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Shri G. Rama Raju, Smt. G. … vs South India Research Institute … on 20 February, 2003

Company Law Board
Shri G. Rama Raju, Smt. G. … vs South India Research Institute … on 20 February, 2003
Equivalent citations: 2004 118 CompCas 156 CLB, 2004 50 SCL 522 CLB
Bench: S Balasubramanian, K Balu


ORDER

K.K. Balu, Member

1. The petitioners claiming to constitute more than one-tenth of the total members of M/s South India Research Institute Private Limited (“the Company”) as well as holding more than one-tenth of issued share capital of the Company have filed this petition under Sections 397/398 of the Companies Act, 1956 (“the Act”) alleging acts of oppression and mismanagement in the affairs of the Company.

2. The main alleged acts of oppression and mismanagement relate to non-sending of annual accounts of the Company as well as notices of general body meetings and unfair allotment of the impugned shares in favour of the respondents. The second respondent is father of the first petitioner. The second petitioner is the wife and the petitioners 3 to 5 are sons of the first petitioner. The respondents 3 & 4 are grand children of the second respondent through his second son Shri G. Subba Raju. The second respondent had incorporated a number of companies including the first respondent company. In the present petition, the petitioners are challenging the allotments made on 01.04.1997 and 28.11.1998 in favour of the respondents in exclusion of the petitioners. The respondents are justifying the impugned allotments made pursuant to the oral understanding entered into between the second respondent and his two sons in order to maintain a sense of equilibrium between the families of the two sons of the second respondent in various group companies. The petitioners have sought the following reliefs:-

(a) to rescind the allotment of 2,40,000 shares made on 01.04.1997 and the allotment of 4,80,000 share made on 28.11.1998 and direct the Company to rectify its register of members; or

(b) to direct the respondents 2 to 6 to transfer such number of their shares in the Company to the petitioners at par against payment, restoring the petitioners’ shareholding to 20.62 per cent of the paid up capital of the Company; and

(c) to restrain the respondents from making any further allotment of shares of the Company, without notice to and without making an offer the petitioners.

