DIRECT TAXES - SEBI & Corporate Law

Sujeeth S. Karkala

1. Inspection of books of accounts & Oppression and Mismanagement – Companies Act, 1956. – s 209A, 397  & 398.

Respondent no. 2 and 3 were the promoters of the respondent-company, they entered into a sponsorship agreement with the petitioners in terms of which the petitioners, acting as sponsors, were to purchase certain per cent of the equity shares of the company. The petitioners filed instant petition under s.397/398 alleged various act of oppression and mismanagement committed by the respondent no.2 and 3 in managing the affairs of the company. The petitioner sought the investigation into the affairs of the company in terms of s. 237 (b) on the ground that the respondent no.2 and 3 and the respondent company have mobilized the fund by way of issue of shares for the purpose of expanding the business and had diverted the same into their sister concern, thus had defrauded the shareholders.

The company should be given full opportunity to present its case in case a prime facie case has been made out by the petitioner. In the instant case the petitioner had made out a prime facie case and the company has also admitted of having made the investments and loans but according to the respondent there has been no violation of the provisions of the Act. The Respondent has failed to furnish in spite of repeated opportunities being given which would have helped the bench to form an firm opinion. Even though petitioner has sought inquiry into the affairs of the company yet an inspection would suffice. Accordingly, the Central Government was to be directed to conduct an inspection of books of accounts of the company and take further action on the basis of the inspection report and so the petition was disposed.

Khandwala Securities Ltd vs. Kowa Spinning Ltd. {[2009] 89 SCL 80 (CLB – New Delhi)}

2. Penalty – Merchant Banker to ensure and discharge by exercising due diligence – SEBI (substantial acquisition of shares and takeovers) Regulations, 1997– Regulation 24 (2).

The present appeal challenged the order passed by the SEBI holding that the appellant had violated various codes of conduct prescribed in the Schedule III to the Securities and Exchange Board of India (Merchant Bankers) Regulation and Regulation 24 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation,1997. The member of the board imposed the minor penalty of censure on the appellant under the SEBI (Procedure for holding enquiry by enquiry officer and imposing penalty ) Regulation, 2002. A share purchase agreement was executed between the acquirer and the seller companies for acquisition of share of the target company. The acquirer made a public offer to the shareholder of the target company to acquire certain per cent of its voting capital following the share purchase agreement. The appellant was appointed as the merchant banker for the open offer. The charge in the enquiry proceeding was that the appellant as a merchant banker failed to comply with the regulation and code of conduct and there was wrong disclosure that the list of equity shares of the target company were listed in various stock exchanges which was actually not listed in any of the stock exchanges in the country. This inaccuracy came to the notice of the Board from the letter of offer issued in connection with the take over of the same target company by another acquirer. The appellant did not deny that the disclosure regarding the listing of shares was incorrect and that it had exercised due diligence in obtaining adequate information from reliable sources based upon which disclosures were made. there was no statutory requirement of disclosure of the listing the status of the target company shares in the documents and did not contain any misleading statement to the effect that the target company shares. The information was reflected in the audited annual accounts of the seller. It can be inferred that in the absence of the contrary information, the seller believed the information to be true. Since the information was clearly not correct, the appellant’s reliance on the sellers ‘ balance sheet became a case of one blind man being led by another.

The court held that regarding the penalty imposed, the appellant submitted that there was no wilful default in this case nor did it gain anything from the wrong disclosure. The reliance was place on the case of Chairman SEBI v, Shriram Mutual Fund [2006] 72 CLA279/ [2006] 5 SCC 361 where Supreme Court considered that in case of default or failure of statutory civil obligation there is no question of proof of intention or any requirement for mens rea and the same is not an essential element for imposing penalty. Once the default is established penalty must be followed. In present case the penalty awarded is the minimum prescribed and there is no occasion for the court to interfere and so the appeal is accordingly dismissed.

