has jointly

promoted the company giving a firm shape to his ideas and concepts and thereafter the 1st petitioner has started actively participating in politics and hence started losing interest in the affairs of the company and that he has sold of approximately 50% of his share-holding of company and does not evince any interest in further progress of the company, ever since he has become a legislator of the local assembly and in fact he does not have time to attend to or take care of the affairs of the company. It is further pointed out that the petitioners have always been part of the Board of Directors, but, however, over a period of time, on their own started dissociating and distancing themselves from the affairs of the company. The 1st respondent had carried on the affairs of the company strictly in accordance with the resolutions passed by the Board of Directors of the company and he at all times kept informed the Board of Directors of the activities and the transactions entered into for and on behalf of the company. However, the 1st respondent has pointed out that the entire records, registers etc., are under the control and physical custody of the petitioner. It is further stated that all details relating to the affairs carried out by the company are put on Internet and they had complete access thereto. Therefore, the various allegations of mismanagement alleged against the 1st respondent are stoutly disputed and denied. It is further pointed out that a subsidiary company has been floated for purpose of ensuring that overseas business is procured and the interests of the company are thus promoted. It is further pointed out that the extraordinary meeting of the shareholders has been convened strictly in accordance with the provisions contained under Section 169 of the Companies Act. Insofar as the publication of the financial results for the quarter ended on 31.12.2006 is concerned, the 1st respondent has regretted that the same have been inadvertently published though the meeting of the Board of Directors could not be held and he assigned the reason for the publication as the Stock Exchanges have been notified. Insofar as the allegations of acquisition of shares, the 1st respondent has pointed out that he has never breached the Takeover Regulations and he had faithfully complied with the requirements. Based on the pleadings, as set up, the Company Law Board did not find the 1st respondent to be exclusively guilty or at fault for non compliance of the SEBI (Prohibition of Insider Trading) Regulations, 1992, (henceforth, called `Insider Trading Regulations’). It had rightly found the 1st petitioner being the Chairman-cum- Managing Director as also responsible for securing compliance of these Insider Trading Regulations. It will be appropriate to notice the following findings recorded by the Company Law Board in its order: A careful perusal of the above documents made available on behalf of the petitioners, in the absence of the books of account and the relevant minutes of the board meetings of the Company, in my view, does not conclusively establish that the first respondent is wholly responsible for the financial irregularities pointed out by the petitioners. The first respondent cannot be mulct with any liability on the strength of mere copies of statements records discussed here above. However, the publication of the un-audited results of the Company for the quarter ended 31.12.2006 caused by respondent is undoubtedly without the authority of the board of directors. The purported inadvertence on his part in such publication, without knowledge of law is however, is not excusable, more so in the absence of any material whatsoever on record to substantiate that the first respondent had convened the board meeting on 31.01.2007 for the purpose of approving the un- audited results and further that he intimated the Stock Exchanges about the board meeting proposed on 31.01.2007. It shall be borne in view that any director cannot singly borrow monies on behalf of the Company, in view of restrictions the explicit imposed in Clause 50 of the articles of Company. association Therefore, the plea of the petitioners respondent availed unsecured loans without the consent of the board of directors runs parallel to the relevant articles of association of the Company. Any borrowing incurred contrary to Clause 50 of the article cannot bind the Company. xxxxxxxxxxxxxxxxxx