3. Shri T. Raghavan, Senior Counsel appearing for the petitioners, while initiating his arguments submitted that the Company was incorporated in August, 1950 with main objects to carry on the business of manufacturing pharmaceutical products. The authorized capital of the Company is Rs. 100 lakhs divided into 10,00,000 shares of Rs. 10/- each and the paid-up capital is 2,40,000 equity shares of Rs. 100/- each. The petitioners hold 49,490 equity shares of Rs. 10/- each representing 20.62 per cent of the paid-up capital of the Company and the respondents’ group holds 17.2 per cent of the paid-up capital of the Company. the second respondent has been the Managing Director of the Company since its inception and continues to be the Managing Director. Though the petitioners are shareholders in the Company, they have not been receiving the annual accounts of the Company or notices of the general body meetings or any information in regard to the affairs of the Company. Consequently the petitioners have not been kept informed of the affairs of the Company. However, when the petitioners obtained certified copies of the annual returns filed by the Company in May 2001, they came to now that the Company had allotted 2,40,000 shares on 01.04.1997, out of which 1,35,490 were allotted in favour of the respondents 2 to 6 and the remaining shares to certain other shareholders. The Company had further allotted 4,80,000 shares on 28.11.1998 to the respondents 2 to 6. The petitioners had no knowledge of such issue of shares and nor were any offers made to the petitioners. By virtue of these impugned allotments, the petitioners’ shareholding has been reduced from 20.62 per cent to 5.15 per cent of the paid-up capital, while the shareholding of respondents 2 to 6 has been increased to 68.5 per cent from the original holding of 17.2 per cent. The petitioners, on coming to know of the impugned allotments caused notices dated 20.06.2001 (page 75 of Petition) and dated 04.09.2001 (page 79 of Petition) to the respondents 1 & 2 calling upon them to cancel the allotments or make such allotments so as to restore parity in the shareholding pattern, which evoked no response from the petitioners. Shri Raghavan pointed that the Company has in the course of business acquired valuable properties in Hyderabad and Vijayawada, presently valued approximately in the range of Rs. 75 crores, which made the respondents to allot the impugned shares to themselves, the exclusion of the petitioners with a view to garner for themselves a larger share in the Company. The second respondent being the Managing Director occupies a fiduciary position, but in breach of his fiduciary duties allotted shares for his personal benefits in exclusion of the petitioners. The power to issue further shares should be exercised bonafide in the interest of the Company and not for benefiting any particular group. The allotments were made with oblique motives not in the interest of the Company, but purely to enable the respondents 2 to 6 to increase their shareholding in the Company. The Board of Directors has not given any reason or explanation for having excluded the petitioners. The allotments are selective and the Board cannot pick and chose the members while allotting the shares. In case of discriminatory allotments, they should have at least been made at premium and not at par. It amounts to abuse of power by the Board of Directors. Shri Raghavan pointed out that the Board of Directors has not filed counter, but only the second respondent has filed a reply; that the second respondent has been in total control of the affairs of the Company and that the directors have no control over the affairs of the Company. The Board has duty to speak and if not, the Board is estopped. Shri Raghavan denied the plea of oral understanding taken by the respondents that the impugned shares were allotted in favour of the respondents to maintain equilibrium among the family members of the second respondent. He pointed out that the respondents have neither given details of the oral understanding between the parties nor proved any such oral understanding. The respondents have failed to raise the plea of such an oral understanding when the petitioners caused notices dated 20.06.2001 and 04.09.2001, calling upon respondents to cancel the impugned allotments. Moreover, the Memoranda of Understanding entered into between the first petitioner and the second son of the second respondent (pages 20 to 35 of rejoinder) negate any such oral understanding. Shri Raghavan specifically referred to para 8 of the Memorandum of Understanding (page 34 of rejoinder), wherein the parties have agreed to share equity shares and assets of the Company and Siri Pharma, yet another company equally, irrespective of their present or future holding fixed by their father, being the second respondent. In these circumstances, the respondents cannot justify the impugned allotments by virtue of the oral understanding between the parties. The allotments are in direct violation of the rights of the petitioners. The second respondent has no grievances and cannot plead the cause of his second son who is not before the CLB. Shri Raghavan emphasized that the parties are at liberty to enforce any such oral understanding before the competent civil court and not before the CLB. For these reasons, Shri Raghavan sought for cancellation of the impugned allotments or for additional shares in favour of the petitioners, according to their entitlement at par and such allotment may be made out of the un-utilised portion of the authorized capital of the Company as well excess holding of the petitioners.

4. Shri R. Shankarnarayanan Counsel appearing for the Respondents while refuting the acts of oppression and mismanagement in the affairs of the Company has submitted that the impugned allotments were made pursuant to the oral understanding between the parties and that the petitioners are aware of these allotments but approached the CLB belatedly without assigning any valid reasons. The Petition suffers from delay and laches. Though the Petitioners are complaining of non sending of the annual accounts and notices of General body meetings, they have failed to furnish the particulars such as the date, month or year for which they were not sent and the manner in which they were sought. The notices dated 20.06.2001 and 04.09.2001 sent by the petitioners are silent regarding these charges. Shri Shankarnarayanan emphasised that the Petitioners are always served with annual Accounts of the Company and notices of all the general body meetings. The Petitioners have not established the provocation for the necessity for having approached the ROC for copies of the Annual Returns filed by the Company. This plea of the Petitioners is only an after though in order to make out the present case. According to Shri Shankarnarayanan the impugned allotments were made with the knowledge of the petitioners, who are, therefore, guilty of acquiescence and malafides in the filing the Petition.

Shri Shankarnarayanan has pointed out that the second Respondent in association with one Mr. P.G. Shanbhag promoted a number of Companies namely (1) M/s Siris Limited, Hyderabad, (2) M/s Siris Agro Limited, Hyderabad, (3) M/s Siri Cellars Private Limited, Hyderabad and also the first Respondent Company. The second Respondent is the founder Chairman of all these Companies. In course of time, the first Petitioner and the second son of the second Respondent were inducted into the business at the instance of the second respondent and they become members of the various Companies promoted by the second Respondent. While the second Respondent has been concentrating in the affairs of the first Respondent Company, the first Petitioner and second son of second Respondent have been managing the affairs of the group Companies based in Hyderabad. While so, first Petitioner, the second Respondent and his second son entered into an oral arrangement to the effect that the share capital in the Companies based in Hyderabad could be increased, and that the allotment of shares would be made to the first Petitioner and second son of second Respondent, so as to maintain majority share holding in these companies. The object of such an oral arrangement was that a sense of equilibrium should be maintained between the families of two sons of the second Respondent. Accordingly the shares were allotted/transferred in various group Companies as a part of the oral understanding and the Petitioners were aware of these allotments and accepted the same without questioning, at any point of time. Shri Shankarnarayanan drew our attention to the share holding pattern of the second respondent and his sons in the various group Companies from time to time as under:-

Sl. No.

