MUMBAI In the matter of� (a) Appeal No. 2/2000 Bank of Baroda Appellant Vs. Securities
& Exchange Board of India
Respondent
(b) Appeal No. 4/2000 Union Bank of India Appellant Vs. Securities
& Exchange Board of India
Respondent
APPEARANCE Shri
M.T. Udeshi
Shri
K.K.Verma
Shri
R.M.Kadam
Shri
V.S.Deshpande
Shri
S.V.Krishnaniohan
Mr.
Vijayakrishnan,
ORDER These
two appeals by the Appellants viz. Bank of Baroda and Union Bank of India,
are directed against the two separate orders, both dated January 19, 2000
made the Respondent, directing the Appellants to refund the application
money collected by them from the subscribers, in their capacity as the
Bankers to the Issue in the public issue of shares made by one Jaltarang
Motels Ltd., in December 1995.
Material
facts giving rise to these two appeals relate to matters arising out of
the public issue of 36 lakhs equity shares of Rs. 1 01- each, made by Jaltarang
Motels Ltd (herein after referred to as the Company) by issuing a prospectus.
Both the Appellants are public sector banks holding certificate of registration
from the Respondent, to act as "Bankers to an Issue". The Appellants along
with Punjab National Bank were the Bankers to an Issue to the company's
public issue of shares. The issue was opened for public subscription on
December 21, 1995 and closed on December 26, 1995 with heavy over subscription.
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 March 4, 1996, Bombay Stock Exchange (BSE)
rejected the request on March 6,1996. However, the Appellant Bank of Baroda,
on March 25, 1996 transferred a sum of Rs.38, 89,218 collected from the
public, to the company's account. The Appellant Union Bank of India, out
of a sum of Rs.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.
Since
BSE had refused to list the company's shares, the public issue became void
in terms of sub section (iA) of section 73 of the Companies Act necessitating
refund of the application money forthwith to the applicants as required
under sub section 2 of the said section 73. However, the company did not
comply with the said requirement of returning money to the applicants and
as a result innocent (investors) were, put to hardship. At this juncture
the Respondent got into the interests of the investors. After holding an
enquiry the Respondent order dated December 19, 1996 directed Shri Atul
Shah, the Managing Director and one of the promoters of the company, to
refund the subscription money to the applicants. Instead of complying with
the said direction, the company preferred an appeal against the order before
the Appellate Authority under the Securities & Exchange Board of India
Act (the Act). The appeal was dismissed on August 22, 1997. The company
filed a revision application before the Appellate Authority, which was
also dismissed on March 17, 1998. Thereafter the company filed a Special
Civil Application in the Gujarat High Court. Single Judge dismissed the
SCA on July 30, 1998 giving liberty to the Respondent to take appropriate
action with respect to recovery of amounts either from the properties purchased
out of the fund or from the fund diverted to Jaitarang Motels Club, an
associate concern, or from the Bankers to the Issue. LPA filed against
the Single Judge's order was dismissed by the Division Bench on September
18, 1998. The Respondent opted to pursue the matter with the Appellant
Banks, being the Bankers to the Issue, and accordingly after making an
enquiry issued orders invoking the powers provided under section 1 IB of
the Act, directing them to refund the money to the investors, holding that
due to their negligence, the investors have been made to suffer. The Appellant
Bank of Baroda was directed to refund a sum of Rs.40.32 lakhs together
with interest @ 15% p.a. from March 25, 1996 and the Appellant Union Bank
was directed to refund Rs.353.32 lakhs together with interest @15% p.a.
from April 3, 1996. Both these orders were issued on January 19, 2000.
These two orders are under challenge in the present appeals.
Both the
appeals, with the consent of the parties were heard together as the main
issue involved for consideration by the Tribunal in these appeals being
common. The fate of these appeals depends on the answer to the question
as to whether the Appellants are liable to make refund of the money and
if so the Respondent under 11 B of the Act is empowered to direct the Appellants
to return the application received by them.
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
11 B 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 July 30, 1998 in the company's SCA, the learned Representative
submitted that since the properties of the company having been charged
to the Respondent, the Respondent should have realised the money therefrorn
and paid to the investors; more so in view of the company's admission of
diversion of funds to purchase of properties and to its associate concern.
He submitted that the Bankers to an Issue has only a limited role to play
in a public issue as its duty is confined to collection of applications
and money. The Lead Manager being the kingpin in the process is required
to over see the public issue and provide guidance to others associated
with the issue. According to him the Bankers to an Issue is required to
go by the advice of the Lead Manager and the Appellant Bank faithfully
went by the same. He submitted that in terms of the requirement of the
prospectus, once allotment of shares was decided by the concerned stock
exchange, the Bankers to an Issue is not required to keep custody of the
funds and that the money was required to be released to the issuer company.
In the instant case ASE vide letter of March 4, 1996 had granted permission
to trade the company's s on ASE and the company had also reiterated this
fact in its letter of March 25, requesting for release of the funds. The
learned Representative submitted that E's decision refusing permission
for listing though dated March 6, 1996, reached the Appellant Bank only
on April 8, 1996 as the decision was communicated by ASE to the Lead Manager
on March 21 and the Lead Manager in turn to them on April 8, 1996. By then
the funds had already been released to the company.
