* IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment pronounced on : November 16, 2015 + I.A. No.21503/2015 in CS(OS) 3082/2015 M/S JUTE INVESTMENT COMPANY LTD... Plaintiff Through Mr.Kapil Sibal, Sr.Adv., Dr.A.M.Singhvi, Sr.Adv. and Mr.Rajiv Nayar, Sr. Adv. with Ms.Misha Rohatgi Mohta, Ms.Gunika Gupta & Ms.Aayushi Sharma, Advs. Versus IDBI CAPITAL MARKET SERVICES LIMITED & OTHERS... Defendants Through Mr.Amit Mahajan, Adv. for D-1. Mr.P.Chidambaram, Sr. Adv. with Mr.Ankur Chawla, Ms.Megha Gupta & Ms.Kanika Singh, Advs. for D-4. Mr.A.S.Chandhiok, Sr. Adv. with Mr.Ankur Chawla, Ms.Kanika Singh, Ms.Shweta Kakkad, Ms.Monika Tyagi, Ms.Megha Gupta & Ms.Mallika Mendhiratta, Advs. for D-5. + I.A. No.21723/2015 in CS(OS) 3105/2015 M/S THE RAMESHWARA JUTE MILLS LTD... Plaintiff Through Dr.A.M.Singhvi, Sr.Adv. and Mr.Sandeep Sethi, Sr. Adv. with Mr.Neeraj Chaudhari & Mr.Prashant Sanghi, Advs. versus CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 1 of 52
M/S UNIVERSAL CABLES LIMITED & OTHERS... Defendants Through Mr.P.Chidambaram, Sr. Adv. with Mr.Ankur Chawla, Ms.Megha Gupta & Ms.Kanika Singh, Advs. for D-1. Mr.Amit Mahajan, Adv. for D-4. Mr.A.S.Chandhiok, Sr. Adv. with Mr.Ankur Chawla, Ms.Kanika Singh, Ms.Shweta Kakkad, Ms.Monika Tyagi, Ms.Megha Gupta & Ms.Mallika Mendhiratta, Advs. for D-5. CORAM: HON'BLE MR.JUSTICE MANMOHAN SINGH MANMOHAN SINGH, J. 1. By way of this common order, I propose to decide the two applications filed by the two respective plaintiffs in the suit for declaration and permanent injunction being common issue involved in the matter. The first suit was filed by M/s. Jute Investment Company Limited on 8 th October, 2015 and summon and notice was issued for 12 th October, 2015 and on 12 th October, 2015, the second suit was filed by M/s. Rameshwara Jute Mills Ltd. M/s. Universal Cables Limited is the defendant No.4 in CS (OS) No.3082/2015 and is defendant No.1 in CS (OS) No.3105/2015 (hereinafter referred as company or defendant No.1 for convenience). 2. The plaintiff has filed the above mentioned suit seeking inter alia the following reliefs: CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 2 of 52
a) Pass a decree declaring the Letter of Offer/ Abridged Letter of Offer both dated 14 th September 2015 issued by Defendant No. 4 as unlawful, null and void ab-initio; b) Pass a decree of Permanent Injunction thereby injuncting the Defendants from proceeding with the Letter of Offer/ Abridged Letter of Offer both dated 14 th September 2015 issued by Defendant No. 4; c) Pass necessary order staying the allotment of Right Shares until the existing holding of the Promoter and Promoter Group entities is finally determined; d) Initiate prosecution proceedings against all the Defendants for misleading incorrect and untrue statements in the Letter of Offer and Abridged Letter of Offer. 3. In the interim applications the plaintiffs have sought inter alia an interim order restraining the defendants from proceeding any further with the Rights Issue under the impugned Letter of Offer dated 14 th September, 2015 in any manner during the pendency of the suit. 4. Let me now deal with the merit of the case. Main facts in CS(OS) No.3082/2015 as per the plaint are follows : i) The plaintiff is a part of the promoter & promoter group of defendant No.4-M/s Universal Cables Limited and holds 59107 equity shares (being 0.26%) in the said defendant who is the Lead Manager to the Rights Issue proposed by defendant No.4. The said company is engaged in the business of manufacturing of Cables and Capacitors. The equity shares of the defendant CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 3 of 52
No.4 Company are listed on BSE Limited and National Stock Exchange of India Limited. ii) The defendant No.5 is the Chairman of the defendant No.4 Company and engaged in day-to-day affairs of the defendant No.4 Company. Defendant No.6 is the Manager and the Chief Executive Officer of the defendant No.4 Company. The defendant No.7 is the Manager and Chief Operating Officer of the defendant No.4 Company. The defendant No.8 is the Chief Financial Officer of the Defendant No.4 Company. Defendant Nos. 9 to 14 are the Directors of the defendant No.4 Company. Defendant No.3 is the Compliance Officer and Company Secretary of the defendant No.4 Company. The defendant No.2 is the Registrar and the Share Transfer Agent to the Rights Issue. iii) In or about third week of September, 2015 the plaintiff came to know that defendant No.4 had issued a Letter of Offer offering to issue 1,15,65,127 equity shares of the face value of Rs.10/- and at issue price of Rs. 51/- each to its shareholders, including the plaintiff, in the ratio of 1 share against the existing 2 shares. The said Letter of Offer did not disclose all material facts and would not enable a shareholder to take an informed decision as to whether or not to subscribe to the said Letter of Offer. In the said Letter of Offer the names of various companies falling under "promoter and promoter group of companies" of the defendant CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 4 of 52
No.4 has been specified to be holding a total shareholding of 52.55%. iv) Though the plaintiff, has at all material times, been a part of promoter/promoter group of the defendant No.4. But the name of plaintiff has not been shown as part of "promoter and promoter group of companies" of the defendant No.4 in the said Letter of Offer. The shareholding of the plaintiff in the defendant No.4, being 59107 shares, has also not been included in the shareholding of the "promoter and promoter group of companies" in the said Letter of Offer. The non-inclusion of the plaintiff in the "promoter and promoter group of companies" of defendant No.4 is deliberate as the other defendants wish to control defendant No.4 in order to deny to the plaintiff the special rights as enjoyed by the promoter of a Company under law and also recognized in the said Letter of Offer. v) The said act of the defendants is contrary to the various provisions of Companies Act, 2013, SEBI (substantial acquisition of shares and takeovers) Regulations 1997 and 2011 and SEBI (issue of capital and disclosure requirements) Regulations, 2009 wherein it mandates that shareholder falling within the category of promoter group is recognized as a special category of shareholder. A promoter has a number of rights and obligations and they play an active role in the affairs of the Company. vi) In paragraph 28 under the heading "Risk Factors" of the said Letter of Offer, the special rights and powers to be enjoyed by CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 5 of 52
