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High Court Of Calcutta
S. B. SINHA
JENSON AND NECHOLSON (INDIA) LTD - Appellant
Versus
UNION OF INDIA - Respondent
W. P. 278 (W) Of 1997
Decided On : 05/09/1997
SECURITIES EXCHANGE BOARD OF INDIA ACT, 1992 - SECTION 11B - COMPANIES ACT, 1956 - SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1994 - A company offering right issue to public cannot be brought within the purview of 'other persons' interested under Section 12 of SEBI Act. Hence, in absence of any regulations, the question of any action being taken as against the company by directing the company in respect of matters specified in Section 11a of the Act does not arise.
Fact of the Case:
Petitioner, a company, made a right issue of fully convertible debenture, the underwriter whereof was one Smifs. The said issue did not reach the minimum 90% subscription to make the same valid. Allegedly underwriting agreement by and between the petitioner and the aforementioned underwriter provided that the underwriter itself would take up debenture or would procure outsider for the said purpose. One Vasundhara Holdings Ltd. (VHL) applied for 7 lacs debentures as renouncee from underwriter on or about 11th October, 1996. It is alleged that along with the application no Memorandum or Articles of Association was deposited by VHL and thus, the petitioner had no knowledge as to who is the person in control or charge thereof. SEBI issued a show-cause notice to the petitioner stating that unilateral action on the part of the petitioners is in contravention of the Regulations, and, thus, it was entitled to issue the directions in terms of the impugned order in exercise of its power under Section 11b of the Securities and Exchange Board of India Act.
Finding of the Court:
The show-cause notice is illegal and void as no formal procedure is prescribed in terms of Section 11a of the Act. The proposed action due does not come within the purview of Section 11b of the Act in the case of a company as in respect of matters specified in Clause 11a refers only to disclosure of matters by companies. Assuming that the proposed action is covered by Section 11b the show-cause notice does not state facts which are germane therefor. The impugned order has been made in violation of principles of natural justice inasmuch as the petitioners were not given an opportunity of further hearing and placing further documents despite the fact that during course of the meeting several new points have cropped up to which the petitioners were entitled to make further submissions. The impugned order is perverse since the findings arrived at therein have no nexus with the purported ground of show-cause i. e. cancellation without following the formal procedure prescribed.
Issues: 1. Whether a company offering right issue to public can be brought within the purview of 'other persons' interested under Section 12 of SEBI Act? 2. Whether in absence of any regulations, the question of any action being taken as against the company by directing the company in respect of matters specified in Section 11a of the Act arises?
Ratio Decidendi: 1. A company offering right issue to public cannot be brought within the purview of 'other persons' interested under Section 12 of SEBI Act. 2. In absence of any regulations, the question of any action being taken as against the company by directing the company in respect of matters specified in Section 11a of the Act does not arise.
Final Decision: Application allowed.
( 1 ) THE petitioner in this application has prayed for the following relief:-"a) Declaration that Section 11b of the Securities Exchange Board of India. Act, 1992 introduced by the Securities Laws Amendment Act, 1995 is ultra vires the Constitution of India and the Companies Act, 1956 and is void in so far as it seeks to empower the Securities and Exchange Board of India to impose penalties on companies and bodies corporate to increase their capital by further issue of shares; b) A writ of and/or order and/or direction in the nature of Mandamus commanding and directing the respondents to withdraw, recall, rescind and cancel the said order dated February 11, 1997 and to forbear and refrain from giving any effect or further effect thereto in any manner whatsoever;c) A writ of and/or order and/or direction in the nature of Certiorari calling upon the respondents to certify and forthwith send to this Hon'ble Court its entire records culminating in the order dated February 11, 1997 so that the same be quashed and conscionable justice done;d) A writ of and/or order and/or direction in the nature of Prohibition prohibiting and restraining the respondents from giving any effect or further effect to the said order dated February 11, 1997 in any manner whatsoever. "
( 2 ) IT tray be stated that prayer (a) of the writ petition has not been pressed.
( 3 ) THE petitioner No. 1 which is an existing company made a right issue of fully convertible debenture, the underwriter whereof was one Smifs Capital (hereinafter referred to as "smifs") Hong Kong and Shanghai Banking Corporation Limited was the lead manager therefor. The said issue was opened on 11th September, 1996 and closed on 11th October, 1996.
( 4 ) ACCORDING to the petitioner the said issue did not reach the minimum 90% subscription to make the same valid which was intimated to the under-writer. Allegedly underwriting agreement by and between the petitioner and the aforementioned under-writer provided that the under-writer itself would take up debenture or would procure outsider for the said purpose. One Vasundhara Holdings Ltd. (hereinafter referred to as 'vasundhara' ) applied for 7 lacs debentures as renouncee from under-writer on or about 11th October, 1996. It is alleged that along with the application no Memorandum or Articles of Association was deposited by Vasundhara and thus, the petitioner had no knowledge as to who is the person in control or charge thereof.
( 5 ) THE matter of allotment had already been delegated to a Committee by the Board of Director of the petitioner and the said Committee allotted 566647 debentures to Vasundhara which never indicated that it had any connection with any of the existing shareholders of the petitioner Company.
( 6 ) ON 12th November, 1996 Vasundhara wrote a letter to the petitioners wherefrom it transpired that it had applied for the debenture in clear contravention of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 1994 (hereinafter referred to as 1994 Regulations') and the said facts were suppressed by Vasundhara and Smifs. A legal advice was obtained by the petitioners to the effect that the said application was illegal and void being in contravention of the 1994 regulations. Owing to failure of 90% subscription the petitioners refunded the subscription money to the applicants on 22nd November, 1996. The said action on the part of the petitioners was questioned by Vasundhara by filing a suit in this Court but units failure to obtain an interim order it withdrew the application money deposited by it with the petitioners.
( 7 ) SMIFS had also written on behalf of Vashundhara for refund of the application money 1 and even lodged a claim of interest at the rate of 36% per annum. On or about. 13th December, 1996 the petitioners received a Show-cause Notice from the Securities and Exchange Board of India (hereinafter referred to SEBI) wherein an action was propo
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