8. The annual returns for relevant years reveal the following essential features: • The annual reports for the years 2001-2002, 2002-2003, 2003-2004, 2004-2005 and 2005-2006 have been signed by, among others, the first petitioner. • The Company paid dividend at 10% on the paid up share capital at pro-rata (1999-2000). • The Company had secured and unsecured from companies, firms, and other parties listed in the register maintained under Sections 301 and 370(1-C) of the Act (1999- 2000 to 2005-2006). • The Company has not accepted any deposits from the public, (1999-2000: 2001-2002 to 2005-2006). services. • The Company has established off- shore and on-sight facilities in USA and established a branch office in UK for monitoring of, off-shore and on The Company continued to extend its sales and marketing network in Europe and USA. The Company offices Chicago. New Jersey and UK worked closely with clients taking support from off-shore India. (2000-2001). located at Hyderabad • The Company constituted an audit committee comprising of the second first respondent and an petitioner, independent director, under Chairmanship of the first respondent. (2000-2001). • The Company was having adequate internal procedures commensurate with the size of the Company. (2000-2001 to 2005-2006). control It was proposed at the annual • general meeting held on 30.09.2002, to extend remuneration on long term basis in favour of the first petitioner not exceeding US $ 75,000 per annum, as may be decided by the board of directors, whenever he worked abroad on long term basis. (2000-2001). • The Company has been awarded (2000- ISO 9001 Certificate. 2001). proposed • The Company incorporate wholly owned subsidiary in USA and UK in order to overseas marketing outfits for the Company. (2000-2001). • There was no non-compliance by the Company during the last three years on any matter relating to capital markets and there were no penalties, strictures imposed on the Company by Stock Exchange or SEBI or any Authority. The Company • neither accumulated losses as at 31.03.2004. 31.03.2005 & 31.03.2006 nor it has incurred any cash losses during the financial year ended on those dates preceding immediately financial year. (2003-2004 to 2005- 2006). reveal

9. The annual reports for various years unequivocally Company's board has a representation of the executive, non-executive and independent directors. The annual general and board meetings are being regularly convened as well as held and the audit committee constituted in March, 2001 is found to be active, and discharging as borne by the annual reports for the period from 2003-2004 to 2005-2006. The Company has been from time to time complying with the conditions of corporate governance, in terms of the requirements of Clause 49 of the Listing Agreement entered with the Stock Exchange, which is reflected compliance with Corporate Governance. Neither the first petitioner nor any other director has been excluded by respondent while carrying on management of the Company. All the borrowings, lending, investments and expenditure incurred on account of foreign travels have been either with the knowledge or consent of the board of directors of the Company. With all these, it is rather difficult to conceive that the petitioners are being sidelined from the management of the Company. certificate the Code the Auditor's All the financial irregularities levelled against respondent, on account of, inter-alia unauthoritised lending, investments, travels. satellite charges, foreign borrowings, exclusive management, etc., have been mutely acquiesced by the first petitioner, as evidenced annual reports produced for the period between 1999-2000 and 2005-2006. This acquiescence by petitioner in the conduct of the affairs the Company, which he has complained of will disentitle him from seeking any relief on these accounts. The loan in favour of YAMPL has been reportedly extended during the year 2000-2001. It is the Company, which established a subsidiary in USA and not first respondent, of which the petitioners cannot plead ignorance. The investments are made over a period of time. The Company, as found reflected in the annual reports, has offices in Chicago and New Jersey in USA and in UK for monitoring off- shore and on-site facilities and further extending its sales and marketing network in Europe and USA. At the annual general meeting held on 30.09.2002, there was proposal to extend a remuneration of US Dollars 75000, in favour of the first petitioner whenever he worked abroad on long term basis. The sequence of events would show that foreign trips, without to have been any doubt, ought undertaken, apart respondent, by first petitioner and other officials of the Company. In this background, the expenditure of Rs. 90 lakh on account of foreign trips cannot be exclusively attributed to the first petitioner, and further the accusation pointed at the first respondent is not supported by any concrete evidence on the part of the petitioners…………. The Company Law Board has further found that in view of the fact that the petitioners on one side and the 1st respondent on the other side are not able to carry on the operations of the company smoothly in view of serious differences between them and since the operations of the company cannot be brought to a grinding halt on account of internal squabbles between the parties though justify winding up of the company for just and equitable grounds, but, however, has taken note of the fact that more than 60% of the shareholding is held by public at large and therefore it is their interests which will be adversely impacted. Therefore, alternative remedial measures were thought of being put in place for carrying on the affairs of the company and it merely ordered that the acquisition of shares by the respondents 