Khoday India Ltd. And Others vs Sebi

1. The appellant No. 1 is a public limited company whose shares

were listed on the Bombay, Madras and Bangalore stock exchanges.

Due to continuous losses, the company did not pay dividend to its

shareholders after the year 2006-2007. At the present moment, the

shares of the company are listed on the Bombay Stock Exchange

(hereinafter referred to as, 'BSE') as the Madras and Bangalore stock

exchanges have been derecognized.

2. The Securities Contracts (Regulation) Act, 1956 (hereinafter

referred to as, 'SCRA') was enacted to prevent undesirable

transactions in securities by regulating the business of dealings

therein, and by providing for certain other matters connected

therewith. Further, for carrying out the mandate of the SCRA, the

Securities Contracts (Regulation) Rules, 1957 (hereinafter referred to

as 'SCRR') were framed by the Central Government. Section 21 of

the SCRA mandates the compliance, by all listed companies, of the

conditions of the listing agreement with the stock exchange. The 8

SCRR, inter-alia, prescribes the requirements which are required to

be satisfied by the companies for the purpose of getting their

securities listed on any stock exchange in India.

3. The SCRR was amended vide notification of the Securities

Contracts (Regulation) (Amendment) Rules, 2010 ('First

amendment') by the Central Government dated June 04, 2010 and

amended again vide Securities Contracts (Regulation) (Second

Amendment) Rules, 2010 ('Second amendment') in terms whereof

Rule 19(2)(b) was amended and a new rule namely, Rule 19(A) was

inserted.

4. The amended Rule 19(2)(b) and newly introduced Rule 19(A)

of SCRR reads as under :-

"(19)(1) A public company as defined under the Companies Act, 1956 desirous of getting its securities listed on a recognized stock exchange, shall apply for the purpose to the stock exchange and forward along with its application the following documents and particulars :

.................................

19(2) Apart from complying with such other terms and conditions as may be laid down by a recognized stock exchange, an applicant company shall satisfy the stock exchange that :

(a) ......................

(b)(i) At least twenty five per cent of each class or kind of equity shares or debentures convertible into equity 9

shares issued by the company was offered and allotted to public in terms of an offer document; or

(ii) At least ten per cent of each class or kind of equity shares or debentures convertible into equity shares issued by the company was offered and allotted to public in terms of an offer document if the post issue capital of the company calculated at offer price is more than four thousand crore rupees:

Provided that the requirement of post issue capital being more than four thousand crore rupees shall not apply to a company whose draft offer document is pending with the Securities and Exchange Board of India on or before the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, if it satisfies the conditions prescribed in clause (b) of sub-rule 2 of rule 19 of the Securities Contracts (Regulation) Rules, 1956 as existed prior to the date of such commencement:

Provided further that the company, referred to in sub clause (ii), shall increase its public shareholding to at least twenty five per cent, within a period of three years from the date of listing of the securities, in the manner specified by the Securities and Exchange Board of India.

Continuous Listing Requirement.

19A. (1) Every listed company other than public sector company shall maintain public shareholding of at least twenty five per cent. :

Provided that any listed company which has public shareholding below twenty five per cent, on the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, shall increase its public shareholding to at least twenty five per cent, within a period of three years from the date of such commencement, in the manner specified by the Securities and Exchange Board of India.

Explanation: For the purposes of this sub-rule, a company whose securities has been listed pursuant to an offer and allotment made to public in terms of sub-clause 10

(ii) of clause (b) of sub-rule (2) of rule 19, shall maintain minimum twenty five per cent, public shareholding from the date on which the public shareholding in the company reaches the level of twenty five percent in terms of said sub-clause.

(2) Where the public shareholding in a listed company falls below twenty five per cent. At any time, such company shall bring the public shareholding to twenty five per cent within a maximum period of twelve months from the date of such fall in the manner specified by the Securities and Exchange Board of India.

