9911796707
TMI Blog2000 (7) TMI 1004X X X X Extracts X X X X X X X X Extracts X X X X ..... l Bank were the Bankers to an Issue to the company s public issue of shares. The issue was opened for public subscription on 21-12-1995 and closed on 26-12-1995 with heavy over subscription. 3. Even though the prospectus issued by the company categorically stated that the company s shares would be listed on the stock exchanges at Ahmedabad and Bombay and that for the purpose necessary application had been made, permission for listing could be obtained only from Ahmedabad Stock Exchange (ASE). While ASE accorded approval on 4-3-1996, Bombay Stock Exchange (BSE) rejected the request on 6-3-1996. However, the Appellant Bank of Baroda, on 25-3-1996 transferred a sum of ₹ 38,89,218 collected from the public, to the company s account. The Appellant Union Bank of India, out of a sum of ₹ 353.32 lakhs collected from the public, transferred few lakh rupees to certain third parties and the balance amount to the company. These transfers were made without waiting for the decision on listing, from BSE. 4. Since BSE had refused to list the company s shares, the public issue became void in terms of sub-section (1A) of section 73 of the Companies Act, 1956 necessitating refund of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money and if so the respondent under section 11B of the Act is empowered to direct the appellants to return the application money received by them. 6. Appearing for the Appellant Bank of Baroda, Shri M.T. Udeshi, the learned Authorised Representative, submitted that the impugned order is beyond the jurisdiction and powers conferred on the Respondent by the Act. According to him section 11B of the Act is only an enabling section and the substantive law governing the matter is section 73 of the Companies Act, under which the issuer company and its officers in default alone are responsible for the consequences of non-compliance of the requirements provided therein, and in any case not the Bankers to an Issue. In the absence of any liability to refund the money fastened on the Bankers to an Issue by statute, appellant is not liable to make such refund and cannot be compelled to make refund. In his view the Act does not empower the respondent to exercise powers to enforce the provisions of the Companies Act. Referring to Gujarat High Court s order dated 30-7-1998 in the company s SCA, the learned Representative submitted that since the properties of the company having been charged t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the liability of the appellant as against the company as Bankers to an Issue stands concluded on handing over the collection money and the respondent cannot, as such direct them to refund the money and only the company can be asked to do so. 8. Further, the direction to refund the money is belated as it is made after a lapse of 4 years from the date of issue of prospectus and after a lapse of 3 years of transferring the money to the company. According to the learned Representative by making the order effective from 23-3-1996, i.e., the date on which the money was released to the company, the respondent had disregarded the fact that the matter was time barred. 9. Referring to the decision of the Supreme Court in Rishya Shringa Jewellers Ltd. v. Stock Exchange, Bombay JT 1995 (7) SC 602 and the Gujarat High Court decision in Rich Paints Ltd. v. Vadodara Stock Exchange Ltd. [1998] 92 Comp. Cas. 282/ 15 SCL 128 , relied in support by the respondent in their reply, it was submitted that in both the cases refund order was directed against the issuer company and not against the Bankers to an Issue. He submitted that the requirement of section 73 that in the event of refusal of per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atalogued in section 11. Section 11 does not confer any recovery power on the respondent as could be seen from sub-section (2) thereof. There is no addition to the section conferring any such power by notification under clause (m) of sub-section (2). Authority to recover money, levy of interest, etc. being substantial powers, cannot be exercised without specific authority of law. The liability to pay interest, the learned Counsel submitted, can arise only in terms of a statutory provision or by any custom or usage, provided such custom or usage is not contrary to the laws and that the power to award interest cannot be exercised unless conferred by statute. The respondent is lacking such authority is evident from the scheme of the Act itself as it does not provide for any recovery mechanism in the event of an order for recovery of money. There is not even an implied suggestion in the Act in this regard. 13. The learned counsel submitted that the impugned order in effect is one to enforce section 73. He submitted that there is no specific indication in the section or generally in the act to believe that the respondent is empowered to exercise authority to enforce compliance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent to recover the money from the company or from its associate concern Jaltarang Motel Club or from the Bankers to the Issue, the learned Counsel submitted that the High Court cannot clothe the respondent with any such additional power which the statute has not provided for, that the High Court s observation cannot be taken as an authority to act upon. He further submitted that a direction under section 11B can be only prospective and it cannot in any case be used to deal with a matter, which is badly delayed being more than 5 years old, that even the Supreme Court had put limitation for filing Writ Petitions under Article 32 by 3 years. 