1, 3 to 7 beyond 5% as invalid and that the company shall rectify the register of members in respect of the shares of respondent No.1, 3 to 7 beyond 5% within 30 days from the receipt of the order and that the company will convene general meeting by 30.11.2007 in order to elect Board of Directors, and those who were so elected will in turn elect the Chairman cum Managing Director in accordance with the relevant Articles of Association and then carry on the business strictly in accordance with the internal regulations of the company, and till then the bank accounts maintained by the company shall continue to jointly operated by the petitioners 1 and 2 and the 1st respondent in accordance with the interim order passed earlier on 13.3.2007, till reconstitution of the Board of Directors takes place. Heard the learned counsel on either side. Sri V.S.Raju, learned counsel for the petitioners submits that the application was filed by the petitioners under Sections 397 and 398 and also under Section 110 and 111A of the Companies Act with a set of specific and clear allegations of suppression and mismanagement and that such allegations are also established before the Company Law Board. Therefore he finds fault with the findings recorded by the Company Law Board and the orders passed by the Company Law Board to the extent of denying the reliefs prayed for. Sri V.S.Raju, would further contend that Section 402 of the Companies Act confers wide powers upon the Company Law Board and when once it has been found that the 1st respondent has violated the SEBI Regulations, the relief prayed for should have been granted. Learned counsel would further submit that Section 32 of the SEBI Act also gives power to the Company Law Board to exercise the jurisdiction. Per contra, Sri S.Ravi, learned counsel for the respondents submits that Section 402 of the Companies Act which is part of Chapter VI and that Chapter itself begins with Section 397 and when once the Company Law Board has rejected the claim of the petitioners insofar as the relief under Section 397 is concerned, it could not have exercised any further power in terms of Section 402 of the Companies Act. Learned counsel would elaborate that power under Section 402 can be invoked only when the allegations meriting consideration for action under Sections 397 and 398 have been found established by the Company Law Board, but not otherwise. Sri S.Ravi would submit that the Company Law Board has confined its findings only insofar as the contentions canvassed with reference to Section 111A of the Companies Act is concerned. It is further pointed out that without appropriately amending the relief portion, no submissions should have been entertained at the hands of the petitioners. The Company Law Board, according to the learned Counsel, Sri Ravi, has grossly erred in not confining its scrutiny to the implication of the alleged violations of Regulations 7, 11 and 11A of the SEBI Takeover Regulations. Instead, the Company Law Board has gone about a roving enquiry and consequently its final order is vitiated. The miscellaneous application, which has been taken out by the petitioner before the Company Law Board, was subsequent to the completion of the pleadings and consequently it should not have been entertained at all. Learned counsel would further submit that Regulation 7 of the Takeover Regulations primarily requires disclosure to be made to the Company and the Stock Exchanges, concerned, while Regulation 8 requires Yearly disclosure to be filed and made to the company, while Regulation 10 deals with acquisition of shares, which taken together, with the existing shares, which enables exercise of 15%; or more, without making a public announcement to acquire shares while Regulation 11 has to be necessarily understood as applicable to the case of the 1st respondent whereas the Company Law Board has erroneously applied Regulation 10 instead of Regulation 11. Even if it is found that the public disclosure and consequential public offer has not been made, the law compels the party to make the public offer and pay it together with interest and it cannot be asked to be written off. While directing the cancellation of the shares acquired in excess of 5% by the respondents, the Company Law Board has not dealt with the consequences of such cancellation. Further, it is pointed out, placing reliance upon the judgment of this in Karamsad Investments Limited[1] acquisition of shares in violation of Regulation 7 does not result in losing the shares altogether. Learned counsel would further submit that the only allegation that has been made against the 1st respondent is about the mismanagement and misappropriation. Therefore, the only provision that could have sprung up consideration is Section 111A and contained in bringing out any action under the said section is only two months and instead of throwing out the petition on this ground alone, notwithstanding the expiry of the two months period specified therein, the Company Law Board has entertained the same and hence the order passed by it is vitiated. Further when once the Company Law