TMI Blog1998 (3) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 1 lakh each to the promoters of the company on a preferential basis with the right to convert the same into 10,000 equity shares of ₹ 10 each at par. The grievance of the petitioners is that when the ruling market price was about ₹ 400 per share, the directors of the company had, to the exclusion of the other shareholders, bestowed upon themselves, undue benefits to the tune of nearly ₹ 40 crores, which, according to the petitioners, is a grave act of oppression, meriting appropriate relief. 5. The respondents have raised a preliminary issue regarding the maintainability of the petition on the ground that the requirements of Section 399 of the Act have not been fulfilled in both the petitions. Shri Padmana-bhan, advocate for the petitioners, dealing with the preliminary objection, stated that, the petitioners in C. P. No. 8 of 1995 held more than 10 per cent. shares in the company, and as a matter of fact, were not aware of any allotment of additional shares in the company till filing of the petition. That is why in the said petition, there is no prayer for setting aside any allotment. Even otherwise, he contended that the purported allotment of further shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there were 568 shareholders in the company and as such 10 per cent. of the same would be 57. Even though the petition has been made on behalf of 12 petitioners with 53 consentors, totalling 65, yet 21 consent letters are not valid for various reasons. Thus, according to him, both the petitions have to be dismissed as not maintainable in terms of Section 399, the satisfaction of which is a pre-requisite to maintain a petition under Section 397/398. 7. To the proposition that satisfaction of the provisions of Section 399 is a pre-condition to proceed with a petition under Section 397/398, he relied on the following case law : (a) Ved Prakash v. Iron Traders Pvt. Ltd. [1961] 31 Comp Cas 122 (Punj) in which it was held that if persons who wish to file a petition under Section 397/398, are not shown as members rightly or wrongly, they must have the register rectified before they can bring a petition. (b) Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1977] 47 Comp Cas 151, 159 (Guj), wherein the court observed that the prerequisite for invoking jurisdiction under Section 397/398, which has been statutorily provided for in Section 399(1), is that the complaint must come f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he further issue and, according to counsel for the respondents, it should be the dates of filing of the petitions which occurred after further issue of shares. Both cited certain cases in furtherance of their arguments. We are inclined to agree with the submissions of counsel for the petitioners for the reasons elaborated below. 11. As per Section 399 of the Act, members holding not less than one tenth of the issued capital of the company or members constituting not less than one tenth of the total number of members or 100 members, have a right to apply under Section 397/398. The primary condition is that they should be members. In addition, they should also satisfy the condition relating to the numerical requirement. Both are prerequisites for filing a petition under Section 397/398 and these requirements are not procedural requirements. In the present case, the petitioners in both the petitions are members of the company. They had held the required percentage of shares as required under Section 399, but the same got reduced due to further allotment of shares when they presented these petitions. The allotment of further shares is impugned in this petition. Now, the question tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen they presented the petition. However, the petition was a composite petition. The court observed (page 159) : One has to be a member before he can complain of oppression as member of the company. 13. Now, if the petitioner's title to the membership is in dispute, and he has to seek relief under Section 155 for getting his name placed on the register of members to clothe himself with the rights of a member, it would be improper, till that dispute is decided, to permit such a person to maintain a petition under Section 397/398 . 14. A perusal of the facts of these cases would show that they are not similar to the facts in the petitions before us. In the petitions before us, the petitioners are admittedly shown as members and no transfer of shares has been impugned. What they question is further allotment of shares by which their percentage holding has come down. There was a suggestion that the petitioners should first institute some other proceedings to get their percentage holding firmed up before they could apply under Section 597/398 or they should have filed a composite petition invoking the provisions of Section 111 also. We had taken a view in Kannappa Automobiles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company and also safeguarding the interest of the controlling group of the company, it was proposed to issue convertible warrants to the present promoters group and their friends, associates and relatives. And after some discussions the board resolved as follows : Resolved that the proposal for the issue of convertible warrants to the present promoters/controlling group of the company and their friends, relatives, and associates be and is hereby approved and the said proposal be recommended as a special business in the agenda for the forthcoming annual general meeting. Resolved further that the articles of association of the company be altered for enabling the company to issue the said convertible warrants. 