TMI Blog2002 (11) TMI 654X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. V.B. Desai and also on respondent Nos. 3 to 8, 9A, 10 and 11. ABFL has also sought a declaration that their rights as a pledgee in respect of the said shares exhibit X were not affected by notification of respondent Nos. 3 to 8, 10 and 11. (Respondent No. 9 Harshad S. Mehta is since deceased). By this petition ABFL has sought a declaration that it is entitled to sell and dispose of the said pledged shares in exercise of their rights as a pledgee and to appropriate the net sale proceeds towards the satisfaction of their dues from respondent No. 2. In the alternative, ABFL has prayed for withdrawal of the attachment of shares under the Special Courts (TORTS) Act, 1992, in order to enable ABFL to sell the shares and apply net realisation in or towards satisfaction of their dues. These are the basic prayers in the petition. Respondent No. 2 M/s. V.B. Desai is a proprietary firm carrying on business as shares and stock brokers. They are registered as brokers with the Bombay Stock Exchange through their proprietor J.R. Shroff. 2. The late Harshad Mehta died on December 31, 2001. He was notified under the said Act, 1992 on June 8, 1992 along with respondent Nos. 3, 4, 5, 6, 7, 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C shares started falling. Therefore, ABFL became apprehensive. They were afraid that M/s. V.B. Desai may not be able to fulfil their obligations. Therefore, officers of ABFL met the representatives of M/s. V.B. Desai and called upon them to provide adequate security/margin to ensure that the contract dated April 29, 1992 was duly performed and to see that ABFL was duly secured for the amount that became payable to them under the contract on May 25, 1992. M/s. V.B. Desai represented to ABFL that they were holding certain shares in their own right and that they would pledge the said shares in favour of ABFL by way of security. That ABFL, accepted the representation. By letter dated May 13, 1992 (exhibit R) M/s. V.B. Desai provided to ABFL shares of certain companies mentioned in the letter by way of additional securities to cover up the margin and in performance of their obligations under the contract which was to be performed on May 25, 1992. ABFL took delivery of the shares mentioned in exhibit R as pledgers. ABFL received the share certificates with blank transfer forms duly signed. By letter dated May 21, 1992, M/s. V.B. Desai requested ABFL for extension by 30 days for performan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be performed on May 25, 1992. That, M/s. V.B. Desai were not in a position to perform the obligations under contract dated April 29, 1992, on May 25, 1992, and, therefore, M/s. V.B. Desai were called upon to furnish security by way of pledge of shares in favour of ABFL. That, accordingly M/s. V.B. Desai had furnished shares by way of pledge on May 13, 1992. That, on May 13, 1992, the petitioners rights as pledgees came to be perfected in all respects by delivery of share certificates with signed blank transfer forms. As stated above, after giving credit, ABFL claims to recover Rs. 44.79 crores (approx.) from M/s. V.B. Desai as outstandings due and payable by M/s. V.B. Desai to ABFL under contract dated April 29, 1992. 5. At this stage, it may be mentioned that by judgment and order dated December 14, 1993, of the Special Court (Variava J.) in Miscellaneous Application No. 11 of 1993 came to the conclusion that ready forward transactions were illegal and void. In view of the said judgment on February 13, 1995, M/s. V.B. Desai filed their affidavit in reply to this petition alleging that the transaction dated April 9, 1992, and April 29, 1992, was a ready forward. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and SCB. That, ABFL took delivery of the securities from the said bankers of HSM against payment. That, against the payment made by ABFL on April 9, 1992, the bankers of HSM delivered the said securities to the petitioners. That, in view of the fall in the market price of ACC during April, 1992, ABFL approached M/s. V.B. Desai to document the oral ready forward agreement and requested M/s. V.B. Desai to issue a contract note for reversal at the agreed reversal rate. That, accordingly on April 29, 1992, M/s. V.B. Desai issued their contract note (exhibit O) to ABFL and also to HSM for reversal of the transaction dated April 9, 1992, under which HSM was to repurchase the above securities. However, delivery and payment under the reversal contract dated April 29, 1992, was to be performed on May 25, 1992, which was the original agreed date of reversal. That in view of further fall in the market price of ACC, ABFL insisted on M/s. V.B. Desai obtaining/securing additional shares/securities equivalent to the difference between the reversal rate of ACC as per exhibit O and the then prevailing market price of ACC. That, accordingly, on May 13, 1992, M/s. V.B. Desai gave delivery of shares w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t account of HSM. According to the affidavit of the late HSM, there was an agreement that interest at the rate of 21 per cent was payable on the above borrowings. That, on April 23, 1992, the scam became public. That, on June 8, 1992, HSM and his associates came to be notified. In para 8 of the affidavit, HSM has categorically stated that the transactions were contracted by him as a principal. He has further alleged that 9 per cent IRFC bonds was his property. That, the said bonds were earlier placed by him with SCB in another RF in order to raise monies. That, 60,000 shares of ACC belonged to the entities of HSM. That, 60,000 shares were given as security for undertaking the borrowing transaction. In the affidavit, vide para 8, HSM has categorically denied sale of 60,000 ACC shares on outright basis to ABFL. That, the said 60,000 ACC shares came