Name of the Party

SIRIS LIMITED

S1R1S
AGRO HYDERABAD

S1RI CELLARS

SOUTH INDIA RESEARCH
INSTITUTE (P) LTD.

 

 

1993

I997%

1993 %

1997 %

1993 %

1997 %

1984 %

1998

1.

2nd  Respl. & his Wife

7,22

1.02

7.85

2.39

15.04

7.12

0.93

11.76

2.

1st Petitioner &
family

21.15

39.35

29.73

54.59

28.06

48

20.62

5.16

3.

G.Subba Raiti &Family

17.46

24.33

29.73

27.72

15.96

7.53

24.55

50.97

Shri Shankarnarayanan referring to the above statement pointed out that in view of the oral understanding, the first petitioner was allowed to increase his holdings in Hyderabad based companies substantially, while in respect of the respondent Company, the second son and his family were allowed to have substantial shares. The allotment and transfer of shares effected from time to time in these Companies are pursuant to the oral understanding between the second respondent and his two sons. Shri Shankarnarayanan emphasised that the share holding pattern of the Petitioners’ group and the Respondents’ group will demonstrate the manner in which the members of the family of the second respondent and his two sons gave effect to the oral understanding. Against this background the second respondent with full knowledge of the Petitioners family allotted the impugned shares in favour of the Respondents in order to maintain the equilibrium between family of two sons. Shri Shankarnarayanan submitted that the oral arrangement can be established by circumstances and in this connection he made a reference to specific admission on part of Petitioners in their reply to the sur-rejoinder to the effect that the second Respondent consented for the Petitioners holding the majority in the group companies. This admission according to Shri Shankarnarayanan demolishes the theory of the Petitioner that there was no understanding among the family members of second Respondents.

According to Shri Shankarnarayanan the authorised capital of the Company was increased from 24 Lakhs to 1 Crores and reduced the face value of equity share from 100 to 10 at an EGM held on 21.12.1996. The authorised capital was increased in order to modernise the Plant & Machinery and also to construct new buildings. Thereafter, the impugned allotments were made to the respondents and the additional infused funds were utilised for modernising the Plant & Machinery and for putting up constructions, of which the Petitioners have full knowledge. Thus both the allotments were in the interest of the Company. There is no breach of fiduciary duty by the Board. For these reasons, Shri Shankarnarayanan sought for dismissal of petition.

5. Shri Raghavan in his reply stressed the following:-

The plea of delay and laches raised by the respondents do not hold good. Mere delay is not laches. As the impugned shares have not further been sold and no third party has been affected, the question of laches will not operate, in support of which, he referred to a passage from the commentaries on the Specific Relief Act by Banerjee.

Though the provisions of Section 81(1) do not apply to private limited companies, yet the principles behind Section 81(1) will apply in case of closely held private limited companies such as the Company before the CLB, to prevent the power of allotment being misused by the Board of Directors.

The details regarding the background of various companies in which the family members are interested and their shareholding from time to time are not relevant to the present petition. Moreover, the correctness of the said statement is disputed by the petitioners.

Accordingly, he sought for the reliefs made in the petition.

6. We have considered the pleadings and arguments of the learned Senior Counsel for the petitioners as well as the learned counsel for the respondents. The question that arises for our consideration is whether the allotment of impugned shares in favour of the respondents in exclusion of the petitioners will amount to an act of oppression and mismanagement on the part of the respondents in the facts and circumstances of the case.