the promoters and which has now been purported to be denied to the plaintiff, has been recognised. Paragraph 28 of the Letter of Offer has been reproduced herein below: 28. Our Company may continue to be controlled by its Promoters and Promoter Companies following this Issue and our other shareholders may not be able to affect the outcome of shareholders voting. After the completion of this Issue, our Promoters and Promoter Companies will collectively hold atleast 52.55% of the fully diluted post-issue equity capital. Further, if our Promoter and Promoter Companies acquire the additional and renounced shares, their shareholding will further increase. Consequently, our Promoters may exercise substantial control over us and have the power to elect and remove a majority of our Directors and/or determine the outcome of proposals for corporate action requiring approval of our Board of Directors or shareholders, such as lending and investment policies, revenue budgets, capital expenditure, dividend policy and strategic acquisitions. Our Promoters will be able to influence our major policy decisions and any wrong decision on their part could adversely affect your investment in the Equity Shares.'" The said Letter of Offer seeks to deprive the plaintiff of its special rights as promoter as recognized in law as well as the Letter of Offer. The plaintiff being part of promoter and promoter group of defendant No.4 should have been consulted with prior to the defendant No.4 coming to a decision of issuing Rights Issue. Issue of Rights Issue of a Company is an important policy decision of the Company and a promoter of a Company has a important role in matters of, inter alia, policy of the Company. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 6 of 52
vii) The plaintiff has not been consulted in the decision making process of the said Rights Issue but has also been denied the opportunity which was given to the other promoters of the defendant No.4 Company as provided in page 14 of the Abridged Letter of Offer issued by the defendant No.4. The relevant extract has been reproduced here as under: "Participation in the Issue by our Promoters and Promoter Companies. Our Promoters and Promoter Companies have intended by their letters dated from May 16, 2015 to May 25, 2015, severally to: (a) to apply for Equity Shares being offered to them pursuant to the Rights Issue to the extent of their Rights Entitlements; (b) to apply directly or through the Promoter Companies for any Equity Shares renounced in their favour; and (c) to apply directly or through the Promoter Companies for any additional Equity Shares in the Rights Issue only to the extent of any unsubscribed portion of the Rights Issue, subject to the applicable law, to ensure that at least 90% of the Rights Issue is subscribed." viii) It is also stated in the plaint that the defendant No.4 is a part of M.P. Birla Group of companies. The defendant No.4 was setup and promoted by Madhav Prasad Birla. Madhav Prasad Birla during his life time and after his death his wife Priyamvada Devi Birla were the promoters of the defendant No.4 and controlled the controlling block of shares in defendant No.4. After the death of Priyamvada Devi Birla, by an order dated 23 rd August, 2012 passed by the Division Bench of High Court at Calcutta a committee of Administrators pendente lite has been appointed CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 7 of 52
over the estate of Priyamvada Devi Birla. The said judgment also held that the estate of Priyamvada Devi Birla includes controlling block of shares in M.P. Birla Group of companies, including the defendant No.5. ix) The shares of Priyamvada Devi Birla, which are now held by the Administrators pendente lite, has also not been included in the promoter and promoter group of defendant No.4 in the said Letter of Offer. Such omission in the Letter of Offer would hamper a shareholder in deciding as to whether or not to subscribe to the said Rights Issue. The true depiction of the promoter of a Company is a vital relevant information for a shareholder in order to decide whether to subscribe to the Rights Issue. x) From paragraph 1 under the heading "Risk Factor" of the said Letter of Offer, the Rights issue has been issued mainly for the purpose of repaying the existing loans of the defendant No.4 to its promoter and promoter companies and not for creation of any assets of the defendant No.4. Using of proceeds of a Rights Issue for the purpose of repayment of loans of a promoter and promoter group of the Company and not for repayment of loans of third parties is not a justifiable reason for issuance of Rights Issue. The issue price of Rs. 51/- fixed in the said Letter of Offer is without any basis and in fact is a very high and unattractive price and will not lead to offset the losses being suffered by the defendant No.4. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 8 of 52
xi) The territorial jurisdiction is invoked by stating that the Letter of Offer and Rights Issue, both Abridged and Full, have been issued by the defendant No.4 within the territorial jurisdiction of this Court. Some of the defendants also reside/carry on their work within the territorial jurisdiction of this Court xii) The prayer is sought to pass a decree declaring the Letter of Offer/Abridged Letter of Offer both dated 14 th September 2015 issued by defendant No.4 as unlawful, null and void ab-initio and to injunct the defendants from proceeding with the Letter of Offer/Abridged Letter of Offer both dated 14 th September 2015 issued by defendant No.4. 5. In the second suit being CS (OS) No. 3105/2015, in addition to the averments made in the first suit, it is submitted that the plaintiff holds 25,152 equity shares holding 0.11% in the defendant No.1. The holding of the plaintiff has wrongly been shown in the Letter of Offer. The other following averments are made: a. Late Priyamvada Devi Birla, now her estate represented by Administrators pendente lite, holds 0.18% shares in defendant No.1 and such shares are part of promoter and promoter group of Company and have been wrongly excluded from promoter and promoter group of Company in the letter of offer. Some trusts and societies hold 8.02% shares in defendant No.1 and such shares are part of promoter and promoter group of Company and have been wrongly excluded from promoter and promoter group in the letter of offer. Similar holding in other CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 9 of 52
