9911796707
TMI Blog1994 (9) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... t 99,075 shares of the appellant-company over a period of time and lodged the instruments of transfer with the appellant for registration the details of which are set out in annexure "A" to the order passed by the Company Law Board. The said transfer applications were considered by the board of directors of the appellant in its various meetings and the board decided to refuse registration of transfers on the ground that the registration of these transfers in favour of the Unit Trust of India which already holds about 4.9 per cent. shares in the company of the appellants would take the total holding of the Unit Trust of India in the appellant-company beyond 5 per cent. of the paid-up capital of the company carrying voting rights, which, according to the board, is against the guidelines of the Government of India or the regulations of the Securities and Exchange Board of India in respect of mutual funds, in accordance with the provisions of section 22A(3)( b ) of the Securities Contracts (Regulation) Act, 1956. According to the appellants, the Unit Trust of India is a mutual fund and, therefore, as per regulation 41 read with Schedule VI to the Securities and Exchange Board of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the appellants, the appeal raises the following, amongst other, questions of law, and the same is preferred on the grounds stated below which are without prejudice to each other: ( i )Whether the Unit Trust of India established under the Unit Trust of India Act, 1963, constitutes a mutual fund within the meaning of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1993? ( ii )Whether the investment restrictions mentioned in Schedule VI to the foregoing Regulations apply to the Unit Trust of India? ( iii )Whether the said restrictions apply to the unit scheme of respondent No. 1 (namely, the Unit Trust of India) and, accordingly, respondent No. 1 under all its schemes could own more than 5 per cent. of the appellants' (or any company's) paid-up capital carrying voting rights? ( iv )Whether regulation 36 of the Unit Trust of India (General) Regulations, 1964 (framed purportedly under section 43 of the Unit Trust of India Act), is impliedly repealed by the Securities and Exchange Board of India Act, 1992, and the Securities and Exchange Board of India (Mutual Funds) Regulations, 1993, framed thereunder? ( v )Whether the Company Law Board ought to int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the Regulations; that the Company Law Board failed to appreciate that regulation 36 of the Unit Trust of India (General) Regulations are impliedly repealed by the Securities and Exchange Board of India Act, and the guidelines issued and the regulations framed under the said Act; that the Company Law Board erred in interfering with the decision of the board of directors of the appellants; having concluded that the decision taken was taken bona fide that the Company Law Board exceeded its jurisdiction; that the Company Law Board failed to appreciate that the jurisdiction was similar to the one under section 111 of the Companies Act only. The respondents have also filed cross-objections and have mainly raised the question about the maintainability of the present appeal against the order of the Company Law Board. On behalf of the appellants, the main contentions which are urged before me are: firstly, that the Company Law Board, while considering the reference under section 22A(4)( c ) of the Securities Contracts (Regulation) Act, 1956, has no power to go into the question about the correctness or otherwise of the decision of the board of directors of the appellants refusing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the Securities Contracts (Regulation) Act, it would not be covered under the said section 10F of the Companies Act. Thereafter, it is contended that even if section 10E of the Companies Act is taken into consideration, it is clear that the said section is only to provide jurisdiction to the Company Law Board. For this purpose, reliance is placed on the wording of sub-section (1A) of section 10E that the Company Law Board shall exercise and discharge such powers and functions as may be conferred on it, by or under the Companies Act or any other law and shall also exercise and discharge such other powers and functions of the Central Government under the Companies Act or any other law as may be conferred on it by the Central Government, by notification in the Official Gazette under the-provisions of this Act or that other law. The submission tried to be made is that the said provision only gives power to the Company Law Board of exercising and discharging the powers and functions as may be conferred on it by or under the Companies Act or any other law, but that would not mean that the decision given by the Company Law Board under any other law could be appealed against under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trictive Trade Practices Act, 1969, a provision for appeal is made under section 55 against the decision of the Company Law Board, it would not necessarily mean that if in any other law no such provision is made, then no appeal would lie under section 10F. Now even if the provision of subsection (1A) of section 10E is considered as a section empowering the Company Law Board to take a decision in respect of any other law also, it would become a decision of the Company Law Board and then, normally, one would consider that the said decision is appealable under section 10F. Though the argument sought to be advanced by Shri Kapadia is no doubt attractive, on reading sections 10E and 10F together, I find that the appeal would be maintainable under section 10F of the Companies Act against the decision