:1: :1: :1: IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION NOTICE OF MOTION NO. 2486 OF 2005 NOTICE OF MOTION NO. 2486 OF 2005 NOTICE OF MOTION NO. 2486 OF 2005 IN IN IN NOTICE OF MOTION NO. 2260 OF 2005 NOTICE OF MOTION NO. 2260 OF 2005 NOTICE OF MOTION NO. 2260 OF 2005 IN IN IN SUIT NO. 2142 OF 2005 SUIT NO. 2142 OF 2005 SUIT NO. 2142 OF 2005 Kesha Appliances P.Ltd and Ors. ......Plffs. vs. Royal Holdings Services Ltd and Ors. ......Defnds. Navroze Seervai a/w. Percy Gandy, Ketan Parekh, Firdaus Puniwala i/b. Crawford Bayley & co. for the plaintiffs. Mr. Aspi Chinoy with Mr. Shrikant Doijode i/b. M/s. Doijode Associates advocate for defendant no.1. K.G. Munshi i/b. Kanga and Co. for defendant no.2. Mr. Janak Dwarkadas a/w. P.K. Samdani and Anuj Bhasme i/b. Wadia Gandy and Co. for defendant no.3. Mr. Virag Tulzapurkar i/b. Amerchand Mangaldas and S.A. and Shroff for defendant no.4. Mr. Gaurav Joshi a/w. Desai and Ashish Bhatia i/b. J. Sagar Associates for defendant no.6. Dr. Abhishek Singhvi and Mr.F. Divitre i/b. M/s. Doijode Associates, advocate for defendant no.7. Mr. Darius Khambhatta i/b. by Mr. Amol Doijode for defendant no.8. Mr. Dinyar Madon i/b. Mr. A.R. Bhole :2: :2: :2: for defendant no.9. Mr. Shyam Mehta i/b. Rustomji Ginwalla for defendant no.10. Mr. Virendra Tulzapurkar i/b. Negandhi Shah & Himaytullah for defendant no.11 and 12. CORAM: S.U. KAMDAR, J. DATE : 30th November, 2005. JUDGMENT : 1. These two Notices of Motion are taken out for various interim reliefs in a suit which has been preferred by the shareholders of a company known as Spice Jet Ltd The defendant no.7 company carries on the business of running a domestic airlines. The 7th defendant company originally commenced the commercial operations on 2.5.1993. The said company was formally known as Modi Luft Ltd. Sometime in or about 20.6.94 a collaboration agreement was executed between erstwhile company known as Modi Luft with Lufthansa under which it was agreed that the operation and management of the airlines will be taken over by Lufthansa. However it seems that in 1996 the said arrangement between Modi Luft and Lufthansa came to an end and there were litigations filed between the defendant no.7 :3: :3: :3: company which was then known as Modi Luft and Lufthansa. Ultimately an out of court settlement was arrived at between the defendant no.7 and Lufthansa on 13.8.1997. On 26.12.1997 the promoters of the defendant no.7 received an approval from Foreign Investments Promotions Board to raise U.S. $ 50 million for the issue and sale of cumulative redeemable convertible preference shares (shortly known as C.R.C.P.S.) In June 1998 a fresh business plan was prepared by the defendant no.7 to relaunch the airlines. On 29.6.98 the defendant no.7 received a no objection certificate from the Indian Ministry of Civil Aviation to import aircrafts. There were also proceedings between the defendant no.7 and various creditors in the Delhi High court in which the Delhi High court directed the 7th defendant to deposit a sum of Rs. 2 crores and a Provisional Liquidator was appointed to take charge of the assets of the 7th defendant. Between 1997 to 1999 the promoters tried to obtain funds from the foreign investors to relaunch the airlines. :4: :4: :4: 2. Sometime in or about March 1999 the promoters found an investor known as Ajmal Khan of Canada and after discussion the said Ajaml Khan agreed to fund the defendant no.7. The said Ajmal Khan through his group of companies agreed to raise U.S.$ 35 million for relaunch of the airlines by way of equity investment of U.S.$ 17.5 million through its holding company, defendant no.1, and further U.S. $ 17.5 million through the bankers and financial institutions. It is the case of the plaintiff that the said Ajmal Khan agreed that the amount of 17.5.million U.S.$ would be offered by private placement and the entire proceeds from the said issue will be utilised by defendant no.1 for investing in cumulative redeemable convertible preference shares (C.R.C.P.S.). In furtherance of the aforesaid proposal it was decided that C.R.C.P.S. to be preferentially allotted to defendant no.1 and inrespect thereof a necessary resolution under Section 81(1)(a) of the Companies Act, 1956, should be passed allotting the said preference shares to the defendant no.1. It was :5: :5: :5: decided to hold a special general meeting of the defendant no.7 for passing the aforesaid resolution. Accordingly a notice was issued on 28.7.99 calling for the special general body meeting and resolution