listed companies of the MP Birla Group (BirIa Corporation Limited and Birla Ericsson Optical Limited) have been duly included in the holding of Promoter and Promoter Group and therefore there is no reason to exclude these holding of shares from promoter and promoter group. Amendment to Clause 35 of the listing agreement was applicable to all listed companies in the same manner. It is done with a oblique motive of denying them special rights which are attached to promoter shareholding as recognised in the Companies Act, 1956 and various SEBI Regulations. The special rights have also been recognised in the said letter of offer. Many false and misleading statements have been made in the said letter of offer with the scheme and design of allotting higher number of additional shares to the promoter and promoter group and thereby have the total holding of promoter and promoter group (including the hidden holding of such excluded entities) much beyond the ceiling limit of 75% holding of all promoter and promoter group entities imposed by Securities and Exchange Board of India. Reduced holding of shares of the promoter and promoter group has purposely been reflected in the said letter of offer for the purpose of changing the Company from a public limited to company to a closely held company, which is illegal. It is done in well-planned manner in de facto control of the company. 6. Replies on behalf of the Company to the application under Order 39 Rule 1 and 2 CPC filed by the plaintiffs have been filed. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 10 of 52
Common pleas are raised on behalf of the defendants who have denied the case of the plaintiffs. It is alleged that the plaintiffs have approached this Court at the belated stage. The plaintiffs cannot plead the case of third parties. It is done by them in order to scuttle the process. The plaintiffs were aware about all the facts for the last many years. They just kept quiet. They did not assert their rights as claimed by them now. At least at this stage the plaintiffs are not entitled for interim injunction as prayed for. Various contentions are raised in the reply. They submit that the suit itself is not maintainable and once the suit is not maintainable, the question of passing of any interim order does not arise. 7. The first objection raised by them is about the lack of territorial jurisdiction to entertain the present suit in view of the reason that Schedule VIII, Part E, clause 5, sub-clause XV of ICDR Regulations lists the regulatory and statutory disclosures that are mandated by law to be made in rights issue. Point G(3) of the same provides as under: "(3) Disclaimer in respect of jurisdiction: A brief paragraph mentioning the jurisdiction under which provisions of law and the rules and regulations are applicable to the letter and offer." In compliance of the said statutory mandate, the letter of offer dated 14 th September, 2015 at page 126 of the documents filed with the plaint provides as under: "Disclaimer with respect to jurisdiction CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 11 of 52
This letter of Offer has been prepared under the provisions of Indian Laws and the applicable rules and regulations thereunder. Any dispute arising out of the Issue will be subject to the jurisdiction of the appropriate court(s) in Madhya Pradesh only." jurisdiction. It is stated that the Courts in Madhya Pradesh only have 8. The second objection is raised that the present suit is not maintainable as the present challenge to validity of the Letter of Offer would lie before the Securities & Exchange Board of India (hereinafter referred to as "SEBI") and the mechanism provided under the Securities & Exchange Board of India Act, 1992 (hereinafter referred to as SEBI Act) in view of the reason that the Draft Letter of Offer was submitted before the Securities & Exchange Board of India as mandated by law and only after receiving observations from SEBI and making necessary compliances to the satisfaction of SEBI, the said Letter of Offer dated 14 th September, 2015 was issued. Thus, by challenging the said offer on behalf of the plaintiff, who sought to challenge the satisfaction expressed by SEBI with the same and such a challenge could only be made under the SEBI Act or the applicable regulations issued under the said Act. The plaintiff has not even made SEBI a party to the present suit. 9. Thirdly, it is submitted that the plaintiff s main contentions in CS(OS) No.3082/2015 are that they are a part of promoter and promoter group of the Company. It is contended that the plaintiff is not a promotor as per plaintiff's own admission, as the promoter is required CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 12 of 52
to submit a disclosure as a promoter of a company in terms of Regulation 30 of Securities & Exchange Board of India (Substantial Acquisition of Shares & Takeovers) Regulations to the stock exchange and to registered office of the company. The plaintiff Company was filing/authorised filing of the said disclosure under then prevailing regulations as a promoter of Company till the financial year ending on 31 st March, 2011 but thereafter the plaintiff Company stopped filing the requisite disclosure. Thus, the plaintiff company itself chose to stop showing itself as a promoter of the Company. In the absence of the plaintiff submitting the mandatory disclosure and after waiting for a reasonable period, the company filed its shareholding pattern in September, 2013 and the Plaintiff was not shown as Promoter and Promoter Group Company. No objection was raised by the plaintiff nor any query/objection raised by the regulator or the stock exchange till date. From the said period, in every quarterly shareholding pattern filed by the Company, the plaintiff is not shown as part of Promoter or Promoter Group Company. The aforesaid shareholding patterns have been available on the website of the stock exchanges since 2013 but no objection was raised. Further, there is no prayer seeking any declaration that the plaintiff company is a part of Promoter & Promoter Group of Company or that its removal as part of Promoter & Promoter Group of Company is invalid and the only relief sought is with regards to the letter of offer. 10. The alleged grievance of the plaintiff in the suit is that by not showing the plaintiff as a promoter in the Letter of Offer, who has been CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 13 of 52