(3) Notwithstanding anything contained in this rule, every listed public sector company shall maintain public shareholding of at least ten per cent. :

Provided that a listed public sector company-

(a) which has public shareholding below ten per cent, on the date of commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2010 shall increase its public shareholding to at least ten per cent, in the manner specified by the Securities and Exchange Board of India, within a period of three years from the date of such commencement;

(b) whose public shareholding reduces below ten per cent, after the date of commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2010 shall increase its public shareholding to at least ten per cent, in the manner specified by the Securities and Exchange Board of India, within a period of twelve months from the date of such reduction."

5. Thus, the provisions quoted above and especially Rule 19(2)(b)

and 19A(1) of the SCRR above require all listed companies to

achieve and maintain the minimum public shareholding of 25% of

each class or kind of equity shares or debentures convertible into 11

equity shares issued by such companies. Those companies with

public shareholding of less than 25% are required to achieve the

same, within a period of three years from the date of commencement

of the first amendment i.e. by June 03, 2013 in the manner specified

by the Securities and Exchange Board of India (hereinafter referred

to as, 'SEBI').

6. In order to achieve the aforesaid requirements, in the light of

the aforesaid amendment made in the SCRR, the company was

required to offload its shareholding to below 75%.

7. With a view to facilitate listed companies to comply with the

Minimum Public Shareholding (MPS) requirement within the time

specified in Rule 19A of the SCRR, SEBI issued circulars dated

December 16, 2010, February 8, 2012 and August 29, 2012

providing the method by which public shareholding may be raised to

the prescribed minimum level. Further, paragraph 3 of the circular

dated August 29, 2012 provided as under :-

"3. Listed entities desirous of achieving the minimum public shareholding requirement through other means may approach SEBI with appropriate details. Further, listed entities desirous of seeking any relaxation from the available methods may approach SEBI with appropriate details. Such requests would be considered by SEBI based on merit. SEBI would endevour to communicate its decision within 30 days from the date of receipt of such requests." 12

8. In this regard, the appellant company had also entered into a

listing agreement with BSE. Clause 24(f) which is relevant to the

present controversy is extracted hereunder :-

"24(f). The company agrees that it shall file any scheme / petition proposed to be filed before any Court or Tribunal under sections 391, 394 and 101 of the Companies Act, 1956, with the stock exchange, for approval, at least a month before it is presented to the Court or Tribunal."

9. In this regard, Rule 19(7) of the SCRR provides as under :-

"19(7). The Securities and Exchange Board of India may, at its own discretion or on the recommendation of a recognized stock exchange, waive or relax the strict enforcement of any or all of the requirements with respect to listing prescribed by these rules."

10. Pursuant to the aforesaid provision, SEBI issued a circular

dated September 3, 2009 wherein certain requirements were

prescribed for seeking exemption under Rule 19(7) of SCRR from the

strict enforcement of Rule 19(2)(b) by listed companies, namely, the

requirement to increase the public shareholding to atleast 25%. SEBI

considering Clause 24(f) of the listing agreement observed that in

terms of circular dated September 3, 2009 and pursuant to the scheme 13

of construction of amalgamation being sanctioned by High Court

under Sections 391, 394 and 101 of the Companies Act, the listed

companies desirous of getting their equity shares listed after

merger/de-merger/amalgamation, etc. were required to seek an

exemption from SEBI from the requirements of Rule 19(2)(b) of

SCRR under Rule 19(7) of the SCRR. It was also observed that SEBI

was granting exemption to such listed companies from time to time

on a case to case basis. SEBI accordingly issued another circular

dated February 4, 2013 revising the requirements for the stock

exchanges and listed companies.

11. Under circular dated February 4, 2013 certain obligations

were imposed upon the listed companies, namely, that the listed

companies would file a draft scheme with the stock exchange in terms

of Clause 24(f) of the listing agreement and would submit the

documents mentioned in Paragraph 2 of Part A of Annexure I to the

circular dated February 4, 2013. The listing company would also

obtain a valuation report from an independent chartered accountant.

