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The matter was before the High Court of Gujarat. The case was disposed of and Judgement was delivered by the Court in 1997.
The Company Laws have time and again been amended to protect the interest of the investors and shareholders. However, it is the work of the judiciary to interpret the provisions of the clauses in a way so as to ensure justice. The courts have to set the ground rules that the company must mandatorily adhere to when there is an issue of allotment of shares. If not, it would put genuine investors at a disadvantage. To avoid this, the Judges have to look at the law from the eyes of the lawmaker. The essence of any provision of a statute can be understood by connecting it the entire statute. In Rich Paints Ltd. vs Vadodara Stock Exchange Ltd., the Judges, in several instance, have not considered the literal meaning of the provisions of the statutes but have considered the provisions in relation to the statute as a whole. I shall be discussing the judgement of the Court and the relevant provisions of S.69 and S.73 of the Companies Act 1956 along with the Court’s interpretation of these provisions in reference to other case laws.
Facts in brief
The petitioner- A public limited company had issued a prospectus making issue of equity shares to the public and the prospectus stated that the company would be filing applications to three stock exchanges- Bombay Stock Exchange(BSE), Vadodara Stock Exchange and Ahmendabad Stock Exchange for listing of shares. According to the company the subscription had exceeded the “minimum subscription requirement” of 90% prescribed by the Companies Act. Both Ahmedabad Stock Exchange and Vadodara Stock Exchange granted approval for listing of shares and mandated the allotment of shares. In the meantime, the BSE managing board amended the conditions for listing of shares and subsequently rejected the Company’s application for listing of shares on the ground that the subscriptions made did not adhere to the new conditions. The Company filed an appeal to SEBI under S.22 of the Securities Contracts (Regulations) Act. 1956– hereinafter referred to as “the Act”, challenging the decision of BSE. Meanwhile, some investors who had made subscriptions to the public issue, filed an appeal in the court regarding the mishandling of issue of shares by the company as well as the matter of non-compliance with the “minimum subscription requirement”. The investors asked for the refund of their money and claimed that since the BSE had rejected the application, the allotment could not survive. The court rejected the said application stating that the investors can approach the court with their grievances and their money be refunded. The Company then approached the SEBI appellate authority and it was held that since the new conditions were brought in after the issue of shares by the company, those conditions won’t be applicable on them. However, the appellate authority held that the company had not complied with the “minimum subscription requirement” upon finding that there were some fraudulent subscriptions made by some people and thus the money be refunded to the investors. The Company then filed a petition under article 226 of the Constitution challenging the decision of the Appellate authority of SEBI. The Court upheld the decision of the Appellate Authority.
Issues in the Case
- Whether the Appellate Authority of SEBI had the jurisdiction to look into the grievances of the investors while also considering the Company’s petition regarding the decision of the BSE.
- Whether the scope of the Appellate Authority could be extended to look into the facts of the case and decide that the application money of the six dubious application was not really “paid and received”.
Arguments on behalf of the Petitioners
The Counsel appearing on behalf of the petitioners, is S.N Soparkar. The arguments put forward by him challenging the Appellate Authority’s decision were:
- The Company (petitioner), by filing an appeal under S.22 of the Act, had challenged the decision of the BSE governing board for refusing to give permission for listing of shares. Thus, the Appellate Authority couldn’t have had broaden the realm of the appeal in order to decide on any issue except the one that had been mentioned in the petitioner’s appeal.
- The material document in a letter dated 12th July, 1995, sent by BSE that was addressed to SEBI- on the basis of which the Appellate Authority had decided the matter- that the document had not been supplied to the petitioner.
- After the Appellate had had held on the merits of the case that the subscription money was “paid and received”- it was not in the scope of the Appellate Authority to look into the facts of the case and decide that the money was not really “paid and received” but was an illusion and the subscriptions were thus, improper.
Arguments on behalf of the Respondents
- In the civil application made by some of the investors- the court had specifically held that the persons having any grievance regarding the decision of BSE for listing of shares, can approach the court to make their representations. This court had not allowed the petition to proceed that was filed by some of the investors regarding disputes over the non-compliance of the subscriptions with the “minimum subscription requirements” on the basis of the appeal made the petitioner that the matter was already under examination by the Appellate Authority. Thus, the Appellate Authority was authorized to look into the grievances of the investors in this issue.