7. According to Shri Raghavan, the learned Senior Counsel for the petitioners, the petitioners have neither been receiving the annual accounts of the Company nor the notices of general body meetings. The allotment of impugned shares in favour of the respondents in exclusion of the petitioners is discriminatory and malafide. However, Shri R. Shankarnarayanan, Counsel appearing for the respondents has stoutly denied these charges and justified the allotments in favour of the respondents pursuant to the oral understanding reached among the family members of the second respondents and his two sons.

Though the petitioners are claiming that they have not been receiving either the annual accounts of the Company or the notices of general body meetings, no details are furnished by them. These charges, in our view, are quite vague. The petition is silent as to how long the petitioners have not been receiving the annual accounts or the notices of the general body meetings. The notice dated 20.06.2001 (page 75 of the petition) caused by the petitioners, does not make mention of their grievances on account of non-receipt of the annual accounts and the notice of general body meetings. There is no other record to show that the petitioners have earlier ventilated their grievances in regard to non-receipt of the annual accounts and notices of the general body meetings. There is, therefore, no force in the plea of the petitioners.

In regard to the impugned allotments made in 01.04.1997 and 28.11.1998, Shri Raghavan vehemently argued that the respondents neither furnished the details of the oral understanding nor proved any such oral understanding between the family members of the second respondent and his two sons. By virtue of the notices dated 20.06.2001 and 04.09.2001 (pages 75 and 79 of the Petitions), the petitioners called upon the respondents to cancel the impugned allotments or in the alternative to make further allotment of shares to the petitioners restoring their shareholding to 20.62 per cent of the paid-up capital of the Company. The notice dated 20.06.2001 categorically sets out the reasons for cancelling the impugned allotments. Nevertheless, there has been no response from the respondents. As rightly pointed out by the learned Senior Counsel for the petitioners, had there had been any oral understanding between the parties the respondents would have come out with the theory of such an oral understanding by way of a reply to the notices dated 20.06.2001 and 04.09.2001 issued by the petitioners. We find force in the argument of the learned senior counsel for the petitioners that the two memoranda of understanding (pages 18 to 35 enclosed to rejoinder) entered into between the first petitioner and his brother with regard to the manner in which the shares of the various group companies are to be dealt with would negate any such oral understanding. However, before drawing any conclusion, we are inclined to go into the facts and circumstances leading to the impugned allotments. Admittedly, the impugned allotments were made in April 1997 and November 1998 in favour of the respondents in exclusion of the petitioners. According to the petitioners they came to know of these allotments in May 2001 when they obtained the certified copies of the annual returns filed by the Company with the Registrar of Companies. The petitioners have not established the necessity or provocation for obtaining certified copies of annual return in May 2001. The petitioners have not offered any explanation in this behalf. Moreover, the admission of the petitioners in their reply to the sur-rejoinder of the respondents assumes importance and the relevant portion runs as follows:-

“….. It is further submitted that with a view to go in for a public issue in the year 1993 and since it was the first Petitioner who developed the Hyderabad based companies, the second Respondent who was the chairman of Siris Ltd., Siri Collars Pvt. Ltd. and Siris Agro Ltd. consented for the Petitioners holding a majority in the aforesaid Companies.” (Page No. 7 of reply of petitioner to the sur-rejoinder by respondents).

The above admission of the petitioners, in our view is rather crucial and establishes the oral understanding between the family members of the second respondent and his two sons. Against this background, the denial of the petitioners of the oral understanding in regard to the Company is not acceptable. The Counsel for the petitioners submitted that the Board had not applied its mind while allotting the shares. However, the minutes of the meetings of the Board of Directors held on 01.04.1997 and 28.11.1998, produced pursuant to the directors of this Bench, which runs as follows indicate otherwise:-

” 02. Allotment of Shares:

Mr. G.S. Raju, Chairman & Managing Director informed he Board that there is an oral understanding between himself and his two sons whereby his eldest son Mr. G. Rama Raju had agreed to the allotment of shares by the Group Companies in such a manner as the Chairman may deem fit and necessary.

The Chairman further informed the Board that his eldest son Mr. G. Rama Raju had allotted shares in Hyderabad Companies namely SIRIS Limited, Hyderabad and SIRI Cellars Pvt. Ltd., Hyderabad and SIRIS Agro Limited, Kakinada though contrary to law, but in pursuance of the understanding as referred to above.

