Clariant International Ltd. & Anr Vs. Securities & Exchange Board of
Insc 492 (25 August 2004)
N. Santosh Hegde,S.B. Sinha & A.K. Mathur With CIVIL APPEAL NOs. 3701, 3872 of 2003 and D3952 of 2004 S.B. SINHA, J:
These appeals under Section 15Z of the Securities and Exchange Board of
India Act, 1992 (for short, 'the said Act) arise out of a judgment and order
dated 21.02.2003 passed by the Securities Appellate Tribunal, Mumbai (for
short, 'the Tribunal') in Appeal No.114 of 2002.
BACKGROUND FACTS :
Colour Chem Ltd. is a target company. Its shares are listed on the Bombay
Stock Exchange and National Stock Exchange. Appellant No.1 (Clariant) in Civil
Appeal No.3183 of 2003 is a Swiss company being subsidiary of another Swiss
company, Clariant AG. Hoechst is a German company whereas Ebito
Chemiebeteiligungen AG (Ebito) is a Swiss company. In Ebito Clariant held 49%
and Hoechest 51% shares. An agreement was entered into by and between Hoechst
and Clariant pursuant whereto and in furtherance whereof German Specialty
Chemicals business was transferred to the latter by transferring 583708 equity
shares of Rs.100/- each of the target company. On or about 21.11.1997, with a
view to give effect to the said agreement, Clariant sought for an exemption from
compliance of the requirements of making open offer to the shareholders of the
target company in terms of the provisions of the Securities and Exchange Board
of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
(for short, the Regulations). Such exemption, however, was not granted. Hoechst
in the aforementioned situation decided to sell off the shares held by it in
the target company to Ebito, a company which was floated on 19.5.2000 as a
special purpose vehicle. Actual transfer took place on 13.10.2000. Ebito by
reason of the aforementioned transfer became a 100% subsidiary of Clariant.
A complaint was received by the Securities and Exchange Board of India (for
short, 'the Board') to the effect that as by reason of the aforementioned
arrangement as 50.1% shares/voting rights and control in the target company had
been made without any public announcement, the provisions of the Regulations
had been violated. Upon an inquiry made in this behalf, the Board came to the
conclusion that the acquirer had actually acquired the control over the target
company on 21.11.1997. By reason of an order dated 16.10.2002, the Board
"13.1 In view of the findings made above, in exercise of the powers
conferred upon me under sub-section (3) of Section 4 read with Section 11B SEBI
Act 1992 read with regulations 44 and 45 of the said Regulations, I hereby
direct the Acquirer to make public announcement as required under Chapter III
of the said Regulations in terms of regulations 10 & 12 taking 21.11.97 as
the reference date for calculation of offer price. The public announcement
shall be made within 45 days of passing of this order.
13.2 Further, in terms of sub regulation (12) of regulation 22, the payment
of consideration to the shareholders of the Target company has to be made
within 30 days of the closure of the offer. The maximum time period provided in
the said Regulations for completing the offer formalities in respect of an open
offer, is 120 days from the date of public announcement. The public
announcement in the instant case ought to have been made taking 21.11.97 as a
reference date and thus the entire offer process would have been completed
latest by 21.3.98. Since no public announcement for acquisition of shares of
the Target company has been made, which has adversely affected interest of
shareholders of Target Company, it would be just and equitable to direct the
Acquirer to pay interest @15% per annum on the offer price, the Acquirer is
hereby accordingly directed to pay interest @15% per annum to the shareholders
for the loss of interest caused to the shareholders from 22.3.98 till the date
of actual payment of consideration for the shares to be tendered in the offer
directed to be made by the Acquirer." An appeal was preferred thereagainst
by the acquirer wherein the primal question raised was the rate of interest for
the delay involved in making payment to the shareholders who tendered the
shares in the public offer required to be made in terms of the Regulations.
It is not in dispute that the value of the share as on 24.2.1998 was
Rs.220/-; on 22.10.2002 Rs.213/- and on the date of public announcement i.e. on
7.4.2003 the value of the share was Rs.209/- , Rs.233/- Rs.203/- and Rs.220/-,
whereas the offer price was Rs.318/-.
The submissions of the acquirer before the Tribunal were that (i) the rate
of interest is on the higher side; (ii) the dividends having been paid in the
meantime, the same should be set off from the amount of payable interest; and
(iii) the interest is payable only to those shareholders who held shares on the
triggering date, namely, 24.2.1998.
The Tribunal by its impugned judgment while rejecting the first two
contentions raised on behalf of the acquirer accepted the third, holding :
"(i) Those persons who were holding shares of the target company on
24.2.1998 and continue to be shareholders on the closure day of public offer to
be made in terms of the directions given by the Respondent vide the impugned
order alone shall be eligible to receive interest in case the shares which they
were holding on 24.2.1998 are tendered in response to public offer made in
terms of the impugned order, and accepted by the Appellants.
(ii) The interest payable by the Appellants shall be at the rate of 15% as
directed by the Respondent in its order dated 16.10.2002.
(iii) The dividend paid by the target company to its shareholders not
required to be deducted from the interest payable to the shareholders by the
Appellants." The acquirer has preferred Civil Appeal No.3183 of 2003, whereas
the Board has filed Civil Appeal No.3701 of 2003 against the said judgment.
Civil Appeal Nos. D3952 of 2004 and 3872 of 2003 have been filed by the
Administrator of the Specified Undertaking of the Unit Trust of India and by
one Umeshkuamr G. Mehta respectively.
Mr. R.F. Nariman, and Mr. D.A. Dave, learned Senior Counsel appearing on
behalf of the appellants, would submit that the intent and purport of
Regulation 44 of the Regulations, being to compensate the shareholders for the
loss suffered by them, the rate of interest payable to the shareholders would
vary from case to case. The guidelines in this regard having been provided for
in the statute, Mr. Nariman would submit, grant of 9% interest should be held
to be just and proper in view the fact that the investment was to be made for a
long period, i.e., for about five years. In support of the said contention, the
learned counsel placed reliance on Kaushnuma Begum (Smt.) and Others vs. New
India Assurance Co. Ltd. and Others [(2001) 2 SCC 9], H.S. Ahammed Hussain and
Another vs. Irfan Ahammed and Another [(2002) 6 SCC 52], United India Insurance
and Others vs. Patricia Jean Mahajan and Others [(2002) 6 SCC 281] and DDA
and Others vs. Joginder S. Monga and Others [(2004) 2 SCC 297].