The learned
Representative submitted that taking into consideration the advice of the
Lead Manager and also the fact that ASE had approved the basis of allotment
and listing as well, the company's request was acceded to by releasing
Rs. 38, 89, 219 from the public issue account to the company's bankers
on March 25, 1996. He also submitted that though the Respondent was fully
aware of the development from day one, having vetted the prospectus and
also having rejected the company's appeal against BSE's refusal for listing
in their capacity as Appellate Authority, they did not advise the Appellant
to retain the money and not to release the same to the company. The learned
Representative submitted that the Appellant had collected the application
money as the company's agent and since the collection money having handed
over to the company, they are not in the picture. According to him 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.
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 March 23, 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.
Referring
to the decision of the Supreme Court in Rishya Shringa Jewellers Ltd vs.
The Stock Exchange, Bombay (JT 1995 (7) SC 602) and the Gujarat High Court
decision in Rich Paints Ltd. Vs. Vadodara Stock Exchange ((1998) 92 Com.Case
Guj)) relied in support by the Respondent in their reply, it was submitted
that in 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 of the Companies Act that in the event of refusal of permission
for listing by any one of the stock exchanges mentioned in the prospectus,
the application money need be refunded, has not been mentioned in the prospectus
prepared by the Lead Manager and vetted by the Respondent. In the absence
of such a binding requirement in the prospectus, the Appellant cannot be
said to have acted negligently for having released the money to the company
on receipt of approval of listing and basis of allotment from the lead
stock exchange i.e. ASE and request from the company for release of collection
money to the company's account.
Further,
according to the learned Representative the impugned order is incomplete
and vague as it is found wanting in material details such as the names
and addresses of the persons to whom refund is to be made and also the
manner and method in which the refund directed is to be made by the Appellant.
Neither the Company, nor the Lead Manager/Registrar to the Issue has been
made parties to the inquiry and thus the inquiry and the order passed thereunder
suffer from non-joinder of necessary parties as well.
Shri R.M.
Kadam, learned Counsel appearing for the Appellant Union Bank of India,
did not dispute the facts of the case. The facts and circumstances leading
to the release of application money by the Appellant are in no way materially
different from the case of the Appellant Bank of Baroda. The learned Counsel
submitted that the Appellant had acted in good faith on the basis of communication
received from the Lead Manager and ASE, as they were the leading players
in the public issue. The learned Counsel's tenor of argument on the legal
position regarding the Respondents' sue directions, was more or less on
the lines adopted by the Appellant Bank.
It was
submitted by the learned Counsel that the impugned order is ultravires
the Act or the powers conferred thereby on the Respondent. Neither section
11 enumerating the functions and powers of the Respondent nor enabling
issuance of directions give powers to the Respondent to issue any order
in the nature of a decree for recovery of money. He submitted that the
impugned order in effect is nothing but a decree to recover the money due
to the applicants. On the scope of section 1 IB he submitted that the powers
under section 11B are subject to the provisions of the Act and those powers
have been catalogued 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 1 earned 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.
The learned
Counsel submitted that the impugned order in effect is one to enforce.
Section 73 of the Companies Act. 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 requirements
of other legislations including the Companies Act. According to him the
Companies Act itself is - If contained code with built in provisions
to deal with defaults thereunder. Proviisions of the Act cannot be used
to administer the provisions of the Companies Act. There is no linkage
between section IIB of the Act and section 73 of the Companies Act. The
matters relating to allotment of shares and debentures, listing of securities
on stock exchanges, consequences of void issues and obligations of company
and its officers, etc. are compressed in section 73 of the Companies Act.
In case an issue fails requiring refund of the application money, the obligation
is on the Issuer Company and its officers in default. Section 73 does not
even remotely cast any obligation on the Banker to an Issue to refund money
to the applicants. As far as the Appellant is concerned, being Bankers
to an Issue, the governing regime is the Securities and Exchange Board
of India (Bankers to an Issue) Regulations 1994. Since specific penalties
have been provided under the regulations can not be resorted to deal with
the omissions and commissions thereunder in view of the well settled legal
position that if a particular legislation prescribes as a course of action,
it is necessary to follow that particular course of action instead of resorting
to the provisions existing else where.
The learned
Counsel submitted that the show cause notice issued to the Appellant Bank
did not talk about recovery of money as directed by the impugned order.
Even assuming that the action is under the Bankers to Issue Regulations,
the procedure prescribed therein has not been followed. The impugned order
ex-facie follows upon the Respondent's Show Cause Notice dated January
11, 1999 asking the Appellant to show cause against alleged breach of section
73 of the Companies Act and the Bankers to an Issue Regulations. Nevertheless
the impugned order purports only to be a direction in terms of the Act.
Refuting
the contention of the Respondent, it was submitted that section 32 of the
Act is only of clarificatory nature stating that the powers under the Act
cannot have over riding effect on other legislations. The section does
not enable the Respondent to plant the provisions of other legislations.
Referring to Gujarat High Court's order in company's Special Civil Application
No.2560 of 1998, giving liberty to the Respondent 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.
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) where the trustee may fairly be presumed to have received
interest. Assuming these limited circumstances of section 23 are fulfilled,
even then liability for interest is limited to 6% per annum. Assuming that
the Appellant was in breach of trust as alleged, in any view of the matter,
the impugned order is clearly contrary to the legislative mandate of section
23 of the Indian Trust Act and consequently of no legal effect. It was
also urged that only investors can claim refund in the event of breach
of trust and the Respondent has not been authorised by investors to act
on their behalf.
Other
grounds such as non observance of the principles of natural justice, pain
of double jeopardy; resultant benefit of unjust enrichment to the company,
discriminatory treatment meted out to the Appellant absolving other leading
players in public issue, treatment of the proceeds of stock invest etc.
etc., adduced in the Memorandum of Appeal were not pressed by the learned
Counsel.