The listed company was also required to include the observation letter

of the stock exchange in the notice that was sent to the shareholders

seeking approval of the scheme and was also required to bring to the

notice of the High Court at the time of seeking approval of the

scheme. On the other hand, the obligation of the stock exchange was 14

to process the draft scheme and forward their objection / no-objection

to SEBI within a stipulated period. Further, the obligation of SEBI

was to provide its comments of the draft scheme to the stock

exchange.

12. Part B of the Annexure I to the circular of SEBI dated

February 4, 2013 further required certain obligations to be carried out

by the company as well as by the stock exchange upon the

sanctioning of the scheme by the High Court. The said circular was

clarified / modified by SEBI by circular dated May 21, 2013.

13. In terms of the circular dated February 4, 2013 and, in order to

achieve the MPS under Rule 19(2)(b) and 19A of the SCRR, the

appellant submitted a draft scheme under Section 100 of the

Companies Act to BSE. It was asserted that since the shareholders

were not receiving any dividend since 2006-2007, the Board of

Directors of the company decided to reduce the share capital of the

company from Rs. 37,59,12,370/- divided by 3,75,91,237 equity

shares of Rs. 10/- each to Rs. 33,66,01,950/- divided by 3,36,60,195/-

equity shares of Rs. 10/- each by returning the capital in respect of

39,31,042 equity shares held by the public.

14. BSE by a letter dated July 19, 2013 forwarded the scheme to

SEBI with a note that they are unable to grant no-objection to the 15

proposed scheme of arrangement. BSE in its objection noted that the

chartered accountant found that the fair value of the equity shares had

been derived at Rs. 31.39 per share and that the merchant banker had

found that the valuation of the share appeared to be fair and

reasonable. The stock exchange also noted that the company had

submitted the auditor certificate as required under Clause 24(l) of the

listing agreement and also noted that under Clause 24(g) of the listing

agreement the scheme did not violate any provisions of the SEBI Act

or Regulations or of the Companies Act. The stock exchange further

noted that the company would forward to its shareholders the fairness

opinion obtained from the independent merchant banker on valuation

of the assets / shares done by the valuer for the company and further

confirmed that the compliance report and the observation letter issued

by the stock exchange would also be included in the notice sent to the

shareholders seeking approval of the draft scheme of the company.

BSE inspite of noting that the scheme submitted by the appellant

company was in terms of the requirements mentioned in the circulars

dated February 4, 2013 and May 21, 2013 refused to grant no-

objection on the ground that the draft scheme of the company

appeared to be in contravention of the provisions of the Delisting

Regulations and that Regulation 3(2) of the Securities and Exchange 16

Board of India (Buy Back of Securities) Regulations, 1998 prohibits

the company from buy back of shares.

15. Based on the comments given by BSE, SEBI vide its letter

dated August 30, 2013 approved the comments of BSE and opined

that the no-objection certificate should not be granted to the company

and that the company should be intimated to include the observation

of the stock exchange while filing an application to the High Court.

16. Notwithstanding the aforesaid, the proposed scheme was laid

before the general body of the company. In the Annual General

Meeting (AGM) of the Company dated December 30, 2013, the

scheme was approved under Section 100 of the Companies Act. The

operative portion of the minutes of the AGM is extracted hereunder :

"The Chairman then declared that both the special resolutions as stated at item nos: 7 & 8 of the Notice under special business, had been passed by a majority of votes cast by the shareholders other than Promoters and Promoter Group i.e. public shareholders in accordance with the procedure mentioned in SEBI Circular CIR/CFD/DIL/5 dated 04th February 2013 (as amended by the subsequent SEBI Circular dated 21st May 2013) and also by more than 3/4ths combined majority of votes cast by shareholders belonging to both Public and Promoters category as required under Section 100 of the Companies Act, 1956." 17

17. Thereafter, the resolution of the general body of the company

was filed for confirmation before the Hon'ble Karnataka High Court.

The Hon'ble Karnataka High Court by an order dated August 7, 2014

allowed the application and reduced the capital as resolved in the 47th

Annual General Meeting of the company held on December 30,

2013. Pursuant to the order of the Hon'ble Karnataka High Court,

the Registrar of Companies issued the certificate dated September 12,

2014 confirming reduction of capital.

