1. The affairs of Shaw Wallace Ltd. (SWC), a blue chip company, with a history of over hundred years, presently under the control of an NRI M.R. Chhabria, (MRC), holding about 39 per cent. shares in the company for nearly a decade and under whose management this company was doing well for some time, have unfortunately become the subject-matter of two petitions-one filed under Sections 235, 237, 397, 398, 399, 402, 403, 406 and 408 of the Companies Act, 1956 (Act) by some of the employee shareholders (first petition) and another, under Section 408 of the Act, by the Central Government (second petition). Both the petitions were heard together, as most of the allegations in both the petitions are founded on certain alleged acts of financial mismanagement and there were quite a few common allegations. To avoid repetition and overlapping, we are disposing of these two petitions by this single common order.
2. There are 61 respondents in the first petition of whom replies have been filed only by respondents "Nos. 1, 2, 4, 5, 6, 8, 45 and 46.
Respondents Nos. 12 to 29 and 47, 49 and 51 were represented by their counsel even though they have not filed any replies. In the second petition, there are ten respondents--SWC and nine directors of the company. Only the company, namely, SWC has filed its reply and no other respondents, perhaps since no personal allegations have been made against them in this petition, have filed any reply nor were they represented during the hearing. While multifarious reliefs including supersession of the board of directors have been sought for in the first petition, the relief sought for in the second petition is for appointment of eight Government directors on the board of the company.
The Central Government has also, in addition, supported the first petition, through an affidavit. The allegations in both the petitions are mostly based on certain complaints made by the employees of the company on which the Central Government had earlier conducted an inspection under Section 209A of the Act. Most of the allegations relate to financial transactions of various nature transacted by SWC from 1990 onwards. These financial transactions, while according to the Central Government in the second petition, indicate gross financial mismanagement of the company requiring appointment of Government directors to safeguard the interest of the company/shareholders/public, according to the petitioners in the first petition, the financial transactions reflect siphoning off of the funds of the company requiring supersession of the board and further remedial steps through grant of various other reliefs sought for in that petition.
3. We heard both the petitions on a number of days. During this period, a large number of applications were filed, both by the company as well as the petitioners in both the petitions. Since we have already issued orders on all the applications, it is not necessary to recapitulate the same in this order, except relating to an order that we passed on November 26, 1996, by which we appointed two of our nominees on the board of SWC. Subsequently, for certain reasons, we had recalled one of the nominees by our order dated April 2, 1998.
4. A summary of the main allegations in the first petition is as follows : The entire control of the management of the company is in the hands of MRC. The assets and funds of the company are being used for his personal benefit. Many of the companies under his control have become sick. The company is not in a position to repay fixed deposits on maturity. MRC allowed his brother K.R. Chabbria, who was earlier the managing director of SWC to take away nearly 15 companies which were under the control of SWC, which included BDA Breweries Ltd., one of the most profitable companies for a meagre consideration. The company had dealings with certain other companies of MRC, like Orson TV, Genelec Limited, etc., by which the company had incurred huge losses. Further, the distribution charges for the products of the company was increased manifold and this way funds were diverted through the medium of distributors for the personal benefit of the promoters. A sum of Rs. 10 crores was paid to Golden Tobacco Limited (GTC) for purported advertisement of the company's products while no such advertisement was actually done. The company also manipulated the accounts in relation to a transaction of purchase and sale of certain software, from Dunlop India Limited at a price of Rs. 30 crores and reported as if the same software had been sold to Jumbo Global Limited, a company belonging to MRC for Rs. 47 crores. Actually, neither the purchase price was paid nor the sale price was realised. The company has purchased jewellery worth Rs. 50 lakhs and booked the same in the name of other Chabbria companies.
5. In the year 1993, the company announced a strategic plan known as "Vision 2000" and a lot of expenditure was incurred to give a wide publicity for the same. To implement this plan, even though proposals were initiated for issue of GDR and public/rights issues, nothing came out and instead, other profitable businesses of the company were sold.Tezpore Tea Company Limited was reportedly sold for a sum of Rs. 23 crores while the actual price was much higher and the difference had been siphoned off. In the process a huge sum was paid to respondent No.45 as his service charges, even though the sale of shares was effected through a stock broker. In addition, at the behest of MRC, many other business entities were sold out. Likewise the occupancy right of very valuable premises at Bombay and Calcutta was given up for an unknown consideration.
