C.A. No. 302 of 2011 in C.P. No. 1 of 2010. Case: Birla Education Trust and Ors. Vs Birla Corporation Ltd. and Ors.. Company Law Board

Case NumberC.A. No. 302 of 2011 in C.P. No. 1 of 2010
CounselFor Appellant: S.K. Kapur, Sr. Adv., Jishnu Saha, Kartik Nayar, Ranjana Gawai and Vasuddha Sen, Advs. And For Respondents: Pratap Chatterjee, Sr. Adv., Debangsu Basak, Sanjiv Kr. Trivedi, Jishnu Chowdhury, Siddharth Vaid and Anish Dayal, Advs. for Respondents except Respondents Nos. 3 and 4
JudgesVimla Yadav, (Chairman)
IssueCompanies Act, 1956 - Sections 9, 13, 16, 17(1), 235, 397, 398, 402 and 408; Companies (Amendment) Act, 2002 - Section 7; Securities and Exchange Board of India Act, 1992; Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 - Regulations 3, 6, 7, 8(2), 10, 11 and 12; Company Law Board ...
Citation2011 (166) CompCas 609 (CLB)
Judgement DateJune 17, 2011
CourtCompany Law Board

Order:

Vimla Yadav, (Chairman), (Principal Bench)

  1. In this order I am considering Company Application No. 302 of 2011 mentioned in C.P. No. 1 of 2010 in the matter of Birla Corporation Ltd., and others. The applicants have contended that they are constrained to make the present application to seek certain urgent interim reliefs in view of certain subsequent developments that have taken place recently and which are certain to have a destructive and ruinous effect on Respondent No. 1, that is, Birla Corporation Ltd. (hereinafter referred to as "the company"). It has been pointed out that during the pendency of C.P. No. 1 of 2010, in the month of May, 2011 the company has issued a postal ballot notice solely with the object of amending the objects clause of the memorandum of association of the company and with the intention of commencing certain entirely new business, to its shareholders on or about May 19, 2011, which was received by the applicants on or after May 24, 2011 (though the said notice is dated April 28, 2011, but the same was allegedly deliberately posted late that is on or after May 19, 2011, to the shareholders). The postal ballot notice requires the company's shareholders/members including Respondents Nos. 11 to 35 holders of 62.9 per cent, voting power through the estate of PDB now Respondent No. 2 (HVL) to send the filled postal ballot form to the appointed scrutinizer by June 18, 2011. It has been contended that Respondent No. 2 (Shri Harsh Vardhan Lodha) by illegally usurping the voting rights of the estate of PDB is now seeking to authorise the company to carry out money market operations including dealing in securities, instruments, etc., which amendment would be ultra vires the Companies Act, 1956, besides being done with an ulterior motive, the amendment of the object clause of a mainly cement manufacturing and trading company to deal in securities, instruments, etc., is a part of a fraudulent scheme, a mischievous device conceived by Respondent No. 2 to defraud the company, its stakeholders and the public to make illicit gains for himself and his family by ensuring continuous brokerage income to the Lodha Companies (Lodha Capital Markets Ltd., and PLC Securities P. Ltd.) without any concern for Respondent No. 1 company whether it makes profits or huge losses through such transactions, it is a device to siphon off Respondent No. 1's financial resources to Respondent No. 2's pockets. The company has proposed the insertion of two new clauses numbered as clauses Nos. (17-O) and (17P) in the objects clause of the company's memorandum with its intention for commencement of new business as under:

    (17-O) To undertake the business as general traders and merchants, and buy, sell, export, import, deal in commodities, goods, things, contracts of all types, to deal in any commodity market, commodity exchange, spot exchange, for itself or for others, transaction in the nature of hedging, spot trading, forward commodity contracts, rate swaps, commodity future/swaps, commodity options, future and options and in derivatives of all the commodities, whether for the purpose of trading, investment, hedging, arbitrage, or any other purpose, whether in India or abroad and to undertake the activity of warehousing and processing as may be required for the aforesaid purpose(s).

    (17P) To invest acquire, subscribe, purchase, hold, sell, divest or otherwise deal in securities, financial instruments, financial products, shares, scrips, stocks, equity/index linked securities, units, bonds, commercial papers, acknowledgments, deposits, notes, obligations, warrants, Government securities, loans, loan certificates, ail kinds of derivatives including interest derivatives, future, forwards, options, calls, swaps, rights or interest in securities, foreign currencies, carbon credits, financial securities and any other securities issued by any entity whether for the purpose of hedging, arbitrage, or for any other purpose.

