Case Law Details
HIGH COURT OF KERALA
Kunnamkulam Paper Mills Ltd.
versus
Securities and Exchange Board of India
W.P. (C) NO. 19192 OF 2003 (I)
Date of Pronouncement – 30.07.2009
JUDGMENT
1. The first petitioner is a public limited company. Petitioners Nos. 2 to 13 are its directors. Challenge in this writ petition is against exhibit P8 order issued by the first respondent, the Securities and Exchange Board of India (SEBI) under section 3(4) read with sections 11 and 11B of the SEBI Act, 1992 and under the provisions of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (hereinafter called “the Guidelines”). By the order impugned, the petitioners were directed to refund the money collected under the issue made by offer document dated February 15, 2001, to the investors, with interest not below the rate charged by commercial banks for long-term fixed deposits. The brief facts of the case is as follows : By exhibit P2 notice the first petitioner declared an offer for a right issue of its shares to the present shareholders on 1:4 basis. In the said offer the company declared that the person who receives that offer has got a right to renounce the shares offered to him or any of them, in favour of any other person. According to the petitioners such a notice was specifically issued declaring the right of renunciation in compliance with the mandate of section81(1)(c) of the Companies Act, 1956. Section 81 deals with, further issue of capital of newly formed companies. It provides that at any time after the expiry of 2 years from the formation of a company or at any time after the expiry of one year from the allotment of shares made for first time after its formation, whichever is earlier, if the company proposes to increase the subscribed capital, such further shares shall be offered to the existing shareholders in the proportion as nearly as circumstances admit, to the capital paid-up on those shares at that date. Section 81(1)(c) stipulates that the offer as aforesaid shall be deemed to include a right exercisable by the existing shareholders to renounce the shares offered to them or any of them in favour of any other person. The said provision further mandates that the notice offering such right shares should contain a statement mentioning about the right of renunciation as above.
2. The dispute arose when the second respondent issued exhibit P3 notice to the first petitioner-company calling upon them to show cause as to why no penal action under section 629A of the Companies Act should not be initiated for violation of section 67 of the Act, because as per section 67 shares cannot be privately placed to more than 50 persons, but the company had issued equity shares to 163 persons without issuing any prospectus for such issue or without complying with the guidelines issued in that respect. On receipt of exhibit P3 notice the first petitioner-company filed an application compounding of the offence before the Company Law Board, under section 621A of the Companies Act. The Company Law Board sought comments of the first respondent on that petition. The first respondent submitted exhibit P4 reply before the Company Law Board. Relying on a decision of the hon’ble Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743; it is observed that a private company or a section 43A company cannot make an offer of right shares with the right of renunciation in favour of any person, in view of section 3(1)(iii)(c) of the Companies Act which prohibits such companies from making invitation to the public to subscribe for shares of the company. It is contended that the offer of right shares with a right of renunciation will be considered as an offer to the public, and since the first petitioner-company has offered the right shares with a right of renunciation can be treated as an offer made to the public. The first petitioner-company thereupon filed exhibit P5 reply statement to the opinion of the first respondent, before the Company Law Board producing all relevant documents like the board’s resolution, copy of the list of members with their shareholdings, etc. But subsequently the petitioner sought permission of the Company Law Board for withdrawing the application for compounding, which was permitted by the Company Law Board.
3. Thereafter the first respondent issued exhibit P6 notice calling upon the first petitioner-company to show cause as to why actions should not be initiated for issuing direction under sections 11 and 11B of the SEBI Act read with the provisions of the guidelines for ordering refund of the money collected and such other actions including prosecution under section 621 of the Companies Act. The allegation in that notice was that the offer made by the company is a deemed public issue under the first proviso to section 67(3) of the Companies Act and since the issue was not made in accordance with sections 56, 60, 69, 72 and 73 of the Companies Act and the guidelines, and therefore the company is liable to be proceeded with. The petitioner-company submitted exhibit P7 reply to the show-cause notice mainly contending that they have not made any public issue of shares and the offer is only for right issue to the existing shareholders. After considering exhibit P7 reply the first respondent issued exhibit P8 order. In exhibit P8 the first respondent found that the offer made by the company for right issue is an offer made by the company to 50 or more persons and therefore the same shall tantamount to a public offer and it is to be regarded as a public issue made by the company in violation of the guidelines. It is further observed that the offer made for right issue of shares need be construed as an offer to the public under section 67(1) and (2) of the Companies Act, because the action of the company will not fall within the exempted categories of offers specified under section 67(3) of the Companies Act. It is further stated that by virtue of proviso to section 67(3) the exemption provisions contained therein will not apply since the offer is made to more than 50 persons. Exhibit P8 is under challenge in this writ petition.
