Company Law Board Shri Kumar Malavalli vs Crcw Search Technologies Private ... on 23 June, 2003 Equivalent citations: [2004]118COMPCAS618(CLB), [2003]48SCL582(CLB) ORDER K.K. Balu, Member 1. This petition is filed under Section 111 of the Companies Act, 1956 ("the Act") against M/s. CRCW Search Technologies Private Limited ("the Company") for rectification of the register of members of the Company in respect of 2000 shares of Rs. 100 covered under share certificate No. 5 by cancelling the allotment of share said to be made in gross violation of the provisions of the Act, in favour of the Petitioner. 2. According to Shri. Parameswaran, Advocate appearing for the petitioner, the petitioner is a NonResident Indian residing at California, US and well known entrepreneur in the information technology business. The petitioner used to extend financial assistance of his friends and relatives in establishment of companies and promotion of business in India. Accordingly, the petitioner had remitted funds to the tune of US$ 4,70,000 on 7.4.2001 in favour of one (SIC) Srikanth Nagaraja (SN) on his request, who was introduced by Prof. Akilesh (SIC) Indian Institute of Science, for incorporation and promotion of the Company. The amount was remitted in the personal name of SN through normal banking channels and SN was the beneficiary, as seen from the certificate of foreign inward remittance dated 7.4.2001 (page 13 of petition). However the funds remitted in favour of SN for the development of information technology business were misutilised by allotting 200 equity shares of Rs. 100 each, aggregating Rs. 2,00,000/ at a premium of Rs. 2,15,65,400 to the petitioner on 22.11.2001 as per Form 2 dated 23.11.2001 (page 14 of petition) filed by SN in his capacity as director of the Company, without consent and knowledge of the petitioner. Shri Parameswaran strongly contended that the petitioner has never agreed in writing to become a member of the Company and that the correspondence exchanged between the parties do not show that the petitioner had agreed to become a member in the Company, satisfying the statutory requirement of Section 41(1). The petitioner had neither agreed for the allotment of the impugned shares in his favour at a premium of Rs. 10,782.70 per share. The premium was fixed without the knowledge and consent of the petitioner. But the petitioner's name was stealthily entered in the Register of Members of the Company. The petitioner, therefore, cannot be deemed to be a member of the Company. Shri Parameswaran in support of his legal submissions relied upon the following decisions: * Rahul Subodh Windoors Limited v. K. Menon and Anr. 1999 (96) Comp. Cas. 539 (SC) to show, interalia that allotment can be made to a persons who becomes a member of the company when an application is made to that effect. * Ram Kishan v. Kanwar Paper Private Limited 1990 (69) Comp. Cas. 209 (HP) to show that the incorporation of the name of any person in the register of members of a Company without thee being any agreement on his part "in writing" is contrary to the statutory requirements of Section 41(2). * Indglonal Investment and Finance Limited v. Rajasthan Breweries Limited 2001 (107) Comp. Cas. 525 (CLB) to show that Section 41 of the Companies Act, 1956 stipulates that a person, to become a member, should agree in writing ... Noncompliance with the provisions of law is a sufficient cause to order rectification of register of members. Moreover under the relevant provisions of the Foreign Exchange Management (Transfer or issue of Security by a Person Resident Outside India) Regulations, 2000 ("FEMR"), any shares issued to persons resident outside India, by a company which is not listed on any recognized stock exchange in India, the price of shares should not be less than fair valuation of shares done by a Chartered Accountant as per guidelines issued by the erstwhile Controller of Capital Issues. A company in India issuing shares to a person resident outside India should receive amount of consideration for such shares by inward remittance through normal banking channels or by debit to NRE/FCNR account of person concerned maintained with an authorised dealer/authorised bank. In the present case there is no direct remittance of funds from the petitioner in favour of the Company. The petitioner did not agree in writing for transferring any amount sent to SN, in favour of the Company towards allotment of shares in favour of the petitioner. Shri Parameswaran, therefore, urged that the issue of impugned shares in favour of the petitioner is in gross violation of the provisions of FEMR. For these reasons Shri Parameswaran sought for the reliefs made in the petition. 3. According to Ms. Chitra Narayanan, Advocate appearing for the Company, SN had in the year 2000 conceived of a hardware database accelerator card, enhancing the performance of operations in computers, prepared with Prof. Akhil