16. In the same meeting, vide item 30, the board also constituted a committee of the board styled as convertible warrant allotment committee constituting Shri Lakshminarayanan and Shri K. Arumugam, both directors of the company, specifying that the quorum for the committee meeting would be two. This committee was authorised to allot 110 convertible warrants of ₹ 1 lakh each to the promoters group, entitling the holders to 10,000 fully paid shares of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity shares against the warrants as all the warrant holders sought for immediate conversion on payment of the full value of the shares. On October 14, 1994, Form No. 2--return of allotment was filed with the Registrar of Companies. 20. Shri Padmanabhan, advocate for the petitioners, narrating the sequence of the events as indicated above, submitted that the preferential allotment suffers from various infirmities as indicated below and as such deserves to be cancelled. (i) The board consists of twelve directors of which there is only one independent director (IDBI nominee), seven are family members and four are their friends. On June 27, 1994, when the decision was taken on preferential allotment, the IDBI nominee was not present and of the nine directors who attended the meeting, seven were interested directors and as such there was no quorum of four disinterested directors. The resolution also does not indicate that the interested directors had disclosed their interest. Therefore, this resolution itself is invalid as per relevant provisions of the Companies Act. (ii) The explanatory statement did not disclose material particulars, more particularly relating to the constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging any premium the directors have acted against the interest of the company and have reaped undue benefits at the cost of the company. By appropriating such benefits to the exclusion of other shareholders, the respondents have committed a grave act of oppression on the minority. 22. He pointed out, referring to the resolution of the annual general meeting, that the warrants were to be converted within 60 months, which the allotment committee changed to 18 months. But the board allowed conversion of the same within two hours of, allotment. Therefore he contended, that, the general body had been misled to believe that the warrants would be converted at a later date, while the respondents should have already decided to convert the warrants immediately after allotment. His further allegation was that, the respondents, apprehensive of the detection of the immediate conversion of the warrants, intentionally concealed the information from the shareholders and the Central Government. Referring to the letter written by the company to the Department of Company Affairs on October 14, 1994, he pointed out that this letter, even though mentions about allotment of convertible debentures, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act of oppression had been committed by the respondents by making preferential allotments to the promoters group since the company was proposing private placement of 4 lakhs shares of foreign institutional investors and others which had also been approved by the general body in the meeting held on August 2, 1994. In order to maintain the promoters' stake in the company at the same level after issue of shares to the FIIs, the general body's approval was sought for making preferential allotment of convertible warrants to the promoters' group. If the private placement as above had materialised, then, with the preferential allotment to the promoters' group, their shareholding would have come to 72.10 per cent. as against 70.65 per cent. shares held by the promoters before such allotment. The proposal for private placement could not be implemented in view of the restraint order passed by the Company Law Board. In other words, what was contemplated by the management was to maintain their shareholding intact and it was not with a view to gaining any undue advantage over the minority shareholders. He further submitted that the practice of preferential allotment to promoters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrants were converted into shares at par, he submitted that the allegation of undue advantage gained by the respondents by this allotment does not merit any consideration inasmuch as the agreement with the financial institutions stipulates that the promoters cannot part with their shares and that even the allotment was subject to a lock-in-period of three years. 25. He also contended that preferential allotment to a select group cannot be considered to be an act of oppression as decided by the Madras High Court in Maxwell Dyes and Chemicals Pvt. Ltd. v. Kothari Industrial Corporation Ltd. [1996] 85 Comp Cas 111 ; V. M. Rao v. V. L Dutt [1987] 61 Comp Cas 20 and also the decision of the Court of Appeal in Bamford v. Bamford [1969] 39 Comp Cas 838 (CA), Hindusthan Commercial Bank Ltd. v. Hindusthan General Electrical Corporation [1960] 30 Comp Cas 367 (Cal) and N. Parthasarathy v. Controller of Capital Issues [1991] 70 Comp Cas 651 ; [1991] 2 Comp L] 1 (SC). Summing up the decisions in the above cases, he submitted, that, the increase of share capital on allotment of shares being a matter of internal management, the same cannot be agitated in a 397/398 petition and that, accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to the allegation that the decision regarding preferential allotment to promoters was taken in a board meeting wherein interested directors were present, he pointed out that even though the board approved the issue of convertible warrants on a preferential basis to the directors, the same was subject to the shareholders' approval. Allotment of shares cannot be treated as a contract as contemplated by Section 300(1) of the Companies Act nor