Board has thrown out the allegations of mismanagement and misappropriation, no further action in terms of Section 397 could have been entertained or taken into consideration. The learned counsel would further submit that a Petition moved in terms of Section 237 of the Companies Act, can be entertained only in the event of a finding that the business of the Company is being conducted with an intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members, or that the persons concerned in the formation of the company or the management of its affairs have been guilty of fraud, misfeasance or other misconduct towards any of its members; or that the members of the company have not been given all the information with respect to its affairs. In the instant case, the learned counsel would submit that mere allegations have been leveled without seeking to substantiate any of these allegations. It was further pointed out that the Company Law Board has not assigned any reasons as to why it has arrived at a conclusion that the interests of some of the members are oppressed. Insofar as the reasoning adopted by the Company Law Board is concerned, it was sought to be discredited on the ground that the Takeover Regulations, have not been properly construed or considered. It will be more appropriate to take up the last contention first. The SEBI Act, has been framed for regulating all aspects relating to and concerned with the securities. The purposes for enacting it have been set out in the Statement of Objects, as under:- “To promote orderly and healthy growth of the securities market and for investors’ protection, Securities and Exchange Board of India was established in 1988. It had been monitoring the activities of stock exchanges, mutual funds, merchant bankers, etc. In recent times capital market has witnessed tremendous growth by the increasing participation of Investors’ confidence in the capital market can be sustained largely by ensuring investors’ protection to achieve these goals keeping this end in view the Government decided to vest Securities and Exchange Board of India immediately with statutory powers to deal effectively with all matters relating to capital market.” the public. In exercise of the powers available under Section 30 of the SEBI Act, 1992, the SEBI (Takeover) Regulations, 1997, have been framed. It will be appropriate to notice as to how the following expressions, namely, “acquirer”, “control”, “person acting in concert” and “promoter”, have been defined in Regulation 2 (b), (c), (e) and (h): “ (b) “acquirer” means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees target company, either by himself or with any person acting in concert with the acquirer. to acquire control over to control the directors or (c) “control” shall include the right to appoint majority of management of policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. (e) “person acting in concert” comprises,- (1) persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate to acquire by acquiring or agreeing shares or voting rights in the target company or control over target company, (2) without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established: (i) a company, its holding company, or subsidiary of such company or company management either individually or together with each other; (ii) a company with any of its directors, or any person entrusted with management of the funds of the company; (iii) directors of companies referred to in sub-clause (i) of clause (2) and their associates; (iv) mutual funds with sponsor or trustee or asset management company; (v) foreign institutional investors with sub- account(s); (vi) merchant bankers with their client(s) as acquirer; (vii) portfolio managers with their client(s) as acquirer; (viii) venture capital funds with sponsors; (ix) banks with financial advisers, stock the acquirer or any brokers of company which is a holding company, subsidiary or relative of the acquirer; (x) any investment company with any person who has an interest as director, fund manager, trustee, or as a shareholder having not less than 2% of the paid up capital of that company or with any other investment company in which such person or his associate holds not less than 2% of the paid up capital of the latter company. (h) “promoter” means- (a) any person who is in control of the target company; (b) any person named as promoter document target company or any shareholding target patern company with exchange pursuant Listing Agreement, whichever is later.” filed by Regulation 3, substantially dealt with the issue of applicability of these Regulations. From a reading of Regulation 3(c) it becomes clear that these Regulations will get attracted even in regard to inter se transfer of shares. Chapter-II of these Regulations dealt with the disclosure and control. Regulation 6 (1) imposes an obligation on any person, who holds more than 5% of shares to disclose within 2 months his aggregate shareholding to the Company. Similarly, sub regulation (2) of Regulation 6 makes it obligatory for every Company within 3 months to disclose the shareholding