Jct Limited vs Sebi

1. This appeal has been preferred aggrieved by the

communication of Respondent No. 1, BSE Limited („BSE‟ for

short) dated August 16, 2019 as well as other related

communications, including from the Securities and Exchange

Board of India („SEBI‟ for short), respondent No:2, on the matter

whereby the proposal to issue 3,64,72,067 equity shares to a

lender on preferential basis was rejected / closed.

2. The relevant facts relating to the matter are the following:-

The appellant is a Company incorporated under the

Companies Act, 1956 and listed with BSE since 1986. It availed

several credit facilities from a consortium of banks. In addition, it

issued Foreign Currency Convertible Bonds („FCCBs‟ for short)

which were due for redemption on April 6, 2011. The FCCBs

could not be redeemed due to the unsound financial condition of

the appellant and the bond holders initiated winding up

proceedings against the appellant in the Punjab and Haryana High

Court. Even a settlement agreement dated June 1, 2015 arrived at

in terms of the direction of the said High Court also could not be

honored since the appellant defaulted in paying the installments.

Therefore, the appellant approached an Asset Reconstruction 3

Company („ARC‟ for short), namely, Phoenix ARC Private

Limited („Phoenix‟ for short) who agreed to a one time settlement

of the obligations of the FCCBs for a total consideration of

Rs. 100 crore as well as agreed for a need based working capital

loan to the appellant up to Rs. 20 crore. Therefore, the said

agreement was for a total loan of Rs. 120 crore with

tenor/maturity of 5 years to be repaid with an interest @ 19% per

annum. It is the contention of the appellant that given that the

interest rate of 19% was on a very high side the appellant and

Phoenix agreed to revise this particular item in terms of 16% per

annum interest payable on a monthly basis and 3% to be paid

upfront at the time of assigning / first draw down of the loan.

Further, it was also agreed between appellant and Phoenix that

equity shares would be allotted to Phoenix in lieu of this 3%

interest component. On September 21, 2018 the Phoenix conveyed

its final sanction of the loan in terms of the above terms.

Thereafter, the Board of Directors of the appellant, on December

31, 2018 approved issue of fresh equity shares of the value in lieu

of the 3% interest which comes to Rs. 9.16 crore on discounted

value basis and therefore 3,64,72,067 equity shares at a face value

of Rs. 2.50 had to be issued. On February 14, 2019 in an

extraordinary general body meeting, a special resolution was

passed empowering the Board of Directors to issue the said 4

shares. On January 30, 2019 the appellant submitted an

application to BSE for in-principle approval of the said issue and

allotment. Various clarifications were sought by BSE which were

replied to. On July 15, 2019 the appellant submitted a

representation to SEBI, Respondent No. 2, seeking in-principle

approval for the said issue and allotment. On August 9, 2019 a

personal hearing was held before SEBI in which officials from

BSE were also present. In this meeting SEBI endorsed the view

taken by the officials of BSE and informed the appellant that

approval cannot be granted to the proposed issue and allotment in

terms of Regulation 169(1) of SEBI (Issue of Capital and

Disclosure Requirements) Regulations, 2018 („ICDR Regulations,

2018‟ for short). On August 16, 2019 the appellant received an e-

mail communication from BSE stating the following:-

"Kindly note that as per the earlier intimation to you to provide the required documents / clarifications, we have not yet received the required documents / clarifications from your end, Hence. your Case No. 90239 is treated as "CLOSED". In case, the application need to be processed, kindly make fresh application through the "Listing Centre" along with the applicable fees and required documents".

3. Aggrieved by the said decision of Respondent No. 1 and 2

that the proposed issue and allotment of equity shares to Phoenix

was not approved and hence the matter was treated as

"CLOSED", this appeal has been filed.

5

4. Learned Senior Counsel Shri Janak Dwarkadas appearing for

the appellant vehemently contended that the issue and allotment of

shares come under the Companies Act and not under the SEBI

Act, 1992; ICDR Regulations, 2018 is issued under Section 30 of

the SEBI Act, which gives power to make Regulation to SEBI is a

subordinate legislation and subordinate legislation should be in

consonance with the parent legislation which in the instance case

is the Companies Act. Since Section 32 of the SEBI Act states

that "the provisions of this Act shall be in addition to, and not in

derogation of, the provisions of any other law for the time being in

force." Accordingly, since "securities" are defined under the

Securities Contracts (Regulation) Act, 1956 („SCRA‟ for short),

Section 2A of the said Act takes us to Section 62 of Companies

Act, 2013 which is regarding further issue of share capital

including preferential allotment and sub section 62(1)(c) deals

with issue for "consideration of cash or other than cash".