16. In the light of the respondent s contention that the Bankers to an Issue is a trustee for the subscribers money, the learned Counsel submitted that in terms of section 23 of the Indian Trust Act, 1882 a trustee, assuming the trustee is liable for any breach of trust, can be directed to pay interest only under limited circumstances viz., (i) the trustee has actually received interest, (ii) breach of trust consists in unreasonable delay to pay the trust money to the beneficiary, (iii) when trustees ought to have received interest, and (iv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same necessitating the respondent s intervention by way of issuance of directions on 19-12-1996 requiring the company to refund the collection money to the applicants. Though the company filed an appeal before the appellate authority challenging the respondents order, they could not succeed and subsequent revision application filed by them was also dismissed. The matter did not rest at that point. The Company filed a special Civil Application in the Gujarat High Court which was also dismissed on 30-7-1998. Letters Patent Appeal filed thereafter against the Single Judge s order also was dismissed by the Division Bench of the High Court on 18-9-1998. Tribunal s attention was invited to the Single Judge s order as endorsed by the Division Bench in the said SCA and in particular to the portion giving liberty to the respondent to take appropriate action with respect to the recovery of amounts either from the properties purchased out of the subscription money or from the Jaltarang Motels Club, an associate unit of the company, to whom part of the subscription money was diverted or from the Bankers to the Issue. He submitted that the impugned order was issued in compliance with the Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court order and in exercise of the powers vested in the respondent by the Act. The learned Representative further submitted that the Appellants being Bankers to an Issue are subject to the jurisdiction of the respondent for their acts of omission and commission and certainly powers under section 11B can reach them. Referring to the standing of the Act vis-a-vis other legislations he submitted that in terms of section 32 of the Act, the provisions of the Act can be used to supplement the provisions of other statutes like Companies Act. Referring to section 73 he submitted that the object of the section is to provide protection to investors paying subscription money on the faith of a promise to get back the same in case shares are not allotted to them. This faith is fortified by the assurance that the money will not be appropriated for any purpose and will be kept in the safe custody of the collection bank. The company or the bank receives the money in a fiduciary capacity and the arrangement made by the company and the subscribers is a special arrangement binding on the company as well as on the bank having regard to the scheme and object of the provisions contained in the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any before listing refusal was received. 26. A public limited company has no obligation to have its shares listed on a recognised stock exchange. But if the company intends to offer its shares or debentures to the public for subscription by issuing prospectus, it must, before issuing such prospectus, apply to one or more recognised stock exchanges for permission to have the shares or debentures intended to be so offered to the public, to be dealt with in each such stock exchange in terms of section 73. 27. It cannot be gainsaid that the prospectus of the company is an important document provided for, under the statute. Section 2(36) of the Companies Act defines prospectus as follows : 2(36) prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body composite; 28. Format of the prospectus has been designed in the statute itself and furnished in Schedule II to the Companies Act thereby providing for disclosure of all the relevant materials to enlighte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by the company. Any allotment of shares will become void if permission is not granted by the stock exchange or each such stock exchange as the case may be, before the expiry of 10 weeks from the date of the closing of the subscription lists. The validity of the allotment is made thus dependent on securing the requisite permission of each stock exchange whose permission has been sought. There is a deemed refusal if permission is not granted by the stock exchange before the expiry of 10 weeks from the date of closing of the subscription lists and upon the expiry of that date, any allotment of shares made by the company becomes void. Sub-section (2) requires the company to repay forthwith all money received from applicants in response to the company s prospectus either where the company has not applied for permission of the recognised stock exchange for listing or where permission has been applied for but not granted. If the company has issued a prospectus without seeking permission for listing, it has clearly acted in violation of the mandatory provisions of the Act, and the company has no right to receive or retain any amount by way of subscription in pursuance of its prospectu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares are allotted after fulfilling the conditions stipulated in the section, the money collected by way of subscription is required to be kept in a separate account with a scheduled bank, away from the reach of the issuer company to be available for returning to the applicants in the event of allotment failing to come through. 