w w w . L a w y e r S e r v i c e s . i n



Hemangini Finance & Leasing (P.) Ltd./Essar Investments Ltd. v/s Tamilnad Mercantile Bank Ltd.

    CP NOS. 7 TO 13/111/SRB OF 1995 & CA NOS. 269 TO 299, 301, 302 & 472 TO 478/111/SRB OF 1995

    Decided On, 04 May 1996

    At, Company Law Board Southern Region Bench Chennai

    By, S. BALASUBRAMANIAN
    By, CHAIRMAN & A.R. RAMANATHAN
    By, MEMBER

    C.A. Sundaram, S. Raghunathan and B. Bhavani Sankar for the Petition-ers. Dulip Singh for the Respondent. Arvind P. Datar, R. Senthilkumar, T.K. Seshadri, Ms. Rajeswari, M. Kamalanathan, Vijay Narayan and P.S. Sundaram for the Interveners.



Judgment Text

1. 7 Appeals have been filed by the appellants under section 111 (2) and (3) of the Companies Act, 1956 ('the Act') against refusal of transfer of shares lodged by them in December 1994 by Tamil Nadu Mercantile Bank Ltd. ('the Bank'). The details of the shares lodged by appellants and refused by the bank are indicated below. As the facts and circumstances of these appeals and the grounds for refusal are similar, we are disposing of these appeals by this common order.


Names of the appellants Shares refused for registration

1. Essar Investments Ltd. 27,324

2. Chennai Holdings (India) Ltd. 26,008

3. Chennai Properties & Investments (P.) Ltd. 24,502

4. Hemangini Finance & Leasing (P.) Ltd. 27,527

5. Mrinalini Leasing & Finance (P.) Ltd. 26,197

6. Kokila Investment & Trading (P.) Ltd. 24,347

7. Mansri Investment & Leasing (P.) Ltd. 27,603

Total 1,83,508


2. These appeals were filed in February 1995. In view of the fact that the shares impugned constitute about 65 per cent of the paid up capital of the company and as the matter relates to a banking company dealing with crores of rupees of public money, we decided to accord priority in hearing of these appeals. On 24-2-1995, when the matter was taken up, at the request of the appellants we directed that no general body meeting of the bank would be held without our approval. In view of certain infirmities in these appeals, after hearing the parties, we allowed the appeals to be amended. In the same way, after hearing the parties, we also allowed certain interested parties to be included as interveners and allowed them to take part in the proceedings. We are not detailing here the arguments of the counsel in respect of allowing the amendment and inclusion of the interested parties as interveners as finally all agreed for amendment and participation of interveners in these proceedings.


3. Following is the summary of the pleadings of the parties.


4. According to the appellants, they are part of Essar Group of Companies. In view of the liberalised economic policy of the Government, they decided to invest in the shares of the bank. There are 3 promoters group in the bank known as Pioneer Group holding 21 per cent of the shares in the bank, Virudhunagar Group holding 14 per cent and Tuticorin Mills Group holding 32 per cent. Initially, in the month of October 1994, representatives of the appellants negotiated to purchase the shares held by Pioneer Group and Virudhunagar Group. On 27-10-1994, 14 per cent of the shares held by them were purchased and on 20th October, another 21 per cent was acquired, at a price ranging from Rs. 2,000 to Rs. 2,500 per share. In the meantime, Tuticorin Mills Group headed by Shri G. Kathiresan, holding 32 per cent shares in the bank, wanted to acquire 19 per cent shares from the shareholders so as to out beat the appellants and through an advertisement, a sum of Rs. 5,000 per share was offered. Since they could not succeed, this group also offered its holdings at Rs. 3,500 per share to the Essar Group. This group consisted of Shri Kathiresan, Shri Vetrivel, Shri D. Ganesan and others. Two of such transferors were also directors of the bank. The representatives of the appellants also reported their acquisition to Shri Jesudasan, Chairman of the bank. Thus, by middle of November 1994, all the shares held by Tuticorin Group were also purchased by the appellants. The acquisition of shares by Essar Group had been widely reported in Economic Times, Hindu, etc., and thus the entire purchase was transparent and was a friendly take-over. In order to be within the limits prescribed under section 12(2) of the Banking Regulation Act, the entire acquisition by those appellants was adjusted among the appellant companies and the books of account were adjusted inter se. This acquisition by this Group was widely known and was not done in a clandestine manner and as a matter of fact one of the core promoter Shri G. Kathiresan sent a letter to Essar Group promising smooth change over of management of the bank. Over a sum of Rs. 60 crore has been invested by the appellants in purchasing the shares and the entire amount was paid through cheques and had been encashed by the transferors. At the time of transfer, the appellants also obtained memoranda of understanding and irrevocable powers of attorney from the transferors.


5. The appellants lodged the transfer instruments along with the share certificates with the bank through their letter dated 18-12-1994 and the same was acknowledged by the bank immediately. The transfer fee as provided in article 52 was also remitted by Money Order on 27-1-1995. After some correspondence with the bank, finally, the bank sent a letter dated 7-2-1995 that the board of directors had refused registration of transfer of shares on certain grounds as indicated in that letter. During the pendency of registration, the bank also actively assisted certain persons in obtaining injunction orders from civil courts from registering the transfers. Even though the entire purchase was made from the families of the promoters with their whole-hearted consent, yet, with an ulterior motive to keep control of the bank with minority holding, the Board consisting of the nominees of Shri Kathiresan had refused registration. The appellants have also, in their appeals, elaborately dealt with each of the grounds taken by the Board to refuse the registration. It is further stated in the pleadings, that, some of the transferors have revoked the powers of attorney and memoranda of understanding, against which, appellants moved the High Court of Madras and the Court has passed an order of injunction against such revocation. Finally, they have prayed for directions to the bank to register the transfers.


6. In the pleadings by the bank, it is stated that, immediately after lodgement of the transfer forms by the appellants, the bank received an ad interim injunction from the Court of the District Munsiff, Tuticorin restraining the bank from receiving, processing and transferring the shares. Certain other orders were also received from other Courts in a suit filed by another shareholder. The High Court of Judicature at Madras stayed the operation of the injunction order. The bank then took up the matter of consideration of the applications received for transfer. In view of a lot of infirmities in the transfer documents and also violation of provisions of law, the Board appointed a Committee of Directors to investigate the matter. The Committee after a thorough investigation, submitted its report, which was considered by the Board of the bank and based on the report and also taking into consideration the interest of the bank employees and shareholders, came to the conclusion, bona fide and in good faith that the registration of transfer of shares should be refused. The grounds on which the decision to refuse the registration of transfer of shares was also communicated to the appellants.


7. In the meanwhile, the bank also made a reference to the Reserve Bank of India (RBI) as required by its Circular No. DBOD. No. BC. 44 /16.13.100 of 1994 dated 16-4-1994 issued by the RBI. No acknowledgement had been received from the RBI till the Board meeting. In the meanwhile, some of the transferors also revoked the powers of attorney and the memoranda of understanding entered into between the appellants and the transferors. The revocation was challenged by the appellants in the High Court of Judicature at Madras. According to the bank, the entire basis on which the appeals have been preferred that the appellants have acquired the shares from the families promoters of the bank is not correct. Nor there was any group of promoters as alleged by the appellants. Therefore, assurance given by Shri Kathiresan who holds only minority shares in the respondent bank assuring smooth take-over cannot be sustained. Out of 10 directors, one is employee-nominee of RBI and he is functioning as Chairman; 2 others have also been nominated by the RBI and others have been elected by the general body. Therefore, it is wrong to say that the directors are connected with Shri Kathiresan. The decision to refuse registration of transfer was a collective decision of the Board and the two directors who were reported to have sold the shares to the appellants did not attend the meeting. The refusal was in accordance with the powers given in the articles of association and in fact, on many earlier occasions also, the Board had refused registration when it considered the transferees as not desirable persons. In addition, there was violation of the provisions of section 108 of the Act as there were many infirmities in the transfer instruments including that they were not duly stamped. Another important aspect considered by the Board was that the acquisition was a clandestine one with a view to gain control over the management of the bank through the back door and in accordance with the RBI circular, since the acquisition was beyond 1 per cent, decided to refuse registration. Even the transfer fees as provided under article 52 were received on 30-1-1995 and not along with transfer documents on 9-12-1994. The Board also considered that the investment was not a genuine investment but only to gain control and take over the management of the bank. The intention of Essar Group and its associates came to light only after the Committee appointed by the Board investigated the matter, as, at no time, the transferors were informed that the purchase of shares was by a Group. Thus, there was a lack of transparency in the acquisition and the investment was not made in the ordinary course by an investment company. The acquisition of shares by the appellant companies for the benefit of Essar Group was not only suspicious but also was in violation of section 372 of the Act and also Benami Transaction Prohibition Act, 1988. Therefore, in view of the violations of the provisions of law, the Board of the bank could have never approved the transfer.


8. Further, the acquisition of shares would defeat the very object for which the bank was established, that is to pursue the interest of Nadar Commu-nity. All along the bank has been concentrating on the development of Nadar Community both in terms of business transacted, and also in terms of employment to that community. Since the Essar Group does not belong to this community and in view of the stand taken by them in the appeals, that, such a provision in the memorandum is contrary to article 15 of the Constitution of India, they are not likely to protect the interests of Nadars. In addition, the memoranda of association of the appellant companies do not permit the appellants from carrying on the business of banking and, therefore, the. acquisition of impugned shares should also be against their own memoranda of association. The reply also gives the progress made by the bank right from its inception. The reply also states that many of the transferors have, through letters, intimated, that they do not approve of take-over by Essar Group and some of them have already challenged the power of attorney and memoranda of understanding. To sum up, the bank has stated that the relief sought for by the appellants should not be granted.


9. The stand of employees associations, Intervener No. 5 is that the acquisition of the shares by the appellants would be prejudicial to the interest of the bank employees who are mostly from Nadar community. Once Essar takes over the company, the promotional avenues of the present employees will be upset and they will also become liable for transfer to various parts of the country. The future employment opportunities for Nadar community will also be affected.


10. According to some of the transferors the acquisition of shares by the Appellants was clandestine and they have already filed a civil suit questioning the validity of the irrevocable power of attorney executed by them in favour of the appellants on various grounds.


11. The stand of the Intervener No. 1, viz., the Associations of Nadars, is that, the bank was promoted by the members of Nadar community and this Bank is servicing mostly the community members and 90 per cent of the employees are from this community. It has always been under the management of persons belonging to this community and under their management the bank has enormously grown. Even though many of the shareholders sold the shares to the appellants, it is because of the inducement offered through high price for the shares. At no time, these shareholders were aware that the acquisition by the appellants was for the purpose of taking over the bank. Had they been aware of the take over attempt, they would not have sold their shares. While acquiring the shares, appellants also obtained from these shareholders, irrevocable power of attorney and memorandum of understanding by concealing the fact of take over attempt. While the consideration was paid by one appellant, the shares were transferred in the name of other appellants, thus attracting the provisions of Benami Transactions (Prohibition) Act. The take over is against the public at large and the community in particular. These interveners are also members of the Bank and change in the management would prejudicially affect them as members also.


12. 13 other shareholders who have not sold their shares and were allowed as Intervener No. 3 have taken the stand more or less similar to the stand taken by the other interveners.


