TMI Blog2006 (10) TMI 244X X X X Extracts X X X X X X X X Extracts X X X X ..... to the reference from the SEBI as regards the direction to the Bombay Stock Exchange to grant its approval, it must be noted that it is not a blanket direction, but an approval to be granted subject to its bye-laws and if the Bombay Stock Exchange finds that the terms of arrangement are contrary to its regulations or the requirement under the listing agreement the same has to be tested in a manner known to law and as provided under the Securities and Exchange Board of India Act. It may also be noted that the Bombay Stock Exchange, apart from referring to the non-satisfaction of the listing requirement, had also pointed out to the conduct of the transferor company, namely, Pentamedia Graphics Ltd., as regards issuance of fake certificates in the market. In the background of this and the view on writing off of assets to a huge sum, it is better the question as to the satisfaction of the listing agreement and the correctness of the order of this court is left to the expert body, viz ., Bombay Stock Exchange, and the appellate forum, if the applicant so chooses to test the correctness of the same. In the light of the view that I have taken, I do not accept the plea of the applicants. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange, Mumbai alone did not indicate its No Objection. This Court passed an order dated 8.11.2004, approving the Scheme of Amalgamation, compromise and arrangement, after considering the report of the Regional Director, Ministry of Company Affairs, as well as the merits of the Scheme, apart from the fact that the procedure under Sections 391 and 394 of the Companies Act were fully satisfied. In the face of such approval by this Court, the applicants raised an issue as to whether the Stock Exchange, Mumbai, is justified in its refusal to list the shares of Mayajaal Entertainment Ltd. 4. It is seen that on an earlier occasion, the Bombay Stock Exchange filed applications in C.A. Nos. 498 to 502 of 2006 before this Court to modify the terms of the order of this Court dated 12.10.2004 approving the Scheme. After hearing both sides, by order dated 5.4.2006, this Court directed that the objections of the applicants herein be placed before the Stock Exchange, Mumbai, and a reasoned order be passed. Consequent on the directions, the Stock Exchange has now passed an order rejecting the plea for listing the shares of Mayajaal Entertainment Ltd. Aggrieved of this, the applicant companies, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fications and reply, admittedly, no order was passed by the Bombay Stock Exchange indicating No Objection in this regard. Incidentally, it may be seen from the extracts of the minutes of the meeting by the Listing Committee of the Stock Exchange, Mumbai dated 22.6.2004, that clarification was sought as to whether any other Stock Exchange had approved this Scheme. The Listing Committee also sought clarification as to what would be the stand of the Company in the event of the Bombay Stock Exchange disapproving the Scheme. The Committee, however, postponed the matter and advised the company to submit the necessary papers called for. On 15.9.2004, further clarifications were sought for. By letter dated 17.9.2004, the applicant company informed the Stock Exchange that the matter is pending before the High Court, Madras. On 30th October 2004, after nearly a month, the Bombay Stock Exchange wrote a letter to Pentamedia Graphics Ltd. that due to non-availability of the information mentioned therein in its letter, the matter could not be placed before the Listing Committee Meeting. Hence the Stock Exchange directed the Company not to proceed with the matter till the Stock Exchange gave its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exchange, National Stock Exchange of India and the Madras Stock Exchange. On 12th September 2003, Pentamedia Graphics Ltd. had issued 95 lakhs equity shares of Rs. 10/- each on preferential basis at Rs. 11.36 per share out of which, Vijay advertising private Limited was allotted 40 lakh Nos. of shares. Originally, the shares were issued in physical form. Pentamedia Graphics Ltd. sent details regarding the above allotment to Cameo Corporate Services Ltd. for master updation. In respect of dues payable by Pentamedia Graphics Ltd. to Oriental Bank of Commerce, shares in possession of Vijay Advertising Private Ltd. were pledged as security. While the security was still in force, Vijay Advertising Private Ltd. sent another set of physical shares having the same distinctive number (as those pledged with Oriental Bank of Commerce) to Cameo Corporate Services Ltd. for dematerialisation of the shares. The demateralisation was effected and Cameo Corporate Services Ltd. uploaded the data in the normal course. 