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Mysore Fruit Products Ltd. and Ors. Versus The Custodian and Ors.

2004 (7) TMI 676 - BOMBAY HIGH COURT

Misc. Petition No. 25 of 2002 with Misc. Application No. 18 of 2004 - Dated:- 28-7-2004 - D Deshmukh, J. JUDGMENT D.K. Deshmukh, J. 1. Misc. Petition No. 25 of 2002 has been filed by Mysore Fruit Products Ltd., M/s. Karnataka Breweries and Distilleries Pvt. Ltd. and Shri D. K. Audikesavulu challenging the order passed by the custodian dated 12th December, 2001 under Section 4(1) of the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992 (hereinafter referred to as .....

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tion and application relate to the same transaction, therefore, both these petitions can be disposed of by a common order. The petitioners in Misc. Petition No. 25 of 2002 hereinafter shall be referred to as "the petitioners" and petitioners in Misc. Application No. 18 of 2002 shall be referred to as "the Custodian". Mr. Hiten Dalai, who is party in both the petitions shall be referred to as "the notified party". 3. The facts that are material and relevant for decid .....

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received the amount of ₹ 1,00,10,000/- from the notified party on 28th May, 1991, According to the petitioner No. 3 as a security for the amounts that were advanced by the notified party to the two companies, the petitioner No. 3 as Director of both companies handed over to the notified party 2,50,000/- shares of F.F.S.L., which were held by him, his wife and his son. According to the petitioners on 8th April, 1992 the petitioner No. 3 sold 1 lakh shares of F.F.S.L. out of 2,50,000/- share .....

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recorded in the letter dated 8.4.1992. It is also submitted that the transaction was agreed on 8.4.1992. The transaction was actually to take place on 30th September, 1993. According to the petitioners, though transaction was completed the notified party did not pay the amount of ₹ 99,90,000/- as agreed. It appears that on 27th November, 1997 the custodian issued a show cause notice to petitioner Nos. 1 and 2 companies and the petitioner No. 3 as also the notified party to show cause why t .....

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e notified party asking them to show cause why the transaction of sale of 1 lakh shares by the petitioner No. 3 to the notified party should not be cancelled as fraudulent and as having been entered into to defeat the provisions of the Act. Petitioners submitted their explanation. They were also heard. The custodian ultimately passed an order dated 12th December, 2001 holding that the transaction of sale of 1 lakh shares by the petitioner No. 3 to the notified party for adjusting the amount adva .....

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sions of the Act. The petitioner filed their petition and challenged the order, during the pendency of that petition the custodian filed Misc. Application No. 18 of 2004 stating therein, without prejudice to the contentions of the custodian that the transaction is fraudulent and has been brought about to defeat the provisions of the Act, that the alleged transaction is illegal and therefore under Section 3 the amount of ₹ 4,00,10,000 which was with the two companies continued to be the pro .....

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he shares by the petitioner No. 3 to the notified party was that the shares were non-transferable and therefore their ownership cannot pass to the notified party and further that as the alleged transaction was entered into to divert the monies from the notified party, the transaction was entered into to defeat the provisions of the Act. It is submitted that the finding recorded in the order that because of the lock-in-period the shares were non-transferable is ex facie incorrect. The impression .....

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ted that, therefore, the finding recorded in the order that the shares were non-transferable and therefore their transfer on 8th April, 1992 is illegal and is therefore liable to be set aside. It is further submitted that the allegation in the show cause notice that the alleged transaction was entered into to divert the monies from the notified party and therefore the transaction was entered into to defeat the provisions of the Act is not a separate ground. It is submitted that in the show cause .....

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ted that there is no fraud involved and therefore the order passed under Section 4 is liable to be set aside. 5. The learned Counsel appearing for the custodian firstly supported the order passed under Section 4 by the custodian and submitted that the transaction was completely fraudulent and was brought about only to defeat the provisions of the Act. It is further submitted by the learned Counsel appearing for the custodian that even the petitioners admit that the sale of the shares was a forwa .....

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dian also relied on a judgment of the learned Single Judge of this Court in the case of BOI Finance v. Custodian and A.K. Menon v. Fairgrowth Financial Services Ltd. and Anr., 2002 (1) All M. R. 180, dated 14th December, 1993. On the contrary the learned Counsel appearing for the petitioners contended that the forward sale of the shares of F.F.S.L. was not prohibited because shares were not listed on the stock exchange. In support of this submission the learned Counsel appearing for the petition .....

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the provisions of the Securities Act applies only to those shares which are listed on the stock exchange. It was also submitted on behalf of the petitioners that though the actual sale of the shares took place on 30th September, 1993, on 8th April, 1992 equitable charge in favour of the petitioners was created on the amount of ₹ 4,00,10,000/- and therefore even if it is assumed that the amount on the date of notification of the notified party under the Special Court Act was the property o .....