13. The Officers' Association of the bank, represented by Shri Sampath, Intervener No. 4, while appreciating the growth of the bank in every area of operation under the present management, has also taken the stand that the take over of the company by Essar Group would be against the interest of the officers' community and public.


14. Another Association of Officers, represented by Shri Gokale, Inter-vener No. 2 states that the bank is not being managed as per the principles of banking and various actions by the bank are prejudicial to the public interest and the bank. The communal colour given by the bank in refusing the transfer, cannot, on any ground, be sustained. The refusal to register the transfer is only with a view to perpetuate the continuation of the present Board which has been causing great damage to the bank.


15. Interveners No. 6 who claim to be members of the respective associa-tions have questioned the locus standi of the intervener No. 1 on the ground that they do not represent the respective associations and the associations have not been authorised to enter in the proceedings to oppose the prayer of the appellants. On the other hand, in view of the mishandling of the affairs of the bank by the Board, the prayer of the appellants should be granted. They have also questioned the communal colour given in justification of the refusal.


16. Before proceeding with these various issues raised in this petition, we may also mention, that, after the instant appeals were filed, during the pendency of these proceedings, certain other petitions have been filed before us in the matter of this bank. They relate to - one petition under section 398(1)(6) of the Act, two petitions under sections 247 and 250 of the Act and one petition under section 167 of the Act. Even though the jurisdiction to hear these petitions is with the Principal Bench/Single Member Bench, since we ourselves constitute the Principal Bench, all matters were, with the consent of the parties, transferred to this Bench and heard together. However, in this order we are considering only the appeals and the judgment on other petitions are being delivered separately.


17. As far as the appeals are concerned, on the basis of the pleadings and arguments, we have set the following issues for decision:


(a) Whether the articles of association vest the Board of Directors the power to refuse registration of transfer.


(b) Whether the instruments of transfer conform to the requirements of section 108.


(c) Whether the transfers are hit by the Benami Transactions (Prohibition) Act and as such are void.


(d) Whether the transfers are in violation of any statutory provisions.


(e) Whether the acquisition of the shares by the appellants is in violation of the provision of the RBI's Circulars.


(f) Relief.


18. Shri C.A. Sundaram, advocate for the appellants argued to state, that, the board of directors of the bank does not enjoy the power to refuse transfer. According to him, article 48 of the articles of associations of the bank dealing with the power of the Board in this regard provide only two occasions when the Board has the power to refuse registration. They are : one in case of transfer of a share not being fully paid to a person of whom the Board does not approve and the second is in respect of a share on which the bank has a lien. However, in case the transfers do not satisfy the requirement of section 108 the bank should send back the instruments for re-submission after complying with the provisions of section 108. There-fore, he submitted that the bank cannot, under the guise of exercising its powers under articles, refuse registration on any ground as it may choose.


19. According to Shri Sundaram, relying on Bajaj Auto Ltd. v. N.K. Firodia [1971] 11 Comp. Cas. 1 (SC), even where the articles provide that directors might, at their absolute discretion, decline to register transfer of shares, then such power cannot be exercised indiscriminately except in the interest of the company and for the general interest of the shareholders because the directors are in a fiduciary position both towards the company and towards every shareholder. The directors are to act bona fide and not arbitrarily and not for any collateral purpose. According to Shri Sundaram, the decision of the board of directors to refuse registration was not bona fide but only to keep out his clients holding nearly 65 per cent of the shares of the company from exercising their right in respect of these shares. All the reasons adduced are only to ensure that the present board of directors with the support of less than 3 per cent of the shareholders in the company to continue to function as such.


20. He also stated, relying on Alaknanda Mfg. & Finance (P.) Ltd. v. CLB [1995] 83 Comp. Cas. 514 (Bom.), bona fides of the decision of the board of directors can always be looked into by the CLB and in the present case, even without any power conferred by the articles, the Board has refused registration and as such CLB should order registration. On this proposition he also relied on Shailesh Prabhudas Mehta v. Calico Dyeing & Printing Mills Ltd. [1994] 80 Comp. Cas. 64 (SC). He also cited V.B. Rangaraj v. V.B. Gopal Krishna [1992] 73 Comp. Cas. 201 (SC) wherein the Supreme Court held that transfers are regulated by the articles alone and restrictions on transfer not specified in the articles are not binding on a company or shareholders. Therefore, according to Shri Sundaram, in the instant case the articles of the bank permit the Board to refuse only in two instances and the Board has gone beyond its powers to adduce various other reasons for refusal which are not binding on his clients.


21. He further stated that the obvious but hidden reason for refusal is to perpetuate the interest of the present board of directors and this cannot be allowed as was held by the CLB in Jagdish Chandra Champaklal Parekh v. Deccan Paper Mills Co. Ltd. [1994] 80 Comp. Cas. 159.


22. Reiterating his stand that the Board of Directors cannot go beyond the power conferred by it by the Articles, he drew our attention to the decision of the Supreme Court in Luxmi Tea Co. Ltd. v. Pradip Kumar Sarkar [1990] 67 Comp. Cas. 518 wherein it was held that company's power to refuse transfer of shares must be specified or provided for in the Act or in its articles of association. Such power cannot be exercised under company's inherent power when no such specific power is conferred. Summing up his arguments on this issue, Shri Sundaram stated that no further enquiry need be made, inasmuch as, the settled law on refusal to register transfer the shares is that, the Board cannot go beyond the powers conferred on it by its articles and since the reasons adduced for refusal on transfer do not fall within any of the two grounds provided in the articles, CLB should order registration of the transfer of shares lodged by his clients. However, he contended, that, if some transfers do not comply with the provisions of section 108, he would not press for an order to register those transfers. At the same time, he maintained that the CLB should not take cognizance of any other ground which was not considered by the Board but were advanced during arguments.


23. Shri Dilip Singh, the counsel for the bank stated that articles cannot be read in isolation of the memorandum. As per the memorandum, the purpose of establishing the bank is to foster the interest of Nadar community and acquisition of such a large percentage of shares by persons not belonging to that community and which is likely to change the composition of the board of directors would straightway defeat the provisions of the memorandum. Even assuming that the articles do not give power of refusal, he stressed, yet the articles, being subordinate to the memorandum, should protect the achievement of the object. The Board has every right to do what it deems fit in the interest of the company, in pursuit of the objectives of the company. Even otherwise, the refusal has not been done on flimsy grounds. One of the main grounds for refusal is to ensure compliance with the provisions of RBI circular and also on the basis of non-compliance with the provisions of section 108 and on consideration that the acquisition is in violation of provisions of various other statutes. As long as the decisions are bona fide and in the interest of the company, the decision of the Board cannot be questioned. Therefore, according to Shri Dilip Singh, CLB's concern should not be whether the Board has any power in the articles or not but to see whether the decision to refuse registration has been taken on proper and valid grounds.


24. Shri Harikrishnan, appearing on behalf of interveners stated, that, a careful reading of the articles would show that there are three grounds under which the Board can refuse registration and not two grounds as stated by Shri Sundaram. According to Shri Harikrishnan, the three grounds are:


(a) When the shares are not fully paid.


(b) When transfer is to a person of whom the Board does not approve.


(c) Shares on which the company has a lien.


According to him, article 48 which deals with transfer of shares is reproduction of the provisions, clause 20 of Table 'A' of the Companies Act, 1913. While doing so 'comma' between 'shares' and 'not being fully paid' had been inadvertently omitted. If the comma is inserted, then it would be clear that the Board can refuse registration of transfer of not fully paid shares and also to persons of whom the Board does not approve. In the present case the Board did not approve the appellants who belong to Essar Group to become members of the bank and as such in the interest of the company, the Board has refused registration. The marginal note to this article "Registry be refused if the transferee not approved" itself would show the existence of such power, he stated. Therefore, to say that the Board does not have the power is not correct and it is also not correct to say that the Board has not acted bona fide and in the interest of the company.


25. He further stated that besides the articles, even section 111 clearly provides, that, in addition to the grounds provided in the articles, the Board can refuse registration on other grounds. The words 'or otherwise' used in section 111(1) indicate the inherent powers of the Board to refuse registration on any ground as long as the same is bona fide and in the interest of the company. Taking us through the decision of the Supreme Court in Luxmi Tea Co. Ltd.'s case (supra), he stated that the words 'or otherwise' used in the then section 111(2) were examined by the Supreme Court and the Supreme Court held that, had the words 'or otherwise' been used in the then section 111(1), perhaps it would mean the inherent powers of the company. Now, that the words 'or otherwise' have been used in section 111(1) itself, it would definitely mean the inherent powers of the board of directors. Therefore, according to Shri Harikrishnan, not only there are powers in the articles to refuse registration in the name of a person whom the Board does not approve, the Act itself vests inherent powers with the Board in view of the words 'or otherwise' used in section 111(1). Under these circumstances, the only issue for consideration by the CLB is whether the decision of the Board to refuse was bona fide and in the interest of the company. He further stated that a reading of the Board Resolution would show that the Board had applied its mind thoroughly before refusing registration. The main object for which the bank was incorporated as is apparent from the memorandum of association, was to foster the interest of Nadar community. Taking over by Essar Group would definitely be against the interest of Nadar community and, there-fore, the Board was right in refusing registration of transfer.


26. We have considered the arguments of the counsel. According to Shri Harikrishnan, not only the articles empower the Board to refuse registration in favour of persons whom the Board does not approve, the Board has also inherent powers to refuse registration. It is the case of Shri Sundaram that neither the articles provide any such power nor the Act confers any inherent power on the Board. It is the case of Shri Dilip Singh that whether articles give powers or not, as long as the decision of the Board is on valid grounds, especially when the decision is in pursuit of the objective of the company, the decision cannot be impugned.


27. As Shri Harikrishnan stated that article 48 is the reproduction of Regulation 20 of Table 'A' of the 1913 Act, it is relevant to extract the same. It reads:


"The directors may decline to register any transfer of shares, not being fully paid shares, to a person of whom they do not approve, and may also decline to register any transfer of shares on which the company has a lien."


Article 48 of the company reads as follows :


"The directors may, subject to right of an appeal conferred by section 111 of the Act, decline to register any transfer of shares not being fully paid, to a person of whom they do not approve and may also decline to register any transfer of shares on which the company has a lien."


A reading of these two would show that article 48 is not the reproduction of Regulation 20 of Table 'A' of the 1913 Act. As a matter of fact in the 1913 Act, there was no section regarding refusal of transfer as section 111 which has been specifically referred to in article 48. For the first time the provision relating to refusal of transfer of shares was inserted in the 1956 Act and consequently Regulation 20 of the 1913 Act has also been amended to read as regulation 21 with certain changes. Perhaps there had been certain amendments to the articles of the company later, to fall in line with Regulation 21 of Table 'A' of the 1956 Act. Regulation 21 of Table 'A' reads as follows:


"The Board may, subject to the right of an appeal conferred by section 111, decline to register:


(a) the transfer of a share, not being a fully paid share, to a person of whom they do not approve; or


(b) any transfer of shares on which the company has a lien."


A comparison of this Regulation with article 48 shows that except for some minor changes in words, the provisions of Regulation 21 of Table 'A' have been practically incorporated in article 48.