was passed under Section 81(1)(a) of the Companies Act, 1956. In its meeting held on 22.8.99 the shareholders authorised the company to issue 8,50,00,000 14% cumulative redeemable convertible preference shares of the face value of Rs.10/- each to the defendant no.1 which was then controlled by Ajmal Khan. Apart from the aforesaid private placement a further loan of 17.5 million U.S. $ was also required to be arranged from the bankers and leading financial institutions. It is the case of the plaintiff that while the private placement issue of the defendant no.1 was still open, two overseas corporation namely Malwood Holdings Ltd and Desmond Holdings Ltd controlled by one Ramesh S. Kansagra and Bhupendra S. Kansangra purchased the controlling interest in the defendant no.1 company from Ajmal Khan. Thus by transfer of the interest in the first defendant company the ownership rights in :6: :6: :6: C.R.C.P.S. of 17.5. million U.S. $ which was issued pursuant to the special resolution dated 27.8.99 in favour of the defendant no.1 stood transferred alongwith beneficial interest therein in favour of the Kansagra Brothers from Ajmal Khan. On 17.10.2000 the defendant no.1 remitted the amount of 17.5 U.S. Dollar and on the same day the defendant no.7 issued 8,10,77,500 14% C.R.C.P.S. to defendant no.1. This allotment was pursuant to the said resolution dated 27.8.99 passed under Section 81(1)(a) of the Companies Act. On 28.2.2001 the said 8,10,77,5000 C.R.C.P.S. were converted into equity shares of defendant no.7. Thus in effect the defendant no.1 acquired 50% stake in the 7th defendant company. 3. Thereafter in 2005 out of the share holding of 8,10,77,5000 shares the defendant no.1 sold 25,68,111 shares to the 2nd defendant, 63,95,643 shares to the 3rd defendant, 44,45,586 to 4th defendant, 43,35,000 shares to the 5th defendant and 29,01,563 to 6th defendant. Thus the holdings of the defendant no.1 in defendant no.7 was reduced :7: :7: :7: by the sale of the aforesaid shares from 8,10,77,500 to 4,83,27,500 shares. On 4.11.2004 the 7th dependant called an extra ordinary general meeting and proposed to raise the share capital from Rs.240 crores to Rs.325 crores with a view to enable the defendant no.7 to relaunch the airlines. It was also proposed to pass a special resolution under Section 81(1)(a) for preference shares allotment of 1 crore equity share/covertible warrants to defendant no.8 to 10 aggregating to 3 crore equity shares/covertible warrant of the face value of Rs.100/-. A notice was issued on 4.11.2004 for the aforesaid proposal and general body meeting was called on 22.12.2004. It is the case of the plaintiff that pursuant to the said notice dated 4.11.2004 on 21.12.2004 various allotments were made of equity shares to the defendant nos.8 to 10. On 28.2.2005 an extra ordinary general meeting was called for the purpose of passing a special resolution authorising the preferential allotment of 1.53 million unsecured fully convertible debentures of Rs.100/- each converted into 3.7 million of Rs.10/- each to such :8: :8: :8: a person as the board may decide. At the said meeting on 28.2.2005 the said preference shares allotment was approved. 4. In the aforesaid circumstances the plaintiffs have challenged the original allotment as well as transfer of the said shares. It is the case of the plaintiff that the preference share allotment of 8,10,77,500 C.R.C.P.S. to defendant no.1 by defendant no.7 in October 2000 is bad in law and violative of Regulation 12 of the Security and Exchange board of India (substantial acquisition of shares and Take Overs) Regulation 1997 and thus illegal. It has been further the case of the plaintiff that the special resolution passed on 27.8.99 at the Annual General Meeting of 27.8.99 is also illegal and invalid. It is the case of the plaintiff that the transfer of the controlling interest in the defendant no.1 from Ajmal Khan to Kansagra Brothers through the medium of two overseas corporate bodies namely Malwood Holdings Ltd and Desmond Holdings Ltd are illegal and unlawful. It is the case of the plaintiff that in :9: :9: :9: effect the Kansaagra Brothers took over the control of the defendant no.1 without giving full disclosure regarding the identity of the allotees for passing a valid general body resolution under Section 81(1)(a) of the Companies Act, 1956. It is further a case of the plaintiff that once the controlling interest was transferred in favour of the Kansagra Brothers then fresh resolution was required to be passed under Section 