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is Sub-sections 3 and 4 of Section 3 which are relevant. They read as under :- "3(3) Notwithstanding anything contained in the Code and any other law for the time being in force, on and from the date of notification under Sub-section (2), any property, moveable or immoveable, or both, belonging to any person notified under that sub-section shall stand attached simultaneously with the issue of the notification. 3(4) The property attached under Sub-section (3) shall be dealt with by the Cust .....

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to the notified party and it was given as advance by the notified party to the petitioner Nos. 1 and 2 companies in the year 1991. According to the petitioners, this amount which belonged to the notified party was adjusted by the petitioner No. 3 as the price of 1 lakh shares of the Company F.F.S.L. on 8th April, 1992. It, therefore, becomes necessary to refer to the letter dated 8th April, 1992 addressed by the petitioner No. 3 to the notified party. At the hearing of the matter, the learned C .....

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four crores and ten thousand only) arranged by you for our companies. We confirm having sold to you this day one lakh shares of Fairgrowth Financial Services Limited at ₹ 500/- net to us. These shares are not transferable till 30th September, 1993 and you have agreed to continue the advance of ₹ 5,00,00,000/- (Rs. 4,00,10,000/- already remitted, balance sum of ₹ 99,90,000/- to be remitted by you), till 30th September. 1993 on which date the absolute sale will take place and en .....

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for the shares standing in the name of Sri D. K. Audikesavulu. We request you to send the confirmation for the above transaction." Reading of this letter shows that the petitioners admit that as on that date namely 8.4.1992 an amount of ₹ 4,00,10,000/- belonging to the notified party was with the two companies. The letter then states that it is agreed between the petitioner No. 3 and the notified party on 8th April, 1992 that the notified party purchases 1 lakh shares of F.F.S.L. at t .....

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ven by the notified party to the two companies till 30th September, 1993 and the sale of the shares was to take place on that date namely 30th September, 1993. One thing that emerges from this letter is that the amount of ₹ 4,00,10,000/- was to continue as advance made by the notified party to the two companies till 30th September, 1993. Mr. Hiten Dalai admittedly was notified under the Act on 6.6.1992. Thus on that date the status of the amount of ₹ 4,00,10,000/- was that the amount .....

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owned the amount, lost his capacity to deal with the amount. Now, the amount could be dealt with only by the custodian under the directions of the Special Court, and therefore, unless the order is made by the Special Court, the sale of the shares for adjusting the advance will not take place. In other words, as a consequence of notification of Mr. Hiten Dalai under the provisions of the Act, for the purpose of completing the sale it was for the petitioners to approach the Court and seek appropr .....

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1992. 7. Another aspect of the matter that is to be seen in view of the provisions of Section 3 is that if the transaction of sale which admittedly is a forward sale of the shares itself is contrary to law, then there is no question of their being any assignment as alleged by the petitioner. There was no dispute before me that the transaction reflected in the letter dated 8.4.1992 is the transaction of forward sale of shares of a public limited company. It is also not disputed that such a sale i .....

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. Patel, (1979) 49 Com. Cas. 1 (Bom.) : 1979-(CC2)-GJX-0087-Bom. In this case the question was whether the said Act applied to a transaction of sale of shares of a private limited company. The issue before the Court, as set out at page 6 of the judgment, was whether an agreement to sell shares of a private limited company was illegal and void by virtue of the provisions of the said Act. In this judgment, it has been laid down that by reason of the definition of the term "securities" un .....

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ngwith the definition of "stock exchanges", it becomes clear that the purpose of the Act is to control securities which are normally dealt with on the stock exchange, i.e. shares of a public limited company. It is held that construed in this sense the definition of the word "securities" would exclude from its purview shares which are not marketable, such as shares of a private limited company. This is because such shares are by their nature not freely transferable in the mark .....

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ling speculation in shares of public limited companies. It is then held that the main purpose was to regulate speculation in shares on the stock exchanges and to regulate the mechanism of stock exchanges for this purpose. The learned Judge also noted the scheme of the Act. After examination of various sections, the learned Judge held that machinery for regulating dealings in securities is the machinery of the stock exchange. The learned Judge noted that there is no provision made in respect of l .....

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been clearly held that marketable means something which is offered for sale in a market. It is submitted that it is held that goods become marketable when there is a market or place where goods can be readily sold. It is submitted that the shares/securities which are not quoted cannot be dealt with on the stock exchange and that, therefore, they could not be said to be marketable. It is submitted that any security which has not been listed on the stock exchange would not be marketable in the se .....

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rly regulated. A consideration of the functions of a stock exchange is perhaps the most suitable starting point for the formulation of an approach to the problem of regulation. The legitimate function of a stock exchange is to provide, consistently with the larger public interest, a forum and a service which are so organised, in the interests of both buyers and sellers, as to ensure the smooth and continual marketing of shares......" It is submitted that this also clearly shows that the sai .....