9. As per the shareholding for the quarter ended 30.9.2004, Vijay Advertising Private Ltd. did not appear as one among the significant shareholders. On 30.12.2004, Oriental Bank of Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ism expected from securities market participants. It is stated that such conduct by the said entities saps the investors' confidence and is detrimental to investors' interest as well as the safety and integrity of the securities market. 11. SEBI initiated formal investigation in this matter. Considering the seriousness of the issue, an interim order was passed on 21.5.2005 holding that Pentamedia Graphics Ltd. shall not issue any further shares or alter its share capital in any manner till further directions. The Company and its Directors were prohibited from accessing the capital market or dealing in securities in any manner, directly or indirectly, till further orders in this regard were given. As far as Vrjay Advertising Private Ltd. is concerned, it was directed that the sale proceeds accruing to them be impounded and Vijay Advertising Private Ltd. was also directed to retain the impounded sale proceeds in its account and the same should not be utilised in any manner for any purpose; that Vijay Advertising Private Ltd. and its Directors should not deal in securities market in any manner directly or indirectly till further orders. The notice granted further time to fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Stock Exchange as per the Scheme approved by this Court. They also marked a copy to the Mumbai Stock Exchange. 15. By letter dated 12th December 2005, the Bombay Stock Exchange addressed a letter to the Securities Exchange Board of India, Mumbai, regarding the listing of the shares of Mayajaal Entertainment Ltd. It referred to the meeting of the Listing Committee on 22.6.2004 that contrary to the decision, the Company had proceeded further to obtain an order of approval to the Scheme on 12th October 2004. In the circumstances, it sought advise from SEBI on the above. The Bombay Stock Exchange sought its advise as to whether the Exchange should take on record the book closure for implementing the Scheme. 16. The Securities Exchange Board of India, vide its letter dated 27th December 2005, referred the letter of the Bombay Stock Exchange on 12th December 2005 and directed that the Bombay Stock Exchange might grant its approval for implementation of the order of this Court dated 12th October 2004 subject to ensuring compliance of the Bombay Stock Exchange's Bye-laws and Regulations. 17. The Bombay Stock Exchange viewed that the Company had not complied with the Bye- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for considering the plea for listing; that on receipt of the objection from the companies, the Stock Exchange would pass an order. In the event of the Stock Exchange passing an order to the prejudice of the companies herein, it kept its doors open for seeking any clarification therefor. Subsequently, an order was passed on 13.6.2006 by the Bombay Stock Exchange, wherein, it is stated that in spite of opportunities granted, the Listing Committee was not convinced of the grounds on which the assets of the company were written off. Apart from that, they referred to the order passed in May/October, 2005 by SEBI, wherein, the Directors of the company Pentamedia Graphics Ltd. were debarred from accessing the capital market or dealing in securities in any manner, directly or indirectly, considering that the conduct of the above entities is not in consonance with the high standards of integrity, fairness and professionalism expected from securities market participants. In the view thus taken, it rejected the application of Pentamedia Graphics Ltd. under Clause 24(f) of the Listing Agreement. It also referred to the letter dated 6.6.2006 of SEBI, wherein it informed about Bombay Stock Exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 24(f) of the Listing Agreement, at least one month prior to the date of presentation of the Scheme before the Court, the Company is required to file the same before the Stock Exchange. It is further stated that Clause 24(g) contains an undertaking from the Company that it will ensure that the Scheme would not violate or circumscribe with requirements of law. 20. Clause 24(g) reads as follows: The company agrees to ensure that any scheme of arrangement/ amalgamation/ merger/ reconstruction/ reduction of capital, etc., to be presented to any Court or Tribunal does not in any way violate, override or circumscribe the provisions of securities laws or the stock exchange requirements. Explanation: For the purpose of this sub-clause, 'securities laws' mean the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996 and the provisions of the Companies Act, 1956 which are administered by SEBI under Section 55A thereof, the rules, regulations, guidelines etc. Made under these Acts and the Listing Agreement. In view of the said requirement, the respondent contended that the applicant company was bound to obtain approval of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, considering the respondents' responsibility in the capital market, it viewed that it would be in public interest not to list the shares of the company, it stated that greater prejudice would be caused if the shares of Mayajaal Entertainment Ltd. were to be feted on the respondent Stock Exchange. However, having regard to the fact that there was a right of appeal against the order of the respondent company, the invoking of the jurisdiction was not sustainable. Hence, the respondent prayed for dismissal of these applications. 