Vimla Yadav, Member
1. In this order I am considering Company Petition Nos. 35/2003 and 37/2003 together. In these two petitions pertaining to M/s Shonk Technologies International Ltd. and Ors.; and M/s Shonk Technologies Ltd., the prayer of the petitioners namely, Union of India through the Department of Company Affairs, Ministry of Finance (Now Ministry of Company Affairs), New Delhi is based on a common premise the nature of allegations being similar. Through these petitions under Section 237(b) of the Companies Act, 1956 the petitioner has sought this Board's directions to investigate into the affairs of the respondents under Section 237(b) of the Companies Act, 1956. The respondent company mentioned in CP No. 35/2003 i.e. M/s Shonk Technologies International Ltd (in short STIL) was incorporated on 28.8.1984 as Gaurav Trading and Finance Ltd having its Regd. Office at Nirmal, 6th Floor, Nariman Point, Mumbai. In 1986 its name was changed to Sapphire Finance and Mercantile Ltd.; in 1994 to Jai Stock Brokers Ltd.; in 1997 to Shreeji brokers Ltd.; In Jan 2000 to Shreeji Yatayat India Ltd.:(SYIL) and in July, 2000 to Shonk Technologies International Ltd.(STIL). The respondent company started its operation as a Non-Ranking Finance Company. Thereafter it expanded its activities into the area of broking and trading operations. It also diversified into transport business activities. As per the Memorandum of Association filed in Dec. 2000 the present main object of the company is to carry on the business in the field of Electronics, Tele Communications, set up or connect SAP/ERP Solutions, etc. As per the balance sheet as on 31.3.2000 the respondent company had a paid up capital of Rs. 2,24,00,000 comprising 22,40,000 shares of Rs. 10 each. In July, 2000, the respondent company i.e. SYIL a listed company (now STIL) took over the entire business as a going concern of an unlisted software company viz., Shonk Technologies Ltd. (STL) having Regd. Office at E-34, 2nd Floor, Harsha Bhawan,(backside) Middle Circle, Connaught Circus, New Delhi-110001. STL is a respondent in CP No. 37/2003. It was an unusual transaction. No consideration was paid to the acquired company. Instead shareholders were allotted shares by the acquiring company. As a result of the acquisition the control of SYIL changed in favour of the promoters of the erstwhile STL namely Advance Hovercraft. & Composits India Ltd.; and Ankur Cultivators (Pvt) Ltd. These two promoters and another allottee namely Padmini technologies Ltd. (name changed from Padmini Polymers Ltd.) hold 11.17%: 11.14%: and 15.45% respectively of the total preferential issued share capital of the company. The respondent company passed a special resolution on 14.7.2000 for increasing its share capital from Rs. 2,5 crores to Rs. 20 crores. On 18.7.2000 the company allotted 1.52,73,093 equity shares of Rs. 10 each at a premium of Rs. 60. Thereafter on 26.7.2000 it filed a return of allotment with the Registrar of Companies stating that the shares were allotted to 55 allottees (out of which 9 were public companies and out of the 9 public companies three companies namely, M/s Panther Finecap; M/s Classic Credit Ltd. and M/s Panther Invest Trade Ltd. belonged to the Ketan Parekh Group). In the unlisted company namely, Shonk Technologies Ltd. which was acquired by SYIL (now STIL). around 8% shares were held by Govt. bodies like UTI. etc Pursuant to the allotment of shares to the shareholders of STL- (the acquired company) it was the promoters and shareholders of Shonk Technologies Ltd. who became the majority shareholders of the acquiring company. On account of non compliance of the various provisions of the Companies Act, 1956, and in view of SEBI's preliminary report of the stock scam engineered by the Ketan Parekh Group, etc. the Central Govt. namely, the Dept. of Company Affairs (now Ministry of Company Affairs) ordered an inspection of the Books of Accounts of the respondent company under Section 209A of the Companies Act, 1956. Now the petitioner has sought this Boards' directions Under Section 237(b) of the Act to investigate into the affairs of the respondent companies. Hence, these petitions.
