TMI Blog2009 (5) TMI 988X X X X Extracts X X X X X X X X Extracts X X X X ..... y Law Board had ordered an investigation in C.P. No. 6 of 2003, by its order dated September 14, 2005, as under: Since this Board has already ordered investigation into the affairs of M/s. Usha (India) Ltd. and since the present respondent-company is a subsidiary of M/s. Usha (India) Ltd., no separate order is necessary as the investigation of holding company, would include investigation of subsidiary also. Accordingly, the petition is disposed of. 4. The respondent preferred an appeal under Section 10F of the Act before the hon'ble High Court of Allahabad who vide its order dated February 22, 2006, remanded the case to the Company Law Board for deciding the petition under Section 237(b) of the Companies Act, after considering the objections raised by the respondent before the Company Law Board as under: In these circumstances, the impugned order is to be quashed and the petition is to be remanded to the Company Law Board for deciding the petition under Section 237(b) of the Companies Act afresh after taking into consideration the objections raised by the appellant before the Company Law Board and after deciding as to whether the investigation is to be made as a sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were pledged by the promoters' group during the period September-October, 2000. The financial institutions/banks had considered a margin of about 50 per cent, (approximately ₹ 400 crores) of the total book value of the shares while sanctioning the loan of about ₹ 410 crores to the promoters' group, resulting in over valuation of the shares to the extent of ₹ 800 crores. The promoters directors have defaulted in payment of all these loans. (g) That a complete preferential allotment of shares has been made to the extent of ₹ 9,35,810 in the issue price range of ₹ 300 to ₹ 2,135 per share for a total value of ₹ 38.33 crores. Many of the private placements have been made by the respondent-company towards the peak prices by taking advantage of the rapid increase in the price of the scrip. (h) That the promoters' group had sold 7,85,000 shares for a total value of ₹ 45.19 crores only. (i) That the front companies of the promoters' group had purchased 24,15,532 shares of the value of ₹ 369.26 crores during the period September 1999 to September 2000. They had also sold 23,73,610 shares of the value of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act such an issue can never be determined by the proceedings through the Company Law Board. The fact whether the company is a subsidiary or not would change with slight dilution in the equity in the hands of the holding company. Therefore, even the fact that whether the subject company is a subsidiary of Usha (India) Ltd. or not can also be determined by thorough investigation only. More so, whether the subject company remained a subsidiary, how long it was a subsidiary, when it lost the status of a subsidiary, who are the persons to whom equity has been diluted, whether it has the history of becoming a subsidiary and de-subsidiary are the questions that can fairly be answered by carrying out the investigation as investigation is warranted in the words of the Company Law Board order when it is not possible to unearth the violation through naked eye. Therefore, it was argued that these proceedings would not be the proper forum to decide the status of a subsidiary as this issue should also be left to be decided by the investigation agency since the respondent has a zigzag approach towards this issue and have replied without withdrawing the previous replies on record. 9. It was fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the affairs of the respondent are not reflecting true and fair picture of its state of affairs and in order to get loans and to off-load the equity at higher price, rosy picture was presented before the stake holders. It was argued that the extent of damage and the real beneficiary of such a decorated state of affairs cannot be ascertained unless and until investigation is carried out findings thereof are on record. 11. To support their contention the petitioner relied in the case law in Whale Stationery Products Ltd. v. Union of India [2007] 140 Comp Cas 478 (Delhi) : [2007] 137 DLT 516, Ketan Parekh of the Bombay High Court and in Union of India v. Shonkh Technologies International Ltd.: [2007] 138 Comp Cas 598 (CLB). 12. Counsel for the respondents contented that respondent No. 1 company is not a subsidiary of the M/s. Usha (India) Ltd. M/s. Usha (India) Ltd., does not control the composition of the board of directors of respondent No. 1 company. It was pointed out that for being a subsidiary, the holding company is required to hold more than half in nominal value of the equity share capital in the other company. Respondent No. 1 is not a subsidiary of Usha (India) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board must be such as to justify an order for deeper probe into the affairs in the company. In the present case, no such circumstances and material is on record which can justify investigation as prayed for as, firstly, the SEBI has already carried out an investigation into the affairs of the company, recommended certain civil and criminal actions and implemented the same by filing the prosecution against the company and its then directors, and whole basis of filing the present petition is just the SEBI's investigation as stated in paragraph 4 of the petition. If paragraph 4 is removed from the petition, no other reason, cause or grounds for seeking investigation into the affairs of the company is left any more. Secondly, it was argued, that the facts and circumstances are not the same as were in the year 1999-2000. The alleged cause of action for seeking investigation is pertaining to the year 1999-2000 hence investigation after a period of almost 9 years will not serve any purpose. Thirdly, as per the interim report of the SFIO dated October 10, 2007, not a single entry, data and finding or instant is pertaining to respondent No. 1 company hence there is no cogent reason for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the provision contained in Section 220(1) and 220(3) of the Criminal Procedure Code, 1973, Article 20(3) of the Constitution of India and Section 26 of the General Clauses Act, 1897. 