1992 (11) TMI 229 - Commission - Companies Law

Unfair trade practices - Whether, where it was not a fresh/first issue but was further issue of capital, decision to reserve a larger percentage of shares in favour of a specific group consisting of co-promoters, foreign collaborator, etc., in comparison to reservation of a lesser percentage of shares/debentures in favour of general public, etc., could be said to be unfair or unjust practice - Held, no

Summary

Issues Involved: Competence of the complaints under section 36A of the MRTP Act, alleged discrimination in the allocation of shares and debentures, approval by the CCI and Central Government, and the legitimacy of the reservations made in favor of promoters and foreign collaborators.

Issue-wise Detailed Analysis:

1. Competence of the Complaints under Section 36A of the MRTP Act:
The respondent-company contended that the complaints were incompetent in law as the basic ingredients necessary for attracting section 36A were totally absent. The entire terms and conditions, including the reservation made in favor of various categories, had been disclosed meticulously in the prospectus. The prospectus was an open book in which the company had disclosed all the relevant information and particulars, including the fact of reservation in favor of the specified group. Hence, there was no scope for the charge that the company had made either misrepresentation or practiced deception or adopted any unfair trade practice.

2. Alleged Discrimination in the Allocation of Shares and Debentures:
The main thrust of the argument advanced by the applicants was that the group represented by the co-promoters and foreign collaborators was allocated a disproportionately larger share in the offer of equity shares compared to what was reserved for the general public, employees of the company, and the existing shareholders. This was claimed to be discriminatory. However, the judgment clarified that the present case was not of a fresh or first issue but of a further issue of capital within the meaning of section 81 of the Companies Act, 1956. A special resolution was passed by the shareholders endorsing the proposed offer, including the earmarking of a certain percentage of shares for the benefit of the co-promoters and others. The existing shareholders had no objection to the allocation, and thus, the applicants could not raise the objection.

3. Approval by the CCI and Central Government:
The respondent asserted that the proposed offer had received the approval of the CCI under the relevant statute as well as of the Central Government under section 81(3). A special resolution in terms of clause (a) of sub-section (1A) of section 81 had been passed by the shareholders of the company at an extraordinary general meeting, fully endorsing and approving the scheme, including the reservation carved out in favor of the co-promoters and others. The proposal was comprehensively scrutinized by the CCI and the Central Government, who suggested rigorous conditions subject to which the reservation could be made. These amendments were duly effected in the prospectus, and the CCI and the Central Government accorded the approval after fully satisfying themselves that the proposed offer was in order and in public interest.

4. Legitimacy of the Reservations Made in Favor of Promoters and Foreign Collaborators:
The judgment emphasized that the co-promoters and foreign collaborators were subjected to far more stringent conditions, such as bringing in the entire contribution in advance before the issue opened and a lock-in period for the shares and debentures. The respondent argued that Reliance Industries Ltd., the co-promoter, had spent substantial resources in conceiving the project and securing financial participation from Itochu Corporation. The reservation made in favor of the co-promoters and foreign collaborators was justified and approved by the shareholders, CCI, and the Central Government. The classification was neither unfair nor discriminatory.

Additional Considerations:
The judgment also noted that the offer was calculated to serve a larger public interest by attracting foreign capital into the Indian market. The argument that the reserved group would have a larger percentage of shares for a smaller price was based on conjectures and surmises. The debentures were optional, and the decision to convert them into shares was at the discretion of the debenture holders. The issue of whether any industry had adopted an unfair trade practice was not a matter of simple arithmetic but had to be determined with reference to the entire gamut of surrounding circumstances.

Conclusion:
The judgment concluded that the charge against the respondent of deception or unfair trade practice was entirely unsustainable and unfounded. The decision to earmark a larger percentage of shares in favor of the 'reserved group' was justified and intended to subserve a larger public purpose. The applications filed under section 36B(a) were dismissed with costs assessed at Rs. 1,000 in each case, and the injunction applications had already been dismissed by the order dated 11-11-1992.