2. The petitioners' case was vehemently argued by the Additional Solicitor General Shri. K.P. Pathak basing his arguments on the due diligence report (placed at Annexure VIII, pages 67 to 93 of the reply of the company in CP No. 35/2003, extracts given in the ensuing paragraphs); the preliminary report of the SEBI; the unusual transaction between listed company and unlisted company violating the provisions of Sections 391/394 of the Companies Act, 1956; etc. My attention was drawn to the unusual transaction alleggdly entered into to defraud the general public and another body corporate. It was pointed out how the business of the company was carried on otherwise for a fraudulent or unlawful purpose and how the persons concerned in the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company. It was pointed out that as per the balance sheet as on 31.3.2000 the respondent company had a paid up capital of Rs. 2,24,00,000 comprising 22,40,000 shares of Rs. 10 each. On 14.7.2000 the company increased its authorized share capital from Rs. 2.5 crores to Rs. 20 crores by creating 1,75,00,000 shares of Rs. 10 each without filing the requisite form No. 5 in the office of Registrar of Companies, Mumbai in violation of the provisions of Section 97 of Companies Act, 1956 and even stamp duty under the Bombay Stamp Act was not paid. In July, 2000 the company made an allotment of 1,52,73,093 shares of face value of Rs. 10 at a premium of Rs. 60 per share as non cash consideration to shareholders of the erstwhile Shonk Technologies Ltd. (the acquired company). The comparative statement of the distribution schedule of the company before and after the allotment was shown as below:
As on March 31,2000(before acquisition/preferential allotment)
As on July, 31,2000 (after acquisition/preferential allotment)
Number of shares
Number of shares
Directors and Relatives and holding/subsidiary/affiliates companies
Government sponsored FI's/IFI's
Other Bodies Corporate
The company's shares were admitted to NSDL w.e.f. 7.8.2000 and CDSL w.e.f. 9.8.2000 for optional dematerialization. The respondent company did not file special resolution under-Section 8(1A) of the Act resulting in violation of the provisions of Sections 81(1A) and 192 of the Act. However, on 26.7.2000 the respondent company filed a return of allotments with the Registrar of Companies Mumbai stating that the company had allotted 1,52,73,093 equity shares of Rs. 10 each at a premium of Rs. 60 per share (total Rs. 106,91,16,5107-). The shares were allotted to 55 allottees consisting of 10 private companies, 9 public companies, UTI, UTI A/c India Growth Fund and 34 individuals. The public limited companies to whom the shares were allotted included a few companies belonging to Ketan Parekh group viz., M/s Panther Fincap & Management Services Ltd.; M/s Classic Credit Ltd.; and M/s Panther Investrade Ltd. The aforesaid shares were allotted for consideration otherwise than cash and there was no contract reduced to writing in this regard. The respondent company had also filed Form No. 3 stating that the aforesaid allotment was made in the satisfaction of the acquisition of the entire business undertaking of STL. It was stated that the purchase price of the property was arrived at Rs. 106.91 crores on the basis of valuation reports prepared by the Statutory Auditors of STL. The property was not valued by the approved valuer. Since the company had acquired the entire business undertaking from STL the shares should have been in the normal course allotted to STL. However, in the instant case, it was pointed out that the shares were allotted to the shareholders of STL, and Form No. 3 containing the particular of the contract are silent as to why the shares were allotted to the shareholders of STL, though the value of the property acquired by the company from STL had been arrived at Rs. 106.91 crores. The details of the properties were not disclosed in Form No. 3 as filed with the Registrar of Companies. Further, my attention was drawn to SEBI's preliminary report revealing that:
a) The shares of the respondent company are quoted at Bombay and Delhi Stock Exchanges. The shares of the respondent company were not traded on BSE between 13.5.1999 to 9.8.2000. The last trade was at Rs. 2.15 on 13.5.1000. Prior to this date the scrip was traded in the range of Rs. 2 to 7. For the new shares of the company (which were allotted on a preferential allotment basis to the shareholders of the unlisted company as consideration for purchase of the business undertaking), the BSE had fixed base price of Rs. 70-/. This was derived from the price at which shares were allotted to the shareholders of erst while Shonkh Technologies Ltd.
The price of the scrip went up from Rs. 75.55 on 9th August, 2000 to Rs. 463.30 on 28th September 2000 of very low volumes. After 29th September 2000 and upto 8th December 2000 there was an increase in volumes but the price started falling and reached Rs. 210/- on 3.11.2000. Thereafter, the prices were moving in a narrow range of Rs. 220/- to Rs. 350/- accompanied with large volumes.
The early high-low of the prices were as given below:
---------------------------------------------------------------- Year High(Rs) Date Low(Rs) Date ---------------------------------------------------------------- 1999 6.4 10.05.1999 2.15 13,5.1999 2000 445.5 27.09.2000 75.55 09.08.2000 2001 315 13.02.2001 199.7 25.01.2001
b) That there was synchronization of logging in buy and sale orders of shares at the same quantity and price. Orders were put within a gap of one or two seconds of each other. This ensured that there was matching of orders and buyers got desired sellers and vice versa. These matched transaction created artificial volume and accounted for entire trading on one particular day. That trading in the DSE was concentrated among three brokers during the period when the share price registered a very sharp increase. There were common clients of these brokers.
