Dismissed

Bank of Baroda v. SEBI & Union Bank of India v SEBI [2 & 4 of 1998]

SAT27 Jul 2000

Case brief

AI extract

What is this about?

The Securities Appellate Tribunal dismissed appeals by Bank of Baroda and Union Bank of India against SEBI directions to refund application money from a void share issue. The Tribunal held that Bankers to an Issue hold funds in a trust capacity and are liable to refund money when listing fails, with SEBI empowered under section 11B to issue such directions. Appeals dismissed.

What did the court decide?

The appeal was dismissed, holding the SEBI direction to refund money legally valid and the Appellants liable to refund the application money to investors.

Bank of Baroda Vs. SEBI & Union Bank of India Vs… — Securities and Capital Markets | SAT (2000)

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BEFORE TIIE SECURITIES APPELLATE TRIBUNAL

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MUMBAI

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In the matter of…

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(a) Appeal No. 2/2000

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Bank of Baroda Appellant Vs.

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Securities & Exchange Board of India Respondent

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(b) Appeal No. 4/2000 Union Bank of India Appellant Vs.

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Securities & Exchange Board of India Respondent

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APPEARANCE

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Shri M.T. Udeshi Dy. General Manager (Legal) Bank of Baroda

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Shri K.K.Verma Managing Director BOB Capital Markets Ltd for Appellant Bank of Baroda

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Shri R.M.Kadam Advocate Shri V.S.Deshpande Dy.Manager Union Bank of India for Appellant Union Bank of India

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Shri S.V.Krishnaniohan Division Chief SEBI Mr. Vijayakrishnan, Legal Officer SEBI for Respondent (in both the appeals)

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ORDER

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These two appeals by the Appellants viz. Bank of Baroda and Union Bank of India, are directed against the two separate orders, both dated January 19, 2000 made the Respondent, directing the Appellants to refund the application money collected by them from the subscribers, in their capacity as the Bankers to the Issue in the public issue of shares made by one Jaltarang Motels Ltd., in December 1995.

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Material facts giving rise to these two appeals relate to matters arising out of the public issue of 36 lakhs equity shares of Rs. 1 01- each, made by Jaltarang Motels Ltd (herein after referred to as the Company) by issuing a prospectus. Both the Appellants are public sector banks holding certificate of registration from the Respondent, to act as "Bankers to an Issue". The Appellants along with Punjab National Bank were the Bankers to an Issue to the company's public issue of shares. The issue was opened for public subscription on December 21, 1995 and closed on December 26, 1995 with heavy over subscription.

¶17

Even though the prospectus issued by the Company categorically stated that the company' s shares would be listed on the stock exchanges at Ahmedabad and Bombay and that for the purpose necessary application had been made, permission for listing could be obtained only from Ahmedabad Stock Exchange (ASE). While ASE accorded approval on March 4, 1996, Bombay Stock Exchange (BSE) rejected the request on March 6,1996. However, the Appellant Bank of Baroda, on March 25, 1996 transferred a sum of Rs.38, 89,218 collected from the public, to the company's account. The Appellant Union Bank of India, out of a sum of Rs.353.32 lakhs collected from the public, transferred few lakh rupees to certain third parties and the balance amount to the company. These transfers were made without waiting for the decision on listing from BSE.

¶18

Since BSE had refused to list the company's shares, the public issue became void in terms of sub section (iA) of section 73 of the Companies Act necessitating refund of the application money forthwith to the applicants as required under sub section 2 of the said section 73. However, the company did not comply with the said requirement of returning money to the applicants and as a result innocent (investors) were, put to hardship. At this juncture the Respondent got into the interests of the investors. After holding an enquiry the Respondent order dated December 19, 1996 directed Shri Atul Shah, the Managing Director and one of the promoters of the company, to refund the subscription money to the applicants. Instead of complying with the said direction, the company preferred an appeal against the order before the Appellate Authority under the Securities & Exchange Board of India Act (the Act). The appeal was dismissed on August 22, 1997. The company filed a revision application before the Appellate Authority, which was also dismissed on March 17, 1998. Thereafter the company filed a Special Civil Application in the Gujarat High Court. Single Judge dismissed the SCA on July 30, 1998 giving liberty to the Respondent to take appropriate action with respect to recovery of amounts either from the properties purchased out of the fund or from the fund diverted to Jaitarang Motels Club, an associate concern, or from the Bankers to the Issue. LPA filed against the Single Judge's order was dismissed by the Division Bench on September 18, 1998. The Respondent opted to pursue the matter with the Appellant Banks, being the Bankers to the Issue, and accordingly after making an enquiry issued orders invoking the powers provided under section 1 IB of the Act, directing them to refund the money to the investors, holding that due to their negligence, the investors have been made to suffer. The Appellant Bank of Baroda was directed to refund a sum of Rs.40.32 lakhs together with interest @ 15% p.a. from March 25, 1996 and the Appellant Union Bank was directed to refund Rs.353.32 lakhs together with interest @15% p.a. from April 3, 1996. Both these orders were issued on January 19, 2000. These two orders are under challenge in the present appeals.

¶19

Both the appeals, with the consent of the parties were heard together as the main issue involved for consideration by the Tribunal in these appeals being common. The fate of these appeals depends on the answer to the question as to whether the Appellants are liable to make refund of the money and if so the Respondent under 11 B of the Act is empowered to direct the

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Appellants to return the application received by them.

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Appearing for the Appellant Bank of Baroda, Shri M.T.Udeshi, the learned Authorised Representative, submitted that the impugned order is beyond the jurisdiction and powers conferred on the Respondent by the Act. According to him section 11 B of the Act is only an enabling section and the substantive law governing the matter is section 73 of the Companies Act, under which the issuer company and its officers in default alone are responsible for the consequences of non compliance of the requirements provided therein, and in any case not the Bankers to an Issue. In the absence of any liability to refund the money fastened on the Bankers to an Issue by statute, Appellant is not liable to make such refund and cannot be compelled to make refund. In his view the Act does not empower the Respondent to exercise powers to enforce the provisions of the Companies Act. Referring to Gujarat High Court's order dated July 30, 1998 in the company's SCA, the learned Representative submitted that since the properties of the company having been charged to the Respondent, the Respondent should have realised the money therefrorn and paid to the investors; more so in view of the company's admission of diversion of funds to purchase of properties and to its associate concern. He submitted that the Bankers to an Issue has only a limited role to play in a public issue as its duty is confined to collection of applications and money. The Lead Manager being the kingpin in the process is required to over see the public issue and provide guidance to others associated with the issue. According to him the Bankers to an Issue is required to go by the advice of the Lead Manager and the Appellant Bank faithfully went by the same. He submitted that in terms of the requirement of the prospectus, once allotment of shares was decided by the concerned stock exchange, the Bankers to an Issue is not required to keep custody of the funds and that the money was required to be released to the issuer company. In the instant case ASE vide letter of March 4, 1996 had granted permission to trade the company's s on ASE and the company had also reiterated this fact in its letter of March 25, requesting for release of the funds. The learned Representative submitted that E's decision refusing permission for listing though dated March 6, 1996, reached the Appellant Bank only on April 8, 1996 as the decision was communicated by ASE to the Lead Manager on March 21 and the Lead Manager in turn to them on April 8, 1996. By then the funds had already been released to the company.

¶22

The learned Representative submitted that taking into consideration the advice of the Lead Manager and also the fact that ASE had approved the basis of allotment and listing as well, the company's request was acceded to by releasing Rs. 38, 89, 219 from the public issue account to the company's bankers on March 25, 1996. He also submitted that though the Respondent was fully aware of the development from day one, having vetted the prospectus and also having rejected the company's appeal against BSE's refusal for listing in their capacity as Appellate Authority, they did not advise the Appellant to retain the money and not to release the same to the company. The learned Representative submitted that the Appellant had collected the application money as the company's agent and since the collection money having handed over to the company, they are not in the picture. According to him the liability of the Appellant as against the company as Bankers to an Issue stands concluded on handing over the collection money and the Respondent cannot, as such direct them to refund the money and only the company can be asked to do so.

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Further, the direction to refund the money is belated as it is made after a lapse of 4 years from the date of issue of prospectus and after a lapse of 3 years of transferring the money to the company. According to the learned Representative by making the order effective from March 23, 1996 i.e. the date on which the money was released to the company, the Respondent had disregarded the fact that the matter was time barred.