to be delivered only to facilitate the borrowing transaction. According to the affidavit, HSM had raised a loan of Rs. 14 crores against a basket of shares (mentioned in exhibit X to the petition) from M/s. V.B. Desai. That, against this borrowing of Rs. 14 crores, registered shares belonging to HSM and his associates came to be delivere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ABFL was in performance of the forward leg of the RF transaction and, therefore, it was hit by the provisions of the Securities (Contracts) Regulation Act, 1956 and, therefore, ABFL had no right, title or interest in the said shares/securities. However, the Custodian has stated that he is not aware of the facts of the case and the parties, accordingly, should be put to strict proof in respect of their transactions. Case of ABFL in rejoinder : 9. On July 28, 1995, ABFL has filed a rejoinder to the affidavit of M/s. V.B. Desai. According to this affidavit, the suit transaction was between ABFL and M/s. V.B. Desai on principal to principal basis. That, there was no privity of contract with HSM. That, the transaction dated April 9, 1992, was separate and distinct from the transaction dated April 29, 1992. That, there was no reversal contemplated in respect of the transaction dated April 9, 1992. That, the transaction dated April 9, 1992, was an outright transaction without reversal. That, the transaction dated April 9, 1992, was outright spot delivery transaction which was duly completed by delivery of securities to ABFL by M/s. V.B. Desai. That, on April 9, 1992, M/s. V.B. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, ABFL have denied that ACC and 9 per cent IRFC bonds delivered to ABFL form part of ready forward transaction. They have also denied the findings of JKR exhibit R2(9). It is further contended in the affidavit that vide letter exhibit AA dated June 9, 1992, from M/s. V.B. Desai to ABFL, respondent No. 2 has stated that they were enclosing post-dated cheques for Rs. 8,03,75,000 and Rs. 6,15,00,000 against contract dated April 29, 1992 (exhibit O) and as part payment and, therefore, M/s. V.B. Desai had undertaken personal liability to perform the said contract (exhibit O). Issues : 10. On the above pleadings the following issues were framed and settled by the Court : (1) Whether the petitioners acquired full and absolute right, title and interest in the suit 60,000 ACC shares as stated in paragraph 8 of the petition ? (2) Whether a valid pledge has been created by respondent No. 2 in favour of the petitioners of the shares mentioned in exhibit X to the petition ? (3) Whether the petitioners rights as pledgees of the shares set out in exhibit X to the petition were completed by delivery of share certificates with the signed, blank transfer deeds/forms on May 13, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )Whether delivery of additional shares by M/s. V.B. Desai to ABFL on May 13, 1992, vide exhibit R along with blank transfer forms duly signed by Harshad Mehta and his associates as last holders, constituted pledge, sale or collateral ? (Issue No. 10) (C)Whether such pledge, sale or collateral was void in view of the judgment of the Supreme Court in Bank of India Finance Ltd. s case ( supra ). (Issue No. 4) (D)Whether the suit transaction was between ABFL and Harshad Mehta on principal to principal basis ? (Issue No. 8) (A) Whether the transactions dated April 9, 1992, and April 29, 1992, to be performed on May 25, 1992, were two separate independent outright transactions or whether they constituted ready forward transaction ? (Issue No. 6) 12. It is now well settled by various decisions of the Special Court that a ready forward transaction is not a simple transaction of purchase or sale. It is a transaction of purchase/sale with a firm commitment to repurchase/resell. It is between the same parties. It is in respect of the same scrip of the same value. It is entered into at the same time. It is a composite contract. The consideration for a ready forward transaction i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Desai, the entire transaction, as a whole, was arrived at on April 9, 1992. That, the reversal rate was also arrived at on April 9, 1992. According to M/s. V.B. Desai, the scam became public on April 23, 1992. That, when the scam became public, the price of ACC shares began to fall and, consequently, ABFL insisted on a formal contract of reversal being entered into on April 29, 1992, to be performed on May 25, 1992. That, the prices of the said ACC shares continued to fall even after April 29, 1992, and, therefore, ABFL insisted on delivery of additional shares by M/s. V.B. Desai. That, accordingly on May 13, 1992, M/s. V.B. Desai vide exhibit R delivered shares of seven companies to ABFL. According to M/s. V.B. Desai, these shares which they delivered on May 13, 1992, were by way of sale whereas according to ABFL, the delivery of these additional shares was by way of pledge. This is the central issue involved in the present case. According to M/s. V.B. Desai, they have acted as brokers in the suit transaction. That, the real counter-party was the late Harshad Mehta. In the pleadings, before the evidence came to be recorded, the case of the custodian was that the suit transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that on April 8, 1992, prices of ACC shares ranged between Rs. 8,300 and Rs. 8,850. He was specifically asked in cross-examination as to why ABFL bought ACC shares on April 9, 1992, at the rate of Rs. 10,000 per share when the market price was ranging between Rs. 8,300 and Rs. 8,850 to which his answer was that the shares were bought at the higher rate because it was a funding transaction (see page 54/pp). In view of the said admission, it is not necessary for this court to go into the evidence of PW-1 at length. PW-1 has conceded on page 54/pp of his evidence that the