1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY APPEAL NO. 30 OF 2005 IN COMPANY PETITION NO. 15 OF 2003 1. Mukta Arts Ltd. & Ors. 2. Mrs. Mukta Ghai 3. Mr. Anil Harish 4. Mr. Manmohan Shetty 5. Mr. Vijay Choraria 6. Mr. Vashdev Bajaj 7. Ms. Meghna Ghai All having address at Ground floor, 28th Road, TPS III, Bandra(West) Mumbai – 400 050. ... Appellants. (Orig. Respondents.) V/s. Union of India, through Secretary, Ministry of Company Affairs, Department of Company Affairs, Shastri Bhawan, New Delhi -110001. ... Respondent. (Orig. Petitioner.) Mr. E.P. Bharucha with Mr. S. Purohit with Mr. Firoz Bharucha with S.N. Vimadalal with Ms. Sandhya Tolat i/b. Vimadala & Co. for the Appellants. Mr. Rajendra Raghuvanshi, Addl. Solicitior General with M.S. Bharadwaj with Ms. Anamika Malhotra for the Respondents . CORAM : S.C. DHARMADHIKARI, J. ORDER RESERVED ON : 10TH JULY 2008. ORDER PRONOUNCED ON : 7TH JANUARY 2009. 2 P.C. :- This is an appeal under Section 10F of the Companies Act, 1956. 2. The Appellants are aggrieved and dis-satisfied with the order dated 30th June 2005 passed by the Company Law Board, Principal Bench, New Delhi. 3. That order was passed in Company Petition No.15 of 2003. This Petition was filed under Section 237 of the Companies Act, 1956 (for short referred to as the Act)seeking investigation into the Affairs of the Appellants before me who were the Respondents before the Company Law Board. 4. It was alleged that the First Appellant Mukta Arts Limited was incorporated on 7th September 1982 as a Private Limite Company. It was converted into a Public Limited Company with effect from 15th March 2000. The main object of the Company is to carry 3 on business of manufacturing, producing, exploiting, and distributing cinematographic films and pictures. The Company is presently carrying on business of production of films, T.V. Serials and Music. The Company also hires out its equipments to other film makers for the purpose of production and post production work. 5. It was alleged that Small Investors Protection Forum made a complaint alleging that the Company Mukta Arts had a common tie- up with Prime International India Ltd. and Ketan Parekh Group Company. Together, they were involved in price manipulation of shares. The allegations in the Complaint/Petition read as under : "(a) (1) Planning of Initial Public Offering (IPO) in a hurried manner. (2)Taking of fullest possible advantage of the then prevailing state of market. (3) Issuing of Bonus shares. (4)Appointment of Shri Bharat Shah as Director. (5)Relationship with Shri Ketan Parekh, Share Broker. (6)Shares sheld by Ketan Paretkh Group of Company. (b) The company is a Film Production Company and it has large dealings with Ketan Parekh Group, who is 4 involved in the latest share market scam. The share holding pattern of the Company is annexed. (c) The Company made a bonus issue in 2000 in the ratio of 1649 shares for every equity share. The management issued 82,45,000 bonus shares. (d) The company made public issue in July and August, 2000 at the rate of Rs.165 per share of the face value of Rs.5 per share. The company made public issue after issue of Bonus Shares. (e) As per Balance sheet as at 31.12.2000, the Company has amde investment of Rs.83,41,34,776/- in the shares of certain companies, which is not its main object. After stock scam in March, 2001 the value of investment must have gone down. (f) The huge funds of the company were used primarily in share market during this scam period. The company has parked the public issue fund in the heads other than the object of the issue. (g) The authorized share capital of the company till the financial year ending 31.12.1999 was Rs.5 lakhs only 5 and the paid up capital was Rs.50 thousand only, later on during the financial year ending 31.12.2000, the authorized capital increased to Rs.12 crores and the paid up capital of the company duriang the year 3000, increased to Rs.11,28,51,000/-. (h) Shri Bharat Shah was Director of the Company for the period from 24th March, 2000 to 16th April, 2001. He was arrested being involved and linked with underworld for anit national activities. (i) M/s. Triumph International Finance Ltd. Is an associate company of M/s. Ketan Parekh had acted as Merchant Banker to the public issue of the company and as on 30.01.01 the shares of the compnay were held by KP group of companies in following manner. The entry and involvement of KP group is yet to be explored. Sr.No. Name of the company No. of shares 1 Classic Credit Ltd. 235 2 Panther Industrial Products Ltd. 75000 3 Triumph Securities (Indore) Ltd. 500 4 Triumph Securities (Vadodara) Pvt. Ltd. 25 5 Chitrakut Computers Pvt. Ltd. 900 6 Triumph International Finance India Ltd. 81871 6 (j). It is a well-known fact that, black money moves freely from underworld to film world and vice versa. (k) The sales of the company came down from Rs.2357.72 lakhs (31.12.99 for nine months) to Rs.1008.12 lakhs (31.12.2000)." 