9911796707
TMI Blog2006 (4) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... anies Act, 1956. The respondent company mentioned in CP No. 35/2003 i.e. M/s Shonk Technologies International Ltd (in short STIL) was incorporated on 28.8.1984 as Gaurav Trading and Finance Ltd having its Regd. Office at Nirmal, 6th Floor, Nariman Point, Mumbai. In 1986 its name was changed to Sapphire Finance and Mercantile Ltd.; in 1994 to Jai Stock Brokers Ltd.; in 1997 to Shreeji brokers Ltd.; In Jan 2000 to Shreeji Yatayat India Ltd.:(SYIL) and in July, 2000 to Shonk Technologies International Ltd.(STIL). The respondent company started its operation as a Non-Ranking Finance Company. Thereafter it expanded its activities into the area of broking and trading operations. It also diversified into transport business activities. As per the Memorandum of Association filed in Dec. 2000 the present main object of the company is to carry on the business in the field of Electronics, Tele Communications, set up or connect SAP/ERP Solutions, etc. As per the balance sheet as on 31.3.2000 the respondent company had a paid up capital of ₹ 2,24,00,000 comprising 22,40,000 shares of ₹ 10 each. In July, 2000, the respondent company i.e. SYIL a listed company (now STIL) took over the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vehemently argued by the Additional Solicitor General Shri. K.P. Pathak basing his arguments on the due diligence report (placed at Annexure VIII, pages 67 to 93 of the reply of the company in CP No. 35/2003, extracts given in the ensuing paragraphs); the preliminary report of the SEBI; the unusual transaction between listed company and unlisted company violating the provisions of Sections 391/394 of the Companies Act, 1956; etc. My attention was drawn to the unusual transaction allegedly entered into to defraud the general public and another body corporate. It was pointed out how the business of the company was carried on otherwise for a fraudulent or unlawful purpose and how the persons concerned in the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company. It was pointed out that as per the balance sheet as on 31.3.2000 the respondent company had a paid up capital of ₹ 2,24,00,000 comprising 22,40,000 shares of ₹ 10 each. On 14.7.2000 the company increased its authorized share capital from ₹ 2.5 crores to ₹ 20 crores by creating 1,75,00,000 shares of ₹ 10 each without filing the requisite form No. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ₹ 106.91 crores on the basis of valuation reports prepared by the Statutory Auditors of STL. The property was not valued by the approved valuer. Since the company had acquired the entire business undertaking from STL the shares should have been in the normal course allotted to STL. However, in the instant case, it was pointed out that the shares were allotted to the shareholders of STL, and Form No. 3 containing the particular of the contract are silent as to why the shares were allotted to the shareholders of STL, though the value of the property acquired by the company from STL had been arrived at ₹ 106.91 crores. The details of the properties were not disclosed in Form No. 3 as filed with the Registrar of Companies. Further, my attention was drawn to SEBI's preliminary report revealing that: a) The shares of the respondent company are quoted at Bombay and Delhi Stock Exchanges. The shares of the respondent company were not traded on BSE between 13.5.1999 to 9.8.2000. The last trade was at ₹ 2.15 on 13.5.1000. Prior to this date the scrip was traded in the range of ₹ 2 to 7. For the new shares of the company (which were allotted on a preferential a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmarked the price which induced others to purchase and/or sell shares. The synchronized set of Ketan Parekh entitles constituted large percentage of total volumes of trade at the exchange. The large stock was concentrated in the hands of a few entitles which facilitated manipulation by Ketan Parekh entities, 21 entities had around 1,48 crore shares which formed 84.5 per cent of the paid up equity capital of the company. d) The trades of Ketan Parekh entities were in violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. e) That the brokers-Credit Suisse First Boston, Vyomit, Omega, Millennium, Visaria, Latin Manoharlal, Hem Securities Ltd., C.J. Dalai, etc facilitated creation of artificial market in certain scrips and assisted, abetted and aided entities connected with Ketan Parekh in market manipulations in violation of Code of Conduct specified in SEBI (Brokers and Sub-brokers) Regulations, 1992 and bye law 357 of the Stock Exchange, Mumbai by inter-alia indulging in fictitious dealings and prejudicial business. Further, the trading of broker - CSFB in respect of the shares of the company--Shonkh Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /scheme entered into between both the respondent companies that the agreement as made between the two companies that STL did not get any consideration for the agreement and the consideration of the agreement i.e. the shares of the Shonk Technologies International Ltd. were allotted to the shareholders of STL. Now, it was pointed out, in the event of dispute the shareholders of Shonk Technologies Ltd. would face difficulty in enforcing this agreement in the Court of Law because the principle of privity of contract would come into play. My attention was drawn to the background and the credentials of Shonk Technologies International Ltd. prior to the scheme of acquisition of business undertaking of STL For this purpose I was shown that the due (sic) Annexure 8 pages 67 to 93 of the reply of the company in CP 35 of 2003. An excerpt of the report is given below: 1. ...VIII. OTHER COMPLIANCE ISSUES AND LITIGATION 8.1 It is observed that there are no pending litigations filed by or against it. 8.2 It is observed that SYIL has caused the cancellation of its sales tax registration. 