4. The main challenge against exhibit P8 order is on the ground of lack of jurisdiction. According to the petitioners, the first respondent gets power with respect to matters related to issue and transfer of shares of a company, only by virtue of section 55A of the Companies Act. Section 55A is extracted below for an easy appreciation of the issue :
55A. Powers of Securities and Exchange Board of India.–The provisions contained in sections 55 to 58, 59 to 84, 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 recognised 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.
Explanation.–For removal of doubts, it is hereby declared that all powers relating to all other matters including the matters relating to prospectus, statement in lieu of prospectus, return of allotment, issue of shares and redemption of irredeemable preference shares shall be exercised by the Central Government Tribunal or the Registrar of Companies, as the case may be.
5. The first respondent had initiated the proceedings on the premise that the allotment of rights issue made by the first petitioner-company will amount to a public issue and in such case it had violated the provisions of the Companies Act especially sections 56, 60, 69, 72 and 73 read with section 67(3)of the Companies Act and the provisions of the SEBI Guidelines.
6. But before resolving the disputed questions as to whether the offer can be treated as public issue or not, and as to whether the right of renunciation was offered only under the mandate of section 81(3), etc.; the question regarding jurisdiction of the first respondent need be looked into. It is evident that the second respondent had once initiated action under exhibit P3 and such action was subsequently dropped. Relying on the provisions of section55A of the Companies Act, the contention of the petitioners is that, since the first petitioner-company is not a listed public limited company nor it is a public company which is intending to get its shares listed on any recognised stock exchange, the first respondent gets no jurisdiction with respect to any matters relating to issue of shares of the first petitioner-company. On the other hand the competent authority is the Central Government to deal with such matters by virtue of section 55A(c) of the Companies Act, is the contention. The above argument is met out by counsel appearing for the first respondent on the ground that by virtue of the construction adopted as provided under section 67(1) and (2) the offer of shares made by the company is to be treated as a public issue and if it is treated as public issue the company will fall within the description of companies mentioned in section 55A(a) and (b) of the Act, and hence the first respondent has got jurisdiction to initiate proceedings as contemplated in exhibit P8.
7. On an anxious consideration of the rival contentions, I am of the opinion that section 55A is the substantial provision conferring jurisdiction on the first respondent. Since section 55A confers jurisdiction on the Central Government in respect of matters relating to companies which are not coming within the description of section 55A(a) and (b), the first respondent cannot usurp the jurisdiction vested on the Central Government, on the basis of a contention that the offer for right issue of shares made by the first petitioner-company can be deemed as a public issue. Since the jurisdiction derived by virtue of the substantial provision in the Companies Act does not permit the first respondent for such an action, I do not think that such jurisdiction can be presumed by depending on any constructive provisions. This is especially because the Central Government, rather the second respondent as a delegate of the Central Government had already seized of the matter and evidently dropped the proceedings after its consideration on merits.
8. Learned counsel appearing for the first respondent has pointed out that the petitioners have got an effective alternate remedy available under section 15D of the SEBI Act to approach the appellate authority, the Securities Appellate Tribunal against exhibit P8 and hence this writ petition is not maintainable. But since the jurisdiction vested on the first respondent itself is under challenge, I am not persuaded to relegate the petitioners to resort to statutory remedy, because I find total lack of jurisdiction in issuing the impugned order. On the basis of the conclusions as aforementioned I am inclined to hold that exhibit P8 is an order issued by the first respondent without jurisdiction. Consequently exhibit P8 is hereby quashed and the writ petition is allowed to that extent.
This 2009 judgement of single bench of Kerala High Court was over turned by its Division bench in December 2012 in favour of SEBI. Division Bench judgement was also upheld by Supreme Court in Feb 2016.