c) That Ketan Parekh entities namely Classic Credit Ltd.; Panther Fincap & Management Services; and Luminant Investment P. Ltd. were the selling clients of broker - Credit Suisse First Boston India Securities Pvt Ltd. (CSEB) and at the same time these entities/other set of entities belonging to Ketan Parekh group were buying these very shares through other brokers by acting as buying clients. The whole transaction was given a colour of purchase and sale of shares but were not genuine transactions. These transactions were entered into with a view to create artificial market in the scrip which were otherwise relatively non descript and illiquid. The SEBI's report further mentioned that a small group of brokers deliberately indulged in recalculating the stock among themselves to create the appearance of artificial demand and liquidity in the shares Fictitious trades though circular trading also artificially benchmarked the price which induced others to purchase and/or sell shares. The synchronized set of Ketan Parekh entitles constituted large percentage of total volumes of trade at the exchange. The large stock was concentrated in the hands of a few entitles which facilitated manipulation by Ketan Parekh entities, 21 entities had around 1,48 crore shares which formed 84.5 per cent of the paid up equity capital of the company.
d) The trades of Ketan Parekh entities were in violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995.
e) That the brokers-Credit Suisse First Boston, Vyomit, Omega, Millennium, Visaria, Latin Manoharlal, Hem Securities Ltd., C.J. Dalai, etc facilitated creation of artificial market in certain scrips and assisted, abetted and aided entities connected with Ketan Parekh in market manipulations in violation of Code of Conduct specilied in SEBI (Brokers and Sub-brokers) Regulations, 1992 and bye law 357 of the Stock Exchange, Mumbai by inter-alia indulging in fictitious dealings and prejudicial business. Further, the trading of broker - CSFB in respect of the shares of the company--Shonkh Technologies International Ltd. (STIL) also aided, abetted and assisted entities connected with Ketan Parekh in violating SEBI (Substantial Acquisition of shares and Takeover) Regulations, 1997. Ketan Parekh entities acquired shares of STIL in excess of 15% and/or 5% of the company entities in February 2001 without complying with these Regulations (without making disclosures to the company and without making public offer).
f) That there has been violation of Takeover Regulations by Iris Infrastructurals Ltd., Milan Mahendra Securities Ltd. and Extempore Securities & Investments Ltd. (now called Pioneer Equity Pvt Ltd.) as result of their acquisition of 14.2.%, 5.71,%- (as on 6.4.2001) and 6.28% (as on 22.3.2001) shares respectively of STIL without informing the company in terms of regulation 7 of the Takeover Regulations.
g) That share price was different at the time of listing at the stock exchanges of Mumbai and Delhi upon commencement of trading. The price at BSE on listing was Rs. 70 and circuit filter was put at this basic rate. However, the price on listing at DSE was Rs. 300 per share. There was hardly a gap of few days between the listing at BSE and DSE.
The counsel for the petitioner drew my attention to the agreement (placed at Annexure G CP 37/2003) that was entered into between both the companies delining the line of acquisition of business (at page 67 of Annexure G). It was mentioned that "in consideration of the transfer of the entire business undertaking of Shonk Technologies, SYIL has made a preferential allotment of equity shares to the shareholders of STL in the same proportion as they were holding in STL". It was pointed out that pursuant to the allotment of shares to the shareholders of Shonk Technologies Ltd. it was the promoters and shareholders of Shonk Technologies Ltd. who became the majority shareholders of the so called acquiring company. It was argued that this condition of agreement showed that the consideration for the sale of entire business undertaking was received by the shareholders of STL instead of the STL. Consequently, this resulted in the loss to the STL to the tune of Rs. 1,047,753,690.00 which was also reflected in the books of accounts of the STL and was also mentioned in the directors report dated 31.12.2000 (placed at Annex P.3). My attention was drawn to this very disturbing aspect of the agreement /scheme entered into between both the respondent companies that the agreement as made between the two companies that STL did not get any consideration for the agreement and the consideration of the agreement i.e. the shares of the Shonk Technologies International Ltd. were allotted to the shareholders of STL. Now, it was pointed out, in the event of dispute the shareholders of Shonk Technologies Ltd. would face difficulty in enforcing this agreement in the Court of Law because the principle of privity of contract would come into play. My attention was drawn to the background and the credentials of Shonk Technologies International Ltd. prior to the scheme of acquisition of business undertaking of STL For this purpose I was shown that the due (sic) Annexure 8 pages 67 to 93 of the reply of the company in CP 35 of 2003. An excerpt of the report is given below:
1. ...VIII. OTHER COMPLIANCE ISSUES AND LITIGATION
8.1 It is observed that there are no pending litigations filed by or against it.
8.2 It is observed that SYIL has caused the cancellation of its sales tax registration.
8.3 SYIL has not obtained the necessary certificate from the appropriate authority under the Shops and Establishment Act. Such certificate and registration should be obtained.
8.4 SYIL does not presently have any employees and therefore does not have any registered code number under the Provident Fund or the Employee State Insurance legislations. The same may be required pursuant to the business transfer whereby the employees of STL will be transferred to SYIL.
8.5 SYIL did not apply for registration as an NBFC even when it was carrying out NBFC activities. It has not applied for any exemption either.