81(1)(a) authorising the allotment of C.R.C.P.S. in favour of the defendant no.1. It is further the case of the plaintiff that once the controlling interest in the defendant no.1 is transferred in favour of the Kansagra Brothers the exemption available under the Regulation 3(1)(c) is not available and thus the resolution passed under Section 81(1)(a) is in effect contrary to the Regulation 10 and 12 of the said Securities and Exchange Board of India (substantial acquisition of shares and Take Over) being the Take Over code. Thus in effect the plaintiffs are challenging in the present suit the preferential allotment of 8,10,77,500 C.R.C.P.S. by 7th defendant to 1st defendant by passing a :10: :10: :10: special resolution in October 2000. By prayer (a) of the suit a declaration is sought that the said resolution passed in October 2000 be declared invalid and in violation of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulation 1997. By prayer (b) of the suit it is claimed that there should be a direction to the defendant no. 7 to cancel the said allotment of 8,10,77,500 C.R.C.P.S. and also subsequent conversion thereof to the equity shares. By prayer c(i) to c(v) a declaration has been sought that the sale of the shares of the defendant no.7 by defendant no.1 to defendant no.2 to 6 are illegal, null and void and nonest because of the original allotment in favour of the defendant no.1 itself being invalid. By prayer d(i) to d(v) the plaintiffs are seeking cancellation of the shares which has been sold in favour of the defendant no.2 to 6. By prayer (e) of the plaint a declaration is sought that the allotment by defendant no.7 of 50,00,000 covertible warrant of Rs.10/- each and 50,00,000 equity shares of Rs.10/- each to the defendant no.8 pursuant to the resolution dated 6.12.2004 is without authority :11: :11: :11: of law, illegal, null and void and nonest. Similarly by prayer e(ii) to e(iii) reliefs are sought against similar allotment of convertible warrant and equity shares of 50,00,000 each in favour of the defendant no.9. By prayer e(iii) an allotment in favour of the defendant no.10 of 1,00,000 convertible warrant of Rs.10/- each and 50,00,000 convertible warrant of Rs.10/- each by resolution dated 6.12.2005 is sought to be declared null and void ab-initio. By prayer clause (f) a direction is sought for cancellation of the allotment in favour of the defendant no.8,9 and 10. By prayer (g) a further allotment of 1.53 million unsecured fully convertible debentures of Rs.100/- each convertible into 3.7 million of Rs.10/- each to defendant no.11 and 12 is sought to be declared as without authority of law and illegal. By prayer (h) a cancellation of the said allotment has been sought. Prayer (i) on which great reliance has been placed seeks rectification of the share register on the basis of grant of each of the aforesaid prayers. The said prayer (i) read as under : :12: :12: :12: (i) this Hon’ble Court be pleased to order and direct Defendant Nos.7 to rectify its Register of Members/Debenture Holders by striking out/removing the names of Defendant nos.1 to 6 and 8 to 12 therefrom as follows : (i) Defendant no.1 quo its shareholding of 4,83,27,500 equity shares of Rs.10 each. (ii) Defendant no.2 qua its shareholding of 25,68,111 equity shares fo Rs.10/-each. (iii) Defendant no.3 qua its shareholding of 63,95,643 equity shares of Rs.10 each. (iv) Defendant no.4 qua its shareholding of 44,45,586 equity shares of Rs.10 each. (v) Defendant no.5 qua its shareholding of 43,25,000 equity shares of Rs.10 each. (vi) Defendant no.6 qua its shareholding of 29,01,563 equity shares of Rs.10 each. (vii) Defendant no.8 qua its shareholdng of 50,00,000 convertible warrants of Rs.10 each. (viii) Defendant no.9 qua its shareholding of 50,00,000 edquity sahres of Rs.10 ech and holding of 50,00,000 convertible wrrants of Rs.10 each. :13: :13: :13: (ix) Defendant no.10 qua its shareholding of 50,00,000 equity shares of Rs.10 each and holding of 50,00,000 convertible warrants of Rs.10 each. (x) Defendant Nos.11 and 12 qua its holding of 1.53 million unsecured fully convertible debentures of Rs.100 each, convertible into 3.7 million shares of Rs.10 each. 5. Prayer (j) onwards are the interim prayers in the present suit. Thus in effect in the present suit what is sought is a cancellation of various allotment of shares in the 7th defendant company and subsequent transfer thereof and also further allotment of the share as in violation of the SEBI Act and the said Takeover Regulations which is