It was further submitted that those shareholders who had purchased the
shares later than the date fixed by the SEBI were not entitled to receive any
compensation by way of interest as they were not the shareholders on the said
date having regard to the fact that their names did not appear in the register
of the company. As regard the findings of the Board that the amount of dividend
paid to the shareholders would not be set off against the amount of interest,
it was argued that having regard to the fact that actual date of transfer had
been fixed on 22.3.1998, by reason of a fiction created, a person must be
deemed to be a shareholder as on that date and having regard to the fact that
interest was being paid to the shareholders at the offer price from the said
date till the actual payment is made, the amount received by the shareholders
by way of dividend is liable to be adjusted from the amount to be paid by way
of interest. Our attention has further been drawn to the fact that pursuant to
the order of this Court dated 28.4.2003 a sum of Rs.111.50 crores had been
deposited and invested in a nationalized bank.
Mr. Kirit Rawal, learned Senior Counsel appearing on behalf of the Board,
would, on the other hand, contend that while fixing the rate of interest, the
Board, being an expert body, exercises a discretionary jurisdiction and, thus,
the Tribunal and this Court should not interfere therewith. The learned counsel
would argue that the rate of interest fixed at 15% p.a. cannot be said to be
arbitrary and in support thereof reliance has been placed on Delhi Development
Authority vs. M/s Surgical Cooperative Industrial Estate Ltd. and Others
[(1993) Supp. 4 SCC 20]. Mr. Rawal would contend that from a bare perusal of
Regulation 44(i) of the Regulations, it would appear that all those
shareholders who had opted to sell their shares pursuant to the public offer
are entitled to the payment of interest and, thus, the finding of the Tribunal
in this regard is bad in law.
It was submitted that Regulation 44 must be read with Section 11B of the Act
so as to put a proper and effective meaning thereto in terms whereof the Board
is entitled to issue any direction including those which are specified
As regard the direction issued by the Tribunal to the effect that only those
shareholders who were on the roll of the company and continued to be so on the
date of public offer alone are entitled to interest, Mr. Rawal would contend
that by reason of such construction of Regulation 44, the free transferability
of the shares which is the basic feature of the security market would be
Mr K.K. Rai, learned counsel appearing on behalf of the Appellant in Civil
Appeal No. 3872 of 2003, would, inter alia, contend that transaction being
commercial in nature, interest at the rate of 15% cannot be said to be on a
high side. Reliance in support of the said contention has been placed on State
Bank of Patiala and Another vs. Harbans Singh [(1994) 3 SCC 495] and Regional
Provident Fund Commissioner vs. Shiv Kumar Joshi [(2000) 1 SCC 98].
It was contended that as shares were traded on speculation, it may not be
possible to identify the shareholders who as per direction of the Tribunal
would be entitled to interest as the shares by such time might have changed
many hands. Furthermore, the process being a complex one, Regulation 44 should
be read in such a manner which may be effectually worked out.
Mr. Shrish Kr. Misra, learned counsel appearing on behalf of the
Administrator of the Specified Undertaking of the Unit Trust of India in Civil
Appeal No.D3952 of 2004 would submit that the appellants therein should be held
to be entitled to grant of interest despite the fact that it was not a
shareholder as on 11.3.1998 as would appear from the following :
A. That the Unit Trust of India was a statutory corporation under the Unit Trust of
India Act, 1963 and was/ is the shareholders of the Target company and as
on 24-2-1998 holding 1123800 shares.
B. That Unit
Trust of India Act, 1963 has been repealed by the Act of the Parliament
Trust of India (Transfer of
Undertaking and Repeal) Act, 2002.
C. That the said Act provides for transfer and vesting of Undertaking
(excluding Specified Undertaking) of Unit Trust of India to a Specified Company
(being UTI Trustee Company Pvt. Ltd.) to be formed and registered under the Companies Act 1956
as well as for transfer and vesting of Specified Undertaking of Unit Trust of
India in the Administrator appointed by the Central Government in the terms of
section 7 of Unit Trust
of India (Transfer of
Undertaking and Repeal) Act, 2002.
D. That as per section 4(1) (b) of the said Act the Specified undertaking of
the erstwhile Unit Trust of India being all business, assets, liabilities and
properties set out in Schedule-I of the said Act stood transferred to the
vested in the "Administrator of the Specified Undertaking of the Unit
Trust of India" on and with effect from the appointed day viz. 1-2-2003.
That by virtue of section 4(1)(a) of the said Act, the Undertaking (excluding
the Specified Undertaking) of the erstwhile Unit Trust of India being all
business, assets, liabilities and properties set out in schedule II of the
said Act stood transferred to and vested in the "UTI Trustee Company Pvt.
Ltd" on and with effect from the appointed day viz. 1-2-2003.
E. That the 1123800 shares (considering face value of Rs.
10/- each) purchased by the erstwhile Unit Trust of India were/are from the
amount which relates to Schedule I & II to the said Act. Therefore, the
shares purchased by the erstwhile Unit Trust of India of M/s. Colour Chem Ltd.
stands transferred to and vested in the 'Administrator of the Specified
Undertakings of the Unit Trust of India' and the 'Specified Company' i.e. UTI
Trustee Company Pvt. Ltd. by virtue of the said Act.
F. That out of 1123800 shares the amount invested for 501100 (considering
face value of Rs.10/- each as on 24- 2-1998) shares is from the schemes which
come under schedule I of the said Act, as such the "Administrator of the
Specified Undertaking of the Unit Trust of India" is the successor in
holder of 501100 shares.
G. That the amount invested by the erstwhile Unit Trust of India for the
balance 622700 (considering face value of Rs.10/- each as on 24-2-1998) shares
was from the schemes which come under the Schedule II of the said Act, as such
the "UTI Trustee Company Pvt. Ltd." is the successor in holder of
those 622700 shares.
H. That as per Section 5(1) of the said Act all the assets and liabilities
including lands, buildings, vehicles, cash balances, deposits, foreign
currencies, disclosed and undisclosed reserves, reserves fund, special reserve
fund, benevolent reserve fund, any other fund stock, investments, shares,
bonds, debentures, security, powers authorities privileges benefits of the
erstwhile Unit Trust of India vest in "Administrator of the Specified
undertaking of the Unit Trust of India" and "UTI Trustee Company Pvt.