The learned
Representative of the Respondent to buttress the course of action adopted
by them narrated the background necessitating the issuance of the impugned
direction. Attention of the Tribunal was invited to the directions issued
by the Respondent on December 19, 1996 in the wake of the company's failure
to refund the application money to the applicants in the context of refusal
of permission for listing by BSE. He submitted that in terms of section
73 (1A) of the Companies Act, permission of each of the stock exchanges
mentioned in the prospectus is required to be obtained and failure to get
such approval would result in the issue becoming void, necessitating refund
of money collected against the allotment of shares, within the stipulated
time and with interest @ 15% per annum in the event of delay in refunding.
In support of the contention that approval of each and every stock exchange
mentioned in the prospectus was necessary, the learned Representative cited
Supreme Court's decision in Rishya Shringa Jewellery's case (supra).
The learned
Representative submitted that the Appellants had failed to exercise due
diligence expected of them. Since BSE had declined permission for listing,
the subscription money was required to be refunded forthwith to the investors
in terms of section 73(2) of the Companies Act. But instead of refunding
the money to its legitimate owners, the company made use of the same necessitating
the Respondent's intervention by way of issuance of directions on December
19, 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 July 30, 1998. Letters Patent Appeal
thereafter against the Single Judge's order also was dismissed by the Division
h of the High Court on September 18, 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 High
Court's specific order in the matter. In fact, the High Court had also
directed the Respondent to find out the conduct of the Bankers to the Issue
in the matter and take suitable action. The learned Representative submitted
that it is not correct to say that the Appellants were singled out and
other players such as Lead Manager and the concerned Registrar to the Issue
were allowed to go scot-free. According to him after inquiry, certificate
of registration granted to the Lead Manager was suspended and the concerned
Registrar to the issue was denied renewal of registration certificate,
and prosecution is being launched against the company and its officers
in default. He submitted that the irresponsible conduct of other persons
associated with the public issue does not abdicate the Appellants from
their responsibilities as Bankers to an Issue.
The learned
Representative submitted that section 11 IB of the Act is wide enough empowering
the Respondent to issue the impugned order The Act empowers the Respondent
to take necessary measures to protect the interest of the investors and
the impugned direction is an investor protection measure. To support this
contention he heavily relied on the Division Bench decision of the Gujarat
High Court in Securities and Exchange Board of India Vs. Alka Synthetics
Ltd (1999) 19 SCL 460 (Guj). According to the learned Representative in
terms of the said decision, the Respondent is empowered to take any measure
to protect the interests of the investors. Citing the Court's order in
the company's Special Civil Appeal it was submitted that t had the requisite
authority in terms of the High Court's mandate also to proceed against
the Appellants. He vehemently denied that the impugned order is a decree
for recovery of money, as contended by the Appellant Union Bank of India.
The impugned order, he submitted, is a remedial order in tune with the
Gujarat High Court's direction, issued in terms of the powers vested in
the Respondent by the Act.
The learned
Representative submitted that Banker to an Issue is an agent of the Issuer
Company and a trustee for the funds of the subscribers. He submitted that
the Appellants should not have released the money to the company ignoring
the requirements of section 73 of the Companies Act. He re-iterated that
impugned order is legally tenable, being one issued in compliance with
the Gujarat 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
of the Companies Act 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 Companies Act.
The section imposes a statutory bar on the use of collection money for
any purpose other than for those specified in the section. It is only the
Bankers to an Issue who can be expected to enforce the restriction on the
use of money by ensuring that the statutory requirements such as collecting
minimum subscription, approval for listing, etc. have been met with.
Referring
to the Appellants submission that the matter is time barred, the learned
Representative submitted that it is not correct to say that the course
of action for such refund by the Appellants as against the company would
be time barred because the course of action for the Appellants arose on
January 19, 2000, when the Respondent had issued directions to refund the
application money and the reckoning date for limitation purpose is not
the date of release of the money to the company as was contended.
The learned
Representative submitted that the Appellants had acted negligently in releasing
the application money from the public issue account without ensuring that
both the sock exchanges mentioned in the prospectus had accorded approval
for listing. He claimed that the Appellant Union Bank had in fact released
part of the collection money even to third parties and the balance amount
to the company, well before the application for listing was made to ASE
on February 10, 1996. The Appellants did not exercise due care and caution
required of the collecting banker in handling the public money. They did
not even heed to the advice given by the Lead Manager vide letter dated
March 2, 1996 to consult the Registrar in the matter. The act of omission
and commission by the Appellants enabled the company to get the money out
of the public issue account, which should have been available to return
to the applicants. In the circumstances it cannot be said that the Appellants
were not in the picture and they cannot be directed to refund the money.
I have
given careful consideration to the rival contentions and the material facts
putforth before me by the parties.
There
is no dispute about the factual position that the Appellants were the Bankers
to the public issue made by the company, that they had received subscription
shares money from the public, that BSE did not accord approval for listing
and that the subscription money kept in the public issue account was transferred
to the company before listing refusal was received.
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 of
the Companies Act.
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 used 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"
The admission
of the securities of a company to trading privileges on a stock exchange
is referred to as listing. The principle objectives of listing are to provide
ready marketability and impart liquidity and free negotiability to stock
and shares, ensure proper supervision and control of dealings therein,
and protect the interests of shareholders and of the general investing
public.
Part 111
of the Companies Act provides the ground rules for issue of shares and
debentures and matters relating thereto. Section 73 therein on the allotment
of shares and debentures is the section with which we are mainly concerned
in the present appeals, for the time being.