6. Without the approval of the board, a large amount of intercorporate deposits (ICD) have been raised at a very high rate of interest and MRC has siphoned off a substantial amount. More than Rs. 300 crore have been diverted to subsidiaries and no interest is being charged on this amount. The performance of the subsidiaries is not commensurate with such inflow of funds. A perusal of the annual accounts of the company shows that there is an alleged profit of Rs. 29 crores from the sale of shares of Maharashtra Distilleries Limited. Actually, no such sales had taken place to outsiders but only with other subsidiaries. Therefore, this transaction is purely for the purposes of window dressing the profitability of the company. The accounts also show that statutory payments like provident fund, ESI, etc., have not been paid and are outstanding. A large number of winding up petitions has been filed against the company for non-payment of dues to the creditors. In view of the very bad financial position of the company, the financial institutions have categorised the company as a non-performing asset and thus have stopped all financial assistance. In the guise of restructuring the organisation MRC has initiated action to shift the headquarters of the company from Calcutta to Mumbai.
7. In spite of such a bad financial state, it is seen from the accounts that the company has invested about Rs. 100 crore in six Gauhati companies, which are, even though claiming to be public limited companies nothing but paper companies. This investment has been made by way of lending money to subsidiaries which in turn, are reported to have invested in these companies. The acquisition of these companies is reported to be through one Mr. N.C. Jain (respondent No. 45), a stock broker registered with the Gauhati Stock Exchange. There have been press reports that this money has been siphoned off by MRC through "hawala route". This investment was done without the knowledge/permission of the board. It is also seen that some of these companies were shown to have ceased to be subsidiaries. Another bad investment made by the company is in Charminar Breweries in Andhra Pradesh wherein prohibition was going to be introduced. The investment in this company is to the order of Rs. 14 chores. Over 400 executives have been sent out of service in the year 1995 since they were not toeing the line of MRC in his nefarious activities of siphoning off funds. A large amount of money is being spent on MRC out of the company funds. The company had advanced money to another company namely. Jumbo (respondent No. 50) for purchase of the shares of the company, thus, violating the provisions of Section 77 of the Act. To avoid detection, MRC has arranged to transfer the shares from the name of respondent No.50 to respondent No. 51.
8. It is also averred in the petition that ever since MRC came into the picture by acquiring a large percentage of shares in the company, the company is being systematically squeezed, bringing the company to a position where it is unable to pay its debts. Such acts are harsh, oppressive and prejudicial to the interest of the company as well as public. It is also submitted in the petition that the petitioners are not in a position to provide the details of the illegal transactions and siphoning off of funds and as such an order of investigation be passed to bring to light the various acts committed by MRC.9. The summary of the grounds on which the Central Government has sought for appointment of Government directors in the second petition is as follows : The Central Government had carried out an inspection of the books and accounts of the company under Section 209A of the Companies Act and this report has brought out a series of financial mis- management in the affairs of the company running into crores of rupees. This financial mismanagement relates to various aspects of financial transactions, inter alia, including the borrowing of the intercorporate deposits at high rates ; lending of money to subsidiaries without interest or waiving of interest, writing off huge amounts as bad debts, payment of unnecessary and exorbitant non-competition fee, exorbitant sales promotion expenses, unwarranted payments of consultancy and brokerage fee, etc. It is further alleged in the petition that due to its inability to pay its dues, a large number of winding up petitions have been filed in the Calcutta High Court; the company has not been able to refund public deposits ; while borrowing funds at high interest rates ranging between 26 to 30 per cent., the said amounts have been lent to subsidiaries at a lower rate of interest ranging from 22 to 28 per cent. ; further, in many of the cases accrued interest has been waived ; huge amount is found to have been paid as financial charges and brokerage for the borrowings made by the company ; the company also incurred heavy losses on trading in T.Vs manufactured by Orson Electronics, a company belonging to MRC group ; there have been violations of the provisions of Sections 211(2), 209(2), 143 and 303 of the Companies Act ; the loans raised by the company stood at Rs. 353.62 crores as on June 30, 1995, and the company has given loans and advances to the tune of Rs. 280.51 crores. The amounts shown above are exponentially higher than what was in the previous many years. Therefore, it is alleged in the petition that the practice of borrowings of short-term funds and lending the same for long-term is against the principles of prudent financial management ; the interest burden has gone up by 859 per cent. in the last three years and it has had the effect of crippling the company ; even the stand of the company that funds were given to subsidiaries for acquiring shares in other companies does not stand to scrutiny, inasmuch as, against Rs. 124.63 crores lent to the subsidiaries during 1994-95, the subsidiaries purchased shares in other companies