22. The questions raised in these applications turn more on the aspect of necessity to secure clearance from the Stock Exchange before moving this Court for an approval and the right of the Exchange to reject the plea for listing in the wake of an approval to the Scheme containing the clause for listing. As may be seen from the counter affidavit and the submission made herein, the objection of the Stock Exchange is that the approval obtained from this Court without waiting for a No Objection was irregular and hence, the Scheme had to be modified to exclude the clause for listing. 23. Learned Counsel for the applicants submitted that a Scheme of Amal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt II Appendix. He also submitted that the details of the assets and the reasons for diminution in the value of the assets were given in detail before the authorities. Consequently, he submitted that the question of the Company not giving a satisfactory explanation does not arise. Countering the plea of the respondent that a right of appeal is available before the Securities Appellate Tribunal, learned Counsel relied on a decision in C.A.No. 1836 of 2002 in C.P.No. 538 of 2000 dated 25th April 2003 in the matter of Scheme of Amalgamation of M/s. Om Sindhoori Capital Investments Ltd. with M/s. Apollo Sindhoori Capital Investment Ltd. wherein this Court considered that even, at the time of considering the sanctioning of an amalgamation, the parties had reserved their right to move this Court for any clarification. In the circumstances it was not necessary to prefer an appeal considering the fact that the Company had complied with Clause 8.3.5 of the SEBI Regulations. Learned Counsel also placed reliance on the decision reported in 38 company cases 701 at page 728 (In Re New Kaiser I Hind Spinning Weaving Company Ltd. ) and submitted that once the Scheme is sanctioned, the Stock Exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferring to the jurisdiction of this Court under the Scheme of Amalgamation, he submitted that Section 391 of the Companies Act is concerned with the compliance of the process of decision-making and not on the decision itself, since the Court does not judge on the pros and cons of the Scheme or the compromise. The Court's jurisdiction is peripheral and supervisory to see whether the procedural formalities are complied with for granting approval. He placed reliance on the decision reported in (H.B. Gandhi v. Gopinath and Sons) and [1983] 142 ITR 663(SC) (Titaghur Paper Mills Co. Ltd. v. State of Orissa) and submitted that in passing this order, the Bombay Stock Exchange has not interfered with the order of this Court, but it had merely exercised its authority as per the Regulations and that the applicants could have avoided this state of affairs if only they had brought this material particulars about Bombay Stock Exchange seeking clarification to this Court. 26. In reply, learned Counsel for the applicant submitted that Mayajaal Entertainment Ltd. had preferred an application on 11.6.2004. He laid great emphasis on the letter from the SEBI that the Bombay Stock Exchange was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of the compromise or arrangement and may, at any time of making such order or at any time thereafter, give such direction in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement It may be noted that although the Court's power in this Section is very wide, yet, from the three limitations, namely, the Court cannot sanction an agreement which is prohibited. Secondly, it cannot sanction an act done if the law permits, only subject to certain conditions, particularly for sanctioning a scheme which would be effected under some provisions of the Companies Act It is stated that while the power of the Court is of a widest amplitude, yet, it has the power to go into all incidental and ancillary matters an effort to satisfy about the requirement of the Act It may be noted that one of the requirements which guides the Court while granting the Scheme is that the proposed Scheme of Compromise is not violative of any provision of few and is not unconscionable or contrary to public policy. In the case of Hindustan Lever v. State of Maharashtra 2004 CriLJ 148, the Supreme Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioning the Scheme of Arrangement, or Compromise, is supervisory in character to see that the Scheme arrived at is lawful and that the affairs of the company were not conducted in a manner prejudicial to the interests of the members or to public interest or unfair to public policy. 