popularly known as ‘TakeOver Code’. After seeking declaration that allotment and/or transfer being illegal the plaintiff has sought the cancellation of the said allotments as well as rectification of the said register on such cancellation by prayer clause (i) of the present suit. 6. At the ad-interim hearing of both the aforesaid motions the defendant no.4 raised the :14: :14: :14: issue as to the jurisdiction of this court under Section 9A of the CPC by filing an affidavit. By my order dated 22.9.2005 I have framed the preliminary issue as to the jurisdiction which reads as under : ". Whether this court has jurisdiction in the light of Section 15Y and Section 20A of the SEBI Act, 1992 read with relevant rules and Regulations thereof ? 7. I have heard the parties at length on the said preliminary issue as to the jurisdiction of this court to entertain the present suit in the light of bar contained in the provisions of the SEBI Act, 1992. Before I deal with the rival submission of the parties it is necessary that the relevant provisions of the Act and regulations must be set out for the purpose of appreciation of the rival contentions. PENALTIES AND ADJUDICATION : 15I Power to adjudicate 15I Power to adjudicate 15I Power to adjudicate (1) For the purpose of adjudging under :15: :15: :15: sections 15A, 15B, 25C, 25D, 15E, 15F, 15G [15H, 15HA and 15HB] the Board shall appoint any officer not below the rank of a Division chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing penalty. (2) While holding an inquiry the adjudicating officer shall have power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub-section (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections. 15Y Civil court not to have jurisdiction 15Y Civil court not to have jurisdiction 15Y Civil court not to have jurisdiction No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which an adjudicating officers appointed under this Act or a securities Appellate Tribunal constituted under this Act is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority inrespect of any action taken or to be taken in pursuance of any power conferred by or under this Act.’ S.21 Savings S.21 Savings S.21 Savings :16: :16: :16: Nothing in this Act shall exempt any person from any suit or other proceedings which might, apart from this Act, be brought against him. S.32 Application of other laws are not S.32 Application of other laws are not S.32 Application of other laws are not barred barred barred The provisions of this Act shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force. SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997 3. Applicability of the regulation. 3. Applicability of the regulation. 3. Applicability of the regulation. (1) Nothing contained in regulations 10,11 and 12 of these regulations shall apply to : (a) allotment in pursuance of an application made to a public issue : Provided that if such an allotment is made pursuant to a firm allotment in the public issues, such allotment shall be exempt only if full disclosures are made in the prospectus about the identity of the acquirer who has agreed to acquire the shares, the purpose of acquisition, consequential changes in voting rights, shareholding pattern of the company and in the board of directors of the company, if any, and whether such allotment would result in change in control over the company. (b) allotment pursuant to an application made by the shareholder for rights issue, :17: :17: :17: (i) to the extent of his entitlement; and (ii) up to the percentage specified in regulation 11: Provided that the limit mentioned in sub-clause (ii) will not apply to the acquisition by any person, presently in control of the company and who has in the rights letter of offer made, disclosures that they intend to acquire additional shares beyond their entitlement, if the issue is undersubscribed ; Provided further that this exemption shall not be available in case the acquisition of securities results in the change of control of management; (c) .... (d) allotment to the underwriters pursuant to any underwriting agreement (e) inter se transfer of shares amongst- [(i) group coming within the definition of group as defined in the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) where persons constituting such group have been shown as group in the last published Annual Report of the target company;] (ii) relative within the meaning of section 6 of the Companies Act, 1956 (1 of 1956); (iii) (a)Indian promoters and foreign collaborators who are shareholders; (b)Promoters :18: :18: :18: [Provided that the transferor(s) as well as the transferee(s) have been holding shares in the target company for a period of at least three years prior to the proposed acquisition;] 10. Acquisition of [fifteen] per cent or 10. Acquisition of [fifteen] per cent or 10. Acquisition of [fifteen] per cent or more of the shares or voting rights of more of the shares or voting rights of more of the shares or voting rights of any company. any company. any company. . 