Ltd." I. That as per section 5(2) of the said Act "All contracts,
deeds bonds guarantees, power of attorney other instruments (including all
units issued and unit schemes formulated by the Trust and working arrangements)
subsisting immediately before the appointed day and affecting the Trust shall
cease to have effect or to be enforceable against the Trust and shall be in
full force and effect against or in favour of the specified company (UTI
Trustee Company Pvt. Ltd.) or the Administrator (Administrator of the Specified
Undertaking of the Unit Trust of India) as the case may be, in which the
undertaking or specified undertaking has vested by virtue of the said Act and
enforceable as fully and effectually as if instead of the Unit Trust of India,
the specified company (UTI Trustee Company Pvt. Ltd) or the Administrator
(Administrator of the Specified undertaking of the Unit Trust of India) had
been named therein or had been a party thereto.
The Relevant Statutory Provisions:
and Exchange Board of India Act, 1992 was enacted 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 matter connected therewith or incidental thereto. Section 11 of the Act provides
that inter alia the duty of the Board is to protect the interest of investors
in securities and to promote the development of, and to regulate the securities
market, by such measures as it thinks fit, which would include in regulation of
substantial acquisition of shares and take-over of companies. Section 11B
empowers the Board to issue directions, inter alia, in the interest of
investors, or orderly development of securities market. Regulation 44 of the
1997 Regulations reads thus :
"44. Directions by the Board. The Board may, in the interests of the
securities market, without prejudice to its right to initiate action including
criminal prosecution under section 24 of the Act give such directions as it
deems fit including :
(a) directing the person concerned not to further deal in securities;
(b) prohibiting the person concerned from disposing of any of the securities
acquired in violation of these Regulations;
(c) directing the person concerned to sell the shares acquired in violation
of the provisions of these Regulations;
(d) taking action against the person concerned".
In terms of the said regulation, there was no express power to issue any
direction as regard grant of interest.
Regulation 44 of 1997 Regulations was substituted in the year 2002 with
effect from 9.9.2002, the relevant portion of which reads thus :
"44. Directions by the Board. Without prejudice to its right to
initiate action under Chapter VIA and section 24 of the Act, the Board may, in
the interest of securities market or for protection of interest of investors,
issue such directions as it deems fit including: - (i) directing the person
concerned, who has failed to make a public offer or delayed the making of a
public offer in terms of these Regulations, to pay to the shareholders, whose
shares have been accepted in the public offer made after the delay, the
consideration amount along with interest at the rate not less than the
applicable rate of interest payable by banks on fixed deposits." As the
impugned order of the Tribunal had been passed on 21.2.2003, it is not disputed
that Regulation 44 as amended in 2002 shall be attracted in the instant case.
'Shareholder' has neither been defined in the Act nor in the Regulations;
whereas 'shares' has been defined to mean shares in the share capital of a
company carrying voting rights and includes any security which would entitle
the holder to receive shares with voting rights but shall not include
In terms of sub-section (2) of Section 2 of the said Act, the words and
expressions used and not defined in the Act but defined in the Securities
Contracts (Regulation) Act, 1956 (42 of 1956) or the Depositors Act, 1996 (22
of 1996) shall have the meanings respectively assigned to them in that Act.
Clause (2) of Regulation 2 provides that all other expressions unless
defined therein shall have the same meaning as have been assigned to them under
the Act or the Securities
Contracts (Regulation) Act, 1956 , or the Companies Act, 1956,
or any statutory modification or re-enactment thereto, as the case may be. As
'shareholder' has not been defined, with a view to bring a 'shareholder' within
the provisions of the said Regulations, we have no option but to refer to the
relevant provisions of the Companies Act, 1956.
Section 41 of the Companies Act
defines 'member', sub-sections (1) and (2) whereof are as under :- "41.
(1) The subscribers of the memorandum of a company shall be deemed to have
agreed to become members of the company, and on its registration, shall be
entered as members in its register of members.
(2) Every other person who agrees in writing to become a member of a company
and whose name is entered in its register of members, shall be a member of the
company." Rate of interest :
Section 11 of the Act provides that it shall be the duty of the Board to
protect the interest of investors in securities. Regulation 44 of 1997,
however, empowered the Board to issue directions only in the interest of the
securities market. The expression "in the interest of the investors"
did not occur therein. Regulation 44 of 2002 Regulations, thus, confers a wider
power upon the Board. The said power is without prejudice to its right to
initiate action under Chapter VIA and Section 24 of the Act which deals with offences
. Regulation 44 of 2002 Regulations, furthermore, empowers the Board to issue
directions both in the interest of the securities market as well as for
protection of interest of investors. Such directions may be issued in its
discretion. It, however, in its discretion may or may not issue such
directions. Regulation 44 (i) of Regulations, therefore, confers a power upon
the Board to issue directions also in the interest of the investors which would
include a direction to pay interest.
A direction in terms of Regulation 44 which was in the interest of
securities market indisputably would have caused civil or evil consequences on
the defaulters. Clause (i) of Regulation 44, however, does not provide for any
penal consequence. It provides for only a civil consequence. By reason of the
said provision, the power of the Board to issue directions is sought to be
restricted to pay the amount consideration together with interest at the rate
not less than the interest payable by banks on fixed deposits. Both the Board
and the Tribunal have proceeded on the basis that the interest is to be paid
with a view to recompense the shareholders and not by way of penalty or
damages. Such a direction, therefore, was for the purpose of protecting the
interest of investors and not "in the interest of the securities
The transactions in the market are not thereby affected one way or the
The Board, as noticed hereinbefore, has a discretion in the matter and,
thus, it may or may not issue such a direction. The shareholders do not have
any say in the matter. As a necessary concomitant, they have no legal right.
The Board further having a discretionary jurisdiction must exercise the same
strictly in accordance with law and judiciously. Such discretion must be a sound
exercise in law. The discretionary jurisdiction, it is well- known, although
may be of wide amplitude as the expression "as it deems fit" has been
used but in view of the fact that civil consequence would ensue by reason
thereof, the same must be exercised fairly and bona fide.
The discretion so exercised is subject to appeal as also judicial review,
and, thus, must also answer the test of reasonableness.