16. It was contended that as per Sections 15Y and 20Y of the SEBI Act, 1992, the present petition/proceedings are barred under the law and the proceedings are liable to be dismissed. The present petition is also liable to be dismissed in limine in accordance with the provisions contained in Order VII, Rule 11 of the CPC which also provides for rejection of plaint where the suit appears from the statement in the plaint to be barred by any law. Reliance is placed on Sections 15Y and 20Y of the SEBI Act, 1992. It was contended that once the SEBI has conducted thorough investigation, interrogated persons associated with it, recommended certain actions and implemented the same by filing various civil and criminal cases, the present petition cannot be allowed and is liable to be dismissed with exemplary cost. 17. Further, it was argued by counsel for the respondents that an investigation into the affairs of the company can be sought only in cases where certain facts are required to be discovered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as filed a copy of the report dated October 10, 2007, signed by the additional director, SFIO. It was pointed out that the petitioner has filed this report along with the reply to the C.A. No. 397 of 2007 and has stated that it is supporting the case for investigation under Section 237(b). It was contended that a bare perusal of the report dated October 10, 2007, shows that not a single entry is related to respondent No. 1 company. Even the name of respondent No. 1 company has not been averred in a single occasion, whole report talks about the alleged diversion and violations by M/s. Usha (India) Ltd., M/s Malvika Steel Ltd. and M/s Koshika Telecom Ltd. It was pointed out that in pursuance of the order dated May 22, 2005, passed by the Company Law Board in C.P. Nos. 53 and 55 of 2003 (IFCI Ltd. v. Usha (India) Ltd. [2006] 129 Comp Cas 534) the SFIO has investigated into the affairs of the three companies and has filed various criminal complaints before the court of law. Hence, for the alleged transactions, as stated in the report dated October 10, 2007, prosecution has already been launched by the SFIO. The SFIO's report does not support the case of the petitioner for seeking i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the holding company, investigation of the holding company would include investigation of the subsidiary company; in the present company petition investigation has been sought on the basis of the SEBI's report, if paragraph 4 in the company petition giving the findings of the SEBI is removed, there is no other reason/cause/ground for seeking an investigation ; the facts and circumstances as of now are not the same as were in the year 1999-2000; SFIO's interim report dated October 10, 2007, does not give any finding regarding any entry, data pertaining to respondent No. 1 company; proceedings under Section 237(b) are fact finding, facts have already been found by the SEBI; the SEBI investigation is a complete investigation which serves the purpose of the present petition; in consequence of the SEBI's finding, respondent No. 1 company and its directors are already facing criminal proceedings and respondents Nos. 2 and 3 have also been debarred from involving themselves in the share market for one year; the same act/cause of action, in which already criminal proceedings are pending, cannot be a basis for second trial/prosecution, the same cause of action is barred as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SEBI proceeded on to investigate respondent No. 1 company. The petitioner's case is that even otherwise whether respondent No. 1 company is or is not a subsidiary of Usha (India) Ltd., is a question of fact and law and facts in this regard can be ascertained only by an investigation and not by the Company Law Board, whether respondent No. 1 company remained a subsidiary of Usha (India) Ltd., for how long it was a subsidiary, when it lost the status of a subsidiary, who are the persons to whom equity has been diluted, whether it has the history of becoming a subsidiary and de-subsidiary are the questions that can fairly be answered in an investigation only which is a fact finding exercise. 