30. A perusal of the Byelaws of the stock exchange show that Byelaws 34 and 35 are the relevant ones containing the list of conditions. Byelaw 34 mandates the Governing Board to consider and in its discretion subject to such terms as it deems proper, approve or defer or reject any application for admission of the securities of a company to dealings on the Exchange. Byelaw 35 states that the Governing Board may not grant admission to dealings on the Exchange to the securities of a Company unless it complies with the listing conditions and requirements prescribed in the relative Regulation namely Regulation 2, or such other conditions and requirements as the Governing Board may from time to time prescribe in addition thereto or in modification or substitution thereof in addition to the listing requirements prescribed in the Securities Contract (Regulation) Rules, 1957. Regulation 2 prescribes a check li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em about the order passed by this Court granting the Scheme. Learned Counsel for the applicants submits that in view of the jurisdiction of this Court granting the Scheme, the jurisdiction absolute in terms of Section 391, there being no mandatory requirement under the provisions of the Companies Act to get the approval of the Stock Exchange to the Scheme proposed, the absence of an order could not be viewed as a deterrent factor that no exception could be taken to the conduct of the petitioners. Apart from this, it is not for the Bombay Stock Exchange to interfere with the orders of this Court. He states that the Bombay Stock Exchange is bound to honour the order of this Court granting approval to the Scheme. 34. While at the first flush of the argument it looks correct, I can accept this only up to a point and subject to the scope of Section 392, since as already noted supra and as laid down by the Supreme Court, while granting sanction, the role of the Court is only supervisory. 35. Learned Counsel for the applicants submits that once a Stock Exchange grants its No Objection, it stands to reason that the rest of the Stock Exchanges before whom the applications were made, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed to be filed before the Court under Sections 391, 394 and 101 of the Companies Act, 1956, with the Stock Exchange for approval within a month before it is presented to the Court for approval. Sub-clause (g) states the company agrees to ensure that any scheme of arrangement/amalgamation/merger/reconstruction/ reduction of capital etc., to be presented to any Court or Tribunal does not in any way violate, override or circumscribe the provisions of securities laws or the stock exchange requirements. 37. The Explanation appended to Sub-clause (g) gives what are included in securities laws. In the context of Sub-clause (g), one cannot view Sub-clause (f) as a mere requirement without a purpose. If Sub-clause (g) is to have some relevance for its existence, Sub-clause (f) must necessarily be understood as to require a satisfactory compliance of Sub-clause (g), so that the authority constituted therein discloses its views on the Scheme. Considering the fact that the existence of the Stock Exchange is a regulatory mechanism, so that the investing public interests are safeguarded, the mere compilation of financial information placed before the shareholders, per se, would not mean that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjections in the light of the information available and place before the Court, facts which might not even be disclosed by the petitioner so that interest of the investing public are fully token note of before the Court passes an order. It may also be seen that when the Central Government places a report before the Court, the normal expectation is that it had taken note of every circumstance so that the interest of the investing public are protected, that the laws relating thereto or governing the affairs of the company involving the public money are not violated. Hence, when the Court grants the sanction, it must be noted that it is only on full satisfaction arrived at as to the compliance of the procedural requirement as well as on the report of the Central Government as to the affairs of the company. Given the constitution of a Stock Exchange, the requirement of a notice not being there under the provisions of the Companies Act or under the Rules, it stands to reason that the notice as such to a Stock Exchange is not a mandatory requirement while granting approval to the Scheme. Consequently, failure to give a notice or to wait for the No Objection from the Stock Exchange does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not mandatory to wait for a nod from the Stock