deprived of the special rights without any basis. No prejudice has been caused to the plaintiff. Firstly the plaintiff is not a Promoter or part of Promoter Group of Company. Assuming that the plaintiff is a Promoter, even then no special rights and privileges are granted or are available to a Promoter under the letter of offer, as the basis of allotment has been done on the basis adumbrated in the letter of offer which provides the order in which the allotment is to be made under Sub Clause (a),(b),(c), (d), (e) of the same. So far as clauses (a) to (c) are concerned the Board has no discretion whatsoever. With respect to sub clause (e) it may appear that the board has a discretion but in fact on a strict construction of the said sub clause, it would be apparent that no discretion vests with the Board inasmuch as the allotment of equity shares has to be done in consultation with the designated stock exchange and further it is stipulated that it will not be a preferential allotment. The said basis of allotment has been approved by both the stock exchanges i.e. BSE Limited and the National Stock Exchange of India Limited having nationwide terminals. During the course of hearing, it was informed that the question of exercise of discretion in the present case does not arise as the issue was overscribed at the stage of (a) to (c), the subsequent stage has not arrived. Thus, the grievance of the plaintiffs has become infructuous. 11. It is also alleged that the basis of allotment set out in the Letter of Offer is the usual practice followed in such rights issues and letters of offer. In all listed companies the similar process of basis of allotment is followed. Defendant No.2 who is the Registrar of the CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 14 of 52
Letter of Offer had issued letter dated 13 th October, 2015 setting out the process of basis of allotment. 12. It is stated that in view of conduct of the plaintiffs themselves they are not entitled to any discretionary relief as the plaintiff was aware as far back as September 2013 about its non inclusion as part of Promoter & Promoter Group of Company in the shareholding pattern filed by the Company with the stock exchange. Since then, in every quarterly shareholding pattern filed by the Company the plaintiff was not shown as part of Promoter or Promoter Group Company of the Company. The said shareholding pattern has been available on the website of Stock Exchanges since 2013 but no objection was raised. With regard to the letter of offer, the plaintiff was aware as far back as June 2015 about the terms of the offer when the same was put on the website of SEBI. 13. Even as per plaintiffs own averment it was aware of the offer in the second or third week of September but despite the same chose to file the suit only on 8 th October, 2015 knowing fully well that the closing date of the rights issue is 14 th October, 2015 when the main process was to be completed by 15 th October, 2015. The practice of approaching the court at the last minute in case of rights issues has been deprecated by the Supreme Court of India in Morgan Stanley Mutual Fund vs. Kartik Das, reported in (1994) 4 SCC 225. 14. The plaintiff in the first suit has not disclosed that an application had been filed on 5 th October, 2015 before the High Court of Calcutta in the Testamentary proceedings pending there with regard to the estate of CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 15 of 52
Smt.Priyamvada Birla. The said fact has been concealed from this Court in order to get an ex-parte interim order. The relevant extract of the prayer clause in the aforesaid application has been reproduced herein below: (a) Leave be given to serve a copy of the instant application on Universal Cables Limited; (b) Set aside and/or quash the impugned rights issue by Universal Cables Limited; (c) Injunction restraining Harsh Vardhan Lodha causing Universal Cables Limited or Universal Cables Limited from proceeding with the rights issue dated 14 th September 2015 (d)..." In the aforesaid application, which was mentioned on 5 th October, 2015 by the plaintiff and now the same is listed on 27 th November, 2015. 15. On the other hand, on behalf of both the plaintiffs it is stated that several false and misleading statements have been made in the impugned Letter of Offer dated 14 th September, 2015 with the scheme and design of allotting higher number of additional shares to the Promoter and Promoter Companies and thereby have the total holding of Promoter and Promoter Companies much beyond the ceiling limit of 75% holding of all promoter and promoter group CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 16 of 52
entities imposed by Securities and Exchange Board of India. The said Letter of Offer includes many false and misleading statements. The same are referred as under: (i) The shareholding of the Promoter and Promoter Group of defendant No. 1 has been wrongly shown as 52.55% as against 60.93%. (ii) The plaintiff holds 0.11% shares in defendant No. 1 and such shares are part of promoter and promoter group of defendant No. 1 and have been wrongly excluded from Promoter and Promoter Group of defendant No. 1 in the letter of offer. (iii) Late Priyamvada Devi Birla, now her estate represented by Administrators pendente lite, holds 0.18% shares in defendant No. 1 and such shares are part of promoter and promoter group of defendant No. 1 and have been wrongly excluded from Promoter and Promoter Group of defendant No. 1 in the Letter of Offer. (iv) Some companies, trusts and societies hold 7.84% (i.e. 8.02% - 0.18%) shares in defendant No. 1 and such shares are part of promoter and promoter group of defendant No. 1 and have been wrongly excluded from Promoter and Promoter Group of defendant No. 1 in the impugned Letter of Offer. Similar holding of the estate of Late Priyamvada Devi Birla and the aforesaid companies, trusts and societies in other listed companies of the M P Birla Group (Birla CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 17 of 52