of the Company Law Board under the powers conferred on it under any other law also. Hence, I am answering in favour of the appellants on this point. Now, the next contention that arises for determination is as to whether the contention of the appellants that the Company Law Board had no power to go into the question about the correctness or otherwise of the decision of the board of directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d section also suffered amendment and a new section 111 came to be substituted by the Companies (Amendment) Act, 1988, with effect from May 31, 1991. Under the old section 111, an appeal was provided under sub-section (3) of the said section to the Central Government. In the new amended section, the said power of appeal is given to the Company Law Board, and if all these provisions are read, it does appear that there is not much of a change made in section 22A of the Securities Contracts (Regulation) Act, 1956, under which now an appeal has been provided against the refusal of the company to transfer the share certificate. Shri Seervai, therefore, contended that the earlier interpretation put on the provision of section 111 of the Companies Act still holds good as the only change effected by introducing section 22A of the Securities Contracts (Regulation) Act is in respect of forum, the onus of proof and four grounds stated in section 22A on which the board of directors could refuse registration and that the decision of the board of directors formerly was required to be appealed against, but now is required to be confirmed by the Company Law Board. Shri Seervai, therefore, contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether they do so under an absolute power or under a power to refuse in specified events. If the directors do give their reasons, the court will examine them, but it will not overrule the decision of the directors, because it disagrees with the conclusion they reached as to the advisability of refusing the transfer. It will, however, do so if the directors have acted on a wrong principle.' " In the next case relied upon by Shri Seervai, i.e., Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp. Cas. 387 (SC), the Supreme Court held that (at page 400): "Rectification of the register under section 155 can, therefore, be granted only if the transferor establishes that the directors had, in refusing to register the shares in the names of a transferee, acted oppressively, capriciously or corruptly, or in some way mala fide and not in the interest of the company. Such a plea has, in a petition for rectification, to be expressly raised and affirmatively proved by evidence. Normally, the court would presume that where the directors have refused to register the transfer of shares when they have been invested with absolute discretion to refuse registration, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd of directors have given them complete discretion as per the articles of the company, then they could be only challenged if the board of directors had acted mala fide , arbitrarily or capriciously and not otherwise. But, if the powers are restricted, then of course, it would become necessary to consider as to whether the board of directors decision was taken in the manner prescribed by the articles of the company and in accordance with the restricted power. Shri Kapadia, appearing for the respondent, has pointed out that in all the cases which have been relied upon by Shri Seervai, the powers of the board of directors were absolute powers without any restriction. He also contended that there is no inherent power to refuse transfer and he relied on the decision in Luxmi Tea Co: Ltd. v. Pradip Kumar Sarkar [1990] 67 Comp. Cas. 518 (SC), to substantiate his contention. In the said decision, the Supreme Court laid down that there is no inherent power to refuse to register transfer and the power must be conferred by law or otherwise and the said words "or otherwise" do not imply inherent power and the power must emanate from some provision in the Act or the articles of associatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case provided that the directors might, at their absolute and uncontrolled discretion, decline to register any transfer of shares; This too was, therefore, a case of power being conferred by the articles of association and not a case of exercise of inherent power. We may also point out that at page 997 of the reports of Escorts Ltd.'s case [1985] 3 SCR 909; [1986] 59 Comp. Cas. 548, 618 (SC), it was held that even though it was open to the company and, indeed, it was bound to refuse to register the transfer of shares of an Indian company in favour of a non-resident where the requisite permission under the Foreign Exchange Regulation Act was not obtained, once permission was obtained, whether before or after the purchase of the shares, the company could not thereafter refuse to register the transfer of shares." Both these cases of Bajaj Auto Ltd. [1971] 41 Comp. Cas. 1 (SC) and Escorts Ltd. [1986] 59 Comp. Cas. 548 (SC) were also placed for consideration before me. The ratio of the same has been crystallised in the above referred decision of the Supreme Court in Luxmi Tea Co. Ltd. [1990] 67 Comp. Cas. 518, and, therefore, the proposition tried to be advanced by Shri Seerva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( b ), ( c ) and ( d ). There is also a departure from the earlier position that the decision of the board was being converted into an opinion of the' board and these were the major changes made with a view to give power to the Company Law Board to see the correctness of the opinion given by the board of directors. Now, it is only when the Company Law Board confirms the opinion, that the decision of refusal is finalised. Much stress is