9911796707
TMI Blog2004 (7) TMI 676X X X X Extracts X X X X X X X X Extracts X X X X ..... oth these petitions can be disposed of by a common order. The petitioners in Misc. Petition No. 25 of 2002 hereinafter shall be referred to as the petitioners and petitioners in Misc. Application No. 18 of 2002 shall be referred to as the Custodian . Mr. Hiten Dalai, who is party in both the petitions shall be referred to as the notified party . 3. The facts that are material and relevant for deciding Misc. Petition No. 25 of 2002 and Misc. Application No. 18 of 2004 are that the petitioner Nos. 1 and 2 are companies incorporated under the Companies Act. Petitioner No. 3 is the Director of both the companies. It appears that the petitioner No. 1/company received an amount of ₹ 1,00,00,000/- on 19th March, 1991 from the notified party. A further sum of ₹ 2,00,00,000/- was received by the petitioner No. 1/company on 23rd March, 1991 from the notified party. The petitioner No. 2 received the amount of ₹ 1,00,10,000/- from the notified party on 28th May, 1991, According to the petitioner No. 3 as a security for the amounts that were advanced by the notified party to the two companies, the petitioner No. 3 as Director of both companies handed over to the noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h interest from the date on which the amounts were received by the two companies. The custodian has set aside the transaction of the adjustment of the advance of ₹ 4,00,10,000/- by the notified party to the two companies on the ground that it is a fraudulent transaction and it was entered into to defeat the provisions of the Act. The petitioner filed their petition and challenged the order, during the pendency of that petition the custodian filed Misc. Application No. 18 of 2004 stating therein, without prejudice to the contentions of the custodian that the transaction is fraudulent and has been brought about to defeat the provisions of the Act, that the alleged transaction is illegal and therefore under Section 3 the amount of ₹ 4,00,10,000 which was with the two companies continued to be the property of the notified party on the date of the notification of the notified party under the Act namely on 6.6.1992 and therefore the monies stand attached under the provisions of Section 3 of the Act and therefore direction is sought from the Court that the two companies should be directed to deposit the attached property with the custodian. 4. It is submitted on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely fraudulent and was brought about only to defeat the provisions of the Act. It is further submitted by the learned Counsel appearing for the custodian that even the petitioners admit that the sale of the shares was a forward sale. It is submitted that the forward sale of the securities was prohibited by the provisions of the Securities Contracts (Regulation) Act, 1956 and therefore the forward sale is illegal. It is submitted on behalf of the custodian that the forward sale of the shares of F.F.S.L. is contrary to the Securities Contracts (Regulation) Act. (hereinafter referred to as the Securities Act ) though the shares are not listed on the stock exchange. The learned Counsel appearing for the custodian also relied on a judgment of the learned Single Judge of this Court in the case of BOI Finance v. Custodian and A.K. Menon v. Fairgrowth Financial Services Ltd. and Anr., 2002 (1) All M. R. 180, dated 14th December, 1993. On the contrary the learned Counsel appearing for the petitioners contended that the forward sale of the shares of F.F.S.L. was not prohibited because shares were not listed on the stock exchange. In support of this submission the learned Counsel appearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed by the Special Court. In the present case, there is no dispute that the amount of ₹ 4,00,10,000/- belonged to the notified party and it was given as advance by the notified party to the petitioner Nos. 1 and 2 companies in the year 1991. According to the petitioners, this amount which belonged to the notified party was adjusted by the petitioner No. 3 as the price of 1 lakh shares of the Company F.F.S.L. on 8th April, 1992. It, therefore, becomes necessary to refer to the letter dated 8th April, 1992 addressed by the petitioner No. 3 to the notified party. At the hearing of the matter, the learned Counsel appearing for the petitioners stated that the transaction stated in the letter dated 8th April, 1992 is the real transaction and all other versions of the transaction that might have been given by the petitioners are disowned and the petitioners rely on the transaction as explained in this letter dated 8th April, 1992. Therefore, in my opinion, it would be appropriate to quote the entire letter, it reads as under : This bears reference to the advance of ₹ 4,00,10,000/- (rupees four crores and ten thousand only) arranged by you for our companies. We confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,00,10,000/- was that the amount, belonged to the notified party and it was lying as an advance with the two companies, and therefore, by operation of the provisions of Sub-section (3) of Section 3 the amount of ₹ 4,00,10,000/- being the property of the notified party on 6.6.1992 would stand attached and that property can be dealt with by the custodian in such manner as the Special Court may direct. It is, thus, clear that before the sale of the shares was to take place i.e. on 30th September, 1993 the notified party who owned the amount, lost his capacity to deal with the amount. Now, the amount could be dealt with only by the custodian under the directions of the Special Court, and therefore, unless the order is made by the Special Court, the sale of the shares for adjusting the advance will not take place. In other words, as a consequence of notification of Mr. Hiten Dalai under the provisions of the Act, for the purpose of completing the sale it was for the petitioners to approach the Court and seek appropriate orders. The learned Counsel for the petitioners relied on the judgment of the Supreme Court in the case of Bharat Nidhi, referred to above, and submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities