HON’BLE SRI JUSTICE NOOTY RAMAMOHANA RAO Company Appeal Nos. 17 of 2007, 18 of 2007 and 6 of 2008 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 the 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 and other records discussed here above. However, the publication of the un-audited results of the Company for the quarter ended 31.12.2006 caused by the first 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 to 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 the explicit restrictions imposed in Clause 50 of the articles of association of the Company. Therefore, the plea of the petitioners that the first 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 loans 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). • 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 sight services. The Company continued to extend its sales and marketing network in Europe and USA. The Company offices in Chicago. New Jersey and UK worked closely with clients taking support from off-shore located at Hyderabad in India. (2000-2001). • The Company constituted an audit committee comprising of the second petitioner, first respondent and an independent director, under the Chairmanship of the first respondent. (2000-2001). • The Company was having adequate internal control procedures commensurate with the size of the Company. (2000-2001 to 2005-2006). • 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 with ISO 9001 Certificate. (2000- 2001). • The Company proposed to 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 has 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 and the immediately preceding financial year. (2003-2004 to 2005- 2006). 9. The annual reports for various years unequivocally reveal that the 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 in the Auditor's certificate on compliance with the Code of Corporate Governance. Neither the first petitioner nor any other director has been excluded by the first respondent while carrying on the 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. All the financial irregularities levelled against the first respondent, on account of, inter-alia unauthoritised lending, borrowings, investments, foreign travels. satellite charges, exclusive management, etc., have been mutely acquiesced by the first petitioner, as evidenced from the annual reports produced for the period between 1999-2000 and 2005-2006. This acquiescence by the first petitioner in the conduct of the affairs of 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 any doubt, ought to have been undertaken, apart from the first 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 court in Karamsad Investments Limited[1] that 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 for consideration is Section 111A and the time limit 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 the public. 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.” 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 to acquire control over the target company, either by himself or with any person acting in concert with the acquirer. (c) “control” shall include the right to appoint majority of the directors or to control the 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 by acquiring or agreeing to acquire shares or voting rights in the target company or control over the 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 under the same management either individually or together with each other; (ii) a company with any of its directors, or any person entrusted with the 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 brokers of the acquirer or any company which