above transaction was a funding transaction under which ABFL funded M/s. V.B. Desai and Co. against shares. That, although the transactions were earmarked as purchase and sales, they were part of funding transaction and that such an inference was possible from the rates at which the securities were bought and sold. Further, on page 54/QQ PW-1 has deposed that M/s. V.B. Desai had bought 60,000 ACC shares and 9 per cent IRFC bonds on April 29, 1992, for which payment was to be made on May 25, 1992, and, therefore, it would be correct to say that M/s. V.B. Desai was to return the borrowings on May 25, 1992, for the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amine evidence of S. Krishnamurthy - PW-2 who was, at the relevant time, an officer working in ABFL, Bombay Office. He was there up to August, 1993. He has deposed in his evidence that on April 9, 1992, Mr. Khanna was the Additional Managing Director. That on April 9, 1992, Mr. Khanna gave to him a letter addressed to Allahabad Bank exhibit C. Under this letter, purchase of 60,000 ACC shares and 9 per cent IRFC bonds face value Rs. 42 crores is referred to. It is a letter from ABFL to Allahabad Bank. It confirms purchase of the above two securities by ABFL for a total sum of Rs. 99,98,02,602.74 (Rs. 60 crores for purchase of 60,000 shares of ACC at Rs. 10,000 per share and Rs. 39,98,02,602.74 in the case of 9 per cent IRFC bonds face value Rs. 42 crores at the rate of Rs. 92.75). This letter further indicates that purchase of the above two securities was to be effected from Grindlays Bank and SCB who were the bankers for Harshad Mehta and his associates. This letter is important. It indicates that the real counter-party was Harshad Mehta and his associates. This letter further indicates that Rs. 100 crores were borrowed from HUDCO out of which Rs. 99,98,02,602.74 were deployed with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 315 referred to in exhibit VVV collectively was the net return calculated at 1.5 per cent per annum (minimum) on Rs. 100 crores for 45/46 days. On page 149 PW-2 has further conceded that during the period April 9, 1992, onwards prices of ACC shares were falling. On page 150, PW-2 has further stated that the fax message exhibit VVV collectively proceeds on the basis of presumed profits which the company expected to earn on April 9, 1992. That, ABFL wanted a margin of 1.5 per cent per annum (minimum) on the borrowed funds and on that basis the company presumed that the income earned would be at least Rs. 18,49,315. This evidence shows that the suit transactions dated April 9, 1992, and April 29, 1992, were part of ready forward transaction. It further shows that the entire arrangement took place on April 9, 1992. That on April 9, 1992, the company had estimated profit margin of 1.5 per cent per annum (minimum) on the borrowed funds and, accordingly, the formal contract was entered into on April 29, 1992, as on that date the profits from ACC shares was Rs. 1,73,85,000 whereas profit from 9 per cent IRFC bonds was Rs. 1,12,03,695.62. Further PW-2 was shown the transfer voucher exhibit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable by M/s. V.B. Desai to ABFL for borrowing Rs. 60 crores on April 9, 1992. This evidence supports the case of respondent No. 2 that the suit transaction was RF. Similarly, on page 205 of his evidence PW-2 has admitted that purchase made on April 9, 1992, was not from bank account; but, it was from market borrowings. He has admitted on page 205 that the company did not possess Rs. 100 crores in bank account/current account on April 9, 1992. Therefore, it is clear that but for the funds being borrowed from HUDCO amounting to Rs. 100 crores, it was not possible for the company to deploy the said amount with M/s. V.B. Desai. Therefore, it is clear that purchase and sale of securities on April 9, 1992, and April 29, 1992, was under RF. 17. Now coming to the evidence on behalf of respondent No. 2, I find that R2W1 - Pradip Ratilal Shroff is a chartered accountant. He has stated in his evidence that he looked after the accounts of M/s. V.B. Desai. He has further deposed that he was aware of the suit transactions. That, all major decisions were taken, inter alia , by him and his brother. He has further deposed that from 1978 onwards, business of M/s. V.B. Desai in Govern-ment secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad Mehta agreed to record the entire transaction and accordingly the contract note dated April 29, 1992, exhibit O came into existence although, the rate of reversal, the fact of reversal, the effective yield and the profit margin were all decided upon as early as April 9, 1992. Under these circumstances, it was agreed between parties on April 29, 1992, that M/s. V.B. Desai will issue reversal contract note to both ABFL and to Harshad Mehta as agreed upon. Accordingly, exhibit O came to be issued. Exhibit O is a contract note of reversal. It is dated April 29, 1992. It indicates the date of performance as May 25, 1992, which date was agreed upon as early as April 8, 1992. This evidence of R2W1 has remained unchallenged. R2W1 has remained unshaken on these facts. The following evidence will, however, show that the suit transaction of purchase and sale was part of an RF transaction. Firstly, 9 per cent IRFC bonds of face value Rs. 42 crores were purchased on April 9, 1992, at the rate of Rs. 92.75 and the reversal rate was Rs. 94.2833. The last four digits after decimal point indicates inbuilt interest component in the reversal rate ( see page 435 of the notes of evidence). Similarl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Harshad Mehta. That, the shortfall between the reversal price of ACC and the subsequent prevailing price of ACC was required to be met by deposit of additional shares on May 13, 1992. That, there was no such similar shortfall in case of 9 per cent