HIGH COURT OF BOMBAY
National Securities Depository Ltd.
Co. Petition No. 110/111A/CLB/MB of 2009
Co. Appeal No. 33 of 2011
October 31, 2012
1. Heard finally.
2. This is an Appeal under Section 10F of the Companies Act, 1956.
3. The Appellant/Original Respondent No.10 has only challenged the impugned order dated 23rd November, 2010 passed by the Member of the Company Law Board, Bench at Bombay (for short “The Board”). The Appellant/Original Respondent No.10 is aggrieved by the following directions :-
” …However, in respect of demated shares shares the Respondent No.10 shall issue notices to the parties as stated in prayer ‘c’ & ‘d’ of the petitioner in whose names the shares have been demated informing them regarding claim of the petitioner in respect of those shares which the petitioner is entitled. After having given an opportunity to the persons in whose names the shares re demated the Respondent No. 10 shall take appropriate decision and inform the Petitioner. With the above directions the CP is disposed off.”
4. This poses a question whether the impugned order against the appellant is contrary to law and without jurisdiction?- Yes.
5. The basic facts are as under :
(a) Mr. Kamlesh Shah (i.e. Original Petitioner), Respondent No.1 herein had filed the Company Petition No.110/111A/CLB/MB/2009 before the Company Law Board, Mumbai Bench against L & T, Ultratech Cement Ltd., Sharepro Service India Pvt. Ltd. (RTA), NSDL, and seven others seeking an order for decision on petitioners title and rectification in respect of 431 shares of Larsen and Toubro Ltd. (Face Value-10) each which were held/dematerialized by various persons. He claimed to have made a bonafide purchase 650 shares of L & T (FV 10) from his Broker on 4th October 1999 who delivered the share certificates and transfer deeds. Respondent no.1 (original petitioner) claimed to have misplaced the 650 transfer deeds in the year 1999. Respondent no.1 received new transfer deeds for 229 shares, however, being unable to obtain fresh transfer deeds in respect of 431 shares, the original petitioner sought rectification order from the Company Law Board in respect of the balance 431 shares. The appellant vide letter No.NSDL/GS/HK/AP/2010/533 dated 10/9/2010 sent a letter to the petitioner’s Constituted Attorney Mr. Kamal Agarwal, stating that the order was not implementable since there was a mismatch of the names and the client identity numbers mentioned in order dated 3/9/2009.
(b) The original petitioner had filed an application i.e. (C.A. No.4 of 2010) for amendment of the petition and to incorporate the changes as suggested vide the NSDL letter dated 10/9/2009. The application for amendment was heard by company Law Board and by its order dated 17/3/2010 allowed the amendment. Amended copy of the plaint was served on the respondent. Affidavit in opposition of the appellant (original respondent No.10) was filed. Respondent No.1 (original petitioner) has filed the rejoinder to the appellants affidavit in objection.
(c) The Company Law Board passed the impugned order dated 23/11/2010 in favour of original petitioner and directed original Respondents i.e. the appellant and respondent nos.2 and 3 herein to issue notices to respondent nos.5 and 6 and take appropriate decision in the matter and inform the petitioner.
6. Appellant is a Public Limited Company incorporated under the Companies Act, 1956. The Depository Act, 1996 provides basic principles for setting up and working of depository claim in India. The facility of Appellant i.e. NSDA who is holding and transfer of shares in dematerialized form, which can be availed through a network of Depository Participants (DIP).