Let us
have a look at the provisions of section 73 in so far as they are material
to the contentions raised in the appeals:
Section
73(1) mandates that every company intending to offer shares or debentures
to the public for subscription by the issue of prospectus shall before
such issue, make an application to one or more recognised stock exchanges
for permission for the shares or debentures intending to be so offered
to be dealt with in the stock exchange or each such stock exchange.
Sub section
(IA) makes it necessary for the company to state in its prospectus the
name of each of the recognised stock exchanges whose permission for listing
has been sought 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 prospectus. On the other hand, where permission has been
sought but has not been obtained within 10 weeks from the date of closing
of the subscription lists, thereby rendering void any allotment made, the
company is bound to repay all such money forthwith, but without interest.
In the event of such money not being repaid within 8 days after the liability
to repay arises, the company and every director of the company who is an
officer in default are made jointly and severally liable to pay the principal
amount as well as interest at the prescribed rate thereon as from the expiry
of the said 8 days.
Sub section
(2A) provides for repayment of amounts received in excess of the aggregate
of the application money relating to the shares or debentures in respect
of which allotments have been made forthwith without interest and if such
money is not repaid within 8 days liable to pay interest also at the prescribed
rate.
Sub section
(2B) concerns solely with default of compliance with the requirement of
sub section (2A)
Sub section
(3) makes it obligatory to keep all the amounts received from the subscribers
in a separate bank account maintained with a scheduled bank. Such money
must so remain in the bank until the permission has been granted by the
stock exchange or until the disposal of an appeal preferred against refusal
to grant permission. Where the permission has not, been sought, the company
has acted in disobedience of the law and the amounts received from the
investors must be credited to the separate bank account and immediately
returned to them together with the interest accrued for the period. But
where permission has been sought but not granted, the amounts so kept in
the bank have to be repaid within the time specified in sub section (2).
Default of compliance with the requirement will make the company and every
officer in default liable to be punished with fine.
In terms
of sub section (3A) the money credited to the separate account can be utilised
for only two purposes: (i) for adjustment against allotment of shares where
listing is permitted, or (ii) for repayment where listing is not permitted
or the company is otherwise unable to allot shares. The company has no
right to deal with the money in any other manner or keep it longer than
permitted by the section.
From the
statutory provisions stated above it is clear that till such time the shares
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.
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 Rishyashringa Jewellery'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 ( 1 A) 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 subsection (IA) 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 company, the consequence is to render the entire allotment void. In other words, if the permission has not been granted by any one of the several stock exchanges named in the prospectus for listing of shares the consequence by virtue of sub section (I A) of section 73 is to render the-entire allotment void and the grant of permission by one of them is inconsequential. This construction also promotes the object of insertion of sub-section (IA) in section 73 by amendment of the law made to overcome the effect of the decision of this Court in Allied International Products Limited".
It is
an admitted fact that out of the two stock exchanges i.e. ASE and BSE,
named in the prospectus, only ASE granted permission to list the company's
shares and BSE rejected the application. Therefore, it is very clear that
the issue became void, necessitating refund of the application money to
the applicants Incidentally, to be factually correct it is stated that
the Respondent's version that the Appellant Union Bank had released money
even before the necessary application for listing was made to ASE is not
correct, as the company's prospectus dated November 21, 1995 as vetted
by the Respondent would indicate that necessary application for listing
has been made to ASE and 13SE. This statement has not been rebutted.
The role/obligation
of the collection bank i.e. Bankers to an Issue and the nature of money
in the hands of the collection bank has been subjected to detailed examination
by various courts in the past. Extracts from some of those decisions having
bearing on the subject matter under consideration, are reproduced below.
Bombay
High Court in BCCI's case (supra) had considered the matter in detail.
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 which the company or the bank receives the said amount is 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 Act and the content of the said provisions. The provisions of the Act impose a statutory prohibition on user of the application money for any purpose other than for the purposes specified in section 73(3A) of the Act. The said provisions are mandatory and incapable of being waived".
"the amounts in question were merely entrusted to the bank for a specific purpose and the same were impressed with trust throughout primarily for the benefit of subscribers and secondarily for the benefit of the company i.e. (i) to the extent allot moneys for the benefit of the company and (ii) 'the extent of the refundable amount for the benefit of the subscribers".
"when amounts are deposited as specific deposit for a specific purpose with specific restrictions and the same are earmarked or segregated for a specific purpose the relationship between the banker and the depositor is that of trustee and beneficiary".
"If listing permission is not granted by even one stock exchange specified in the prospectus or where the company is for any reason unable to make allotment of shares, application moneys received from the public have to be refunded within the time limit stipulated in the provisions of section 73 of the Companies Act. The scheme of sections 69 and 73 of the Companies Act, would, therefore, suggest that the money 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 Rs. 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 93) and (3A) of section 73 are interpreted as stated earlier, that is to say, all moneys received from applicants for shares offered to the public for subscription shall be deposited and kept deposited in the scheduled bank/s which are bankers to the issue until the company has complied with all the requirements of section 69 and section 73 of the Companies Act. It has been held that bankers to the issue hold the application moneys in the nature of a trust fund, i.e. the statute has created a kind of trust for the protection of persons who pay the money on the faith of a promise to refund the money, in case certain conditions are not fulfilled (Nanwa Gold Mines Ltd., In re [19551 25 Comp Cas 443: [19551 3 All ER 219 (Ch.D); Reserve Bank of India vs. Bank of Credit and Commerce International (Overseas) Ltd (No. 1) f 19931 78 Comp Cas 207 (Born), Reserve Bank of India v. Bank of Credit and Commerce International (Overseas) Ltd (No.2)[19931 78 Comp Cas 230 (Born). It is only the bankers to the issue who can be expected to make sure that before withdrawal the company has got the listing permission from each stock exchange specified in the prospectus. It is only the bankers to the issue who are subject to the statutory control of the SEBI through the SEBI (Bankers to an Issue) Rules, 1994, and the SEBI (Bankers to an Issue) Regulations, 1994."