5. In short, it is the contention of the learned Senior Counsel

that the proposed issue and allotment of equity shares on a

preferential basis to the ARC Phoenix is fully in compliance with

the provisions of the Companies Act as well as the ICDR

Regulations, 2018 since it has followed the legal trajectory of

board resolution and a special resolution passed in an 6

extraordinary general body meeting and such a special resolution

was passed because of the preemptive rights of the existing

shareholders in preferential allotment and in the instant case

allotment is to "others" i.e. other than existing shareholders.

Therefore, the appellant Company is entitled to make such an

issue under Section 62 of the Companies Act, 2013.

6. The learned Senior Counsel further contended that the

proposed issue and allotment is for "consideration other than cash

basis" because the 3% interest component over a period of 5 years

was converted into a net present value (NPV) basis thereby

converting a Rs. 21.55 crore potential liability into a Rs. 9.16

crore liability by using an appropriate discounting.

7. The learned Senior Counsel also relied on the commentaries

of Ramaiah‟s on the Companies (Second Amendment) Act, 2002

on payment in "Cash" or in "kind" and sought to emphasize the

Department‟s Clarification - I & II which are as follows:-

"Department's Clarification.- I, If consideration for allotment of shares is actual cash, then only the allotment would be for cash. "Cash" is actual money or instruments e.g. cheques which are generally used and accepted as money. If consideration for allotment is not flow of cash but some other mode of payment e.g. cancellation of a genuine debt or outstanding bills, for goods sold and delivered, marketable securities, time deposits in banks, then allotment 7

cannot be treated as for cash (Department's Letter No. 8/4/69-CL-V, dated 18-11-1969).

Clarifications-II. Further, clarification given by the Department of Company Affairs is as follows:-

"I am directed to refer to this Department's Circular Letter No. 8/4/69, dated 18-11-1969 and to say that the views conveyed therein have since been re- examined. The Department is now of the view that the allotment of shares by a company to a person in lieu of a genuine debt due to him is in perfect compliance of the provisions of section 75(1). In this connection it is clarified that the act of handing over cash to the allottee of shares by a company in payment of the debt and the allottee in turn returning the same cash as payment for the shares allotted to him is not necessary for treating the shares as having been allotted for cash. What is required is to ensure that the genuine debt payable by a company is liquidated to the extent of the value of the shares. [Circular 8/32(75) 77-CL-V, dated 13th March, 1978]."

8. The learned Senior Counsel further submitted that the

proposed issue and allotment of shares to Phoenix is on non-cash

consideration basis is also emphasized by the fact that the same

has been classified as part of the expense account as per Rule

13(2)(j)(ii) of the Companies (Share Capital and Debentures)

Rules, 2014. The learned Senior Counsel further admits that while

making application to BSE an inadvertent error was made in the

application which stated that "other than cash consideration" was

not applicable. However, it was submitted that an inadvertent

error made by an official of a Company should not come in the 8

way of correct interpretation of the provisions of law when it is

called upon to do so.

9. The learned Senior Counsel Shri P.N. Modi appearing on

behalf of Respondent No. 1, BSE submitted that the application

for listing the proposed issue and allotment did not say other than

cash, but said N A (not applicable); therefore the appellant was

fully aware that proposed issue and allotment was for cash and at

this later state they cannot change the stand. In any case, the

learned Senior Counsel, emphasized that a reading of the

provisions of law makes it clear that the proposal to issue and allot

shares in lieu of 3% reduction in interest is for cash, since the

interest obligation otherwise would have been a cash liability.

10. The learned Senior Counsel Shri Shyam Mehta appearing on

behalf of the Respondent No. 2, SEBI submitted that Section 24 of

the Companies Act, 2013, and Section 11(a), Section 30(1),

Section 30(2) etc. of SEBI Act give ample powers to SEBI to

regulate listed Companies or Companies intending to be listed. It

was further submitted that there is a discrepancy between the

sanction letter at page 34 and the minutes of the board of directors

held on December 31, 2018; while the former shows no reference

to NPV the latter refers to NPV. In any case, it was contended by

the learned Senior Counsel that the entire agreement is as if the 9

ARC is paying price of the shares every month hence it is in cash;

not other than cash. However, if the ARC had deducted Rs. 9.06

crore from the loan of Rs. 120 crore sanctioned instead of

adjusting against the future interest payment it would have been

on cash basis. In short, the arguments of the learned Senior

Counsel for the respondents was that the application did not

specify that the issue was on non-cash basis and since the

adjustments is with respect to a liability in terms of interest

equivalent of 3% it is on cash basis.

11. Since entire dispute is relating to interpretation of

Regulation 169(1) of ICDR Regulations, 2018, for convenience

of reference we reproduce the section which reads:-

"169. (1) Full consideration of specified securities other than warrants shall be paid by the allottees at the time of allotment of such specified securities except in case of shares issued for consideration other than cash.