18. Inspite of the process of reducing the shareholdings had

started, SEBI issued an interim order dated June 4, 2013 against the

company for failing to comply with the minimum public

shareholding requirements. The directions so issued are extracted

hereunder :-

"Vide an Order dated June 4, 2013("Interim Order"), SEBI issued the following directions inter alia against Khoday, an entity which failed to comply with the requirement of minimum public shareholding requirement by June 3, 2013,-

17. "Hence, in exercise of the powers conferred upon me by virtue of Section 19 and under Sections 11(1), 11(2)(j), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 ("SEBI Act") read with Section 12A of Securities Contracts (Regulation) Act, 1956 ("SCRA"), pending passing of the final order in these case, I hereby: 18

a. Direct freezing of voting rights and corporate benefits like dividend, rights, bonus shares, split, etc. with respect to the excess of proportionate promoter / promoter group shareholding in the above mentioned non - compliant companies, till such time these companies comply with minimum public shareholding requirement.

i. For the purpose of above direction, proportionate promoter/promoter group shareholding shall be computed on the basis of the public shareholding in the company; e.g. if public shareholding in a company after the deadline is less than 25%, say 10%, in such case, the proportionate promoter shareholding would be 30% (i.e. three times the existing public shareholding). Thus the excess promoter/promoter group holding i.e. 60%, shall be frozen till the minimum public shareholding requirement is complied with.

ii. In case of more than one entity in the promoter/promoter group in a company, the excess promoter holding for the purpose of taking action shall be computed on a proportionate basis. For illustrating the example above, if there are three promoters; A, B and C with shareholdings of 45%, 35% and 10% respectively; the excess 19

promoter holding of 60% shall be allocated as follows:

1. A: (60% multiplied by [45%/45%+35%+10%]) = 30.00% 2. B: (60% multiplied by [35%/45%+35%+10%]) = 23.33% 3.C: (60% multiplied by [10%/45%+35%+10%]) = 06.67% Total = 60.00%

b. Prohibit the promoter/promoter group and directors of these non - compliant companies from buying, selling or otherwise dealing in securities of their respective companies, either directly or indirectly, in any manner whatsoever, except for the purpose of complying with minimum public shareholding requirement till such time these companies comply with the minimum public shareholding requirement.

c. Restrain the shareholders forming part of the promoter/promoter group in the non - complaint companies from holding any new position as a director in any listed company, till such time these companies comply with the minimum public shareholding requirement.

d. Restrain the directors of non - compliant companies from holding any new position as a director in any listed company, till such time these companies comply with the minimum public shareholding requirement."

19. The interim order was subsequently, confirmed on July 24,

2014. The appellants being aggrieved by the interim order as

confirmed on July 24, 2014 filed an appeal before this Tribunal. This 20

Tribunal after taking into consideration the order of the Hon'ble

Karnataka High Court dated August 7, 2014 passed an order dated

July 7, 2016 permitting the appellants to withdraw the appeal with

liberty to make a representation before SEBI bringing to the

knowledge the order passed by the Hon'ble Karnataka High Court

which was apparently passed after the confirmatory order.

Accordingly, the appeal was withdrawn.

20. In the light of the aforesaid, a representation dated July 26,

2016 was filed before SEBI bringing to the knowledge the order of

the Hon'ble Karnataka High Court dated August 7, 2014 by which

their scheme for reduction of share capital under Section 100 of the

Companies Act was allowed and the appellants were permitted to

reduce the share capital of the company to the extent of the public

shareholding. In the light of the order of the Hon'ble Karnataka

High Court, the appellant prayed that the interim order and the

confirmatory order should be recalled / modified.

