Varghese K. Joseph vs The Custodian & Ors

3. The substantial details and circumstances under which this appeal arises indicate that the appellant herein who is a small investor had purchased 100 equity shares of the respondent No.2 Company namely Reliance Industries Ltd. on 12.6.1989 and payment of the same was made through his share broker - respondent No.4 - Abex and Company which perhaps is not in existence now. However, the payment for purchase of the shares had admittedly been 2 made through Union Bank of India by way of a demand draft. It is the case of the appellant herein that the respondent No.4 despite repeated enquiries never informed the appellant regarding the status of his shares and hence the appellant was absolutely in dark and had no clue about the same. The appellant in the meantime was also living abroad due to his professional obligation and could not ascertain the fate of his shares.

4. However, when the appellant finally approached respondent No.2 - Reliance Industries Ltd. seeking dividend and other consequential benefits like issue of rights and bonus on shares, it was informed to the appellant by the respondent No.2 that the shares of the appellant on which dividend was claimed, were found to be tainted and hence it was unable to consider the request of the appellant for payment of dividends. The appellant, thereafter also learnt that there had been mutual correspondence between the share broker companies i.e. respondent No.3 Karvy Consultants Ltd. and respondent No.4 - Abex and Company for taking the accounts of the shares in question vide Annexure-P1 in order to complete 3 certain procedural formalities. But as per the case of the appellant, neither the respondent No.3 nor respondent No.4 cared to inform the appellant about the said development through which he had purchased the shares. The appellant has annexed the copy of the letter dated 12.7.1995 vide annexure P-1 which was written by the respondent No.4 -

5. Since the appellant had been informed by the respondent No.2 - Reliance Industries Ltd. that the dividends could not be paid to him as the shares were held to be tainted, the appellant also tried to ascertain the status of his shares purchased by him through respondent Nos. 3 and 4. However, it is alleged by the respondent No.3 -M/s. Karvy Consultants Ltd. that it had informed the appellant to submit appropriate application seeking certification of the tainted shares as the equity shares in question stood in the name of M/s. Fair Growth Financial Service Ltd. which subsequently became the subject matter of attachment as per the order of the Government of India since it was found to be involved in some scam and hence the shares issued by 4 this company required certification by the Custodian as per order of the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992. But the appellant's case is that he never received the said communication nor the said letter indicated anything about the cut off date for making application for certification of the tainted shares. Annexure P-2 is the copy of the letter dated 5.1.2001 which is allegedly written by the respondent No. 3- M/s. Karvy Consultants Ltd. to the appellant directing him to file the application seeking certification of shares.

- Mr. Joseph that he should file an application/petition mentioning therein the reliefs/directions intended to be sought from the Hon'ble Special Court (Torts) through the advocate along with the documents, papers at the address of the Special Court which was stated therein. It was further requested to the appellant to forward the relevant 6 order from the Special Court along with original share certificates and transfer deeds to enable it to do the needful. But the appellant's case is that he never received the said communication etc.

7. As per the appellant's version the original shares and transfer deeds had been delivered to the respondent No.4 -Abex and Company - the share broker company through whom the appellant had purchased the shares as under the rules, the share certificates were not issued from the company to the appellant but the same was lying in the hands of respondent No.3 i.e. Karvy Consultants Ltd. through respondent No.4 and so the appellant could not produce the share certificates. However, the respondent No.4 -Abex and Company had assured the appellant that it would return the share along with the Clearance Certificate from the Stock Exchange but the respondent No. 3 i.e. Karvy Consultants Ltd. was unable to process the share through respondent No.6 - Madras Stock Exchange as they were tainted. The appellant, therefore, stated that he is a bonafide purchaser and the owner of 100 tainted shares of respondent No. 2 and the said shares were required to be 7 transferred in the name of the appellant along with all the accrual till dates after certification. The appellant as already stated also learnt that the tainted shares required certification through respondent No.1 - the Custodian and for this purpose he would be required to seek permission from the Special Court under the Special Courts Act of 1992.

11. A show cause notice was issued to all the respondents in this appeal but no one appeared except respondent No.1 - the Custodian based at Mumbai who has filed reply in this appeal. As per the reply of the Custodian 9

20. The aforesaid position is clearly admitted by the Custodian - Respondent No.1 himself which is borne out from the reply filed by him. Thus the appellant who had purchased the shares of the respondent No.2 - Reliance Industries Ltd. through respondent No.4 - Abex and Company whose affairs were later taken care of by respondent No.3 - Karvy Consultants Ltd. also and perhaps respondent No.5 - M/s. Fair Growth Financial Service Ltd. would clearly be deemed to be bonafide purchase. 1 However, since the shares in question were held to be tainted by order of the Government of India due to which it was not honoured by the respondent No.2 - Reliance Industries Ltd., the need arose for its certification through the Custodian under the control and supervision of the Special Court constituted under the Act of 1992. Meanwhile, long time had elapsed between the date of purchase and the application for certification of the shares and obviously during this long period it is the respondent - Custodian in coordination with the notified company and the share brokers respondent Nos. 3 and 4 (Karvy Consultants Ltd. and Abex and Company) who was responsible to certify the shares of the notified company so that the dividends accruing on the shares could be paid. In the process, no doubt, the respondent No.1 - Custodian encountered several procedural hassels as the claim of payment were made at frequent intervals by large number of investors holding the shares which were informed to be tainted and hence required certification by the Custodian.

26. As a consequence of the aforesaid discussion, we set aside the impugned order of the Special Court and allow this appeal as a result of which the respondent - Custodian shall entertain the application filed before the Special Court for certification of his shares and verify the claim of the appellant in regard to the shares bearing Certificate Nos. 3489027 and 8170517 Distinctive Nos. D-915292605 to 654 and D-114196259 to 308 and ensure payment of 2 dividends on those shares after certification by the respondent No.2. If necessary the Custodian may co- ordinate with the concerned stock exchange and the share broker companies i.e. respondent No.4 - Abex and Company as also respondent No.3 - Karvy Consultants Limited for ensuring release of payment accruing as dividend on the shares noted hereinbefore. In case of default in any manner, it shall be the duty of the Custodian to take recourse to the remedy against any defaulting party in accordance with law. The appeal accordingly is allowed.

....................................J (Markandey Katju) ....................................J (Gyan Sudha Misra) New Delhi, January 31, 2011 2