only to the extent of Rs. 20 crores ; the turnover of the new subsidiaries for the years 1993-94 and 1994-95 is not commensurate with the investments made to acquire the new subsidiaries ; the company is in the practice of hiving off profitable subsidiary companies like Tezpore Tea Company Ltd. and Maharashtra Distillery Limited and acquiring new companies like Gauhati companies which are only paper companies ; the company has not been paying statutory dues like PF, ESI, etc. due to financial crunch ; there has been enormous increase in the expenses relating to publicity incurred, in connection with procurement of short term funds and huge sums of money have been paid in terms of restrictive covenants while acquiring new breweries/distilleries ; while the operating profits of the company have been coming down over a period of time, the company is showing profits only on account of other non-trading extraordinary incomes or by showing the expenditure as deferred revenue expenditure ; for debentures worth Rs. 5 crores issued in the year 1991-92, the company has paid Rs. 1.58 crores as finance charges, consultancy charges and brokerage and commitment charges when the entire debentures were issued to Peerless General Finance and Investment Company Limited ; an inspection conducted in respect of Niagra Investment Limited to which .... company paid Rs. 30 lakhs as loan processing fees for these debentures and it was found that this company had neither any employee nor any whole time director and SWC is not in a position to explain as to whom an amount of Rs. 30 lakhs was paid and it is nothing but a scheme designed to divert the funds of the company ; further, in the year 1993-94, the company had borrowed Rs. 11.9 crores from Peerless at 21 per cent. interest for which the company incurred an expenditure of Rs. 1.6 crores as one time service charges paid to Peerless and Rs. 51.75 lakhs to Raj Laminates Private Ltd. at 4.5 per cent. brokerage. The company was not able to justify this payment of brokerage ; likewise the company also paid Rs. 83.48 lakhs to one P.L. Mittal as service charges in connection with the disposal of the shares of Tezpore Tea Company Ltd. even though the shares were sold through a registered broker, Shri Shyam Sunder, on payment of usual brokerage ; the payment of the service charges is not only unjustified but it is a way of squandering the company funds ; the company has been, year after year, writing off huge amounts as bad debts indicating that it has not been prudent in lending money after verifying the bona fides of the borrowers ; the income-tax authorities have conducted various raids on the premises of the company as also in the residential premises of directors. Summing up these allegations, the Central Government has averred that there has been continuous gross financial mismanagement against sound business principles resulting in the affairs of the company being conducted in a manner oppressive to the shareholders and prejudicial to the interest of the company and public interest. Accordingly, it has sought for appointment of eight Government directors for a period of three years to safeguard the interest of the respondent company, shareholders and the public interest.
10. Since we are dealing with both the petitions together the opening submissions of counsel for the petitioners and counsel for the respondents in both the petitions are summarised first before dealing with the detailed arguments on the allegations.
11. Shri Sarkar, senior advocate, appearing for the petitioners in the first petition, initiating his arguments, submitted that SWC is being thoroughly mismanaged for his personal benefit by MRC, the non-executive chairman of the company. The entire board consists of his own nominees, who, in spite of various obligations imposed on them by the statute, always act according to the dictates of MRC. Most of the decisions of the company, more particularly in relation to financial matters have either been taken by him independently without bringing the same to the knowledge of the board or the decisions of the board have always been in accordance with the wishes of MRC. In the process, according to Shri Sarkar, all norms of financial propriety are thrown to the winds and the interest of the company has been marginalised leading to a severe financial crunch, due to which there has been heavy accumulation of debts which the company is unable to pay and as a matter of fact, a large number of winding up petitions have already been filed against the company. Further; he submitted that, both the Enforcement Directorate and the Income-tax Department have initiated inquiries against the company and MRC. Besides imprudent financial decisions, there have been a number of financial transactions leading to a suspicion that the money involved in the transactions has been siphoned off. He further submitted that, at the whims and fancies of MRC, directors/senior executives are inducted/removed without any basis or justification. He submitted that the financial irregularities committed with the view to siphon off the funds permeate practically every sphere of the activity of the company-investment, sales, raising of finance, sale of property, etc. His grouse is that, even though MRC is the non-executive chairman, he resides in Dubai, and does not visit India due to the enquires by governmental authorities, but he controls the affairs of the company by remote control through his nominee directors. Shri Sarkar submitted that the allegations are so serious in nature, that they would justify grant of the various reliefs sought for particularly relating to the supersession of the board, recovery of the amount of money siphoned off, etc. He further submitted, that if for one reason or the other, the Bench were to feel that the allegations require further investigation, then an order of investigation should be passed.