¶24

Referring to the decision of the Supreme Court in Rishya Shringa Jewellers Ltd vs. The Stock Exchange, Bombay (JT 1995 (7) SC 602) and the Gujarat High Court decision in Rich Paints Ltd. Vs. Vadodara Stock Exchange ((1998) 92 Com.Case Guj)) relied in support by the Respondent in their reply, it was submitted that in the cases refund order was directed against

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the issuer company and not against the bankers to an Issue. He submitted that the requirement of section 73 of the Companies Act that in the event of refusal of permission for listing by any one of the stock exchanges mentioned in the prospectus, the application money need be refunded, has not been mentioned in the prospectus prepared by the Lead Manager and vetted by the Respondent. In the absence of such a binding requirement in the prospectus, the Appellant cannot be said to have acted negligently for having released the money to the company on receipt of approval of listing and basis of allotment from the lead stock exchange i.e. ASE and request from the company for release of collection money to the company's account.

¶26

Further, according to the learned Representative the impugned order is incomplete and vague as it is found wanting in material details such as the names and addresses of the persons to whom refund is to be made and also the manner and method in which the refund directed is to be made by the Appellant. Neither the Company, nor the Lead Manager/Registrar to the Issue has been made parties to the inquiry and thus the inquiry and the order passed thereunder suffer from non-joinder of necessary parties as well.

¶27

Shri R.M. Kadam, learned Counsel appearing for the Appellant Union Bank of India, did not dispute the facts of the case. The facts and circumstances leading to the release of application money by the Appellant are in no way materially different from the case of the Appellant Bank of Baroda. The learned Counsel submitted that the Appellant had acted in good faith on the basis of communication received from the Lead Manager and ASE, as they were the leading players in the public issue. The learned Counsel's tenor of argument on the legal position regarding the Respondents' sue directions, was more or less on the lines adopted by the Appellant Bank.

¶28

It was submitted by the learned Counsel that the impugned order is ultravires the Act or the powers conferred thereby on the Respondent. Neither section 11 enumerating the functions and powers of the Respondent nor enabling issuance of directions give powers to the Respondent to issue any order in the nature of a decree for recovery of money. He submitted that the impugned order in effect is nothing but a decree to recover the money due to the applicants. On the scope of section 1 IB he submitted that the powers under section 11B are subject to the provisions of the Act and those powers have been catalogued in section 11 Section 11 does not confer any recovery power on the Respondent as could be seen from sub section (2) thereof There is no addition to the section conferring any such power by notification under clause (m) of sub section (2). Authority to recover money, levy of interest, etc. being substantial powers, cannot be exercised without specific authority of law. The liability to pay interest, the 1 earned Counsel submitted, can arise only in terms of a statutory provision or by any custom or usage, provided such custom or usage is not contrary to the laws and that the power to award interest cannot be exercised unless conferred by statute. The Respondent is lacking such authority is evident from the scheme of the Act itself as it does not provide for any recovery mechanism in the event of an order for recovery of money. There is not even an implied suggestion in the Act in this regard.

¶29

The learned Counsel submitted that the impugned order in effect is one to enforce. Section 73 of the Companies Act. He submitted that there is no specific indication in the section or generally in the Act to believe that the Respondent is empowered to exercise authority to enforce compliance of the requirements of other legislations including the Companies Act. According to him the Companies Act itself is - If contained code with built in provisions to deal with defaults thereunder. Proviisions of the Act cannot be used to administer the provisions of the Companies Act. There is no linkage between section IIB of the Act and section 73 of the Companies Act. The matters relating to allotment of shares and debentures, listing of securities on stock exchanges, consequences of void issues and obligations of company and its officers, etc. are compressed in section 73 of the Companies Act. In case an issue fails requiring refund of the application money, the obligation is on the Issuer Company and its officers in default.

¶30

Section 73 does not even remotely cast any obligation on the Banker to an Issue to refund money to the applicants. As far as the Appellant is concerned, being Bankers to an Issue, the governing regime is the Securities and Exchange Board of India (Bankers to an Issue) Regulations 1994. Since specific penalties have been provided under the regulations can not be resorted to deal with the omissions and commissions thereunder in view of the well settled legal position that if a particular legislation prescribes as a course of action, it is necessary to follow that particular course of action instead of resorting to the provisions existing else where.

¶31

The learned Counsel submitted that the show cause notice issued to the Appellant Bank did not talk about recovery of money as directed by the impugned order. Even assuming that the action is under the Bankers to Issue Regulations, the procedure prescribed therein has not been followed. The impugned order ex-facie follows upon the Respondent's Show Cause Notice dated January 11, 1999 asking the Appellant to show cause against alleged breach of section 73 of the Companies Act and the Bankers to an Issue Regulations. Nevertheless the impugned order purports only to be a direction in terms of the Act.

¶32

Refuting the contention of the Respondent, it was submitted that section 32 of the Act is only of clarificatory nature stating that the powers under the Act cannot have over riding effect on other legislations. The section does not enable the Respondent to plant the provisions of other legislations. Referring to Gujarat High Court's order in company's Special Civil Application No.2560 of 1998, giving liberty to the Respondent to recover the money from the company or from its associate concern Jaltarang Motel Club or from the Bankers to the Issue, the learned Counsel submitted that the High Court cannot clothe the Respondent with any such additional power which the statute has not provided for, that the High Court's observation cannot be taken as an authority to act upon. He further submitted that a direction under section 11B can be only prospective and it cannot in any case be used to deal with a matter, which is badly delayed being more than 5 years old, that even the Supreme Court had put limitation for filing Writ Petitions under Article 32 by 3 years.

¶33

In the light of the Respondent's contention that the Bankers to an Issue is a trustee for the subscribers' money, the learned Counsel submitted that in terms of section 23 of the Indian Trust Act, 1882 a trustee, assuming the trustee is liable for any breach of trust, can be directed to pay interest only under limited circumstances viz. (i) the trustee has actually received interest (ii) breach of trust consists in unreasonable delay to pay the trust money to the beneficiary (iii) when trustees ought to have received interest and (iv) where the trustee may fairly be presumed to have received interest. Assuming these limited circumstances of section 23 are fulfilled, even then liability for interest is limited to 6% per annum. Assuming that the Appellant was in breach of trust as alleged, in any view of the matter, the impugned order is clearly contrary to the legislative mandate of section 23 of the Indian Trust Act and consequently of no legal effect. It was also urged that only investors can claim refund in the event of breach of trust and the Respondent has not been authorised by investors to act on their behalf.

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Other grounds such as non observance of the principles of natural justice, pain of double jeopardy; resultant benefit of unjust enrichment to the company, discriminatory treatment meted out to the Appellant absolving other leading players in public issue, treatment of the proceeds of stock invest etc. etc., adduced in the Memorandum of Appeal were not pressed by the learned Counsel.

¶35

The learned Representative of the Respondent to buttress the course of action adopted by them narrated the background necessitating the issuance of the impugned direction. Attention of the Tribunal was invited to the directions issued by the Respondent on December 19, 1996 in the wake of the company's failure to refund the application money to the applicants in the context of refusal of permission for listing by BSE. He submitted that in terms of section 73 (1A) of the Companies Act, permission of each of the stock exchanges mentioned in the prospectus is

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required to be obtained and failure to get such approval would result in the issue becoming void, necessitating refund of money collected against the allotment of shares, within the stipulated time and with interest @ 15% per annum in the event of delay in refunding. In support of the contention that approval of each and every stock exchange mentioned in the prospectus was necessary, the learned Representative cited Supreme Court's decision in Rishya Shringa Jewellery's case (supra).

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The learned Representative submitted that the Appellants had failed to exercise due diligence expected of them. Since BSE had declined permission for listing, the subscription money was required to be refunded forthwith to the investors in terms of section 73(2) of the Companies Act. But instead of refunding the money to its legitimate owners, the company made use of the same necessitating the Respondent's intervention by way of issuance of directions on December 19, 1996 requiring the company to refund the collection money to the applicants. Though the company filed an appeal before the Appellate Authority challenging the Respondents' order, they could not succeed and subsequent revision application filed by them was also dismissed. The matter did not rest at that point. The Company filed a special Civil Application in the Gujarat High Court, which was also dismissed on July 30, 1998. Letters Patent Appeal thereafter against the Single Judge's order also was dismissed by the Division h of the High Court on September 18, 1998. Tribunal's attention was invited to the Single Judge's order as endorsed by the Division Bench in the said SCA and in particular to the portion giving liberty to the Respondent to take appropriate action with respect to the recovery of amounts either from the properties purchased out of the subscription money or from the Jaltarang Motels Club, an associate unit of the company, to whom part of the subscription money was diverted or from the Bankers to the Issue. He submitted that the impugned order was issued in compliance with the High Court's specific order in the matter. In fact, the High Court had also directed the Respondent to find out the conduct of the Bankers to the Issue in the matter and take suitable action. The learned Representative submitted that it is not correct to say that the Appellants were singled out and other players such as Lead Manager and the concerned Registrar to the Issue were allowed to go scot-free. According to him after inquiry, certificate of registration granted to the Lead Manager was suspended and the concerned Registrar to the issue was denied renewal of registration certificate, and prosecution is being launched against the company and its officers in default. He submitted that the irresponsible conduct of other persons associated with the public issue does not abdicate the Appellants from their responsibilities as Bankers to an Issue.