Corporation Limited and Birla Ericsson Optical Limited) have been duly included in the holding of Promoter and Promoter Group and therefore, there is no reason to exclude these holding of shares by the defendant No. 1 from promoter and promoter group. Submissions on behalf of the Plaintiffs 16. It is argued on behalf of the plaintiffs that the exclusion of shareholders from the Promoter and Promoter Group of company has been made with the malafide intention and motive of denying them special rights which are attached to promoter shareholding as recognized in the Companies Act, 1956 / Companies Act, 2013 and various SEBI Regulations and such special rights have also been recognized in the said impugned letter of offer vide clause 28 under the head Internal Risks. The same is done in the impugned Letter of Offer with the scheme and design of allotting higher number of additional shares to the Promoter and Promoter Companies and thereby have the total holding of Promoter and Promoter Group (including the hidden holding of such excluded entities) much beyond the ceiling limit of 75% holding of all promoter and promoter group entities imposed by Securities and Exchange Board of India. It is also submitted that certain other entities have been excluded from category of Promoter and Promoter Group in the impugned Letter of Offer deliberately, illegally and with malafide intent and in complete derogation of the law. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 18 of 52
17. Counsel for the plaintiffs has referred the definition of promoter in Section 2(69) of the Companies Act, 2013, the term promoter includes a person who has direct or indirect control over the affairs of a company, or in accordance with whose advice, directions or instructions the board of directors of the company is accustomed to act. Further, Regulation 2(1)(za) of the ICDR Regulations defines promoter to include persons in control of the issuer. Regulation 2(1)(zb) defines promoter group in a wide manner to include several connected entities. The defendant No. 1 has in fact not complied with such definition. The said exercise is not permissible and in this regard the legal framework prescribed under the SEBI law bars such re-classification of promoters as public. The SEBI document dated 23 rd June, 2015 provides only three circumstances under which such re-classification is permissible. None of the said circumstances exist in the present case. 18. It is argued on their behalf that the misrepresentation with regard to the correct status of promoter and promoter group of the defendant No.1 Company vide the impugned Letter of Offer has resulted in ousting the plaintiff and certain other entities (including the estate of PDB) from the said category thereby clearly resulting in grave prejudice to the plaintiff and such entities. On account of such malafide and illegal exclusion, instead of the total percentage holding of the promoter and promoter group of the defendant No. 1 Company being 60.93% is falsely represented to be a mere 52.55% without any basis i.e. a reduction by 8.38%. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 19 of 52
19. It is stated that in the year 1999 in the Letter of Offer for Rights Issue, issued by the defendant No. 1, it has acknowledged that it was promoted by Late Shri M.P. Birla and after his death, Late Smt. Priyamvada Devi Birla had been acting as Chairman of the Defendant No. 1. The status declared in the said Letter of Offer of 1999 with regard to promoters, therefore, is sought to be completely changed in the impugned Letter of Offer without any basis. 20. The defendant No. 1 company has nowhere explained the reasons for excluding the plaintiff and other entities from the category of Promoter. It has violated its obligation under Regulation 57(2)(b) of the ICDR read with Schedule VIII, Part E (5)(VI)(C), to make true and accurate disclosures as to the details of shareholding of the promoters and the promoter group. 21. The contention of the defendants is that the plaintiff has been excluded from the Promoter and Promoter Group as the plaintiff had stopped making disclosure as a promoter of the defendant No. 1 under Regulation 30 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations after 31 st March, 2011 and therefore, the defendant No. 1 has not shown the plaintiff as a Promoter or a Promoter Group company since September, 2013 does not have any merit. It is submitted that the plaintiff is a Promoter company by virtue of the definitions of Promoter as contained in the SEBI Regulations and the Companies Act. So long as the plaintiff meets the CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 20 of 52
requirement of the law for being a promoter, the plaintiff cannot be excluded from the category of Promoter and Promoter Group. 22. The modus operandi of valuing the share value with regards to the Rights Issue at a high price of Rs.51/- is with an objective of ensuring that the public at large and most of the other shareholders are dissuaded to participate in the same and as a consequence of which the so called Promoters would seek the benefit thereof. There is no justification emanating from the records for pegging the price at Rs. 51/-, it is essential to note that such fixation of the price was within the domain of the defendant No. 1 Company and its Board of Directors/ Rights Issue Committee and there is no approval required by an independent statutory agency. 23. In the garb of a rights issue, the defendant No. 1 has sought to allot shares only to a specific group of shareholders, thereby effectively undertaking a preferential allotment without complying with Section 62(1)(c) of the Companies Act and specific regulations and guidelines of Securities and Exchange Board of India for issue of shares on preferential basis. The Rights Issue is in contravention of the Companies Act and SEBI Regulations and hence illegal. 24. It is submitted that there has been no delay on the part of the plaintiff in approaching this Court as the plaintiff is not represented on the Board of Directors of the defendant No. 1 and therefore, no notice of such board meeting was given to the plaintiff. It is submitted that in the Postal Ballot Notice, the defendant No. 1 had not provided at all the terms and conditions of the Rights Issue. The price of the CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 21 of 52
