2012 (6) TMI 116 - SC - Companies Law

Certification of shares - tainted shares - Claim of dividend Custodian - Held that - appellant under the facts and existing circumstances of the case where he ended up buying tainted shares for no fault on his part but had to seek its certification from the Custodian under compelling circumstance which was not his creation and also had no control, could not have been denied his due on the ground of delay in filing the application for certification specially when the appellant had sought certification of his shares only after two months of the cut off date for reasons beyond his control which cut off date has no statutory effect or legal force. The appellant on the one hand was saddled with the tainted shares for no fault on his part through respondent Nos. 4, 5 and 6 on which he had no control or any role to play and on the top of it, when he sought a remedy of certification for claiming dividends, he had to suffer an order by which his application was rejected on the ground that he had not moved an application within the cut off date which had no statutory force as the same had been fixed at the instance of the Custodian seeking approval from the Special Court. order of the Special Court set aside and allow this appeal as a result of which the respondent-Custodian shall entertain the application filed before the Special Court for certification of his shares and verify the claim of the appellant in regard to the shares.

Issues Involved:
1. Whether the Special Court was right in rejecting the application for certification of tainted shares due to delay beyond the cut-off date.
2. The appellant's role and involvement in the treatment of shares as tainted.
3. The procedural requirements and statutory provisions for certification of tainted shares.
4. The duty of the Custodian and the Special Court in safeguarding the interests of bona fide investors.

Issue-wise Detailed Analysis:

1. Rejection of Application for Certification Due to Delay Beyond Cut-off Date:
The Special Court rejected the appellant's application for certification of shares on the ground that it was filed after the cut-off date of 27-6-2005. The appellant argued that he was unaware of the cut-off date and the procedure for certification until he received a letter on 22-8-2005. The court noted that the cut-off date was not a statutory provision but was set by the Special Court for administrative convenience. The appellant's delay of two months in filing the application was due to reasons beyond his control, including his residence abroad and lack of communication from the concerned parties.

2. Appellant's Role and Involvement in Treatment of Shares as Tainted:
The appellant, a small investor, had no role or involvement in the treatment of the shares as tainted. He purchased 100 equity shares of Reliance Industries Ltd. through a share broker and paid through a demand draft. The shares were later found to be tainted due to the involvement of M/s. Fair Growth Financial Services Ltd. in a scam. The appellant was not informed about the status of his shares by the brokers and was unaware of the need for certification.

3. Procedural Requirements and Statutory Provisions for Certification:
The certification of tainted shares was necessitated by the involvement of the shares in a scam and their subsequent attachment by the Custodian. The Special Court had set a cut-off date for filing applications for certification, but this date did not have statutory force. The appellant argued that there was no statutory time limit for certification under the Securities Contracts (Regulation) Act, 1956, or the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

4. Duty of the Custodian and Special Court in Safeguarding Bona Fide Investors:
The court emphasized the duty of the Custodian and the Special Court to protect the interests of bona fide investors. The Special Court's order to fix a cut-off date was for administrative convenience and should not have a binding statutory effect. The court highlighted the importance of ensuring that investors are not deprived of their dues due to procedural delays or lack of communication. The Custodian was responsible for certifying the shares and ensuring the payment of dividends to bona fide investors.

Conclusion:
The Supreme Court set aside the impugned order of the Special Court and allowed the appellant's appeal. The respondent-Custodian was directed to entertain the appellant's application for certification of shares and verify his claim. The Custodian was also instructed to coordinate with the concerned stock exchange and share broker companies to ensure the payment of dividends on the certified shares. The appeal was allowed, emphasizing the duty of the Custodian and the Special Court to safeguard the interests of bona fide investors.

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