¶38

The learned Representative submitted that section 11 IB of the Act is wide enough empowering the Respondent to issue the impugned order The Act empowers the Respondent to take necessary measures to protect the interest of the investors and the impugned direction is an investor protection measure. To support this contention he heavily relied on the Division Bench decision of the Gujarat High Court in Securities and Exchange Board of India Vs. Alka Synthetics Ltd (1999) 19 SCL 460 (Guj). According to the learned Representative in terms of the said decision, the Respondent is empowered to take any measure to protect the interests of the investors. Citing the Court's order in the company's Special Civil Appeal it was submitted that t had the requisite authority in terms of the High Court's mandate also to proceed against the Appellants. He vehemently denied that the impugned order is a decree for recovery of money, as contended by the Appellant Union Bank of India. The impugned order, he submitted, is a remedial order in tune with the Gujarat High Court's direction, issued in terms of the powers vested in the Respondent by the Act.

¶39

The learned Representative submitted that Banker to an Issue is an agent of the Issuer Company and a trustee for the funds of the subscribers. He submitted that the Appellants should not have released the money to the company ignoring the requirements of section 73 of the Companies Act. He re-iterated that impugned order is legally tenable, being one issued in compliance with the Gujarat High Court order and in exercise of the powers vested in the Respondent by the Act, The learned Representative further submitted that the Appellants being Bankers to an Issue are subject to the jurisdiction of the Respondent for their acts of omission and commission and

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certainly powers under section 11B can reach them. Referring to the standing of the Act vis-Avis other legislations he submitted that in terms of section 32 of the Act, the provisions of the Act can be used to supplement the provisions of other statutes like Companies Act. Referring to section 73 of the Companies Act he submitted that the object of the section is to provide protection to investors paying subscription money on the faith of a promise to get back the same in case shares are not allotted to them. This faith is fortified by the assurance that the money will not be appropriated for any purpose and will be kept in the safe custody of the collection bank. The company or the bank receives the money in a fiduciary capacity and the arrangement made by the company and the subscribers is a special arrangement binding on the company as well as on the bank having regard to the scheme and object of the provisions contained in the Companies Act. The section imposes a statutory bar on the use of collection money for any purpose other than for those specified in the section. It is only the Bankers to an Issue who can be expected to enforce the restriction on the use of money by ensuring that the statutory requirements such as collecting minimum subscription, approval for listing, etc. have been met with.

¶41

Referring to the Appellants submission that the matter is time barred, the learned Representative submitted that it is not correct to say that the course of action for such refund by the Appellants as against the company would be time barred because the course of action for the Appellants arose on January 19, 2000, when the Respondent had issued directions to refund the application money and the reckoning date for limitation purpose is not the date of release of the money to the company as was contended.

¶42

The learned Representative submitted that the Appellants had acted negligently in releasing the application money from the public issue account without ensuring that both the sock exchanges mentioned in the prospectus had accorded approval for listing. He claimed that the Appellant Union Bank had in fact released part of the collection money even to third parties and the balance amount to the company, well before the application for listing was made to ASE on February 10, 1996. The Appellants did not exercise due care and caution required of the collecting banker in handling the public money. They did not even heed to the advice given by the Lead Manager vide letter dated March 2, 1996 to consult the Registrar in the matter. The act of omission and commission by the Appellants enabled the company to get the money out of the public issue account, which should have been available to return to the applicants. In the circumstances it cannot be said that the Appellants were not in the picture and they cannot be directed to refund the money.

¶43

I have given careful consideration to the rival contentions and the material facts putforth before me by the parties.

¶44

There is no dispute about the factual position that the Appellants were the Bankers to the public issue made by the company, that they had received subscription shares money from the public, that BSE did not accord approval for listing and that the subscription money kept in the public issue account was transferred to the company before listing refusal was received.

¶45

A public limited company has no obligation to have its shares listed on a recognised stock exchange. But if the company intends to offer its shares or debentures to the public for subscription by issuing prospectus, it must, before issuing such prospectus, apply to one or more recognised stock exchanges for permission to have the shares or debentures intended to be so offered to the public, to be dealt with in each such stock exchange in terms of section 73 of the Companies Act.

¶46

It cannot be gainsaid that the prospectus of the company is an important document provided for, under the statute. Section 2(36) of the Companies Act defines "prospectus" as follows:

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"2(36) "prospectus" means any document described or used as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body composite"

¶48

Format of the prospectus has been designed in the statute itself and furnished in Schedule 11 to the Companies Act thereby providing for disclosure of all the relevant materials to enlighten the public to make an informed decision to invest or not in the company's shares or debentures. All statements contained in the prospectus are matters permitted to be inserted by the statute. Civil as well as criminal liability for misstatements in the prospectus has also been provided in the statute. One of the matter to be stated prominently on the face of the prospectus is the name of the stock exchanges where the issue is going to be listed and the fact of making application to the exchanges where the issue is going to be listed and the fact of making application to stock exchanges specified therein for quotation of the shares or debentures offered public subscription. The object underlying this statement as the Company Law Committee (pg.68) put it " is to give an assurance to the intending investor that the shares will become marketable and to induce him to subscribe for them on that basis. Although there is no guarantee that the application for quotation will be granted by the stock exchange authorities the public assumes that subscribe".

¶49

The admission of the securities of a company to trading privileges on a stock exchange is referred to as listing. The principle objectives of listing are to provide ready marketability and impart liquidity and free negotiability to stock and shares, ensure proper supervision and control of dealings therein, and protect the interests of shareholders and of the general investing public.

¶50

Part 111 of the Companies Act provides the ground rules for issue of shares and debentures and matters relating thereto. Section 73 therein on the allotment of shares and debentures is the section with which we are mainly concerned in the present appeals, for the time being.

¶51

Let us have a look at the provisions of section 73 in so far as they are material to the contentions raised in the appeals:

¶52

Section 73(1) mandates that every company intending to offer shares or debentures to the public for subscription by the issue of prospectus shall before such issue, make an application to one or more recognised stock exchanges for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange.

¶53

Sub section (IA) makes it necessary for the company to state in its prospectus the name of each of the recognised stock exchanges whose permission for listing has been sought by the company. Any allotment of shares will become void if permission is not granted by the stock exchange or each such stock exchange as the case may be, before the expiry of 10 weeks from the date of the closing of the subscription lists. The validity of the allotment is made thus dependent on securing the requisite permission of each stock exchange whose permission has been sought. There is a deemed refusal if permission is not granted by the stock exchange before the expiry of 10 weeks from the date of closing of the subscription lists and upon the expiry of that date, any allotment of shares made by the company becomes void.

¶54

Sub section (2) requires the company to repay forthwith all money received from applicants in

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response to the company's prospectus either where the company has not applied for permission of the recognised stock exchange for listing or where permission has been applied for but not granted. If the company has issued a prospectus without seeking permission for listing, it has clearly acted in violation of the mandatory provisions of the Act, and the company has no right to receive or retain any amount by way of subscription in pursuance of its prospectus. On the other hand, where permission has been sought but has not been obtained within 10 weeks from the date of closing of the subscription lists, thereby rendering void any allotment made, the company is bound to repay all such money forthwith, but without interest. In the event of such money not being repaid within 8 days after the liability to repay arises, the company and every director of the company who is an officer in default are made jointly and severally liable to pay the principal amount as well as interest at the prescribed rate thereon as from the expiry of the said 8 days.

¶56

Sub section (2A) provides for repayment of amounts received in excess of the aggregate of the application money relating to the shares or debentures in respect of which allotments have been made forthwith without interest and if such money is not repaid within 8 days liable to pay interest also at the prescribed rate.

¶57

Sub section (2B) concerns solely with default of compliance with the requirement of sub section (2A)

¶58

Sub section (3) makes it obligatory to keep all the amounts received from the subscribers in a separate bank account maintained with a scheduled bank. Such money must so remain in the bank until the permission has been granted by the stock exchange or until the disposal of an appeal preferred against refusal to grant permission. Where the permission has not, been sought, the company has acted in disobedience of the law and the amounts received from the investors must be credited to the separate bank account and immediately returned to them together with the interest accrued for the period. But where permission has been sought but not granted, the amounts so kept in the bank have to be repaid within the time specified in sub section (2). Default of compliance with the requirement will make the company and every officer in default liable to be punished with fine.

¶59

In terms of sub section (3A) the money credited to the separate account can be utilised for only two purposes: (i) for adjustment against allotment of shares where listing is permitted, or (ii) for repayment where listing is not permitted or the company is otherwise unable to allot shares. The company has no right to deal with the money in any other manner or keep it longer than permitted by the section.

¶60

From the statutory provisions stated above it is clear that till such time the shares are allotted after fulfilling the conditions stipulated in the section, the money collected by way of subscription is required to be kept in a separate account with a scheduled bank, away from the reach of the issuer company to be available for returning to the applicants in the event of allotment failing to come through.