8.3 SYIL has not obtained the necessary certificate from the appropriate authority under the Shops and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ology Ltd. took away with them the business of STL and acquired STIL or SYIL, a listed company because after the allotment of shares to the shareholders of STL in lieu of transfer or acquisition of business undertaking of STL the shareholders of STL became the majority Shareholders in STIL. The shares of the respondent company were quoted at Bombay and Delhi Stock Exchanges. One of the consequences of this arrangement, it was argued, was that, the last trade of the shares of the erstwhile SYIL presently STIL was at ₹ 2.15. On 13.5.1999 to 9.8.2000 the scrip was not traded at all on the Bombay Stock Exchange. Prior to this date the scrip was traded in the range of ₹ 2 to ₹ 7. Thereafter, on the basis of price at which shares were allotted to the shareholders of STL, the BSE fixed the base price of the share at ₹ 70. Then my attention was drawn to SEBI's preliminary report showing how there was synchronization of logging in buy and sale orders of shares at the same quantity and price putting orders within a gap of 1 or 2 second of each other, and how such matching transactions created artificial volume and accounted for entire trading on one particular day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investigated by the SEBI. Undoubtedly it can be investigated under normal criminal law by the CBI. I am further of the opinion that merely because the material on the basis of which investigation is being undertaken is identical to the material which is subject matter of investigation by the other authority it cannot be stated that both the authorities can not simultaneously investigate pursuant to power conferred on them under I heir respective statutes. I am of the opinion that every authority is entitled to investigate even may be in respect of the same material as well as from the angle and facet in which they have been asked to carry out investigation. It is possible that the SEBI maybe investigating the same material on the ground of breach of the various provisions of the SEBI act and other security related legislations whereas the central government, department of company affairs can consider and/or investigate the fraud and/or breach if various provisions of law in the light and context of the provisions of the Companies Act may be in respect of the same material. However, I am of the opinion that the contention advanced by the learned Counsel for the appellant cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conferred on the court is to ascertain whether there is a material in support of the opinion arrived at by the central government and/or the said exercise is not a malafide exercise of power. In the facts of the present case I do not consider that the exercise of the Central Government is malafide. There is a plethora of material and in view therein I do not desire to interfere with the investigation ordered by the central Government in exercise of power conferred-under Section 237(i)(b) of the Act. In view of the foregoing the counsel for the petitioner vehemently argued that this is a fit case for directing investigation under Section 237(b) of the Act, as the pre conditions before initiating action under this provision are fulfilled as the business of the company was conducted with the intent to defraud the general public and the other body corporate. The respondents have, it was argued, cheated the general public and an artificial person STL divorced from its shareholders which has suffered a loss of more than ₹ 104 crores and that the respondents case also comes under the category of cases when the business of the company is being carried on otherwise for a fraudulent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck list was also worked out elaborately and was made the basis of the legal action. Reference was made to the report at page 67, Annexure - VIII, to the documents attached to the reply affidavit filed by the respondent company on 8.7.2004. Specific reference to the "legal due diligence check list" at page 86, Appendix A was made to show that each and every aspect of law had been taken into account and all the actions were wholly within the scope of law and purely on legal advice. The entire scheme was read out as part of the arguments. It was argued that no error or malafides has been attributed to the report and no attempt whatsoever even made to show that any part of the report did not reflect the true legal position. It was further argued that the transactions having been made purely in terms of the said legal documentary due diligence report, it was not open to the petitioner to make allegation against the respondent company, in a vague and general manner and thereby seek investigation. It was pointed out that none of the specific issues raised had been addressed by the petitioner either in the petition, rejoinder or in the arguments. It was submitted that the acquisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd consequently the question of payment of stamp duty on so called transfer of assets would not arise. As regards non compliance with Section 391 of the Act, it was argued, that from the nature of transactions involved it was not mandatory on the part of the company to have recourse to Section 391 of the Companies Act. It was further pointed out that in the case of the shareholders not approving the scheme of merger or takeover in totality, the same may