pattern of its members to all the Stock Exchanges. Regulation 7 has material impact upon the controversy involved in this case. Regulation 7(1) requires any acquirer, who acquires 5%, 10%, 14%, 54% and 74% of shares in a Company, to disclose, at every stage, the aggregate of his shareholding. Such a person is required to disclose this information both to the Company as well as the Stock Exchanges. Under Regulation 8, the disclosures have got to be made on a regular and continual basis. Regulations 10 and 11 dealt with the aspects relating to acquisition of 15% and consolidation of holdings and hence, they were appropriately dealt with in Chapter-III of the Regulations, titled as “Substantial Acquisitions”. A proper and careful analysis of Regulations 7, 8, 10 and 11 of the aforementioned Regulations will make the following clear: The shareholding pattern of the Members of a Company should be as transparent as is possible, hence, it is required to be disclosed at regular intervals whenever additional shareholding at the specified percentages is picked up. Regulations have stipulated the percentage of shareholding in any Company, which requires such compulsory disclosure. This will help all the people concerned with a Company to understand as to how the control of the Company is likely to be chartered. In the instant case, the data furnished to the Company Law Board as well as the data gathered by it, make the position this much clear that the acquisitions of the Respondent/Appellants are within those limits. If the acquisition of shares in the Company are within the limits, can they be still said to have violated the SEBI Regulations, is one aspect of the matter, which requires deeper consideration. In my considered opinion, this aspect of the matter has not been properly assessed or considered by the Company Law Board. It is, therefore, appropriate to notice the findings recorded by the Tribunal in this respect:

16. Regulation 7(1A) provides that any acquirer who has acquired shares or voting rights of a company under Sub- Regulation (1) of Regulation 11, shall disclose purchase or sale aggregating two per cent or more of the share capital of the target company to the target company exchange within two days of concerned such purchase or sale along with the aggregate share holding after such acquisition or sale. It is beyond doubt respondents on account of acquisition of further shares during the financial year 2003- 2004 and 2005-2006 increased his share holding from 15.67% to 18.213% 23.623% respectively, i.e. over 2% during these financial years, to have disclosed to the Company as well as Bombay Stock Exchange as specified in Regulation 7(1A), which are found lacking. they ought

20.132% Having noticed that the shares of the respondents/Appellants as on 31.03.2003, being 15.67% of the share capital, initially went up to 18.213% and went up further to 20.132% and further went up to 23.933%. At every stage, the percentage of increase shareholding has never touched the 5% margin. The increase of the shareholding pattern is in the range of 3 - 4 % and it has never crossed 4%. In such circumstances, can it be said that the SEBI (Takeover) Regulations and (Insider Trading) Regulations are violated. To my mind, the answer is that the Respondents/Appellants have not violated any such directions. It is, therefore, appropriate to notice reasons in this regard. Regulation 7(1) of Takeover Regulations requires, any acquirer who acquires shares or voting rights together with shares or voting rights already held by him, would entitle him to more than 5% or 10% or 14% or 54% or 74% shares or voting rights in a company, to disclose at every stage the aggregate of his share holding or voting rights, both to the company as well as stock exchanges where the shares are listed. Until the acquisition additional shares respondents/appellants, crosses the next stage beyond 14%, being 54%, the question of disclosure in that regard would not normally arise. It will be appropriate to notice that sub-regulation (1) of Regulation 7 has been substituted with effect from 9.9.2002 through Second Amendment Regulation 2002. Through this amendment, the acquisitions which are made after 9.9.2002 are sought to be regulated on a staggered basis. Therefore, five different stages have been conceived at which the disclosure are required to be made. They are (1) 5% (2) 10% (3) 14% (4) 54% (5) 74%. If the share holding of the respondents/appellants were beyond this 14%, till the next slab of 54% is reached, the question of disclosure, would not arise. It will also be appropriate to notice that the figures 54% and 74% have been brought about by way of amendment to these regulations through Second Amendment Regulations 2004 with effect from 3.1.2005. Hence, the respondents/appellants would not have been faulted on this count. Regulation 11 which dealt with consolidation of holdings requires public announcement to be made by any acquirer who together with persons acting in concert with him, has acquired 15% or more, but less than 55% of the shares or voting rights in a company taken together with