28. The issue for our consideration is whether the words "to a person of whom they do not approve" in article 48 stand alone as contended by Shri Harikrishnan, or it is to be read with the preceding words "decline to register any transfer of share not being fully paid" as contended by Shri Sundaram. According to Shri Harikrishnan, if 'comma' is inserted between the words 'any transfer of shares' and 'not being fully paid shares' then it would be clear that these two grounds are distinct and separate. According to Shri Sundaram, one has to read the articles as they are, and even if 'comma' is inserted, then the words 'may decline' should have been used before the words 'to a person' as has been used before the words "to register any transfer of shares on which the company has a lien". According to Shri Sundaram, a reading of Regulation 21 of the 1956 Act which has been more or less reproduced in article 48 would make it clear that "to a person of whom they do not approve" has to be only with reference to a share not being fully paid share and it cannot be applied to a share which has been fully paid. In other words, according to him, as long as the shares are fully paid, the question of consideration whether the transferee is a desirable person or not does not arise.


29. We are in general agreement with the proposition of Mr. Sundaram. No doubt article 2 of the articles of the company does make it clear that Table 'A' of either the 1913 Act or the 1956 Act shall not apply to the Bank. But to interpret the provisions of an article, we feel that assistance could be taken from Table 'A' especially when Shri Harikrishnan stated that article 48 is the reproduction of Regulation 20 and if we do so, it makes it abundantly clear that the Board can decline to register in favour of that person not approved by them only in case of shares which have not been fully paid, even after taking into consideration the 'comma' as pleaded by Shri Harikrishnan. The reasons for such a provision could be that in case of partly paid shares, the Board's consideration would be whether the transferee would be in a position to pay the balance amount on such shares or not and as such we are of the view that only in this context the power to refuse registration in case of partly paid shares to a person not approved by the Board has been inserted in the Articles. Therefore, as long as the shares are fully paid, the question of consideration whether the transferee is a desirable person or not does not arise. Thus, we are not in a position to read from the articles that the Board has absolute powers not to approve any transfer even when it relates to fully paid shares on the grounds that the transferee is not a desirable person. In view of the foregoing we are of the view that the restrictions regarding transfer of shares as contained in article 48 relate only to partly paid shares and the shares on which the company has a lien. Shri Harikrishnan argued that the marginal note "Registry to be refused if the transfer not approved" has also to be taken into account while reading to article. In this connection it is relevant to quote from article 1 of the bank. "The marginal note inserted for convenience shall not affect the construction of the Article". From this it is clear that the marginal note is only for facilitation and not to be read in isolation of the contents of the articles and marginal note cannot affect the construction of the articles.


30. As far as the arguments of Shri Dilip Singh regarding the supremacy of memorandum over articles are concerned, we do agree that it is a well settled principle of law but in the instant case in linking the power of the Board to refuse registration with the object regarding fostering the interest of a particular community, we do not find much substance. The arguments of Shri Dilip Singh in this regard is the direct outcome of the averments made in the appeals by the appellants, that such an object in the Memorandum is against article 15 of the Constitution. On this score, the apprehension that the appellant group may not continue with that object has been expressed. However, during the hearing, Shri Sundaram, categorically stated that the policy followed by the bank will be continued and there need be no apprehension in this regard. If we consider the particular object in the memorandum which reads as "To foster and develop the resources of the community or class called as Nadars", we are not in a position to come to the conclusion that the ownership of the bank through shares should always be held by the people of this community. If the intentions were that there could be no change in the ownership of the shares, nothing prevented the company from very specifically providing in the articles itself that no transfer of shares to persons other than those belonging to this particular community would be approved or that there would be pre-emptive right to members of this community to purchase shares whenever offered, in the memorandum itself, such a stipulation could have been made. For a similar plea for refusal to register transfer on the ground of pursuing company's objects in Luxmi Tea Co. Ltd.'s case (supra), the Supreme Court ruled that the objects or purposes for which a company is created should be distinguished from the powers which it can exercise. Shri Datar's reliance on Angostura Bitters v. Albert Kerr [1934] 4 Comp. Cas. 1 (PC) that where articles nullify the objects in the memorandum, the later should prevail does not apply in this case in view of Supreme Court decision in Luxmi Tea Co. Ltd.'s case (supra). Therefore, we are unable to uphold the contention of Shri Dilip Singh that the power to refuse registration on this ground could be traced to the memorandum.


31. As far as the inherent powers are concerned, the counsel for both the appellants as well as respondents have relied on the decision of the Supreme Court in Luxmi Tea Co. Ltd.'s case (supra). While it is the case of the respondents that the words 'or otherwise' talks of inherent powers of the Board, according to Shri Sundaram, it does not.


32. Before we deal with this issue it is necessary to refer to the legislative background relating to section 111. Before amendment to section 111 in 1988 sub-section (1) of erstwhile section 111 reads as follows:


"Power to refuse registration and appeal against refusal?(1) Nothing in sections 108, 109 and 110 shall prejudice any power of the company under its article to refuse to register the transfer of, or the transmission by operation of law of the right to, any shares or interest of a member in, or debenture of, the company."


Sub-section (2) reads as follows:


"If a company refuses, whether in pursuance of any power under its articles or otherwise, to register any such transfer or transmission of right, it shall, within two months from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as the case may be."


33. In 1988, section 111 was amended by which sub-section (1) was omitted and the then sub-section (2) was renumbered as sub-section (1) with the addition of the words "giving reasons for such refusal" at the end of the sub-section. In other words, earlier, whenever a company refused registration, it was not incumbent on the company to furnish, alongwith the notice, the reasons for refusal. But now sub-section provides that alongwith notice, reasons for refusal should also be furnished. Luxmi Tea Co. Ltd.'s case (supra) was decided on the basis of the provisions of section 111 as it stood before 1988 amendment. That case was similar to the case before us in the sense that, in that case the articles of association of that company provided that the Board could refuse registration of transfer in case of not fully paid shares and shares in which the company had a lien. The company refused transfer of shares on other grounds and it was the contention of the company that the words 'or otherwise' in the then sub-section (2) conferred upon the company, inherent powers and, therefore, the company was right in refusing registration of transfer. Dealing with words 'or otherwise', the Supreme Court held as follows:


'Even the submission based on the words "or otherwise" in sub-section (2) of section 111 of the Act and in article 42 of the articles of association to the effect that these words recognise the existence of an inherent power to refuse registration of the transfer of the share does not commend itself to us. The words "or otherwise" were inserted in sub-section (2) of section 111 of the Act in 1960; and it is this sub-section so amended which is applicable to the facts of the instant case. Sub-section (2) of section 111 does not confer any right but only casts a duty to give notice of refusal to register the transfer of a share and provides for punishment in case of default in doing so. Giving of notice is necessary, inter alia, to facilitate the exercise of the right of appeal conferred by sub-sections (3) and (4) of section 111 to introduce a concept of either conferment or recognition of a right to refuse registration of the transfer of a share in sub-section (2) militates against and runs counter to the very texture and purpose of this sub-section. Such an interpretation would have the effect of imputing to the Legislature an intention of making an effort to fix a square peg in a round hole, when the purpose, if it was to confer or recognise any inherent power to refuse registration of the transfer of a share, could plainly be achieved by inserting the words "or otherwise" after the words "under its articles" and before the words "to refuse to register" in sub-section (1) of section 111 which is the sub-section relevant for the purpose.


The words "or otherwise" take colour from the context in which they are used. In our opinion, the words "under its articles" in sub-section (2) of section 111 of the Act have been used in the same sense as is expressed in legal terminology by the familiar words "conferred by law". Consequently, if the opening part of sub-section (2) is read as - "If a company refuses, whether in pursuance of any power conferred by law or otherwise", it would be incongruous to suggest that the Legislature in using the words "or otherwise" intended to give recognition to a power to refuse registration of the transfer of a share even otherwise than in accordance with law. This would be tantamount to putting a premium on taking the law into one's own hands. The Legislature cannot be imputed with any such intention. For these reasons, we are of the view that in the context in which the words "or otherwise" have been used in sub-section (2) of section 111, they only purport to cast a duty or impose an obligation of giving notice of refusal to register the transfer of a share irrespective of the fact whether such refusal is under the articles of association of the company or de hors the articles, which would include even a case where such refusal has been made arbitrarily or for any collateral purpose. A fortiorari, this would be the interpretation of even article 42 of the articles of association of the company inasmuch as on its plain language which, except for the provision for punishment, is in pari meteria with sub-section (2) of section 111 of the Act, the purpose of this article is the same as of the said sub-section (2)....' (p. 523)


34. Relying on the observation of the Supreme Court "If it was to confer or recognise any inherent power to refuse registration of the transfer of a share, could plainly be achieved by inserting the words 'or otherwise' after the words 'under the articles' and before the words 'to refuse to register' in sub-section (1) of section 111 which is the sub-section relevant for such purpose", Shri Harikrishnan stated that now the words 'or otherwise' appear in sub-section (1) itself after 1988 amendment, it should be deemed to confer inherent powers on the board of directors of a company to refuse registration. We are unable to sustain this argument. As pointed out earlier, sub-section (1) which was considered by the Supreme Court no longer exists after 1988. This sub-section, as is clear from its contents, recognised the power of a company under its articles to refuse registration of transfer. Now with the omission of this sub-section in section 111, there is no statutory recognition of such power. The then sub-section (2) which is now sub-section (1) deals only with the duty of a company whenever they refuse registration either under powers in the articles or otherwise to send intimation alongwith reasons for refusal. This sub-section does not deal with the power of a company. As a matter of fact, according to us, compared to the provisions of pre-amendment section 111, present provisions of section 111 are more restrictive. The observation of the Supreme Court referred to above with regard to the words 'or otherwise' has not in any way altered the interpretation given by the Supreme Court just because sub-section (2) has been renumbered as sub-section (1). Therefore, we have no hesitation to say, that, as held by the Supreme Court the words 'or otherwise' cannot be deemed to confer any inherent powers on the board of directors to refuse registration of transfer.


In respect of refusal to register transfer of shares, from the various cases dealt with by the Courts, four positions emerge. One; there is no power in the articles to refuse registration, two; the articles provide for unfettered powers of refusal, three; articles provide restrictive powers in regard to refusal. Fourth and last, the powers to refuse should be traceable to the Act.


36. Even though there are many judicial decisions by various Courts touching upon all these situations, since the Apex Court has also dealt with all these situations, it is worthwhile referring to these decisions. In Bajaj Auto Ltd.'s case (supra), article 52 of the articles of association of the appellant company provided that the directors might, at their absolute discretion, decline to register any transfer of shares. It was held by the Supreme Court that "discretion did not mean the power of affirmation or negation of a proposal. It implies just and proper consideration of the proposal in the facts and circumstances. In the exercise of that discretion, the directors have to act for the paramount interest of the company and in the general interest of the shareholders because the directors are in fiduciary position, both towards the company and towards every share-holder". Therefore, it is apparent from this decision, that, even where a company has absolute discretion, reasons adduced for refusal should be just, proper, bona fide and in the interest of the company. In other words there is no blanket authority available to a company to refuse registration of transfer, even if the articles provide for absolute discretion.


37. In regard to a situation where the articles provide for restrictive powers, it was held by the Supreme Court in V.B. Rangaraj's case (supra) that "shares in a company are transferable like any movable property. The only restriction on transfer of a share of a company is as laid down in the articles, if any. The restriction which is not specified in the articles is, therefore, not binding either on the company or on the shareholders. The vendee of the shares cannot be denied registration of shares purchased by him on a ground other than that stated in the articles". The same principle of law has been further reiterated by the Supreme Court in Luxmi Tea Co. Ltd.'s case (supra). It is worthwhile quoting the relevant portion from that judgment.