In Kruger and Others vs. Commonwealth of Australia, reported in 1997 (146)
Australian Law Reports, page 126, it is stated :
"Moreover, when a discretionary power is statutorily conferred on a
repository, the power must be exercised reasonably, for the legislature is
taken to intend that the discretion be so exercised. Reasonableness can be
determined only by reference to the community standards at the time of the
exercise of the discretion and that must be taken to be the legislative
intention." The discretionary jurisdiction has to be exercised keeping in
view the purpose for which it is conferred, the object sought to be achieved
and the Chhotey Singh and Another, (1983) 4 SCC 131] A discretionary
jurisdiction, furthermore, must be exercised within the Vice-Chancellor,
Banaras Hindu University and Others, (1961) 3 SCR 386 and also para 9-022 of De
Smith, Woolf and Jowell's Judicial Review of Administrative Action, 5th
Edition, page 445] Interest can be awarded in terms of an agreement or
statutory provisions. It can also be awarded by reason of usage or trade having
the force of law or on equitable considerations. Interest cannot be awarded by
way of damages except in cases where money due is wrongfully withheld and there
are equitable grounds therefor, for which a written demand is mandatory.
In absence of any agreement or statutory provision or a merchantile usage,
interest payable can be only at the market rate. Such interest is payable upon
establishment of totality of circumstances justifying exercise of such
equitable jurisdiction. [See Municipal Corporation of Delhi vs.
Sushila Devi (Smt.) and Others (1999) 4 SCC 317 Para 16].
In Executive Engineer, Dhenkanal, Minor Irrigation Division, Orissa and
Others vs. N.C. Budharaj (Deceased) by Lrs. And Others [(2001) 2 SCC 721],
Raju, J. speaking for the majority held that a person deprived of the use of
money to which he is legitimately entitled has a right to be compensated for
the deprivation by whatever name it may be called, namely, interest,
compensation or damages.
In Black's Law Dictionary, the word 'compensation' has been defined as under
"money given to compensate loss or injury".
In a given case where the liability arises during pendency of a litigation,
doctrine of restitution can be invoked. In South Eastern Coalfields Ltd. vs.
State of M.P. and Others [(2003) 8 SCC 648], it was observed :
"In law, the term "restitution" is used in three senses (i)
return or restoration of some specific thing to its rightful owner or status;
(ii) compensation for benefits derived from a wrong done to another; and (iii)
compensation or reparation for the loss caused to another (See Black's Law
Dictionary, 7th Edn., p. 1315). The Law of Contracts by John D. Calamari &
Perillo has been quoted by Black to say that "restitution" is an
ambiguous term, sometimes referring to the disgorging of something which has
been taken and at times referring to compensation for injury done:
"Often, the result under either meaning of the term would be the same.Unjust
impoverishment as well as unjust enrichment is a ground for restitution. If the
defendant is guilty of a non-tortious misrepresentation, the measure of
recovery is not rigid but, as in other cases of restitution, such factors as
relative fault, the agreed- upon risks, and the fairness of alternative risk
allocations not agreed upon and not attributable to the fault of either party
need to be weighed." When a bench-mark is fixed by a statute, the question
as to whether a discretion has been judicially or properly exercised or not
will have to be determined in the context of the facts of the particular case.
[See Irrigation Department vs. G.C. Roy, (1992) 1 SCC 508]. When a bench-mark
is fixed or the court grants interest at the agreed rate, it may not be
necessary to give reasons but where interest is granted at a higher or lessor
rate, some reasons are required to be assigned.
By reason of Regulation 44, as substituted in 2002, the discretionary
jurisdiction of the Board is curtailed. It in terms of Regulations 1997 could
award interest by way of damages but by reason of Regulation 2002, its power is
limited to grant interest to compensate the shareholders for the loss suffered
by them arising out of the delay in making the public offer. The courts of law
can take judicial notice of both inflation as also fall in bank rate of
interest. The bank rate of interest both for commercial purpose and other
purposes had been the subject-matter of statutory provisions as also the
judge-made laws. Even in cases of victims of motor vehicles accidents, the
courts have upon taking note of the fall in the rate of interest held that 9%
interest to be reasonable. [See Kaushnuma Begum (supra), and H.S.
Ahammed Hussain (supra) and Patricia Jean Mahajan (supra)] The statutory
changes brought about must be noticed by the court keeping in view the fact
that the nature of jurisdiction by the Board has been changed. The mischief
rule also in this case should be applied. Furthermore while construing such
provisions, the courts must take into consideration the provisions of the law
as had been interpreted by courts prior thereto.
By way of an example we may notice that the proviso appended to sub-sections
(1) and (2) of Section 34 of Code of Civil Procedure provides for the grant of
rate at which moneys are lent or advanced by nationalized banks in relation to
In DDA vs. M/s Surgical Cooperative Industrial Estate Ltd. and Others
[(1993) Supp.4 SCC 20] whereupon Mr. Rawal has placed reliance, 15% interest
was directed to be paid only in favour of those members who had already been
allotted plots and made some payments, on a suggestion made by the court, as
would appear from the following :
"At the rate of 15% interest the amount would be considerably less yet
we suggested to the learned counsel for these members to ascertain from their
clients if they would be willing to purchase the plots at 50% of the price
realised in the last auction. They conveyed their willingness to pay that price
i.e. 50% of Rs. 10,756 per square metre. Mr. Arun Jaitley, the learned counsel
for the Delhi Development Authority submitted that although he had no
instructions from his clients in the matter his clients would abide by any
just, reasonable and fair order that this Court would make in the facts and
circumstances of the case." The said decision, therefore, has no application
to the fact of the present matter.
We also do not agree with the contention that the payment of interest for
delay in making the public offer is a commercial transaction.
While determining the cases of commercial transaction also, fall in rate of
interest has been taken note of by this Court in Citibank N.A. etc. vs.
Standard Chartered Bank and Others etc. [(2004) 1 SCC 12, Para 62] and
Citibank N.A. vs. Standard Chartered Bank etc [(2004) 6 SCC 1, para 54].
It is at this stage relevant to note that the rate of interest at the rate
of 15% as directed by the Board has been affirmed by the Tribunal stating :
"Even on applying the said test, it does not appear to me that the 15%
interest directed to be paid to the shareholders as compensation for the delay
involved in making the payment in the Appellants' case is unjust. In this
context it is to be noted that the payment was to be made, in case the offer
had been made according to the provisions of the Takeover Regulations, by
22.3.1998 and the amount to be so paid remains unpaid till date.