Having
come to the conclusion that the application money in the event of a public
issue becoming void is required to be refunded to the applicants as it
belonged to them, the next question is as to whether the Appellant Banks
are under statutory obligation to make refund of the money to the applicants.
I do not consider it necessary to elaborately discuss this question again
as the answer is already available from the Bombay High Court's decision
in BCCI case and Gujarat High Court decision in Rich Paints case cited
above. The Bombay High Court had very clearly stated that the collection
moneys were merely entrusted to the collection bank for a specific purpose
and the same were impressed with trust throughout primarily for the benefit
of subscribers and secondarily for the benefit of the company i.e. (i)
to the extent of allotment 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 case has further elaborated this aspect, as could
be seen from the portion from the judgement extracted above.
The Bankers
to an Issue has a prominent role in the process of raisins 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 before me 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 allotment and actual allotment are
not one and the same. Allotment is made on the basis determined by the
concerned stock exchange in consultation with other parties. Allotment
follows after the basis of allotment is decided. The purport of sub section
(3) of section 73 is very clear and there is hardly any scope to interpret
the requirement to come to the conclusion that listing approval from the
regional stock exchange is sufficient to release the money to the company.
The Appellants representatives had admitted during the argument that they
had acted as Bankers to an Issue in several cases in the past. That being
the case they cannot be unaware of the scheme of public issue and the governing
statutory requirements to be followed and the Supreme Court decision in
the matter cited. Are we to believe that they were that ignorant of the
statutory requirements and they needed to be reminded by the Lead Manager
and the Respondent of their legal obligations?
Public
issue of shares is a team action involving not only the Issuer Company
but also several agencies including Bankers to an Issue with well-defined
roles assigned to each one of them. Every one involved is required to exercise
due diligence as public money is handled in the process. The stand that
the Bankers to an Issue was dependent on the wisdom of the Lead Manager
or the issuer company or the Respondent, in the discharge of their duties
and obligations inspite of the same having been clearly spelt out in the
law and in the prospectus, is unacceptable. The positive declaration prominently
printed in the prospectus, the -"holy document"- that "the subscription
monies will be kept in separate bank account and the company will not have
access to such funds unless allotment of shares has been made in consultation
with the stock exchanges when listing is sought"-, based on which the public
made subscriptions, does not mean anything? Who else other than the Bankers
to an Issue is responsible to keep the collection money in safe custody?
Who else other than the Bankers to an Issue can keep the money away from
the reach of the company? If it is to be viewed that the Bankers to an
Issue are to be guided only by the version of the company, without making
any independent efforts to know the compliance of the statutory requirements,
the whole protective mechanism provided under the law will turn out to
be meaningless. 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.
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 requirement 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 in the light of the statutory provisions
in section 73 holding the company and its officers responsible to make
refund, does not hold good in the light of the role of the Bankers to an
Issue and the nature of money kept by them and the clear mandate to keep
the money in their custody out of the reach of the issuer company before
the allotment is made as stated by the High Courts (supra). To blame the
Respondent for not having advised the Appellant Bank to hold on the money
and to say that but for the Respondent's silence they would not have parted
with the money is too much to digest. Respondent's role is not that of
a micro level adviser suo-moto providing dos and don'ts to each and every
market intermediary in the day to day business activities. It is neither
practically possible nor necessary The Appellants' guide should be the
provisions of the Act, rules, regulations and the practice in vogue and
not external agencies like the Respondent. The Respondent is a regulatory
authority, and not a personal adviser to all those connected with the capital
market. The Appellants would have been perhaps on a better footing had
they specifically sought guidance from the Respondent and if the same was
not given. The argument that the information regarding rejection of the
proposal for listing reached the Appellants late and they had by that time
transferred the money to the company does not go in their favour for the
reason that statutory mandate is to part with the money only after allotment
is validly made and such allotment cannot be validly made without getting
the listing approval from all the stock exchanges mentioned in the prospectus.
In the instant case they did not wait for the decision of rejection or
approval of the listing application by BSE, for reasons best known to them.
The Appellants
had laboriously canvassed before me that the Respondent had invoked of
the Act to enforce the provisions of the Companies Act, which was not permissible
for the reason that the Respondent was not a designated authority to enforce
the provisions of the Companies Act. The argument, that neither the Act
nor the Companies Act recognised the Respondent as an authority for the
purpose of the Companies Act and as such the Respondent's action enforcing
the said Act through section 1 IB is ultravires the Act, and for default
under section 73(2), the action lies 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 wholesome 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 failing 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 public 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.
In the
light of the rival contentions, one has to see as to whether the provisions
of the Act, independent of the provisions of the Companies Act, empower
the Respondent to issue the impugned order. For an answer to the question
it is necessary to know the back ground of the legislation and the object
and scheme of the Act as well.
