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Koshy George Versus Divisional Head

2017 (11) TMI 723 - KERALA HIGH COURT

Initial Public Officer (IPO) or Stock Market Launch - Non adherence to ASBA process - allotment of shares - Held that:- On an examination of the contents of the statement filed on behalf of the fourth respondent, it become indisputable that the equity shares applied for by the petitioners under the Rights Issue and the additional shares applied for by them have not been yet alloted and that the amounts expended by the petitioners for application of such shares through demand drafts are also stil .....

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ied under the ASBA process. As already shown above, the ASBA process is intended to the benefit of the petitioners and merely because’ they had not made payment under that process, it would be a paradox that they are refused allotment of shares. This is more so because the petitioners’ action in not applying through ASBA process would not and has not in any manner prejudiced any of the respondents, including respondents 4 and 5. - In such view of the matter, it is of the firm opinion that W. .....

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though the petitioners may have a case, going strictly by the terms of the relevant provisions, that the company ought not to have transferred such large percentage of its profits to general reserves without enhancing the rate of dividend, such action has only helped the financial condition of the company and has contributed to increase the value of its shares rather exponentially. The petitioners, being the investors, cannot he said to be prejudiced because even though the dividend was not enh .....

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ubmitting that the petitioner does not intend to continue with the challenge against such action and that this writ petition can thus be closed without any further orders. I think this is a very fair stand taken by the petitioner and I, therefore, close W.P.(C)No. 32874/2009 without any further orders. - Direct respondents 4 and 5 to allot to the petitioners the shares applied for by them under the Rights Issue as also the additional shares by accepting the amounts for such purpose provided .....

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ner : Koshy George, Annie Koshy, Nilesh K. George, Nileena Achy Koshy, Nithin Sunny Alex, Nithin M. Koshy and P.C. Haridas, Advs. For The Respondent : K.M. Jamaludheen , M. Gopikrishnan Nambiar, P. Gopinath, P. Benny Thomas, K. John Mathai, Joson Manavalan, Kuryan Thomas and Vivek Varghese P.J., SC JUDGMENT 1. Initial Public Officer (IPO) or Stock Market Launch is a process through which a privately held company transforms into a public one. It is a kind of public offering in which shares of a c .....

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the trusting and often under informed small investor. One such reforms process developed by the SEBI for applying in an IPO is called the Applications Supported by Blocked Amount1 (ASBA), under which the investors application money in an IPO is protected and preserved until the shares are issued. 3. I have indited the short foreword as above since in these cases the operational realm of the ASBA process along with issues relating to General Reserves and Dividends of a public company have been pr .....

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venience I deem it appropriate to treat W.P.(C)No. 6106/2015 as the lead case and all reference to parties and documents in this judgment will be as obtaining the said writ petition. 6. I have heard Sri.P.I.Davis and Sri.P.C.Haridas, learned counsel appearing for the petitioners, Sri.P.Gopinatha Menon, learned Standing Counsel for M/s.Canfin Homes Ltd., and Sri.K.MJamaludheen, the learned counsel for the official respondents. 7. The petitioners in W.P.fQNo.6106/15 are existing shareholders of th .....

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they had applied for shares already alloted to them. For the purpose of this Rights Issue, the petitioners say that the Company had forwarded to them three Composite Application Forms (CAF) and that they had submitted the same to the Registrars to the issue, namely Karvy Computer Share (P) Ltd., Hyderadad, the fifth respondent herein, for an aggregate number of 10,583 shares on Rights Entitlement and for additional shares, along with four demand drafts drawn from Dhanalakshmi Bank Ltd., aggregat .....

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unt exceeds ₹ 2 lakhs could participare in the issue only through the ASBA process. The petitioners have produced the Letter of Offer, which has been appended to this writ petition as Exhibit P5. They contend that such restrictions in the Letter of Offer are without any reason and that it has no nexus to the object to be achieved, namely protection of the investors. 8. W.P.(C)No.6106/2015 has been filed by the petitioners seeking to quash the first condition in Exhibit P5 General Instructi .....

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M/s.Canfin Homes LtdL and to deiete the first condition as mentioned above. 9. I notice that a counter affidavit has been filed on behalf of the fourth respondent and according to them, the conditions in the Letter of Offer, namely those contained in Section I - General - Definitions and Abbreviations, which mandate that all applicants, whose application amount exceeds ₹ 2 lakhs, shall participate in the issue only through ASBA process is designed to protect them and for nothing else. 10. .....