IRFC bonds. That, on April 8, 1992, the reversal terms were decided upon. That, they were oral. They were not in writing. However, when the scam became public in order to bind the parties pursuant to several meetings, the contract of reversal was formally entered into on April 29, 1992, on which date there were two reversals; one between ABFL and M/s. V.B. Desai and the other was between M/s. V.B. Desai and Harshad Mehta. In both these contracts, the parties agreed that the date of performance was May 25, 1992 ( see page 541 of the evidence). This is also supported by exhibits R2(53)(5), R2(53)(6), R2(53)(7) and R2(53)(8) (debit entries dated April 29, 1992, to the account of Harshad Mehta in the books of M/s. V.B. Desai). On page 571 of his evidence, R2W1 has deposed that the real nature of the suit transaction was lending by ABFL to M/s. V.B. Desai on interest. He has deposed that interest was to be paid back in the form of rever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bond and accordingly the minimum reversal price per bond worked out to Rs. 94.2809. However, ABFL and M/s. V.B. Desai agreed to peg the reversal price at Rs. 94.2833 ( see page 423 of the evidence). This was between ABFL and M/s. V.B. Desai. However, the reversal price between M/s. V.B. Desai and Harshad Mehta was Rs. 94.32. That, brokerage was payable by Harshad Mehta to M/s. V.B. Desai which was calculated as a difference between Rs. 94.32 and Rs. 94.2833. Similarly, in respect of ACC the minimum expected earning was Rs. 1,72,65,745. This minimum earning was to be added to minimum reversal price of ACC shares on May 25, 1992, and, if so added, the minimum earning per share came to Rs. 287.76. This figure was to be added to the base price of ACC shares of Rs. 10,000 per share and when so added, the minimum reversal price for ACC works out to Rs. 10,287.76 per share between petitioners and respondent No. 2. However, the parties, viz., M/s. V.B. Desai and ABFL agreed on April 8, 1992, that the reversal price of ACC on May 25, 1992, would be Rs. 10,289.75 per share. The above discussion was for reversal price of the two securities between ABFL and M/s. V.B. Desai. On page 423 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id letter ABFL has further recorded receipt of additional shares from M/s. V.B. Desai. In this case, the important point to be answered is whether on May 13, 1992, by reason of delivery of additional shares, was there a completed transfer of property in the shares. On page 54/LL, PW-1 has stated that on May 13, 1992, ABFL received shares with blank signed transfer forms. That, they were signed by Harshad Mehta and his family members, that ABFL knew that Harshad Mehta and his family members were the last holders of the shares delivered on May 13, 1992. This evidence shows that real counter-party was Mr. Harshad Mehta and not M/s. V.B. Desai. This evidence shows that ABFL was aware that the real counter-party was Harshad Mehta and his associates. Further in his evidence at page 54/SS PW-1 has deposed that ABFL was a pledgee in respect of additional shares offered by M/s. V.B. Desai on May 13, 1992. PW-2 has also confirmed that on May 13, 1992, additional shares were delivered to ABFL by M/s. V.B. Desai. Further, in exhibit HH, ABFL has earmarked the position of security held by them on account of M/s. V.B. Desai under the caption "securities held as pledge/sold". This entry was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares were delivered as pledge. However, at page 242 of his evidence, PW-2 has stated that he has no personal knowledge as to the status of shares by M/s. V.B. Desai on May 13, 1992, and, therefore, he was not in a position to say whether delivery was by way of pledge or whether it was by way of sale against purchase dated April 9, 1992. Thereafter, PW-2 was shown a letter dated May 25, 1992 [exhibit R2(3)] from ABFL, Bombay to the chairman of ABFL, Calcutta. In his cross-examination, at page 244, PW-2 has conceded that additional securities mentioned in exhibit R2(3) were taken by ABFL on May 13, 1992, to cover the shortfall arising out of price difference between April 29, 1992, and May 13, 1992. Therefore, the primary question the court has to answer is whether delivery of additional shares on May 13, 1992, was to cover the shortfall arising out of price difference between April 29, 1992, and May 13, 1992, or whether it was a pledge. PW-2 in his cross-examination at page 251 has deposed that the value of the shares delivered on May 13, 1992, was Rs. 28,57,98,230. However, he has stated that he was not in a position to say whether this value was adequate to cover shortfall betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 60 crores but in all he was held liable for total amount of Rs. 61,73,85,000. On page 363 of his evidence PW-2 has deposed that on April 29, 1992, the market price of ACC was in the range of Rs. 6,700, Rs. 5,700 and Rs. 6,350 whereas as per exhibit O which is the contract note dated April 29, 1992, ACC shares were sold by ABFL at the rate of Rs. 10,289.75. This is one more factor to show that the sale dated April 29, 1992, was at off market price and, therefore, it was RF. On page 367 of evidence, PW-2 has conceded that ABFL had insisted on M/s. V.B. Desai delivering additional shares along with transfer forms duly signed by the last holders pursuant to which additional shares were delivered under exhibit R by M/s. V.B. Desai. He has further conceded that these additional shares were given in order to cover the shortfall. He has, however, denied that by delivery of additional shares, the obligation for ACC shares stood fulfilled by M/s. V.B. Desai on May 13, 1992. Now coming to the evidence of R2W1 regarding delivery of additional shares, the witness has deposed that on May 13, 1992, M/s. V.B. Desai had delivered shares to ABFL of seven