"The Securities and Exchange Board of India Ordinance, 1992" "to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and matters connected therewith or incidental thereto" was promulgated on January 30, 1992. This Ordinance was converted into an Act viz. "The Securities and Exchange Board of India Act, 1992 by Parliament in April 1992. What prompted the Government to place in position a legislation focussed on investor protection is evident from the following Objects and Reasons of the Bill-. - "The capital market has witnessed tremendous growth in recent times characterised particularly by the increasing participation of the public. Investor�s confidence in the capital market can be sustained largely by investor protection. With this end in view Government decided to clothe SEBI immediately with statutory powers required to deal effectively with all matters relating to capital market".
Chapter
IV of the Act is on "powers and functions" of the Board. Section 1 1 therein
enumerates the functions of the Board. Sub section (1) of section 1 1 provides
that subject to the provisions of the Act, it shall be the duty of the
Board to protect the interests of investors in securities and to promote
the development of, and to regulate the securities market, by such measures
as it thinks fit. Sub section (2), provides without prejudice to the generality
of sub section (1) certain specific measures for the purpose. One of the
specific measures provided therein is the provision for registering and
regulating the working of several types of capital market intermediaries,
including Bankers to an Issue.
The Act was further amended 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, persons 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 anew. 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 interests 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 Vs. M.K.Gupta ((1994) SCC 243): recognising the need for specific consumer protection legislation enacted by the Parliament and a constructive approach in interpreting the provisions of the law. The Supreme Court observed that: "it appears appropriate to ascertain the purpose of the Act, the objective it seeks to achieve and the nature of social purpose it seeks to promote as it shall facilitate in comprehending the issue involved and assist in construing various provisions of the Act effectively. To begin with the preamble of the Act, which can afford useful assistance to ascertain the legislative intention, it was enacted, 'to provide for the protection of the interest of consumers'. Use of the word, protection' furnishes key to the minds of makers of the Act. Various definitions and provisions, which elaborately attempt to achieve this objective, have to be construed in this light without departing from the settled view that a preamble cannot control otherwise plain meaning of a provision. In fact the law meets long felt necessity of protecting the common man from such wrongs for which the remedy under ordinary law for various reasons has become illusory. Various legislations and regulations permitting the State to intervene and protect interest of the consumers have become a haven for unscrupulous ones as the enforcement machinery either does not move or it moves ineffectively, inefficiently and for reasons which are not necessary to be stated. The importance of the Act lies in promoting welfare of the society by enabling the consumer to participate directly in the market economy. It attempts to remove the helplessness of a consumer which he faces against powerful business, described as ' a network of rackets' or a society in which, producers have secured power' to 'to the rest' and the might of public bodies which are degenerating into storehouses of inaction where papers do not move from one disk to another as a matter of duty and responsibility but for extraneous consideration leaving the common man helpless, bewildered and shocked. The malady is becoming so rampant, widespread and deep that the society instead of bothering, complaining and fighting against it, is accepting it as part of life".
The Apex Court in 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".Section 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. Respondent's
power under to issue the impugned order has been subjected to severe attack
by the Appellants on the ground that it lacked authority of law and cannot
be stretched too far. The said section 11B is extracted below for ready
reference:
"Power to issue directions: (i) in the interest of investors, or orderly development of securities market; or (a) to any person or class of persons referred to in section 12, or associated with the securities market; or
While
section 11 deals with the functions of the Board, is on the powers of the
Board is more action oriented, in a sense it is a functional tool in 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 on 12 of the Act or associated with the
securities market. In other words the identities the persons to whom and
the purposes for which, directions can be sue.
Gujarat High Court had examined the scope of section 11 and vis-a-vis the Respondent's position, while deciding an appeal against the Single Judge's order in Alka Synthetics 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 1 1 B 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 the Court observed: - "The SEBI Act is an Act of remedial nature and, therefore, the present cases could not be compared with the cases relating to the fiscal or taxing statutes or other penal Statutes for the purposes of collection of levy, taxes etc. As and when new problems arise, they call for new solutions and the whole context in which the SEBI had to take a decision, on the basis of which impugned orders were passed, cannot be said to be without authority of law in face of the provisions contained in section 11 and section 11B. As the language of section 11 (1) itself shows and as the matters for which the measures tan be taken are provided in sub - section (2) of section 11. It is clearly made out by the plain reading of the language of the section itself that the SEBI has to protect the interests of the investors in Securities and has to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in sub-section (2) of section 11 and in due discharge of this duty cast upon the SEBI as a part of its statutory function, it has been invested with the powers to issue directions under ... Thus, so far as the authority of law in the SEBI to issue such directions is concerned, such authority to take measures as it thinks fit is clearly discernible on the basis of the provisions contained in section 11 read with of the SEBI Act. ... We have to therefore consider and interpret the power of SEBI under the provisions so as to see that the objects sought to be achieved by Act is fully served, rather than being defeated in the basis of any technicality... The duty and function had been entrusted to take such measures as it think fit and in order to discharge this duty, the power is vested under section 11B, ... The authority has been given under the law to take appropriate measures as it thinks fit and that by itself is sufficient to cloth the SEBI with the authority of law".
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 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 ion 73 in
the order as a referral point of investor�s grievance. If the direction
had been for non-compliance of section 73, then as rightly pointed out
by the Appellants, it should have been directed to the company and its
officers in default, as they are the persons stated in the section, to
face action for default. But it is not so. 1 find a glaring inconsistency
in the line of argument adopted by the Appellant Bank of Baroda that while
a direction under cannot reach them it can reach an issuer company or a
Lead Manager. They, like the Appellant Union Bank of India, had submitted
that the Respondent had no power to issue directions to them as the subject
matter of refund of application money is governed under the regime of the
Companies Act. But the Appellant Bank in their appeal memorandum had stated
that " in the absence of any liability on the part of the Bankers to the
Issue such direction ought to be issued to the Lead Manager and/or to the
company"; The statement is an admission of the Respondent's power to issue
directions to the market players in the public issue like the Lead Manager/
the company under section 1 IB, to the exclusion of the Appellant.
