BSE VS. Jaya I.

Shah
SYNOPSIS
A registered broker was declared by the Bombay Stock Exchange to be a defaulter on or about 4th November,
1997 whereupon he cased to be a member of the Exchange. The defaulters committee took charge of all his
rights interests and claims. In the early stages the exchange categorically stated that there were enough assets
to satisfy the claims of the respondents. Later it was alleged that there was a short-fall of Rs. 70 lakh. The
Supreme Court has given suitable directions for identifying the claims and settling them to the extent possible
with the available assets.
JUDGMENT
1.

Interpretation of Securities Contract Regulation Act, 1956 (hereinafter referred to as the Act) vis-avis rules, bye-laws and the regulations framed thereunder as regard the right of a third party to
realise his dues out of the corpus of the Defaulters Committee is the question involved in this appeal
which arises out of a judgment and order dated 25th July, 1997 passed by the High Court of
Judicature at Bombay in Appeal No. 17 of 1996.

Miheer H. Mafatlal Vs. Mafatlal Industries

SYNOPSIS
A Single Judge of the Gujarat High Court had held in the case of Mafatlal Industries Ltd., In re. [1995] 17 CLA
249, that a company which was injuncted by a prohibitory order of the City Civil Court from making certain
allotments of a rights issue could be estopped from contending that even if it had committed any breach of the
order of the court, the only remedy would be in an action for civil contempt and that the allottee of the shares
could legitimately participate in the meetings of the equity shareholders called to consider a scheme of
amalgamation of the company with another company. The Single Judge found, however, that even if the votes
cast by the two persons who had been wrongly allotted shares were excluded from consideration, the
proposed scheme of amalgamation had been passed by the requisite majority. While the appeal against the
order of the Single Judge sanctioning the scheme of amalgamation has been dismissed by the Division Bench
(whose judgment will be reported shortly in the Journal), cross objections to the Single Judge's ruling in regard
to the effects of the alleged unauthorised allotment of rights shares to two persons in contravention of the
court injunction have also been dismissed by it through a separate order.
The Division Bench has pointed out that section 81 requires the offer of allotment of shares by the company to
the existing shareholders in the first instance and only shares which have not been accepted by the existing
shareholders or by renouncees can be dealt with by the company in any manner considered to be in its best
interests by its Board of directors. This also requires valid enforceable contracts between the company and the

persons to whom allotment is to be made. Since there was a temporary injunction on allotment of shares to
third parties without the court' s prior permission, the company was not competent to make offer for
allotment to any third party or to accept the offer made by the third party to bring into existence a valid and
binding contract of allotment of shares in favour of any third party. Any contract which comes into existence
stultifying the court's injunction order, would be contrary to public policy and void under section 23 of the
Contract Act.
The Division Bench also held as follows in this connection :
The unabsorbed portion of the further issue of capital to which the court injunction related, was only capital
which had been offered to and had been refused or could be deemed to have been refused by the existing
shareholders.
The court can go into all the incidental and ancillary questions in satisfying itself that a proposed scheme of
amalgamation, sanction for which was sought, had the approval of the requisite majority. No rule could be
laid down regarding issues which the court would or would not decide or the manner in which it could
proceed to decide them
Swedish Match AB Vs. SEBI
SYNOPSIS
The Securities Appellate Tribunal dismissed an appeal filed by the Swedish Match AB against SEBIs order
directing it to make a public announcement in terms of sub-regulation (1) of regulation 11 taking 27th
September, 2000 as the reference for calculation of offer-price Swedish Match AB v. SEBI [2003] 54 CLA
106 (SAT). The Supreme Court has accepted the view of the SEBI and the SAT that a public offer was called for
on the facts of the case and that once a public offer is made, the investors will be entitled to elect to transfer
their shares at the higher price which may be offered by the acquirer with a view to acquire control over the
target company, viz., Wimco Ltd. The investors would also be entitled to interest at such rate as the SEBI may
determine. The provisions of section 15H of the Securities and Exchange Board of India Act, 1992 mandate
that a penalty of Rs. 25 crore may be imposed. The Board does not have any discretion in the matter and thus
the adjudication proceeding is a mere formality. Imposition of penalty upon the appellant would thus be a
foregone conclusion. Only in the criminal proceedings initiated against the appellant, existence of men rea on
the part of the appellants will come up for consideration.
Tracing from the sequence of events, the Supreme Court noticed that the Board was not sure of the legal
position since the Board did not think it fit to apply the Explanation appended to regulation 12. It was only the
Tribunal at a later stage that came to a clear finding that the proviso to regulation 12 would bear no
application and the Explanation would. The Supreme Court thought it fit to exercise its jurisdiction under
article 142 of the Constitution and issued a direction to the SEBI to forbear from proceeding under section

15H of the Securities and Exchange Board of India Act against the appellant for levy of penalty, but
simultaneously clarified that this should not be treated as a precedent.