as an arrangement in terms of Section 299 of the Act. Drawing an analogy he submitted, that, the decision taken in a board meeting for transfer of shares to certain relations of directors had been held to have not attracted Section 299 or 300 by the Kerala High Court in Mukkattukara Catholic Company Limited v. M. V. Thomas [1995] 4 Comp LJ 311 ; [1999] 96 Comp Cas 864 and appointment of additional director does not amount to a contract as contemplated by Section 300(1) as held in Public Prosecutor v. T. P. Khaitan [1957] 27 Comp Cas 77 ; AIR 1957 Mad 4. He also drew our attention to the clarification issued by Government of India (Letter No. 2/ 32/63/PR, dated September 20, 1963), according to which the resolution in regard to fixation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrants into shares, and what the board did was only with the authority of the general body which was aware of the interest of the directors. Therefore we do not find any infirmity in the interested directors participating in allotting the shares. Therefore, this objection relating to presence of interested directors in the board meeting held on September 14, 1994, where the decision to allot convertible debentures was taken, does not stand. 30. In regard to insufficiency of information in the explanatory statement, we find from the explanatory statement, as rightly pointed out by counsel for the respondents, that full disclosures as to whom the preferential allotment was being made, the terms under which the same is to be made, etc., have been clearly elaborated. The non-mentioning of constitution of a committee for allotment, we do not consider, is material that, it would have, if mentioned, influenced the general body in any manner. In regard to his allegation that the explanatory statement relating to private placement, did not disclose any details other than empowering the board to decide on various issues relating to the same, Shri Ramani has dealt with the same as narrated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 each to FFIs and others. Therefore, the purpose of private placement was to augment the resources of the company at a cheaper cost for modernisation purposes. Once it is done, naturally the promoters holding would come down from 70 per cent. to 53 per cent. Therefore, the proposal of the company to go in for convertible warrants, convertible into shares with a view to maintain the shareholding intact does not appear to be an act of oppression against minority. Whether the board should have at all proposed private placement instead of raising the funds from the existing shareholders either at par or at premium to meet the cost of modernisation is an issue wholly within the realm of the board of directors. As long as the object is not to increase in their shareholding thus reducing the holding of the minority then how the board decides to raise funds is for the board to decide, especially when the same is placed before the general body for its consideration and approval. Therefore, the issue of convertible warrants to the promoters cannot be held to be an act of oppression in the facts of the case. 33. Even assuming that the promoters decided to keep their holdings intact after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only around ₹ 130. Further, there is a lock in period of three years and the promoters, since they desire to keep their holding intact, do not propose to divest their holding. If that is the case, then the question of notional undue advantage of ₹ 40 crores to the promoters does not merit any consideration. We are inclined to agree with the submission of Shri Ramani. Perhaps, the petitioner would have had a very valid claim if the respondents, after getting the allotment, disposed of the shares and thus appropriated the difference between the issue price and the sale price. Even the notional profit attributed by the petitioner at ₹ 40 crores has now, due to fall in the price of the shares, come down substantially low. Considering the fact that there is a lock in period, and the commitment of the promoters to the financial institutions not to part with the shares, we do not consider that the board has allowed the promoters to gain undue advantage at the cost of the company. May be that, the company could have charged a premium as contended by the petitioners, but the fact is, that, at the relevant time, many companies had resorted to such issues, and the provocatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promoters hold about 84 per cent. shares in the company as against their earlier holding of about 70 per cent. This is because, as explained by Shri Ramani due to an order passed by us restraining the company from proceeding with allotment of any further shares. Considering the fact, that, with the present holding by the promoters, the holding by the general public has gone below 20 per cent. and that the object of the issue of convertible warrants was only with a view to maintain the shareholding by the promoters intact, unless the company implements its decision to allot 4 lakhs shares on private placement basis to FFIs and others, the allegations of the petitioners, that the preferential allotment was made with a view to increase the promoters shareholding would become justified. Therefore, it has become necessary for us to issue the following directions : 38. The board of directors shall implement its decision to allot four lakhs shares to financial institutions and others as approved by the general body on August 4, 1994, before December 31, 1998. In case, their proposal does not materialise by then, within a further period of three months, the company shall issue shares a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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