The impugned
direction certainly is in the nature of a relief measure for the benefit
of the investors. It is nothing but an investor protection measure, which
the Respondent is duty bound to take. In a scenario like the one in the
instant case, where investors were denied of their legitimate claim to
get back their money, the Respondent cannot be expected to remain passive.
Is it that the Respondent has merely to look at such persons helplessly
on the mere ground that since the matters relating to refund of application
money being a matter covered under section 73 also, the powers of the Respondent
are unenforceable to protect the interests of investors? If the Respondent
is to take such a stand that would be in negation of the very purpose for
which the Respondent is put in position. If such a passive attitude is
adopted then investor protection would be the casualty. There is no denial
of the fact that there are several other legislations like Companies Act
with certain provisions to protect the interests of investors are overlapping
jurisdiction of authorities under the Companies Act and in the field of
investor protection. The Respondent's power to take measures to protect
the interests of investors 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.
Supreme Court's decision in Radheyshyam Khemka Vs. State of Bihar (1993) 77 Com. Case 356(SC) throws enough light on the role of dual agencies where enforcement of power is found overlapping. In Khemka's case 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 misbehaviour 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 Companies Act contains Provisions regarding the issuance of prospectus, applications for shares and allotment thereof and provides different checks over the misuse of the funds collected from the public for issuance of shares or debentures. But can it be said that where persons issue prospectus and collect moneys from the public assuring them that they intend to do business with the public money for their benefit and the benefit of such public, but the real intention is to do no business other than collecting the money from the public for their personal gain, still such persons are immune from the provisions of the Indian Penal Code? In such a situation the quashing of the prosecution pending against the appellants only on the ground that it was open to the applicants for shares to have recourse to the provisions of the Companies Act, cannot be accepted".
The power
to issue directions to protect the interests of investors in 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.,
Vs. Appellate Authority, 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 of the Companies
Act. Even 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 of the Companies Act, 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 of section 69 and 73 of the Act are complied with and till the company can proceed to make valid allotment of shares. In other words, the monies 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 the law. This statutory object of the provision of the act VAII be frustrated if it is held that application monies 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 monies or any part thereof in flagrant violation of the provisions of sections 69 and 73 of the Act and then agree to pay fine of Rs.5000/- under sections 69(4) and 73(3) of the Act. Therefore no fault can be found with the impugned orders which are quite in consonance with the provisions of sub section 4 of section 69 and sub section 3 and 3A of section 73 of the Act. The Appellate Authority had rightly directed the petitioner company to deposit all monies received from applicants for shares offered to the public in the account to be opened with the Banker to a the Issue because it (Banker to the Issue) holds the application monies in the nature of a trust fund which has been directed by the statute for the protection of persons who pay the money on the faith of a promise of refund, in case certain conditions are not fulfilled".
The Respondent
has been assigned with a proactive and interventionist role in the field
of investor protection, and not that of a passive onlooker. Having invested
with such a duty the legislature has given ample power to effectively enforce
the same. One of such powers is the power to issue directions as provided
under of the Act. As the Delhi High Court in M.Z.Kban's case said "under
section 11 of the SEBI Act the SEBI has the power to protect the interests
of the investors in securities and to promote the development of and to
regulate the securities market by such measures as it thinks fit. The power
is of a very wide nature and not hedged by any restriction" (M.Z Khan VS.SEBI
AIR 1999 Del. 164). True scope of section 1 IB was recently subjected to
examination by the Bombay High Court in Ramrak-h R Bohra VS.SEBI (1999)
33 CLA 243 (Born). In the said case the High Court observed that:
"Section 11 B 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 [19961 20 CLA 195/AIRI 996 SC 646 the Supreme Court has observed as under: 'It would, thus, appear that section 4SK(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 construed as to subserve the purpose for which it has been enacted. It is a well accepted canon of statutory construction that "it is the duty of the court to further Parliament's aim of providing a remedy for the mischief against which the enactment is directed and the court should prefer a construction which advances this object rather than one which attempts to find some way of circumventing it"�
In the case of ITO v.Mohammed Kunhi AIR 1969 SC 430 it has been observed as under: ... It is a firmly established rule that an express grant 0 power carried with it by necessary implication the authority to use all reasonable means to make such grant effective�
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 refers only to the extent of operation of the provisions
of the Act vis-a-vis the provisions of other statutes. However, in the
matter under challenge provisions of sections 73 and section 11B are not
in conflict. They are concurrent provisions directed to achieve a common
objective i.e. of investor protection.
As the
Respondent is concerned they have been provided with wider jurisdiction
under so as to reach any person or class of persons referred to in section
12 or associated with the securities market. Section 12 itself covers a
wide range of functionaries including Bankers to an Issue. Reach of directions
has been further extended also to any person associated with the securities
market. Since an issuer company is a person associated with the securities
market, as its shares are listed on the stock exchanges and there is an
on going binding agreement governing such listing with the stock exchange,
the directions will reach the company also. In other words scope of section
11 B is wider than the scope of section 73 as it can reach not only the
Issuer Company but also almost all the players who are associated with
the public issue of shares. In this context it is pertinent to mention
that the Respondent in exercise of the powers under had directed the company
management on December 19, 1996 to refund the money but the same did not
bring any tangible relief to the investors. Having failed in that course
of action, the Respondent turned to the Bankers to the Issue and issued
directions, which they are perfectly entitled to do in terms of the provisions
of the Act and also as per the order of the Guiarat High Court in the Company's
SCA.
