Case: Kalpana Bhandari & Others Vs. Securities & Exchange Board of India & Others

R.M. LODHA, J.The petitioners have sought for reliefs against the first respondent in following terms: "(a) That this Honble Court be pleased to issue a writ of Mandamus or a writ in the nature of Mandamus or any other appropriate writ, order or direction under Article 226 of the Constitution of India against the 1st Respondent, ordering and directing the 1st Respondent to: (i) forthwith direct the 2nd and/or 3rd Respondent to withdraw the offer dated 5th June, 2003 (Exhibit-G hereto); (ii) forthwith direct the 2nd Respondent to cease and desist from making an offer for acquiring from investors/ shareholders the shares of the 3rd Respondent at a price less than Rs.57/- per share (or the appropriate price computed on the basis of the principles under Section 73 of the Companies Act, 1956) or such other higher price that may be determined pursuant to a fair valuation of shares conducted after requiring an independent audit to be conducted into the accounts of the 2nd and the 3rd Respondents and the monies diverted/siphoned off from the 3rd Respondent be brought back into the 3rd Respondent; (iii) forthwith issue all necessary directions and orders including the initiation of investigations and/or inquiries into the affairs of the 2nd and 3rd Respondents with respect to the charges of unfair and fraudulent trade practices, insider trading and violation of the regulations pertaining to Registrars to the issue." 2.The controversy arises in the following circumstances : The petitioners are shareholders of the 2nd respondent company viz, Sesa Goa Limited (for short Sesa Goa). Sesa Goa is the listed company. Its shares are listed on the Bombay Stock Exchange and National Stock Exchange amongst other Exchanges. The third respondent viz. Sesa Industries Limited (for short Sesa Industries) is a subsidiary of Sesa Goa. It is petitioners case that Sesa Goa represented to its shareholders that for future expansion and diversification projects in the steel related areas, subsidiary company be set up and that is how Sesa Industries was incorporated. In or around 1993, Sesa Industries made preferential offer to the shareholders of Sesa Goa. This offer was in respect of 43,83,540 equity shares of Rs.10/- each for cash at a premium of Rs.12.50 per share. The petitioners claim to have invested in the shares of Sesa Industries under the aforesaid preferential offer. It is averred that approximately 31000 small investors such as the petitioners invested in the shares of Sesa Industries. Sesa Industries collected an amount of Rs.110 million from the investors. According to the petitioners, all along Sesa Industries represented that they had intention to have their securities listed at the Stock Exchanges. However, the said representations were false and fraudulent. Petitioners have alleged that Sesa Goa as well as Sesa Industries acted in a fraudulent manner, deceived the small investors and induced them to invest their hard earned monies on the basis of material misrepresentations/ assurances without any intention of performing such assurances/ representations and their actions and omissions are in gross violation of the Companies Act. The petitioners made representation to the first respondent viz. Securities & Exchange Board of India (SEBI) and requested them to: (i) conduct a full inquiry into the affairs of Sesa Goa and Sesa Industries and in particular with regard to the fraudulent manner in which the public monies were collected and thereafter siphoned out; (ii) pass urgent interim directions and restrain Sesa Goa from making the proposed mala fide offer of purchasing shares of Sesa Industries from small investors at Rs.30/- per share and pass further interim directions appointing an investigating authority; (iii) ensure that if at all the Sesa Goa is allowed to make a voluntary offer for purchasing the shares of the minority investors, the same should be at a price not less than the base price which is presently Rs.57/- per share (Rs.22.5 being the application money plus 15% interest from November, 1993 till date). The petitioners have set up the case that Sesa Goa and Sesa Industries are one entity and corporate veil ought to be lifted. In this connection, the details of the Board of Directors, Registered Officer, auditors, solicitors and bankers of both the companies viz. Sesa Goa and Sesa Industries have been set up. 3.Mr. Shyam Diwan, the learned counsel appearing for the petitioners extensively referred to the averments made in the writ petition, the provisions of SEBI Act, 1992, SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1955, SEBI (Prohibition of Insider Trading) Regulations, 1992 and the relevant provisions of the Companies Act. The thrust of the contention of the learned counsel for the petitioners is that the SEBI has jurisdiction to examine and look into the diverse grievances raised by the petitioners that the proposed offer (Exhibit "G") amounted to fraudulent and unfair trade practices relating to securities market and insider trading in securities. According to the learned counsel the material placed before SEBI was sufficient to indicate that Sesa Industries intended to get its securities listed on recognised Stock