companies. Accordingly, M/s. V.B. Desa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V.B. Desai, it was towards reduction of that liability of Rs. 61,73,85,000. Therefore, delivery of additional shares on May 13, 1992, was to settle the dues payable to ABFL by M/s. V.B. Desai arising out of the contract dated April 29, 1992, and, to that extent, it amounts to appropriation. On page 483 of his evidence, R2W1 has deposed that contract dated April 29, 1992, was a reversal contract for 60,000 ACC shares and 9 per cent IRFC bonds the face value Rs. 42 crores. He has further deposed out of Rs. 42 crores, Rs. 40 crores transaction was completed by June 3, 1992, and the balance of Rs. 2 crores was performed on June 30, 1992 ( see page 498 of the evidence). There are further sales on account of ABFL on and after June 9, 1992. In this case, we are not concerned with those sales. On page 541 of his evidence, R2W1 has deposed that on April 8, 1992, the reversal terms were agreed upon. However, they were not reduced in writing. However, on April 29, 1992, they were reduced in writing. That, on April 29, 1992, there were two contracts of reversal. That, one was between ABFL and M/s. V.B. Desai and the other was between M/s. V.B. Desai and Harshad Mehta. That, all the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh M/s. V.B. Desai. Further, vide para 8 of the affidavit of Harshad Mehta dated June 19, 1995, he has admitted that the suit transaction was between him and ABFL on principal to principal basis. Further, exhibit V is the letter dated May 9, 1992, from Harshad Mehta to M/s. V.B. Desai under which authority was given by HSM to M/s. V.B. Desai to deliver additional shares to ABFL. That, vide exhibit V Harshad Mehta gave consent to M/s. V.B. Desai to hand over the shares belonging to him and his family together with transfer deeds to ABFL. The above evidence shows that the suit RF was between ABFL and HSM through M/s. V.B. Desai. Arguments on behalf of respondent No. 2 : 20. As stated above, the central point which needs to be addressed to in this matter is the status of the delivery of additional shares on May 13, 1992. According to ABFL, delivery of additional shares on May 13, 1992, vide exhibit R was a pledge. Whereas, according to M/s. V.B. Desai, the delivery was sale. Mr. Shailesh Shah learned counsel appearing on behalf of respondent No. 2 submitted that in case of pledge, a pledgee would be entitled to sell the security only in the event of non-performance of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fers to 29 transactions between July, 1991, to March 26, 1992. He contended that these 29 transactions were RF transactions between M/s. V.B. Desai and ABFL on principal to principal basis. That, these 29 transactions are also reflected in JKR exhibit R2(9). That, in the entire chart exhibit R2(10), the date of sale is not mentioned because the reversal price was fixed on April 9, 1992. That, the reversal price covered interest payable to ABFL. That, exhibit R2(10) shows that the reversal was at off-market price and that the reversal price was determined on April 9, 1992. In this case, we are not concerned with 29 transactions. However, reliance is placed on those transactions in order to show the parameters of an RF transaction. The 29 transactions have been referred to and relied upon to show the difference between outright transactions and RF transactions. As regards the suit transactions, it was urged that on April 9, 1992, it was impossible for M/s. V.B. Desai to know the market price of ACC shares on May 25, 1992. However, on April 9, 1992, itself the reversal rate was decided. That, the reversal rate had to be more than the rate of purchase in the ready leg. Similarly, the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare and that the difference between the two was the brokerage receivable by M/s. V.B. Desai from HSM only and similarly the difference in 9 per cent. IRFC bonds between Rs. 94.2833 and Rs. 94.3200 was the brokerage receivable by M/s. V.B. Desai from HSM. He, therefore, contended that both the legs constituted one transaction of purchase/sale under RF which assured a fixed return to ABFL. He contended that only the reversal rate ensured fixed return to ABFL. He contended that additional shares were given on May 13, 1992, as they represented the difference between the reversal price under exhibit O dated April 29, 1992, and the market price. That, addi-tional shares were offered in order to meet the shortfall on April 29, 1992, and further fall in prices of ACC between April 29, 1992, and May 13, 1992. He contended that if one looks at exhibit R2(36), it is clear that on account of fall in ACC prices, additional shares were offered by M/s. V.B. Desai to meet the shortfall/difference referred to above and in the circumstances, ABFL became owners of the shares delivered to them on May 13, 1992. That, this difference was payable in terms of cash or in terms of additional shares. He con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment by ABFL of Rs. 100 crores with interest to HUDCO. He contended that both sale and reversal transactions took place coterminous with the date of repayment of Rs. 100 crores with interest by ABFL to HUDCO. He contended that on April 8, 1992, it was agreed between the parties that the deal would be reversed on May 25, 1992, under which ABFL would resell ACC at Rs. 10,289.75 per share and further it was agreed that the reversal rate which HSM would pay would be at Rs. 10,350 per share and that the difference between the two constituted the brokerage. He contended that in the deal, ABFL was expected to earn Rs. 2,83,56,163 which included Rs. 1,10,90,414 on 9 per cent. IRFC bonds and, therefore, the expected earning from ACC shares was Rs. 1,72,65,745. Mr. Shah next contended that HSM insisted that ABFL should pay consideration for purchase of the two securities by