Rights share has also not been provided in the said Notice. The said Notice as well as the explanatory statement is vague and lacking in material particulars. The Defendant No. 1 s contention that the Rights Issue has been approved by 99.16% of the shareholders is of no consequence as the shareholders who were present and voting represent only about 65% of shareholders out of which over 60% is controlled by the promoters and promoter group. Thus, support for such resolution by public shareholders was negligible and certainly not over 99% as contended by the defendant No. 1 Company. 25. It is submitted that on receipt of the impugned Letter of Offer, the plaintiff immediately collected the necessary information and consulted its legal advisors in relation to the filing of the suit. Thereafter, the suits were filed during 2 nd week of October 2015. It is submitted that there has been no undue delay in approaching this Court. It was only on 7 th September, 2015 that SEBI noted compliances made by the defendant No.1 on the comments on the Letter of Offer by SEBI. 26. On behalf of plaintiffs it was denied that the plaintiffs have not been shown as part of Promoter and Promoter Group Companies since September 2013. The defendant No. 1 never informed the plaintiffs that it was being reclassified as public shareholder as the plaintiffs had failed to make disclosures as required under Regulation 30. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 22 of 52
27. With regard to the objection of territorial jurisdiction, it is argued that the cause of action has arisen within the territorial jurisdiction of this Court in as much as the impugned Letter of Offer / Abridged Letter of Offer have been issued from New Delhi. The impugned Letter of Offer/ Abridged Letter of Offer has been signed on 14 th September, 2015 in New Delhi. The meeting of Board of Directors of the Company in which the issue of shares was approved was held on 31 st March, 2015 in New Delhi. 28. The meeting dated 7 th September, 2015 of Rights Issue Committee of the defendant No.1 was held at New Delhi. In the said meeting, the Rights Issue Committee had approved the terms of the proposed Rights Issue inter alia, issue price, entitlement ratio, record date etc. Therefore, substantial part of cause of action arose in New Delhi. The defendant No. 1 is carrying on business from New Delhi. Further, the defendant No. 9 is also a resident of New Delhi. 29. The said disclaimer clause of territorial jurisdiction at Satna, MP does not confer exclusive jurisdiction in the Courts at Satna, MP as the impugned Letter of Offer confers jurisdiction on Courts at Satna only in relation to disputes in relation to subscription of shares by a particular shareholder pursuant to the Rights Issue. 30. The dispute between the parties is not merely a breach of the Regulations framed by SEBI, but also allegations of fraud committed by the defendant No. 1 Company and its Board of Directors. Therefore, Section 15Y of the SEBI Act is not a bar to the present suit. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 23 of 52
Arguments on behalf of the defendants 31. Apart from various objections raised in the reply about the maintainability of the suit and interim application, it is argued on behalf of the defendants that after filing of the instant suit, the plaintiff had applied for equity shares to the extent of its rights entitlement (29,553 nos. of shares of a value of Rs. 15,07,203/-) in the Rights Issue under Letter of Offer dated 14 th September, 2015 in terms of clause (a) of the basis of allotment mentioned in page 148 of the Letter of Offer. The process of allotment of equity shares under the rights issue has been completed on 20 th October, 2015 itself on the basis of allotment approved by BSE. The plaintiff was eligible for additional shares under the said rights issue but did not applied for the same as provided in clause (c) of the basis of allotment. The plaintiff now cannot raise any objection as regards the basis of allotment of shares. 32. The basis of allotment adopted at Page 148 of the Letter of Offer is the standard practice and is in compliance with the law. It is submitted that the allotment of additional equity shares to all the eligible shareholders were made on equitable basis having due regard to the number of equity shares held by them on the record date fixed for the purpose of Right Issue in consultation with the designated Stock Exchange i.e BSE Limited. After taking into account allotment to be made under (a) to (d) as stated on basis of allotment if there is any unsubscribed portion, the same is deemed to be unsubscribed. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 24 of 52
33. It is submitted that all the shares in respect of the rights issues were subscribed under clauses (a) to (c). Clauses (d) and (e) therefore became inoperative. All the shareholders of the company whether be promoters or public shareholders or the plaintiff were able to exercise their rights equally under clauses (a) to (c). Thus, the shareholders have suffered. The basis of allotment has been approved by the designated Stock Exchange of the Company for the purpose of Rights Issue i.e. BSE Limited by its letter dated 20 th October, 2015. 34. It is submitted on behalf of the defendants that the case of the plaintiff is that they have been deprived of the special rights that would accrue to it as a Promoter Company in the rights issue. The said objection is without any basis as no prejudice has been caused to the plaintiffs on the reasons that assuming the plaintiff is a Promoter Company, even then no special rights and privileges are granted or are available to a Promoter Company under the Letter of Offer. The basis of allotment has been done on the basis adumbrated in the Letter of Offer at running page 151 of the documents filed with the plaint which provides the order in which the allotment is to be made under Sub Clause (a), (b), (c), (d), (e) of the same. So far as clauses (a) to (c) are concerned, the Board has no discretion whatsoever. Pertaining to sub clause (e) it may appear that the board has discretion but in fact on a strict construction of the said sub clause. No discretion vests with the Board inasmuch as the allotment of equity shares has to be done in consultation with the designated stock exchange and it is also stipulated that it will not be a preferential allotment. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 25 of 52