25. It is noted that the respondents have failed to refute the petitioner's case for investigation. The respondents' arguments are not tenable. Besides there are contradictions in their own stand and contentions. On the one hand it is argued that the SEBI has already completed detailed investigation and as per the findings of the SEBI the respondents are already undergoing trial in criminal proceedings, on the other hand it is argued that there is no case made out under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsuant to the power conferred on them under their respective statutes. Every authority is entitled to investigate even may be in respect of the same material as well as from the angle and facet in which they have been asked to any out the investigation. The SEBI may be investigating the same material on the ground of breach of the various provisions of the SEBI Act and other security related legislations whereas the Central Government, Ministry of Corporate Affairs can consider and/or investigate the fraud and/or breach if various provisions of law in the light and context of the provisions of the Companies Act may be in respect of the same material. The contention advanced by counsel for the respondent appellant cannot be accepted particularly in view of the fact that every authority has been conferred various powers in their respective legislation. Reference may be made to a similar issue which arose before the English court under the identical provisions of investigation under the Companies Law and the Court of Appeal in the case of London United Investments pic, In re reported in [1992] BCLC 285 : [1992] 2 All ER 842, wherein it was held as under (page 849): The power of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under Section 237(b) is also not tenable. 29. The Company Law Board is to decide the petition under Section 237(b) afresh after considering the objections raised by the respondents as to whether the investigation is to be made as a subsidiary company of Usha (India) Ltd. or there is a case for making investigation under Section 237(b) separately as an independent company. The respondents' contention that the Company Law Board is to first decide whether respondent No. 1 is a subsidiary company or not is not tenable in the facts and circumstances of this case. What the Company Law Board is to decide after considering the respondents' objections is whether there is a case for ordering investigation into the affairs of respondent No. 1 company under Section 237(b) as a subsidiary of Usha (India) Ltd. or even otherwise. 30. The petitioner has pointed out that it is a fit case for ordering an investigation under Section 237(b) of the Companies Act, 1956 whereas the respondent's case is that no case has been made out for ordering an investigation under Section 237(b) of the Act. This Board has an onerous duty to form an opinion with regard to the existence of the inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the SFIO in this matter, the respondents' observations regarding SFIO's report to support their contentions are irrelevant in deciding this petition. There is no dispute that the power under Section 237(b) has to be exercised carefully. Even otherwise the SFIO's report is only an interim report, the SFIO had only commenced investigation it had not completed it when the order for investigation stood quashed remanding the matter to the Company Law Board by the hon'ble High Court of Allahabad. 32. There is no dispute with the legal principles laid down in the cases relied upon by the respondents in Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp Cas 634 (Delhi), the reasons warranting the appointment contained in the preamble to the order was nothing more than a repetition of the language of Section 237(b)(ii), the general charge cannot by itself, be a ground justifying the action under Section 237, unless it is substantiated with reference to one or more of the other charges; in S.L. Verma v. Delhi Flour Mills Co. Ltd. [1975] 45 Comp Cas 33 (Delhi), it was held dismissing the petition, that the purpose of Section 237 is not to order an investigation into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions. They follow the scheme of Sections 164 to 175 of the English Act of 1948. Section 235 enables the Central Government to appoint inspectors for investigation and report generally if the Registrar reports under Section 234 and also if a stated number of shareholders or shareholders possessing a stated voting power apply. When members apply they must support their application by evidence and give security for costs of investigations. This section is in two parts. The first part which is (a) compels the Central Government to appoint the inspectors to investigate and report of the company by a special resolution or the court by order declares that the affairs be investigated. The second part which is (b) gives a discretionary power. Part (b) of Section 237 reads: 237. Without prejudice to its powers under Section 235 the Central Government--... (b) may do so (i.e., appoint one or more competent persons as inspectors to investigate, etc.) if, in the opinion of the Central Government, there are circumstances suggesting-- (i) that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner vehemently argued that this is a fit case for directing an investigation under Section 237(b) of the Act, as the pre-conditions before initiating an action under this provision are fulfilled as the business of the company was conducted with the intent to defraud the general public, in the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company. Now coming to the facts of the present case, it has to be determined that whether the conditions as laid down in Section 237(b) of the Act are satisfied or not. The facts and circumstances of the present case prima facie demonstrate and establish the existence of prerequisites which compel me to form an opinion in terms of Section 237(b) of the Act. The directors owe fiduciary duty to the shareholders and they have to function not only in good faith but in very good faith. But in this case the shareholders faith seems to have been belied. It is a case where the respondents and the persons concerned in the management of the company appears to be guilty of fraud, misfeasance and other misconduct towards the company. The business of the company appears to have been carried on otherwise ..... X X X X Extracts X X X X X X X X Extracts X X X X
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