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ment is finalised. What is intended obviously is, therefore, the protection of the investor. 11. This is a process developed by the India s Stock Market Regulator SEBI for applying to an IPO. Under this process an IPO applicant s account does not get debited until shares are alloted to them. The ASBA process facilitates investors bidding at a cut off, with a singular option, to apply through Self Certified Syndicate Banks (SCSBs), in which the investors have bank accounts. SCSBs are those banks .....

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of his choice and it will get debited from his account only if his/her application is selected for allotment after the basis of allotment is finalised. This is a supplemental process of applying in an IPO through the Book Building route and co-exists with the extant process of using Cheque/Demand Drafts as a mode of payment. 12. It is ineluctable that the process of ASBA was visualised and ope rationalised by SEBI to protect the investor because this allows the investor s money to remain in his .....

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also be eliminated. 13. In the case at hand,, however, it is ironic is that what is intended to be for the benefit of the investor has now boomeranged against them as a detriment. The petitioners had applied for the Rights Issue offered by the fourth respondent and had remitted the funds required, namely ₹ 48,58,983/-, through demand drafts drawn from a bank enclosed with their applications. As far as the fourth respondent - the issuer of the rights and the fifth respondent - the Registra .....

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fts were not accepted and allotments were also refused. This is very ironic and as I have already recorded above, what was meant to be for protection finally presented itself to be a great detriment. 14. There is no doubt that going by the specific terms of Exhibit P5, the petitioners are obligated to apply under the ASBA process. However, they applied with demand drafts in lieu of the said process. This has caused no prejudice whatsoever either to the fourth respondent or to the fifth responden .....

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them to purchase the demand drafts would have remained blocked for long periods of time until the same had been refunded to them. I am, therefore, of the firm view that even though .the petitioners have not complied with the specific manner under which the funds are to be provided for the issue as per Exhibit P5, since they have provided the funds through demand drafts, which could have been encashed by respondents 4 and 5 without any impediment, it would not be justified forensically or ethical .....

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hat the additional shares were also not considered for allotment. The statement also says that the amounts paid by the petitioners, namely ₹ 48,58,983/- through demand drafts, excluding the demand draft charges of ₹ 10,947/-, have been kept in a separate bank account (current account) opened for the purpose of the Rights Issue. The fourth respondent further says that the additional shares applied for by the petitioners were also not considered for basis of allotment and that no such .....

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ue account of the Bank. The statement further says that the Board of Directors of the Company, at their 164th meeting held on 09.03.2015, has resolved that allotment of 10,583 number of equity shares of the Rights Issue be kept in abeyance pending final decision of this writ petition. 17. On an examination of the contents of the statement filed on behalf of the fourth respondent, it become indisputable that the equity shares applied for by the petitioners under the Rights Issue and the additiona .....

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ve and since the petitioners have supported their applications for shares honestly and bona fide through valid demand drafts, it would be unfair and unjust to subject them to a detriment merely because they have not applied under the ASBA process. As I have already shown above, the ASBA process is intended to the benefit of the petitioners and merely because they had not made payment under that process, it would be a paradox that they are refused allotment of shares. This is more so because the .....

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nt. 20. Before I issue final orders in this case, it will be now necessary to consider the contentions of the petitioner in W.P.(C)No.32874/2009. I see that the petitioner in the said writ petition is the second petitioner in W.P.(C)No.6106/2015. The essential challenge in these writ petitions is that even though Canfin Homes Ltd. had been posting better results in the past years, it has not increased its dividend from 25% for the five years prior to 2009, when the said writ petition was filed. .....

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d that transfer of amounts into the general reserves, even though the dividend not having been raised, can only add to the financial health of the company. He concedes that over the years the value of the shares of the company has escalated exponentially which also fortifies the fact that the company s action in maintaining a high reserve has helped it its long run. 21. The declaration of a proper dividend by a company under Section 205 of the Companies Act and transfer of profits to reserves un .....

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f Directors and the share holders had passed necessary resolutions before declaration of dividend in the relevant year. They. maintain that there is nothing in the Rule prohibiting the. company to transfer to thes1 reserves, a higher percentage of the profits than that is compulsorily required under the Rules. 23. On an examination of the relevant and vital factors involved in this case, I see that even though the petitioners may have a case, going strictly by the terms of the relevant provision .....

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