¶61

The question as to whether permission from each and every stock exchange mentioned in the prospectus is required or not before allotment, was a contentious issue before the Supreme Court declared the legal position in Rishyashringa Jewellery's case (supra) holding that

¶62

"........... where the prospectus held out that enlistment of shares would be in more than one stock exchange the consequence envisaged in sub-section ( 1 A) of section 73 ensues to render void the entire allotment of shares unless the

¶63

permission is granted by each and everyone or all of the stock exchanges named in the prospectus for enlisting the shares. This is the plain meaning of subsection (IA) of section 73. In short, unless permission is granted by each or everyone of all the stock exchanges named in the prospectus for listing of shares to which application is made by the company, the consequence is to render the entire allotment void. In other words, if the permission has not been granted by any one of the several stock exchanges named in the prospectus for listing of shares the consequence by virtue of sub section (I A) of section 73 is to render the-entire allotment void and the grant of permission by one of them is inconsequential. This construction also promotes the object of insertion of sub-section (IA) in section 73 by amendment of the law made to overcome the effect of the decision of this Court in Allied International Products Limited".

¶64

It is seen from the company's prospectus dated November 21, 1995 that the company had proposed to list its shares on ASE and BSE. I find at least at three places in the prospectus, i.e. at pages 17 and 16, such a narration. Listing at Ahmedabad and Bombay Stock Exchanges has been shown as one of the 'high lists' on page 1, itself On page 2, there is a statement that "applications have been made to the stock changes at Ahmedabad and Mumbai for permission to deal in and for an official quotation of the Equity Shares of the Company". On page 16, it has been stated that "the company's equity shares are proposed to be listed on the stock exchanges at Ahmedabad and Mumbai".

¶65

It is an admitted fact that out of the two stock exchanges i.e. ASE and BSE, named in the prospectus, only ASE granted permission to list the company's shares and BSE rejected the application. Therefore, it is very clear that the issue became void, necessitating refund of the application money to the applicants Incidentally, to be factually correct it is stated that the Respondent's version that the Appellant Union Bank had released money even before the necessary application for listing was made to ASE is not correct, as the company's prospectus dated November 21, 1995 as vetted by the Respondent would indicate that necessary application for listing has been made to ASE and 13SE. This statement has not been rebutted.

¶66

The role/obligation of the collection bank i.e. Bankers to an Issue and the nature of money in the hands of the collection bank has been subjected to detailed examination by various courts in the past. Extracts from some of those decisions having bearing on the subject matter under consideration, are reproduced below.

¶67

Bombay High Court in BCCI's case (supra) had considered the matter in detail. In the said case the court was considering the claim of two companies which made public issue of shares wherein the issue was over subscribed. However, before transferring funds to the companies the collection bank was taken into liquidation and a provisional liquidator was appointed. The bank refused to hand over the money to the companies on the ground that the bank was in liquidation and the money in question formed part of its general assets. But the Court over ruled this contention stating that....

¶68

"the statutory Provisions contained in section 73(3) and section 73(3A) of the Companies Act 1956 create a statutory trust so as to impress the said amounts with trust, whether in the hands of the company or in the hands of the bank".....

¶69

"The object of these provisions is to provide complete protection to the persons who pay subscription moneys on the faith of promise to refund the moneys in case certain conditions are not fulfilled and earmarking of subscription amounts in the safe custody of the bank. The application moneys do not form part of the general assets of the company or the bank The moneys deposited are merely in the custody

¶70

of the bank. The capacity in which the company or the bank receives the said amount is a fiduciary capacity and the arrangement made by the company and the subscribers is a special arrangement binding on the company as well as on the bank having regard to the scheme and object of the provisions contained in the Act and the content of the said provisions. The provisions of the Act impose a statutory prohibition on user of the application money for any purpose other than for the purposes specified in section 73(3A) of the Act. The said provisions are mandatory and incapable of being waived".

¶71

The Court held that.....

¶72

"the amounts in question were merely entrusted to the bank for a specific purpose and the same were impressed with trust throughout primarily for the benefit of subscribers and secondarily for the benefit of the company i.e. (i) to the extent allot moneys for the benefit of the company and (ii) 'the extent of the refundable amount for the benefit of the subscribers".

¶73

The Court further observed that ……..

¶74

"when amounts are deposited as specific deposit for a specific purpose with specific restrictions and the same are earmarked or segregated for a specific purpose the relationship between the banker and the depositor is that of trustee and beneficiary".

¶75

Gujarat High Court's decision in Rich Paints case (supra) is also helpful in this text. The Gujarat High Court in the said case had occasion to examine the scope of section 73 and the role of Bankers to an Issue with respect to moneys collected by them in a public issue from the public, In this case the issuer company had sought permission for listing from three recognised stock exchanges viz. ASE, VSE and BSE. Even though ASE and VSE granted permission for listing, BSE rejected the request thereby necessitating refund of the entire subscription money. The following extract from the Judgement is considered relevant to the question under consideration in the present appeals.

¶76

"If listing permission is not granted by even one stock exchange specified in the prospectus or where the company is for any reason unable to make allotment of shares, application moneys received from the public have to be refunded within the time limit stipulated in the provisions of section 73 of the Companies Act. The scheme of sections 69 and 73 of the Companies Act, would, therefore, suggest that the money should not be allowed to be handled or manipulated by the company till all the mandatory requirements of sections 69 and 73 of the Companies Act are compiled with and till the company can proceed to make valid allotment of shares. In other words, the moneys must be kept out of the reach of the company and its directors/promoters till the company can make allotment of shares in accordance with law. This salutary object of the provisions of the Companies Act will be frustrated if it is held that application moneys received from the public are permitted to be deposited in any bank account of any scheduled bank where the company may choose to deposit. In that case, there will be no control on the company which may withdraw the application moneys or any part thereof in flagrant violation of the provisions of sections 69 and 73 of the Companies Act and then agree to pay a fine of Rs. 5, 000 under sections 69(4) and 73(3). No difficulty will arise either to the company which has offered its shares to the public and is acting bona fide or to the investors, if the provisions of sub-section (4) of section 69 and sub-sections 93) and (3A) of section 73 are interpreted as stated earlier, that is to say, all moneys received from applicants for shares offered to the public for

¶77

subscription shall be deposited and kept deposited in the scheduled bank/s which are bankers to the issue until the company has complied with all the requirements of section 69 and section 73 of the Companies Act. It has been held that bankers to the issue hold the application moneys in the nature of a trust fund, i.e. the statute has created a kind of trust for the protection of persons who pay the money on the faith of a promise to refund the money, in case certain conditions are not fulfilled (Nanwa Gold Mines Ltd., In re [19551 25 Comp Cas 443: [19551 3 All ER 219 (Ch.D); Reserve Bank of India vs. Bank of Credit and Commerce International (Overseas) Ltd (No. 1) f 19931 78 Comp Cas 207 (Born), Reserve Bank of India v. Bank of Credit and Commerce International (Overseas) Ltd (No.2)[19931 78 Comp Cas 230 (Born). It is only the bankers to the issue who can be expected to make sure that before withdrawal the company has got the listing permission from each stock exchange specified in the prospectus. It is only the bankers to the issue who are subject to the statutory control of the SEBI through the SEBI (Bankers to an Issue) Rules, 1994, and the SEBI (Bankers to an Issue) Regulations, 1994."

¶78

The legal position regarding the consequences of non listing of shares or debentures on the stock exchanges and the nature of application money in the hands of the Banker to an Issue is very clear from the High Court decisions extracted above.

¶79

Having come to the conclusion that the application money in the event of a public issue becoming void is required to be refunded to the applicants as it belonged to them, the next question is as to whether the Appellant Banks are under statutory obligation to make refund of the money to the applicants. I do not consider it necessary to elaborately discuss this question again as the answer is already available from the Bombay High Court's decision in BCCI case and Gujarat High Court decision in Rich Paints case cited above. The Bombay High Court had very clearly stated that the collection moneys were merely entrusted to the collection bank for a specific purpose and the same were impressed with trust throughout primarily for the benefit of subscribers and secondarily for the benefit of the company i.e. (i) to the extent of allotment moneys for the benefit of the company and (ii) to the extent of refundable amount for the benefit of the subscribers. Decision in Rich Paints case has further elaborated this aspect, as could be seen from the portion from the judgement extracted above.