8.6 As per representations by SYIL, SYIL has not received any notices from any authority directing or pointing towards any compliance related issues till the date of this report on the basis of information made available.
SYIL has not maintained complete and accurate corporate registers in accordance with the relevant provisions pertaining to disclosure of interest by Directors and these compliances should be met with. (Ref: page 83 of reply in CP 35/2003)
2. 7.8. As suggested above, in respect of non-compliances made by SYIL in the past, some amount as retention amount may be set aside to meet any contingent liabilities that may arise on account of such non compliances. This amount should cover all non compliances under the Companies Act or the rules made there under, guideline issued by SEBI and in respect of non registration as an NBFC. (Ref. page 82 of reply in CP 35/03).
It was strongly argued that all the above mentioned facts raised serious questions and doubts as to the credentials of the respondent company. Admittedly, for a long time in the past the company was not complying with the requirements of law; it was not even following the guidelines by SEBI, it was carrying on the business of NBFC without registration; this company had got its sales tax registration cancelled; it did not have any employees at all; it was not maintaining any complete and accurate corporate registers with the relevant provisions pertaining to disclosure of interest by directors, etc. In such circumstances, it was questioned by the counsel for the petitioner as to why would company like STL agree to sell its business undertaking to a company with this type of track record and that Shonk Technologies International Ltd. never bought or acquired the business undertaking STL and in fact, it was the other way round that the promoters and shareholders of the Shonk Technology Ltd. took away with them the business of STL and acquired STIL or SYIL, a listed company because after the allotment of shares to the shareholders of STL in lieu of transfer or acquisition of business undertaking of STL the shareholders of STL became the majority Shareholders in STIL. The shares of the respondent company were quoted at Bombay and Delhi Stock Exchanges. One of the consequences of this arrangement, it was argued, was that, the last trade of the shares of the erstwhile SYIL presently STIL was at Rs. 2.15. On 13.5.1999 to 9.8.2000 the scrip was not traded at all on the Bombay Stock Exchange. Prior to this date the scrip was traded in the range of Rs. 2 to Rs. 7. Thereafter, on the basis of price at which shares were allotted to the shareholders of STL, the BSE fixed the base price of the share at Rs. 70. Then my attention was drawn to SEBI's preliminary report showing how there was synchronization of logging in buy and sale orders of shares at the same quantity and price putting orders within a gap of 1 or 2 second of each other, and how such matching transactions created artificial volume and accounted for entire trading on one particular day and how the trading in the BSE was concentrated among three brokers during the period when the share price registered a very sharp increase for the common clients of the Ketan Parekh entiries namely, Classic Credit Ltd.,; Panther Fincap and Management Services Ltd.; and Luminant Investment P. Ltd. and how the whole transaction was given a colour of purchase and sale of shares without any genuine transactions. It was pointed out that in respect of these companies of the Ketan Parekh Group this Principal Bench of CLB on 27.9.2004 had ordered investigation under Section 237(b) of the Act, "The said order was challenged in the Bombay High Court. The Bombay High Court upheld CLB's order. And the SLP preferred against the order of the Bombay High Court was dismissed by the Hon'ble Supreme Court in limine.
Arguing that this is a fit case for directing investigation under Section 237(b) of the Act, my attention was drawn to the fact that inspection under Section 209A had already been ordered in these cases and that that inspection had revealed violations and non-compliance of the provisions of the Companies Act. It was argued that the scope of inspection under Section 209A and investigation under Section 237(b) of the Act was entirely different. Further, assuming that nothing is discovered or no irregularities are found during the course of inspection under Section 209A, and that the compounding of contraventions pointed out during inspection under Section 209A was immaterial and hence, irrelevant, still it was a fit case for investigation under Section 237(b). While responding to the plea of the respondents that SEBI, CBI and the Dept. of Company Affairs (now Ministry of Company Affairs) under 209A of the companies Act had already carried out inspections and investigations, the counsel for the petitioner drew my attention to the decision of the Bombay High Court in Appeal No. 1-14/2005 in CP No. 39/2003 in the case of Panther Fincap and Management Services Ltd. v. Central Government at page 58 onwards wherein this matter has been considered in detail:
...I am also of the further opinion that the investigation in respect of the corporate fraud can be initiated and considered by the Central Government under Section 237(b)(i) of the Companies Act. I have not been able to come across any provisions under the SEBI act in which any corporate fraud can be investigated by the SEBI. Undoubtedly it can be investigated under normal criminal law by the CBI. I am further of the opinion that merely because the material on the basis of which investigation is being undertaken is identical to the material which is subject matter of investigation by the other authority it cannot be stated that both the authorities can not simultaneously investigate pursuant to power conferred on them under I heir respective statutes. I am of the opinion that every authority is entitled to investigate even may be in respect of the same material as well as from the angle and facet in which they have been asked to carry out investigation. It is possible that the SEBI maybe investigating the same material on the ground of breach of the various provisions of the SEBI act and other security related legislations whereas the central government, department of company affairs can consider and/or investigate the fraud and/or breach if various provisions of law in the light and context of the provisions of the Companies Act may be in respect of the same material. However, I am of the opinion that the contention advanced by the learned Counsel for the appellant cannot be accepted particularly in view of the tact that every authority has been conferred various powers n their respective legislation. A similar issue arouse before the English Court under the identical provisions of investigation under the Companies Law and the Court of Appeal in the case of Re London United Investments plc reported in 1992 BCLC 285 equivalent to 1971 AH England Law Reports page 849, it is held as under:
The power of the Secretary of State to appoint inspectors to investigate the affairs of a company and to report is an important regulatory mechanism for ensuring probity in the management of companies' affairs. That of course is in the public interest. Since the Secretary of State's powers under Section 432(2) are exercisablc where there are circumstances suggesting fraud, it is likely that in many cases where inspectors are appointed an investigation by the police or the Serious Fraud Office could also be appropriate. But the code under the 1985 Act is a separate code even though it may overlap the field of criminal investigation.