- The letter dated 12th July, 1996 was, in fact, presented before the court at the hearing of the petition and that letter had merely mentioned that “copies of the letter dated July 10, 1996 and its enclosures received from Shri Kamlesh S. Jain are being sent by the BSE to the SEBI Appellate Authority” and the mentioned letter dates 10th July and its enclosures had already been provided to the petitioners. Thus, there is no case of a breach of rule of natural justice.
- The petitioner had been given sufficient time and opportunity by the Appellate Authority to provide an explanation in reply to the grievances filed by some of the investors. Later on finding of the fact that the “minimum subscription requirement” of 90% was not actually “received” but was an illusion since the money was withdrawn on the same date it was received, it was held that the subscriptions did not comply with the “minimum subscription requirement” and the allotment is thus, improper.
Judgement by the Appellate Authority of SEBI
The appellate authority after hearing the appeal made by the company, held that the new conditions for the listing of shares would not be applicable on the issue of shares by the company as the prospectus for issue of shares was issued prior of those conditions being introduced by the BSE. However, the court observed that there had been subscriptions made through six disputed applications, all coming from the same address, with the subscription money being en-cashed in Punjab National Bank(PNB) which was not a “banker to the issues”. The money was withdrawn on the same day by cheque in favour of an employee of the company without any proper reason, thus, it was held that the money was not actually “received” as the money received by those six dubious applications were not taken into account. The company was thus made liable to refund the money of the investors.
Judgement given by the High Court
- On the issues of “minimum subscription” requirement: The judgement expressed the meaning of “minimum subscription” as “the amount which, in the estimate of the directors, must be raised to meet the following needs, namely, purchase price of any property to be defrayed partly or wholly out of the proceeds of the issue, preliminary expenses and working capital and no shares can be allotted unless at least so much amount has been subscribed.” In the instant case, the minimum subscription requirement for allotment of shares was held to be 90%. The court did not accept the contention made by Mr. Soparkar that- “SEBI’s Appellate Authority acting as an Appellate Authority of the Government for hearing and deciding appeals is different from SEBI acting as an authority to protect the investors and thus, it does not have the jurisdiction to hear the grievances while considering the company’s petition. The Court examined S.69 and S.73 of the Companies Act and held that for a legitimate allotment of shares, two conditions are precedent: (I) a minimum subscription of 90% , (II) the listing approval from all the recognised stock exchanges that had been mentioned in the prospectus. The “minimum subscription requirement” should be mandatorily complies with first for subsequent approval for share listing. Thus, the Appellate Authority had the power and duty to look into the issue if non-compliance with the minimum subscription requirement while hearing the company’s petition – as to decide the matter, it needs to ensure that the first mandatory condition of minimum subscription is met and looking into the matter regarding non compliance with that condition formed an essential component of the Appellate Authority’s powers.
- The petitioner’s argument, that Kamlesh S. Jain’s complaint cannot be accepted as he was not one of those investors who had filed the civil application, was rejected stating that the nature of the complaints made by him are similar to the grievances made by those investors. Thus, the court held that there was no error on the part of the Appellate Authority while looking into the complaint made by Kamlesh S. Jain.
- On “breach of principle of Natural Justice”: Since it was found that copies of the contents of the letter dated 12th July, 1996 addressed by BSE to SEBI was sent to the petitioner, it was held that there is no “breach of principle of natural justice” by the respondents.
- The Merits of the dispute: Upon examination, the Appellate Authority found out about the six dubious application of one lakh shares each and the amount being deposited in PNB which was not a “banker to the issue”, and there was a violation of S.73 of the Companies Act. the money was withdrawn in favour of an employee of that company and the company gave an explanation that the money as withdrawn towards purchasing plant and machinery. Since no proof was submitted by the company to back this reason, the court held that the money “received” was a mere illusion. S.69 and S.73 of the Companies Act state that all the subscription money collected towards shares should be kept in a scheduled bank (bankers to the issues) and to be kept there until the final allotment is done in accordance with the provisions of law. If the allotment fails, that money should be refunded to the investors. Even if one Stock Exchange mentioned in the prospectus rejects to grant permission for listing of shares, the allotment cannot be done and the money should be refunded to the investors. Due to these statutory provisions, it becomes important for the money to be “paid and received”. The court specified that if the subscription money be allowed to be deposited in any bank as per wishes of the company, the statutory provisions would be frustrated and there would be no control on the company regarding the manner in which it could withdraw the money and utilize it. This would put the genuine investors in a rough position.
