Vimla Yadav, - (1.) IN C.P. No. 75 of 2002 the petitioner has sought an order for investigation into the affairs of the R-1 under Section 235 of the Companies Act, 1956 (hereinafter referred to as 'the Act') alleging that R-4 and his group have fabricated resolutions and siphoned off funds of R-1 by illegal remittance of USD 1 million to a wholly owned subsidiary namely 'Local INformation Service INc' in the US which did not even exist at the relevant time (the date of incorporation was stated as "Applied").
(2.) Shri Neeraj Sharma, Counsel for the petitioner pointed out that the petitioner, Citicorp International Finance Corporation (hereinafter referred to as "CIFC"), entered into a Subscription-cum-Shareholders Agreement dated July 24, 2000 (the "Agreement") with Respondent Nos. 1 (hereinafter referred to as the "Company"), 2 and 4. In terms of the Agreement, CIFC by way of a Preferential Issue, subscribed to One Million Equity Shares of the Company of the face value of Rs. 10/- each for a consideration of Rs. 157 million @ Rs. 157/- per equity share at a premium of Rs. 147/- per equity share. The said shares were duly issued and allotted by the Company to the Petitioner and constitute 14.25% of the paid up and fully issued share capital of the Company on date. CIFC's nominee (hereinafter referred to as the "the CIFC Director"), Mr. Ajay Relan, was appointed as an Additional Director of the Company by a resolution of Board of Directors passed September 27, 2000 by circulation and was subsequently appointed as a Director of the Company by members at the Annual General Meeting of the Company held on August 10, 2001. It was pointed out that the Articles of Association of the Company gave certain affirmative rights to CIFC: (a) the Chairman of the Board of Directors was to be a person acceptable to CIFC (Article 81.2); (b) the Managing Director of the Company was to be a person acceptable to CIFC (Article 81.3); (c) the quorum of the Board Meetings of the Company could not be considered valid till such time as the CIFC Director is not present (Article 81.8); (d) no item listed in Article 82 could be discussed or voted upon at any meeting of the Board unless the same had been included in the agenda of the meeting (Article 81.12); (e) a circular resolution on a matter enumerated in Article 82 required the affirmative vote in writing of the CIFC Director (Article 81.13); and (f) Article 82 when read with Articles 81.12 and 81.13 expressly provided that circular resolutions on matters relating to approval of the annual budget of the Company including capital expenditure, investment in securities of any other company or subsidiary, revenue expenses, revenue targets and funding plans could neither be discussed or voted upon at any meeting of the Board unless the same had been included in the agenda of the meeting nor could they be passed without the affirmative vote in writing of the CIFC Director. Further, it was pointed out by the counsel that in the meeting of the Board of Directors held on November 30, 2001 that CIFC Director attended along with Respondent Nos. 4, 5, 6, 7 and 8, the Directors passed resolutions, inter alia, for the incorporation of a wholly owned subsidiary of the Company in the USA. In connection with the same, the Board also passed a resolution in-principle approving an investment of USD 1 million to be made in a wholly owned subsidiary in the USA. The resolution giving the in-principle approval was conditional upon: (a) a cut off date to be determined by the Board of the Company; and (b) a signed business plan of the Company envisaging investment of USJ 1 million in the wholly owned subsidiary to be incorporated at a later stage. It was pointed out that no person was identified to give effect to the resolution since the same pertained merely to an in-principle approval. Furthermore, no source of funds was identified for the purposes of the said investment. The next meeting of the Board of the Company was called by notice for the January 5, 2002 and three Directors, namely CIFC Director, Respondent No. 4 and Respondent No. 5 attended the meeting. The draft minutes of this Board Meeting were prepared and circulated by Respondent No. 7 via email on January 17, 2002, to the CIFC Director and Mr. J.K. Basu, an officer of Citibank N.A., an affiliate of CIFC. These draft minutes were subsequently debated and discussed by the Directors but could not be finalized on account of differences between Respondent No. 4 and Respondent No. 6 with regard to authority given to Respondent No. 6 for operation of bank accounts. As such, the minutes of the Board Meeting of the Company held on January 5, 2002 were never finalized and remained in draft form. Furthermore, the said draft minutes were never confirmed on account of the fact that no Board Meeting of the Company was held after the Board Meeting of January 5, 2002. The draft minutes of the Board Meeting of the Company held on January 5, 2002 and circulated on January 17, 2002 confirmed the minutes of the Board Meeting of the Company held on November 30, 2001. Furthermore, these draft minutes record that the CIFC Director asked Respondent Nos. 4 and 6 to stop further investment in wholly owned subsidiaries of the Company in Canada on account of non-operation of the same after the change in business conditions in the USA post the World Trade Centre attacks on September 11, 2001. It was pointed out by the counsel that it is expressly recorded in these draft minutes that the CIFC