Decided on September 29,1995



- (1.) SHRI Chandrika Prasad Sinha of Patna has filed this petition under Sections 237(b), 247, 248 and 250 of the Companies Act, 1956 (hereinafter called "the Act"), against Bata India Ltd., Calcutta (hereinafter called "the company"). The other respondents are : Leader A.G. St. Moritz, Switzerland, c/o. Bata (India) Ltd., Calcutta (respondent No. 2) and Bata (BN) D.V. Amsterdorm, the Netherlands, c/o. Bata India Ltd., Calcutta (respondent No. 3), Bata India Ltd. is a public company with an authorised capital of Rs. 30 crores. The petitioner is a member of the company holding 140 equity shares as on December 17, 1992 (hereinafter called "the record date"). Respondent No. 2 is a foreign company which holds 40 per cent. of the equity of the company as on the record date and has been the promoter of the company. Respondent No. 3 said to be a 100 per cent. subsidiary of respondent No. 2 did not hold any shares in the company as on the record date. The main issue raised by the petitioner relates to the allotment of additional 47,14,000 equity shares of Rs. 10 each at a premium of Rs. 25 to respondent No. 3 as on the said record date on a preferential basis.
(2.) The facts of this case are briefly set out below : (i) The petitioner received from the company a notice dated June 15, 1992, for an extraordinary general meeting on July 24, 1992, to seek the approval of members for the rights issue of 1.05 lakhs equity shares to the resident Indian members of the company at the issue price of Rs. 30 per share including a premium of Rs. 20 per share. The notice was deceptive and clandestine inasmuch as a proposal for the issue of additional 47,14,000 new equity shares as reserved shares in favour of a single shareholder, namely, respondent No. 3, at an arbitrarily fixed price of Rs. 35 per share when the prevailing stock market price was around Rs. 250 per share was also included in the proposal. The aforesaid item of the reserved issue did not appear in the notice in the usual form of a separate resolution as per normal practice. The explanatory statement has also been very vague and sketchy. It did not talk of any new projects nor any specific provision of law and no guideline was cited for the purported 100 per cent. reservation. The petitioner sent a written objection in this regard which was not placed before the extraordinary general meeting. Later, on request, a copy of the minutes of the extraordinary general meeting was made available which incorporated the decision to issue 47,14,000 new equity shares as 100 per cent. reserved issue to respondent No. 3 as a nominee of respondent No. 2. However, the minutes did not contain any provision of law/ guidelines in this regard. It was also noted that both the rights issue and the 100 per cent. reserved issue were proposed and seconded by a single motion and were put to vote and declared carried by a show of hands with the requisite majority in one go. Later, however, a letter dated November 2, 1992, received from the company showed as if separate votes were cast in favour of the rights issue and for the 100 per cent. reserved issue. It is also stated that respondent No. 2 was in control of 99.6 per cent. of the total voting strength present and voting at the extraordinary general meeting. It is the contention of the petitioner that the directors and other persons intentionally managed to avoid the aforesaid proposal of 100 per cent. reserved issue from being placed at the annual general meeting held on June 15, 1992, on which date the notice of the extraordinary general meeting was issued. Thus, the extraordinary general meeting was to be held within a gap of around 37 days after the annual general meeting at a heavy cost to the company with the aim of easily carrying through without any opposition the 100 per cent. reserved issue. (ii) The newspaper announcement of the issue in the Economic Times, Calcutta, on January 7, 1993, suppressed several material facts and contained false statements as under : (a) closing date not announced, (b) the date of despatch of the letter of offer for the rights issue was not true in many cases. The offer to the petitioner himself was despatched on January 12, 1993, as against January 7, 1993, as announced in the newspaper and still he did not receive his copy of the letter, (c) the paper announcement did not disclose the purported issue of 47,14,000 equity shares as 100 per cent. reserved shares, (d) many members could not exercise their right due to the delay resulting in great under-subscription. Consequently, a large chunk of the equity shares which were unsubscribed seems to have been allotted to respondent No. 2, thereby raising the foreign shareholding beyond 51 per cent. (iii) Since the petitioner did not receive the letter of offer, he requested the company and the Registrar to the issue on January 29 and 30, 1993, for sending a duplicate letter of offer which was not heeded to and the petitioner had to send a plain application with bank draft for the rights shares and additional shares. Though the company allotted 149 shares to the petitioner the share certificates received did not bear the common seal. On pointing out this grave omission the company put the responsibility on the registrar to the issue. (iv) The letter of offer also contained several untrue and misleading statements as also suppressed several material particulars : (a) the letter is dated November 3, 1992, but it contains a reference to the Reserve Bank of India's approval obtained on November 26, 1992 ; (b) there is no information about the approval by the Secretariat for Industrial Approvals ; (c) there is no information regarding vetting of the letter by SEBI ; (d) there is no disclosure as to compliance with the guidelines of the Central Government, SEBI and the erstwhile Controller of (Capital) Issues especially in respect of reserved issues, issue price and preferential allotment ; (e) the company and the board did not comply with the terms and conditions of the guidelines of the SEBI dated June 11, 1992, and June 17, 1992, those of the Central Government issued, vide Press Note No. 17 of 1991 and later revised, vide Press Note No. 13 of 1992 of the Ministry of Industry and also