¶80

The Bankers to an Issue has a prominent role in the process of raisins capital by companies from the public through public issue in as much as it is the custodian of public funds, accountable to the applicants in case an issue fails to pass through its final phase i.e. allotment of shares. To part with the collection money for any other purpose is in clear breach of trust. In this context, it is all the more relevant to take note of the fact that both the Appellants are public sector banks and as such they should have been all the more careful in dealing with funds. It is quite evident from the facts before me that they had failed to exercise due diligence expected of them befitting to their position and status. The argument that since ASE had allowed the basis of allotment requiring the Appellant to release the moneys to the company is not based on a proper appreciation of the requirements of section 73. Basis of allotment and actual allotment are not one and the same. Allotment is made on the basis determined by the concerned stock exchange in consultation with other parties. Allotment follows after the basis of allotment is decided. The purport of sub section (3) of section 73 is very clear and there is hardly any scope to interpret the requirement to come to the conclusion that listing approval from the regional stock exchange is sufficient to release the money to the company. The Appellants representatives had admitted during the argument that they had acted as Bankers to an Issue in several cases in the past. That being the case they cannot be unaware of the scheme of public issue and the governing statutory requirements to be followed and the Supreme Court decision in the matter cited. Are we to believe that they were that ignorant of the statutory requirements and they needed to be reminded by the Lead Manager and the Respondent of their legal obligations?

¶81

Public issue of shares is a team action involving not only the Issuer Company but also several agencies including Bankers to an Issue with well-defined roles assigned to each one of them. Every one involved is required to exercise due diligence as public money is handled in the process. The stand that the Bankers to an Issue was dependent on the wisdom of the Lead Manager or the issuer company or the Respondent, in the discharge of their duties and obligations inspite of the same having been clearly spelt out in the law and in the prospectus, is unacceptable. The positive declaration prominently printed in the prospectus, the -"holy document"- that "the subscription monies will be kept in separate bank account and the company will not have access to such funds unless allotment of shares has been made in consultation with the stock exchanges when listing is sought"-, based on which the public made subscriptions, does not mean anything? Who else other than the Bankers to an Issue is responsible to keep the collection money in safe custody? Who else other than the Bankers to an Issue can keep the money away from the reach of the company? If it is to be viewed that the Bankers to an Issue are to be guided only by the version of the company, without making any independent efforts to know the compliance of the statutory requirements, the whole protective mechanism provided under the law will turn out to be meaningless. It appears that the Appellants had not taken cognizance of the binding nature of the commitment made in the prospectus and the faith reposed in them by the applicants. The whole purpose of keeping the money in a separate account is defeated if the issuer company is given free access to the funds kept in that account.

¶82

The learned Representative of the Appellant Bank of Baroda had put forth an argument that requirement of obtaining listing permission from each one of the stock exchanges mentioned in prospectus should have been stated in the prospectus itself for their guidance. Since this requirement being a part of the substantive law, repetition of the same in the prospectus is not warranted for the enlightenment of the Banker to an Issue. Strangely, the Appellants having not taken cognizance of their duty to prevent the company accessing the funds remaining in their custody, as provided in black and white in the prospectus were urging for an explanatory clause incorporated in the prospectus on a matter specified in the statute itself for guidance! What for? The argument that Bankers to an Issue cannot be fastened with the liability of refunding the collection money in the light of the statutory provisions in section 73 holding the company and its officers responsible to make refund, does not hold good in the light of the role of the Bankers to an Issue and the nature of money kept by them and the clear mandate to keep the money in their custody out of the reach of the issuer company before the allotment is made as stated by the High Courts (supra). To blame the Respondent for not having advised the Appellant Bank to hold on the money and to say that but for the Respondent's silence they would not have parted with the money is too much to digest. Respondent's role is not that of a micro level adviser suo-moto providing dos and don'ts to each and every market intermediary in the day to day business activities. It is neither practically possible nor necessary The Appellants' guide should be the provisions of the Act, rules, regulations and the practice in vogue and not external agencies like the Respondent. The Respondent is a regulatory authority, and not a personal adviser to all those connected with the capital market. The Appellants would have been perhaps on a better footing had they specifically sought guidance from the Respondent and if the same was not given. The argument that the information regarding rejection of the proposal for listing reached the Appellants late and they had by that time transferred the money to the company does not go in their favour for the reason that statutory mandate is to part with the money only after allotment is validly made and such allotment cannot be validly made without getting the listing approval from all the stock exchanges mentioned in the prospectus. In the instant case they did not wait for the decision of rejection or approval of the listing application by BSE, for reasons best known to them.

¶83

The Appellants had laboriously canvassed before me that the Respondent had invoked of the Act to enforce the provisions of the Companies Act, which was not permissible for the reason that the Respondent was not a designated authority to enforce the provisions of the Companies Act. The argument, that neither the Act nor the Companies Act recognised the Respondent as an authority for the purpose of the Companies Act and as such the Respondent's action enforcing the said Act through section 1 IB is ultravires the Act, and for default under section

¶84

73(2), the action lies only against the company and its officers in default, is correct. I fully agree with the Appellant's version that the Respondent cannot enforce the provisions of the Companies Act in the absence of requisite statutory authorisation. The Companies Act itself is a wholesome legislation leaving its enforcement to the authorities designated thereunder and the Respondent is not one among them. But then, one has to carefully examine the impugned order to see as to whether the impugned order is one enforcing the provisions of the Companies Act or one enforcing a matter failing under the purview of the Act itself and the competency of the Respondent to deal with the matter. On a perusal of the impugned order it could be seen that though the requirement of section 73, which governs certain aspects of public issue of shares, allotment, etc. have been discussed in the order, nowhere it has been stated that the order is intended for enforcing the said section 73. The order categorically refers to the authority vested in the Respondent vide section 11B of the Act.

¶85

In the light of the rival contentions, one has to see as to whether the provisions of the Act, independent of the provisions of the Companies Act, empower the Respondent to issue the impugned order. For an answer to the question it is necessary to know the back ground of the legislation and the object and scheme of the Act as well.

¶86

"The Securities and Exchange Board of India Ordinance, 1992" "to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and matters connected therewith or incidental thereto" was promulgated on January 30, 1992. This Ordinance was converted into an Act viz. "The Securities and Exchange Board of India Act, 1992 by Parliament in April 1992. What prompted the Government to place in position a legislation focussed on investor protection is evident from the following Objects and Reasons of the Bill-. -

¶87

"The capital market has witnessed tremendous growth in recent times characterised particularly by the increasing participation of the public. Investor’s confidence in the capital market can be sustained largely by investor protection. With this end in view Government decided to clothe SEBI immediately with statutory powers required to deal effectively with all matters relating to capital market".

¶88

Section 3 of the Act provides for establishment of a Board namely the "Securities and Exchange Board of India", for the purposes of the Act. The purposes of the Act according to its preamble are to "provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected there with or incidental thereto"

¶89

Chapter IV of the Act is on "powers and functions" of the Board. Section 1 1 therein enumerates the functions of the Board. Sub section (1) of section 1 1 provides that subject to the provisions of the Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. Sub section (2), provides without prejudice to the generality of sub section (1) certain specific measures for the purpose. One of the specific measures provided therein is the provision for registering and regulating the working of several types of capital market intermediaries, including Bankers to an Issue.

¶90

The Act was further amended in 1995, because: -

¶91

"On the basis of past experience of the Board a need has been felt to amend the said Acts (i.e. SEBI Act and Securities Contracts (Regulation) Act), in respect of certain categories of intermediaries, persons associated with the securities market and companies on matters relating to issue of capital and transfer of securities".

¶92

Accordingly several amendments were made to the Act, most of them intended to strengthen the Respondent's role as protector of investors' interest. "In order to enable the Board to function more effectively", the Board was given power to issue directions vide anew. It is needless to say that investors by and large are often at the receiving end in the hands of certain unscrupulous market players. There was no focussed attention to protect their interests in the securities market. Their plight was in no way different from the plight of consumers. In view of the comparable position in which the investors and the consumers are placed, it is felt appropriate to cite the following observations made by the Supreme Court in Lucknow Development Authority Vs. M.K.Gupta ((1994) SCC 243): recognising the need for specific consumer protection legislation enacted by the Parliament and a constructive approach in interpreting the provisions of the law. The Supreme Court observed that:

¶93

"it appears appropriate to ascertain the purpose of the Act, the objective it seeks to achieve and the nature of social purpose it seeks to promote as it shall facilitate in comprehending the issue involved and assist in construing various provisions of the Act effectively. To begin with the preamble of the Act, which can afford useful assistance to ascertain the legislative intention, it was enacted, 'to provide for the protection of the interest of consumers'. Use of the word, protection' furnishes key to the minds of makers of the Act. Various definitions and provisions, which elaborately attempt to achieve this objective, have to be construed in this light without departing from the settled view that a preamble cannot control otherwise plain meaning of a provision. In fact the law meets long felt necessity of protecting the common man from such wrongs for which the remedy under ordinary law for various reasons has become illusory. Various legislations and regulations permitting the State to intervene and protect interest of the consumers have become a haven for unscrupulous ones as the enforcement machinery either does not move or it moves ineffectively, inefficiently and for reasons which are not necessary to be stated. The importance of the Act lies in promoting welfare of the society by enabling the consumer to participate directly in the market economy. It attempts to remove the helplessness of a consumer which he faces against powerful business, described as ' a network of rackets' or a society in which, producers have secured power' to 'to the rest' and the might of public bodies which are degenerating into storehouses of inaction where papers do not move from one disk to another as a matter of duty and responsibility but for extraneous consideration leaving the common man helpless, bewildered and shocked. The malady is becoming so rampant, widespread and deep that the society instead of bothering, complaining and fighting against it, is accepting it as part of life".