6. On these allegations it was prayed that the management of the company conducted the business with intend to defraud its creditors, members, etc. in unlawful manner. This is also oppressive of the members of the Company. Therefore, action under Section 237 of the Companies Act be permitted and the Central Government be allowed to appoint Investigator to investigate into the affairs of the company. Reliance was placed upon the investigation ordered by the Department of Company Affairs vide letter dated 13th June 2001 and the report of the Investigating Officers submitted in pursuance thereof. It was alleged that the contraventions/irregularities are pointed out in this inspection report. 7. After the Petition was filed before the Company Law Board, Principal Bench, New Delhi, it was served on the Respondents who 7 are Appellants before me. On their behalf, one Perwez Farooqui, Executive Director of the Appellant No.1 filed an affidavit in reply dealing with the allegations in the Petition. It was stated that the inspection of the Company was ordered by Department of Company Affairs of which pri-intimation dated 25th June 2001 was received on 28th June 2001. The Company received a letter dated 13 July 2001 intimating that an inspection of books of accounts and other books and papers in terms of Section 209A of the Companies Act will be taken up with effect from 20th July 2001. The Company also received a letter dated 12th December 2001 listing discrepancies/violations/ irregularities noticed by the Officer and to offer comments/explanation to the same. A detailed reply was given on 17th January 2002 which is exhaustive and self-explanatory. 8. As far as the complaint of Small Investors Protection Forum, the Company offered its comments on each of the points raised and contended that the complaint has no substance. There are no irregularities. In such circumstances, it was contended that there is no case made out for invoking Section 237 (b)(i)(ii) or (iii) of 8 the Act. The Petition therefore be dismissed. More so, when there is a Share Holders/Investors Committee formed by the Company and all grievances have been redressed and resolved to the satisfaction of the Share Holders. Number of documents were annexed to the reply. 9. Thereafter, further affidavits were filed by parties annexing therewith documents. 10. The Petition was placed before the concerned Member and by referring to the report of the Investigator submitted to the Registrars of Company under Section 209A of the Act so also the complaint by the Small Investors Protection Forum, the Member allowed the Petition and directed the Central Government to undertake investigation under Section 237 of the Act so also take suitable action on the basis of the report, when received. 11. These conclusions of the Member of the Company Law Board are based upon the following findings :- 9 " As I have already said that the irregularities/violations of the provisions of the Companies Act have already been taken care by the Registrar of Companies but some revealing propositions comes out from the documents and averments of this case. The compnay was incorporated as early as in 1982 and since then the authorized share capital was Rs.5 lakhs and paid up capital was Rs.15,000 as on 13.12.1999 but huge investments in share capital have been made within a short spell of 3 to 4 months. It is also admitted position that the company made investments of Rs.83,41,00,000/- in the shares of the certain companies when the main object of the company is not to enter the business in share market. The lead to value of huge investment going down after stock scam took place in March, 2001. It is also interested to note that within a spell of two months the authorized capital was raised first from 50,000 to Rs.11 crores and thereafter to Rs.12 crores. The genesis and origin of the huge funds invested by the respondent company in share market when they were not in the business, needs to be probed into. It is difficult to find from the documents places on record as to whether there was any relationship in the transactions with the Ketan Parekh Group of Companies or these were the normal transaction of the business. This can only be found out by investigating the matter in depth." 10 12. It is this conclusion and order of the Company Law Board which is subject matter of challenge in the Appeal. 13. The Appeal has been admitted in the light of the questions of law formulated in para 2(a) to 2(e). 