Apart from the aforesaid position in law, I am also of the further opinion that the central government having constituted the Serious Fraud Investigation Office and if it desire to carry out investigation in respect of the affairs of the aforesaid 14 appellant companies without any malafide intention then it is not possible to stall the investigation merely the basis of contentions and arguments advanced by the learned Counsel for the appellants all the authorities cannot be permitted to carry the investigation simultaneously respect of the very same material. I therefore, reject the contention on behalf of the appellant in investigation. It has been contended by the learned Counsel for the appellant that there are serious allegations in the present case and thus this Court must refrain from exercising jurisdiction and interfering with (he investigation at this stage. I find considerable substance in the contention advanced by the learned Counsel for the respondent. It is well settled that the court must be reluctant in interfering in the matter where the same is still at investigating stage. The court cannot and should not usurp the jurisdiction vested in the central government to form an opinion and come to a conclusion as to whether the investigation is necessary or not limited jurisdiction or power is conferred on the court is to ascertain whether there is a material in support of the opinion arrived at by the central government and/or the said exercise is not a malafide exercise of power. In the facts of the present case I do not consider that the exercise of the Central Government is malafide. There is a plethora of material and in view therein I do not desire to interfere with the investigation ordered by the central Government in exercise of power conferred-under Section 237(b)(i) of the Act.
In view of the foregoing the counsel for the petitioner vehemently argued that this is a fit case for directing investigation under Section 237(b) of the Act, as the pre conditions before initiating action under this provision are fulfilled as the business of the company was conducted with the intent to defraud the general public and the other body corporate. The respondents have, it was argued, cheated the general public and an artificial person STL divorced from its shareholders which has suffered a loss of more than Rs. 104 crores and that the respondents case also comes under the category of cases when the business of the company is being carried on otherwise for a fraudulent or unlawful purpose. Furthermore, it was pointed out that this case will also come under the category of cases where the persons concerned in the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company.
3. The counsel for the respondents argued bringing to my notice the provisions of Section 237(b) of the Act, that it is a settled law that before an investigation can be ordered under this Section "there must exist circumstances" set out in Clause (b) of Section 237 which is a condition precedent to the formation of opinion which may lead to investigation. Reference was also made to the Supreme Court's judgment in the case of Barium Chemicals Ltd. and Anr. v. Company Law Board and Ors. (1966) Supp. SCR page 311 and Rohtas Industries V.S.D. Aggarwal and Ors. AIR 1919 SC 707. It was contended that the allegations made namely; the company had changed its name, the listed company takes over unlisted company, special resolution not filed; stamp duty not paid, Section 391 not complied with; volatility of shares and its value and proceedings before CLB in other matters namely, CP Nos. 34,36,38,39,40,43,49,52,56,60,64,65,67 and 68 of 2003 in the matter of UOI v. Panther Industries Products Ltd. and Ors. (copy of CLB's order given during the course of hearing) are either incorrect or wholly irrelevant and none of the said arguments fall within the scope of Section 237(b) of the Act. It was pointed out that none of the creditors, shareholders or concerned persons have filed any complaint or have been aggrieved and that no case of any fraud or unlawful purpose has ever been averred or established. Regarding the allegation of the listed company taking over unlisted company it was argued that the take over of the company was pursuant to or as a consequence of and in term of due diligence report of a reputed legal firm namely M/s Amarchand and Mangaldas and Suresh A. Shroff and Co. New Delhi, as given in its report dated 10.10.2000. The report specifically and elaborately explained the basis and the procedure to be followed and also confirmed that the entire transaction was in accordance with law. Further the detailed procedure suggested and advised had been worked out on elaborate scrutiny and after taking into consideration all the relevant facts which formed pail of the report. A legal due diligence check list was also worked out elaborately and was made the basis of the legal action. Reference was made to the report at page 67, Annexure - VIII, to the documents attached to the