Exchange. The learned counsel in this regard referred to (a) statutory meeting/meetings at Sesa Goa Industries; (b) Chairmans speech in the first annual general meeting of Sesa Industries for the year 31st March, 1994; (c) Chairmans speech in the second annual general meeting of Sesa Industries for the year 31st March, 1995; (d) Chairmans statement in the third annual general meeting of Sesa Industries for the year 31st March, 1996; (e) Chairmans statement in fourth annual general meeting of Sesa Industries for the 31st March, 1997; (f) letter dated 26th April, 1999 from Sesa Industries; (g) Directors report/ Annual report of Sesa Industries for the year 31st March, 2000; (h) Directors report/Annual report of Sesa Industries for the year 31st March, 2001 and (i) Directors report/Annual report of Sesa Industries for the year ended 31st March, 2002. He submitted that though the test applied by SEBI that the intention of any company to get its shares listed is manifested when it makes an application to a recognised Stock Exchange may be proper test but it cannot be said that is the only test. He would urge that there may be other facts indicating the intention of the company to get its securities listed on any recognised Stock Exchange and the facts obtaining in respect of Sesa Industries do indicate their intention of getting securities listed on any recognised Stock Exchange. The learned counsel. submitted that due to commonality of the members of Board of Directors of the Sesa Goa and Sesa Industries, the Directors had price sensitive information but these people never disclosed the said information to the petitioners or other shareholders and thus, a clear case of insider trade practice was made out. He also narrated facts which in his opinion per se reflect fraudulent and unfair act on the part of the Sesa Goa and Sesa Industries. In support of his contention of lifting the corporate veil, the learned counsel relied upon the judgment of the Supreme Court in State of U.P. and Ors. Vs. Renusagar Power Co. and Ors., AIR 1988 SC 1737. 4.The petition is stoutly opposed by the respondents. SEBI in its affidavit have set up the case that Sesa Industries is not listed. They have not made any application to any recognised stock exchange for getting their securities listed manifesting their intention to have their securities listed at the recognised stock exchange. In the circumstances it has no jurisdiction in the matter. According to SEBI, the grievance of the petitioners can be redressed under section 55-A of the Companies Act through Central Government as section 55-A inter alia provides that in all cases in which SEBI is unable to regulate the provisions relating to issue and transfer of securities may be administered by the Central Government. They have pointed out that the petitioners in fact have vide their letter dated 17th June, 2003 requested the department of Company Affairs to invoke their powers under Companies Act, 1956 for carrying out special audit and investigation into the affairs of the Sesa Goa and Sesa Industries. 5.On behalf of Sesa Goa and Sesa Industries initially two separate affidavits were filed on 15th July, 2003. Thereafter, further affidavit was filed on 21st July, 2003 and then yet another further affidavit was filed on 29th July, 2003. By the further affidavit dated 29th July, 2003 it is pointed out that Sesa Goa has changed the Registrar to the offer and appointed M/s. Karvy Consultants Limited which is duly registered with SEBI under the SEBI (Registrars to an issue and Share Transfer Agents) Rules, 1993. They have sought to set up the case that petitioners have not come to this court with clean hands and suppressed the material facts. In this connection, they have referred to the earlier writ petition filed by some other shareholder (Ms. Krishna Bajaj) being Writ Petition No.1280 of 1999 and the rejection of the said writ petition by this court on 17th June, 1999. They have also set up the case that the offer made by Sesa Goa dated 5th June, 2003 clearly sets out the reasons for the inability to list the securities of Sesa Industries on recognised Stock Exchange. According to them, the said offer is in fact made in good faith in order to provide the shareholders with an exit route if they wish to avail of the same. They have denied having siphoned off the money or committed any fraud or used any unfair means. They have raised the plea that for enforcement of contractual rights through extraordinary jurisdiction is misconceived. 6.Mr. Iqbal Chagla, the learned senior counsel for Sesa Goa and Sesa Industries and Mr. Kumar Desai, the learned counsel for SEBI argued on the lines set up by the said respondents in their respective reply affidavits. 7.We reflected over the matter. Though the learned counsel for petitioner worked very hard, to an extent unnecessary, to persuade us to entertain the writ petition, however, we hardly found the case fit for invocation of extra ordinary jurisdiction for the reasons which we indicate hereinafter. First, there is substance in the submission of SEBI that as Sesa Industries is not listed company nor have they made any application to any recognised Stock Exchange manifesting intention of getting their securities listed and, therefore, they have no jurisdiction in the matter. 