"We are of the opinion that unless there is any impediment in the transfer of a share of a public limited company, such as the appellant, a shareholder lias the right to transfer his share. Correspondingly, in the absence of any impediment in this behalf, the transferee of a share, in order to enable him to exercise the rights of a shareholder as against the company and third parties, which is not possible until the transfer is registered in the company's register, is entitled to have a rectification of the share register of the company by inserting his name therein as a registered shareholder of the share transferred to him. To have such rectification carried out is the right of the transferee and can be defeated by the company or its directors only in pursuance of some power vested in them in this behalf. Such power has to be specified and provided for. It may even be residuary but in that case too it should be provided for and traceable either in the Act or the articles of association. Even if the power of refusal is so specified and provided for, the registration of a transferred share cannot be refused arbitrarily or for any collateral purpose, and can be refused only for a bona fide reason in the interest of the company and in the general interest of the shareholders. If neither a specific nor residuary power of refusal has been so provided, such power cannot be exercised on the basis of the so-called undeclared inherent power to refuse registration on the ground that the company or its directors take the view that in the interest of the company and the general interest of the shareholders, registration of the transfer of shares should be refused. Indeed, making a provision in the Act or the articles of association, etc, conferring power of refusal would become futile if existence of an inherent power such as claimed by the company in the instant case is assumed for the simple reason that the amplitude of the so-called undeclared inherent power would itself take care of every refusal to register the transfer of share. Assumption of such a power would result in leaving the matter of transfer of share and its registration at the mercy and sweet will of the company or its directors as the case may be. In the absence of any valid and compelling reason, it is difficult to comprehend such a proposition." (p. 522


38. From the above discussion, the legal position that emerge is that when the articles do not provide for any powers for refusal, the company cannot refuse. If it has restrictive powers as per articles, the powers could be exercised only in regard to these matters and where unfettered powers are available under the articles, even then it should be only for bona fide reasons and in the interest of the company and in general interest of the shareholders otherwise the power should be traceable to the Act.


39. Considering the legal position as enumerated above, we have no hesitation to come to the conclusion that the board of directors of the company does not have any general power to refuse transfer either under the articles or under inherent powers except under two circumstances as provided in the articles.


2nd issue - Requirements of section 108


40. Having considered the legal position in regard to the powers of a company to refuse registration of transfer, we may look into the reasons given by the bank for refusal of the impugned shares covered in these appeals. The reasons can be grouped as general and specific. As for the general reasons are concerned, they are:


(a) The transfer of shares is not in the nature of genuine investment.


(b) Motive for purchase of the shares is to take over the management of the company.


(c) The registration would defeat the purpose for which the bank was established.


As far as the specific reasons are concerned, most of them relate to the deficiencies in the transfer instruments as indicated below which attract the provisions of section 108:


(I) ** ** **


(a) Instruments are not duly stamped.


(b) Transferor's signature differ from the specimen signatures.


(c) The transfer fee, as per article 52, has not been remitted.


(d) Transferor's signature had not been attested.


(e) The value of notarial stamp is insufficient as against Rs. 10, only stamps worth Rs. 5 have been affixed.


(f) Corrections in the deed not authenticated by transferor and transferees.


(g) Transfer deed has not been lodged within the time prescribed by the Act.


(h) Transfer deed has not been presented to the prescribed authority for affixing the stamp as per section 108 (1)(a).


(i) Copy of the resolution of the transferor company enclosed with the transfer deed is incomplete.


(j) Specimen signature of the authorised signatory had not been attested.


(k) Authorised signatory of the transferor or transferee company has not signed the transfer deed in the respective capacity.


(l) In case of shares held in the name of minors, there is no Court order or a declaration to the effect that the sale proceeds would be utilised for the minor's benefit.


(m) The transfer deed suffer from absence of witnesses of transferor, date of execution, place of execution, specimen signature of transferee, address of the transferee.


(II) There is violation of provisions of section 187 of the Act.


(III) The acquisition is in violation of the circular issued by RBI.


41. In the reply filed by the bank and during the arguments, certain other grounds were advanced to justify the refusal to register. These grounds relate to alleged infringement of the provisions of law in acquiring the shares. It was argued that even if these grounds were not considered by the Board, they should be taken cognizance of by the CLB. The new grounds are (hat the transfers are hit by the provisions of the Benami Transactions (Prohibition) Act; transfers are in violation of the provisions of section 370/372 of the Act, etc.


42. As far as the general grounds are concerned we are of the view that we need not have to go into these aspects on the premises that they do not fall within the restrictive powers given by article 48 of the articles to refuse registration. We feel that we would correct in taking this view on the basis of the decision of the Supreme Court in Laxmi Tea Co. Ltd.'s case (supra) wherein, as already extracted, the Supreme Court observed "if neither specific nor residuary power of refusal has been so provided, such power cannot be exercised on the basis of the so-called undeclared inherent power to refuse registration on the ground that the company or its directors take the view that in the interest of the company and general interest of the shareholders, registration of the transfer of shares should be refused. "[Emphasis supplied]


Our stand in this regard is also supported by Supreme Court decision in V.B. Rangaraj's case (supra) in which the Court observed that "the vendee of the shares cannot be denied registration of shares purchased by him on the grounds other than what stated in the articles."


43. As far as the second issue regarding compliance with the provisions of section 108 is concerned, Shri Sundaram stated, that, while compliance with the requirements of this section is a must, yet, under the guise of the provisions of section 108, the Board has taken cognizance of certain minor irregularities in the instruments which cannot invalidate the instruments. Therefore, he urged that while deciding this issue, the CLB should identify all the mandatory requirements and disallow refusal on grounds which are not material as far as the instruments of transfer are concerned. Shri Dilip Singh cited a large number of cases which we do not propose to discuss in regard to the mandatory nature of section 108 and provisions of the Indian Stamp Act, in view of the established legal position in this regard and in view of the fact that such propositions are not seriously challenged.


44. As we have already observed, even if, there are no powers in the articles, if the powers can be traced to any provisions of the Act, then power to refuse registration can be exercised by the Board. The provisions of section 108 have been declared to be mandatory by the Supreme Court in Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp. Cas. 185. According to section 108 the company shall not register transfer unless proper instrument of transfer duly stamped and executed by and on behalf of the transferor and by and on behalf of the transferee and specifying the names, address and occupation, if any, of the transferee alongwith the certificates relating to shares are lodged with the company. The section also provides that the transfer instruments shall be in the prescribed form. From the provisions of this section it is clear that the following requirement have to be satisfied before a company registers a transfer:


(a) Prescribed form is to be used.


(b) It has to be duly stamped.


(c) It has to be executed by and on behalf of the transferor and by or on behalf of the transferee.


(d) The name, address, occupation, if any, of the transferee have to be specified.


(e) Instrument of transfer has to be delivered alongwith the certificates relating to the shares, within a specified period of time.


45. In regard to the deficiencies in the transfer instruments, it is worth-while referring to the decision of Court of Appeal in Paradise Motor Co. Ltd., In re [1968] 38 Comp. Cas. 863 and Nisbet v. Sheperd 19 CLA 234 wherein the Court held that the omission from the transfer forms of the particulars regarding consideration, the date of execution, the address of the transferor and the transferee and the stamp duty were mere irregularities and were not such as to render the instrument of transfer not proper instruments for the purpose of section 75 of the English Companies Act, 1948. It also held that the expression 'proper instruments' does to mean an instrument has to comply with every statutory requirement. However, in view of the Supreme Court decision that the provisions of section 108 are mandatory, we cannot apply the English decision in this regard. Therefore, the requirements that have been indicated will have to be complied with before an instrument could be considered as proper within the meaning of section 108 and as long as the refusal is with reference to non-compliance with these requirements, such refusal cannot be impugned. However, we find that some of the transfers have been refused on the ground that the occupation of the appellant had not been indicated. Since all the appellants are investment companies and they have already affixed the rubber stamp of their names, as transferees, omission to mention occupation does not invalidate the instruments as held by the CLB in Jagatjit Industries Ltd. v. Mohan Meakin Ltd. [1994] 80 Comp. Cas. 411.


46. Therefore, we have to only see whether other deficiencies are material or not. Let us examine some of the other reasons one by one. Article 52 requires that a sum not exceeding Rs. 5 as may be prescribed by the directors from time to time will have to be paid in respect of transfer or transmission of shares. In this regard, the counsel for the bank relied on the decision of the Kerala High Court in Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd. [1992] 73 Comp. Cas. 80 and P.V. Chandran v. Malabar & Poineer Hosiery (P.) Ltd. [1990] 69 Comp. Cas. 164 and stated that the Court held that refusal to register for non-payment of transfer fee was valid. In the both cases, the fee was not at all paid by the time the Board considered registration. It is an admitted position that the fee did not accompany the certificates but was remitted later. In other words, by the time they considered the transfers, the transfer fee had already been received by the bank. Thus the decision cited by the counsel are not applicable in this case as long as, by the time the Board considered the transfer, the fee had been paid, article 52 has been complied with. Non-receipt of fee along with the instruments cannot be a material factor for declining the registration.


(b) In regard to the point that transferor's signature had not been attested, even as per the instructions at the reverse of the prescribed form, attestation of transferor's signature is required only in cases where the same differs from the specimen signatures or thumb impression has been used in place of signature. As long as the transferor's signature does not differ, there is no requirement that attestation is necessary. Therefore, this objection is also not material.


(c) In regard to insufficient value of notarial stamps, there is no requirement of notarial attestation, either as per the provisions of section 108 or as per the instructions contained on the reverse of the prescribed form except as stated in (b) above. Insufficient notarial stamps does not invalidate the instruments as not duly stamped and, therefore, this infirmity is also not a material one.


(d) One of the grounds taken is, that, in case of shares held in the name of minors, there is no Court order to the effect that the sale proceeds will be utilised for the minor's benefit. Not much light was thrown on this matter during the arguments. Perhaps, this objection is based on provisions of Hindu Law. If a property is held for the benefit of the minor, then the karta can sell the property only for legal necessities or for the benefit of the minor, otherwise, the sale could be declared void. Therefore, it is the buyer, in this case, the transferee, who has to be more concerned about this aspect, and the bank, being only the registering authority should not be concerned about it. Even otherwise in Manik Chand v. Ramachandra [1980] 4 SCC 22 the Supreme Court held that "contract entered into by the guardian on behalf of a minor is enforceable". Therefore, this ground of rejection cannot be sustained.


(e) On the other objections like resolution of the transferor company enclosed with the transfer deed is incomplete, authorised signatory of the transferee and transferor had not signed the transfer deed in their representative capacity, specimen signature of the authorised signatory had not been attested, etc., were not explained during the hearing. As these are all procedural matters, not going into the route of the transactions, nor the validity of the instruments of the transfers, we do not consider them to be material enough to merit rejection of registration.


47. To sum up, on the basis of the foregoing discussion, the company was justified in refusing registration of transfer of shares which suffer from one or more of the following deficiencies and not on any other ground under the provisions of section 108:


(a) Instruments not duly stamped.


(b) Transferor's signature differ from the specimen signatures.


(c) Transfer deed not lodged within the prescribed time.


(d) Transfer deed not presented to the prescribed authority.