Maharashtra Apex Corp. Ltd., In re

SYNOPSIS
The Maharashtra Apex Corporation Ltd. was a non-banking finance company, the equity shares of which
were listed with some of the stock exchanges. It had issued 1,41,50,100 equity shares of the face value of Rs.
10 each but its accumulated losses as at 31st March, 2002 stood at about Rs. 105.85 crore. It entered into a
scheme of compromise and arrangement with its creditors, shareholders, bond holders and deposit holders
and moved the High Court for its sanction. In formulating the scheme the Board of directors had proceeded on
the view that some of the subsidiary companies in which it had invested in the form of share capital should
form part of the arrangement so that its creditors were not deprived of the benefit of repayment of their
legitimate debts. According to the scheme, all the depositors and creditors were to get back the entire amounts
due to them within five years. The Court found the scheme to be just, fair and reasonable. It was not contrary
to public policy. None of its terms was violative of any provisions of the law. Three-fourths of the total value of
shareholders and creditors were not present at the meeting, but the requirement under sub-section (2) of
section 391 is only that a majority in number representing three-fourths in value of the creditors or
shareholders present and voting should have approved the scheme, and this requirement was met. The scheme
was accordingly sanctioned with certain modifications. All criminal cases filed against the company as well as
the suits, execution petitions and complaints/appeals before the National Commission, State Commission, and
District Consumer Forum were to stand abated and payments made in these proceedings were to be adjusted
against outstanding debts payable to such claimants
Clariant INl. Vs. SEBI
SYNOPSIS
A public announcement offering to purchase 20 per cent of the target companys equity capital was to have
been made by the acquirer, taking 21st November, 1997 as the reference date, and the entire offer process
would have been completed latest by 21st March, 1998. In view of the acquirers failure to make such an
announcement, the SEBI considered that it would be equitable and just to direct the acquirer to pay interest at
15 per cent per annum on the offer price from the 22nd March, 1998 to the date of actual payment of the
consideration for the shares to be tendered under the offer directed to be made by the acquirer. It was not in
dispute that the value of shares as on the triggering date, viz., 24th February, 1998, had been Rs. 220 ; on
22nd October, 2002 Rs. 213 ; and on the date of public announcement, i.e., on 7th April, 2003, Rs. 209, 233
and Rs. 220 whereas the offer price was Rs. 318. The acquirers submissions before SAT were that (i) the rate

of interest was on the higher side ; (ii) dividends having been paid in the meantime, they should be set off
against the amount of payable interest ; and (iii) interest was payable only to such of the shareholders as had
held the shares in question on the triggering date, viz., 24th February, 1998. SATs decisions were as follows :
Those persons who were holding shares of the target-company on 24th February, 1998 and continued to be
shareholders on the closure day of the public offer to be made in terms of the directions given by SEBI shall be
eligible to receive interest in case the shares that they had been holding on 24th February, 1998 were
tendered in response to the public offer
Interest was to be paid at 15 per cent as directed by the SEBI.
The dividend paid by the target-company to its shareholders was not required to be deducted from the
interest payable to the shareholders.
The Supreme Court has held that interest was payable only to those persons who had been shareholders of the
company on the triggering date and who had suffered a loss by reason of the delay in making the public
announcement and would therefore have to be compensated. Having regard to the peculiar facts and
circumstances of the case, the interests of the justice would be served if the rate of interest payable by the
acquirer was 10 per cent per annum from March 1998 till 2003, instead of 9 per cent which was the normal
rate otherwise. The dividends paid to the concerned shareholders should be adjusted against the interest
payable to them. The appellants had deposited a sum of 111.50 crore which was invested in accordance with
the courts directions. The interest accruing thereupon shall also enure to the benefit of those shareholders
who were entitled to the payment of interest during the period during which the said amount remained
invested in terms of the courts order. The Administrator of the specified undertaking of the Unit Trust of
India, the successor of the UTI, would be entitled to interest irrespective of the fact that it came into being after
1998.