¶94

These observations, it is felt, are in equal force applicable to the cause of helpless investors as well, and also to the Securities and Exchange Board of India Act.

¶95

The Apex Court in the said decision had also Provided guidance for the benefit of the Courts in interpreting such a beneficial legislation: Since the Act is also a beneficial legislation the approach of the courts in interpreting its provisions should not be different. Following extract from the decision provides the guidance: -

¶96

"The provisions of the Act thus have to be construed in favour of the consumer to achieve the purpose of enactment as it is a social benefit oriented legislation. The primary duty of the court while construing the provisions of such an Act is to adopt a constructive approach subject to that it should not do violence to the language of the provisions and is not contrary to the attempted objective of the enactment".

¶97

Section 11,11B and 12 are the core sections in the Act from the functional angle. As stated, section 11 enumerates the functions of the Board in a general way. New section 11B is on the power to issue directions. Section 11B is more specific and action oriented. Section 12 provides for registration of intermediaries with the Respondents for carrying on business activities in the securities market.

¶98

Respondent's power under to issue the impugned order has been subjected to severe attack by the Appellants on the ground that it lacked authority of law and cannot be stretched too far. The said section 11B is extracted below for ready reference:

¶99

"Power to issue directions:

¶100

11B. Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary, -

¶101

(i) in the interest of investors, or orderly development of securities market; or

¶102

(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or

¶103

(iii) to secure the proper management of any such intermediary or person, it may issue such directions,-

¶104

(a) to any person or class of persons referred to in section 12, or associated with the securities market; or

¶105

(b) to any company in respect of matters specified in section 11 A, as may be appropriate in the interests of investors in securities and the securities market.

¶106

Section 11 and are interconnected and coextensive as both these sections are mainly focussed on investor protection. On a careful perusal of the said section 11 referred to in the earlier paragraphs, it could be seen that the Respondent has been in no uncertain terms mandated to protect the interests of investors in securities by such measures as it thinks fit. Of course those measures are subject to the provisions of the Act. The expression 'measure' has not been defined in the Act. So we have to go by its generally understood meaning. According to Corpus Juris Secundum measure means "anything desired or done with a view to the accomplishment of a purpose, a plan or course of action intended to obtain some object, any course of action proposed or adopted by a Government". However, I am not inclined to agree with the Respondent's view that the power under section 11 is unlimited. I am of the view that the legislature has circumscribed the power, by putting the caveat that these measures are subject to the provisions of the Act. The ambit of power is contained within the framework of the Act. But within the statutory frame work such power reigns.

¶107

While section 11 deals with the functions of the Board, is on the powers of the Board is more action oriented, in a sense it is a functional tool in the hands of the Board. In effect section 11B is one of the executive measures available to the Respondent to enforce its prime duty of investor protection. As could be seen from the text of the section reproduced above, the Respondent is empowered to issue directions in the interests of investors to any person or class of persons referred to on 12 of the Act or associated with the securities market. In other words the identities the persons to whom and the purposes for which, directions can be sue.

¶108

Gujarat High Court had examined the scope of section 11 and vis-a-vis the Respondent's position, while deciding an appeal against the Single Judge's order in Alka Synthetics Case (supra). The basic issue for consideration before the Division Bench in the said appeal was as to whether the Respondent had the authority to issue an order under section 1 1 B of the Act for

¶109

impounding or forfeiting the money received by stock exchanges, as per the concluded transactions under its procedure, until final decision is made. While negating the views of the Single Judge, and upholding the Respondent's power to issue such a direction under section 11B the Court observed: -

¶110

"The SEBI Act is an Act of remedial nature and, therefore, the present cases could not be compared with the cases relating to the fiscal or taxing statutes or other penal Statutes for the purposes of collection of levy, taxes etc. As and when new problems arise, they call for new solutions and the whole context in which the SEBI had to take a decision, on the basis of which impugned orders were passed, cannot be said to be without authority of law in face of the provisions contained in section 11 and section 11B. As the language of section 11 (1) itself shows and as the matters for which the measures tan be taken are provided in sub - section (2) of section 11. It is clearly made out by the plain reading of the language of the section itself that the SEBI has to protect the interests of the investors in Securities and has to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in sub-section (2) of section 11 and in due discharge of this duty cast upon the SEBI as a part of its statutory function, it has been invested with the powers to issue directions under ... Thus, so far as the authority of law in the SEBI to issue such directions is concerned, such authority to take measures as it thinks fit is clearly discernible on the basis of the provisions contained in section 11 read with of the SEBI Act. ... We have to therefore consider and interpret the power of SEBI under the provisions so as to see that the objects sought to be achieved by Act is fully served, rather than being defeated in the basis of any technicality... The duty and function had been entrusted to take such measures as it think fit and in order to discharge this duty, the power is vested under section 11B, ... The authority has been given under the law to take appropriate measures as it thinks fit and that by itself is sufficient to cloth the SEBI with the authority of law".

¶111

One has to view the powers of the Respondent under the provisions of the Act in the context of the objects sought to be achieved by the Act and the duty cast on them in achieving the same. Section 11 B and give enormous authority to the Respondent in this regard. As long as the power exercised under is subject to the provisions of the Act and well within the legal and constitutional frame work, intended to achieve the purposes of the Act and subjecting the persons specified in the section, the power will sustain. Since the exercise of power is subject to the provisions of the Act and the purposes for which it can be exercised and the persons to whom it can reach has been specified in the section, it can not be said that the power is unguided or unlimited. It is a wholesome provision designed to achieve the objectives of the Act.

¶112

As mentioned earlier the Respondent cannot exercise powers under the Companies Act, being not a designated enforcement authority thereunder. But, on a careful perusal of the impugned order it is seen that it is not a direction for enforcement of section 73. The impugned order in its enforcement is independent of section 73. During the course of argument, the learned Representative of the Respondent had stated they had received complaints from investors seeking the Board's intervention as the application money paid by them towards the share issue, despite refusal for listing by BSE, had not been returned to them. The Respondent had cited the provisions of ion 73 in the order as a referral point of investor’s grievance. If the direction had been for non-compliance of section 73, then as rightly pointed out by the Appellants, it should have been directed to the company and its officers in default, as they are the persons stated in the section, to face action for default. But it is not so. 1 find a glaring inconsistency in the line of argument adopted by the Appellant Bank of Baroda that while a direction under cannot reach them it can reach an issuer company or a Lead Manager. They, like the Appellant Union Bank of India, had submitted that the Respondent had no power to issue directions to them as the subject matter of refund of application money is governed under the regime of the Companies Act. But the Appellant Bank in their appeal memorandum had stated that " in the absence of

¶113

any liability on the part of the Bankers to the Issue such direction ought to be issued to the Lead Manager and/or to the company"; The statement is an admission of the Respondent's power to issue directions to the market players in the public issue like the Lead Manager/ the company under section 1 IB, to the exclusion of the Appellant.

¶114

The impugned direction certainly is in the nature of a relief measure for the benefit of the investors. It is nothing but an investor protection measure, which the Respondent is duty bound to take. In a scenario like the one in the instant case, where investors were denied of their legitimate claim to get back their money, the Respondent cannot be expected to remain passive. Is it that the Respondent has merely to look at such persons helplessly on the mere ground that since the matters relating to refund of application money being a matter covered under section 73 also, the powers of the Respondent are unenforceable to protect the interests of investors? If the Respondent is to take such a stand that would be in negation of the very purpose for which the Respondent is put in position. If such a passive attitude is adopted then investor protection would be the casualty. There is no denial of the fact that there are several other legislations like Companies Act with certain provisions to protect the interests of investors are overlapping jurisdiction of authorities under the Companies Act and in the field of investor protection. The Respondent's power to take measures to protect the interests of investors and the requirement of section 73 intended to protect the interest of the applicants, to me appears to be concurrent. There is no inhibition of any sort on exercising measures for investor protection by the Respondent in view of the specific mandate given by the Act. The Companies Act does not carve out an exclusive jurisdiction for itself to the exclusion of other authorities in the field of investor protection.