Director asked the management of the Company to have a signed business plan, which would be strictly adhered to. The business plan, which was one of the pre-conditions to the in-principle approval by CIFC for the infusion of USD 1 million in the wholly owned subsidiary of the Company resolved to be incorporated vide the resolution dated November 30, 2001, had not been prepared. In response to the draft minutes circulated, Respondent No. 4 responded with his comments with regard to the limits for the signatory to the bank accounts of the Company. However, Respondent No. 4 did not advert or refer to any resolution for changing the authorized signatory to the Company's investment with mutual funds in this communication and did not seek the addition or inclusion of any such discussion or resolution to the draft minutes. My attention was drawn to the following essential points which emerge on a perusal of the draft minutes of the Board Meeting dated January 5, 2002: (a) the CIFC Director was the Chairman of the said Board Meeting and the draft minutes were never confirmed by him and do not bear his signatures till date; (b) the agenda for the Board Meeting held on January 5, 2002 did not incorporate the alleged proposed investment in the wholly owned subsidiary in terms of Article 81.12 of the Articles of Association of the Company; (c) the CIFC Director had instructed to stop any further investment in the subsidiaries on account of poor market conditions post September 11, 2001; and (d) the CIFC Director was made the Chairman of the Audit Committee which has had no meeting or report on the alleged investment of USD 1 million till date.
(3.) SHRI Neeraj Sharma, Counsel for the petitioner further pointed out that the CIFC Director and representative Mr. J.K. Basu received an e-mail dated January 24, 2002 from Respondent No. 6, alleging fraud and embezzlement by Respondent No. 4 and his family members. It was also alleged that plans were being made by Respondent No. 4 in collusion with certain other Respondents to somehow siphon the balance US$ 1.2 million which was in the Company's accounts at the relevant time. This was followed by another email dated January 26, 2002 whereby Respondent No. 6 again reiterated that outgoings from the Company's Indian and US bank accounts were not in control. He apprehended that in the absence of signed minutes of the Board Meeting of the Company held on January 5, 2002 that authorized him to operate the accounts, monies were being rapidly withdrawn. Upon being questioned by the CIFC Director regarding the allegations above, Respondent No. 4 denied any wrongdoing and offered to agree to an audit of the Company, its branch office in the US and also of Respondent No. 4's associates and affiliates companies in the US, which offer was accepted by the CIFC Director who immediately initiated steps to conduct the audit of the Company and its branch office in the US. On February 7, 2002 another email was addressed by Respondent No. 6 to the CIFC Director and Mr. J.K. Basu about the fraud and embezzlement being perpetrated by Respondent No. 4 and his family members on CIFC. On being confronted by the CIFC Director, Respondent No. 4 offered on February 19, 2002 to buy back 6% of the shares of the Company held by CIFC, albeit he continued to deny allegations of fraud in the manner in which the affairs of the Company were being conducted. However, subsequently, this offer to buy back 6% of the CIFC shareholding was not given to CIFC. On February 6, 2002 Respondent No. 4 addressed another email to the CIFC Director and Mr. J.K. Basu whereby he denied any attempts to siphon monies from the Company. On the contrary aspersions were cast on Respondent No. 6. By way of this communication Respondent No. 4 offered that an audit of the Company be carried out. In the bona fide belief that the express representations made by Respondent No. 4 were true, CIFC mandated Ernst & Young Pvt. Ltd. to carry out the audit of the Company. Respondent No. 4 was also informed about the appointment of Ernst & Young Pvt. Ltd. vide email dated February 27, 2002. This was followed by an initial information request by Ernst and Young on March 6, 2002 to Respondent No. 4. However, the audit of the Company and its subsidiaries in USA as represented by Respondent No. 4 was evaded by Respondent No. 4 on several occasions and the same was not permitted to be carried out in accordance with the previous promises. In the meantime the CIFC Director learnt that three identical letters dated January 23, 2002 had been issued by the Company under the signatures of the Company Secretary to three assets management companies, namely Sunlife Mutual Fund, Alliance Capital Management India (P) Ltd. and Prudential ICICI Assets Management Company Limited (hereinafter referred to as the "Investment Funds"). These letters to the Investment Funds were for the purpose of changing the authorized signatories of the Company in respect of investments of the Company maintained with them. These three letters of January 23, 2002 enclosed what was claimed to a certified copy of a resolution of the Board of Directors dated January 5, 2002 for the purpose of authorizing the change in authorized signatories in respect of the investments with the Investment Funds. This enclosure was certified to be a true copy of the original minutes by Respondent No. 5 and this alleged resolution authorizes, inter alia, the authorized signatories namely Respondent No. 4 or Respondent No. 5, Respondent