21. It transpires that SEBI upon coming to know of the order of

the Hon'ble Karnataka High Court filed an intervention application

before the Hon'ble Karnataka High Court praying that they should be

impleaded as the respondent. The Learned Single Judge of the

Hon'ble Karnataka High Court by an order dated September 21, 21

2015 rejected the application of SEBI for impleadment holding that

the order of the Hon'ble Karnataka High Court dated August 7, 2014

allowing the reduction of the share capital under Section 100 of the

Companies Act was independent and would not affect the

proceedings under the Securities and Exchange Board of India Act,

1992 (hereinafter referred to as, 'SEBI Act') or the SCRA and the

Rules and that non-compliance of the SCRR would be considered by

SEBI on its own merits. The learned Single Judge held :-

"14. In the instant case, the SEBI is alleging non compliance of SCRR for which proceedings in exercise of the power under Section 19 and Section 11(1),2(j),(4) and 11B of SEBI Act read with Section 12A of Securities Contracts (Regulation) Act, 1956 ('SCR Act' for short) has already been initiated. If in that light the said conclusion in MCX Stock Exchange case is kept in view, there can be no doubt that the proceedings are independent of each other. If that be the position, irrespective of the sanction being granted by the Company Judge to the reduction of share capital, the non compliance of any other regulations over which the SEBI has the jurisdiction would be dealt with by the SEBI as a regulatory authority and the consequence thereof will visit the listed Company. Since the two proceedings are held to be different and distinct, the order dated 07.08.2014 in Co.P.No.132/2014 will only have the effect of providing the approval as contemplated under Sections 100 to 104 of the Companies Act to the extent the procedure contemplated therein has been adhered to, but it cannot be held as a shield by the Company to protect itself in the proceedings already initiated or to justify the non-compliance with the requirement of any other regulations, if it is still required to be complied." 22

22. The learned Single Judge further held :-

"..... Hence all that is required to be clarified herein is, since the said proceedings is a continuation of a different and distinct proceedings than the proceedings for reduction of share capital, all contentions of the parties therein would be considered in the appeal, independent of the order dated 07.08.2014. When such right is available to SEBI irrespective of the subsistence of the order dated 07.08.2014 passed in Co.P.No.132/2014, the consequences thereof would follow. Hence the question of allowing SEBI to implead themselves would be wholly unnecessary."

23. The Hon'ble Karnataka High Court in the operative portion

of the order held :-

ORDER

"(i) The C.A. Nos. 1415/2014, 1416/2014 and 313/2015 are accordingly rejected.

(ii) The C.A.Nos. 1648/2014 and 1778/2014 are disposed of as unnecessary.

(iii) It is however clarified that the order dated 07.08.2014 in Co.P.No.132/2014 shall remain independent and shall not effect the proceedings under SEBI Act and SCR Act initiated by SEBI for non-compliance of SCRR, which would be considered on its own merits and all contentions are left open in the appeal pending before the Securities Appellate Tribunal.

(iv) Parties to bear their own costs."

23

24. Thereafter, the representation of the appellants was rejected by

the Whole Time Member (hereinafter referred to as, 'WTM') by the

impugned order dated May 8, 2017 and the interim order dated June

4, 2013 read with the confirmatory order dated July 24, 2014 was

again confirmed. The appellants, being aggrieved by the said order,

have filed the present appeal.

25. The WTM held that irrespective of the scheme for reduction

of the share capital being granted by the Hon'ble Karnataka High

Court the appellants were required to comply with the provisions of

the Securities and Exchange Board of India (Delisting of Equity

Shares) Regulations, 2009 (hereinafter referred to as, 'Delisting

Regulations'). Since the same has not been done, the interim order

and the confirmatory order would continue to operate. The WTM

further held that the scheme of arrangement involved reduction in

share capital was rejected by SEBI by an order dated April 1, 2013

since there was no provision for granting exemption under the

Delisting Regulations. Consequently, the company was required to

comply with the minimum public shareholding requirement as

contemplated under Rule 19 and 19(A) of the SCRR. It was also

observed that the scheme of arrangement approved by the Hon'ble

Karnataka High Court under Section 100 of the Companies Act

proposed to pay the public shareholders the price of Rs. 75/- per 24

share whereas under the Delisting Regulations the price would be

much more than what was being offered under the scheme of

arrangement and therefore, the scheme was not in the interest of the

investors.