tried to be placed on the words "in good faith" occurring in sub-section (4) of section 22A on behalf of the appellants and it is tried to be contended that the said words also indicate that once the company arrives at a decision in good faith that cannot be challenged even under section 22A(4). On the other hand, it is contended that the words "in good faith" occurring in the said sub-section are only to emphasise that the opinion which has to be formed has to be arrived at in good faith and it does not mean that the decision of the company cannot be challenged on any other ground than lack of good faith. Shri Kapadia is right in contending that now that the powers of the company which are listed on the stock exchange are sought to be restricted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7] 1 Ch 123, and pointed out that in the said case, the court went into the ground of refusal to transfer and concluded that the transfer on the ground was not within the articles and consequently, the refusal was not dropped. The view expressed in the said decision is that the court could go into the grounds on which the transfer was refused. In view of this submission made by Shri Kapadia where uncontrolled discretion is given to the board of directors, only the bona fides and mala fides could be seen but where the discretion is not uncontrolled but power is specified to be exercised in any manner, one has to see apart from bona fides and mala fides whether there is a power to refuse the transfer and the manner in which it has to be refused and then conclude whether the refusal is legitimate or not. Shri Seervai of course contended that, even while doing so, only the principles could be considered meaning thereby that whether the board of directors had committed an error on principles only in the manner. It is difficult to accept the said proposition. In the present case, therefore, I am of the view that the Company Law Board has a power to consider as to whether the refusal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellants. On behalf of the respondents, as a matter of fact, the first challenge is as to whether the said guidelines can be considered as law or rules made under the guidelines or administrative instructions and/or conditions of listing agreement laid down in pursuance of such laws or rules envisaged under clause ( b ) of sub-section (3) of section 22A of the Securities Contracts (Regulation) Act. I will consider that aspect later on. First, I am considering on an assumption that the said guidelines do fall under the said clause. On behalf of the appellants, it is very strenuously contended that the Company Law Board was in error in holding that though the respondents are a mutual fund, they are different from the mutual fund envisaged under the guidelines or administrative instructions. Reliance is placed on the Securities and Exchange Board of India (Mutual Funds) Regulations, 1993, and it is contended that under the said Regulations also, the respondents are covered as under regulation 1(3) of the said Regulations it is provided that the said Regulations will apply to all mutual funds except ( i ) money market mutual funds established for investment exclusively for money market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt this position. If the regulations were to be made applicable to the mutual fund of the respondents which have come into existence by virtue of a statute, the regulations would have provided accordingly when it is clear that the other mutual funds would be under a trust deed as also they have to get the trust deed approved by the Board, it would necessarily mean that only those mutual funds which are established by execution of a trust deed and registered under the Indian Trusts Act would only be covered and the mutual fund of the respondents would not be covered. On behalf of the respondents, it is also tried to be pointed out that even in the Income-tax Act, a distinction was made between mutual funds generally established and the Unit Trust. I do not think that merely because the Income-tax Act has made a distinction between the two, it would necessarily mean that, on that basis, it could be said that the Securities and Exchange Board of India Regulations would not be applicable ; but I have already come to the conclusion that the respondents, though mutual funds, are not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations and, therefore, the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld more than 5 per cent. of the paid-up capital carrying voting rights in any company. Now, it is necessary to consider as to whether the guidelines and the regulations could be considered as law or rules made therein or administrative instructions or conditions of listing agreement laid down in pursuance of such laws or rules. As far as the guidelines are concerned, obviously, they cannot be considered as either law or rules made thereunder. As far as the Regulations are concerned, it may be possible to construe the same as rules, as they have been framed and issued in exercise of the powers conferred by clause ( c ) of sub-section (2) of section 11 read with section 30 of the Securities and Exchange Board of India Act, 1992, and, therefore, it may be possible to hold that if they cover the respondents, they would be applicable to them. An attempt was made to contend that as the respondents were formed or brought into existence by a statute and they are governed by the same, it is not possible to hold that the said Regulations could govern them. In this respect, merely because the respondent is a statutory body it would not mean that they could not be governed by any other rules ..... X X X X Extracts X X X X X X X X Extracts X X X X
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