33. The question as to whether permission from each and every stock exchange mentioned in the prospectus is required or not before allotment, was a contentious issue before the Supreme Court declared the legal position in Rishya Shringa Jeweller Ltd. s case (supra) holding that . . . where the prospectus held out that enlistment of shares would be in more than one stock exchange the consequence envisaged in sub-section (1A) of section 73 ensues to render void the entire allotment of shares unless the permission is granted by each and everyone or all of the stock exchanges named in the prospectus for enlisting the shares. This is the plain meaning of sub-section (1A) of section 73. In short, unless permission is granted by each or everyone of all the stock exchanges named in the prospectus for listing of shares to which application is made by the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the said case the Court was considering the claim of two companies which made public issue of shares wherein the issue was over subscribed. However, before transferring funds to the companies the collection bank was taken into liquidation and a provisional liquidator was appointed. The bank refused to hand over the money to the companies on the ground that the bank was in liquidation and the money in question formed part of its general assets. But the Court over ruled this contention stating that . . . . the statutory provisions contained in section 73(3) and section 73(3A) of the Companies Act, 1956 create a statutory trust so as to impress the said amounts with trust, whether in the hands of the company or in the hands of the bank . . . . The object of these provisions is to provide complete protection to the persons who pay subscription moneys on the faith of promise to refund the moneys in case certain conditions are not fulfilled and earmarking of subscription amounts in the safe custody of the bank. The application moneys do not form part of the general assets of the company or the bank. The moneys deposited are merely in the custody of the bank. The capacity in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not be allowed to be handled or manipulated by the company till all the mandatory requirements of sections 69 and 73 of the Companies Act are compiled with and till the company can proceed to make valid allotment of shares. In other words, the moneys must be kept out of the reach of the company and its directors/promoters till the company can make allotment of shares in accordance with law. This salutary object of the provisions of the Companies Act will be frustrated if it is held that application moneys received from the public are permitted to be deposited in any bank account of any scheduled bank where the company may choose to deposit. In that case, there will be no control on the company which may withdraw the application moneys or any part thereof in flagrant violation of the provisions of sections 69 and 73 of the Companies Act and then agree to pay a fine of ₹ 5,000 under sections 69(4) and 73(3). No difficulty will arise either to the company which has offered its shares to the public and is acting bona fide or to the investors, if the provisions of sub-section (4) of section 69 and sub-sections (3) and (3A) of section 73 are interpreted as stated earlier, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moneys for the benefit of the company, and (ii) to the extent of refundable amount for the benefit of the subscribers. Decision in Rich Paints Ltd. s case (supra) has further elaborated this aspect, as could be seen from the portion from the judgment extracted above. 42. The Bankers to an Issue has a prominent role in the process of raising capital by companies from the public through public issue in as much as it is the custodian of public funds, accountable to the applicants in case an issue fails to pass through its final phase i.e., allotment of shares. To part with the collection money for any other purpose is in clear breach of trust. In this context, it is all the more relevant to take note of the fact that both the appellants are public sector banks and as such they should have been all the more careful in dealing with funds. It is quite evident from the facts that they had failed to exercise due diligence expected of them befitting to their position and status. The argument that since ASE had allowed the basis of allotment requiring the appellant to release the moneys to the company is not based on a proper appreciation of the requirements of section 73. Basis of allot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess. It appears that the appellants had not taken cognizance of the binding nature of the commitment made in the prospectus and the faith reposed in them by the applicants. The whole purpose of keeping the money in a separate account is defeated if the issuer company is given free access to the funds kept in that account. 