7. The basic procedure, as relevant for adjudicating the present issue, is as under. The procedure for opening an account by an investor is that the prospective account holder will have to open an account in the depository system with a DP by furnishing an application (account opening form). As per Section 5 of the Depositories Act, 1996, the investor is required to enter into an agreement with the DP in the specified format under the Bye-Laws of the depository. Once the DP has accepted the application, the applicant investor will be issued a Client account (Client Identity for short “Client Id”) number. The Client Id is a unique number with respect to the DP with which the investor is holding a Beneficial Owner account. The DP’s are also identified in the depository system by a unique DP identity (DP Id) number. The combination of Client Id and DP Id forms the unique identification number for any person who desires to hold his securities in the depository system and the same is required to be referenced by the investor for dealings in the depository system. Dematerialization is a process by which an investor can get his physical security/(ies) certificate/(s) converted into electronic balances, and hold the same in its/his account with a DP in the depository system. Dematerialization does not result in change in Ownership but results only in change in the method of holding shares. Any share holder who wants to dematerialize his shares in the depository system, can only do so if the Company of which he is the share holder has made arrangements for joining the depository system by setting up/installing the necessary infrastructure i.e. establishing electronic connectivity with the depository as per the procedure specified by depository. If the Company is not able to set up the required infrastructure or establish electronic connectivity with the depository on its own, it may enter into an arrangement with an Share Registrar/Registrar and Transfer Agent that has already established such a connectivity with depository and thereafter, it may inform its share holders that it has made arrangements with the depository to enable them to dematerialize their securities and hold them with the depository in electronic form. Before making this facility available to its shareholders, a Company is required to enter into an agreement as specified in the Bye Laws of the depository. In the event the Company prefers to establish the electronic connectivity through a Share Registrar/Registrar and Transfer Agent which has already established electronic connectivity with the depository, then in such a case it is required to enter into a Tripartite Agreement with the depository along with the Share Registrar/Registrar and Transfer Agent through whom it desires to establish connectivity with the depository. The procedure for dematerialization of securities is that the holder who intends to dematerialize his securities has to deface and surrender the physical security certificates registered in its/his name to the DP along with Dematerialization Request Form (DRF). The DP then sends the said certificates along with the DRF to the concerned Company/ Registrar and Transfer Agent. If the Company /Registrar and Transfer Agent after scrutiny of the security certificates and signature(s) finds the same in order, it cancels the physical security certificate and confirms the dematerialization in favour of the holder by authorizing the depository electronically, to credit the account of the holder, who had lodged them for dematerialization, for that many quantity of securities. On receiving such information from the Company/Registrar and Transfer Agent, depository authorizes credit to the relevant Beneficial Owner account of the security holder which is held with the DP. No credit of any shares to the account of any client shall be made by depository unless depository has received an authorization from the Company/Registrar and Transfer Agent.
8. As per Section 9 of the Depositories Act, 1996, the securities held in dematerialized form with the depositories are fungible i.e. they become identical and interchangeable and cease to have any unique characteristic such as certificate no., distinctive nos., folio Nos. etc. The holdings of particular shares are identical to each other and thus they are interchangeable. The fungible characters of the shares have also been made permissible by an amendment to Section 83 of the Companies Act, 1956.
9. Under Section 10(3) of the Depositories Act, 1996, the Beneficial Owner (the person who holds securities in the depository system) has also the rights and liabilities, and the depository does not have any voting rights or other rights in respect of the dematerialized shares held in the depository system nor does it suffer any liabilities in respect of such securities. Under Section 41(3) of the Companies Act, 1956, the Beneficial owner of the shares that are held with a depository is treated as a member of the company and is entitled to all benefits that are declared and issued by the Company.
10. As per Section 7(1) of the Depositories Act, 1996, and Regulation 42(2) of the SEBI (Depositories and Participants) Regulations, 1996, a DP shall debit the Beneficial Owner account of the share holder on receipt of a transfer instruction from the Beneficial Owner.
11. In view of the above, it is clear that the role and power of the Respondent No.10 is quite restricted and limited. They are not empowered to decide and/or adjudicate the claim of title in respect of demated shares. Any dispute with regard to the ownership and/or title of any share including demated, the proper forum is somewhere else. Unless the title and/or any objection regarding transfer of shares is decided finally in case of dispute and in case there is no dispute, it cannot be forwarded by the Company for further transfer.
12. It is also clear that the parties concerned i.e. seller, purchaser, shareholder and/or the Company, unless clears the position about the ownership and/or title of the shares, the Petitioner is no way in a position to accept and/or permit the transfer of demated shares. Their role, in view of the above position, just cannot be enlarged in such a fashion, as done by the impugned order.
13. The Act and provisions referred above and, even otherwise, considering the role and scope, if Appellants are not in a position to adjudicate and/or decide the title of any shares, there is no question of issuing notice to the concerned and hear them for deciding the title/ownership. Therefore, there is also no question of taking any decision with regard to the same. Everything will be, in my view, without jurisdiction and authority. The direction, therefore, so issued, as recorded above, is, therefore, unenforceable in law as it is also contrary to the provisions. The poser is answered accordingly.
14. It is made clear that the present Company Appeal is preferred only by the Respondent No.10/Appellant and not by other Respondents and/or Original Respondents and not deciding any issue with regard to other part of the order passed against the Company and/or in favour of the original Petitioner.
15. Resultantly, the following order is being passed :-
(i) The part order dated 23rd November, 2010 passed by the Board against the Appellant/Respondent No.10 is quashed and set aside.
(ii) However, liberty is granted to the concerned Respondents/Original Petitioners to take out appropriate proceedings to get their dispute settled with regard to the title of the demated shares and/or such other shares.
(iii) The Company Appeal is partly allowed and disposed of accordingly.
(iv) There shall be no order as to costs.