Therefore, in my view the interest rate applicable should be that rate which
was prevailing on 22.3.1998 and not the one prevailing on the date of the
According to the information furnished by the Appellants the rate of
interest payable on deposits for a period of 3 years and above by nationalized
banks was around 12% at that point of time. In this context one should not fail
to note that the interest is directed to be paid to the shareholders to compensate
the loss. Had the shareholder received the money on due date, in the normal
course what return he would have received by effectively investing that money
has to be taken into consideration.
The amount was due on 22.3.1998. The then existing rate of 12%, if
calculated on quarterly rest basis, at the end of 2002 works out to more than
15% and therefore, even if the interest is worked out in relation to the rate
of interest payable on deposit by nationalized banks, the rate of interest
payable by the Appellants fixed at 15% p.a. by the Respondent in the instant
case cannot be considered unjust, and the same is also not contrary to the view
held by the Hon'ble Supreme Court in Kaushnuma Begum's case or against the
provisions of regulation 44(i)." The observation of the Tribunal was on a
wrong premise as the rate of interest in a case of fixed deposit in a
nationalized bank was not to be calculated on quarterly rest basis.
Furthermore, the bank rate of interest which was prevailing in 1998 had also fallen
The rate of interest at the relevant time as was payable by Syndicate Bank,
a nationalized bank, is as under :
"FIXED DEPOSIT INTEREST RATES FOR THREE YEARS AND ABOVE FROM SYNDICATE
From To Percentage 1.
02.07.1996 30.04.1997 13% 2.
01.05.1997 31.08.1997 12% 3.
01.09.1997 31.10.1997 11% 4.
01.11.1997 21.12.1997 10% 5.
22.12.1997 14.01.1998 11% 6.
15.01.1998 21.01.1998 11.5% 7.
09.02.1998 11.10.1998 12% 8.
12.10.1998 14.03.1999 11.5% 9.
15.03.1999 04.04.1999 11.25% 10.
05.04.1999 30.04.1999 11% 11.
01.05.1999 22.08.1999 10.5% 12.
23.08.1999 11.11.1999 10.25% 13.
12.11.1999 09.04.2000 9.75% 14.
10.04.2000 31.08.2000 9% 15.
01.09.2000 15.10.2000 9.5% 16.
16.10.2000 31.12.2000 10% 17.
01.01.2001 11.02.2001 9.75% 18.
12.02.2001 14.03.2001 10% 19.
15.03.2001 09.07.2001 9.5% 20.
10.07.2001 14.09.2001 9.25% 21.
15.09.2001 15.12.2001 8.75% 22.
16.12.2001 20.01.2002 8.50% 23.
21.01.2002 07.04.2002 8.25% 24.
08.04.2002 06.08.2002 7.75% 25.
07.08.2002 27.10.2002 7.50% " While awarding interest, it is required
to bear in mind that interest would be payable on the maximum price of the
share which was Rs.318/- and not on Rs.220/- which was not the prevailing price
in 1998, as a result whereof not only a shareholder would be getting a higher
price but would also be getting interest thereupon.
So far as the contention regarding the applicability of dynamics of the
market or its being a volatile one is concerned, the same, in our opinion, has
nothing to do with rate of interest inasmuch both the Board and the Tribunal
proceeded on the basis that the shareholders are to be compensated by way of
interest for delayed payment. In that view of the matter, the relevance of rate
of interest payable for the period it is payable and the persons who are
entitled to be compensated were required to be determined. Rate of interest
should be a reasonable one as the same became payable for the delay in making
the payment, subject of course to the statutory provision contained in the
Regulations. As noticed hereinbefore, the discretion of the Board vis- `-vis
the Tribunal had been curtailed. There is a change even in relation to the
nature of discretion of the Board. The Board and the Tribunal , thus, failed to
apply the correct principles of law in determining the rate of interest payable
in this case.
To whom interest is payable:
It is not in dispute that the acquirer contravened Regulation 12 while
acquiring the control of the target company. Regulation 14(3) provides that a
public announcement referred to in Regulation 12 is required to be made by the
merchant banker not later than four working days after any such change or
changes are decided to be made as would result in the acquisition of control
over the target company by the acquirer. Clause 4 of Regulation 15 provides
that the offer under these Regulations shall be deemed to have been made on the
date on which the public announcement appeared in any of the newspapers
referred to in clause (1). The announcement of offer in terms of Regulation
16(xi) is to contain that date by which individual letters of offer would be
posted to each of the shareholders. Regulation 20 provides for the minimum
offer price. In terms of clause (1) of Regulation 21, the public offer is
required to be made by the acquirer to the shareholders of the target company
to acquire from them an aggregate minimum 20% of the voting capital of the
The Board arrived at an inference that the acquirer had acquired the control
of the target company as the special vehicle company on 19.5.2000.
The liability of the acquirer to pay interest should be judged in the
To become a shareholder, a person has to fulfill two conditions, namely, he
must agree in writing to become a member of a company and whose name should be
entered in its register of members. The members holding equity share capital of
company and whose names are entered as beneficial owner in the records of the
depository shall be deemed to be the members of the concerned company.
In Palmer's Company Law, 23rd Edn. at page 154, para 12-07, it is stated :
"12-07 Subscribers as members The subscribers of the memorandum are
deemed to have agreed to become members of the company, and on its registration
shall be entered as members in its register of members (1948 Act, s.
26(1))." It is further stated :
"49.04. Other members In the case of members other than the
subscribers to the memorandum two essential conditions have to be satisfied to
constitute a person a member:
(1) an agreement to become a member; and (2) entry on the register.
These two conditions are cumulative: unless they are both satisfied, the
person in question has not acquired the status of member.
Thus, an agreement to become a member alone does not create the status of
membership; it is a condition precedent to the acquisition of such status that
the shareholder's name should be entered on the register.
