TMI Blog2004 (7) TMI 695X X X X Extracts X X X X X X X X Extracts X X X X ..... utta Stock Exchange and Mumbai Stock Exchange. 4. The company went in for two issues of secured debentures. The first issue opened on 1-9-1999 and the second issue on 1-4-2000. The company wanted to set up a chicken processing plant and wanted to expand its activity in floriculture and steel plant. Each issue was for ₹ 10 crores with a green-shoe option of ₹ 500 lakhs. It was alleged that these debentures were not offered to select group of persons and therefore the offer of debentures was not a private placement but a public offer. Admittedly, two commission agents, who felt aggrieved by perhaps the non-payment of commission or for some other reason best known to them, gave a complaint to SEBI to the effect that funds were collected by the company from the public and requested SEBI to enquire into the matter. 5. The SEBI at Annexure A-1 issued a show cause notice to the company under the heading Violation of the Provisions of Companies Act, 1956 Notice for Prosecution . The first show cause notice of 25th of September 2000 is marked as Annexure A-1. The allegation in the notice was with reference to the letter of offer submitted by the company for multiplier sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, private placement as claimed by the company? (2) Whether SEBI had the power to issue Guidelines without those Guidelines being laid before Parliament as required under Section 31 of the Securities and Exchange Board of India Act, hereinafter referred to as 'the Act'? (3) Whether SEBI's impugned order survives for consideration in the light of the order of the Supreme Court in Civil Appeal 9738 of 2003 wherein the debenture-holders have been allowed to convert their debentures into preferential shares by consent of the debenture-holders and the company with effect from 1st of April, 2003? (4) Whether there was any grievances from the Debenture-holders? (5) Whether SEBI had power to restrain persons from accessing the securities market prior to the introduction of Section 11(4) of the Act, which was inserted by the Securities and Exchange Board of India (Amendment) Act, 2002 Section 4(d) and came into force with effect from 29-10-2002? 10. First issue to be addressed to is whether the debentures were offered to the public or whether it was a private placement. It appears that the SEBI Guidelines only relate to public placement. It is common ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for shares or debentures is made to fifty persons or more, This proviso was not in force when the two debenture issues were made by the company. The first issue was on 1st of September, 1999 and the second issue was on June 1, 2000. The allotments were completed by July, 2000. Therefore, the proviso, which came into force on 13-12-2000 holding that any issue made to 50 or more persons will be deemed to be public issue, was not in force. 13. We are now left with the definition of a 'public issue' before the amendment. Section 67(3) of the Companies Act stipulates in the negative to the effect that no offer or invitation shall be treated as made to the public if the offer or invitation does not result directly or indirectly in the debentures being available for notice by persons other than those receiving the offer or initiation. In other words, no offer shall be treated as being made to public unless it can be shown that directly or indirectly the debentures were calculated to make available to purchasers other than those receiving the offer or invitation. 14. The learned senior counsel for the appellants, Mr. S.K. Kapur, took us through the salient features of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by which reasoning SEBI comes to the conclusion that the Debentures are public placement. It reads as under : The matter of raising funds by TIIL allegedly by way of issue of privately placed debentures was brought to notice of SEBI by Banamali Maji and Ashok Chakraborty or West Bengal. Copies of letter of offer and application form for issue of secured debentures were furnished and advice sought from SEBI in regard to becoming agents of TIIL. Similarly reference was also received from Laxmi Narayan of Agra and I.K. Mishra of Calcutta (forwarded through PMO). Reference were also received from the Dy. Commissioner of Police, Detective Department, Calcutta bringing to SEBI's notice that TIIL was mobilizing public money against issuance of secured debentures and that TIIL had engaged agents for that purpose. The letter also specified names and telephone numbers of certain agents of TIIL such as Shri Amal Kumar Das, Shri Bimal Kumar Das, Pallab Banerjee etc. Statements of some agents engaged by TIIL were also recorded by SEBI such as Shri Banamali Maji, Shri Shyamal Mondal etc. documents obtained in course of enquiry made by SEBI revealed that, agents were being ensured in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the next following section, it shall not be lawful to issue any form of application for shares in or debentures of a company unless the form is issued with a prospectus which complies with the requirements of this section : provided that this sub-section shall not apply if it is shown that the form of application was issued either - (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to the shares or debentures; or (b) in relation to shares or debentures which were not offered to the public. ... [Emphasis supplied] 22. The proviso is more or less the same as in Section 67(3) of the Companies Act, 1956. While interpreting whether the offer was public or private, the English Court pronounced as follows: It is alleged by the plaintiff company that it is a prospectus to which Section 38 of the Companies Act, 1948, applies, and that as such it does not comply with the requirements of that Act. It is not disputed that if it is such a prospectus, it does in fact fail to