9911796707
TMI Blog1994 (9) TMI 274X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the appellants 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 UTI which already holds about 4.9 per cent shares in the company of the appellants would take a total holding of the UTI 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 Regulations of SEBI 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 UTI is a mutual fund and, therefore, as per regulation 41 read with Schedule VI of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1993 ('Regulations') and the guidelines issued by the Government of India in 1992, mutual funds are not supposed to hold more than 5 per cent of the shares carrying voting powers in any company. It appears that the Board of directors of the appellants relied on the Government guidelines of 1992 and later on the Regulations, and the opinion formed by the Board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r any company's) paid-up capital carrying voting rights? 4 .Whether regulation 36 of the Unit Trust of India Regulations, 1963 (framed purportedly under section 43 of the Unit Trust of India Act) is impliedly repealed by the Securities and Exchange Board of India Act, 1992 and the Securities and Exchange Board of India (Mutual Funds) Regulations, 1993 framed thereunder? 5 .Whether the Company Law Board ought to interfere with bona fide decision of the Board of directors of a company that the transfer of shares covered by the subject reference contravened the provisions of any law, rules, regulations and guidelines and/or administrative instructions and ought not to be registered? 6 .Whether the Company Law Board under section 22A of the Securities Contracts (Regulation) Act, 1956 has an original and unlimited power to decide whether the grounds for refusal of registration stipulated in section 22A(3) are satisfied, or whether the jurisdiction of the CLB is similar to that conferred by section 111 of the Companies Act and is restricted to deciding whether the directors have acted bona fide and in good faith in forming the opinion that registration of the transfer should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd of directors of the appellants refusing the registration having concluded that the said decision was taken in good faith and was not mala fide. The second contention tried to be raised is that the CLB erred in concluding that though the UTI is a mutual fund it is excluded from the operation of the guidelines of 1992 issued by the Central Government and Regulations issued in 1993. The appellants have also very strenuously urged that the appeal of the appellants is maintainable under section 10F. It is also very strenuously contended on behalf of the appellants that the cross-objections of the respondents are in fact not maintainable. Now, as far as the cross-objections are concerned, even if it is assumed that the cross-objections are not maintainable, the respondents can always substantiate the final decision of the CLB on any other ground available in law to them, and, therefore, the said contention of the appellants about the non-maintainability of the cross-objections of the respondents does not have much substance. 6. On behalf of the respondents, the maintainability of the appeal itself is challenged and, therefore, it would be proper to decide the said question bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law there is no provision of appeal against the decision of the CLB arrived at under section 22A of the SCRA. It is also pointed out that this becomes clear if one looks at the provision of section 55 of the Monopolies and Restrictive Trade Practices Act, 1969 ('MRTP Act') which provides for an appeal. It is contended that under the said section 55 an appeal is provided against the decision of the CLB taken under the said Act. Shri Kapadia contended that if under the MRTP Act also the decision is taken by the CLB, then, if an appeal was envisaged to be provided under section 10F being a decision of the CLB, there was no necessity of providing any appeal under section 55. Now it is true that the provision of section 10E gives jurisdiction to the CLB and the CLB is by the said provision empowered with a jurisdiction to exercise and discharge such powers and functions as may be conferred upon it by or under the Companies Act and also any other law. The said section, according to the appellants, has to be read with section 10F and when, under the SCRA, the CLB has been conferred with a power of confirmation of the opinion of the Board of directors under section 22A(4)(c) and, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( b ) read with the provisions of regulations and guidelines and/or administrative instructions framed under the Regulations and that also after reading the letter received from the said SEBI. On behalf of the appellants, it is very strenuously contended that even though by making a provision of section 22A in the SCRA the position of law as it stood earlier to the introduction of the present section does not really change very much except in respect of the forum, onus of proof and grounds stated in section 22A on which company can refuse registration. Shri Seervai, appearing for the appellants, has very strenuously contended that the law prior to coming into force of the provision of section 22A is very well-settled. He also pointed out that prior to 31-5-1991, the Companies Act provided power of rectification of register of members of the company under section 155 and the said provision was omitted by Companies (Amendment) Act, 1988 with effect from 31-5-1991. Similarly, there was a provision of section 111 which provided for power to refuse registration and appeal against refusal and the said section also suffered amendment and a new section 111 came to be substituted by the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision which reads as under : "10. The law on the subject has been admirably summed up in Halsbury 's Laws of England, Vol. 5, p. 281 (Hailsham's edn.). It is there stated : 'The power of refusing to register a transfer is usually conferred on the directors, and in such a case must be exercised by a resolution of the board of directors. It is a discretionary power and must be exercised reasonably and bona fide and for the company's benefit and not arbitrarily, though in the absence of