¶115

Supreme Court's decision in Radheyshyam Khemka Vs. State of Bihar (1993) 77 Com. Case 356(SC) throws enough light on the role of dual agencies where enforcement of power is found overlapping. In Khemka's case the criminal proceeding pending against the appellants was challenged on the ground that since the provisions of the Companies Act take care of the interest of Investors and they put restrictions on the misbehaviour of the promoter and the directors of the company, for any lapse on their part in such matters they cannot be summoned to stand trial for offences under Indian penal Code. Demolishing this contention the Supreme Court held that:

¶116

"it is true that Companies Act contains Provisions regarding the issuance of prospectus, applications for shares and allotment thereof and provides different checks over the misuse of the funds collected from the public for issuance of shares or debentures. But can it be said that where persons issue prospectus and collect moneys from the public assuring them that they intend to do business with the public money for their benefit and the benefit of such public, but the real intention is to do no business other than collecting the money from the public for their personal gain, still such persons are immune from the provisions of the Indian Penal Code? In such a situation the quashing of the prosecution pending against the appellants only on the ground that it was open to the applicants for shares to have recourse to the provisions of the Companies Act, cannot be accepted".

¶117

Precisely the same principle is applicable to the present case as the Respondent had exercised independently its powers available under section 11B, though section 73 of the Companies Act also provides for remedial action. So the argument that since section 73 is in position, nothing else should be done by other authorities to redress the grievances of the applicants to restore the money due to them is not tenable. As already stated the provisions of the Companies Act relating to refund of application money by the issuer company and its officers, in no way inhibits the Respondent issuing directions to any one of the institutional players in a public issue to refund the money to the helpless investors who have been duped. Issuance of such a direction in the instant case is a speedy and summary measure for the benefit of the investors, especially in view of the fact that the direction issued to the company in 1996 did not yield any tangible relief. It is to be noted that the Companies Act when compared to the Act, in a sense is

¶118

a general statute relating to companies in general. Investor protection is only one of the fields covered therein, whereas the Act is a special statute focussed mainly for protecting the interests of investors. One cannot ignore this aspect while examining the ambit of the powers bestowed on the Respondent by the said Act. Supreme Court's advice as to interpretation of the provisions of a benefit-oriented legislation cited above need be kept in mind in this context.

¶119

The power to issue directions to protect the interests of investors in matters relating to public issue of shares has been recognised by Punjab and Haryana High Court also as could be seen from its decision in Universal Incast Ltd., Vs. Appellate Authority, SEBI (2000 CLC 948). In the said case the Respondent while exercising the appellate powers under section 22 of the Securities Contracts (Regulation) Act, 1956, in an appeal filed against the failure of the Ludhiana Stock Exchange to give listing approval to the appellant company, had directed the issuer company to deposit all monies received by them from applicants for shares, in a separate account to be opened with the Banker to an Issue, as required under section 73 of the Companies Act. Even the Respondent was exercising powers under section 22 of the SCR Act (not under section 11B) and the direction was on a matter requiring compliance under section 73 of the Companies Act, the Respondent's order intended to protect the interests of the investors was upheld by the Division Bench observing that

¶120

"the scheme of sections 69 and 73 of the Act, would, therefore suggest that the money should not be allowed to be handled or manipulated by the company till all the mandatory requirements of section 69 and 73 of the Act are complied with and till the company can proceed to make valid allotment of shares. In other words, the monies must be kept out of the reach of the company and its directors/promoters till the company can make allotment of shares in accordance with the law. This statutory object of the provision of the act VAII be frustrated if it is held that application monies received from the public are permitted to be deposited in any bank account of any scheduled bank where the company may choose to deposit. In that case there will be no control on the company which may withdraw the application monies or any part thereof in flagrant violation of the provisions of sections 69 and 73 of the Act and then agree to pay fine of Rs.5000/- under sections 69(4) and 73(3) of the Act. Therefore no fault can be found with the impugned orders which are quite in consonance with the provisions of sub section 4 of section 69 and sub section 3 and 3A of section 73 of the Act. The Appellate Authority had rightly directed the petitioner company to deposit all monies received from applicants for shares offered to the public in the account to be opened with the Banker to a the Issue because it (Banker to the Issue) holds the application monies in the nature of a trust fund which has been directed by the statute for the protection of persons who pay the money on the faith of a promise of refund, in case certain conditions are not fulfilled".

¶121

The Punjab & Haryana High Court decision cited strengthens the view that investor protection is not the exclusive domain of the Companies Act.

¶122

The Respondent has been assigned with a proactive and interventionist role in the field of investor protection, and not that of a passive onlooker. Having invested with such a duty the legislature has given ample power to effectively enforce the same. One of such powers is the power to issue directions as provided under of the Act. As the Delhi High Court in M.Z.Kban's case said "under section 11 of the SEBI Act the SEBI has the power to protect the interests of the investors in securities and to promote the development of and to regulate the securities market by such measures as it thinks fit. The power is of a very wide nature and not hedged by any restriction" (M.Z Khan VS.SEBI AIR 1999 Del. 164). True scope of section 1 IB was recently subjected to examination by the Bombay High Court in Ramrak-h R Bohra VS.SEBI (1999) 33 CLA 243 (Born). In the said case the High Court observed that:

¶123

"Section 11 B is an enabling provision enacted to empower the SEBI to protect the interest of investors and to promote the development of and to regulate the securities market and to prevent malpractices and manipulations, inter alia, by brokers. Such an enabling provision must be construed so as to subserve the purpose for which it is enacted. It would be the duty of the court to further the legislative object of providing a remedy for the mischief A construction which advances this object should be preferred rather than one which attempts to find a way to circumvent it. In the case of RBI v. Peerless General Finance & Investment Co.Ltd [19961 20 CLA 195/AIRI 996 SC 646 the Supreme Court has observed as under:

¶124

'It would, thus, appear that section 4SK(3) is an enabling provision enacted to empower the bank to regulate the conditions on which deposits may be accepted by non-banking companies or institutions and (the) to prevent malpractices in the matter of acceptance of such deposits. Such an enabling provision must be so construed as to subserve the purpose for which it has been enacted. It is a well accepted canon of statutory construction that "it is the duty of the court to further Parliament's aim of providing a remedy for the mischief against which the enactment is directed and the court should prefer a construction which advances this object rather than one which attempts to find some way of circumventing it"…

¶125

Section 45K is in the nature of an enabling provision. In the matter of construction of enabling statutes, the principle applicable is that if the Legislature enables something to be done, it given power at the same time, by necessary implication, to do everything which is indispensable for the purpose of carrying out the purpose in view (see Craies on Statutes, 7th edn, p.258). It has been held that the power to make a law with respect of any subject carries with it all the ancillary and incidental powers to make the law effective and workable and to prevent evasion. (see Sodhi Transport Co. v.State of UP) [1986] 1 SCR 939 at pp.94748/AIR 1986 SC 1099)

¶126

In the case of ITO v.Mohammed Kunhi AIR 1969 SC 430 it has been observed as under:

¶127

... It is a firmly established rule that an express grant 0 power carried with it by necessary implication the authority to use all reasonable means to make such grant effective…

¶128

Therefore in our view, the express grant of statutory power conferred by section 11B carries the authority to use of reasonable means to make such power effective"

¶129

"If one has regard to the aforesaid principles, it would follow that the power which has been conferred by to issue direction are of a widest possible amplitude and are exercisable in the interest of investors and in order to prevent, inter alia, a broker from conducting his business in a manner detrimental to the interests of the investors or the securities market. The said power to issue directions under section 1 IB must carry with it, by necessary implication, all powers and duties incidental and necessary to make the exercise of these powers fully effective including the power to pass interim orders in aid of the final orders"

¶130

In the light of the decision of the various High Courts cited above, the authority of the Respondent to issue directions of the type impugned, for the purpose of investor protection is well established. In the instant case the Respondent's power to issue direction has been approved by the Gujarat High Court in the SCA filed by the company itself, as could be seen from the order dismissing the appeal filed against the Respondent's direction of December 19, 1996. A reading of section 11 B with the Gujarat High Court's order in the company's SCA would indicate that the Respondent had acted with authority.

¶131

The Respondent's submission that in view of section 32 of the Act, they are competent to take action supplementing the provisions of other legislations like the Companies Act is not correct. What section 32 provides for is that the provisions of the Act shall be in addition to and not in derogation of the provisions of other laws, meaning thereby that in the event of a conflict between the provisions of an existing legislation and the Act, the provisions in the existing statute will prevail 'over the provisions of the Act. To put it differently, the provisions of the Act in its application will be only supplemental to the provisions of other existing legislations. The section does not empower the Respondent to supplement the provisions of any other law, but refers only to the extent of operation of the provisions of the Act vis-a-vis the provisions of other statutes. However, in the matter under challenge provisions of sections 73 and section 11B are not in conflict. They are concurrent provisions directed to achieve a common objective i.e. of investor protection.