of the Ministry of Finance regarding the valuation of the shares ; (f) the net worth of equity shares had been shown in the letter of offer as Rs. 35.16 per share whereas in the annual report for 1991 it has been mentioned as Rs. 41.75 per share. The company has got the valuation done by a valuer but such fact is not mentioned in the letter of offer ; (g) the cost of project said to be appraised by the SBI Capital Market Ltd. involves a foreign exchange outgo of over Rs. 9.55 crores but the total issue to respondent No. 2 and its nominee to be subscribed in foreign currency was Rs. 29.1 crores and no expansion was also envisaged. On the other hand, the explanatory statement justifies the fund requirements as for on going expansion and modernisation, working capital, augmentation of long-term resources without indicating any requirement for an export-oriented undertaking or for other new schemes and without indicating any foreign exchange requirement ; (h) the highlights in the letter of offer stated that the entire proceeds are earmarked for modernisation, expansion programme and for setting up a 100 per cent. export-oriented undertaking. However, the details in the letter of offer do not envisage any expansion or the setting up of a 100 per cent. export-oriented undertaking ; (i) no letter of intent or licence for an export-oriented undertaking project was obtained but the full money has been collected, the implementation schedule showed that most of the projects/schemes will be completed by 1993 and a few by 1994 ; (j) the opening para of the letter of offer states as if the 100 per cent. reserved offer is in accordance with Section 81 but the notice of the extraordinary general meeting does not contain such a statement ; (k) there is conflict between the letter of offer and the notice for the extraordinary general meeting with regard to the holding by respondent No. 2 and respondent No. 3 ; (l) the letter of offer also appears to contain tall claims and inflated estimates with regard to land and cost of construction. The turnover is estimated to be doubled by 1995 though the additional capacity contemplated by the export oriented undertaking project is only 1 million pairs per annum against the present position of around 34 million ; (v) The annual report for the year 1992 published on March 12, 1993, appears to contain contradictory and misleading statements regarding the 100 per cent. reserved issue. For instance, the directors' report described the 100 per cent. reserved issue as "special rights issue". Yet another reference to this issue describes it as a special issue to the company's foreign shareholder though actually the issue was made to respondent No. 3 which was not a shareholder. In yet another place this issue has been described as a rights issue. (vi) The company and its directors/officers failed to supply to the petitioner in spite of the repeated requests information regarding the statutory compliance with Section 81(1A) of the Act and regarding terms and conditions of various regulations and guidelines of the Central Government and the SEBI while taking the decision to make the reserved issue. They have also failed to supply the copy of the prospectus in spite of the repeated requests which indicate that no such prospectus was issued. The company has also failed to reply to the letter dated February 13, 1992, of the petitioner in this regard. The petitioner's visit to the office of the Registrar of Companies, West Bengal, showed that no returns, documents of 1992 were placed on the record and as such no inspection could be carried out. Consequent to the reserved issue huge wrongful gains have accrued to respondent No. 3 by virtue of heavy under-pricing of shares against the current market price resulting in heavy losses to the company and to small scattered shareholders. This is prejudicial to the company and to the public interest. According to the petitioner, the facts and circumstances suggest that : (a) The issue and allotment of 100 per cent. reserved shares to respondent No. 3 is with the intent to defraud the members, for unlawful purpose and oppressive of the members. The same is also prejudicial to the members, the company, the nation and public interest. (b) The members of the company have not been supplied with information in regard to the issue and allotment of the 100 per cent. reserved shares. (c) Several untrue, false and misleading statements with suppression of material facts by the company/its officers and directors in the newspaper announcement, letter of offer, notice of the extraordinary general meeting, the minutes of the extraordinary general meeting and the annual reports of 1991 and 1992 and other relevant records have been made in regard to the 100 per cent. reserved issue. (d) There have been contravention of the provisions of Sections 81(1), 81(1A), 56, 70 and other relevant provisions of the Act and of the terms and conditions of various guidelines of SEBI, Industry Ministry, Finance Ministry of the Government of India. (e) The persons concerned with the management have been guilty of fraud, misfeasance, malfeasance and other misconduct. The petitioner, therefore, prayed for : (i) recommendation to the Central Government for a thorough investigation under Section 237(b) of the Act into the affairs of the company especially in regard to the 100 per cent. reserved issue ; (ii) the declaration under Section 247 of the Act that the affairs of the company ought to be investigated ; (iii) an order under Section 250 to impose restrictions for three years in respect of the reserved shares with regard to transfer, exercise of voting rights, issue of rights/bonus shares, payment of dividend, capital or otherwise. Alternatively to declare that the decision of the board of directors and of the extraordinary general meeting and all other acts done as a consequence with regard to the 100 per cent. reserved shares as null and void and that those shares be issued and allotted to the existing members of the company.
(3.) THE company was directed to file its reply to the petition before March 31, 1994. However, the company sought further time and filed its reply only on July 1, 1994.;

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