43. The learned Representative of the Appellant Bank of Baroda had put forth an argument that requirement of obtaining listing permission from each one of the stock exchanges mentioned in prospectus should have been stated in the prospectus itself for their guidance. Since this require-ment being a part of the substantive law, repetition of the same in the prospectus is not warranted for the enlightenment of the Banker to an issue. Strangely, the appellants having not taken cognizance of their duty to prevent the company accessing the funds remaining in their custody, as provided in black and white in the prospectus were urging for an explanatory clause incorporated in the prospectus on a matter specified in the statute itself for guidance ! What for ? The argument that bankers to an Issue cannot be fastened with the liability of refunding the collection money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only against the company and its officers in default, is correct. I fully agree with the appellant s version that the respondent cannot enforce the provisions of the Companies Act in the absence of requisite statutory authorisation. The Companies Act itself is a whole- some legislation leaving its enforcement to the authorities designated thereunder and the respondent is not one among them. But then, one has to carefully examine the impugned order to see as to whether the impugned order is one enforcing the provisions of the Companies Act or one enforcing a matter falling under the purview of the Act itself and the competency of the respondent to deal with the matter. On a perusal of the impugned order it could be seen that though the requirement of section 73, which governs certain aspects of pubic Issue of shares, allotment, etc. have been discussed in the order, nowhere it has been stated that the order is intended for enforcing the said section 73. The order categorically refers to the authority vested in the respondent vide section 11B of the Act. 45. In the light of the rival contentions, one has to see as to whether the provisions of the Act, independent of the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mended in 1995, because :- On the basis of past experience of the Board a need has been felt to amend the said Acts [(i.e., SEBI Act and Securities Contracts (Regulation) Act], in respect of certain categories of intermediaries, person associated with the securities market and companies on matters relating to Issue of capital and transfer of securities. Accordingly several amendments were made to the Act, most of them intended to strengthen the respondent s role as protector of investors interest. In order to enable the Board to function more effectively , the Board was given power to Issue directions vide a new section 11B. 48. It is needless to say that investors by and large are often at the receiving end in the hands of certain unscrupulous market players. There was no focussed attention to protect their interest in the securities market. Their plight was in no way different from the plight of consumers. In view of the comparable position in which the investors and the consumers are placed, it is felt appropriate to cite the following observations made by the Supreme Court in Lucknow Development Authority v. M.K. Gupta [1994] 1 SCC 243 : recognising the need for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the said decision had also provided guidance for the benefit of the Courts in interpreting such a beneficial legislation : Since the Act is also a beneficial legislation the approach of the courts in interpreting its provisions should not be different. Following extract from the decision provides the guidance :- The provisions of the Act thus have to be construed in favour of the consumer to achieve the purpose of enactment as it is a social benefit oriented legislation. The primary duty of the court while construing the provisions of such an Act is to adopt a constructive approach subject to that it should not do violence to the language of the provisions and is not contrary to the attempted objective of the enactment. 51. Sections 11, 11B and 12 are the core sections in the Act from the functional angle. As stated, section 11 enumerates the functions of the Board in a general way. New section 11B is on the power to Issue directions. Section 11B is more specific and action oriented. Section 12 provides for registration of intermediaries with the respondents for carrying on business activities in the securities market. 52. Respondent s power under section 11B to Issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of the Board. In effect section 11B is one of the executive measures available to the respondent to enforce its prime duty of investor protection. As could be seen from the text of the section reproduced above, the respondent is empowered to Issue directions in the interests of investors to any person or class of persons referred to in section 12 of the Act or associated with the securities market. In other words the section identifies the persons to whom and the purposes for which, directions can be issued. 