26. We have heard Shri Mustafa Doctor, the learned senior

counsel with Shri Ravichandra Hegde and Shri Robin Shah, the

learned counsel for the appellants and Shri Kumar Desai, the learned

counsel with Mr. Chirag Bhavsar, the learned counsel for the

respondent.

27. In our view, the WTM has completely ignored the circulars

dated February 4, 2013 and May 21, 2013 which provided a method

for complying with the MPS requirements under Rule 19 and 19A of

the SCRR. One such method which was permitted by SEBI was to

reduce the share capital of the company under Section 100 of the

Companies Act. We find that neither SEBI nor BSE while refusing to

grant the no-objection certificate considered the requirements of SEBI

circulars dated February 4, 2013 and May 21, 2013 and only

considering the provision of the Delisting Regulations which is

wholly irrelevant. Further, there is no finding by BSE while refusing

to grant no-objection to the effect that the scheme was not in

accordance with the requirements contemplated under the circulars 25

dated February 4, 2013 and May 21, 2013. The finding of the WTM

that the price per share indicated in the scheme of arrangement was

not in accordance with the Delisting Regulations is per se erroneous

and misconceived in as much as the method was already prescribed

under the circulars dated February 4, 2013 and May 21, 2013,

28. In our view, the approach adopted by the WTM is patently

erroneous and cannot be sustained. The WTM has not considered the

import of the provisions of the Sections 77 and 100 of the Companies

Act and has only considered the impact of the Delisting Regulations

under the SEBI laws. In order to proceed further, it would be

appropriate to refer to the provisions of the Sections 77 and 100 of

the Companies Act and Regulation 4 of the Delisting Regulations.

For facility, the Sections 77 and 100 of the Companies Act and

Regulation 4 of the Delisting Regulations are extracted hereunder :-

Sections 77 and 100 of the Companies Act -

"S. 77. Restrictions on purchase by company or loans by company for purchase, of its own or its holding company's shares.-

(1) No company limited by shares, and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402.

(2) No public company, and no private company which is a subsidiary of a public company, shall give, whether 26

directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company:

Provided that nothing in this sub- section shall be taken to prohibit-

(a) the lending of money by a banking company in the ordinary course of its business; or

(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried office or employment in the company; or

(c) the making by a company of loans, within the limit laid down in sub- section (3), to persons (other than directors, or managers) bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves by way of beneficial ownership.

(3) No loan made to any person in pursuance of clause (c) of the foregoing proviso shall exceed in amount his salary or wages at that time for a period of six months.

(4) If a company acts in contravention of sub- sections (1) to (3), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to [ten thousand rupees].

(5) Nothing in this section shall affect the right of a company to redeem any shares issued under section 80 or 27

under any corresponding provision in any previous companies law.

"S. 100. Special resolution for reduction of share capital, - (1) Subject to confirmation by the (Tribunal), a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorized by its articles, by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power, may -

(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up;

(b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets; or

(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-

up share capital which is in excess of the wants of the company;

and may, if and so far as is necessary, alter its, memorandum by reducing the amount of its share capital and of its shares accordingly.

(2) A special resolution under this section is in this Act referred to as "a resolution for reducing share capital".

Regulation 4 of the Delisting Regulations :

"4. (1) No company shall apply for and no recognised stock exchange shall permit delisting of equity shares of a company,-

28 (a) pursuant to a buyback of equity shares by the company; or

(b) pursuant to a preferential allotment made by the company; or

(c) unless a period of three years has elapsed since the listing of that class of equity shares on any recognised stock exchange; or

(d) if any instruments issued by the company, which are convertible into the same class of equity shares that are sought to be delisted, are outstanding.

[(1A) No promoter or promoter group shall propose delisting of equity shares of a company, if any entity belonging to the promoter or promoter group has sold equity shares of the company during a period of six months prior to the date of the board meeting in which the delisting proposal was approved in terms of sub-regulation (1B) of regulation 8.]