8.Section 55-A of the Companies Act provides thus "55-A. The provisions contained in sections 55 to 58, 59 to 81 (including sections 68A, 77A and 80A), 108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121,122, 206, 206A and 207, so far as they relate to issue and transfer of securities and non-payment of dividend shall, (a) in case of listed public companies; (b) in case of those public companies which intend to get their securities listed on any recognized stock exchange in India, be administered by the Securities and Exchange Board of India; and (c) in any other case, be administered by the Central Government." 9.It would be, thus, seen that the provisions contained in various sections as noted in Section 55-A so far as they relate to issue and transfer of securities and non-payment of dividend SEBI has powers (i) in case of listed public companies and (ii) in case of those public companies which intend to get their securities listed on any recognized stock exchange in India. In other words SEBI does not have power in relation to the issue and transfer of securities and non-payment of dividend under the various provisions referred to in section 55-A for the companies other than listed public companies and the public companies which intend to get their securities listed on any recognised stock exchange in India. Such power is vested in the Central Government. Sesa Industries is admittedly not a listed company on any recognised Stock Exchange. The question is whether SEBI erred in its opinion that Sesa Industries is not even covered under Section 55A(b) of Companies Act. It is the case of SEBI that Sesa Industries intention to get its securities listed is not manifested as it has not made any application to recognised stock exchange under Rule 19 of Contract (Regulation) Rules, 1957. The approach of SEBI cannot be faulted. Even the learned counsel for the petitioners did not dispute that the criteria applied by SEBI is not irrelevant. However, the learned counsel for the petitioners submitted that every year the Chairman in his speech in the annual general meeting, expressed companys intention to have their shares listed at the recognised stock exchanges. The intention is always a question of fact and unless the opinion of regulatory body on this aspect is palpably perverse and grossly erroneous, it would not be proper for this court in extraordinary jurisdiction to interfere with such opinion of regulatory body. Moreover not a single resolution of the Board of Directors has been placed on record by the petitioners to indicate that the Board of Sesa Industries took decision to have their securities listed at the recognised stock exchange/s. Besides that the yardstick applied by SEBI that by making an application to recognised Stock Exchange, the intention of the company to have its securities listed at recognised stock exchange is manifested cannot be said to be unreasonable. In the circumstances SEBIs stand that it has no jurisdiction in the matter cannot be said to be without basis. 10.Even if Sesa Industries is not a listed public company nor is held to have intended to get their securities listed on any recognised stock exchange in India, the various provisions referred to in section 55A relating to issue of transfer of securities and non-payment of dividend in relation to the said company is clearly administered by the Central Government and the petitioners can always apply to the Central Government for the various grievances raised before us. Not only that, section 237 of the Companies Act provides for investigation in the companys affairs by the Central Government in the manner provided therein. Section 237 reads thus - "237. Without prejudice to its powers under section 235, the Central Government - (a) shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if (i) the company, by special resolution; or (ii) the Court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and (b) may do so if, in the opinion of the (Company Law Board), there are circumstances suggesting (i) that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose; (ii) that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or (iii) that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, (***) or the manager, of the company." As a matter of fact, the petitioners themselves, have, made an application to the Central Government requesting them to invoke their powers under the Companies Act for carrying out special audit and investigation into the affairs of Sesa Goa and Sesa Industries. Surprisingly and for the reasons best known, the petitioners have not impleaded Central Government as party respondent in the present writ petition, presumably because the petitioners feel that the Central Government would act on the application made by them in the near future. Be that as it may, it appears to us that the grievances raised by the petitioners in the writ petition though are not within the powers of SEBI can be adequately looked into by the Central Government. 11.Moreover, the primal grievance of the petitioners, as we see, is that Sesa Goa must offer the petitioners price not less than Rs.57/- per share for acquiring the shares of Sesa Industries from the petitioners and other investors. Some of the shareholders similarly situated with that of petitioners filed a writ petition being Writ Petition No. 1280 of 1999 before this court earlier. Inter alia, the prayers made therein were: "(a) ..............