14. Mr. Bharucha, learned Senior Counsel appearing for the Appellants made the following submissions :- "1. No investigation could be ordered by the CLB without first ascertaining the relevant circumstancs, which would allow it to form an opinion that investigation under Section 237(b) was necessary. The CLB without coming to any prima-facie conclusion has allowed investigation into the affairs of the Company contrary to the mandate of Section 237(b) of the Companies Act. 2. The CLB has to first form a bonafide opinion that there exists circumstances which suggest that the business of the Appellant Company was being conducted with a intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose, etc. 3. The existence of circumstances is fundamental to the 11 formation of the opinion and if questiioned, the existence of the circumstances has to be proved atleast prima-facie. If no inference set out in Section 237(b) can be drawn from the circumstances then the action is ultravires the Act and therefore, void. If there is no material upon which, authority could form the requisite opinion, then it is a clear case of lack of application of mind on the conditiions precedent under Section 237(b) is not fulfilled. 4. The CLB has observed "it is also interesting to note that within a spell of two months the authorised capital was raised from 50,000/- to Rs.11 crores and thereafter to Rs.12 crores." The aforesaid observations are contrary to the facts on record and perverse. The substantial reserves of the Appellant Company (arising out of prudent management of past profits) and a small capital base are not in dispute. It was considered necessary to issue bonus shares to reward the existing shareholders and to increase the Paid-up Capital of the Appellant Company to reflect the shareholders' funds employed in the Company. The issuance of bonus shares is an internal matter of the Appellant Company and in accordance with law. The reserves and surplus capitalized are the profits and earnings which have been retained by the company and accordingly recorded in the returns filed with the income- 12 tax authorities. Thus, the origin of the reserves and surplus was never in dispute and can never be ground for ordering an investigation. The rest of the increase in the share capital of the Appellant company came from the IPO. The increase in the authorised and paid up capital of the Appellant Company is transparent and cannot call for any investigation. 5. The assumption that large sums were invested by the Appellant Company in share market is completely contrary to the records. No amount was invested in the stock market. A sum of Rs.82.15 crores from the proceeds of the IPO not immediately utilised, was invested by the Appellant Company in debt based mutual funds. The said investment was in accordance with the information in the prospectus as disclosed to the subscribing public, SEBI and the relevant stock exchanges. The said investment increased to Rs.82,64,15,368/- as on 31.12.2000. The detailed particulars of the Debt Mutual Funds in which the moneys was invested is set out in Annexure "A". 6. Not a single rupee was invested in the stock market. All the investments were reflected in the balance sheets. The NAV as on 31st December 2001 stood at Rs.90,95,00,000/-. As on 31st December 2001, only 13 Rs.64.88 Crores out of the unutilized proceeds of the IPO was invested, the balance being out of the earnings of the company (page 10). The compnay does not invest in the stock market. The Appellant Company does not have a DEMAT account. The Appellant Company has not done a single transaction in the stock market. Thus, the allegation that the Appellant Company utilized the proceeds of the IPO and invested the same in the stock market is unfounded and contrary to the records. 7. The above record clearly shows that : i. The investments were not in shares but in debt mutual funds; ii. The investments were made from the IPO proceeds not immediately required; iii. The investments in debt mutual funds was in accordance with the disclosure made in the prosepectus. 8. In the premises, the observation in the impugned order that "The lead to value of huge investment going down after stock market scam took place in March, 2001" is ex facie false and contrary to record. Since no amount was invested in the share market the question of the value of the investment going down cannot and does not arise. 