- The court held that the company had committed a flagrant breach of the provisions of the Companies Act by withdrawing and using the money even before the Vadodara Stock Exchange or Ahmedabad Stock Exchange had given approval for share listing. The Companies Act state that the withdrawal of money could not have been done prior to the allotment of shares- the allotment of shares could not have been made prior to the listing of shares by all the three stock exchanges. The permission could not be granted before the minimum subscription requirement was met with. The court viewed the act of the company as a planned out design of the company to defraud the investors. Withdrawal of money from the bank could have been overlooked as a mere illegality, however, withdrawal in a deceptive manner without any justification, gives it a face of “fraud”. The court upheld the decision of the Appellate Authority of SEBI.
Analysis of the Case
This judgement has touched upon various provisions of S.69 and S.73 of the Companies Act, 1956. The decision was made by conforming to various case laws and a stark interpretation of the statutes.
On “minimum subscription” requirement:
The court looked closely in the meaning of the term. To get a definite meaning, the court followed the words of Prof. Gower regarding the company law that said, “The object of the present provisions is to prevent the company getting under way until it has raised the capital needed to carry out the objects in which it has invited the public to participate”. The court also referred to Section D of guidelines for disclosure and investor protection issued by the SEBI, to conclude that the mandatory minimum subscription in the instant case is 90%.
The court did not accept the contention of the petitioner regarding the jurisdiction of Appellate Authority or the absence thereof to look into the grievances of the shareholders while considering the petition of the company. It held that minimum subscription and listing permission are mandatory requirements for a allotment of shares. Similarly, in Sri Gopal Jalan & Co v Calcutta Stock Exchange Association Ltd, the court pressed on the objective of S.69 – is to ensure the company has complied with the minimum subscription requirement before allotment of shares.
The court thus closely adhered to the provisions of S.69 and held that non compliance with the minimum subscription is a crucial part in deciding on the decision of the BSE and the Appellate Authority was right to look into the complaints of the investors regarding non compliance of the matter.
Similarly later In The Securities & Exchange Board of India v A.P.L. Industries Ltd. & Ors., the Judge did not mandate the allotment of shares as the minimum subscription requirement was not met.
While looking into the merits of the case, the court found out about the six dubious applications that made. The matter was then examined while keeping in mind the provisions of S.73 which stated that the money received towards the issue of shares should be kept in a scheduled bank that is a banker to the issue. In the light of the facts, the court allowed the company to furnish it with explanations regarding the withdrawal of money. The court rejected the explanation by strictly looking at the provisions of S.73 and held that the company could not have withdrawn the money before the permission from the Stock Exchange for listing of shares was received and unless even one of all Stock Exchanges mentioned in the prospectus has given its approval, the allotment cannot be done. Only after the allotment had been done, could the company have withdrawn the money. In Rishiyashringa Jewellery Limited v Stock Exchange, Bombay and other, the court had held a similar opinion that until the listing permission for shares has been granted by all the Stock Exchanges mentioned in the prospectus, the allotment would be void.
