2009 (5) TMI 988 - Board - Companies Law

Summary

Issues Involved:
1. Whether the investigation into the affairs of M/s. Information Technologies (India) Ltd. under Section 237(b) of the Companies Act, 1956, is warranted.
2. Whether the respondent company is a subsidiary of Usha (India) Ltd.
3. The impact of SEBI's prior investigation and findings on the present proceedings.
4. The relevance and implications of the SFIO's interim report.
5. The legal objections raised by the respondents regarding the jurisdiction and maintainability of the petition.

Detailed Analysis:

1. Whether the investigation into the affairs of M/s. Information Technologies (India) Ltd. under Section 237(b) of the Companies Act, 1956, is warranted:
The petitioner, Union of India, sought an investigation under Section 237(b) based on SEBI's findings that indicated manipulation and fraudulent activities by the respondent company. The SEBI's investigation revealed several discrepancies, including the improper preparation of balance sheets, fictitious entries to boost share value, and manipulation in the valuation of assets and shares. The Company Law Board (CLB) concluded that there was sufficient prima facie evidence suggesting that the business of the respondent company was conducted with the intent to defraud its members, creditors, and the general public. The Board emphasized that the formation of an opinion under Section 237(b) must be based on reasonable and justifiable grounds, and in this case, the petitioner had acted bona fide in seeking the investigation.

2. Whether the respondent company is a subsidiary of Usha (India) Ltd.:
The respondents contended that M/s. Information Technologies (India) Ltd. was not a subsidiary of Usha (India) Ltd., arguing that the holding company did not control the composition of the board of directors and did not hold more than half of the nominal value of the equity share capital. However, the petitioner pointed out that the respondents had previously admitted in their replies that the respondent company was a subsidiary of Usha (India) Ltd. The CLB noted that whether the respondent company was a subsidiary or not could only be determined through a thorough investigation, as the status of a subsidiary could change with slight dilution in equity. The Board held that the issue of subsidiary status should be left to the investigation agency to decide.

3. The impact of SEBI's prior investigation and findings on the present proceedings:
The respondents argued that since SEBI had already conducted a detailed investigation and initiated civil and criminal actions, a parallel investigation under the Companies Act was not warranted. They relied on legal provisions and case law to support their claim that the SEBI's findings should suffice. However, the petitioner contended that the scope and powers under the Companies Act were broader than those under the SEBI Act, and the investigation under Section 237(b) was necessary to uncover the full extent of fraudulent activities. The CLB agreed with the petitioner, stating that the SEBI's investigation did not preclude the need for a separate investigation under the Companies Act, as the latter could cover violations of other statutes as well.

4. The relevance and implications of the SFIO's interim report:
The respondents highlighted that the SFIO's interim report did not mention any specific findings against the respondent company, arguing that this indicated no grounds for further investigation. The petitioner countered that the SFIO had only commenced its investigation when the matter was remanded by the High Court and had not completed it. The CLB found that the interim report was irrelevant to the decision on whether to order an investigation under Section 237(b), as the SFIO had not completed its work. The Board emphasized that the power under Section 237(b) should be exercised carefully but found that the prerequisites for such an investigation were met in this case.

5. The legal objections raised by the respondents regarding the jurisdiction and maintainability of the petition:
The respondents argued that the CLB lacked jurisdiction under Sections 15Y and 20Y of the SEBI Act, which they claimed barred parallel investigations. They also contended that the petition was barred by law and should be dismissed under Order VII, Rule 11 of the CPC. The CLB rejected these objections, stating that the Companies Act and the SEBI Act had different scopes and could operate concurrently. The Board held that the jurisdiction of the CLB was not ousted by the SEBI's investigation and that the petition was maintainable. The CLB also dismissed the argument that the investigation would cause undue hardship, noting that the allegations of fraud and misconduct warranted a thorough probe.

Conclusion:
The CLB concluded that there were sufficient grounds to order an investigation under Section 237(b) of the Companies Act, 1956, into the affairs of M/s. Information Technologies (India) Ltd. The Board emphasized that the investigation was necessary to uncover the full extent of fraudulent activities and to protect the interests of stakeholders. The petition was allowed, and the investigation was ordered to be carried out by the Central Government to ensure that the truth about the company's transactions and operations could be revealed.