35. The basis of allotment set out in the present Letter of Offer is the usual practice followed in such rights issues and letters of offer. In all listed companies the similar process of basis of allotment is followed. Defendant No.2 who is the Registrar of the present Letter of Offer had issued letter dated 13 th October, 2015 setting out the process of basis of allotment. The offer has been fully subscribed and in fact oversubscribed in stage (a)(b) and (c) itself special rights of a promoter company, if any, would have only come after exhaustion of stage (e). The plaintiffs were entitled to apply for additional share at stage (c) but have chosen not to apply. 36. On behalf of the plaintiffs it is submitted that 52.55% of shareholding in the company is shown to be held by promoters & promoters Companies whereas total shareholding of Promoters & Promoters Companies should have been shown as 61.12%. Following categories excluded from promoter & promoter Companies, namely, (a) 8.02% held by trust & societies, (b) 0.18% of Late Smt. Priyamvada Devi Birla s estate., (c) 0.26% of plaintiff in CS(OS) No. 3082/2015 and 0.11% of plaintiff in CS(OS) No.3105 of 2015. In reply to the submissions of the learned Senior Advocate on behalf of the plaintiffs, it is argued that 52.55% Shareholding of Promoter & Promoter Companies is rightly shown. The three categories stated by the plaintiff are not Promoter & Promoter Companies of defendant No.1 and therefore the same are not being shown. With regards to 8.02% share held by Trust & Societies it is submitted that firstly they are not a party to the suit, plaintiff has no locus standi to espouse CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 26 of 52
their alleged cause. Secondly, Note (b) at Page 38 clearly states that the said parties were removed from Promoters & Promoter Companies as far back as 2006 and no objection to the same raised till date. Pertaining to 0.18% of Late Smt. Priyamvada Devi Birla it is submitted that firstly, the Administrator pendent lite of Late Smt. Priyamvada Devi Birla is not a party to the suit, plaintiff has no locus standi to espouse their alleged cause. Secondly, Late Smt. Priyamvada Devi Birla herself was not a promoter of defendant No.1 and thus no question of her administrator pendent lite being promoters and thirdly, the issue of Late Smt. Priyamvada Devi Birla s estate is pending before the High Court of Calcutta. An application has already been moved by one of the parties therein with regards to the impugned letter of offer and the same is listed on 27 th November, 2015. With regards to the shareholding of the plaintiffs in the two suits, the same has rightly not been included in the shareholding of Promoter & Promoter Companies of defendant No.1 as they are not Promoter & Promoter Company as already stated herein above. 37. With regard to allegation on behalf of the plaintiff that the Share price in the letter of offer is very high, it is argued that share price for letter of offer is to be determined keeping in mind the provisions of Regulation 10 (4) (b) of Takeover Regulations. The share price for the letter of offer was determined keeping in view the provisions of the said Regulation reference may be had to Auditor s Certificate dated 7 th September, 2015. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 27 of 52
38. On the basis of the said computation and after being satisfied with the same, the Lead Manager in terms of Regulation 54(5) of ICDR Regulations has at page 38 of letter of offer stated that: 5. The ex-rights price of the Equity shares as per regulation 10(4)(d) of the Takeover Regulation is Rs. 57.33. Therefore, the share price of Rs. 51/- is much below the exrights price determined as per regulations and there is no infirmity with the same. 39. With regard to argument that as to why the object is repayment of promoter loan and not loans of bank or third parties, in reply it is submitted that the defendant No.1 has not taken any loans from third parties. The only borrowing from the Bank is from State Bank of India. The same is only for regular working capital, which is renewable every year. The Bank is fully aware of the purpose of the rights issue including objects of the rights issue and letter of offer and has given its consent for the rights issue vide its letter dated 20 April 2015 for bringing rights issue. 40. The bank by its letter dated 14 th October, 2015 while renewing the working capital credit facility has put a covenant stating that increased working capital facility would be released subject to completion of rights issue thus any injunction would directly impact defendant No.1 s working capital and result in losses. It is submitted that the objects of the Issue was clearly and explicitly set out in the Letter of Offer dated 14 th September, 2015 and as contained under CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 28 of 52