As far as item (a) is concerned, the bank has stated that many of the transferors have intimated that when the instruments were executed by them, no stamps had been affixed and, therefore, all such instruments should be deemed to be unstamped. We are not inclined to do so for the reason that before they were lodged the instruments had been stamped and the presumption to be drawn is that even before the transferee signed the instruments, they had been stamped. Another argument taken was that mere crossing of lines on the stamps cannot be considered as cancellation. In this regard the legal position is that any mode of cancel-lation, is permissible as long as such cancellation made the stamps unreusable.


48. Since the appellants questioned the correctness of the various deficiencies in the transfer forms reported to have been noticed by the Board, with the consent of the parties we appointed Shri B.T. Rangamani, a practising Company Secretary and a former President of the Institute of Company Secretaries of India, as scrutiniser of all the transfer deeds with the directions to give a report on the deficiencies noted in the Board Resolution. We also made it clear that his findings will be binding to the parties. Shri Rangamani has since given his report with a copy to the parties. Later, the bank has furnished a list of 6 transfer forms, which according to the bank, have not been duly stamped but the scrutiniser had indicated in his report that they were duly stamped. We direct the scrutiniser to go through the originals of these transfer forms and give his findings on the same, which will be binding on the parties.


In final, whichever instrument the scrutiniser has observed in his report to suffer from any of the deficiencies, which, we have held as mandatory in nature in para 47, we hold that transfers covered by these instruments have been rightly refused, and the decision to refuse registration of shares covered in all other instruments on the ground of non-compliance with provisions of section 108, is not correct.


3rd issue - Benami Transactions (Prohibition) Act, 1988


49. Having held that the board of directors do not have powers to refuse registration except on two grounds as stated in the articles, yet they have the powers to refuse registration for non-compliance with the mandatory provisions of section 108, the question before us is whether the Board is justified in refusing registration on other grounds as stated in the Board Resolution and also certain other grounds taken during the arguments. While one of the specific grounds considered by the Board was in regard to the provisions of RBI Circular, the other issues raised in the reply in the appeals and during the argument, related to violation of the provisions of Benami Transactions (Prohibition) Act and sections 187(c), 49, 370 and 372. According to the counsel for the respondents, even if the later grounds had not been considered by the Board, yet, since they relate to violation of provisions of a statute, CLB should also take them into consideration while deciding the matter. This stand has raised a larger issue as to whether a company can go beyond the transactions of transfer and take a decision on such findings. In this connection, it is material to point out that the Bank is an unlisted company. Unlike a listed company which was earlier governed by section 22 of SCR Act (which has now been repealed) which provided that, notwithstanding anything contained in the articles a listed company may refuse registration of transfer if the transfers were in contravention of any law. In other words, even in the absence of provisions in the articles, a listed company was justified in going behind the acquisition and decide on whether the acquisition had violated the provisions of any law or not. The Bank being a unlisted company, our inclination would be that the Board cannot go behind the transfers and find out whether any violation of any law has taken place. But, in order to ensure that we do not lend credence to an illegal transaction, we thought it fit to give findings on the same.


50. The contention that the acquisition of shares by the appellants is hit by the provisions of Benami Transactions (Prohibition) Act 1988 (Benami Act) was urged by Shri Arvind Datar, Advocate for intervener. Taking us through the pleadings of the appellants and also through a chart submitted during the hearing on the transactions relating to these acquisitions. Shri Datar stated, that, Memorandum of Understanding for sale of shares was entered into by one appellant with a transferor but the transfer was effected in the name of another appellant and in many cases the consideration was paid by one appellant while the shares were transferred in the name of another appellant. In other words, according to Shri Datar the consideration was paid by one while the shares were transferred in the name of another. This, according to him, straightway attracts the provisions of section 2(a) of the Benami Act. Even assuming, as stated in the pleadings, that the accounts of all the appellants were adjusted later by appropriate debit/credit entries relating to the consideration paid by one for the other, such adjustments, he urged, do not validate a benami transaction. According to him the moment one pays consideration for purchase of property and the property is transferred in the name of another benami transaction has taken place. There is no scope for interpretation of the provision of section 2(a) of the Benami Act which is clear and explicit. It is immaterial whether the consideration paid is repaid or refunded or adjusted later in the books of the parties.


51. He further stated that as per section 23 of the Contract Act, if an act is prohibited, then the contract is void. In this case, the Memorandum of Understanding entered into for purchase of shares was on behalf of someone and the shares were actually purchased in the name of another, funds being provided by yet another clearly indicating the fact of benami. Once an act is a benami, then the transaction is illegal and void. In that regard he relied on firm Pratap Chand v. Firm Kotrike AIR 1975 SC 5223 and Manalal v. Kedarnath AIR 1977 SC 53. According to him, the Supreme Court in Union of India v. Mokoh Builders AIR 1977 SC 409, has stated that the real test of benami is the source from where the consideration came. In this case, admittedly as the money was provided by one for the other benami is established. He also relied on Sree Meenakshi Mills Ltd. v. CIT AIR 1957 SC 49 in this regard. He further stated that the appellants belonging to a group and thus providing funds for each other cannot validate a benami transaction as each appellant being a company, is a separate entity. Lifting of corporate veil is permissible only in cases of evasion of tax or circumvention of tax obligation. On this proposition he relied on Workmen Employed in Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. AIR 1986 SC 1, Union of India v. Play World Electronics (P.) Ltd. [1990] 68 Comp. Cas. 582 (SC) and Juggilal Kamalapat v. CIT AIR 1969 SC 932.


52. He further stated that the Benami Transaction (Prohibition of the Right to Recover Property) Ordinance, 1988 did not define the word 'Benami'. But with the Act defining the term, there is no scope to go beyond the definition and one cannot fall back on the earlier decision of courts in this regard. He drew our attention to the decision of Andhra Pradesh High Court in P. Ramachandra Rao v. G. Jangaiah [1989] 179 ITR 438 and S. Mohammad Anwaruddin v. Dr. Sabina Sultana [1989] 179 ITR 442 wherein the court considered the provisions of the Ordinance as well as the Act, to state that benami transaction is absolutely prohibited and therefore void. He also quoted from Manalal case to state 'where a contract, express or implied, is expressly or by implication is forbidden by statute, no court will lend its assistance to give it effect'. One is not concerned as all with the intent of the parties if the parties enter into a prohibited contract, that contract is unenforceable". Therefore, according to Shri Datar, since benami transaction is prohibited CLB cannot by an order, give effect to the same.


53. He further stated that in the suit in Madras High Court, the plea of benami has been raised and even though the Single Judge has observed that the plea of benami transaction is without merits, in view of the Divisional Bench order that the same was in substitution of the order of the Single Judge no cognizance need be taken of the Single Judges' observation especially when the same was made at an interlocutory stage.


54. Shri Harikrishnan also concurred with the arguments of Shri Datar.


55. Shri Sundaram, Advocate, for the appellants contended, that, the Board of the Bank did not consider the alleged benami transactions in the Board Meeting. It has been taken only in the reply filed and is being argued by the 3rd party interveners who have no locus standi as far as the transfers are concerned. None of the parties who sold these shares except a few, has alleged benami. Even otherwise, the question of benami is entirely independent of registration. If there was benami, it had already taken place between the transferors and transferees and, as far Bank is concerned, the transactions had already been completed, and by registering the shares, the Bank is not creating any benami transaction. Even otherwise according to him, the allegations against the appellants is that they belong to Essar Group. If position is recognised, then it is immaterial that one pays for the other within the Group. The payment of money for one appellant by another was only a temporary accommodation depending on availability of funds with each. After the transactions had taken place suitable credit/debit entries were made within the appellants as is evident from the annual reports for the year 1994-95 in respect of these appellants.


56. He further stated that one cannot go by the literal words used in a statute as contended by Shri Datar without considering the import and consequences of such application. He stated that to understand any term or terminology, interpretation given by the courts should be taken into consideration especially when the mere application of the words used is likely to result in ambiguity. According to him, the words used in the relevant section 'consideration paid or provided' are ambiguous.


57. Literal application of the definition, as suggested by Shri Datar, if approved, Shri Sundaram stated, then it would lead to an absurd situation where even if some property is purchased by taking loan from someone else, such a transaction has to be treated as a benami transaction. Relying on Peerless General Finance and Investment Co. Ltd. v. Union of India [1987] 61 Comp. Cas. 628 (Cal.) he stated that:


"One should not construe a definition clause in a manner de hors the natural meaning of the term defined unless such a construction becomes imperative on the express language of the definition clause."


58. According to Mr. Sundaram, the term Benami has been interpreted by the courts before the Benami Prohibition Act was enacted. Therefore, when there is ambiguity in the definition, then resorting to the earlier pronouncements of the court is the right course of action to resolve the ambiguity. In other words, before the enactment of this Act, the meaning of Benami has been well settled and by enacting this particular Act what the Legislature has intended was to prevent benami transactions and subject the persons indulging in benami transactions to appropriate punishment. But the Legislature had not intended to change the meaning of the term 'Benami' in any way. Therefore, according to him, as held by Supreme Court in B.P. Gaziwala v. Union of India [l992] 1 SCC 410 - It is a rule of legal policy that the law should be altered deliberately rather than casually. Legislature does not make radical changes in law "by a side wind, but only by measured and considered provisions". 'It is a well established principle of construction that a statute is not to be taken as effecting a fundamental alteration in the general law unless it uses words that point unmistakably to that conclusion".


59. He also relied on Union of India v. Sankalchand Himatlal Sheth AIR 1977 SC 2328 regarding interpretation of a statute in which case the court observed : 'There is no surer way to misread a document than to read it literally'. Shri Sundaram stated that Supreme Court in Jaydayal Poddar v. Bibi Hazra AIR 1974 SC 171 has laid down the parameters of a benami transaction. In this case, the Supreme Court held that to examine whether a transaction is Benami or not, the following should be taken into consideration by a court:


(a) The source from which the purchase money came.


(b) The natural possession of the property after purchase.


(c) Motive, if any, in giving transaction a benami colour.


(d) The position of the parties and relationship, if any, between the claimant and the alleged Benamidar.


(e) Custody of the title deed after the sale.


(f) Conduct of the parties concerned in dealing with the properties, after sale.


60. He stated, that, while it is a fact that the purchase consideration was temporarily made available by one for the other, which may, in literal sense, fall within (a) above, one cannot shut his eyes to the other aspects from (b) to (f) above. A careful consideration of these aspects would show that, the possession of the certificates are with those in whose names the shares were purchased and recorded in their books of accounts as their own and the custody is also with them. They alone would deal with the shares. Therefore, benami colour cannot at all be given just because temporary accommodation was made by providing funds for purchase of the shares.


61. He would further argue to state that Single Judge of Madras rejected the claim of benami and this order has not been set aside by the Division Bench. The order of the Division Bench has actually merged with the order of the Division Bench. In view of this, Shri Sundaram stated that as far as the issue of benami is concerned, it has already been settled by the Madras High Court and there is no need for us to go into the same and this contention of benami should be straightway rejected.


62. We have considered the arguments of the counsel. It is a fact, that, the Board of the Bank at the time of refusing the registration, did not consider the issue of benami as a ground for rejection of the registration. Even though this ground had been taken by the Bank in the reply filed, most of the arguments relating to this were advanced by the counsel for the interveners. In the normal course, we would have agreed with the contention of Shri Sundaram in this regard, but in view of the fact that benami transactions are prohibited by law and as all the counsels elaborately argued on this point, we thought it fit to consider the same. As a matter of fact, to declare a transaction as benami is not within the jurisdiction of this Board especially when such a declaration has serious consequences as per the provisions of Benami Act. But, since an answer to this issue has a bearing on our decision we thought fit to give our prima facie findings on the same taking into consideration that the order of Division Bench of Madras High Court has been stayed by the Supreme Court.


