IN THE HIGH COURT OF JUDICATURE OF ANDHRAPRADESH AT HYDERABAD HONOURABLE SRI JUSTICE SAMUDRALA GOVINDARAJULU CRIMINAL PETITION No.5589 of 2009 DATE:26.04.2011 Between: Mr.L.N.Agarwal and another …… Petitioners And U.K.Agarwal and another …..Respondents HONOURABLE SRI JUSTICE SAMUDRALA GOVINDARAJULU CRIMINAL PETITION No.5589 of 2009 ORDER : The petitioners 1 and 2/A-1 and A-2 are accused of offences punishable under Sections 418, 420, 423/34 I.P.C in C.C. No.367 of 2009 on the file of XIV Additional Chief Metropolitan Magistrate, Hyderabad. A-2 is son of A-1. The 1st respondent filed the complaint in the lower Court on behalf of his Hindu Undivided Family. The 1st respondent’s father and A-1 are brothers. 2) A-1 is Chairman and Managing Director of M/s.Suryalakshmi Cotton Mills Limited (in short, SCML), Secunderabad. A-2 is Managing Director of SCML. Originally the complainant was also one of the directors of SCML. In the year 2004, there was memorandum of understanding between A-1 and the complainant in the following terms. “This Records the understanding between Sri L.N.Agarwal and Sri U.K.Agarwal. As per the understanding following properties will be transferred to the new Company viz., Rajvir Industries. 1) Suryalakshmi Mahabubnagar unit along with Dyeing Plant. In case institution stipulates a liability greater than Rs.13.25 Crores for Mahabubnagar, it will be borne by Suryalakshmi. 2) Further Rs.7 Crores will be invested before March, 2005 in Capital Expenditure by present Company in Mahabubnagar. 3) Further out of existing working capital limits, Rs.25.5 Crores DP will be provided to new Company along with Margin Money. 4) Further 4000 Sq. Ft. in I Floor, Surya Towers Office Block will be provided for new Company for their own office premises.” As per the said understanding, SCML had to transfer its Mahabubnagar spinning unit along with dyeing plant at Edira to the Company flouted by the complainant under the name and style of M/s.Rajvir Industries Limited (in short, RIL). In pursuance of the said understanding, a scheme of arrangement for demerger of SCML was prepared. A-1 representing SCML filed Company Petition No.8 of 2005 in this Court for approval of the scheme; and the complainant as Managing Director of RIL which is the resulting company filed Company Petition No.9 of 2005 in this Court for the said purpose, under Sections 391 to 394 of the Companies Act and Section 2 (19AA) of the Income Tax Act. By common order dated 22.03.2005 in C.P. Nos.8 and 9 of 2005, this Court approved the said scheme. 3) Share holding pattern of SCML which is a public limited company under the demerger scheme was arrived at on the basis of swap ratio prepared by M/s.M.P.Chitale & Co., Chartered Accountants, Mumbai, as per which every three shares held by SCML shareholder will get two shares of SCML and one share of RIL after demerger. It was part of scheme of arrangement. Prior to demerger, HUF of the complainant had 24,22,042 shares in SCML. After demerger and as per swap ratio, the complainant got 16,14,695 shares of SCML and 8,07,347 shares of RIL. Similarly A-1 and A-2 got 12,21,612 shares of RIL as per the demerger scheme approved by the Court. 4) It is alleged by the complainant that the accused proposed the scheme with an intention to defraud the complainant and that A-1 ill-advised the complainant to transfer the shares of SCML to A-1’s family members to the above extent of 16,14,695 and in turn offered to transfer 12,21,612 shares of RIL to the complainant. Accordingly, the complainant transferred the shares of SCML on 20.06.2005 when the transfer was effected. Towards value of excess shares transferred by the complainant, A-1 and A-2 gave two cheques for Rs.3,80,77,646/- and Rs.3,39,12,086/- in favour of the complainant. When those cheques were dishonoured for want of sufficient funds, the complainant filed C.C. Nos.53 of 2007 and 54 of 2007 in Criminal Court against the accused for the offences punishable under Section 138 of the Negotiable Instruments Act, and they are pending. Those two cases under the Negotiable Instruments Act are subject matter of another litigation with which both the parties are not concerned in C.C. No.367 of 2009 in the lower Court which is the subject matter herein. With the above back ground of facts, the allegations in C.C. No.367 of 2009 have to be scrutinised, primarily for finding whether the allegations therein taken on their face value prima facie constitute ingredients of the offences for which the case was taken cognizance by the lower Court. 