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 [fifteen] 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. 12. Acquisition of control over a company. 12. Acquisition of control over a company. 12. Acquisition of control over a company. . Irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquire such shares in accordance with the regulations. . Provided that nothing contained herein shall apply to any change in control which takes place in pursuance to a [special] resolution passed by the shareholders ion a general meeting : . [Provided further that for passing of the special resolution facility of :19: :19: :19: voting through postal ballot as specified under the Companies (Passing of the resolutions by Postal Ballot) Rules, 2001 shall also be provided.] . [Explanation-For the purpose of this regulations, acquisition shall included direct or indirect acquisition of control of target company by virtue of acquisition of companies, whether listed or unlisted and whether in India or abroad.] 44. Directions by the Board : 44. Directions by the Board : 44. Directions by the Board : . Without prejudice to its right to initiate action under Chapter VIA and Section 24 of the Act, the Board may, in the interest of securities market or for protection of interest of investors, issue such directions as it deems fit including :- (a) directing appointment of a merchant banker for the purpose of causing disinvestment of shares acquired in breach of regulation 10, 11 or 12 either through public auction or market mechanism, in is entirety or in small lots or through offer for sale; (b) directing transfer of any proceeds or securities to the Investors Protection Fund of a recognised stock exchange; (c) directing the target company or depository to cancel the shares where an acquisition of shares pursuant to an allotment is in breach of regulation 10,11 or 12. (d) directing the target company or the depository to give effect to transfer or further freeze the transfer of any such shares and not to permit the :20: :20: :20: acquirer or any nominee or any proxy of the acquirer to exercise any voting or other rights attached to such shares acquired in violation of regulation 10, 11 or 12. (e) debarring any person concerned from accessing the capital market or dealing in securities for such period as may be determined by the Board. (f) directing the person concerned to make public offer to the shareholders of the target company to acquire such number of shares at such offer price as determined by the Board; (g) directing disinvestment of such shares as are in excess of the percentage of the shareholding or voting rights specified for disclosure requirement under regulation 6,7 or 8; (h) directing the person concerned not to dispose of assets of the target company contrary to the undertaking given in the letter of offer; (i) directing the person concerned, who has failed to make a public offer or delayed the making of a public offer in terms of these regulations, to pay to the shareholders, whose shares have been accepted in the public offer made after the delay, the consideration amount alongwith interest at the rate not less than the applicable rate of interest payable by banks on fixed deposits.] 4. Holding of inquiry. 4. Holding of inquiry. 4. Holding of inquiry. (1) In holding an inquiry for the purpose of adjudging under Sections 15A, 15B, 15C, 15D, 15E, 15F, 15G and :21: :21: :21: 15H whether any person has committed contraventions s specified in any of section 15A, 15B, 15C, 15D, 15E, 15F, 15G and 15H, the adjudicating officer shall, in the first instance, issue a notice to such person requiring him to show cause within such period as my be specified in the notice (being not less than fourteen days from the date of service thereof) why an inquiry should not be held against him. (2) Every notice under sub-rule (1) to any such person shall indicate the nature of offence alleged to have been committed by him. (3) If, after considering the cause, if any, shown by such person, the adjudicating