55. The Gujarat High Court had examined the scope of section 11 and section 11B vis-a-vis the respondent s position, while deciding an appeal against the Single Judge s order in Alka Synthetics Ltd. s case (supra). The basic Issue for consideration before the Division Bench in the said appeal was as to whether the respondent had the authority to Issue an order under section 11B of the Act for impounding or forfeiting the money received by stock exchanges, as per the concluded transactions under its procedure, until final decision is made. While negating the views of the Single Judge, and upholding the respondent s power to Issue such a direction under section 11B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the legal and constitutional frame work, intended to achieve the purposes of the Act and subjecting the persons specified in the section, the power will sustain. Since the exercise of power is subject to the provisions of the Act and the purposes for which it can be exercised and the persons to whom it can reach has been specified in the section, it can-not be said that the power is unguided or unlimited. It is a wholesome provision designed to achieve the objectives of the Act. 57. As mentioned earlier the respondent cannot exercise powers under the Companies Act, being not a designated enforcement authority thereunder. But, on a careful perusal of the impugned order it is seen that it is not a direction for enforcement of section 73. The impugned order in its enforcement is independent of section 73. During the course of argument, the learned representative of the respondent had stated that they had received complaints from investors seeking the Board s intervention as the application money paid by them towards the share issue, despite refusal for listing by BSE, had not been returned to them. The respondent had cited the provisions of section 73 in the order as referral p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the requirement of section 73 intended to protect the interest of the applicants, to me appears to be concurrent. There is no inhibition of any sort on exercising measures for investor protection by the respondent in view of the specific mandate given by the Act. The Companies Act does not carve out an exclusive jurisdiction for itself to the exclusion of other authorities in the field of investor protection. 59. Supreme Court s decision in Radheyshyam Khemka v. State of Bihar [1993] 77 Comp. Cas. 356 throws enough light on the role of dual agencies where enforcement of power is found overlapping. In Radheyshyam Khemka s case (supra), the criminal proceeding pending against the appellants was challenged on the ground that since the provisions of the Companies Act take care of the interest of investors and they put restrictions on the misbehavior of the promoter and the directors of the company, for any lapse on their part in such matters they cannot be summoned to stand trial for offences under Indian Penal Code. Demolishing this contention the Supreme Court held that : It is true that the Companies Act contains provisions regarding the issuance of prospectus, applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n matters relating to public issue of shares has been recognised by Punjab and Haryana High Court also as could be seen from its decision in Universal Incast Ltd. v. Appellate Authority, Securities Exchange Board of India (SEBI) [2000] CLC 948. In the said case the respondent while exercising the appellate powers under section 22 of the Securities Contracts (Regulation) Act, 1956, in an appeal filed against the failure of the Ludhiana Stock Exchange to give listing approval to the appellant company, had directed the issuer company to deposit all monies received by them from applicants for shares, in a separate account to be opened with the Banker to an issue, as required under section 73. Even though the respondent was exercising powers under section 22 of the SCR Act (not under section 11B) and the direction was on a matter requiring compliance under section 73, the respondent s order intended to protect the interests of the investors was upheld by the Division Bench observing that : . . . the scheme of sections 69 and 73 of the Act, would, therefore, suggest that the money should not be allowed to be handled or manipulated by the company till all the mandatory requirements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B was recently subjected to examination by the Bombay High Court in Ramrakh R. Bohra v. SEBI [1991] 33 CLA 243. In the said case the High Court observed that : 21. Section 11B is an enabling provision enacted to empower the SEBI to protect the interest of investors and to promote the development of and to regulate the securities market and to prevent malpractices and manipulations, inter alia, by brokers. Such an enabling provision must be construed so as to subserve the purpose for which it is enacted. It would be the duty of the court to further the legislative object of providing a remedy for the mischief. A construction which advances this object should be preferred rather than one which attempts to find a way to circumvent it. In the case of RBI v. Peerless General Finance Investment Co. Ltd. AIR 1996 SC 646 the Supreme Court has observed as under : It would, thus, appear that section 45K(3) is an enabling provision enacted to empower the bank to regulate the conditions on which deposits may be accepted by non-banking companies or institutions and (the) to prevent malpractices in the matter of acceptance of such deposits. Such an enabling provision must be so constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is well established. In the instant case the respondent s power to issue direction has been approved by the Gujarat High Court in the SCA filed by the company itself, as could be seen from the order dismissing the appeal filed against the respondent s direction of 19-12-1996. A reading of section 11B with the Gujarat High Court s order in the company s SCA would indicate that the respondent had acted with authority. 