(2) For the removal of doubts, it is clarified that no company shall apply for and no recognised stock exchange shall permit delisting of convertible securities.

(3) Nothing contained in clauses (c) and (d) of sub- regulation (1) shall apply to a delisting of equity shares falling under clause (a) of regulation 6.

(4) No promoter shall directly or indirectly employ the funds of the company to finance an exit opportunity provided under Chapter IV or an acquisition of shares made pursuant to sub-regulation (3) of regulation 23.

(5) No [acquirer or promoter or promoter group or their related entities] shall -

(a) employ any device, scheme or artifice to defraud any shareholder or other person; or

(b) engage in any transaction or practice that operates as a fraud or deceit upon any shareholder or other person; or 29

(c) engage in any act or practice that is fraudulent, deceptive or manipulative -

in connection with any delisting sough or permitted or exit opportunity given or other acquisition of shares made under these regulations."

29. Under Section 77 of the Companies Act, a limited company

is prohibited from buying its own shares. The main reason for this

prohibition is that such purchase may either amount to trafficking in

its own shares thereby enabling the company in an unhealthy

manner, to influence the market price of its shares by reducing the

stock or it would operate as a reduction of capital to the prejudice of

its creditors. This general prohibition has however, being diluted by

the insertion of Section 77A, 77AA and 77B of the Companies

Amendment Act, 1999 which provides for buy back of its own

securities by a company subject to the conditions specified therein.

30. In addition to the aforesaid buy back of the equity shares

which are listed on any recognized stock exchange, the company

shall, additionally, comply with the provisions of the Delisting

Regulations issued by SEBI. Elaborate procedure has been

prescribed for buy back of its equity shares by a listed company from

existing shareholders. However, such buy back of shares is not

applicable where there is a reduction of the share capital under 30 Section 100 of the Companies Act. Section 77 of the Companies Act

clearly indicates that no company shall have the power to buy its own

shares unless the consequent reduction of the capital is effected and

sanctioned in pursuance of Sections 100 to104 of the Companies Act.

31. The process of reduction of share capital under Section 100

of the Companies Act has been summed up by the Hon'ble Supreme

Court in Pujab Distilleries India Ltd. vs. CIT, [(1965) 35 Com

Cases 541, 544] as under :-

"First, there will be a resolution by the general body of a company for reduction of capital by distribution of the accumulated profits amongst the shareholders. Secondly, the company will file an application in the court for an order confirming the reduction of capital. Thirdly, after it is confirmed, it will be registered by the Registrar of Companies. Fourthly, after the registration the company will issue notices to the shareholders inviting applications for refund of the share capital and fifthly, on receiving the applications, the company will distribute the said profits."

32. The Act does not prescribe the manner in which the

reduction of capital is to be effected. Nor is there any limitation of

the power of the court to confirm the reduction except that it must

first be satisfied that all the creditors entitled to object to the

reduction have either consented or been paid or secured. 31

33. Subject to the confirmation of the Court which is required

for safeguarding the interests of creditors and minority shareholders

and seeing that it is fair and reasonable, the question of reducing the

capital is a domestic affair to be decided by the majority, and the

Act leaves the Company to decide for itself the extent, mode, etc., of

the reduction and the application of the moneys released thereby as

held in Hindustan Commercial Bank Ltd. vs. Hindustan General

Electric Corporation, (1960) 30 Com Cases 367 : AIR 1960 Cal

637 and In re, Panruti Industrial Company (private) Ltd., AIR

1960 Mad 537.

34. We also find that in its consideration of the fairness of a

proposed reduction of capital of a Company, the Court's jurisdiction

is not confined to matters relating to the reduction alone. All

circumstances relating to the adjustment of the interests of the

different classes of shareholders, but not mere possibilities that may

ultimately affect them, may properly be taken into account.