reply affidavit filed by the respondent company on 8.7.2004. Specific reference to the "legal due diligence check list" at page 86, Appendix A was made to show that each and every aspect of law had been taken into account and all the actions were wholly within the scope of law and purely on legal advice. The entire scheme was read out as part of the arguments. It was argued that no error or malafides has been attributed to the report and no attempt whatsoever even made to show that any part of the report did not reflect the true legal position. It was further argued that the transactions having been made purely in terms of the said legal documentary due diligence report, it was not open to the petitioner to make allegation against the respondent company, in a vague and general manner and thereby seek investigation. It was pointed out that none of the specific issues raised had been addressed by the petitioner either in the petition, rejoinder or in the arguments. It was submitted that the acquisition of business undertaking of Shonkh Technology Ltd by Shree Yatatyat India Ltd, the consideration for which was given by way of allotment of shares of the company to shareholder of the Shonkh Technology Ltd. was on 1:1 on basis and that the company had also complied with provisions of listing agreement of Stock Exchange, Mumbai by sending the necessary notice to the concerned authorities and that the Company had also informed SEBI all the details of acquisition on 26.7.2000 under regulation 3(4) of SEBI. The application clearly stated the reasons and the basis of allotment of shares. The SEBI had, it was pointed out, also acknowledged the receipt of the said information as would be apparent from the letter at page 107 of the compilation of documents filed alongwith the reply dated 8.7.2004. Further, it was emphasized that the complaint and/or action initiated by SEBI, is under the provisions of Securities Exchange Board of India Act which contemplates independent action and that this very Act cannot be the subject matter of the proceedings under Section 237(b). It was further argued that in any event the stage at which the proceedings have reached in SEBI is also matter of record. As would be seen from the documents field on behalf of SEBI, charges and the issues have already been worked out and SEBI has also mentioned the particulars of the witnesses whom they wish to examine as well as the list of documents they wish to refer and rely upon. It was pointed out that the enquiry is complete and there is no necessity for any further information and, therefore, the present investigation apart from being exercise in futility may only tantamount to a fishing and roving enquiry which is clearly prohibited under Section 237(b). For this ground, it was argued, again the reference to the SEBI report for basis of investigation is wholly outside the scope of Section 237(b) and cannot be said to be a circumstance for investigation under Section 237(b), As regards Special Resolutions not filed it was brought to my notice that the special resolution had been filed with the authorities and the requisite fees had also been paid by the respondent company. Further it was argued that the non payment of stamp duty cannot be made the basis for invoking powers under Section 237(b) and in any case the transfer was of undertaking and there was no sale of assets involved per se and consequently the question of payment of stamp duty on so called transfer of assets would not arise. As regards non compliance with Section 391 of the Act, it was argued, that from the nature of transactions involved it was not mandatory on the part of the company to have recourse to Section 391 of the Companies Act. It was further pointed out that in the case of the shareholders not approving the scheme of merger or takeover in totality, the same may then not be binding on such shareholders who may have to approve of such a scheme of merger, not involving the provisions of Section 391 which cannot in any way amount to any violation of the Companies Act. Regarding Volatility and its value it was argued that the Union of India has not been authorized to act for and on behalf of SEBI to make an attempt for further fishing and roving enquiries for this purpose. It was brought to my notice that the CBI had initiated proceedings against the respondent company and that the court of special judge greater Bombay after taking notice of the fact that the CBI had sought to close the investigation held in order dated 16.11.2005 that "I agree with CBI that mensrea which was so essential to constitute the crime would not be established and I would therefore agreeing with the CBI accept the closure report". Lastly, it was argued that admittedly the shareholding by Ketan Parekh in the respondent company had been at all material times less than 1.6% and at present the holding is nil. In view of the foregoing, the respondents' case is that no case has been made out for investigation under Section 237(b) of the Act.