Conversely, the company is not entitled to place a person's name on the
register without his having agreed to become a member; a person improperly
registered without his assent is not bound thereby and may have his name
removed from the register." In M/s Howrah Trading Co., Ltd. vs. The
Commissioner of Income Tax, Calcutta [(1959) Supp.(2) SCR 448], the law is
stated thus :
"The question that falls for consideration is whether the meaning given
to the expression "shareholder" used in section 18(5) of the Act by
these cases is correct. No valid reason exists why "shareholder" as
used in section 18(5) should mean a person other than the one denoted by the
same expression in the Indian Companies Act, 1913. In In re Wala Wynaad Indian
Gold Mining Company Chitty, J., observed :
"I use now myself the term which is common in the courts, 'a
shareholder', that means the holder of the shares. It is the common term used,
and only means the person who holds the shares by having his name on the
register."" [See also Balkrishan Gupta and Others vs. Swadeshi
Polytex Ltd. and Another [(1985) 2 SCC 167]] The rights of a shareholder are
purely contractual and would be such which are granted to him by Company's
Memorandum or Articles of Association together with the statutory rights
conferred on him by the Companies Act.
A shareholder having regard to the direction issued by the Tribunal must be
one who was a shareholder on the triggering date. Purpose and object of
creating a legal fiction is well-known. Once a fiction is created upon
imagining a certain state of affairs, the imagination cannot be permitted to be
boggled when it comes to the inevitable corollaries thereof.
[See Dipak Chandra Ruhidas vs. Chandan Kumar Sarkar [(2003) 7 SCC Directions
by the Board are required to be issued for the purpose of protecting the
interest of the investors which would imply that such protection be extended to
the persons who are entitled thereto and not any other shareholder who would
get the same by windfall. The shareholders contemplated under clause (i) of
Regulation 44 must be those shareholders whose shares have been accepted upon public
announcement of offer and who have suffered loss owing to blockage of amount by
not being able to sell the shares held by them. The object of the said
provision is to protect the interest of such shareholders who had suffered a
loss for delay in making the public announcement and, thus, may have to be
compensated. The very fact that the bench-mark as regard the rate of interest
has been fixed is also a pointer to the fact that the interest is to be paid to
such investors who had suffered some loss.
While compensating a person, the court should see that he is not unjustly
enriched. Interest is directed to be paid on the default of the acquirer
occasioning loss suffered by an investor of his money. The question of paying
interest by way of compensation to persons who had not suffered any loss, thus,
would not arise.
Interest was, therefore, payable only to such persons who were shareholders
of target company as on the triggering date.
Deposits made by the Appellants in this Court Effect :
It is not in dispute that the appellants pursuant to an order of this Court
dated 28th April, 2003 have deposited a sum of Rs.111.50 crores which has been
calculated on the following basis :
Total paid-up capital of Colour-Chem Ltd.
(By number of shares) 11,650,000 2.
No. of shares to be acquired through open offer 2,330,000 3.
Estimated number of shares available for offer having eligibility for
interest as per SAT Order (as of 25.4.2003) 3,724,224 4.
Ratio of acceptance as per Regulation 21(6) 40% 5.
No. of shares likely to be acquired as per Regulation 21(6) from the lot
eligible for Interest 1,489,690 6.
Balance to be acquired from the lot of shares not eligible for interest
Total price consideration @ Rs.318/- per share 740,940,000 8.
Total interest payable in respect of shares at Sl.
No.5 above As per the Open Offer - @ 15% p.a. for the period 22.3.1998 to
21.6.2003 (1918 days) Rs.250.65/share) Rs.373,390,799 TOTAL AMOUNT TO BE
DEPOSITED AS PER SUPREME COURT ORDER OF 28TH APRIL, 2003 Rs.1,114,330,799
ROUNDED OFF TO :
Rs.111.50 crores " The estimated number of shares available as per
order of the Tribunal as on 25.4.2003 would be about 60% of the total
shareholders, who would be benefitted.
We have hereinbefore noticed that the offer price of Rs. 318/- per equity
share would be payable as on 24.2.1998 although the market price thereof at the
relevant time was only Rs.220/-.
We may notice the difference on monetary terms on the amount payable to the
investors on public announcement of offer, as would appear from the following
TOTAL PAID-UP CAPITAL OF COLOUR-CHEM LTD. : 1,16,50,000 EQUITY SHARES FACE
VALUE : RUPEES 10/- EACH OPEN OFFER PRICE : RUPEES 318/- PER SHARE NO.OF SHARES
TO BE ACQUIRED IN THE OPEN OFFER : 20% OF THE PAID-UP CAPITAL 23.30 LAKHS
SHARES TOTAL CONSIDERATION : RUPEES 7409.40 LAKHS Interest Rate per Annum
Period 24.2.1998 to 20.6.2003 Interest per Share (Rs.) A B C 15% 5916.35 253.92
14% 5521.93 237.00 13% 5127.51 220.07 12% 4733.08 203.14 11% 4338.66 186.21 10%
3944.24 169.28 9% 3549.81 152.35 8% 3155.39 135.42 The difference of amount
calculated on the basis of interest at the rate of 10% and 15% would be about
Rs.85 per equity share. If shareholders are to be compensated owing to the act
of delay on the part of the acquirer in making the public announcement, in a
case of this nature, an attempt should be made to strike a delicate balance.
The bank rate of interest payable by the nationalized banks on a fixed deposit
for the period from 1998 to 2003 was around 9%. This fact has been accepted by
the Tribunal. It has also been accepted by the Tribunal that the decisions of
this Court relating to rate of interest payable by nationalized banks on fixed
deposits and on the compensation amount fixed under the Motor Vehicles Act
would be 9% p.a.
The Tribunal has applied the said test but, as discussed hereinbefore,
committed two apparent errors, namely, it did not think fit to calculate the
mean of the rate of interest payable by the banks and; it thought that quarterly
rests is payable on the deposits made by an investor in a bank.
Quarterly rests are only payable in commercial transactions when a bank
When any criteria is fixed by a statute or by a policy, an attempt should be
made by the authority making the delegated legislation to follow the policy
formulation broadly and substantially and in conformity thereof.
[See Secretary, Ministry of Chemicals & Fertilizers, Government of India
vs. Cipla Ltd. and Others (2003) 7 SCC 1 - Para 4.1] The rate of interest
fixed by the Board and the Tribunal, thus, in our opinion, was not correct.
Effect of Board being an expert body:
The modern sociological condition as also the needs of the time have
necessitated growth of administrative law and administrative tribunal.
Executive functions of the State calls for exercise of discretion. The
executive also, thus, performs quasi judicial and quasi legislative functions
and, in this view of the matter, the administrative adjudication has become an
indispensable part of the modern state activity.
Administrative Tribunals may be called a specialized court of law, although
it does not fulfil the criteria of a law court as is ordinarily understood
inasmuch as it cannot like an ordinary court of law entertain suits on various
matters, including the matter relating to the vires of legislation.