(b) that this Honble Court may be pleased to issue a writ of mandamus or any other appropriate writ order or direction in the nature of mandamus: (i) immediately calling upon Respondent No.1 and Respondent No.2 to refund the said moneys of the Petitioner as invested by the Petitioner in the said shares of Respondent No. 1, with interest thereon, by buying back the said shares of the Petitioner at a rate so decided by this Honble Court after taking into consideration the original issue price of Respondent No.1 and the interest loss caused to the Petitioner for holding on to the shares of Respondent No.1 ever since;(ii)...............(iii) ...............(iv) directing Respondent No.3 to initiate necessary action against Respondent No.1 and Respondent No.2 for committing gross violations of the provisions of SEBI Act, 1992 and Companies Act, 1956 and for defrauding and misleading the members of the investing public." 12.The said writ petition came to be dismissed by the Division Bench of this court on 17th June, 1999 by the following order : "CORAM: M. B. GHODESWAR & B. N. SRIKRISHNA, JJ. DATE: 17TH JUNE, 1999P.C. :"1. The crux of the case sought to be made out by the Petitioner is that the 2nd Respondent Company (whose shares are already listed on the Stock Exchange) had privately issued circulars to its shareholders regarding the issue of shares of the 1st Respondent-Company with a promise that the shares of the 1st Respondent would be listed on the Stock Exchange at Mumbai after about 12 to 18 months. This contingency failed to take place. The Petitioner made complaints to the 3rd Respondent, The Securities and Exchange Board of India (SEBI). The SEBI has ignored the complaints. The Petitioner seeks a writ of mandamus against the SEBI to carry out its duties. 2. Mr. Samdani, learned Counsel appearing on behalf of the Petitioner, has taken us to the provisions of the Securities and Exchange Board of India Act, 1992 (for short, the "SEBI Act") and the regulations made therein. Even assuming that there is a breach of the promise to list the securities of the 1st Respondent on the Mumbai Stock Exchange, we are not prima facie satisfied that it would, by itself, amount to a dereliction of a statutory duty of the SEBI as a watchdog of investors under the SEBI Act. 3. In our view, the Petitioner may have his remedy either under the Contract Act or under the provisions of the Companies Act, but we see no failure in discharge any statutory duties on the part of the SEBI. No relief can be granted in exercise of our powers under Article 226 of the Constitution of India. Hence, rejected." 13.It is true that at the time the Writ Petition No.1280 of 1999 was filed the letter of offer dated 5th June, 2003 issued by Sesa Goa and now under challenge before us had not seen the light of the day and obviously, the said letter was not under challenge but the effective prayer for buy back of shares of Sesa Industries by Sesa Goa at a reasonable rate is identical in both matters. For the reasons on which the earlier Writ Petitions No.1280 of 1990 came to be rejected, justify rejection of the present writ petition as well. 14.In the light of the aforesaid discussion, we do not deem it necessary to go into the diverse aspects raised by the learned counsel for the petitioners regarding the lifting of the corporate veil, the allegations of insider trade practices, fraudulent and unfair action of Sesa Goa and Sesa Industries. Suffice it to say, however, that letter dated 5th June, 2003 is voluntary letter of offer made by Sesa Goa. It is for the petitioners to accept the same or reject outright. There is no compulsion on the part of the offerer upon the petitioners to accept the said offer. The offer has been made inter alia for the reasons: "(e) The Company has been unable to list its shares by reasons of the difficulties mentioned above and also due to the weak state of the capital market and also world wide industrial recession, particularly in the steel industry. The company had also taken the opinion of a leading merchant banker on the disability of listing its shares after taking into consideration various relevant factors in the context of the original proposal. Furthermore it was advised that it would not be practical to successfully make a new issue or divest part of the promoter holding to facilitate listing of the Companys shares in the larger interest of existing shareholders. Hence the shares remain unlisted till date. (g) The Company is of the view that the recovery of the capital market on a large scale basis may take some more time. Listing of the Shares of the Company would have provided an exit route to the shareholders, but unfortunately it has not been possible so far to do so. Therefore, with a view to provide an exit opportunity to the shareholders, SIL has requested the Acquirer to make this offer and the Acquirer has agreed to the same." If the petitioners feel that the said offer is not for their benefit, they may not accept the same and not follow the exit route suggested by the offerer. Ultimately it is pure commercial dealing.