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provisions of the said Act merely talk of "securities", it necessarily means "securities which are listed on the stock exchange". It is submitted that even the notifications issued under Sections 13 and 16 must necessarily relate to securities which are listed on the stock exchange. The learned Counsel for the petitioners also relied upon the judgment given by the Appellate Court in the appeal filed against the above judgment. The judgment of the Appellate Court is reported .....

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the Division Bench recognises, right at the beginning, that the said Act also deals with regulation of transactions in securities outside the stock exchanges, i.e., unlisted securities. The Division Bench then held that the effect of Section 13 was that if transaction in securities was to be validly entered into, such a transaction has to be between members of a recognised stock exchange or through a member or with a member of a recognised stock exchange. The Division Bench held that the defini .....

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rities of 'like nature', that is to say, like those which were categorised or enumerated earlier were also to be marketable before they could be held to fall within the definition of 'securities'. .......in our view, the words plainly read are incapable of any other meaning except that the Legislature made the definition of 'securities' an inclusive one having regard to the object with which the Regulation Act was enacted, namely, to control transactions which were carrie .....

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ce of buying and selling. Indeed, the Act itself refers to the power of the stock exchange to provide for opening and closing of markets and the regulation of the hours of trade as a matter on which a by-law can be made by the stock exchange. The stock exchange, therefore, is contemplated as a market even under the Act... Thus, as put by Lord MacDermott, the word 'marketable' must, in the present case, govern the catalogue of securities earlier mentioned. In Webster's Third New Inter .....

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nd on any other circumstance except the circumstance of sale and purchase. A market, therefore, contemplates a free transaction where shares can be sold and purchased without any restriction as to title. The shares which are sold in a market must, therefore, have a high degree of liquidity by virtue of their character of free transferability. Such character of free transferability is to be found only in the shares of a public company." (emphasis provided) The Division Bench has also, inter .....

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xchange. The use of the term "capable", in my view, would clearly include securities which are not just listed but also securities of public companies which are capable of being listed on a recognised stock exchange. 8. These authorities, therefore, do not support the proposition canvassed on behalf of the petitioners. It is to be seen that the question which has come up for consideration before this Court was not being considered either by the learned Single Judge or by the Division B .....

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w. If one goes through the provisions of the Act, the scheme of the Act makes it clear that no restrictive interpretation can be placed on the terms used in the Act. If the provisions of the Act are looked at, it is clear that it relates not merely to securities which are listed but it also relates to securities which may not be listed in any stock exchange. All that is required is that there must be "marketability". In my view, it cannot be said that any security which is not listed o .....

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ble of being freely transferable is marketable. As is seen, the definition of the word "security" under Section 2(h) is an inclusive definition. It is very wide. Thus all securities which are marketable and which have an ease or facility of selling and/or which have a high degree of liquidity and/ or are capable of being sold in a market i.e. stock exchange, are included. That this definition includes securities which are not listed by a stock exchange is clear from Section 17. If Sect .....

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the object of the Act, as seen from the preamble, is "to prevent undesirable transactions in securities by regulating the business of dealing therein". It is settled law that there can be two methods of regulation (1) by making something compulsory; and (2) by laying down certain disadvantages if the provisions are not complied with. In my view, the said Act seeks to regulate by placing certain disadvantages in respect of transactions in securities unless the companies get their shares .....

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d the notification issued thereunder, even though it says that it "regulates transaction in securities in the whole of India", are by reason of an artificial definition to be restricted only to areas where there are stock exchanges. To accept the argument of the learned Counsel for the Petitioners, would amount to saying that in areas where there are stock exchanges and the securities are listed on that stock exchange, ready forward transactions would be prohibited in these securities .....

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ublic limited companies which are not listed on the stock exchange are prohibited by the Securities Act. Therefore, the transaction alleged to have been entered into on 4th April, 1992 of forward sale of 1 lakh shares of F.F.S.L. was contrary to the provisions of the Securities Act and therefore even if it is assumed that the transaction infact took place the transaction cannot be given effect to as it is illegal transaction. The amount of ₹ 4,00,10,000/-, therefore, will continue to belon .....

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t in the show cause notice, it is merely alleged that the transaction has been entered into to defeat the provisions of the Act, the facts on the basis of which this conclusion can be reached are not disclosed. However, to my mind it is clear that the facts on the basis of which it can be said that the transaction was shown to have been entered into to defeat the provisions of the Act are apparent on the face of the record. The huge amount of ₹ 4,00,10,000/- is claimed to have been given m .....

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by the petitioner No. 3 either for the amount of ₹ 99,90,000/- or for 1,50,000 shares, which Mr. Hiten Dalai is supposed to be holding, belonging to the petitioner No. 3. It is common knowledge that the securities scam had broken out in the month of March, 1992 and steps were being taken by the authorities in that regard. It was also obvious that Mr. Hiten Dalal was involved in that scam and therefore obviously papers were prepared to show adjustment of the amount. It is impossible to bel .....

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