comply with the requirements of the Act. 23. After setting forth the proposition of law the English Court answered the question, in the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... British and Commonwealth Shipping Co. Ltd. (hereinafter called the new company ) and contained in the new company's circular letter (hereinafter called the offer ) dated November 12, 1955 to acquire my/our holding of (blank) ordinary stock in the Union -Castle Mail Steamship Co. Ltd. (hereinafter called the stock ) upon the terms and subject to the condition set out therein'. Paragraph (2) states that the stockholder encloses his stock certificate which is to be held by Union-Castle upon the terms of the offer. Paragraph (3) provides that, subject to the offer becoming unconditional, the signature of the stockholder to the form of acceptance and transfer shall constitute for Union-Castle an execution by the stockholder of an instrument of transfer of the stock to the new company, and the stock holder further undertakes to execute any further assurance that may be necessary in connection with such transfer. The stockholder then authorizes and requests Union-Castle to forward to him a fully paid non-renounceable letter of allotment, and in due course a dividend certificate in respect of the shares of the new company to be allotted to the stockholder pursuant to the offer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icts the right to transfer its share, if any, limits the number of its members to 50, and lastly prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company. According to Mr. Daobia, offer of shares to any person other than the existing members of the company is tantamount to an invitation to the public to subscribe for shares which is under a statutory ban. My attention has also been drawn to Section 67(3) of the Act which runs as under : 'No offer or invitation shall be treated as made to the public by virtue of Sub-section (1) or Sub-section (2); as the case may be, if the offer or invitation can properly be regarded, in all the circumstances: (a) as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation; or (b) Otherwise as being a domestic concern of the persons making and receiving the offer or invitation/ (9) This provision corresponds to Section 55(2) of the English Companies Act of 1948. In Buckley on the Companies Act, 12th Edition, at page 138, after reproducing Sub-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Police, Kolkata, the learned senior counsel for the respondent submitted that the reference to the letters received from Banamali Majhi/Ashok Chakraborty/Lakshmi Narayan/I.K. Mishra clearly and admittedly shows that these persons had written to SEBI seeking advice to become agents of the appellant company . In actual point of fact, admittedly these four persons were not the agents of the appellant company at any point of time. They were not investors. They had nothing to do with the debentures in question. They had nothing to do with the two issues. 31. With respect to the letter from the Dy. Commissioner of Police, Kolkata, it appears that on a perusal of the letter the police did not make any complaint against the company or in respect of the debentures. They were merely seeking information. 32. With respect to the so-called commission agents, it was submitted that the impugned order refers to a statement said to have been recorded from Banamali Majhi. It was further submitted that the statement of one Shyamal Mondal is referred to in the impugned order, was produced before this Tribunal on the last day of hearing. The substance of the said statement was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vitation had in fact actually subscribed to the offer. It these two conditions are fulfilled, then no amount of camouflage in the letter of offer can make a public issue into one of a private issue. In this regard, we have given oar anxious consideration to the facts and circumstances of the case emanating from the impugned order. Certainly SEBI could have done a better job by examining during enquiry one or two subscribers to determine whether they were invited or not. That would have been a clinching proof to hold that a public issue was sought to be brought out in the guise of a private issue. The reasons given by SEBI for holding it as a public placement, is, strictly speaking, not in accordance with law. As expressed by us, there is no bar on fulfilling certain conditions for a company paying commission to an agent in a private issue. SEBI was in error in holding that mere payment of commission to an agent would make an issue public. SEBI also did not put enough materials in the impugned order to prove that the company had gone in for a public issue. SEBI got carried away by the statements of disgruntled commission agents and the letter from Kolkata Police. Accordingly, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aces of meetings of the Board and the procedure to be followed at such meetings under Sub-section (1) of Section 7 including the quorum necessary for the transaction of business; (b) the term and other conditions of service of officers and employees of the Board under Sub-section (2) of Section 9; (c) the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which such matters shall be disclosed by the companies under Section 11A; (d) the conditions subject to which certificate of registration is to be issued, the amount of fee to be paid for certificate of registration and the manner of suspension or cancellation of certificate of registration under Section 12. Even after a Regulation is made by Notification under Section 30, every regulation made under Section 30 shall be laid before Parliament. The laying section is Section 31. Section 31 reads as hereunder : Rules and regulations to be laid before Parliament.