4. I have considered the pleadings and arguments of the counsels for the petitioners and the respondents. Petitioners' case is that it is a fit case for ordering investigation under Section 237(b) of the Companies Act, 1956 whereas the respondents case is that no case has been made out for ordering an investigation under Section 237(b) of the Act. This Board has an onerous duty to form an opinion with regard to the existence of the intent to defraud...(conditions contained in Section 237(b) to be satisfied) before ordering investigation under Section 237(b) of the Act. Now coming to the facts of the present case, it has to be determined that whether the conditions as laid down in Section 237(b) of the Act are satisfied or not. The facts and circumstances of the present case prima facie demonstrate and establish the existence of pre-requisites which compel me to form an opinion in terms of Section 237(b) of the Act. On a consideration of the facts and circumstances of the case, I am satisfied that the grounds for ordering investigation do exist. I find overwhelming material pointing to the circumstances suggesting that the business of the company was conducted for a fraudulent and unlawful purpose with the intent to defraud the general public and the other body corporate and the persons concerned in the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company. This is a case squarely covered under the provisions of Section 237(b) as the pre conditions for initiating such action exist as would be clear from the following:-
(i) STL an artificial person divorced from its shareholders seems to have been cheated. Consequently, it has suffered a loss of more than Rs. 104 crores as reflected in the books of accounts. Shareholders are not the company. Company is a separate legal entity whose interest itself seems to have been compromised by paying sale consideration to the shareholders. This in itself is a sufficient ground for ordering investigation under Section 237(b) of the Act. This is a very unusual case where the consideration for taking over of an unlisted company instead of being paid to the company has been passed on to the shareholders of STL. It has been rightly pointed out that in the event of dispute the shareholders of Shonk Technologies Ltd. can face difficulty in enforcing this agreement in the Court of Law because the principle of privity of contract would come into play;
(ii) The general public seems to have been cheated. The business of the company seems to have been conducted with an intent to defraud its creditors and public at large. In the wake of market manipulations in the scrips as clearly brought out by SEBI fraudulent means appears to have been adopted violative of SEBI Acts and Regulations to defraud the creditors and public at large. The facts as stated point towards the involvement of companies belonging to the Ketan Parekh Group and the stock scam preliminarily revealed by the SEBI. The modus operandi in the present case can be traced out only by investigation under Section 237(b) of the Act;
(iii) The take over of the unlisted company as admitted by the respondents was pursuant to the due diligence report of a reputed legal firm namely, M/s Amarchand and Mangaldas and Suresh A. Shroff and Company, New Delhi. The report specifically and elaborately explained the basis and the procedure to be followed and also confirmed that the entire transaction was in accordance with law. The respondents rely on this report. They cannot choose to deny the following state of affairs as contained in this report placed at Annexure 8 pages 67 to 93 of the reply of the respondent in CP No. 35 of 2003:"
2. ...VIII, OTHER COMPLIANCE ISSUES AND LITIGATION
8.7 It is observed that there are no pending litigations filed by or against it.
8.8 It is observed that SYIL has caused the cancellation of its sales tax registration.
8.9 SYIL has not obtained the necessary certificate from the appropriate authority under the Shops and Establishment Act. Such certificate and registration should be obtained.
8.10 SYIL does not presently have any employees and therefore does not have any registered code number under the Provident Fund or the Employee State Insurance legislations. The same may be required pursuant to the business transfer whereby the employees of STL will be transferred to SYIL.
8.11 SYIL did not apply for registration as an NBFC even when it was carrying out NBFC activities. It has not applied for any exemption either.
8.12 As per representations by SYIL, SYIL has not received any notices from any authority directing or pointing towards any compliance related issues till the date of this report on the basis of information made available. SYIL has not maintained complete and accurate corporate registers in accordance with the relevant provisions pertaining to disclosure of interest by Directors and these compliances should be met with.(Ref.: page 83 of reply in CP 35/2003)
2. 7.8. As suggested above, in respect of non-compliances made by SYIL in the past, some amount as retention amount may be set aside to meet any contingent liabilities that may arise on account of such non compliances. This amount should cover all non compliances under the Companies Act or the rules made there under, guideline issued by SEBI and in respect of non registration as an NBFC. (Ref. page 82 of reply in CP 35/03).
The respondent cannot choose to rely on one part and ignore the other. The above extract makes the credentials and intention of the respondent company amply clear. Such credentials raise suspicion and the question as to why a company like STL agree to sell its business undertaking to a company like SYIL and suffer loss remains unanswered. Raising of share capital from Rs. 2.5 crores to 25 crores in violation of Section 97 of the Act cannot go unnoticed. Investigation seems to be the remedy available.
(iv) The directors owe fiduciary duty to the shareholders and they have to function in not only in good faith but in very good faith. But in this case shareholders faith seems to have been belied. It is a case where the respondents and the persons concerned in the management of the company appears to be guilty of fraud, misfeasance and other misconduct towards the company. The business of the company appears to have been carried on otherwise for a fraudulent and unlawful purpose. I find no force in the respondents plea that the condition precedent for exercising power under Section 237(b) of the Act, the business of the company should be in operation, i.e. the company should be carrying on operation and in case by any reason whatsoever, has stopped carrying on the business then no investigation can be carried out. Similar question was raised and agitated before the Bombay High Court in Appeal No. 1 - 14/2005 and this question stands answered in the High Court's judgment as contained in para 25 at page 45 as under:
...Thus in my opinion the true and correct interpretation of Section 237(b)(i) would only mean that if the company while conducting the business has acted in a fraudulent or unlawful purpose then such companies will fall within the net of Section 237(b)(i) irrespective of the fact that whether it is a running concern or close down subsequently for any reason whatsoever I am of the aforesaid opinion also because under the provisions of Section 250(A) it is specifically provided that investigation may be initiated under Section 237(b)(i) notwithstanding that the application is made under Section 397 and 398 of the Companies Act or it has passed a special resolution for voluntary winding up of such a company. In my opinion if Section 250(A) is read alongwith Section 237(b)(i) it is without any doubt that the contention of the learned Counsel for the appellant that no investigation can be carried out once the company has ceased to operate its business. In any event on a true and proper construction of the Section I do not accept the contention of the learned Counsel for the appellant that the business of the company should be conducted in presence for the purpose of ordering investigation by the central government under Section 237(b)(i).