However, such a Tribunal like ordinary law courts are bound by the rules of
evidence and procedure as laid down under the law and are required to determine
the lis brought before it strictly in accordance with the law.
O. Hood Phillips in his 'Constitutional and Administrative Law', Eight
Edition, at page 686 under the Chapter "Tribunals" has stated as
follows :- "These are independent statutory tribunals whose function is
judicial. The tribunals are so varied in composition, method of appointment,
functions and procedure, and in their relation to Ministers on the one hand and
the ordinary courts on the other, that a satisfactory formal classification is
impossible." Reasons for creating special tribunals, according to the
learned author, are:
(i) Expert knowledge (ii) Cheapness (iii) Speed (iv) Flexibility (v)
Informality At para 30-021 at page 692 of the said treatise, it is stated :
"Appeals from tribunals A party to proceedings before most statutory
tribunals, who is dissatisfied with the tribunal's decision on a point of law,
may either appeal to the High Court or require the tribunal to state a case for
the opinion of the High Court. Appeal lies by leave of the High Court or of the
Court of Appeal to the Court of Appeal, and thence to the House of Lords
(section 11)." In 'Environmental Enforcement: The Need for a Specialist
Court' by Robert Carnwath published in (1992) Journal of Planning and
Environment Law at page 799, the requirements of having an environment court in
place of the ordinary courts were highlighted. The author had submitted a
report known as "Enforcing Planning Control" and on referring
thereto, it was noticed:
"Most of the report's substantive recommendations for reform of the
planning enforcement system were adopted by the Government and incorporated in
the Planning and Compensation Act 1991.
There was no formal response to the suggestions for a unified court system.
This was hardly surprising, since reform of the court system is not within the
remit of the Department of the Environment.
Last year, however, the idea was given a new impetus from an unexpected
quarter. Sir Harry Woolf gave his Garner lecture to U.K.E.L.A. on the theme
"Are the Judiciary Environmentally Myopic?" He commented on the
problems of increasing specialization in environmental law;
and on the difficulty of the Courts, in their present form, moving beyond
their traditional role of detached "Wednesbury" review. He went on to
discuss the benefits of:
"having a Tribunal with a general responsibility for overseeing and
enforcing the safeguards provided for the protection of the environmentThe
tribunal could be granted a wider discretion to determine its procedure so that
it was able to bring to bear its specialist experience of environmental issues
in the most effective way." A key feature of this Tribunal would be
Possible innovations would be the involvement of expertise from other
professions (architects, surveyors, etc.); "multidisciplined adjudicating
panels"; broad discretion over rights of appearance; power to instruct
independent counsel on behalf of the Tribunal or members of the public;
resources for direct investigation by the Tribunal itself; and incorporation into
the Tribunal of the existing inspectorate to deal with "cases of a lesser
dimension." The Board is indisputably an expert body. But when it
exercises its quasi judicial functions; its decisions are subject to appeal.
The Appellate Tribunal is also an expert Tribunal. Only such persons who have
the requisite qualifications are to be appointed as members thereof as would
appear from Sub-section 2 of Section 15M of the said Act which reads thus:-
"15.M Qualification for appointment as Presiding Officer or Member of the
Securities Appellate Tribunal. (2) A person shall not be qualified for
appointment as Member of a Securities Appellate Tribunal unless he is a person
of ability, integrity and standing who has shown capacity in dealing with
problems relating to securities market and has qualification and experience of
corporate law, securities laws, finance, economics or accountancy:
Provided that a member of the Board or any person holding a post at senior
management level equivalent to Executive Director in the Board shall not be
appointed as Presiding Officer or Member of a Securities Appellate Tribunal
during his service or tenure as such with the Board or within two years from
the date on which he ceases to hold office as such in the Board." The conflict
of jurisdiction between an expert tribunal vis-`-vis the courts in the context
of the doctrine of separation of powers poses a problem even in other
countries. [For a detailed discussion see the Article 'Powers of the Takeovers
Panel and their Effect upon ASIC and the Court' by Barbara Mescher [ 2002 (76)
Australian Law Journal, p.119].
In Australia, the takeover Panel has also a function of identifying and
notifying the third parties who are affected by a decision. Takeover panel
created under the Corporate Law Economic Reform Programme Act, 1999, as amended
by the Corporation Act, 2001, is also an expert panel.
Throughout the world, specialized adjudicators are performing numerous
roles. There are diverse specialized tribunals in America as also in the
Commonwealth countries. In certain States, statutes have been enacted
authorizing appeals to the Administrative Division which jurisdiction used to
be exercised by the High Court alone. The appeals range from questions of law
to selected questions of fact, to full rehearing of all issues. [See Stephen
Legomsky's 'Specialized Justice].
Had the intention of the Parliament been to limit the jurisdiction of the
Tribunal, it could say so explicitly as it has been done in terms of Section
15Z of the Act whereby the jurisdiction of this Court to hear the appeal is
limited to the question of law.
The jurisdiction of the appellate authority under the Act is not in any way
fettered by the statute and, thus, it exercises all the jurisdiction as that of
the Board. It can exercise its discretionary jurisdiction in the same manner as
The SEBI Act confers a wide jurisdiction upon the Board. Its duties and
functions thereunder, run counter to the doctrine of separation of powers.
Integration of power by vesting legislative, executive and judicial powers in
the same body, in future, may raise a several public law concerns as the
principle of control of one body over the other was the central theme
underlying the doctrine of separation of powers.
Our Constitution although does not incorporate the doctrine of separation of
powers in its full rigour but it does make horizontal division of powers
between the Legislature, Executive and Judiciary. [See Rai Sahib The Board
exercises its legislative power by making regulations, executive power by
administering the regulations framed by it and taking action against any entity
violating these regulations and judicial power by adjudicating disputes in the
implementation thereof. The only check upon exercise of such wide ranging power
is that it must comply with the Constitution and the Act. In that view of the
matter, where an expert Tribunal has been constituted, the scrutiny at its end
must be held to be of wide import. The Tribunal, another expert body, must,
thus, be allowed to exercise its own jurisdiction conferred on it by the
statute without any limitation.
