2004 (10) TMI 342 - HC - Companies Law

Summary

Issues Involved:
1. Whether the Take Over Code contemplates identical consequences in case of breach of Chapter II or Chapter III under Regulation 97.
2. Validity and consequence of acquisition of shares without compliance with the Take Over Code.
3. Rectification of the Shareholder Register under section 111A(3) of the Companies Act, 1956.
4. Validity and maintainability of the proceedings under sections 397 and 398 of the Companies Act, 1956.
5. Interpretation of relevant regulations of the SEBI Act and Take Over Code.
6. Precedents and their applicability to the present case.
7. Reliefs and directions to be granted to the parties.

Detailed Analysis:

1. Whether the Take Over Code contemplates identical consequences in case of breach of Chapter II or Chapter III under Regulation 97:
The moot question addressed whether the Take Over Code imposes identical consequences for breaches under Chapter II and Chapter III. The court noted that Chapter II mandates disclosure of shareholding exceeding 5%, while Chapter III restricts acquisition beyond 15% without a public announcement. The court concluded that the two chapters have independent approaches: Chapter II obligates disclosure and imposes penalties for non-compliance, whereas Chapter III restricts acquisition and renders such acquisition invalid and null if violated.

2. Validity and consequence of acquisition of shares without compliance with the Take Over Code:
The Company Law Board had allowed rectification of the Shareholder Register, declaring the acquisition of shares beyond 5% without compliance as invalid. The court, however, observed that non-compliance with Chapter II does not lead to forfeiture of shares but only attracts penalties. The acquisition under Chapter III without a public announcement is invalid, but Chapter II violations do not invalidate the acquisition itself.

3. Rectification of the Shareholder Register under section 111A(3) of the Companies Act, 1956:
The Company Law Board directed rectification of the Shareholder Register by deleting the names of the appellants. The court held that section 111A(3) empowers rectification in case of any violation of SEBI regulations, but it does not contemplate forfeiture of shares for non-compliance with disclosure requirements under Chapter II.

4. Validity and maintainability of the proceedings under sections 397 and 398 of the Companies Act, 1956:
The appellants filed proceedings under sections 397 and 398, contesting the management's attempt to account for unaccounted sums as liabilities. The court held that the section 397 proceeding was maintainable as the appellants held more than 10% shares at the time of filing, thus reversing the Company Law Board's dismissal of the section 397 proceeding.

5. Interpretation of relevant regulations of the SEBI Act and Take Over Code:
The court analyzed regulations 2(i)(b), 2(i)(e), 7, and 10 of the SEBI Act and Take Over Code. It clarified that "acquirer" under regulation 7 does not include "persons acting in concert," unlike regulation 10, which explicitly includes them. The court emphasized the distinct purposes of Chapter II (disclosure) and Chapter III (restriction on acquisition).

6. Precedents and their applicability to the present case:
The court reviewed several precedents, including:
- Bombay Dyeing & Mfg. Co. Ltd. v. Arun Kumar Bajoria: Regulation 7 is mandatory; non-compliance attracts rectification.
- Mega Resources Ltd. cases: Similar views on mandatory disclosure and penalties.
- Nile Ltd.: Distinguished between regulations 7 and 10, holding that non-compliance with regulation 7 does not invalidate acquisition.
- Shirish Finance & Investment (P.) Ltd.: Analyzed the meaning of "acquirer" and "persons acting in concert," holding acquisition void for non-compliance.
- Unreported decision in Arun Kumar Bajoria: Regulation 7 includes "persons acting in concert."

The court favored the interpretation in Nile Ltd., disagreeing with the view that regulation 7 includes "persons acting in concert."

7. Reliefs and directions to be granted to the parties:
The court set aside the Company Law Board's order of forfeiture. It directed the company to buy back the appellants' shares at Rs. 73.40 per share, the value at the time of filing the section 397 proceeding. Alternatively, if the appellants do not wish to sell, the company can delete their names from the Shareholder Register after depositing the share value in a nationalized bank. The company may proceed with asset disposal as contemplated, complying with legal formalities.

Conclusion:
The appeal succeeded, setting aside the Company Law Board's order of forfeiture. The section 397 proceeding was held maintainable. The company was directed to buy back the appellants' shares or delete their names from the Shareholder Register after depositing the share value. The interim injunction continued for a fortnight to facilitate share transfer. The court disposed of the appeal and application without costs.