which are normally dealt with on the stock exchange, i.e. shares of a public limited company. It is held that construed in this sense the definition of the word securities would exclude from its purview shares which are not marketable, such as shares of a private limited company. This is because such shares are by their nature not freely transferable in the market. Their transfer is restricted in the manner provided in the articles of association of private limited companies and these shares cannot be quoted on the stock exchange. The learned Judge also examined the background in which the Act was passed, the mischief which was sought to be suppressed and the statement of object and reasons for passing the legislation. It was noticed that a Committee known as the Gorwalla Committee was constituted for suggesting ways and means of preventing and controlling speculation in shares of public limited companies. It is then held that the main purpose was to regulate speculation in shares on the stock exchanges and to regulate the mechanism of stock exchanges for this purpose. The learned Judge also noted the scheme of the Act. After examination of various sections, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that Sections 21 and 22 give powers to compel listings, so that if transactions in securities of any public or Government company are to be governed, then that company can be forced to list its shares/securities. It is submitted that though Sections 13, 16 and various other provisions of the said Act merely talk of securities , it necessarily means securities which are listed on the stock exchange . It is submitted that even the notifications issued under Sections 13 and 16 must necessarily relate to securities which are listed on the stock exchange. The learned Counsel for the petitioners also relied upon the judgment given by the Appellate Court in the appeal filed against the above judgment. The judgment of the Appellate Court is reported as Dahiben Umedbhai Patel v. Norman James Hamilton, 1985 (57) Com. Cas. 700 (Bom.). In this judgment it has been held that the statement of objects and reasons shows that the object of the Act was to provide for regulation of stock exchanges and of transactions in securities dealt in on them with a view to preventing undesirable speculation in them and it also seeks to regulate the buying and selling of securities outside the limits of sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e word 'marketable' must, in the present case, govern the catalogue of securities earlier mentioned. In Webster's Third New International Dictionary 'marketable' is stated to mean 'fit to be offered for sale in a market; being such as may be justly or lawfully sold or bought'. In order that securities may be marketable in the market, namely, the stock exchange, the shares of a company must be capable of being sold and purchased without any restrictions. In other words, the transfer of a share in a company must vest title in the purchaser and this vesting of title in the purchaser should not be made to depend on any other circumstance except the circumstance of sale and purchase. A market, therefore, contemplates a free transaction where shares can be sold and purchased without any restriction as to title. The shares which are sold in a market must, therefore, have a high degree of liquidity by virtue of their character of free transferability. Such character of free transferability is to be found only in the shares of a public company. (emphasis provided) The Division Bench has also, inter alia, held that in the case of shares of a public limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferable is marketable. As is seen, the definition of the word security under Section 2(h) is an inclusive definition. It is very wide. Thus all securities which are marketable and which have an ease or facility of selling and/or which have a high degree of liquidity and/ or are capable of being sold in a market i.e. stock exchange, are included. That this definition includes securities which are not listed by a stock exchange is clear from Section 17. If Section 17 is read, it is clear that it applies to areas where Section 13 could not apply. This is because in the whole of India, so far as the Court is aware, there are only 21 recognised stock exchanges. Thus, in areas where there are no stock exchanges and where there can be no listed securities, the Government can regulate by means of licensed dealers. The licensed dealers would have to follow the regulations laid down by the Government in their licences and the provisions of the said Act. Also the object of the Act, as seen from the preamble, is to prevent undesirable transactions in securities by regulating the business of dealing therein . It is settled law that there can be two methods of regulation (1) by making somethi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner Nos. 1 and 2 companies would be liable to deposit the amount with interest with the custodian. Really speaking in the face of the view that I have taken, it is not necessary for me to examine whether the custodian was justified in holding that the transaction was entered into to defeat the provisions of the Act. It is true that in the show cause notice, it is merely alleged that the transaction has been entered into to defeat the provisions of the Act, the facts on the basis of which this conclusion can be reached are not disclosed. However, to my mind it is clear that the facts on the basis of which it can be said that the transaction was shown to have been entered into to defeat the provisions of the Act are apparent on the face of the record. The huge amount of ₹ 4,00,10,000/- is claimed to have been given merely as an advance by Mr. Hiten Dalai to the two companies. Nothing is mentioned about the interest which is payable by the two companies to Mr. Hiten Dalai. 250,000 shares of F.F.S.L. are supposed to have been given by the petitioner No. 3 to Mr. Hiten Dalai in 1991. As per the letter dated 8.4.1992, Mr. Hiten Dalai was to return 1,50,000 shares to the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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