5) Gravemen of the complaint in the present case C.C. No.367 of 2009 is that A-1 and A-2 in furtherance of their deceitful act, plan and design declared bonus issue of shares of SCML on the very next day of obtaining transfer of shares from the complainant, without prior information or making the complainant aware of the same before transfer. According to the complainant, he was induced to transfer the shares to the accused a day prior to the bonus issue of shares. Transfer of shares of SCML by the complainant in favour of the accused was effected in books on 20.06.2005. Bonus issue of shares on existing shares of SCML was declared on 21.06.2005 by way of a Board resolution of SCML. According to the complainant, because of the said declaration of bonus on 21.06.2005, he suffered loss to the extent of 16,14,695 shares of SCML of the value of Rs.7.00 Crores. Further, according to the complainant, the accused after 21.06.2005 had gone for providing placement of SCML shares with U.T.I Bank at the rate of Rs.235/- per share and the bonus shares fetched wrongful gain to the accused to the extent of Rs.235/- per share. It is alleged that as per the swap ratio report of M/s.M.P.Chitale and Co., the complainant should have returned only 6,10,806 shares out of 16,14,695 shares and that therefore, 10,03,889 shares must have been with the complainant and that in that process the complainant suffered wrongful loss to the extent of 10,03,889 x 2 x Rs.235/- = Rs.47,18,27,830/-. 6) There is no complaint by the complainant against the chartered accountants by name M/s.M.P.Chitale & Co., Mumbai who prepared swap ratio report to the effect that original share holders of SCML prior to demerger will get 2:3 shares of SCML and 1:3 shares of RIL after demerger of SCML and forming resulting company RIL. The said swap ratio was fixed by M/s.M.P.Chitale & Co., Mumbai admittedly by evaluating the assets and liabilities of SCML before demerger. It is not the complainant’s case that any of the accused or SCML hided or withheld any material fact or data or information from M/s.M.P.Chitale & Co, Mumbai at the time of preparation of swap ratio report. The complainant was also in the Board of Directors of SCML prior to demerger of SCML and continued as such in the Board of Directors of SCML upto 31.03.2005. This Court approved the scheme of demerger in C.P.Nos.8 and 9 of 2005 filed by both the parties under Sections 391 to 394 of the Companies Act. M/s.M.P.Chitale & Co, Mumbai prepared the swap ratio report after evaluating assets and liabilities of SCML including potentiality of SCML to declare any bonus shares in future. Declaration of bonus shares by any company depends on its potential value of assets. There is no prohibition under the scheme approved by this Court i.e., Company Law Court prohibiting SCML after demerger from issuing any bonus shares. Similarly there was no understanding or agreement between the complainant and the accused that the accused cannot declare issue of bonus shares of SCML till any fixed period after transfer of shares of SCML by the complainant in favour of family members of the accused after demerger. It is not the complainant’s case that there was any specific deception or misrepresentation or fraud made by the accused to him to the effect that they would not declare issue of any bonus shares of SCML after obtaining transfer of shares of SCML from the complainant. In the absence of any specific allegations of deception or fraud or misrepresentation of any specified kind, the complainant cannot contend that he was cheated by any of the accused in the transaction of transfer of 16,14,695 shares of SCML after demerger in favour of the accused. Allegations of deception or fraud in the complaint are vague and general in nature. Simply because the complainant was put to some surprise by the Board of Directors of SCML by declaring issue of bonus shares of SCML to the tune of 1:1 after the accused obtained transfer of SCML shares from the complainant, it cannot be said that the accused practised or perpetrated any fraud or deception on the complainant. 7) In M.A.A.Annamalai V. State of Karnataka[1] it was held by the Supreme Court that the Company when invited investment from the depositors to invest in the business/benefit funds after receiving due approval of the scheme from the Reserve Bank of India, the element of cheating alleged cannot be made out by any stretch of imagination. The Supreme Court further observed: “42. The inherent power should not be exercised to stifle the legitimate prosecution but at the same time no person be compelled to face criminal prosecution if basic ingredients of the alleged offence against him are altogether absent.” 8) On total evaluation of the allegations in the complaint filed by the 1st respondent/complainant against the petitioners 1 and 2/A-1 and A-2 in the lower Court, I have no hesitation to come to the conclusion that even if those allegations are taken on their face value, they do not constitute basic ingredients of cheating alleged in this case. Therefore, A-1 and A-2 cannot be compelled to face criminal prosecution in the lower Court. 9) In the result, the Criminal Petition is allowed quashing proceedings in C.C. No.367 of 209 on the file of XIV Additional Chief Metropolitan Magistrate, Hyderabad. _______________________________ SAMUDRALA GOVINDARAJULU, J April 26, 2011 ksh [1] (2010)158 Comp.Cas-369(SC)