12. Shri Vali, counsel for the Central Government, moving the second petition, going through the allegations in brief, stated that, this is a fit case which calls for appointment of Government directors to protect the larger interest of the company, shareholders and the public. According to him, the company is facing near bankruptcy requiring immediate remedial action. The Central Government, being the custodian of public interest is justified in moving the CLB under Section 408 for appointment of Government directors to save the company. He further submitted, that, there could never have been a better case than this for the appointment of Government directors and the materials placed before the CLB would very clearly indicate that the financial mismanagement of the company resulting in severe financial crunch has endangered the company's solvency. This clearly shows that the affairs of the company are being conducted in a manner oppressive to its members and in a manner, which is prejudicial to the interest of the company and the public interest.
13. Shri Mookherjee, senior advocate, appearing for MRC, respondent No.2, submitted that, the issue is to whether the two petitions, one under Section 397/398 and other under Section 408 can go together inasmuch as in P.S. Nanawati v. Jaipur Metals and Electricals Ltd.  69 Comp Cas 769 (Raj) it has been held that both the petitions cannot go together. According to him, the main relief sought in the first petition relates to supersession of the board while in the second petition, the relief sought is for appointment of Government directors.
The allegations contained in both the petitions are practically similar, arising out of a complaint received from the employees on which the Central Government has already conducted an inspection under Section 209A and the inspecting officer has already cleared the respondents of many of the charges. He also submitted that certain other shareholders have already filed a suit in the Calcutta High Court, seeking similar reliefs on similar allegations. According to him, the source of allegations in all these proceedings is the same and based on the same facts.
14. According to Shri Mookherjee, the first petition, even though titled as a Section 397/398 petition, is essentially a petition under, Section 398. The petitioners in this petition are employees of SWC, who were allotted shares from the employees' quota and their percentage holding in the company is just about 0.07 per cent. This petition is not a bona fide petition, but it has been instigated by someone inimical to MRC. He further submitted that the employees, through this petition have sought to settle their grievances arising out of employment, in the garb of shareholders. The motive for filing this petition will have to be kept in mind before grant of any relief and as a matter of fact, according to him, the petition should be dismissed as the real purpose of the petition is not for redressing the grievances taut for a collateral purpose. For this proposition he relied on Bellador Silk Ltd., In re  1 All ER 667 (Ch D). Further, he submitted that, even the second petition has not arisen out of bona fide exercise of powers by the Central Government. Relying on the decision of the Calcutta High Court in Peerless General Finance and Investment Co. Ltd. v. Union of India  71 Comp Cas 300, he submitted that the condition precedent for invoking the provision of Section 408 is that, the Central Government should be satisfied that the affairs of the company are being conducted in a manner prejudicial to public interest and interests of the company and such satisfaction should be based on evidence. According to him no evidence has been produced to substantiate any of the allegations. While drawing our attention to the decision of the Division Bench of the Delhi High Court in South India Viscose Ltd. v. Union of India  52 Comp Cas 247 he submitted that, the Central Government has to establish, in an objective manner that requisite conditions have been fulfilled to satisfy itself that it is necessary to make appointment of Government directors in order to prevent the affairs of the company being conducted in a manner oppressive to members or in a manner prejudicial to the interest of the company or public interest. Both Sections 398 and 408 deal with situations of the affairs of the company being conducted in a manner prejudicial to the public interest of the company. The allegations in the petition relate to past alleged acts of mismanagement. Even otherwise, he submitted that, the reliefs sought in both the petitions are drastic in nature, which cannot be granted on prima facie findings. According to him, all the enquiries including the suit instituted prior in time are pending and any finding on the facts would greatly prejudice the respondents inasmuch as the findings of the CLB on the facts are final and are not appealable. He also submitted that the reliance of the Central Government on the interim report of the Income-tax Department and Enforcement Directorate cannot be accepted as they are only interim reports. Even otherwise, he submitted that there are no affidavits or primary records that have been produced along with these reports.
15. Shri Anil Diwan, senior advocate appearing for the company supplementing the arguments of Shri Mookherjee argued to state that the first petition suffers from lack of particulars especially in relation to the allegations of fraud and siphoning off of funds. According to him, it is for the petitioners to prove the allegations and not for the respondents to disprove the same. Taking us through the various allegations in the petition, he pointed out that all the allegations have been based on suspicion and surmises but without any proof or evidence. In cases of allegations of fraud, etc., he submitted that, full details together with relevant evidence should be produced, failing which, the court should not take cognizance of the allegations.