I find no reason to differ on this issue.
As regards the respondents' argument that since inspection under Section 209A has already been ordered in the case of the respondent company and hence there is no justification for multiplicity of proceedings for the same action by way of investigation under Section 237(b) of the Act, the scope of inspection and the scope of investigation is entirely different. Inspection does preclude investigation. Section 209A of the Act has been introduced in the place, of Sub-section (4), Clauses (b), (c)(d) of Section 209 by Companies Amendment Act (XLI) of 1974) with effect from 1.1.1975 to strengthen the law suitably. Inspection under this Section could not be effective unless the inspector is given power to compel production of books, and to examine on oath, etc., as an Income Tax Officer has under Section 131 of the Income Tax Act. The inspection under this section is not an investigation, though it may led to one, in case there is anything wrong or objectionable or fraudulent. It is to ensure that there is nothing objectionable in the conduct of the business or affairs of the company. On a perusal of the inspection report, the Central Government may lay the information to police for the purpose of investigation under the Criminal Procedure Code instead of proceeding under Section 235 and 237 of the Companies Act. (Indian Express (Madurai) Pvt. Ltd. v. Chief Presidency Magistrate, (1974) 44 Companies Act, 1956 Cases 106 (Mad). Scope of investigation under Section 237(b) is very wide as compared to the scope of inspection provided under Section 209A of the Act. The expression "affairs of the company, in Section 237 is wide enough to include violation of any law in the conduct of those affairs which is for the time being, in force. An investigation can extend upto the whole range of company's affairs without any limitation as to the period or officers or members to be covered. "Intent to defraud" is not something black and white which can be inspected and picked up. Only investigation can facilitate culling out the "intent to defraud'' from a wider spectrum provided by investigation by going deep into the contents investigated. On the other hand inspection under Section 209A only triggers investigation. Violations of the provisions of the Companies Act inspected under Section 209A only strengthen the ground for investigation. Investigation alone can reveal the true state of affairs. In fact, inspection under Section 209A is a much more stronger ground fortiori for ordering investigation under Section 237(b) of the Act.
As regards the respondents' reliance on the arguments that CBI has already closed the matter mentioning that "mensrea which was so essential to constitute the crime would not be established ...", I find it to be a very slippery slope. There is a marked difference as to the effect (or weight of evidence) i.e. probative force of evidence in civil and criminal proceedings. There are marked variations in standards of proof and burden of proof in civil and criminal cases. In civil cases, mere preponderance of probability is sufficient whereas in criminal cases issues must be proved beyond any reasonable doubt. The evidence must be such as to exclude any reasonable doubt of the guilt of the accused. In case of any reasonable doubt as to the guilt of the accused, the benefit of doubt should always be given to the accused. The accused is always presumed to be innocent until the prosecution proves him to be guilty, while in civil cases all that is necessary to insist upon is that the proof adduced in support of a fact is such that should make a prudent man to act upon the supposition that it exists. The general rule in civil action is that an uncontested case may be established by a minimum of proof, and a contested case by a balance of probabilities. For instance, a case of corruption charges against an employee may fail under the Prevention of Corruption Act, but on the same set of facts an employee can be charge sheeted and dismissed under the disciplinary proceedings. In the present case the petitioner is on a very sound footing besides having come to this Board bona-fide. Only investigation under Section 237(b) of the Act can bring out the true state of affairs. Let the truth prevail. An order to investigate under Section 237(b) of the Act, in any case cannot prejudice the respondents. An order of this Board under this section, directing an investigation is only analogous to the issue of a fact finding commission.
5. In view of the above, I have reason to believe that there is a likelihood of the existence of malpractices envisaged in Clauses (i) to (iii) of Section 237(b) of the Act. To prove this prima-facie case of "intent to fraud" and misfeasance on general public and the other body corporate and conducting the business of the company otherwise for a fraudulent and unlawful purpose, I have no hesitation in granting the petitioners' prayer for ordering investigation under Section 237(b) of the Companies Act, 1956 in view of the foregoing. The facts and circumstances of the case compel me to opine that this is a fit case for ordering investigation under Section 237(b) of the Act. To do substantial justice between the parties, I hereby order that investigation of the respondent companies be carried out by the Central Government under the provisions of Section 237(b) of the Companies Act, 1956 so that the truth can come out about the nature and modus operandi of these transactions.
With the above directions, the petitions are allowed.