No. 7 or Respondent No. 9 to sell, withdraw, disinvest, redeem or otherwise dispose of such investments, deposits, etc. In fact, no such resolution was passed by the Board of the Company which is evidenced from a perusal of the resolutions recorded in the draft minutes of the Board Meeting held on January 5, 2002. Furthermore, these communications were forwarded to the Investment Funds even prior to the finalization/confirmation of the minutes of the Board Meeting dated January 5, 2002 of the Company. Additionally, it was pointed out by the counsel, the communication containing the comments of Respondent No. 4 to the draft minutes of the said Board Meeting also did not bear any reference to the above resolution. The CIFC Director realized that this purported resolution and its certification were false and on the basis of this fabricated resolution, Respondent No. 5 had apparently in collusion and conspiracy with Respondent No. 4 and other persons in these resolutions, caused the investments of the Company amounting to Rs. 57 million to be unauthorisedly withdrawn from the Investment Funds. The malafldes and illegality of the transaction and the fact that Respondent No. 5 and Respondent Nos. 8 and 9 made efforts to conceal the liquidation of these deposits were established when the CIFC Director further learnt that the amounts from these deposits on being received from the Investment Funds had been deposited in a bank account of the Company maintained with HDFC Bank, New Delhi that was to have been closed vide Board resolution dated December 20, 2000. As such, the said resolution dated December 20, 2000 was never given effect to and the same was deliberately and willfully suppressed by Respondent No. 4 from CIFC. CIFC further learnt that on February 4, 2002 the Company addressed a letter under the signatures of Mr. K.P. Singh, Respondent No. 9 and remitted USD 1 million purportedly to a wholly owned subsidiary in the USA. It was pointed out by the counsel that Respondent No. 9 was not a Director of the Company at the time and did not have the authority to sign on behalf of the Company. Respondent No. 9 was not authorized to draw cheques on the bank account of the Company maintained with HDFC Bank as per the draft minutes circulated on January 17, 2002 of the Board Meeting of the Company. Even as per the fabricated resolutions forwarded by the Company to the asset management companies Respondent No. 9 alone did not have the authority and required the signatures of either Respondent No. 4 or Respondent No. 5 for the same to be in consonance therewith. The CIFC Director further learnt from investigations that after the amounts realized from the withdrawn investments were deposited in the Company's accounts maintained with HDFC Bank, New Delhi, these were debited from that account in the last week of February 2002 to the account of the Company's wholly owned subsidiary in the US, Local Information Services Inc. On February 14, 2002 Respondent No. 5 addressed a letter to HDFC Bank requesting remittance of USD 1 million in favour of a wholly owned subsidiary of the Company in the name and style of 'Local Information Service Inc.' The filing made by the Company with RBI discloses that the subsidiary, Local Information Services Inc, USA, to which the remittance of USD 1 million was made did not, in fact, exist at the relevant time in as much as the date of incorporation for the same has been stated as "APPLIED". It was pointed out that the ODA has been signed only by Respondent No. 5 which is contrary even to the fabricated resolution purported to have been passed by the Board at the Board Meeting dated January 5, 2002 and requires the signatures of either Respondent No. 7 or Respondent No. 9 to be in consonance with the fabricated resolution (page 176 of the petition refers) Pursuant to receiving information of the malafide and patently illegal acts of Respondent Nos. 4 and 5 in collusion with Respondent Nos. 7 and 9, the CIFC Director addressed a letter dated April 6, 2002 to the Board of Directors and the Company Secretary of the Company objecting to the illegal and unauthorized remittances made by the Company on the basis of a fabricated resolution of the Board purportedly passed on January 5, 2002. In this letter the CIFC Director specifically denied that any resolution was passed on January 5, 2002 to change the authorized signatory of the Company in respect of the deposits with the investment funds. In the correspondence dated April 11, 2002 in response to the above the Company under the signatures of Respondent No. 9, Respondent No. 9 deliberately neglected and failed to furnish any details regarding the illegal remittance of USD 1 million to a wholly owned subsidiary, 'Local Information Service Inc.' and instead sought time to collate the requisite information on the false ground of non-availability of the directors of the Company It was further pointed out that on receipt of the above letter dated April 11, 2002, the CIFC Director addressed a letter dated April 17, 2002 to the Board of Director and the Company Secretary and intimated his intention to personally inspect and examine all the records of the Company on April 22, 2002. The CIFC Director also called upon Respondent No. 9 to have all necessary and relevant books and papers of the Company ready for inspection and also to ensure presence of all officers responsible for financial matters relating to the Company. No inspection was allowed. Respondents did not cooperate.;