--Every rule and every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act just as 'Guidelines' are not in the SEBI Act. The Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 597, 7 Taxman 13 pronounced that circulars are binding on Income Tax Authorities and further they are in the nature of contemporanea expositio and are legitimate aid in construction of law. It was further held that contemporanea expositio and hence, Circulars, must be clearly wrong before they are overturned. Under Central Excise law, the Supreme Court in Paper Products v. CEC AIR 1999 SC 3341, pronounced that CBEC Circulars are binding on excise authorities. In CCE v. Usha Martin Industries [1997] 7 SCC 47 it was held that an assessee can contest the validity/legality of a Circular but revenue cannot. It was further held that Appellate Authorities would not be bound by Circulars, In CCE v. Kores (India) Ltd. [1997] 10 SCC 338, it was held that Tariff Advice/Trade Notices from the CBEC will not bind Appellate Authorities. Under General law, the Supreme Court in DDA v. Vijaya C. Gurusahaney [2003] 7 SCC 301, held that guidelines of the DDA were binding as policy decisions or guidelines of statutory bodies in the absence of rules to the contrary. The & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke to add that a time has come to define guidelines in the Act and to end this controversy once and for all. Issuance of such guidelines in conformity with the provisions of the Act will be beneficial to SEBI and to the investor public for the efficient management of the securities market. SEBI must be empowered in the Act to issue guidelines from time to time. This power will enable SEBI to take action for violations of the guidelines in accordance with law as is being done for violation of the Regulations in accordance with law. We will have it at that: 40. Mr. Desai, the learned counsel for the respondent, submitted that the SEBI has sou motu powers to issue directions in the interest of investors under Section 11B. Section 11B reads as follows : Power to issue directions.--Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,-- (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interests of investors of securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Vide order dated 29th May, 2003 this Court directed that a meeting of all the debenture holders be held to decide whether debentures are to be converted to preference shares. With the consent of the parties justice S.N. Kapoor (Retd.) was requested to convene a meeting of the debenture holders of the defendant company. A meeting of all the debenture holders was held under the Chairmanship of Justice S.N. Kapoor (Retd.) where only 7 debenture holders were represented. Postal ballots had been received from numerous debenture holders of the defendant company. In terms of the order dated 10th June, 2003 the said postal ballots were counted and the plaintiff learnt that a majority of the debenture holders have voted in favour of the proposal to issue preference shares for the value of the debentures. In the order dated 29th May, 2003 it has been recorded that the outcome of the meeting will be binding on the parties. Counsel for the plaintiff contends that in view of the fact that the defendant was present in Court on 20th May, 2003 when the order was passed and it had agreed to be bound by the result of the meeting held in terms of that order, the result of the meeting being in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, which were not redressed by the company either before the SEBI or while the matter was before us. We have given our anxious consideration of this matter. Although we have held that it is not possible to hold that the debentures are a public placement, we are of the view that as a court of equity we would be justified in directing the company to redress all grievances from the date of issue till the cut off date given by the Supreme Court, namely, 1st of April, 2003. 44. The learned senior counsel for the appellants fully co-operated with the Tribunal de hors all technicalities. The Chairman and the Managing Director of the company has filed an affidavit dated 8th of July, 2004 wherein it has been stated that every debenture investor grievance has been settled by the company to the satisfaction of the debenture-holders. All the grievances that were brought to the notice of the Tribunal by SEBI have been fully satisfied by the company and this finds a place in the affidavit filed by the company. We have taken upon ourselves this exercise since it was submitted by the counsel for the appellants that if there is any grievance of any investor with respect to the debentures, it wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Section 11(4) of the Act w.e.f. 29-10-2002. It was vehemently submitted by the senior counsel, Sri S.K. Kapur, that the provisions of Section 11(4) of the Act conferring upon the Board the power to take measures mentioned therein were inserted into the Act by Section 4(d) of the Securities and Exchange Board of India (Amendment) Act, 2002 with effect from 29th October, 2002. It is only by this amending Act that the Board was conferred the power to restrain persons from accessing the securities market and to prohibit any person associated with the securities market to buy or sell or deal in securities. It is submitted that prior to 29th October, 2002, the Board had no power to take such a measure. In this connection, we have carefully perused the statement of object and the statement of object and reasons of the amending Act of 2002, which categorically recognizes that SEBI had no jurisdiction to prohibit issue of securities and further states, inter alia, that the amendments are intended to confer power upon the Board to impose such a restriction. A perusal of the amending Act and its statement of object and reasons, demonstrates that prior to the 2002 amendment the Boar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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