For this proposition he cited the following cases : 15 Indian Appeals 108 ; Mulla on Criminal Procedure Code page 1154 : 16 Indian Appeals 111 ; Bishundeo Narain v.Seogeni Rai, AIR 1951 SC 280 ; Lalchand Bhagat Ambica Ram v. CIT  37 ITR 288 (SC) ; Dhakeswari Cotton Mills Ltd. v. CIT  26 ITR 775 (SC); Umacharan Shaw and Brothers v. CIT  37 ITR 271 (SC) and 151. Further he submitted that, the additional affidavit filed by the petitioners in the first petition does not satisfy the requirement of the CLB regulations as it has not been properly sworn as required by regulation 14. Since the matters complained of are very serious in nature, seeking drastic remedies, the swearing of the affidavits as per regulations is mandatory and as such the first petition deserves to be dismissed. For this proposition he relied on State of Bombay v.Purushottam Jog Naik, AIR 1952 SC 317 ; Raj Kumar Dhar v. Colonel A.Stuart Lewis, AIR 1958 Cal 104 ; Gaya Textiles Pvt. Ltd. v. Star Textile Engineering Works Ltd., AIR 1968 Cal 388 ; Virendra Kumar Saklecha v. Jagjiwan  1 SCC 826. He also submitted that, a perusal of the various allegations would show that most of them relate to certain decisions taken by the management of the company which have unfortunately not borne fruit. According to him, as held in South India Viscose Ltd. v. Union of India  52 Comp Cas 247 (Delhi) errors of misjudgment or failure of business decisions or imprudent business decisions will not justify appointment of Government directors under Section 408 and as a matter of fact the power under the section is extraordinary and is to be exercised very sparingly only when the conditions specified in the section are fulfilled. He further pointed out that, it has been held by the Delhi High Court in Vinod Kumar v.Union of India  52 Comp Cas 211 that the Central Government has to be satisfied after such enquiry as it deems fit to make, that it is necessary to make appointment of Government directors. He submitted that, the Central Government has already conducted an inspection under Section 209A of the Act and the enquiring officer has already exonerated the company on most of the allegations. However, the Central Government has in the present petition, included many such allegations on the ground that the Central Government was not in agreement with the finding of the enquiring officer, which according to him, would be beyond the powers of the Central Government to do in terms of the provisions of Section 408. According to him, when the declared policy of the Government is less Government intervention and free economy, there is no reason as to why the Government should try to control this company with Government directors. He, however, fairly stated that, in spite of all these objections relating to absence of detailed particulars to substantiate the allegations in both the petitions, he -would place before the Company Law Board all the relevant material to satisfy the Bench that there are no grounds that exist calling for grant of any of the prayers as prayed for in these petitions. While admitting that the company is presently facing severe financial crunch, he submitted, that, this has been brought about by circumstances beyond the control of the management. According to him, the liquidity problem of the company originally was purely on account of non-assistance by financial institutions to increase the working capital limits of the company. Even though the turnover increased from Rs. 100 crores to Rs. 400 crores from 1984 to 1992, the banks increased the limit only by Rs. 10 crores. Further, due to entry of multinationals into the liquor trade, the company had to incur enormous expenses on publicity, brand development and sales promotion.
16. He further submitted, that in view of the liberalised policy announced by the Government in 1991 and with a view to diversify, the company engaged the services of Dr. Mratunjoy Athreya, a renowned management consultant to guide and assist the company in preparing a detailed blueprint and plan of action for diversification and expansion. After an extensive study the said consultant prepared a blue print known as "Vision 2000", which identified areas of diversification/expansion and sources of funds. This plan also visualised disposal of businesses and assets of non-core area. "Vision 2000" envisaged not only expanding the existing business activities, but also entering into certain other new strategic areas of business.
The total investment envisaged under the plan was of the order of Rs. 1,600 crores. The funding for these projects was to be raised from various sources like GDR issues--Rs. 480 crores : public issue--Rs. 351 crores (May, 1995) : rights issue--Rs. 513 crores (June-July, 1995) : internally generated funds--Rs. 256 crores. Anticipating the raising of funds through GDR and public rights issues, which would take some time to materialise in view of various procedural formalities, with a view to give a momentum to the projections made in Vision 2000, the company borrowed short-term high cost inter-corporate deposits as bridge finance. Even though, in February 1994, the company arranged for a loan of 70 million Swiss Francs at a very low interest, which could have helped the company to get Rs. 154 crores, this favourable proposal could not materialise due to the reasons beyond the company.