Internal Risks disclosure No. 1, No. 13 and No. 17 of the copy of Full Letter of Offer filed by the plaintiff with the suit. There is no irregularity or illegality in utilizing the issue proceeds for repayment of existing loans and Clause 5(vii)(H) of Schedule VIII(Part) E of ICDR Regulations specifically permits such utilization. 41. With regard to objection that under Section 62 of Companies Act if there has to be a preferential allotment it requires a special resolution, in reply it is submitted that there is no preferential allotment basis of allotment that has been adopted is the standard practice and it is mentioned in the letter of offer that the basis of allotment at Clause (b), (c), (d) will not be a preferential allotment. There is no challenge to the basis of allotment in the plaint. Even, there can be no challenge to the same in the absence of stock exchange as allotment is done under these clauses in consultation with the designated stock exchange. The rights issue was approved by a special resolution and thus the objection is without any merit. 42. In rejoinder arguments, learned Senior Advocate appearing on behalf of the Plaintiffs has also made additional submissions with regard to interpretation of clause c of basis of allotment at page 151. It was argued that a promoter could not apply under clause c of basis of allotment. 43. In reply learned Senior Counsel appearing on behalf of the defendants submitted that the said submissions are beyond pleadings and the same should not be considered and a decision cannot be based on grounds outside the pleadings of the parties. CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 29 of 52
Reliance is placed on Union of India v. Ibrahimuddin reported as (2012) 8 SCC 148 (para 77). 44. Clause (c) of the Basis of Allotment provides that: c) Allotment to the Eligible shareholders, who having applied for all the Equity Shares offered to them as part of the Issue, have also applied for additional Equity Shares. The Allotment of such additional Equity Shares will be made as far as possible on an equitable basis having due regard to the number of Equity Shares held by them on the Record Date, provided there are any unsubscribed Equity Shares after making full allotment in (a) and (b) above. The Allotment of such additional Equity Shares will be at the sole discretion of the Board in consultation with the Designated Stock Exchange, as a part of the Issue and will not be preferential allotment. The pre-requisite for applying under clause c is that one must be an Eligible equity shareholder. An Eligible equity shareholder is defined at Page No.5 of documents filed with the Plaint as Section I General definitions and abbreviations and as per definition of eligible equity and shareholders/eligible shareholders means:- Equity shareholders whose names appear on the register of members of our Company or on the list of register of beneficial owners of our Company maintained by the Depositories as at the end of business hours on the Record Date i.e. September 18,2015. 45. The said definition includes both promoters and non-promoters. The same has also been clarified at the Options available to eligible shareholders at page 135 of documents which have been filed with the plaint which reads as under :- CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 30 of 52
If the Eligible Equity shareholders applies for an investment in equity shares then Eligible Equity shareholder can: - Apply for its Rights Entitlement of Equity Shares in full; - Apply for its Rights Entitlement of Equity Shares in part; - Apply for its Rights Entitlement of Equity Shares in part and renounce the other part of Equity Shares; - Apply for its Rights Entitlement in full and apply for additional Equity Shares; - Renounce its Rights Entitlement in full. Also at page no. 158 of Letter of Offer states that the CAF form could be liable to be rejected if the instructions contained in the Letter of Offer are not followed 46. From the conjoint reading of all the aforesaid provisions that all eligible equity shareholders can apply for additional shares under category c of the basis of allotment, whether they are promoter or non-promoter. There is a force in the submissions of the defendants that the specific plea was not taken by the plaintiff in its plaint. 47. The following are the relevant dates and events which are necessary to be referred for the purpose of deciding the two interim applications filed by the plaintiff: Date Particulars 31.03.2015 The object of the letter of offer was set out in the Board Resolution dated 31.03.2015. The said Resolution was put CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 31 of 52
up for voting by postal ballot to the shareholders. The postal ballot form was also sent to the plaintiff on 8 th April 2015. 13.05.2015 The plaintiff chose not to vote. 99.97% of the valid votes cast on the resolution by the shareholders voted in favour of the said resolution. 29.05.2015 Draft Letter of Offer Submitted to SEBI, BSE and NSE. 30.05.2015 Notice issued to the shareholders of the company including the plaintiff about proposed rights issue published in various newspapers. 19.09.2015 Certificate Issued by Defendant No.2 certifying that the Abridged letter of offer has been dispatched to all the shareholders of Defendant No.4 including the plaintiff. 20.09.2015 Notice published in various newspaper informing issue open and close date. 08.10.2015 When the first suit was filed by M/s. Jute Investment Company Ltd. 12.10.2015 When the second suit was filed by M/s. The Rameshwara Jute Mills Ltd. 15.10.2015 Summary of provision basis of allotment. 20.10.2015 Allotment was approved by BSE Ltd. and as per defendant, lead Manager and CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 32 of 52
the Registrar to the Issue gave instructions to all banks for fund transfer from Escrow account to company account to proceed for allotment of shares and in the Board Meeting, it was decided to approve allotment of 1,15,65,127 equity shares of the face value of Rs.10/- at an issue price of Rs. 51/- per equity share including premium of Rs.41/- per share. 48. Break-up of applications received in the rights issue as per details supplied on behalf of the plaintiffs are as follows : Total No. of Shares issued in the Rights Issue Promoter Group Holding 52.55% (Admitted) Excluded (Trusts, Society, 8.02% Estate) Excluded (June Investment) 0.26% Excluded (Rameshwara) 0.11% 60.94% Promoters Entitlement in the Issue Shares Applied by Shareholders out of Entitlement Promoters entitlement being higher than total shares applied It is assumed that all shares applied are by the Promoters only. 11565127 7047788 60.94% 7047590 60.94% CS(OS) No.3082/2015 & CS(OS) No.3105/2015 Page 33 of 52