The Take Over Code distinguishes between Chapter II and Chapter III, with Chapter II providing for penalty for non-compliance and Chapter III prohibiting acquisition beyond 15% and making such acquisition illegal. Section 111A(3) of the Companies Act, 1956 empowers the company to apply for rectification in case of any violation, but the Company Law Board cannot direct forfeiture of the entire shareholding.

( 1 ) THE moot question involved in this appeal is whether the Take Over Code contemplates identical consequences in case of breach of Chapter II or Chapter III under Regulation 97.

( 2 ) APPELLANTS held 14. 12% shares in the company. The company in its meeting of the shareholders wanted to bring in an unaccounted sum as liability towards the company. Being aggrieved by that the present proceeding under sections 397 and 398 was filed by the appellants. The said sums surfaced when there was raid by the Income-tax Authorities on 6th August, 1998. The Income-tax authorities found hidden income of Rs. 1 crore and directed payment of tax of rs. 66. 28 lac. The company had to pay the said sum. The management attempted to bring that liability in the accounts of the company to the detriment of the company and its shareholders. During the pendency of the section 397 proceeding the respondents made an application under section 111a (3) of the companies ACT, 1956, 1956 for rectification of its Shareholder Register by deleting the names of the appellants as according to them such transfer was in violation of the Take Over Code. In section 397 proceeding the management contended that since the very acquisition of shares was unlawful the proceeding under sections 397 and 398 was not maintainable. Company Law Board heard both the proceedings and by a common order allowed rectification and dismissed section 397 proceeding. Hence this appeal.

( 3 ) THE Company Law Board while allowing rectification relied on their own judgment in the case of Bombay Dyeing, reported in 2002, Vol-I, Company Law journal at page 347. According to the Board under Regulation 7 shares acquired beyond 5% would be invalid without compliance of the provision of the said regulation and Shareholder Register required rectification under section 111a (3 ).

( 4 ) THE Company Law Board also considered two Single Bench decisions, one unreported decision of this Court in the case of Bombay Dyeing Ltd. and other of the Hon'ble Andhra Pradesh High Court in the matter of Nile Limited, reported in 108, Company Cases, Page 58. The Company Law Board also considered the judgment of Security Appellate Tribunal in the case of Bombay dyeing, reported in 2002, Vol-III, Company Law Journal page 179. The Company law Board while rectifying the Shareholder Register observed that the subject shares stood forfeited as the acquisition was illegal.

( 5 ) MR. P. C. Sen, learned Counsel appearing for the appellants contended that Chapter II of the Take Over Code puts a mandate on the acquirer to inform the appropriate authority, for non-compliance the penalty was provided for whereas Chapter III restrains acquisition of more 15% of shares. According to mr. Sen Chapter II provides for certain obligation, non-compliance cannot attract forfeiture of the shares whereas under Chapter III acquisition of more than 15% was prohibited and thus illegal. The Company Law Board according to mr. P. C. Sen misconstrued these two chapters by holding that the Chapter II also contemplates forfeiture of shares. Mr. Sen heavily relied upon the judgment in the case of Nile Limited with regard to the construction of the relevant regulations. According to him that was the correct law that should govern the instant issue. Commenting on the unreported decision of this Court Mr. Sen contended that the unreported decision relied upon, was pronounced by the learned Single Judge of this Court in a writ proceeding where a show cause notice was challenged. According to him the writ petitioner in the said case also challenged the validity of Regulation 7 which the learned Single Judge declined.

( 6 ) MR. Sen also assisted me in having his version on the interpretation of the relevant regulations which I would discuss hereinafter.

( 7 ) MR. Sudipta Sarkar, learned Counsel appearing for the respondents contended that section 111 A (3) empowers the company to apply for rectification in case of any vio