2013 (2) TMI 115 - HC - Companies Law

Withdrawal of the share application money - the petitioner submitted that it is well settled that the prospectus is an invitation to offer and that an applicant desirous of applying for shares of a listed company can withdraw his offer prior to its acceptance - whether the date of closure is to be taken into account for determining whether or not the petitioner company achieved the minimum subscription - Held that - A share application is like any other offer which would require acceptance of the offer made. The acceptance of an offer of this nature can only be brought about, inter alia by allotment of shares made in favour of the applicant by some overt method. Like in any other transaction between two individuals before an offer is accepted, the offerer is entitled to revoke the offer. This is precisely what happened in the present case. The minimum subscription clause is inserted in a prospectus to protect the interest of the investors, which is why Section 69 of the Companies Act provides that if minimum subscription is not achieved, a company issuing the prospectus cannot proceed to allotment of shares. The argument advanced on behalf of respondent no.1/company that on receipt of the share application form, a concluded contract came into existence, is a submission which is completely misconceived because if it was so the concerned company would have to, as of necessity, allot to the applicant, without fail, the exact number of shares for which a request is lodged. As is well known, on very many occasions the opposite happens. This is legitimate since in law, a share application is only an offer. Therefore, the minimum subscription clause appearing in the prospectus would have to yield to the right of an applicant to withdraw his offer before its acceptance. The prospectus issued by a company was an invitation to offer and if the application for shares is made, pursuant to issuance of a prospectus, it was only an offer which could be withdrawn at any stage before its acceptance. Thus minimum subscription would have to be calculated after taking into account the requests made for withdrawal of share application. See Official Liquidator of Bellary Electric Supply Co. Ltd. Vs. Kanniram Rawoothmal and A. Sirkar vs Parjoar Hosiery Mills Ltd. (1932 (9) TMI 11 - HIGH COURT OF MADRAS) Undoubtedly, in this case like in other public issues, there are rejections by a Registrar based on various technical grounds. If as per the clause of minimum subscription, the minimum subscription had to be calculated as on the date of closure, it would be well impossible to carry out that exercise as more often than not the rejections are made even after the date of closure. Therefore, if the minimum subscription amount is not reached, which is the case in the present petition, then surely no allotment can be made. Withdrawal can only take place if its is accepted by the company and since in the present case, the withdrawal request was accepted by the Registrar the order of the Chairman SEBI had to be reversed. Once a request is triggered for withdrawal of a share application, in law, it requires no acceptance. The only bar which is statutorily introduced, is one, provided under section 72(5) of the Companies Act. The bar is also put in place for a limited period of time i.e., till the closing of the 5th day of the opening of the subscription list. It is no one s case before the authorities below that withdrawal applications were not received after the expiry of the eclipse period, as provided in section 72(5) of the Companies Act - Thus the order of the Chairman SEBI dated 22.05.1998 would have to be sustained and the directions contained therein for refund of the money to the share applicants would have to be implemented.

Issues Involved:
1. Validity of SEBI's directive for refund of share application money.
2. Interpretation of minimum subscription clause in the prospectus.
3. Authority of the Registrar to permit withdrawal of share applications.
4. Applicability of Section 69 and Section 72(5) of the Companies Act.

Issue-wise Detailed Analysis:

1. Validity of SEBI's directive for refund of share application money:
The petitioner challenged the Securities Appellate Tribunal (SAT) order dated 18.10.2010, which reversed SEBI's directive for refund of the share application money. SEBI had directed the respondent company to refund the entire share application amount as it had not achieved the minimum subscription as per its prospectus. The High Court upheld SEBI's directive, stating that the minimum subscription clause must be interpreted to protect investors' interests, as per Section 69 of the Companies Act. The court concluded that the minimum subscription should be calculated after considering withdrawal requests, and since the minimum subscription was not achieved, no allotment could be made.

2. Interpretation of minimum subscription clause in the prospectus:
The prospectus required a minimum subscription of 100% of the issue amount by the closure date, failing which the company had to refund the entire subscription amount. The court held that a share application is an offer that can be revoked before acceptance, which occurs upon the allotment of shares. The minimum subscription clause must yield to the applicant's right to withdraw the offer before its acceptance. The court emphasized that the clause is intended to protect investors, ensuring the company receives sufficient capital as stated in the prospectus.

3. Authority of the Registrar to permit withdrawal of share applications:
Respondent no.1/company argued that the Registrar had no authority to permit withdrawal of share applications, which should be accepted only by the company. The court rejected this argument, stating that the Registrar's role includes finalizing the list of applications, implicitly granting the power to permit withdrawals and order refunds. The court referred to Rule 2(e)(i)(iii)(b) of the SEBI Rules to support this conclusion.

4. Applicability of Section 69 and Section 72(5) of the Companies Act:
SEBI argued that under Section 69, the company could not make an allotment if the minimum subscription was not achieved. Additionally, Section 72(5) allowed withdrawal of share applications after the 5th day from the opening of the subscription list. The court agreed, stating that the prohibition on withdrawal only extended to the 5th day, and thereafter, applicants could withdraw their applications without requiring acceptance from the company or the Registrar. The court concluded that the withdrawal requests were valid and should be considered in calculating the minimum subscription.

Conclusion:
The High Court set aside the SAT order, upheld SEBI's directive for refund, and emphasized that the minimum subscription clause must be interpreted to protect investors. The Registrar was deemed to have the authority to permit withdrawals, and the company was required to refund the share application money as the minimum subscription was not achieved. The court directed SEBI to ensure the refund process was completed expeditiously and any deficiency recovered from the respondent company.

← Previous Next →