K.K.Balu, - (1.) THE petitioners together holding 14.20 per cent, of the issued and paid-up capital of M/s. Hydro S & S Industries Ltd. ("the company"), while invoking the jurisdiction of the Company Law Board under Sections 397 and 398 read with Sections 402, 403 and 406 of the Companies Act, 1956 ("the Act"), on account of certain alleged acts of oppression and mismanagement in the affairs of the company, sought for an interim order, restraining the company to buy back its own securities, on the premises elaborated in the company petition, in support of which Shri T.V. Ramanujam, learned senior counsel, submitted as under: THE respondents have increased the authorised capital of the company from Rs. 1 crore to Rs. 21 crores at the annual general meeting held on September 16, 2008, to meet the business needs, while at the same time, the board of directors at the board meeting held on the very same day, namely, September 16, 2008, approved the buy back of the equity shares of the company to an extent of Rs. 2.62 crores, resulting in reduction of the share capital, which is contrary to the aforesaid decision of the members, to increase the authorised capital of the company. THE respondents instead of placing at the annual general meeting, the agenda of buy back of securities, clandestinely passed necessary resolution at the board meeting, depicting the mala fides of the respondents. THE company has not produced the board minutes authorising the buy back of shares. THE act of buy back of shares being completely unwarranted is in breach of fiduciary duties bestowed on the respondents. Respondents Nos. 2 to 9 further arbitrarily got approved at the extraordinary general meeting held on October 13, 2008, the amendment of Articles by inserting a new article, enabling the company to buy back its own shares. THE decision to buy back the shares has been taken only by the promoters, who alone are benefited and not any other shareholders. THE proposed buy back of securities is against the company's interest and contrary to the provisions of Section 77A of the Act. Section 77A(2)(a) stipulates that no company shall purchase its own shares, unless the buy back is authorised by its articles. THE statement of objects and reasons would emphasis the mandatory requirements of Section 77A. This is a pre-condition for any buy back of shares, without fulfilment of which, will be ultra vires the Articles and such an act is violative of Section 77A(2)(a) of the Act. Nevertheless, the respondents have first approved the buy back of shares and, thereafter, amended the Articles at the extraordinary general meeting held on October 13, 2008, thereby empowering the company to buy back its own shares. By virtue of Section 77A(2)(a), the Articles are required to have the specific enabling provision to buy back the securities and therefore, the Articles of the company ought to have been first amended, before the respondents decided to go for buy back of shares. THE proposal to buy back the shares cannot be, implemented, in the absence of any enabling provision in the existing article. THE requirement of a special resolution, as envisaged in Sub-section (2)(b) of Section 77 A, does not apply in a case where (i) the buy back is or less than 10 per cent, of the total paid-up equity capital and free reserves of the company; and (ii) the buy back has been authorised by the board by means of a resolution passed at its meeting. THE promoters by resorting to buy back of shares are attempting to gain more shares and strengthen their control over the company, thereby leading to mismanagement of the company and oppression of the minority shareholders. THE price offered by the company to buy back its shares is quite high, which would cause unnecessary burden on the capital outflow of the company. It cannot, therefore, be in the interest of the company. THE notice of extraordinary general meeting of October 13, 2008, has been dispatched only on September 25, 2008, as borne out by the envelopes received by the petitioners, which would show the lack of 21 days clear notice, as required under Section 171 of the Act, and therefore, the proceedings approving amendment of the Articles cannot be valid in law. THE Company Law Board by an order dated October 7, 2008, directed that the company will not buy back its own shares, without leave, but the company acted contrary, which is illegal and oppressive, and cannot be cured. THE respondents are justifying their illegal acts. THE illegality, which is continuing has to be remedied under Section 397/398.