interbank cheques in favour of ANZ and Standard Chartered Bank (exhibit B). That, the delivery was to be effected by the bankers of Harshad Mehta. That, the securities were delivered on April 9, 1992, to ABFL against payment. That, exhibit R2(53)(1) and exhibit R2(53)(4) shows receipt of Rs. 99,98,02,602.74 by Harshad Meh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive companies on account of Harshad Mehta. Accordingly, vide exhibit R1(1) dated April 29, 1992, M/s. V.B. Desai called upon respondent No. 3 herein M/s. HSM to furnish to M/s. V.B. Desai authority along with the transfer deeds duly signed by HSM and his family members for giving collateral security of additional shares to ABFL. Accordingly, exhibit V being the letter of authority from Harshad Mehta dated May 9, 1992, came to be issued in favour of M/s. V.B. Desai and pursuant to that letter of authority additional shares were delivered to ABFL on May 13, 1992. In between, there was also a reminder addressed by M/s. V.B. Desai to Harshad Mehta on May 4, 1992, which is also referred to in exhibit V. The letter dated May 4, 1992, is exhibit R2(35). He, therefore, contended than an express authority was given by Harshad Mehta to M/s. V.B. Desai to deliver additional shares as collateral securities on account of fall in ACC prices to ABFL. Mr. Shah, therefore, contended that there is no merit in the arguments advanced on behalf of Harshad Mehta that delivery of additional shares was without authority. Mr. Shah contended that, in any event, in this case, delivery of additional shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds for which obligations were outstanding up to June 30, 1992, and which ultimately came to be performed on June, 30, 1992. Mr. Shah next contended that evidence on record shows that Harshad Mehta acted as a principal. He pointed out the affidavit of Harshad Mehta dated June 19, 1995, which concedes that he was the principal and the real counter-party in the transaction. Further, payment of Rs. 99,98,02,602.74 was received by Harshad Mehta on April 9, 1992. That, delivery of securities was made by Harshad Mehta. Further, exhibit V, exhibit R1(1), exhibit R2(35) and exhibit R show that Harshad Mehta had authorised M/s. V.B. Desai to deliver additional shares as security. It was contended that even the question posed to R2W1 in cross-examination by learned counsel appearing on behalf of HSM shows that even according to HSM the suit transaction took place on principal to principal basis. ( See page 401 of the evidence and also pages 54/LL and 54/SS of notes of evidence). Mr. Shah contends that even according to HSM, as reflected in his affidavit, there was no pledge in favour of ABFL. That, the delivery of shares on May 13, 1992, was by way of additional security and, therefore, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ker s obligations to ABFL and, therefore, there was transfer of property in the shares in favour of ABFL on May 13, 1992, i.e., before the date of notification and in the circumstances it was not hit by the Special Court (TORTS) Act, 1992, and nor is it hit by the judgment of the Supreme Court in the case of B.O.I. Finance Ltd. ( supra ). Arguments on behalf of respondent Nos. 3 to 11 : 22. On behalf of respondent Nos. 3 to 11 Mr. Ajay Khandar, learned counsel for the said respondents supported the arguments of respondent No. 2 that the suit transaction constituted one ready forward transaction. Therefore, it is not necessary to repeat those arguments once again. He, however, submitted that on May 13, 1992, there was no sale and, therefore, contract dated April 29, 1992, was not performed on May 13, 1992, and, therefore, the contract remains outstanding till today. He disputed the contention of respondent No. 2 that the act of delivering additional shares belonging to HSM and his family members on May 13, 1992, amounted to sale. He disputed that by such delivery the contract dated April 29, 1992, stood performed on May 13, 1992. He contended that the evidence on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , remained outstanding. It was next contended that, in fact, ABFL granted extension of 15 days from May 25, 1992, as per exhibit R2(3) which indicates that the contract was outstanding on May 25, 1992, and the date of performance was extended up to June 8, 1992. It was further contended that even vide exhibit CC being letter dated June 27, 1992, the delivery of shares on May 13, 1992, was as and by way of additional securities which shows that the transaction was outstanding even after May 13, 1992. It was further pointed out that exhibit DD is M/s. V.B. Desai s account in the books of ABFL which shows that credit has been given to the sundry debtors account even after May 13, 1992, which indicates that the transaction was outstanding even on May 13, 1992. He contends that credits were given right up to 1994. He, therefore, contends that contract remained outstanding even till date/today. Mr. Khandar submitted that exhibit V dated May 9, 1992, was not proved against HSM. He further submitted that exhibit V shows that it was never written on May 9, 1992, by Harshad Mehta. He further contends that on May 13, 1992, short delivery was discovered. It was acknowledged by respondent No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel appearing for the Custodian submitted that the contract dated April 29, 1992, was a forward leg. That, it was void in view of the judgment of the Supreme Court in the case of B.O.I. Finance Ltd. ( supra ). However, Mr. Rustomjee fairly pointed out that exhibit O, dated April 29, 1992, had no connection with the collateral contract between petitioners and respondent No. 2 dated May 13, 1992. He pointed out that the judgment of the Supreme Court in Bank of India Finance Ltd. s case ( supra ) deals only with RF and that the said judgment does not deal with the