The absence
of specific details and the manner and method of refund in the impugned
order can not nullify the direction, as contended by the Appellant as the
order itself has taken care of this aspect. It has been made clear in the
order that detailed instructions on the method and manner of refund to
investors in the public issue will be issued separately in consultation
with the intermediaries concerned.
Yet another
contention is that the direction is hit by the provisions of. It could
be seen that the cause of action in this case is relatable to several developments,
following one after the other. The Appellants had transferred the collection
money to the company in February/March, 1996. The Respondent, vide order
dated December 19, 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 August 22, 1997 and revision filed by the company thereafter
was disposed of on March 17, 1998. Thereafter the company filed a SCA in
the Gujarat High Court, which was disposed of by the Single Judge on July
30, 1998 and LPA filed by the company against that order in the same Court
was disposed of by the Division Bench on September 18, 1998. Thereafter,
in tune with the Gujarat High Court's order the Respondent initiated inquiry
by issuing a show cause notice, on January 11, 1999, the Appellants were
heard on September 16, 1999 and impugned order was issued on January 19,
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
on January 19, 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.
The contention
that the directions can be issued only prospectively and not retrospectively
is not correct. Issuance of direction under section 1 ]B being an administrative
function and not in exercise of any delegated legislative function, the
Respondent is at liberty to issue directions of the type under -challenge,
even retrospectively. However, in the instant case it cannot be said that
the direction has been issued retrospectively. The direction is to refund
the money, required to have been kept in the custody of the Appellants.
Since the amount due to the applicants was not paid, the claim remained
alive even on the date of issuance of the direction.
The submission
that since the Appellants were acting as agents of the company and as having
passed on the collection money to the company, they are no longer liable
to repay the money, cannot sustain for the simple reason that they had
acted negligently and thereby caused hardship to the investors. By handing
over the money to the company, which was not due to the company, the Appellants
liability to the applicants did not cease.
The argument
put forth by the learned Counsel appearing for the Appellant Union Bank
that the interest cannot be charged without specific statutory authorisation
and that the Act does not empower the Respondent to charge interest, is
correct. However, he appears to have missed the crucial fact that the Respondent
had not charged interest but only asked to pay the interest accrued on
the defaulted amount as provided under the law. It does not stand to reason
that when the principal amount is paid, the interest legally accrued thereto,
need not be paid. The interest payable on the defaulted amount is in reality
a compensation for the delayed payment. Once the repayment is delayed liability
to pay interest automatically sets in. That is what section 73 provides
for. There is hardly any way to escape from this liability. The rate of
interest @15% is prescribed by the Central Government as provided under
section 73(2), not arbitrarily decided by the Respondent.
The learned
Representative of the Appellant Bank of Baroda had urged that since the
company, the Lead Manager and the Registrar were not made parties to the
inquiry, the inquiry and the order passed thereunder suffer from non-joinder
of necessary parties. This conclusion is based on an inadequate appreciation
of the scope of the inquiry contemplated under. The inquiry referred to
in 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.
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.
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 1 IB cannot supplant the Regulation, was putforth. On a perusal of the said Regulation it is seen that its scope is restricted to the procedural requirements of documentation and reporting, such as maintenance of books of account, records and documents relating to collection of applications and application money. The Regulation does not deal with the post collection scenario. The subject matter of the impugned order is not a matter falling under the scope of the said Regulation. The argument that since the Bankers to an Issue Regulation is in position other provisions of the Act cannot reach the Bankers to an Issue is not a sound one. Section 11 B is of wider amplitude to reach the Bankers to an Issue for the purpose of investor protection being a person covered under section 12 of the Act. Bankers to an Issue as per the Regulations is required to abide among other matters, directions from the Respondent as could be seen from the following provision of the Regulations: "A Banker to an Issue shall abide by the provisions of such Acts and rules, regulations, guidelines, resolutions, notifications, directions, circulars and instructions as may be issued from time to time by the Central Government, the Reserve Bank of India, the Indian Banks association or the Board as may be applicable and relevant to the activities carried on by the Bankers to the issue"
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 had not read this portion
in the prospectus casting such an important obligation on them? There is
nothing on record to show that the Appellants had made any efforts to ascertain
the compliance as to whether both the stock exchanges mentioned in the
prospectus had accorded listing approval. The main reason for the investor�s
misery in this case is attributable to the negligence of the Appellants.
Negligence is not an attribute of good faith. The facts and circumstances
placed before me do not suggest that the Appellants had acted diligently.
From the
legal and factual position discussed above, it is clear that the Appellants
as Bankers to an Issue were duty bound to wait for the decision on the
company's application from both the stock exchanges mentioned in the prospectus
and only after ensuring compliance of the statutory requirements, they
should have decided to release the collection money to the company. Since
they were holding the application money in trust they were accountable
for its safe up keep and return. They cannot escape the liability for misapplication
of money. The liability to refund the money is now on them. I am of the
view that the Appellants are not out of the reach of and the Respondent
is not short of power to reach them.
For the
reasons discussed above, I have no hesitation to hold that the impugned
order is legally valid and there is no merit in the appeals. The appeals
are accordingly dismissed.
(C.ACHUTIIAN)
Place:
Mumbai
PRESIDING OFFICER Date: 27th July 2000 |
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