  2. It was pointed out that the company is almost a 100 year old company promoted by the well-known Birla family patriarch late G.D. Birla and presently its core enterprise consists of manufacturing, trading and selling operations in cement. The company has several plants in Rajasthan, West Bengal, Madhya Pradesh and Uttar Pradesh where its business of manufacturing cement is carried on. The cement business yields nearly 93 per cent. of the total revenue of the company and the minuscule remainder is generated from certain miscellaneous activities and particularly its business operations in jute and power generation. Other divisions, namely, the auto trim division and vinoleum divisions made no contributions or made very insignificant contributions as the existing management of the company has brought these divisions to the stage of virtual closure. The company is the flagship company of the industrial conglomerate consolidated by the late M.P. Birla (MPB), who died on July 30, 1990. During his lifetime MPB controlled his business empire essentially through majority shareholdings which he held in his own name and in the name of his wife, late Smt. Priyamvada Devi Birla (PDB). Such majority shareholdings were owned particularly in two companies, namely, the East India Investment Company P. Ltd. (EIICPL) Respondent No. 24 and GWCPL (respondent No. 17) the personal shares held by PDB in Respondent No. 24, EIICPL (74.92 per cent.) and Respondent No. 17, GWCPL (50.43 per cent.) allowed PDB to control each of the corporate entities (respondents Nos. 11 to 28). With these shareholdings MPB and his wife were able to control an interlocking chain of companies including Respondents Nos. 11 to 16, 18 to 23 and 25 to 28 and by this methodology the entire group of industrial enterprises forming the M.P. Birla group were owned and administered. Respondents Nos. 11 to 35 collectively hold 62.9 per cent. of the shares of the company. The balance is held by members of the public including the applicants. In effect, Respondents Nos. 11 to 35 were the nominees and/or alter ego of MPB and through them the largest block of voting power amongst the shareholders of the company was retained, controlled and exercised. It was pointed out that in a listed company under the provisions of the Securities and Exchange Board of India Act, 1992 and Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, the promoters and persons in control and persons acting in concert have to file declarations under Regulations 6, 7 and 8 for their shareholding and the voting rights exercised by them and based thereon the company is required to file with the stock exchanges prescribed particulars of the holding of the promoters, the persons in control and the persons acting in concert. Respondent No. 2 has not complied with Regulations 6, 7 and 8 of the Takeover Regulations. My attention was drawn to the note filed under the Takeover Regulations of the company after the death of PDB. The note filed for the quarter ended March, 2011 reads as under:

    "4. Smt. Priyamvada Birla, shown as one of the promoters and/or one of the persons having control over the company and/or persons acting in concert, expired on July 3, 2004. As already informed under Regulation 8(2), Shri R.S. Lodha, an executor of the last will and testament of late Shri Priyamvada Birla, had, as a matter of abundant caution, been included in the said list. Probate proceedings was initiated with 'him with regard to her estate, which includes all her shareholding in the hon'ble Calcutta High Court being P.L.A. No. 204 of 2004 (now T.S. No. 6 of 2004). Shri R.S. Lodha also expired on October 3, 2008. The company is informed that petition being G.A. No. 3434 of 2008 filed by Shri H.V. Lodha and other heirs of Shri R.S. Lodha, inter alia, for bringing them on record and to be allowed to continue with T.S. No. 6 of 2004 in place of Shri R.S. Lodha, since deceased has by judgment and order dated February 5, 2010, been allowed and the suit for grant of probate has been amended and converted into a suit for grant of letter of administration. Such proceeding being T.S. No. 6 of 2004 is pending. It may be noted in this regard that in any event, under Regulation 3(g) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, acquisition of shares by way of transmission on succession or inheritance would be exempt from the applicability of Regulations 10, 11 and 12 of the said Code."

  3. The above note relates to the entirety of the 62.9 per cent. shares held by PDB at the time of her death through the chain of Respondents Nos. 11 to 35 which is now allegedly said to be under the illicit and illegal control of Respondent No. 2.

  4. It was pointed out that Respondent No. 2, namely, Shri Harsh Vardhan Lodha (hereinafter referred to as HVL) and his stooges and henchmen and associates presently illegally in control of the company do not own even a single share in the company. Since the death of R.S. Lodha (hereinafter referred to as RSL) the control of the business, affairs and administration of the company has illegally passed entirely into the hands of his younger son, Harsh Vardhan Lodha who is Respondent No. 2. For all practical purposes such control by Respondent No. 2 is equivalent to that exercised by a proprietor over a proprietary business. The individuals who presently are members of the existing board of directors of the company are virtually "Yes men" of Respondent No. 2 who exercise no independent volition at all in the matter of performing their duties as directors and are content to merely rubber stamp decisions which are taken by Respondent No. 2. The entire board acts exactly, as required and demanded by Respondent No. 2 and no contribution of any worth by any of them is made in the formulation of policy or the decision making process of the company or in the...

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