35. In the light of the aforesaid, the Hon'ble Karnataka High

Court categorically held that the proceedings under Section 100 of

the Companies Act were different and distinct from the delisting

proceedings under the Delisting Regulations. 32

36. Thus, in our view, as a result of the reduction in the share

capital of the company, and as a necessary consequence thereof, the

shareholders were required to "surrender their shares". The phrase

"surrender of shares" means the surrender to the company on the part

of the registered holder of the shares already issued. Where shares

are surrendered to the company under Section 100 of the Companies

Act, it amounts to a reduction of the share capital. In our opinion, it

is not a case of "buy back of shares" as prohibited under Section 77

of the Companies Act. In our view, the surrender of shares under

Section 100 of the Companies Act is an exception to the Rules as

provided under Section 77 of the Companies Act.

37. Much stress was laid by the respondent with regard to

Regulation 4 of the Delisting Regulations which provided that no

company shall apply for delisting of equity shares of the company

pursuant to buy back of equity shares by the company. In our

opinion, Regulation 4(1)(a) of the Delisting Regulations is not

applicable in the case of reduction of the share capital under Section

100 of the Companies Act in view of the fact that it is not a case of

buy back of shares by the company pursuant to the scheme

sanctioned by the Hon'ble Karnataka High Court but is a case of

surrender of the shares by the shareholders. 33

38. In this regard, Section 55A of the Companies Act which has

been inserted by the Companies Amendment Act, 2000 is extracted

hereunder :-

"S. 55A. POWERS OF SECURITIES AND EXCHANGE BOARD OF INDIA.- The provisions contained in sections 55 to 58, 59 to 84, 108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207, so far as they relate to issue and transfer of securities and non-payment of dividend shall, -

(a) in case of listed public companies ;

(b) in case of those public companies which intend to get their securities listed on any recognized stock exchange in India,

be administered by the Securities and Exchange Board of India ; and

(c) in any other case, be administered by the Central Government.

Explanation. - For removal of doubts, it is hereby declared that all powers relating to all other matters including the matters relating to prospectus, statement in lieu of prospectus, return of allotment, issue of shares and redemption of irredeemable preference shares shall be exercised by the Central Government, [Tribunal] or the Registrar of Companies, as the case may be]"

39. The aforesaid provision indicates that SEBI has the power to

deal with the provisions of Sections 77, 77A, 77AA and 77B of the

Companies Amendment Act, 1999 and does not have any power to 34

question the reduction of the share capital under Sections 100 to 104

of the Companies Act.

40. The respondent has unnecessarily mixed up the provisions of

the Delisting Regulations with that of the MPS requirements. SEBI

vide its letter dated April 1, 2013 in connection with the proposed

scheme of reduction of the appellant company had observed that

'reduction of share capital' and 'delisting of shares' are distinct

processes and separate procedure have been prescribed under law in

respect thereof. SEBI further observed that it is not required under

law to apply the provision of the Delisting Regulations to a scheme of

reduction of share capital under Section 100/101 of the Companies

Act. In the light of the specific observation of SEBI vide its letter

dated April 1, 2013 in relation to the proposed scheme of reduction of

the paid-up capital of the appellant company, it was not open to the

WTM to state that the interim order could not be vacated or rescinded

on account of non-compliance of the Delisting Regulations.

41. In view of the aforesaid, it is apparently clear that the

reduction of the share capital sanctioned under Section 100 of the

Companies Act does not, in any manner, breach the provisions of the

Regulation 4 of the Delisting Regulations. 35

42. As a result of the sanctioned scheme under Section 100 and

upon implementation of the reduction of the share capital, the

appellants and the respondent are required to comply with Part B of

Annexure I to the circular dated February 4, 2013. If the same is not

adhered to, it would be open to the respondent to initiate proceedings

again, but at this stage, the interim order and the confirmatory order

cannot be allowed to continue. Accordingly, the interim order dated

June 4, 2013 and the confirmatory order dated July 24, 2014 are

quashed. The appeal is allowed. In the circumstances of the case,

parties shall bear their own costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 04.09.2019 Prepared & Compared by PTM