The S.73 has been amended a lot of times thereby exposing it to being interpreted ambiguously. Thus, it becomes very important for the Court to interpret it, taking into account the future repercussions of that interpretation. S.73 states that the subscription money received should be deposited and kept in a “separate bank account in maintained with a scheduled bank” while S.69 states it should be deposited and kept in a “schedule bank” until the allotment is done. Thus, by looking at these separate provisions together, it could be interpreted that the money can be kept in “any scheduled bank”. But, the court referred to the words of United States Judge Learned Hand, which has also been cited by the Learned Judges of Supreme Court in C. B. Gautam v. Union of India and K. P. Varghese v. ITO that in some cases the statues can be interpreted in its literal sense, but that “it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning”. Thus, the court held that the money cannot be kept in any scheduled bank, but the banks that are bankers to the issue as had the money been allowed to be kept in “any schedule bank”, it would have been exposed to misuse by the company. Thus, the application money ought to have been deposited in the banks that are bankers to the issue and not in any other bank. This point was also upheld by the High Court of Punjab and Haryana in Universal Incast Ltd. v. Appellate Authority, SEBI However, since they were not submitted in any bank that was a banker to the issue, those six applications cannot be said to be “paid and received”. The court arrived at this decision by interpreting the term “paid and received” in relation to S.69 and S.73 by relying on the observations of the apex court in State of West Bengal v. Union of India that, “The court must ascertain the intention of the Legislature by directing its attention not merely to the clauses to be construed but to the entire statute; it must compare the clause with the other parts of the law, and the setting in which the clause to be interpreted occurs.”
The court held that the six dubious applications cannot be accepted owing to the reasons cited above, the minimum subscription requirement is not met and according to S.73, the money received from the investors should thus be refunded. A similar opinion was held in Raymond Synthesis Limited v Union of India, by the Learned Judge that “if the permission is not received for share-listing by the Stock Exchange and the allotment is not done, the money be refunded to the investors”. The same was made clear In Goldeline Financial Services Ltd. v Hyderabad Stock Exchange by the Securities Appellate Tribunal.
Suryadeep Salts, Refinery & Chemicals Works Ltd v Prarthana Engineering, the deciding authority had made a allotment of shares invalid due to non compliance with “minimum subscription” requirement and prohibited the companies in the respective cases from accessing the capital market.
The court, therefore made clear the conditions required for the proper allotment of shares. By referring to various case laws throughout the judgement, the court has reiterated the importance of interpretation of statutes and finding their meaning other than the literal meaning. Not a lot of precedents are present on the provisions of S.69 and S.73 of the Companies Act. The court must take into account the “animus imponentis” i.e. “the intention of the law-maker expressed in the law itself, taken as a whole”. By adopting such a practice, can the court be able to derive the true meaning of the terms that are otherwise not defined or are ambiguously defined. In Several later cases like Rishiyashringa Jewellery Limited v Stock Exchange, Bombay and others and The Securities & Exchange Board of India v A.P.L. Industries Ltd. & Ors., the courts have followed the same approach that was followed in this case and by doing so and reiterated the mandatory adherence to the minimum subscriptions requirement criteria. The court has clearly set some ground rules that must be adhered to when an allotment of shares is to be properly done
 Rich Paints Ltd. v Vadodara Stock Exchange Ltd 1998 92 CompCas 282 Guj
 Indian Companies Act, 1956.
 Securities Contracts (Regulations) Act. 1956
 Rich Paints Ltd. vs Vadodara Stock Exchange Ltd 1998 92 CompCas 282 Guj
 Indian Companies Act 1956
 Indian Companies Act s 73
 Indian Companies Act 1956
 Gower, Principles of Modern Company Law (4th Ed, 1979)
 Sri Gopal Jalan & Co v Calcutta Stock Exchange Association Ltd 1969 SCC OnLine Cal 113
 The Securities & Exchange Board of India v A.P.L. Industries Ltd. & Ors.2013 SCC OnLine Del 188
 Rishiyashringa Jewellery Limited v Stock Exchange, Bombay and other (1995) 6 SCC 714
 Indian Companies Act 1956 s 73
 Indian Companies Act 1956 s 69
Universal Incast Ltd. v. Appellate Authority, SEBI (2000) 38 CLA 332
Raymond Synthesis Limited v Union of India (1992) 2 SCC 255
 Goldeline Financial Services Ltd.Versus Hyderabad Stock Exchange (2001) 41 CLA 52, 61
 Suryadeep Salts, Refinery & Chemicals Works Ltd. v Prarthana Engineering 2002 SCC OnLine SEBI 40
 Rishiyashringa Jewellery Limited v Stock Exchange, Bombay and other (1995) 6 SCC 714
 The Securities & Exchange Board of India v A.P.L. Industries Ltd. & Ors. 2013 SCC OnLine Del 188