Sri G.S. Raju, Chairman and Managing Director explained the necessity for raising further capital through allotment of shares and placed before the meeting the applications received for such allotment. After thorough discussions, the Board unanimously passed the allotment of following shares:

… … … … … …

… … … … … …”

– (Minutes of the meeting held on 01.04.1997)

” 03. Allotment of Shares:

Mr. G.S. Raju, Chairman & Managing Director informed the Board that there is an oral understanding between himself and his two sons whereby his eldest son Mr. G. Rama Raju had agreed to the allotment of shares by the Group Companies in such manner as the chairman may deem fit and necessary.

The Chairman further informed the Board that his eldest son Mr. G. Rama Raju had allotted shares in Hyderabad Companies namely SIRIS Limited, Hyderabad and SIRI Cellars Pvt. Ltd., Hyderabad and SIRIS Agro Limited, Kakinada though contrary to law, but in pursuance of the understanding as referred to above.

Sri G.S. Raju, Chairman and Managing Director explained the necessity for raising further capital through allotment of shares and placed before the meeting the applications received for such allotment. After thorough discussions, the Board unanimously passed the allotment of the following shares:

… … … … … …

… … … … … …”

– (Minutes of the meeting held on 28.11.1998)

From the above minutes of the Board of Directors of the Company it is clear that the second respondent has kept the Board informed of the rationale of allotment.

Admittedly, the petitioners have claimed that the Company had sub-divided its shares from face value of Rs. 100/- each to Rs. 10/- each and consequently the petitioners together hold 49,490 equity shares of Rs. 10/- in the Company. At this juncture, it is relevant to observe that the decision to sub-divide the equity shares of the Company originally of Rs. 100/-, each into shares of Rs. 10/- each was taken at the extraordinary meeting of the shareholders of the Company held on 21.12.1996. It is at the very same meeting the authorized capital of the Company was increased from Rs. 24 lakhs to Rs. 100 lakhs as borne out by the extract of the resolution passed at the extraordinary general meeting of the shareholders of the Company held on 21.12.1996 (page 161 to 164 of Counter). While the petitioners claim to have the knowledge of sub-division of the shares of the Company, they are denying the resolution passed at the very same meeting increasing the authorized capital which, in our view, is not probable. The Company being a private limited company, provisions of Section 81(1) are not applicable in allotment of shares in this company and as such the petitioners do not have any statutory right to claim proportionate allotment. Normally, in a private company if it is established that either the allotment is malafide with the sole purpose of reducing one’s shareholding or that a long standing practice of allotment on proportionate basis had been breached, then a shareholder can complain. In the present case no such established practice had been there and as a matter of fact it is found that in 1950 the second respondent held 40 per cent shares in the Company at which time his sons were not shareholders at all in that company. The petitioner has also not established malafide in the impugned allotments other than claiming proportionate allotment. In a family held company it is not uncommon that shares are allotted on certain oral understandings with a view to achieve certain objects. In the present case, the second respondent claims that the shares were allotted in favour of the family members of his second son with a view to maintain equilibrium. For this contention, he has pointed out that there has been substantial increase in the shareholding of the first petitioner and his family members in Hyderabad based companies, so that he could have control of those companies. Likewise, according to him, he desired his second son should have control of the respondent company. We do not find any flaw in this stand of the second respondent. Whether there was a family agreement to this effect or whether the MOU between the two brothers would negate the so called family arrangement is of no consequence as the facts speak for themselves in this case. It is not disputed by the petitioners’ group that their shareholding in the Hyderabad based companies has gone up substantially as against that of the second respondent and the second son of the second respondent without any contest or protest from them. This itself would show that, if no express agreement, there had been certain tacit agreement between the parties that each son would control a company. Considering these facts, we do not find any malafide in the allotment of shares to the respondents’ group in exclusion of the petitioners and as seen from the minutes of the Board meetings in which the shares were allotted, the second respondent had informed the Board also on the rationale behind the allotment. As far as need for funds of the Company is concerned, we find from the balance sheets for the years 31.03.1998 and 31.03.1999 (pages 181 and 211) that the Company had incurred substantial expenses for purchase of plant and machinery and also for construction of building and therefore the need for further issue of shares has also been established. Accordingly, we do not find any scope to grant any of the reliefs sought for by the petitioners. Accordingly, the petition is dismissed.

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