63. Section 2(a) of the Benami Transaction (Prohibition) Act, 1988 (Benami Act) defines a Benami transaction as follows:


"Benami transaction means any transaction in which property is transferred to one person for a consideration paid or provided by another person;"


It is an admitted position that in a number of cases, one appellant paid money for purchase of shares in the name of another appellant. According to Shri Datar and other counsel for the Bank, and interveners, that the admission by appellants in this regard makes it clear that the transactions are benami transactions. It is the contention of Shri Sundaram that the purchase consideration was paid only as a temporary measure and therefore the same cannot be treated as benami transactions.


64. The issue for our consideration is whether temporary lending of money by one, to purchase a property in the name of another, could be termed as benami on the basis of the definition of the term 'Benami' in the Benami Act. Before we consider this issue, it is necessary to first establish that the money paid was really a temporary lending.


65. In this connection it is relevant to refer to Exhibit R-18 at pages 105 to 113 of Volume 1 filed by the Bank, as a part of its reply to the appeals in which details of payments made by the appellants to the transferors have been given. From the details it is seen that purchase consideration had been paid by one appellant for the other as indicated below:


Name of appellant No. of transfers Consideration

paid by other appellants

Hemangini 17 10

Kokila 68 22

Mansri 26 10

Mrinalini 16 5

Chennai Holdings 65 15

Essar Investments 52 16

Chennai Properties 23 2

Total 267 80


On the basis of these details, the Bank has raised the ground of benami against all transfers while it had material to substantiate this ground only in respect of 80 transfers. In other words, the Bank did not have any material to allege benami in respect of 187 transfers. The fact of one appellant having paid consideration for another appellant in respect of some transfers has been admitted by the appellants also.


66. We have perused the annual reports of the appellant companies for the year 1994-95 ending as on 31-3-1995. The purchases were made during that year. It is seen from these annual reports, that wherever one appellant has purchased shares with the money paid by another, the former has issued shares/debentures in respect of such money, which is also reflected as an investment in shares/debentures in the latter. In other words, whatever money was paid by one for purchase of shares in the name of another, debtor/creditor relation has been established through accounting entries between these appellants and the entries have been adjusted by issue and acceptance of shares/debentures. Thus, the factum of temporary accommodation, through provision of funds, for purchase of shares in the name of one, by another has been established. As a matter of fact even the Bank has raised the issues relating to violation of section 370, thus admitting that there had been loan transactions between the appellants.


67. Now we have to consider whether purchase of a property through loans is also to be treated as a benami transaction in view of the definition of 'Benami' in the Benami Act/According to Benami Act, a transaction in which property is transferred to one person for a consideration paid or provided by another person is Benami. There is nothing to indicate whether such consideration paid or provided has to be on a permanent basis or it can also be on a loan basis as has happened in this case. A literal application of these words 'paid' or 'provided' ignoring the real intent of the transactions would be misconstruing the legislative intent.


68. The Benami Act was enacted in 1988. Benami transactions have been in existence in India for a very long time. What is a benami has also been judicially interpreted by the Apex Court. The present Act has been enacted with a view to prevent benami transactions and subject those entering into such transactions to penal action. Here we have a classic instance where the rule laid down in Heyden's case can be advantageously applied for proper construction of the provisions of this Act. The rule laid down in Heyden's case is to enable consideration of four matters in construing an Act. They are:


(i) What was the law before making of the Act?


(ii) What was the mischief or defect for which the law did not provide?


(iii)What is the remedy that the Act has provided?


(iv) What is the reason of the remedy?


69. If we apply this rule, we find that before the Benami Act came into being, there was no enactment in this regard and the definition of Benami was the one which had been propounded by Judges. Most of the time Benami transactions were entered into for ulterior purposes either to defeat the exchequer of its revenue or to defraud one's creditors. The Legislature thought it fit to put to an end to this nefarious practice by providing stringent action in this regard.


70. While interpreting the definition clause in this Act, we have to necessarily keep in mind the law as propounded by the Apex Court. Literal reading and application of the words 'paid' or 'provided' would result in absurdities. While we do not share the view of Shri Sundaram that the words are ambiguous we are certain that literal application of the words would result in uncertainties to such an extent that most of the transactions which were treated as benami earlier would not be benami now and many of the transactions which were not benami earlier would be treated as benami now.


71. In this connection it is relevant to extract from the judgment of Supreme Court in Sree Meenakshi Mills Ltd.'s case (supra) wherein the Supreme Court has dealt with as to what a benami transaction is:


"Two kinds of 'benami' transactions are generally recognized in India. Where a person buys a property with his own money but in the name of another person without any intention to benefit such other person, the transaction is called benami. In that case, the transferee holds the property for the benefit of the person who has contributed the purchase money, and he is the real owner. The second case which is loosely termed as a benami transaction in a case where a person who is the owner of the property executes a conveyance in favour of another without the intention of transferring the title to the property thereunder. In this case the transferor continues to be the real owner. The difference between the two kinds of benami transactions referred to above lies in the fact that whereas in the former case there is an operative transfer from the transferor to the transferee though the transferee holds the property for the benefit of the person who has contributed the purchase money, in the latter case, there is no operative transfer from the transferor to the transferee at all and the title rests with the transferor notwithstanding the execution of the conveyance. One common feature, however, in both these cases is that the real title is divorced from the ostensible title and they are vested in different persons. The question whether a transaction is a benami transaction or not mainly depends upon the intention of the person who has contributed for the purchase money in the former case and upon the intention of the person who has executed the conveyance in the latter case. It is only in the former case that it would be necessary when a dispute arises as to whether the person named in the deed is the real transferee or not, to enquire into the question as to who paid the consideration for the transfer. But in the latter case, when the question is whether the transfer is genuine or sham, the point for decision would be, not who paid the consideration but whether any consideration was paid."


71A. Thus, the meaning of a benami transaction is well-settled by the Apex Court. If we literally apply the words used in the Benami Act, where a lender directly pays the money for purchase of a property in the name of another person or provides funds on loan basis to one for purchase of property in his name, all these transactions will be hit by the provisions of Benami Act. But at the same time, where a property is transferred without any consideration to another person without any intention of benefiting such a person, this will not be a benami transaction because no consideration is paid or provided. Thus, all transactions of purchase of property through assistance from financial institutions will have to be treated as benami transactions. We are unable to support this literal application. As has been pointed out by Supreme Court, one has to see the intention of the parties and also other tests laid down by the Supreme Court in Bhim Singh case, in which the Supreme Court held that while considering whether the transaction is a benami transaction or not, while the source of consideration is of primary concern, other aspects like the intention for providing funds, the relationship between the parties, the circumstances in which it was done, motive for doing so, etc., have to be taken into consideration.


71B. The Supreme Court in Santa Singh v. State of Punjab AIR 1976 SC 2386 held that 'the words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonise with the subject of the enactment and the object which the Legislature has in view. The same was approved by Venkataramana Ayyar, J. in Tirath Singh v. Bachittar Singh AIR 1955 SC 830 :


"Where the language of a statute, in its ordinary meaning and the grammatical construction leads to a manifest contradiction of the apparent purpose of the enactment or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words and even the structure of the sentence."


72. As already stated, the literal application of the words used in the Benami Act would result in uncertainties unintended by the Legislature. The Supreme Court in Peerless General Finance & Investment Co. Ltd.'s case (supra) observed:


"...In our opinion, Mr. Gupta is right in contending that if we accept such a construction, we would render the provisions of the Act so uncertain that nobody will be in a position to know what exactly is the transaction sought to be prohibited." (p. 655)


According to Craies on Statute Law (Page 83, 7th Edition) 'The language of a statute is not always that which a rigid grammarian would use. It must be borne in mind that a statute consists of two parts, the letter and the sense'. Thus, while considering the words used in the Benami Act, we should look into the sense in which the words have been used. If we do so it would be clear that purchase of property with loans given or provided by another could not come within the definition of Benami.


73. To ascertain the intention of the Legislature it is also a well-established principle of law that the provisions of whole statute should be considered to arrive at a harmonious construction of the provisions of any statute. If we do so, section 4 of the Benami Act talks of a person holding the property in benami and a person claiming to be the real owner of the property. Thus, the Benami Act itself recognises two separate entities - one, the benami holder and the other - the real owner. Such instance of two entities would normally arise only when the consideration paid or provided is of permanent nature and the person in whose name the property is purchased is only a name lender without any right to enjoy the benefits arising therefrom.


74. If we apply this test, we find from the pleadings by the appellants, that, since all belong to one group and depending on the availability of the funds at a particular point of time with each appellant, the consideration was paid or provided among themselves, for purchase of the shares and it was only as a temporary measure subject to adjustments later in the books of accounts. According to the appellants it was done only because a large number of shares were involved and the whole transactions were com-pleted within a few days. It is also to be borne in mind that, this explanation was taken in the appeal itself when the bank had not raised the plea of benami. This we are pointing out only to show that it has not been an after-thought to justify these transactions after the plea of the benami was taken by the Bank. A benami, in the real sense would arise, according to us, when a property is held in the name of one but the enjoyment of the property is with a person who had contributed funds for purchase of the property. In this case, the appellants are all incorporated companies and whatever shares had been purchased in their names are shown as property of the respective companies and they have sought to register such shares in their own names. Both the transferees and the lenders assert that both real title and beneficial interests are with the transferees and there is no inter se dispute on this among themselves. Therefore, to give a colour of benami just because some other appellant had temporarily provided the funds for the purchase of the shares, according to us, is not correct. Therefore, considering the nature of the transactions, the circumstances surrounding the transactions and the way in which the whole transactions have been treated in the books of accounts of the appellant companies, it is crystal clear that the real owners of the shares are those in whose names the shares were purchased and these are not benami holders. Accordingly, we do not find any merit in the contention of the Bank and the interveners that these transactions are benami transactions.


4th issue - Violation of statutory provisions


75. One of the grounds for refusal as considered by the Board of the Bank, was that, the appellants had violated the provisions of section 187C. In the pleadings and during the arguments, the Bank and the interveners urged, that, in addition, the acquisition of shares by the appellants had violated the provisions of sections 49, 370 and 372.


76. Section 187C requires, that, any one, whose name is entered in the Register of Members of a company and who does not hold the beneficial interest in such a share, shall have to make a declaration to the company specifying the name and other particulars of the person who holds the beneficial interest in such share. It is the stand of the Bank that as the shares were purchased by one appellant in the name of another appellant, the latter not holding any beneficial interest in the shares, should have filed a declaration under section 187C and the failure to do so entitles the Board to refuse registration. We are unable to accept this contention. Assuming that the transferees in this case do not hold beneficial interest, the question of declaration would arise only when their names are entered in the Register of Members. Till such time the names of the transferees are entered in the Register of Members, the question of their filing any declaration does not arise. The obligation to declare is a post-registration obligation. Any way this issue is only academic, as we have held in the earlier paragraphs that the transferees in this case are the real owners having beneficial interest in the shares and, therefore, there is no question of any declaration under section 187C.