evidence to the contrary, the power will be presumed to have been properly exercised. Where there are several grounds on which the power can be exercised, the directors are bound to state on which ground they act, unless excused from so doing by the articles although they need not in any case give the reasons which influenced them in exercising their discretion on that ground 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the rulings in P. Vajravelu Mudaliar v. Special Deputy Collector MR 1965 SC 1017', Ahmed G.H.Ariffv. CWTAIR 1971 SC 1691 and SakalDeep Sahai Srivastava v. UOI AIR 1974 SC 338. In fact there is no quarrel with the proposition which Shri Seervai has advanced but it appears that even in the cases relied by Shri Seervai to substantiate his contention in favour of the appellants that the appellate authority has a limited power restricted only to the extent of considering whether the decision was taken bona fide or mala fide, capriciously, arbitrarily or otherwise, it is clear that in all these cases the powers of board of directors emanated from articles of company and were unrestricted and therefore the courts held that if the powers of the Board of directors were giving them complete discretion as per the articles of the company, then they could be only challenged if the Board of directors have 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 director's decision was taken in the manner prescribed by the articles of the company and in accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Lastly, reliance was placed on Life Insurance Corpn. of India v. Escorts Ltd [1986] 59 Comp. Cas. 548 (SC). In that case with reference to an earlier decision of this Courtin Bajaj Auto Ltd v .N.K. Firodia [l971] 41 Comp. Cas. 1, it was held that where the articles permitted the directors to decline to register the transfer of shares without assigning reasons, the court would not necessarily draw an adverse inference against the directors but will assume that they acted reasonably and bona fide. Here again, as is apparent from the decision in the case of Bajaj Auto Ltd ( supra ) , article 52 of the articles of association of appellant-company in that 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 p. 618 of the reports of Escorts Ltd. ( supra ) , 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce. [Emphasis supplied] 9. Now the non obstante clause appearing in the said sub-section (3) clearly shows that the Legislature intended a departure from the provision of section 82 and section 111 and the position thereunder and wanted to provide that the refusal to transfer could only be on the grounds stated under clauses ( b ) , (c) and ( d ) of sub-section (3). 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 CLB to see the correctness of the opinion given by the Board of directors. Now it is only when the CLB 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 22 A 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 sub-section (4) of section 22A. On the other hand, it is contended that the words 'in good faith' occurring in the said sub-section are only to emphasise th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis of the articles of association, then the refusal, it was not in accordance with the articles of association, could be challenged in the court of law. Shri Kapadia has relied upon the decision in Bede Steam Shipping Co. Ltd., In re. 1 Ch. D 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 that where controlled discretion is given to the board of directors, only 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 dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elines, cannot acquire more than 5 per cent of equity of the appellants. 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 only 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. 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 CLB was in error in holding that the respondents, though are mutual funds, are different than the mutual fund envisaged under the guidelines or administrative instructions. Reliance is place on the regulations and contended that under the said Regulations also the respondents are covered as, under sub-regulation (3) of regulation 1 it is provided that the said regulation will apply to all mutual funds except (t) money market mutual funds established for investment exclusively for money market instrument, and ( ii ) mutual funds established outside India and, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds 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 Trust Act would only be covered and the mutual funds 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, 1961 distinction was made between the mutual funds generally established and the Unit Trust. I do not think that merely because the Income-tax Act has made distinction between the two, it would necessarily mean that on that basis it could be said that regulations would not be applicable. But I have already come to a conclusion that the respondents though are mutual funds, they are not covered under the Regulations and therefore the CLB was right in holding so and concluding that the board of directors of the appellants had committed an error in holding that the respondents are governed by the said- Regulation of SEBI and, therefore, they cannot hold more than 5 per cent of the equity of the appellants. 11. In respect of certain shares sought to be transferred o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it may be possible to construe the same as rules as they have been framed and issued in exercise of powers conferred by clause ( 3 ) of sub-section (2) of section 11. read with section 30 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 or Regulations which are framed under a statute. As far as guidelines are concerned, of course, it is not possible to apply the same principles and, therefore, as far as the second guidelines, are concerned, it must be held that they would not apply to the respondents. It is not necessary to go into the details in this respect as I have already held that even if the said Regulations are held to be applicable the respondents are not included under the said Regulations. As far as the guidelines are concerned, they cannot apply to the respon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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