Decision reasoning: 0[ds]Though the learned counsel for petitioner worked very hard, to an extent unnecessary, to persuade us to entertain the writ petition, however, we hardly found the case fit for invocation of extra ordinary jurisdiction for the reasons which we indicate hereinafter. First, there is substance in the submission of SEBI that as Sesa Industries is not listed company nor have they made any application to any recognised Stock Exchange manifesting intention of getting their securities listed and, therefore, they have no jurisdiction in thewould be, thus, seen that the provisions contained in various sections as noted in Sectionso far as they relate to issue and transfer of securities andof dividend SEBI has powers (i) in case of listed public companies and (ii) in case of those public companies which intend to get their securities listed on any recognized stock exchange in India. In other words SEBI does not have power in relation to the issue and transfer of securities andof dividend under the various provisions referred to in sectionfor the companies other than listed public companies and the public companies which intend to get their securities listed on any recognised stock exchange in India. Such power is vested in the Central Government. Sesa Industries is admittedly not a listed company on any recognised Stock Exchange. The question is whether SEBI erred in its opinion that Sesa Industries is not even covered under Section 55A(b) of Companies Act. It is the case of SEBI that Sesa Industries intention to get its securities listed is not manifested as it has not made any application to recognised stock exchange under Rule 19 of Contract (Regulation) Rules, 1957. The approach of SEBI cannot be faulted. Even the learned counsel for the petitioners did not dispute that the criteria applied by SEBI is not irrelevant. However, the learned counsel for the petitioners submitted that every year the Chairman in his speech in the annual general meeting, expressed companys intention to have their shares listed at the recognised stock exchanges. The intention is always a question of fact and unless the opinion of regulatory body on this aspect is palpably perverse and grossly erroneous, it would not be proper for this court in extraordinary jurisdiction to interfere with such opinion of regulatory body. Moreover not a single resolution of the Board of Directors has been placed on record by the petitioners to indicate that the Board of Sesa Industries took decision to have their securities listed at the recognised stock exchange/s. Besides that the yardstick applied by SEBI that by making an application to recognised Stock Exchange, the intention of the company to have its securities listed at recognised stock exchange is manifested cannot be said to be unreasonable. In the circumstances SEBIs stand that it has no jurisdiction in the matter cannot be said to be withoutif Sesa Industries is not a listed public company nor is held to have intended to get their securities listed on any recognised stock exchange in India, the various provisions referred to in section 55A relating to issue of transfer of securities andof dividend in relation to the said company is clearly administered by the Central Government and the petitioners can always apply to the Central Government for the various grievances raised before us. Not only that, section 237 of the Companies Act provides for investigation in the companys affairs by the Central Government in the manner provideda matter of fact, the petitioners themselves, have, made an application to the Central Government requesting them to invoke their powers under the Companies Act for carrying out special audit and investigation into the affairs of Sesa Goa and Sesa Industries. Surprisingly and for the reasons best known, the petitioners have not impleaded Central Government as party respondent in the present writ petition, presumably because the petitioners feel that the Central Government would act on the application made by them in the near future. Be that as it may, it appears to us that the grievances raised by the petitioners in the writ petition though are not within the powers of SEBI can be adequately looked into by the Centralis true that at the time the Writ Petition No.1280 of 1999 was filed the letter of offer dated 5th June, 2003 issued by Sesa Goa and now under challenge before us had not seen the light of the day and obviously, the said letter was not under challenge but the effective prayer for buy back of shares of Sesa Industries by Sesa Goa at a reasonable rate is identical in both matters. For the reasons on which the earlier Writ Petitions No.1280 of 1990 came to be rejected, justify rejection of the present writ petition asthe light of the aforesaid discussion, we do not deem it necessary to go into the diverse aspects raised by the learned counsel for the petitioners regarding the lifting of the corporate veil, the allegations of insider trade practices, fraudulent and unfair action of Sesa Goa and Sesa Industries. Suffice it to say, however, that letter dated 5th June, 2003 is voluntary letter of offer made by Sesa Goa. It is for the petitioners to accept the same or reject outright. There is no compulsion on the part of the offerer upon the petitioners to accept the said offer. The offer has been made inter alia for theThe Company has been unable to list its shares by reasons of the difficulties mentioned above and also due to the weak state of the capital market and also world wide industrial recession, particularly in the steel industry. The company had also taken the opinion of a leading merchant banker on the disability of listing its shares after taking into consideration various relevant factors in the context of the original proposal. Furthermore it was advised that it would not be practical to successfully make a new issue or divest part of the promoter holding to facilitate listing of the Companys shares in the larger interest of existing shareholders. Hence the shares remain unlisted tillThe Company is of the view that the recovery of the capital market on a large scale basis may take some more time. Listing of the Shares of the Company would have provided an exit route to the shareholders, but unfortunately it has not been possible so far to do so. Therefore, with a view to provide an exit opportunity to the shareholders, SIL has requested the Acquirer to make this offer and the Acquirer has agreed to thethe petitioners feel that the said offer is not for their benefit, they may not accept the same and not follow the exit route suggested by the offerer. Ultimately it is pure commercial dealing.