then not be binding on such shareholders who may have to approve of such a scheme of merger, not involving the provisions of Section 391 which cannot in any way amount to any violation of the Companies Act. Regarding Volatility and its value it was argued that the Union of India has not been authorized to act for and on behalf of SEBI to make an attempt for further fishing and roving enquiries for this purpose. It was brought to my notice that the CBI had initiated proceedings against the respondent company and that the court of special judge greater Bombay after taking notice of the fact that the CBI had sought to close the investigation held in order dated 16.11.2005 that "I agree with CBI that mens rea which was so essential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholders. This in itself is a sufficient ground for ordering investigation under Section 237(b) of the Act. This is a very unusual case where the consideration for taking over of an unlisted company instead of being paid to the company has been passed on to the shareholders of STL. It has been rightly pointed out that in the event of dispute the shareholders of Shonk Technologies Ltd. can face difficulty in enforcing this agreement in the Court of Law because the principle of privity of contract would come into play; (ii) The general public seems to have been cheated. The business of the company seems to have been conducted with an intent to defraud its creditors and public at large. In the wake of market manipulations in the scrips as clearly brought out by SEBI fraudulent means appears to have been adopted violative of SEBI Acts and Regulations to defraud the creditors and public at large. The facts as stated point towards the involvement of companies belonging to the Ketan Parekh Group and the stock scam preliminarily revealed by the SEBI. The modus operandi in the present case can be traced out only by investigation under Section 237(b) of the Act; (iii) The take over of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove extract makes the credentials and intention of the respondent company amply clear. Such credentials raise suspicion and the question as to why a company like STL agree to sell its business undertaking to a company like SYIL and suffer loss remains unanswered. Raising of share capital from ₹ 2.5 crores to 25 crores in violation of Section 97 of the Act cannot go unnoticed. Investigation seems to be the remedy available. (iv) The directors owe fiduciary duty to the shareholders and they have to function in not only in good faith but in very good faith. But in this case shareholders faith seems to have been belied. It is a case where the respondents and the persons concerned in the management of the company appears to be guilty of fraud, misfeasance and other misconduct towards the company. The business of the company appears to have been carried on otherwise for a fraudulent and unlawful purpose. I find no force in the respondents plea that the condition precedent for exercising power under Section 237(b) of the Act, the business of the company should be in operation, i.e. the company should be carrying on operation and in case by any reason whatsoever, has stopped carryi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax Act. The inspection under this section is not an investigation, though it may led to one, in case there is anything wrong or objectionable or fraudulent. It is to ensure that there is nothing objectionable in the conduct of the business or affairs of the company. On a perusal of the inspection report, the Central Government may lay the information to police for the purpose of investigation under the Criminal Procedure Code instead of proceeding under Section 235 and 237 of the Companies Act. (Indian Express (Madurai) Pvt. Ltd. v. Chief Presidency Magistrate, (1974) 44 Companies Act, 1956 Cases 106 (Mad). Scope of investigation under Section 237(b) is very wide as compared to the scope of inspection provided under Section 209A of the Act. The expression "affairs of the company, in Section 237 is wide enough to include violation of any law in the conduct of those affairs which is for the time being, in force. An investigation can extend upto the whole range of company's affairs without any limitation as to the period or officers or members to be covered. "Intent to defraud" is not something black and white which can be inspected and picked up. Only investig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of this Board under this section, directing an investigation is only analogous to the issue of a fact finding commission.
5. In view of the above, I have reason to believe that there is a likelihood of the existence of malpractices envisaged in Clauses (i) to (iii) of Section 237(b) of the Act. To prove this prima-facie case of "intent to fraud" and misfeasance on general public and the other body corporate and conducting the business of the company otherwise for a fraudulent and unlawful purpose, I have no hesitation in granting the petitioners' prayer for ordering investigation under Section 237(b) of the Companies Act, 1956 in view of the foregoing. The facts and circumstances of the case compel me to opine that this is a fit case for ordering investigation under Section 237(b) of the Act. To do substantial justice between the parties, I hereby order that investigation of the respondent companies be carried out by the Central Government under the provisions of Section 237(b) of the Companies Act, 1956 so that the truth can come out about the nature and modus operandi of these transactions.
With the above directions, the petitions are allowed. X X X X Extracts X X X X X X X X Extracts X X X X
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