77. In regard to violation of the provisions of section 49, according to which all investments of a company are to be held in its own name, it was the contention of the Bank that since one appellant had purchased shares in the name of another appellant, the provisions of this section have been violated. As we have already held that the transaction between one appellant and another was in the nature of a lender and a borrower, we do not find any merit in the contention of the Bank.


78. On the basis of the averments of the appellants that the consideration paid was by way of loan, it is argued that the appellants had violated the provisions of section 370 which deals with inter-corporate loans. According to this section, the aggregate of loans lent by any company shall not exceed 30 per cent of the subscribed capital of the lending company and its free reserves. It is the contention of the Bank that this limit has been exceeded by many of the appellants when they lent money to other appellants towards purchase of shares in the Bank. Shri Dilip Singh urged that any lending beyond this limit can be only with the approval of the general body and the Central Government, as provided in the section and since the appellants couldn't produce any evidence regarding compliance of these provisions, the Bank was justified in refusing registration.


79. Shri Sundaram stated, that, whether the appellants have complied with the provisions of this section or not can be examined only by the prescribed authority under the Act and the Bank cannot take upon itself this task. Even assuming that the provisions of this section had been violated, yet it cannot affect the end-use of the money lent, he argued. However, he pointed out to the exemptions provided in the section to state that the provisions of this section are not applicable to private limited companies unless they are subsidiaries of a public limited company. Therefore, he stated that this argument has been taken only to justify the action of the Bank but without any merit.


80. It is a fact, that, for a short period from the time one appellant paid the consideration for purchase of shares in the name of another appellant and till such time the latter issued shares / debentures in lieu of such consideration, the amount involved had been treated as loan. In most of the cases, the amount lent had exceeded the limit prescribed under section 370. Of the 7 appellants, 5 are private limited companies and none of them is a subsidiary of a public company. Therefore, as rightly pointed out by Shri Sundaram, the provisions of section 370 are not applicable in respect of the 5 appellants. As for the other 2 appellants, namely - Essar Investments and Chennai Holding - they are public limited companies and, therefore, the provisions of this section are applicable. In other words, if the lending by these two companies had exceeded the limit prescribed, then they should obtain the approval of the general body and the Central Government. As rightly pointed out by Shri Sundaram, this is a matter to be enquired into and decided upon by the prescribed authority under the Act and a company, in this case, the Bank is not bound to enquire into whether compliance with the provisions of section 370 has been done. The same view was taken by CLB in Jagatjit Industries Ltd.'s case (supra). Even otherwise, assuming there is violation of section 370, the end-use of the money lent in purchasing the shares cannot be a ground for refusal to register. Accordingly, we do not find any merit in the contention of the Bank in this regard.


81. Another violation agitated upon by the Bank is that the appellants had violated the provisions of section 372. According to Shri Dilip Singh, the appellants had invested in the shares of the Bank beyond the limits prescribed under section 372. According to section 372(2) the aggregate investment of a company in all other bodies corporate shall not exceed 30 per cent of the subscribed capital and free reserves of the investing company and any investment in excess of the same can be only with the prior approval of the Central Government. In this case, according to him, even though the investment by the appellants in shares of the Bank and other bodies corporate had exceeded the limit, the appellants have not produced any evidence of the Central Government approval and as such, the Bank was right in refusing the registration.


82. Shri Sundaram urged to state that the same arguments he advanced in relation to section 370 are applicable in this case and he further stated that the provisions of this section are not applicable to investment companies and since all the appellants are investment companies, these provisions are not applicable to any one of them.


83. The allegation regarding violation of the provisions of section 372 has to be examined in the light of the fact that all the companies are investment companies, 5 out of them are also private limited companies. The specific allegation is with regard to investment beyond the limits prescribed in the first proviso to sub-section (2) of section 372. Sub-section (13) of this section specifically exempts investment companies insofar as they relate to the limits under sub-section (2). This being so, investments made by all these investment companies are beyond the coverage of section 372(2). Added to this, complete exemption is available under sub-section (14) to 5 of the 7 companies which are private limited companies. Therefore, there is no scope for holding against the appellants with regard to violation of section 372. Apart from this, we are also in agreement with the arguments of Shri Sundaram that violation of section 3 72 is a matter to be enquired into and decided upon by the appropriate authorities under the Act and the Bank had no justification to examine the compliance of this provision while considering the registration of transfer.


84. To sum up, it is clear that the Bank has not been able to establish the allegations relating to violation of various provisions of the Act by the appellants. We also note that the Bank is not justified in agitating various grounds which are in contradiction with one another. For instance, if the transactions are benami, then the question of the violation of provisions of section 372 cannot be agitated and vice versa. In the same way, allegations of violation of sections 49 and 370 cannot go hand in hand.


85. Before we go into the next issue, we feel that other points raised on behalf of the Bank need to be dealt with:


(a) It is alleged that the appellants should have filed separate appeal in respect of refusal relating to each transfer instead of combining many cases in one appeal. It is alleged that by filing only seven appeals instead of 285 appeals, the State has been deprived of its revenue. We do not find any merit in this contention inasmuch as the cause of action in all cases is similar and the seven transferees who were aggrieved, have filed separate appeal in respect of all the transactions in favour of each and we do not find any infirmity in the same.


(b) Another point raised is that the interested directors had participated in the meeting of the Board on 6-2-1995. In the absence of the details of the allegation which was also not argued in detail, we do not propose to consider the same.


(c) It is alleged that the memoranda of association of the appellants specifically prohibit the appellants from carrying on banking business. Admittedly all the appellants are investment companies and what they did in purchase of the shares is by way of investment. Investments in a banking company does not and cannot mean carrying on business of banking. It is the respondent bank which will continue to carry on the business of banking and the appellants are only shareholders in the bank and by themselves they do not carry on the banking business. As such there is no merit in this contention. It is not the requirement of law, nor is practicable for every investment company to incorporate all the objects of the investee company before investing in the shares of such company.


(d) Another contention is with regard to the past record of Essar and that RBI had refused permission to Essar to carry on banking business. We are of the view that these allegations are extraneous to these appeals and do not merit any consideration.


(e) In regard to the allegation that acquisition by this group is prejudicial to the public interest and against the interest of employees and also against the interest of Nadar community, we do not propose to deal with same in view of our finding at para 42 of this order.


5th issue - Violation of the provisions of RBI Circulars


86. One of the grounds for refusal as considered by the board of directors of the Bank was, that, the acquisition of shares by the appellants of about 64 per cent of shares in the Bank was in violation of RBI Circular No. BC 44/60/30/100/94, dated 16-4-1994. Shri Dilip Singh stated that, acquisition by these appellants was a clandestine one to corner the shares of the company with the intent to take over the management and as such the investment is not a genuine investment. The shares were acquired from various individuals without disclosing that all the appellants belong to a group and the intention of acquisition was for the purpose of gaining a controlling interest in the Bank. Had the transferors been aware of the take over attempt, none of them would have parted with the shares. Even the management of the Bank was not aware of the large acquisition of shares by the appellants till they were lodged for registration. There is no transparency in the purchase of shares and as such it was not a friendly take over but a hostile take over. The acquisition of such a large percentage of shares comes within the parameters detailed in the RBI's circulars and therefore the acquisition was not only against the provisions of the RBI Circular but even the reference made by the Bank to RBI, no acknowledgement had been received from RBI when the Board considered the matter and therefore the Board was right in refusing the registration. Even otherwise, without the acknowledgement of RBI, since the acquisition by the appellants belonging to a single group exceeded 1% of the shares in the company, the Bank could have never approved the registration without the RBI's acknowledgement. The stand of Shri Dilip Singh was also supported by Shri Hari Krishnan and Shri Datar.


87. According to Shri Sundaram, RBI Circulars do not prohibit acquisition of shares, but only require acknowledgement to be obtained from RBI if the acquisition goes beyond 1 per cent. In this connection he relied on the decision of the CLB in Bank of Madura Ltd. v. M.O. Bhaskaran [1995] 83 Comp. Cas. 321 in which the CLB held that RBI Circulars do not prohibit acquisition of shares beyond 1 per cent. He further stated that the allegation of clandestine acquisition of shares is absolutely false and incorrect. There was wide publicity regarding acquisition of shares by Eassar Group and even some of the directors of the Bank transferred their shares to the appellants. He further stated that not only the shareholders who transferred the shares but even the directors of the Board were fully aware of the acquisition and as a matter of fact the entire acquisition was done only with the active co-operation and consent of the people control-ling the affairs of the Bank. Therefore, according to him, the allegation of an attempt of hostile take over is unfounded and the intention of the appellants to gain controlling interest was fully known to everyone. According to him, non-receipt of acknowledgement from RBI cannot be a ground for refusal at the most the Bank could have waited for receipt of acknowledgement. He further stated that even though RBI circulars prescribed that a reference should be made within 3 days of lodgement, the Bank took its own time of nearly 5 weeks to make the reference and decided to refuse registration on the ground of non-receipt of acknowledgement from RBI. According to him, this act of the Board was with an ulterior motive to deny the right of the appellants in getting into the Register of Members.


88. As far as the provisions of RBI circulars are concerned, RBI issued 3 circulars as per the powers conferred on it by section 35A of the Banking Companies Regulation Act ? one in 1970 and another in 1991 and the last on 16-4-1994. The circulars are reproduced below:


Circular dated 13-1-1970


Share-holding and transfer of shares :


"It has been decided that as and when your bank receives an application for transfer of shares which would make the holding of the proposed transferee equivalent to 1% and over of the total paid-up capital of the bank, you should within three days of such lodgement, advise our regional office concerned, the full particulars of the proposed transfer, such as name, address and occupation of the transferee, number of shares, paid-up value of shares and percentage to the total paid-up capital, consideration etc. and if possible, purpose of investment. A declaration to the effect that the proposed transferee is not likely to acquire either singly or along with the companies and concerns in the 'group' a controlling interest in the bank should also be furnished to the Reserve Bank. If, on the other hand, on the basis of information available with the bank, the transfer of shares appears to be not in the nature of genuine investment by the transferee concerned or if the bank suspects any attempt at cornering of shares with a view to acquiring a controlling interest in the bank it should forthwith report the matter to the Reserve Bank.


2. The bank should await an acknowledgement from us before effecting the above transfers."


Circular dated 23-5-1991


Transfer of shares of banks:


"Please refer to our circular DBOD No. EFS. 93 /C. 249 ? 70 dated January 13, 1970 requiring banks to obtain an acknowledgement from Reserve Bank of India before effecting transfer of shares when the transfer makes the shareholdings of the individual/group equivalent to 1 % and over of the total paid-up capital of the bank. The primary purpose of our instructions in this regard was to put the banks on guard against attempts by individuals/groups to acquire a controlling interest in a bank by manipulating acquisition of shares and the consequential adverse influence on the functioning of the bank.


2. We have, however, recently come across some instances where banks have overlooked our instructions and have had to face problems following cornering of shares by a few individuals/groups. This could have a destabilising effect on the working of the banks.


3. We, therefore, have to reiterate our instructions that when on the basis of information available with the bank, any transfer of shares appears to be not in the nature of genuine investment or if the bank suspects any attempt at cornering of shares with a view to acquiring controlling interest in the bank, the bank should take appropriate action. When the transfer of shares makes the holding of the proposed transferee, either singly or along with companies/concerns in the group equivalent to 1% and over of the total paid-up capital of the bank, the matter should be referred to the Reserve Bank of India, within three days of the lodgement of shares and the bank should await an acknowledgement from us before effecting the transfer. More importantly, banks should in their own interest anticipate such situation whenever they make rights issues and take all necessary measures to ensure that no individual or groups manoeuvere to corner large blocks of shares."