Provided that in case of a preferential issue of specified securities pursuant to any resolution of stressed assets under a framework specified by the Reserve Bank of India or a resolution plan approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code 2016, the consideration may be in terms of such scheme."

12. The expression "Cash" is further amplified in Ramaiah‟s

compilation in terms of Department‟s Clarification-I which thus

reads- "Cash" is actual money or instruments e.g. cheques which 10

are generally used and accepted as money." It also states that

"cancellation of a genuine debt or outstanding bills, for goods

sold and delivered, marketable securities, time deposits in banks,

then allotment cannot be treated as for cash". Clarification-II

further amplifies this provisions by stating that "The Department

is now of the view that the allotment of shares by a company to a

person in lieu of a genuine debt due to him is in perfect

compliance of the provisions of section 75(1)". In terms of this

interpretation we are of the considerate view that if as part of an

agreement of liquidating a future obligation / liability if an issue

and allotment is made it shall be treated as for "other than cash

consideration". The submission of the respondent here that it has

to be an existing debt obligation is a very tight and narrow

interpretation, particularly, in the context of a beneficial economic

legislation where some degree of freedom of doing business is to

be granted while interpreting provisions of such law in the

absence any allegation of violations, manipulations or other

offences.

13. Here is a case of a Company on the brink of liquidation

trying to pay up its past obligations to the financial institutions by

availing a term-loan from an ARC who for its own business

considerations are ready to give such a term-loan though at an 11

exorbitant rate of interest @ 19%. Given that 19% is too high,

which might again make the appellant company non-viable, it has

entered into an agreement with an ARC for a reduction in the

interest liability in terms of giving some shares of the same

company, which the ARC is willing to accept and for which a

NPV calculation was also agreed to. By this NPV method a

potential liability of Rs. 21.55 crore has been converted into

Rs. 9.16 crore and hence the adjustments were made and the

agreement was accepted. There are lots of genuine business

decisions in terms of this agreement. Even if it is possible to read

such an interest adjustment for shares as for cash consideration it

is also possible to read the same futuristic NPV based

considerations as not for cash. In such a context of „right versus

right‟ and that too in the case of business decisions we need to

read it with a positive spirit for enabling business and genuine

business decisions.

14. Further, the basic principle of the construction of a statute is

that when the words of a statute are clear, plain or unambiguous,

the courts are bound to give effect to the meaning irrespective of

the consequences. When the language is plain and unambiguous

and admits of only one meaning, then no question of construction

of a statute arises for the Act speaks for itself. If the words used 12

are capable of one construction then it is not open to the courts to

adopt any other hypothetical construction. The salient principle is,

that the court must avoid addition of words and resort to only in

exceptional circumstances to achieve the purpose of the

Act/provision or to give a purposeful meaning to the provision.

15. In the instant case, the proposal to issue and allot shares in

lieu of 3% reduction in interest is clearly "other than cash". These

words are clear, plain and unambiguous and needs no further

interpretation and therefore use of any additional words to give a

purposeful meaning to the provision is not required especially

when clarification 1&2, as quoted above, have been made.

16. Therefore, in the facts and circumstances of the matter, we

are of the considered view that the impugned issue and allotment

of equity shares is for "other than cash", and no violation has been

attributed in the entire matter.

17. In view of the aforesaid reasons, impugned Order is quashed

and appeal is allowed with no orders on costs. 13

18. This Order has been pronounced through video conference

due to Covid-19 pandemic, since the matter had been reserved

only a few days prior to the lockdown. At this stage it is not

possible to sign a copy of this order nor a certified copy of this

order could be issued by the registry. In these circumstances, this

order will be digitally signed by the Presiding Officer on behalf of

the bench and all concerned parties are directed to act on the

digitally signed copy of this order. Parties will act on production

of a digitally signed copy sent by fax and/or email.

Justice Tarun Agarwala Presiding Officer TARUN Digitally signed by TARUN AGARWAL DN: c=IN, o=PUBLIC WORKS DEPARTMENT UTTAR PRADESH, postalCode=221505, st=Uttar Pradesh, 2.5.4.20=30fcf68685192bbc53e6ff1608a83fb3881de7ac2ab7954d509c85

AGARWAL ed6e0f7c41, serialNumber=095f8b286bb0b1cd07ff676611f4f5e7999727d404aa38ca4 22f9d3529bdb8a3, cn=TARUN AGARWAL Date: 2020.11.12 19:21:58 +05'30'

Dr. C.K.G. Nair Member

Justice M.T. Joshi Judicial Member 12.11.2020 msb