the shares or voting rights held by him already, if such acquisition is more than 5% of the voting rights in any financial year ending on 31st March. So, therefore when Regulation 7(1) and Regulation 11 are read together, the compulsions thrust by Takeover Regulations become clearer. As is already noticed supra, that the respondents/appellants have not violated the limits prescribed under Regulation 7(1), though their shareholding has increased beyond 14%, the next slab being 54%, the respondents/appellants are still required to comply with Regulation 11(1) provided the acquisition of additional shares has exceeded 5% in any financial year ending on 31st March. As was noticed, the increase in the shareholding has never crossed 4% in any particular financial year. Therefore, the compulsions of disclosures under Regulation 7(1) and Regulation 11 have not been violated by the respondents/appellants. However, Regulation 7(1A) requires every acquirer who has acquired shares or voting rights of a company in terms of sub-regulation (1) of Regulation 11 shall disclose purchase or sale aggregating to 2% or more of the share capital, to the company and the stock exchanges where those shares are listed, within two days of purchase of sale. Therefore, Regulation 7(1A) must also be read in the context of sub-regulation (1) of Regulation 11 and every such acquisition or sale of shares aggregating to 2% or more to be disclosed to the company as well as the stock exchanges where shares of such a company are listed. The material which has been collected by the Company Law Board has shown that the respondents/appellants have acquired more than 2% of shares during the financial years 2003-04 and 2005-06. Reacting to these additional shares, the finding of the tribunal is as under: concerned

16. Regulation 7(1A) provides that any acquirer who has acquired shares or voting rights of a company under Sub- Regulation (1) of Regulation 11, shall disclose purchase or sale aggregating two per cent or more of the share capital of the target company to the target company exchange within two days of such purchase or sale along with the aggregate share holding after such acquisition or sale. It is beyond doubt respondents on account of acquisition of further shares during the financial year 2003- 2004 and 2005-2006 increased his share holding from 15.67% to 18.213% 23.623% respectively, i.e. over 2% during these financial years, to have disclosed to the Company as well as Bombay Stock Exchange as specified in Regulation 7(1A), which are found lacking. they ought

20.132% While arithmetically any increase between 15.67% to

18.213%, and 20.132% to 23.623% would disclose an increased acquisition of more than 2%, thus requiring compliance with Regulation 7(1A), it will be important to notice that this very material information has been disclosed by the company. In fact in `Statement B’, recorded in the order under Appeal, the acquisitions made by Sri Ravindra Manchala for the period ended on

31.3.2003 has not been furnished by the company, but it was gathered from the website of the Bombay Stock Exchange and accordingly it was incorporated `Statement B’ by the Company Law Board. Similarly, for the year ended on 31.3.2004, the additional acquisition of shares by Sri Ravindra Manchala has not been furnished by the company in the statement as on 31.3.2004, but appeared from the statement available as on 31.3.2005 having been incorporated “under the previous year column”. Therefore, there appears from the order of Company Law Board, to be some factual vagueness with regard to the alleged violations resorted to by the respondents/appellants with reference to Regulation 7(1- A). If the stock holding disclosures are made by either the company or the stock exchange concerned, it pre- supposes that the information in that respect was disclosed or made available by the acquirer to the company and or the stock exchange. If the information about the additional acquisition has been furnished to the company as well as the stock exchange concerned, in the ordinary course, question of violation in terms of Regulation 7(1A) would not arise, unless it is established that such disclosures are not made within the time limits specified. In fact, the appellants in Company Appeal No. 6 of 2008 have gone before the Company Law Board by institution of the company petition, with a specific case of total non disclosure. It is for them to have not only urged the contentions with regard to the alleged violations of Regulation 7(1A), but to prove the same with regard to specific material on record. In my opinion, the Company Law Board having noticed the fact that the necessary information was available both with the company and the Bombay Stock Exchange, ought to have called upon the petitioners before it to further establish as a fact whether these acquisitions have also been disclosed by the acquirer with the time limit in terms of Regulation 7(1A) or not. Without ascertaining this fact one way or the other, apparently the Company Law Board has jumped to the conclusion that the respondents/appellants have