Circular dated 16-4-1994 Acquisition of shares of banks for gaining controlling interest:


"Please refer to our circulars DBOD No. EFS. 93/C. 249-70 dated January 13, 1970 and DBOD. Fol. BC. 129/C.249-91, dated May 23, 1991 requiring banks to obtain an acknowledgement from Reserve Bank of India before effecting transfer of shares when the transfer makes a shareholding of the individual/group equivalent to one per cent and over of the total paid-up capital of the bank. We observe that the primary purpose and the procedure set out in our circulars have not been appreciated judging by the enquiries received by us.


2. The instructions issued by the Reserve Bank regarding transfer/ allotment of shares which would take the shareholding of the transferee cither singly or along with the associated individuals, companies and concerns in a group to one per cent or over of the total paid-up capital are basically to alert the board of directors of the bank regarding manipulation in acquisition of shares to gain controlling interest in a bank and the likely consequential adverse influence in destabilising the working of the bank. Blocks of shares could be acquired either at the time of right issues by way of renounced shares by offering huge monetary incentives to the renouncers, or by purchasing shares from individual shareholders privately by offering to them an abnormally high price not warranted by the financial indicators of the bank. Even the prices of quoted shares have been artificially boosted by active trading for this purpose. At times, RBI instructions have also been sought to be by passed by applying for individuals allotment/transfer of less than one per cent of the paid-up capita] in an organised manner. The obvious intention of the concerted efforts of the interested group or an industrial house is to corner the bank's shares by every available means. The transfer/allotment of shares is often not in the nature of a genuine investment.


3. We have, therefore, to clarify that a reference to Reserve Bank will be necessary even when individual allotment/transfer of shares is for less than one per cent of the paid-up capital of the bank if the above dubious method has been adopted to get over the ceiling of one per cent and to camouflage the purpose of cornering of shares by individuals/groups.


4. It is necessary that the managem

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ent of a bank should be vigilant about any move made through the backdoor by individuals/groups to corner shares of the bank. The Board should deliberate on all aspects of allotment/ transfer of shares and take a view after due consideration of all aspects, including the credibility of the persons or entities acquiring the shares where the acquisitions are for significant amounts. The Board should in particular consider whether our instructions to pre-empt hostile takeover of banks by individuals/groups have been scrupulously followed. The bank should approach the Reserve Bank of India with all the relevant details for acknowledgement of transfer/allotment of shares after the Board makes such a review. It is also reiterated that banks Boards should invariably await the Reserve Bank's acknowledgement, for approving the registration of the transfers in their books." 89. A combined reading of these circulars would show, that, in case of acquisition of shares equivalent to and over one per cent the total paid up capital of the bank, the bank should make a reference to RBI within the three days of the lodgement and the Bank should await an acknowledgement from RBI before effecting the transfer of shares. The intention as is obvious from the contents of the circulars, is that, the controlling interest in the Bank is not passed on without the knowledge and approval of RBI. However, there is nothing in these circulars to indicate that no one should acquire shares beyond 1 per cent. Thus, refusal on the plea of violation of RBI Circulars cannot be sustained by us. The same view had been taken in the Bank of Madura Ltd.'s case (supra) also. 90. In the present case, it is an admitted position that, all the appellants belong to Essar Group. As far as the allegations of clandestine cornering of the shares and that the acquisition is towards a hotile take over are concerned, we are of the view that the same do not seem to be correct for various reasons. The impugned shares were acquired between the last week of October 1994 and 2nd week of November 1994. During this period, it was pointed out to us, that there had been press reports in the Economic Times dated 28-10-1994 and 7-11-1994 regarding acquisition of shares by this Group. It is also reported that a similar report appeared in 'HINDU' on or about 1-11-1994 on the same. It is an admitted position that majority of the shares were held by persons belonging to Nadar community and such persons were all residing in a very restricted geographical area. From the statement produced during the hearing by the interveners, it is seen that out of 200 shareholders in Tuticorin area, about 75 shareholders had transferred their shares to the appellants. The appellants had also produced a copy of an advertisement issued by one Shri Kathiresan in Dinathanthi dated 28-10-1994, wherein he had offered a sum of Rs. 5,000 per share of the Bank, and as a matter of fact, later, he himself had sold his shares to the appellants. In addition, it is impossible for us to believe that the shareholders living in such a restricted geographical area, all belonging to a single community, would not have known each other selling the shares to the appellants without the knowledge of the group identity. Even though there are about 2000 shareholders in the Bank, the shares impugned in these appeals constitute about 65 per cent of the shares in the Bank and held by less than 300 persons. In other words, persons holding large number of shares have sold their shares to the appellants and we are unable to appreciate the arguments that persons holding such large percentage of shares did not care to look into the identity of the appellants especially when a very high price was paid for such shares. Therefore, considering the circumstances and from whom the shares were purchased we are unable to accept the arguments relating to the acquisition being either hostile or clandestine. 91. In the present case, all the appellants belong to Essar Group and they acquired among themselves, over 60 per cent of the shares in the Bank. The Board of Bank considered the contents of the circulars and took the view that the acquisition was an attempt towards a hostile take over and made a reference to RBI. It is pertinent to mention here that shares were lodged for transfer on 9-12-1994 and the reference was made on 14-1-1995, i.e., after a period of more than a month as against the stipulated period of three days. The Board considered the matter on 6-2-1995, i.e., within a period of three weeks from the date on reference but before receipt of any communication from RBI. As per section 111 of the Act, the Bank is obliged to take a decision of the transfers within a period of two months from the date of lodgement. While the Board had considered the transfers within a period of 2 months from lodgement, yet there was a long delay of nearly a month in making a reference to RBI. Had the reference been made earlier, perhaps some decision from RBI could have come before the Board Meeting. It was reported to us, during the hearing in January 1996 that no communication from RBI had yet been received. 92. It is necessary for us, in this connection to observe, as we did in Bank of Madura Ltd.'s case (supra) that, even though RBI has stipulated that a reference should be made to it within three days from the lodgement of shares, yet, there is no stipulation in the circulars as to within which period the RBI would indicate its decision. We believe that any regulatory authority having powers to regulate, should also discharge its responsibilities within a time frame. It is all the more necessary because banks, being companies governed by the provisions of Companies Act, have to follow the time limit prescribed under section 111 and under section 113 in regard to transfers, as, section 2 of the Banking Companies (Regulation) Act, clearly states that the provisions of this Act are not in derogation of the provisions of the Companies Act. We feel that a timely action by RBI in disposing of the reference could have avoided this litigation as the Bank and the appellants would have been bound by the decision of RBI. Considering the provisions of section 111 and section 113, we urge on the RBI to set a time limit for itself in disposing of reference received from Banks as per RBI circulars, so that, in future, these types of litigations are avoided. As a matter of fact, all of a sudden, the Bank, through its Chairman, filed before us a copy of the letter dated 13-4-1996 from RBI to the Bank, in which directions had been given, that, a copy of this letter should be filed with us before 16-4-1996. In this letter RBI has cautioned the Bank, that the registration of the transfer shall not be made without acknowledgement from the RBI. In this letter, there is no mention about the reference which the Bank had made on 14-1-1995. It is clear from this letter that RBI has not yet taken a decision on the reference from the Bank. 93. As far as the RBI circulars are concerned, we have already held that there is no prohibition in acquiring more than 1 per cent of shares of the Bank and the acquisition by the appellants, is therefore not in violation of these circulars and as such, cannot be a ground for refusal to register. If non-receipt of acknowledgement was the reason for refusal, as we held in Bank of Madura Ltd.'s case (supra), the Bank has not acted in excess of its authority but the refusal could only be a temporary nature, till some communication is received from RBI. 6th issue - Relief : 94. As far as the relief is concerned, the appellants have sought for direction to the Bank to register all the shares involved in the Appeals. We have already held that the Bank was right in refusing registration in respect of shares covered under the instruments which are not in conformity with the provisions of section 108. As far as the other shares are concerned, we have already held in the earlier paragraphs that, none of the grounds advanced by the Bank and the interveners had any merit. Therefore, the relief that we could grant is that the Bank should register all the shares except those which we have held as rightly refused. However, as we held in the Bank of Madura Ltd.'s case (supra) since registration of transfer of shares beyond 1 per cent is governed by the provisions of RBI circulars which have been issued under section 35A of the Banking Companies (Regulation) Act and which have been held to have statutory effect by courts in Cochin Shipping Company v. E.S.I. Corpn. AIR 1993 SC 252 and D.S. Gowda v. Corpn. Bank AIR 1983 Kar. 143, it is but appropriate that the Bank should make a fresh reference in respect of these shares within a period of 4 (four) weeks from the date of this order and the RBI should dispose of the reference within 4 (four) weeks from the date of receipt of reference. We order accordingly. To avoid any dispute as to the number of shares to be registered, we also order that Shri B.T. Rangamani, appointed as Scrutinizer earlier, will within a period of two weeks from the date of this order, furnish, referring to his earlier report, the details of shares which are to be registered, by taking note of our decision in para 47, within 2 weeks. Thereafter, the Bank shall make a reference to RBI as mentioned earlier. The Bank and the appellants shall pay a sum of Rs. 2,500 each to Shri Rangamani as honorarium. As far as the shares covered in the instruments not in conformity with the provisions of section 108, the appellants are at liberty to relodge them after complying with the necessary requirements for consideration by the Board of the Bank. 95. Before parting with this order, it is essential for us to mention certain events that took place both during the time of hearing and afterwards till the date of this order. During the hearing, some of the directors of the Bank met us and informed, that, to protect the interest of Nadars, the Bank was trying to negotiate with certain financial institutions for acquisition of the shares from Essar Group and on this score they requested us to defer issuing the order for some time. In the same way, a group of persons representing themselves to be a part of Share Retrieval Committee met us and informed that, the Nadar community has formed a Committee to raise funds for purchase of shares from Essar Group and had also got the consent of the Essar Group in this regard. The representatives of the Essar Group also confirmed this understanding to state that the time given to the Retrieval Committee had already expired and the Committee could not raise the agreed amount of Rs. 90 crores for purchase of the shares. However, the representatives of the Committee informed us that efforts were on to mobilise the required amount and sought a period of 3 months from January to April 1996 to complete the deal. We told them, that, while we cannot take cognizance of any private arrangement between the parties, yet, we informed them that we shall not issue the order for a period of 3 months and in case they could complete the deal before that, they were free to do so. 96. On 16-4-1996, seven directors of the Bank and the representatives of Essar Group met us and informed us that these directors had formed a Committee of Directors and this Committee, in a meeting on 15-4-1996, had decided, subject to the approval of RBI, to register the shares in favour of the appellants on certain conditions which had been agreed to by the appellants. They also produced a copy of the resolution passed by the Committee. We had advised them that, whatever they wanted to file, it should be filed in the form of an affidavit and should be through the respondent Bank. Till the date of this order, no further communication has been filed with us. Perhaps, the provocation for the RBI to issue the letter dated 13-4-1996 which we referred earlier and which was directed to be filed with us before 16-4-1996 must have been on this account. 97. The appeals are disposed of accordingly. Interim orders passed are vacated. 98. There will be no order as to cost.
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