Exchange for granting approval to the Scheme, could the Stock Exchange reject the Scheme approved or implement, even if any clause therein is violative of any of the requirements of law. Regulation 2 of the Stock Exchange, Mumbai, enumerates the conditions precedent to dealing on the Exchange. We have already noted Regulations 34 and 35 of the Stock Exchange, Mumbai. Given the autonomy in its operation, the compliance of these Regulations is absolute if any company wishes to have its dealings on the Exchange. Clause 24(f) of the Listing Agreement states: The company agrees that it shall file any scheme/petition proposed to be filed before any Court or Tribunal under Sections 391, 394 and 101 of the Companies Act, 1956, with the stock exchange, for approval, at least a month before it is presented to the Court or Tribunal.- Clause 24(g) states as follows: The company agrees to ensure that any scheme of arrangement/amalgamation/merger/ reconstruction/reduction of capital, etc., to be presented to any Court or Tribunal does not in any way violate, override or circumscribe the provisions of securities laws or the stock exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e clear-cut respective jurisdiction on matters before it. 42. It must be noted that SEBI acts in its own field, given the jurisdiction as a regulatory agency in the matter of dealing with stocks, shares and debentures. The intricacies on the listing of the Company is entirely with the Stock Exchange. Section 4 of the Securities Contracts Regulation Act empowers SEBI to recognise the Stock Exchanges. It also controls the rule-making of the said Exchanges. Stock Exchanges are held to be regulatory authorities. Their byelaws bind not only buyers, sellers and brokers, but also third parties who are affected by the transactions in the Stock Exchange. They are entitled to regulate all matters connected with the business of the Stock Exchange. The byelaws have the effect of the statutory force. Hence, given the expertise in the above field, the exclusive province of the Stock Exchange to grant recognition subject to the compliance of the Securities Laws, the Regulations and the Listing Agreement, in the context of Clause 24(f) is not to be confused with the jurisdiction of this Court granting approval of the Scheme. The applicants have, no doubt, filed a copy of the Scheme and the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered void in view of the rejection of the application by the Stock Exchange, Bombay, to render ineffective even the permission granted by the Coimbatore Stock Exchange within the stipulated period. Taking note of the amendment brought to Section 73(1)(A), the Supreme Court held that the expression each in Section 73(1)(A) has to be read as each and every one of the Stock Exchanges mentioned in the prospectus. Hence, going by the plain meaning of Section 73(1)(A), the Apex Court held that in the absence of permission granted by each and every one of the Stock Exchanges named in the prospectus for listing the shares, the allotment in toto would be void and the grant of permission of one of them is inconsequential. In a subsequent decision reported in 95 Comp. Cas. 339 (Jaltarang Motels Ltd. v. Union of India and Ors. following the decision of the Supreme Court reported in 85 Comp. Cas. 479 (Rishyashringa Jewellery Ltd. v. Stock Exchange), the Gujarat High Court held that a transfer would be void. The question then would be, will this decision have a bearing on the requirement in the Listing Agreement, particularly to Sub-clause (f) and (g) of Clause 24. Considering the scope of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt under the Listing Agreement, the same has to be tested in a manner known to law and as provided under the Securities and Exchange Board of India Act. It may also be noted that the Bombay Stock Exchange, apart from referring to the non-satisfaction of the listing requirement, had also pointed out to the conduct of the transferor company, namely, Pentamedia Graphics Ltd. as regards issuance of fake certificates in the market. In the background of this and the view on writing off of assets to a huge sum, it is better the question as to the satisfaction of the Listing Agreement and the correctness of the order of this Court is left to the expert body viz., Bombay Stock Exchange and the appellate forum, if the applicant so chooses to test the correctness of the same. In the light the view that I have taken, I do not accept the plea of the applicants. I accept the objections raised by the Bombay Stock Exchange. 46. The question is what would be the effect of the order of this Court granting approval. It must be noted that the Act provides for an appeal against the order of the Bombay Stock Exchange before the Appellate Tribunal. In the face of such an expert body to deal with ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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