(2.) Shri R. Murari, learned counsel, while opposing the prayer for any order to restrain the company from buying its own shares, submitted: The lone act of buy back of the company's shares, not being a continuous course of oppressive conduct on the part of the respondents, will not entitle the petitioners to invoke the provisions of Section 397 of the Act. The act of buy back of shares can neither be oppressive nor constitutes mismanagement in the affairs of the company. The business decision of the company cannot be challenged before the Company Law Board. The main petition is to be heard, in which case, there is no need to obtain leave of the Bench, as contended by the petitioners. The company only passed a resolution at the annual general meeting held on September 16, 2008, increasing the authorised capital, in order to issue further shares in future and it is only an enabling resolution and no further shares have been issued, in which case, passing any enabling resolution will be of least consequence, in the context of the present petition. The company proposed to buy back shares up to an extent of 10 per cent, of its paid-up capital and free reserves from the open market through the stock exchange mechanism. There was therefore, no legal requirement for such buy back to be placed before the annual general meeting held on September 16, 2008. Nevertheless, the company immediately on the-board deciding to go for buy back of shares, placed the same on the BSE website, informed Madras Stock Exchange, SEBI and published in the all India edition of The Financial Express for the benefit of the shareholders and knowledge of the statutory and other authorities. The board's decision to buy back the shares is subject to amendment of the Articles of association, which came to be carried out at the extraordinary general meeting held on October 13, 2008. The company has to make public announcement and comply with the relevant provisions of the SEBI Regulations, 1998. The company is yet to buy back its shares. The authorisation envisaged in Section 77A relates to the effecting of buy back and not to a decision of the board to buy back securities. When the company buys back its shares, there should be enabling articles. Even otherwise, any violation of law per se does not constitute an act of oppression. Thus, the impugned buy back is in due compliance with the provisions of Section 77k. The shareholders, including the petitioners will be benefited on account of the proposed buy back of shares. The petitioners have not shown any prejudices, which may be suffered by them, on account of the buy back proposal mooted out by the company. The company delivered notices of the extraordinary general meeting of October 13, 2008, as early as on September 19, 2008, thereby complying with the requirements of Section 171 regarding service of notice. The respondents cannot be held responsible for the delay of the postal department in effecting service of notices on the shareholders. None of the shareholders excepting the petitioners has complained of, lack of the requisite notice under Section 171 of the Act. The extraordinary general meeting has been convened for amending the articles, in which case, the explanatory statement could not relate to the buy back per se. The charges of the petitioners on the lack of details regarding the buy back are untenable. All the shareholders present in person or by proxy unanimously approved the resolution amending the Articles of association of the company, permitting the buy back of the shares. The petitioners did not choose to attend the meeting, expressing their objections on the aforesaid resolutions. The buy back would cost the company only an amount of Rs. 2.63 crores, as against the free reserves of Rs. 19 crores available with the company. The confidence of the shareholders will be boosted, pursuant to buy back of the shares. The company is 20 years old and supplies materials to reputed car manufacturers. The current intrinsic value comes to Rs. 45 per share. The company in the larger interest of its shareholders is offering an exit route for desiring shareholders on reasonable terms. It is purely a voluntary act. The shareholders who opt to remain with the company will also be benefited by enhancement in shareholder value, with better return on their investment. The promoters are already holding about 65 per cent, of the paid-up capital of the company, which would increase to 69 per cent, depending upon the number of shareholders opting for the buy back of shares. This will not confer any additional benefit on the promoters in the matter of management or control of the company. The shareholding of the petitioners would likewise increase. The buy back increases the earnings per share, as the company's equity is lessened to the extent of the bought back shares. A large number of companies have started announcing buy back of shares as found reflected in the publication appeared in a local newspaper in November, 2008. The decision to buy back of shares could neither constitute oppression nor mismanagement, as contemplated in Section 397/398 of the Act, whereas the prayers made by the petitioners, causing prejudice to the interest of the company, will disclose their conduct. Furthermore, the Company Law Board will not interfere with the domestic management of the company. I have considered the arguments of learned counsel. The short issue for my consideration is whether the company be restrained from buying-back its own shares in the light of strong opposition posed on behalf of the petitioners.
(3.) SECTION 77A provides for buy back of its own securities by a company, in accordance with the prescribed procedure, and subject to the safeguards specified therein. By virtue of Clause (a) of Sub-section (2) of SECTION 77A, Articles of association must specifically empower the company to buy back its securities. The provisos to Clause (b) of Sub-section (2) of SECTION 77A, inserted by the Companies (Amendment) Act, 2001 See [2002] 108, Comp Cas (St.) 45 with effect from October 23, 2001, stipulate that a company can buy back its own shares by means of a resolution passed at the meeting of its board of directors, up to 10 per cent, of the total of its paid-up equity capital and free reserves, provided the board has not made any offer for buy back of its own securities during the preceding 365 days. However, the company must pass a special resolution at its general meeting, if the buy back is in excess of the specified limit of 10 per cent, of the total paid-up equity capital and free reserves. These provisions are unambiguous.;