collateral contract entered into to secure an RF transaction. He further points out that in the case before the Supreme Court, the forward leg was executory and, therefore, the Supreme Court has ruled that if a party seeks to enforce the forward leg then the court ought to refuse specific performance of the forward leg. Mr. Rustomjee pointed out that under the judgment of the Supreme Court in Bank of India Finance Ltd. s case ( supra ), it is made clear vide para 51 that the judgment was not to undo the performance which has already taken place. In the circumstances, in the present case also, this court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, till today, the Custodian has not cancelled the contract dated April 29, 1992, under section 4 of the Special Court (Torts) Act, 1992. That, till today, Harshad Mehta has not adopted any proceedings claiming ownership of those shares. That, even in the present proceedings, no evidence has been led on behalf of respondent Nos. 3 to 11. That, on facts, it is established that Rs. 60 crores was received by Harshad Mehta on April 9, 1992, and that having received Rs. 60 crores from ABFL, he now seeks return of his shares which argument was unjust and unconscionable. He contended that even assuming for the sake of argument that delivery of additional shares on May 13, 1992, was not in full and final satisfaction, even then the shares delivered on May 13, 1992, constituted sale/transfer of property and, to that extent, the transaction stood completed and in view of the judgment of the Supreme Court in B.O.I. Finance Ltd. s case [1997] 89 Comp. Cas. 74 , this court ought not to recall those shares. Reliance was placed on para. 54 of the said judgment. It lays down that once the title in the shares stood transferred to the bank, the shares ought not to be recalled on the ground tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C shares were to be sold back on May 25, 1992, at the reversal rate of Rs. 10,289.75. [ see exhibit R2(7)(2)]. Therefore, the reversal price receivable by ABFL on May 25, 1992, was Rs. 61,73,85,000. Hence, the difference between the purchase price and reversal price was Rs. 1,73,85,000 [ see exhibit R2(7)(3)]. In other words, on April 29, 1992, M/s. V.B. Desai were liable to ABFL for Rs. 61,73,85,000 in the account of ABFL. This shows that the transaction was RF and not outright. Secondly, two securities were bought on April 9, 1992, viz. 60,000 ACC shares and 9 per cent IRFC bonds face value Rs. 42 crores (hereinafter referred to as "the suit securities"). Coming to 9 per cent IRFC bonds, the rate of purchase was Rs. 92.75 but the reversal rate was Rs. 94.2833. Therefore, the reversal rate was in four decimal points which shows that the interest component was built into the reversal rate. Hence, the reversal rate of 9 per cent IRFC bonds is one more indicia which shows that the transaction was RF. Thirdly, on April 9, 1992, the market price of ACC was Rs. 8,300 per share [ see exhibit R2(5)(1)]. But the petitioners have bought the scrip for Rs. 10,000 per share. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an RF transaction. Sixthly, the amount of Rs. 1,72,65,745 being the minimum expected return on ACC has been added to the reversal price of ACC as on May 25, 1992, and, if so added, the minimum earning per share was Rs. 287.76 which had been rounded off by parties to Rs. 289.75, was added to the base price of Rs. 10,000 per share of ACC on April 9, 1992, and accordingly the reversal price of ACC was fixed on April 9, 1992, at Rs. 10,289.75. This is one more fact which establishes that the contract was a ready forward contract. It also shows that the reversal sale price was fixed on April 9, 1992, itself. Seventhly, the evidence of R2W1 further shows that there were two reversal prices, one for ABFL and the other for HSM. The reversal sale price for ABFL was Rs. 10,289.75 whereas, the reversal buy-back price for HSM was Rs. 10,350. In his evidence, the R2W1 has explained that the reversal price for HSM was fixed at Rs. 10,350. That reversal was to be performed on May 25, 1992, under agreement of April 9, 1992. He has further deposed that brokerage payable by HSM under the contract between M/s. V.B. Desai and Harshad Mehta was Rs. 60.25 per share which has been added to the reversa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , exhibit R2(43) dated July 8, 1992, being application for certification made to the Secretary, Bombay Stock Exchange, shows that certification was sought by ABFL as owners. That, they had requested attachment under the Act to be lifted. Therefore, exhibit R2(43) shows appropriation. Further, exhibit R2(3) is a letter dated May 25, 1992, addressed by the Bombay office of ABFL to its chairman at Calcutta. This letter recites that Rs. 100 crores were raised from HUDCO on April 9, 1992, at 21 per cent for 46 days, due and payable on May 25, 1992, by ABFL. That, the said funds were deployed for purchase of 60,000 ACC shares at Rs. 10,000 for total consideration of Rs. 60 crores and for purchase of 9 per cent IRFC bonds at Rs. 92.75 for a total consideration of Rs. 39,98,02,602.77, in all amounting to Rs. 99,98,02,602.77. That, the said securities were sold by the broker who agreed to buy-back on May 25, 1992, at a higher reversal rate of Rs. 10,289.75 for ACC and at the rate of Rs. 94.2833 for 9 per cent IRFC bonds and for the total consideration of Rs. 1,02,83,92,298. As per this letter, ABFL had to repay Rs. 100 crores with interest on May 25, 1992, amounting to Rs. 1,02,64,65,753 le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reversal (exhibit O) on May 13, 1992. Exhibit R2(3) also explains the meaning of the word "margin" as difference between the reversal price and the market price. The evidence further shows that ABFL has repaid the loan to HUDCO on May 25, 1992, with interest amounting to Rs. 