14 9. A comparative chart of holding of the Ketan Parekh entities was also tendered to the Respondents. In the absence of any direct transaction between the Appellant Company and Ketan Parekh or his Group of Companies allegations of nexus between the Appellant Company and the said Ketan Parekh group is not even established prima-facie and the condition precedent for exercising Section 237(b) is not satisfied. There are no allegation by SEBI /BSE/NSE that the Appellants have allotted any shares to Ketan Parekh or his group of Companies prior to the IPO. M/s. Triumph International had offered their services as Lead managers and co-book runners. The Appellant Company appointed them as a Lead manager vide their letter dated 24th March 2000. The Appellants executed an agreement with the said Triumph on 31st March 2000 as per normal business transaction. Subsequently, a Syndicate agreement was executed on 5th July 2000 between HSBC, Enam Financial, Smiffs Capital, UTI Bank, Enam Securities and Triumph International as Lead Managers and Co-Book Runners. Thus, The Appellant Company did not deal exclusively with Triumph as sought to be conveyed by the Respondents. The Appellant Company paid Triumph requisite fees as per the Co-Book runners and as per the 15 Underwriting Agreement. The said appointment was approved by SEBI and the payments made thereunder as per the draft IPO submitted to SEBI. 10. The Appellant Company had no knowledge at that time of the Ketan Parikh or his entities being involved in the scam which came to light after the IPO. The reference to JPC report by the Respondents in the course of the present arguments is wholly irrelevant for the following reasons : (i). The JPC report was not considered by the CLB before passing the impugned order; (ii). The JPC report does not refer to the Appellant Company; (iii). The Ketan Parikh group of companies was permitted to operate in the capital market for many years after the JPC report. 11. A reference on behalf of the Respondents was made in the course of oral arguments to orders / judgments dated 31/3/2005, 2/5/2005 and 18/7/2005 of the Hon'ble High Court. It is respectfully submitted that all these orders deal with Ketan Parikh and his group. There is no reference to the Appellant Company in any of these orders/judgments. In the premises, the reliance by the 16 Respondents on these orders/judgments is wholly irrelevant. 12. The first allegation in the complaint of the Small Investors Forum is that IPO planned in a hurried manner. The Appellant Company states that the IPO was planned in a systematic manner after passing Special Resolution in March 2000 in an Extra Ordinary General Meeting. Thereafter, various agencies were appointed, offer documents including the prospectus were submitted to SEBI and other relevant authorities and obtained all the regulatory clearances. The allegation that the IPO was planned in a hurried manner is ex facie without any merit. Efficiency in completing the IPO cannot be a ground to order an investigation under Section 237(b). Even assuming the IPO was planned in a hurried manner, in the absence of an illegality, irregularity, fraud or any detriment to the public or the Company on its members the same cannot be a ground to under an investigation. 13. The second allegation of the Small Investors Protection Forum is that the Appellant Company has taken advantage of market conditions. It is respectfully submitted this is a statement and not an allegation. Other 17 IPOS which were planned during the same period were deferred whereas IPOs of the Appellant Company was over subscribed many times. 14. The third allegation of the Small Investors Protection Forum that bonus shares were issued by the Appellant prior to IPO also does not warrant any order of investigation. The resolution to issue bonus shares was passed in a meeting of shareholders on 22nd January 2000. The Board of Directors passed the Resolution dated 30th January 2000, allotting bonus shares. The bonus shares were issued to capitalize reserves, which were obtained due to the efforts of the then existing shareholders. All the formalities with respect to the allotment of bonus shares were complied and returns filed with ROC and the same could never be a ground for ordering an investigation. 15. the fourth allegation of the Small Investors Protection Forum that Mr. Bharat Shah, a director on the Board of the Appellant company was involved in Criminal Cases also does not warrant any investigation. Mr. Bharat Shah was appointed as director on 24th March 2000. Form 32 was filed with the ROC on 6th April 2000. During the course of due diligence conducted by HSBC, Mr. Bharat Shah 18 issued a letter dated 12th April 2000 certifying that there is no pending litigation against him or any firm or company promoted by him involving violation of statutory regulation or criminal offence (page 14 of the Compilation). The appointment of Mr. Bharat Shah was from 24th March 2000 to 16th April 2001 i.e. Till the next AGM. No notice was received from any shareholder proposing the candidature of Mr. Bharat Shah, therefore he ceased to be a director after 16th April 2001. During his tenure eight board meetings were held and in none of them Mr. Bharat Shah had participated. Thus, the said allegation did not warrant any investigation under Section 237(b). 