HSBC Securities & Capital Markets (India) (P.) Ltd vs. Whole – Time Member , SEBI [2009] 88 CLA 236 (Sat-Mum) ]

3. Share capital – Reduction – Companies Act, 1956 – s 100.

The petitioner company sought reduction of its share capital on the basis that under the proposed scheme of amalgamation between it and the transferor-company, the share held by the petitioner/ transferee-company in the transferor company and vice-versa would be delivered up and cancelled. The authorized share capital of the transferor company would stand added to and consolidated with the authorized share capital of the transferee – company as an integral part of the scheme without any further act. The Board of directors, shareholders and creditors of the petitioner company approved the scheme of amalgamation and reduction of share capital in an extra-ordinary general meeting of the shareholders of the petitioners–company, where special the resolution for reduction of share capital was passed to which the Central Government had no objection. Hence in view of the approval of the equity shareholders and the fact that the proposed scheme did not effect the creditors, the petitioner-company filed instant petition seeking the confirmation of proposed reduction of share capital and to get the minutes registered under section 103 (1) (b).

In the instant case the court held that the shareholder and the creditors of the petitioner company had unanimously approved the scheme including the reduction of the share capital so it could not have been said that there had been any unfair or inequitable transaction so as not to permit the petitioner to reduce its share capital. Consequently there was no legal impediments or any valid reason for not accepting the proposed scheme of cancellation and reduction of share capital. The petition was allowed and the form of minutes proposed to be registered under section 103 (1) (b) for reduction of share capital of the petitioner company were to be approved .

Siel Ltd. In re. [2009 (89) SCL (434 ) Del]

4. Substantial acquisition of shares or voting rights – Interest of small share holders – SEBI (Substantial Acquisition of shares and Takeovers) Regulation, 1997 – Regulation 21.

The Respondent was substantial acquirer of the shares of the target company. After having acquired along with a person acting in concert (PAC), certain percent of the paid-up equity share capital, it issued a public announcement for the acquisition of further certain per cent of the paid –up equity share capital. The Board permitted the acquirer to proceed with the public offer subject to certain changes being made in the public announcement and the offer letter. The appellants who were public shareholder of the target company filed an appeal against the permission granted by the Board contending that if, under the circumstance, the acquirer purchased certain per cent more through the public offer, the public shareholding in the target company would fall below 25 per cent and the SEBI (Delisting of Securities) Guidelines,2003 would be triggered leading to the delisting of the targeted company which would hurt the interest of the small shareholders like the appellants ; and that the Board had failed in its duty to protect small investors by allowing the public offer to go ahead and should be directed to restrain the acquirer from proceeding further with the offer.

The court held that since in the fact and the circumstances of the instant case, delisting was a contingency that might or might not arise in the future, the apprehensions voiced by the appellants were premature and would be examined if and when the occasion arise. The appeal was, accordingly, to be dismissed as premature.

Roshan Anand Sujan vs. Securities and Exchange Board of India. [2009] 89 SCL 368 (SAT-Mum)].

5. Winding up – only creditors – locus standi – Companies Act, 1956. S 433.

The partnership firm of which the petitioning creditor was a partner, along with his father (since deceased) was appointed as marketing and publicity agent of the respondent-company. The services rendered by the firm to the company included booking of the slots in various television channels for telecasting advertisement of various products manufactured and/ or marketed by the company. After the death of the petitioning creditor as the sole proprietor, the firm from time-to-time raised bills on the company for the expenses incurred by it for booking slots on behalf of the company for telecasting advertisements along with its services charges. According to the petitioning creditors, the company had duly accepted the bills raised by the firm on the company without objection and after giving credit for all the payments made by the company to the firm, there remained certain sum outstanding from the company to the firm. A statutory notice of winding up of the company was served on behalf of the firm u/s. 434. The company neither replied to the notice nor paid the outstanding dues of the firm. The petition filed a petition for winding up of the respondent, the respondent questioned the locus standi of the petitioning creditors to file the winding up application on the ground that the transaction were with the partnership firm and not with the proprietary concern of the petitioning creditor. The company also submitted that many of the bills referred to in statement of accounts appended with the winding up petition, had not at all been received; that the amounts claimed in some of the bills which had been received were disputed; and the slot were obtained and advertisement were telecasted without the approval of the company.

The court held that the partnership firm was dissolved on the death of the father (deceased). The petitioning creditor himself was the partner and was also legal heir of the deceased partner who lacked locus standi to pursue a debt due to the firm. the condition precedent for admitting an application for the winding up of a company is a finding of indebtedness of the company to the petitioning creditor. A winding up application therefore cannot be entertained. The court further held that the company court is not a debt collecting court. In view of the defence raised by the petitioning creditor was to be relegated to a suit and the winding up application was to be dismissed.

Binayak Sarkar vs. Shuvam Watch Straps (P) Ltd. [2009 (90) SCL 178 (CAL)]