1,02,64,65,753. This amount could not have been repaid but for delivery of additional shares on May 13, 1992, as indicated by exhibit R2(3). Lastly, there is a letter exhibit R2(3). It is addressed by ABFL to the Calcutta Stock Exchange on September 22, 1992. By this letter, ABFL has informed the Calcutta Stock Exchange that M/s. V.B. Desai has delivered the additional shares on May 13, 1992, by way of margin with consent of Harshad Mehta and consequently they may be certified. This letter conclusively shows that ABFL have treated delivery of additional shares as transfer in their favour. This letter, therefore, shows appropriation by ABFL of additional shares delivered to them on May 13, 1992. In the circumstances, I find merit in the case of respondent No. 2 that additional shares delivered on May 13, 1992, were sold and appropriated by ABFL. 29. Even assuming for the sake of argument that delivery of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent No. 2 would not have asked for extension on May 21, 1992, of the validity period of exhibit O. It was further contended that exhibit O was to be performed on May 25, 1992, and there was no reason why respondent No. 2 should advance the date of performance to May 13, 1992. It was contended that exhibit T shows reference to fall in prices of ACC for which respondent No. 2 has stated that they are providing additional shares as margin. It was urged that exhibit T shows that extension was sought for ACC and not for the bonds. On the other hand, R2W1 in his evidence has deposed that there was no question of seeking extension for ACC shares because the contract stood performed on May 13, 1992. That, although exhibit T refers to fall in the price of ACC, what was meant by M/s. V.B. Desai was for extension of time to perform the buy-back of 9 per cent IRFC bonds of face value Rs. 42 crores. That, around June 3, 1992, ABFL bought back 9 per cent IRFC bonds of face value Rs. 40 crores and the balance 9 per cent. IRFC bonds of face value Rs. 2 crores came to be performed on June 30, 1992. In other words, R2W1 has given oral evidence contrary to exhibit T. However, I am satisfied that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares became part of Rs. 60 crores. It is important to bear in mind that RFs are structured transactions. They are essentially funding transactions. Therefore, additional shares delivered on May 13, 1992, constituted repayment of loan. In fact, for ACC, respondent No. 2 is shown as a sundry debtor by the petitioners. Hence, recalling of shares is not possible. Lastly, ABFL was a "Repo Lender" ( see para 42 of B.O.I. Finance). Therefore, on receipt of additional shares, ABFL got title and, therefore, appropriation is done in exhibit R2(3) on May 13, 1992. Therefore, it was not a pledge. On May 13, 1992, on delivery title passed to Repo Lender qua additional shares and delivery cannot be recalled. 33. Findings on point No. (D) whether the suit transaction was between ABFL and Harshad Mehta on principal to principal basis? (Issue No. 8). 34. This point is covered by issue No. 8 and also by Issue Nos. 11 and 12. The evidence on record shows that the real counter-party to the RF was HSM and not M/s. V.B. Desai. The evidence of R2W1 is unshaken on this point. He has categorically deposed in his evidence that respondent No. 2 had no capacity to furnish adequate security in supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence of R2W1 who has proved letter dated May 9, 1992 (exhibit V) particularly when it refers to the letter dated May 4, 1992, from M/s. V.B. Desai to HSM exhibit R2(35). Therefore, I hold that HSM and his family members had delivered the shares with blank transfer forms to M/s. V.B. Desai. In the present case, it is not disputed that on May 13, 1992, respondent No. 2 had delivered the shares with blank transfer forms to the petitioners. Till date, no claim has been made by HSM or his family members in legal proceedings for a declaration that exhibit V was fabricated and that the delivery of additional shares was without autho-rity. Even the evidence of R2W1 on letter dated May 4, 1992, has remained unchallenged. It is pursuant to the letter dated May 4, 1992, which is categorically mentioned in exhibit V that the letter of authority came to be given. Therefore, the evidence of R2W1 is accepted. It indicates that authority was there with M/s. V.B. Desai to deliver shares of five companies belonging to HSM which delivery was effected on May 13, 1992. In this connection, I may further add that HSM has been given credit in respect of delivery of shares on May 13, 1992, vide exhibit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etition, was a ready forward transaction? In the affirmative. 7.Whether the alleged transaction of sale of shares entered into on April 29, 1992, was a forward contract and was illegal in view of the provisions of the Securities Contract Regulation Act? In my judgment, I have held that although the forward leg was void, delivery of additional shares on May 13, 1992, was not hit by the Securities Contract Act in view of the judgment of the Supreme Court in B.O.I. Finance Ltd. s case [1997] 89 Comp. Cas. 74 . 8.Whether the transaction of purchase and proposed sale of shares referred to in the petition were between the petitioners and res-pondent No. 3 or between the petitioners and respondent No. 2? The transaction was between petitioners and respondent No. 3 as principal to principal. 8A.Whether the petitioners are entitled to the accretion/benefits arising out of the shares allegedly pledged? In the affirmative. 9.Whether respondent No. 2 gave good delivery of the shares along with blank transfer forms as listed in annexure A to the reply of res-pondent No. 2 to the petition? In the affirmative. 10.Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X
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