16. The allegation that the sales of the company reduced from Rs.2,357.72 Lakhs (31st December 1999) to Rs.1,008.12 Lakhs (31st December 2000) is equally unfounded. The said contention is not even raised by the Respondents in its letter dated 12th December 2001 seeking inspection of the books of accounts under Section 209A. 17. The Appellant Company is in film production and distribution business. The film production and exhibition takes more than a year. The revenue is generated from the sale of rights to exhibit the films, the DVD and Satellite 19 rights and re-issue rights of earlier films. In the year ended 31st December 1999, the film "Taal" was released, therefore, the Appellant Company had a higher income of Rs.2,255 lakhs. During the year ended 31st December 2001, no new film was released and hence, the Appellant Company had a lower income. Once again as in the year ended 31st December 2000, two films "Rahul" and "Yadein" were released, therefore, Turnover increased to Rs.3,733 lakhs. The sales figures were dependent on the release of the movies and have no bearing on the stock market, as alleged. In the absence of any investment made in the stock market, the rise and fall of the sales figures have no relation or bearing thereon." 15. In support of his submissions, Mr. Bharucha has relied upon the following Decisions :- (i) AIR 1967 SC 295 Barium Chemicals Ltd. V/s. Company Law Board & Ors. (ii)AIR 1969 SC 707 Rohtas Industries Ltd. V/s. S.D. Agarwal & Anr. (iii) 40 COMP CASES 102 New Central Jute Mills Co. Ltd. V/s Deputy Secretary, Ministry of 20 Finance, Dept. Of Revenue & Co. Law & Ors. (iv)52 COMP CASES 589 Modi Industries Ltd. V/s. Union of India & Ors. (v)40 COMP CASES 83 Deputy Secretary, Ministry of Finance, Deptt. Of Revenue & Company Law V/s. Sahu Jain Ltd. (vi)AIR 1967 CALCULLA 159 M/s. Ashokam Marketing Ltd. V/s. Union of India. (vii)AIR 2008 SC 1771. (Bhikhubhai Y. Patel and Ors. V/s. State of Gujarat & Anr.) 16. On the other hand, Mr. Raghuvanshi, learned Addl. Solicitor General of India appearing on behalf of the Respondent submitted that no interference is required with the order of the Company Law Board. He submits that it is an admitted position that the Appellants have carried on their share transactions through a Broker known as Triumph Securities Limited. This is one of the Group companies of Ketan Parekh Group. These group companies were subjected to scrutiny of joint Parliamentary Committee. The transactions with the Appellants were also scrutinized by the J.P.C. Since Triumph Securities Limited is under investigation, even the Appellants can be brought within the purview of the same. He has referred to the 21 allegaions in the complaint of the Investors Forum and contended that the link with Ketan Parekh Group of Companies and the Appellant is well established. They were de-barred by Securities Exchange Board of India (SEBI) from trading. The Company Law Board in that case had ordered inspection and probe into the affairs of the Appellant No.1 and this order was passed on 30th June 2005. The Group Companies and Others challenged that order so also the further investigation directed under Section 237 of the Companies Act by filing Petitions but the same were dismissed by this Court. The Judgment and Order of the learned Single Judge was challenged before a Division Bench and the Division Bench dismissed the Appeal. The order of the Division Bench was upheld by the Supreme Court when it dismissed the Special Leave Petitions vide order dated 18th July 2005. Therefore, this is a fit case for directing a probe and investigation and the Appeal be dismissed. 17. Mr. Raghuvanshi further submitted that the Appellant Company was incorporated as a Private Limited Company on 7th September 1982. The main objects of the Company interalia is 22 to carry on the business of manufacturers, producers, exhibitors, exploiters, financiers, importers and distributors of cinematographic films and pictures, both talkies and silent etc.. The company was carrying on the business of production of films, TV serials and music in addition to the hiring out of its equipments to other film makers for the purpose of production and post production work. An Inspection of the Company was ordered by the Department of Company Affairs vide letter No.3/75/2001/CL.II dated 13.6.2001. The Inspecting Officer submitted his Inspection Report u/s. 209A of theCompanies Act, 1956 and he has observed various violations of the provisions of the Companies Act, 1956. Arising out of the Inspection Report the ROC had already filed