64. The respondent s submission that in view of section 32 of the Act, they are competent to take action supplementing the provisions of other legislations like the Companies Act is not correct. What section 32 provides for is that the provisions of the Act shall be in addition to and not in derogation of the provisions of other laws, meaning thereby that in the event of a conflict, between the provisions of an existing legislation and the Act, the provisions in the existing statute will prevail over the provisions of the Act. To put it differently, the provisions of the Act in its application will be only supplemental to the provisions of other existing legislations. The section does not empower the respondent to supplement the provisions of any other law, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uary/March, 1996. The respondent, vide order dated 19-12-1996 directed the company s management to refund the money. The appeal filed before the appellate authority by the company against the said order was disposed of on 22-8-1997 and revision filed by the company thereafter was disposed of on 17-3-1998. Thereafter the company filed a SCA in the Gujarat High Court, which was disposed of by the Single Judge on 30-7-1998 and LPA filed by the company against that order in the same Court was disposed of by the Division Bench on 18-9-1998. Thereafter, in tune with the Gujarat High Court s order the respondent initiated inquiry by issuing a show cause notice, on 11-1-1999, the appellants were heard on 16-9-1999 and impugned order was issued on 19-1-2000. In fact it is on the basis of the Gujarat High Court order the respondent proceeded against the appellants and issued the impugned direction under section 11B on 19-1-2000. From the sequence of events it is evident that there was no delay in the matter, and provisions of Limitation Act do not apply to the case as claimed by the appellants. 68. The contention that the directions can be issued only prospectively and not retrospectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to in section 11B is not an adversarial proceeding, but only a fact finding process. In the present case necessary inquiry was made to ascertain the conduct of the appellants before directing them to refund the money. The appellants were given adequate opportunity to put forth their views in the inquiry, before the direction was issued. This is born out of the records. 72. The argument that only the investors can claim refund and that in the absence of authorisation from them, the respondent cannot take up the matter is untenable because such an argument goes against the very purpose for which the respondent has been put in place by the statute. It may not be forgotten that the main object of setting up the Board is to protect the interests of investors. It is an institutional set up clothed with powers and resources at its disposal, to take up the cause of investors. 73. An argument that Bankers to an Issue is amenable only to the regime under the Securities and Exchange Board of India (Bankers to an Issue) Regulations, 1994 and section 11B cannot supplant the Regulation, was putforth. On a perusal of the said regulation it is seen that its scope is restricted to the proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s order in the company s SCA. The High Court apparently had taken note of the powers under section 11B while permitting the respondent to recover the money from the appellants. 75. The appellants being public sector banks it was all the more expected of them to exercise due diligence before parting with the public money to the company. They cannot seek shelter on the ground that they were not aware of the requirements of law, that they did not get proper advice from the Lead Manager and the respondent, etc. According to their own admission they had acted as Bankers to an Issue in several public issues in the past and as such they cannot claim ignorance of the statutory requirements and their obligations. It is also to be remembered that in the prospectus itself an undertaking was given that the subscription monies will be kept in separate bank accounts and the company will not have access to such funds unless allotment of shares has been made in consultation with the stock exchanges where listing is made. Are we to believe that the appellants has not read this portion in the prospectus casting such an important obligation on them ? There is nothing on record to show that the app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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