In Cellular Operators Association of India and Others vs. Union of India and
Others [(2003) 3 SCC 186], this Court observed :
"TDSAT was required to exercise its jurisdiction in terms of Section
14A of the Act. TDSAT itself is an expert body and its jurisdiction is wide
having regard to sub- section (7) of Section 14A thereof. Its jurisdiction
extends to examining the legality, propriety or correctness of a direction/order
or decision of the authority in terms of sub-section (2) of Section 14 as also
the dispute made in an application under sub-section (1) thereof. The approach
of the learned TDSAT, being on the premise that its jurisdiction is limited or
akin to the power of judicial review is, therefore, wholly unsustainable. The
extent of jurisdiction of a court or a Tribunal depends upon the relevant
statute. TDSAT is a creature of a statute. Its jurisdiction is also conferred
by a statute. The purpose of creation of TDSAT has expressly been stated by the
Parliament in the Amending Act of 2000. TDSAT, thus, failed to take into
consideration the amplitude of its jurisdiction and thus misdirected itself in
The court noticed the celebrated book on "Judicial Review of
Administrative Law" by H.W.R. Wade and C.F. Forsyth and held :
"The rule as regard deference to expert bodies applies only in respect
of a reviewing court and not to an expert tribunal. It may not be the function
of a court exercising power of judicial review to act as a super-model as has
been stated in Administrative Law by Bernard Schwartz, 3rd edition in para 10.1
at page 625; but the same would not be a case where an expert tribunal has been
constituted only with a view to determine the correctness of an order passed by
another expert body. The remedy under Section 14 of the Act is not a
TDSAT's jurisdiction is not akin to a court issuing a writ of certiorari.
The tribunal although is not a court, it has all the trappings of a Court. Its
functions are judicial.
In 'Jurisdiction and Illegality' by Amnon Rubinstein a judicial power in
contrast to the reviewing power is stated thus:
"A judicial power, on the other hand, denotes a process in which
ascertainable legal rules are applied and which, therefore, is subject to an
objectively correct solution. But that, as will be seen, does not mean that the
repository of such a power is under an enforceable duty to arrive at that
solution. The legal rules applied are capable of various interpretations and
the repository of power, using his own reasoning faculties, may deviate from
that solution which the law regards as the objectively correct one." The
regulatory bodies exercise wide jurisdiction.
They lay down the law. They may prosecute. They may punish. Intrinsically,
they act like an internal audit.
They may fix the price, they may fix the area of operation and so on and so
forth. While doing so, they may, as in the present case, interfere with the
existing rights of the licensees".
In West Bengal Electricity Regulatory Commission vs. CESC Ltd.
[(2002) 8 SCC 715], a Bench of this Court, (in which one of us Santosh
Hegde, J. was a member), observed :
"From s.4 of the 1998 Act, we notice that the Central Electricity
Regulatory Commission which has a judicial member as also a number of other
members having varied qualifications, is better equipped to appreciate the
technical and factual questions involved in the appeals arising from the orders
of the Commission. Without meaning any disrespect to the judges of the High
Court, we think neither the High Court nor the Supreme Court would in reality
be appropriate appellate forums in dealing with this type of factual and
Therefore, we recommend that the appellate power against an order of the
state commission under the 1998 Act should be conferred either on the Central
Electricity Regulatory Commission or on a similar body. We notice that under
Regulatory Authority of India Act 1997 in
chapter IV, a similar provision is made for an appeal to a special appellate
tribunal and thereafter a further appeal to the Supreme Court on questions of
law only. We think a similar appellate provisions may be considered to make the
relief of appeal more effective." The provisions of the 1992 Act and the
Regulations framed thereunder squarely apply to the observations made by this Court
in West Bengal Electricity Regulation Commission (supra).
We may furthermore notice that in Part XI of the Electricity Act, 2003, an
expert appellate tribunal for electricity in the light of the observations made
by this Court has been constituted.
Dividend: Effect of In view of our findings aforementioned, we are of the
opinion that while calculating the amount of interest, the amount of dividend
paid to the shareholders should be excluded. The shareholders who by reason of
default on the part of acquirer have been deprived of interest payable on the
difference of the offer price and market price would be entitled to interest as
direction to pay interest being not penal in nature, they cannot make double
gains. The Tribunal, in our opinion, has committed an error in holding that the
dividend being a participatory benefit available to a shareholder and being
distinct from interest, the same should not be taken into consideration.
The regulation fixes a benchmark as regard rate of interest. If any amount
has been received by the shareholders by keeping the shares till a public offer
was made, the amounts so received by him by way of dividend should be set off.
We would reiterate that the shareholders did not have any right to get interest
and in effect and substance they were only to be compensated for the loss of
interest and nothing more. On the same analogy, if they had received some gains
by holding the shares fairly for a long period of five years, the amount of
dividend cannot be permitted to be retained by them.
The amount of dividend should, thus, be adjusted towards the interest
payable to them.
We, therefore, direct, having regard to the peculiar facts and circumstances
of the case, that the interest of justice would be sub-served, if the rate of
interest is directed to be paid at 10% per annum from March 1998 till 2003.
The interest at the rate of 10% per annum is directed in stead and place of
normal 9% having regard to the fact that the Appellants themselves in their
Memorandum of Appeal filed before the Tribunal had contended that the Board
should have granted interest at the rate of 10% per annum instead of 15%.
If any dividend was paid during the said period, the same shall be adjusted
with the amount of interest.
The appellants had deposited a total amount of 111.50 crores which sums have
been invested. The interest accruing thereupon shall enure to the benefit of
those shareholders who were entitled to the payment of interest for the period
during which the said amount remained invested in terms of the order of this
We uphold that part of the decision of the Tribunal whereby it was held that
those persons who were the shareholders till 24.2.1998 and continued to be
shareholders on the closure day of public offer alone would be entitled to
The case of the Administrator of the Specified Undertaking of the Unit Trust
of India, however, stands on a different footing. The facts of the matter, as
noticed hereinbefore, clearly go to show that in effect and substance, the
Appellants are the successors of the U.T.I. They being the statutory
beneficiary, are entitled to interest irrespective of the fact that it came
into being after 1998.
For the reasons aforementioned, Civil Appeal Nos.3183 of 2003, filed by the
Acquirer and D3952 of 2004 filed by the Administrator of the Specified
Undertaking of the Unit Trust of India, are allowed; whereas Civil Appeal
No.3701 of 2003 filed by SEBI and Civil Appeal No. 3872 of 2003 filed by
Umeshkumar G. Mehta are dismissed. No costs.