¶132

As the Respondent is concerned they have been provided with wider jurisdiction under so as to reach any person or class of persons referred to in section 12 or associated with the securities market. Section 12 itself covers a wide range of functionaries including Bankers to an Issue. Reach of directions has been further extended also to any person associated with the securities market. Since an issuer company is a person associated with the securities market, as its shares are listed on the stock exchanges and there is an on going binding agreement governing such listing with the stock exchange, the directions will reach the company also. In other words scope of section 11 B is wider than the scope of section 73 as it can reach not only the Issuer Company but also almost all the players who are associated with the public issue of shares. In this context it is pertinent to mention that the Respondent in exercise of the powers under had directed the company management on December 19, 1996 to refund the money but the same did not bring any tangible relief to the investors. Having failed in that course of action, the Respondent turned to the Bankers to the Issue and issued directions, which they are perfectly entitled to do in terms of the provisions of the Act and also as per the order of the Guiarat High Court in the Company's SCA.

¶133

The absence of specific details and the manner and method of refund in the impugned order can not nullify the direction, as contended by the Appellant as the order itself has taken care of this aspect. It has been made clear in the order that detailed instructions on the method and manner of refund to investors in the public issue will be issued separately in consultation with the intermediaries concerned.

¶134

Yet another contention is that the direction is hit by the provisions of. It could be seen that the cause of action in this case is relatable to several developments, following one after the other. The Appellants had transferred the collection money to the company in February/March, 1996. The Respondent, vide order dated December 19, 1996 directed the company's management to refund the money.

¶135

The appeal filed before the Appellate Authority by the company against the said order was disposed of on August 22, 1997 and revision filed by the company thereafter was disposed of on March 17, 1998. Thereafter the company filed a SCA in the Gujarat High Court, which was disposed of by the Single Judge on July 30, 1998 and LPA filed by the company against that order in the same Court was disposed of by the Division Bench on September 18, 1998. Thereafter, in tune with the Gujarat High Court's order the Respondent initiated inquiry by issuing a show cause notice, on January 11, 1999, the Appellants were heard on September 16, 1999 and impugned order was issued on January 19, 2000. In fact it is on the basis of the Gujarat High Court order the Respondent proceeded against the Appellants and issued the impugned direction under on January 19, 2000. From the sequence of events it is evident that there was no delay in the matter, and provisions of Limitation Act do not apply to the case as claimed by the Appellants.

¶136

The contention that the directions can be issued only prospectively and not retrospectively is not correct. Issuance of direction under section 1 ]B being an administrative function and not in exercise of any delegated legislative function, the Respondent is at liberty to issue directions of the type under -challenge, even retrospectively. However, in the instant case it cannot be said that the direction has been issued retrospectively. The direction is to refund the money, required to have been kept in the custody of the Appellants. Since the amount due to the applicants was not paid, the claim remained alive even on the date of issuance of the direction.

¶137

The submission that since the Appellants were acting as agents of the company and as having passed on the collection money to the company, they are no longer liable to repay the money, cannot sustain for the simple reason that they had acted negligently and thereby caused hardship to the investors. By handing over the money to the company, which was not due to the company, the Appellants liability to the applicants did not cease.

¶138

The argument put forth by the learned Counsel appearing for the Appellant Union Bank that the interest cannot be charged without specific statutory authorisation and that the Act does not empower the Respondent to charge interest, is correct. However, he appears to have missed the crucial fact that the Respondent had not charged interest but only asked to pay the interest accrued on the defaulted amount as provided under the law. It does not stand to reason that when the principal amount is paid, the interest legally accrued thereto, need not be paid. The interest payable on the defaulted amount is in reality a compensation for the delayed payment. Once the repayment is delayed liability to pay interest automatically sets in. That is what section 73 provides for. There is hardly any way to escape from this liability. The rate of interest @15% is prescribed by the Central Government as provided under section 73(2), not arbitrarily decided by the Respondent.

¶139

The learned Representative of the Appellant Bank of Baroda had urged that since the company, the Lead Manager and the Registrar were not made parties to the inquiry, the inquiry and the order passed thereunder suffer from non-joinder of necessary parties. This conclusion is based on an inadequate appreciation of the scope of the inquiry contemplated under. The inquiry referred to in is not an adversarial proceeding, but only a fact-finding process. In the present case necessary inquiry was made to ascertain the conduct of the Appellants before directing them to refund the money. The Appellants were given adequate opportunity to put forth their views in the inquiry, before the direction was issued. This is born out of the records.

¶140

The argument that only the investors can claim refund and that in the absence of authorisation from them, the Respondent cannot take up the matter is untenable because such an argument goes against the very purpose for which the Respondent has been put in place by the statute. It may not be forgotten that the main object of setting up the Board is to protect the interests of investors. It is an institutional set up clothed with powers and resources at its disposal, to take up the cause of investors.

¶141

An argument that Bankers to an Issue is amenable only to the regime under the Securities and Exchange Board of India (Bankers to an Issue) Regulations, 1994 and section 1 IB cannot supplant the Regulation, was putforth. On a perusal of the said Regulation it is seen that its scope is restricted to the procedural requirements of documentation and reporting, such as maintenance of books of account, records and documents relating to collection of applications and application money. The Regulation does not deal with the post collection scenario. The subject matter of the impugned order is not a matter falling under the scope of the said Regulation. The argument that since the Bankers to an Issue Regulation is in position other provisions of the Act cannot reach the Bankers to an Issue is not a sound one. Section 11 B is of wider amplitude to reach the Bankers to an Issue for the purpose of investor protection being a person covered under section 12 of the Act. Bankers to an Issue as per the Regulations is required to abide among other matters, directions from the Respondent as could be seen from

¶142

the following provision of the Regulations:

¶143

"A Banker to an Issue shall abide by the provisions of such Acts and rules, regulations, guidelines, resolutions, notifications, directions, circulars and instructions as may be issued from time to time by the Central Government, the Reserve Bank of India, the Indian Banks association or the Board as may be applicable and relevant to the activities carried on by the Bankers to the issue"

¶144

The impugned direction cannot in any view be considered as a penalty or for recovery of funds, issued without authority of law. The direction is to return the money, which the investors had put in the custody of the banker, in good faith allotment of shares. It is the obligation of the Bankers to an Issue to return the money as the allotment could not take place. In fact a right did accrue in favour of the applicants to get the money back, the moment BSE declined to accord listing approval to the company's shares. Since the repayment is delayed, liability to pay interest @ 15% per annum on the defaulted amount has automatically arisen, as provided in section 73. The investors are aggrieved, as they have not been refunded the money due to them. Since the money belongs to them it has to be restored to them. The direction is only for this purpose. Hence it is only a measure of investor protection under the Act and not a decree or an order under the Companies Act. Section 73 of the Companies Act serves only as a referral point relatable to cause of investor grievance in this case. The Respondent's action is also in tune with the Gujarat High Court's order in the company's SCA. The High Court apparently had taken note of the powers under section 11B while permitting the Respondent to recover the money from the Appellants.

¶145

The Appellants being public sector banks it was all the more expected of them to exercise due diligence before parting with the public money to the company. They cannot seek shelter on the ground that they were not aware of the requirements of law, that they did not get proper advice from the Lead Manager and the Respondent, etc. According to their own admission they had acted as Bankers to an -Issue in several public issues in the past and as such they cannot claim ignorance of the statutory requirements and their obligations. It is also to be remembered that in the prospectus itself an undertaking was given that the subscription monies will be kept in separate bank accounts and the company will not have access to such funds unless allotment of shares has been made in consultation with the stock exchanges where listing is made. Are we to believe that the Appellants had not read this portion in the prospectus casting such an important obligation on them? There is nothing on record to show that the Appellants had made any efforts to ascertain the compliance as to whether both the stock exchanges mentioned in the prospectus had accorded listing approval. The main reason for the investor’s misery in this case is attributable to the negligence of the Appellants. Negligence is not an attribute of good faith. The facts and circumstances placed before me do not suggest that the Appellants had acted diligently.

¶146

From the legal and factual position discussed above, it is clear that the Appellants as Bankers to an Issue were duty bound to wait for the decision on the company's application from both the stock exchanges mentioned in the prospectus and only after ensuring compliance of the statutory requirements, they should have decided to release the collection money to the company. Since they were holding the application money in trust they were accountable for its safe up keep and return. They cannot escape the liability for misapplication of money. The liability to refund the money is now on them. I am of the view that the Appellants are not out of the reach of and the Respondent is not short of power to reach them.

¶147

For the reasons discussed above, I have no hesitation to hold that the impugned order is legally valid and there is no merit in the appeals. The appeals are accordingly dismissed.

¶148

(C.ACHUTIIAN)

¶149

PRESIDING OFFICER

¶150

Place: Mumbai Date: 27^th July 2000

Bank of Baroda v. SEBI & Union Bank of India v SEBI [2 & 4 of 1998]

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Bank of Baroda v. SEBI & Union Bank of India v SEBI [2 & 4 of 1998]

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