violated the regulations. Therefore, the Company Law Board has failed to notice that the petitioners before it have failed to discharge the initial onus lying on them, for, the respondents to be called upon to disprove the factum. The respondent cannot be held accountable for violation of any statutory regimen, till the burden is shifted on to them. Further, Learned counsel for the appellant has also drawn my attention to the principle enunciated by a learned single Judge of this Court (Justice J.Chelameswar,J – as the learned Chief Justice, then was) in KARAMSAD INVESTMENTS LIMITED’s case (supra 1) wherein the issue relating to the effect of acquisition of shares, even if they are in contravention of Regulation 7 of the Takeover Regulations has fallen for consideration and the same has been concluded in the following words: “…..does not affect the legality of the acquisition by the GMM, but the failure on its part if any to comply with an obligation created under regulation 7 after the acquisition is validly made, might expose GMM to penalties contemplated under regulation 45 and nothing more in the facts of the present case.” I am in respectful agreement with this principle. Even though I have come to the conclusion that the facts on record have not established any such violation of Regulation 7(1) or Regulation 7(1A) or Regulation 11 by the respondents/appellants, even if such acquisitions were to fall foul of the same, it does not require them to be written off. Therefore, the conclusion reached by the Company Law Board is erroneous. At best, the respondents/appellants have exposed themselves to a risk of possible penal action. The conclusion reached by the Company Law Board for the Register to be altered duly deleting the shareholding of the Appellants, does not appear to be correct or proper view. The findings recorded by the Tribunal with regard to the allegations of mismanagement of the affairs of the company, as already been noticed supra, the learned counsel for the appellant in Company Appeal No. 6 of 2008 had attacked them as erroneous. The findings are drawn by the Company Law Board based upon the material available on record. It has very carefully scrutinized the material available on record and recorded finding the material does not conclusively establish that the 1st respondent before it is wholly responsible for any financial irregularities pointed out by the petitioners. Dealing with the borrowings said to have been made by the 1st respondent, the Company Law Board has rightly noticed the restrictions imposed in Clause 50 of the Articles of Association of the company requiring that no Director can singly borrow money on behalf of the company. A legally correct finding has been recorded by the Company Law Board holding that the borrowings incurred by the company contrary to Clause 50 of the Articles of Association cannot bind the company. Thus, the interests of the company have not been said to be adversely impacted at all. More importantly, it was noticed by the Company Law Board that the annual reports continuously from the year 2001- 02 upto 2005-06 have been signed by, among others, the 1st petitioner. Therefore, he cannot now turn around and make any allegations of irregularities with regard to the same. The secured and unsecured loans secured by the company are found reflected in the register maintained in terms of Sections 301 and 370 of the Companies Act. Insofar as the expenses booked with regard to foreign travel is concerned, it has been noticed by the Company Law Board that the extent of Rs.90 lakhs cannot be exclusively attributed to one person and the expenses incurred by the 1st respondent are not supported by any concrete evidence brought in by the petitioners. For a company established overseas establishments both in United States of America and United Kingdom, the expenditure said to have been incurred on foreign trips, could not be described as excessive or out of proportion to the business carried out. Therefore, the substantial allegations which have been made part of the petition before the Company Law Board by the petitioners/appellants in Company Appeal No. 6 of 2008 remained unsubstantiated. In the absence of any concrete material, calling for any action either under Section 237 or 397 of the Companies Act, the Company Petition moved before the Company Law Board and the Company Appeal No. 6 of 2008 deserve to be dismissed. It is a settled principle of law that on suspicions, however strong they might be, or on mere allegations action under Section 237 cannot be initiated as serious consequences can legitimately flow to the detriment of the company from any such action taken under Section 237. Consequently, the company appeal Nos. 17 and 18 of 2007 stand allowed. The Company Petition No. 8 of 2007 moved before the Company Law Board deserves to be dismissed. In the result, CA Nos. 17 and 18 of 2007 are allowed. Company Appeal No. 6 of 2008 is dismissed. The parties do bear their respective costs. --------------------------------------------- JUSTICE NOOTY RAMAMOHANA RAO Dt : 30.12.2009 [1] [2002] 108 Comp Cases 58