17. In the extraordinary general meeting held on May 24, 1994, he stated that the approval of the general body was obtained to raise the borrowing limits of the company to Rs. 1,000 crores and also to amend the memorandum of association of the company to incorporate the proposed objects of diversification of the company's activities as per the blue print of "Vision 2000". In other words according to Shri Diwan, the shareholders were fully aware of the proposed diversified activities of the company. In October, 1994, the company obtained the approval from the Ministry of Finance for GDR of US dollars 150 million but due to Reliance/UTI scam in November, 1994, there was loss of confidence of foreign investors in Indian corporations due to which this proposal could not materialise. Even though the company made an application to the SEBI for a rights-cum-public issue in April, 1995, due to the stock market crash on account of the M. S. Shoes episode, the company could not go in for rights-cum-public issue. In March, 1995, the consortium of banks of the company enhanced the cash credit limits of the company from Rs. 42 crores to Rs. 90 crores, but the same has not been implemented by the banks. During this period, the company had acquired, through its subsidiaries a large number of breweries and distilleries to strengthen and expand its core activities by borrowings through intercorporate deposits which stood at Rs. 243 crores as on June 30, 1995. Thus, according to Shri Diwan, the liquidity crisis arose on account of the company's inability to mobilise long term funds at reasonable rates due to reasons beyond its control. According to him, had the proposal to raise funds through GDR/rights/ public issue materialised, the company would not be facing the liquidity problem.
Therefore, he submitted that, even assuming that the company should not have gone in for long-term investment with short-term funds, yet, it could only be termed an imprudent business decision and cannot be viewed as mismanagement requiring grant of relief sought for by the petitioners. He further submitted that in spite of the difficult situation, the company had repaid over Rs. 80 crores during the period from April-December, 1996.
18. Even though, a lot of allegations relating to financial mismanagement and alleged siphoning off of funds have been alleged in the first petition, Shri Sarkar laid more emphasis on the following allegations. Since some of these allegations have been reiterated by counsel for the Central Government also, we are combining the arguments of both counsel under each of these allegations as also the counter arguments of counsel for the respondents : (a) Diversion of funds to six Gauhati based companies : Shri Sarkar : The company is reported to have invested around Rs. 90 crores in six Gauhati companies. All these companies are obscure and fake paper companies and in the name of investment, the amount of Rs. 90 crores has been siphoned off. At no time, the matter of investment in these companies was discussed and approved by the board of directors. These companies are Das Apartments Limited, Kamalakal Limited, Gulmohar Estates Limited, Pulp Products Ltd., Raksha Audio Limited and Manipur Pharmaceutical Works Limited, which have all been impleaded as respondents but none of them has filed any affidavit. Even though these companies are purported to be listed companies, the intrinsic worth of these companies is negligible. The entire scheme of purported investment in these companies has been done in a manner by which a huge amount has been siphoned off and has become undetectable. There has been a conspiracy between respondents Nos. 2, 3, 4 and 12 by which inter-corporate deposits were made in various investment subsidiaries of SWG, which in turn, were invested in Das Apartments Limited, Kamlakal and Gulmohar Estates Limited and the investment in Raksha Audio Ltd., Pulp Limited and Manipur Pharmaceutical Limited was made by investing Rs. 45 crores as share capital by SWC in Haywards Breweries Limited which in turn invested Rs. 30 crores in these companies. This is significant to note that Haywards has not produced even a single bottle of beer or ever owned a brewery. These investments were never brought to the notice of the board nor is there any board approval.
The stand of the company that the investment in these companies is in pursuance to the long term business plan is also not correct inasmuch as Vision 2000 does not contemplate diversification into pulp and paper or pharmaceutical lines. Further, as per the balance-sheet of the company as on June 30, 1995, Kamalakal Limited, Das Apartments Ltd. and Gulmohar Limited have ceased to be subsidiaries of SWC. Even though the investment in these companies was purported to have been done through a broker, namely, Shri Nem Chand Jain, he, according to the Gauhati Stock Exchange, was not a trading member nor the transactions in respect of these shares had gone through the stock exchange. Therefore, the entire transaction of investment in these company is dubious. According to P.L.
Narasimhan, respondent No. 3 in his statement before the Enforcement Directorate, the entire amount of Rs. 90 crores was invested in these companies as per the directions of MRC. Even assuming that this investment has really been made, the same is in contravention of Section 292 of the Companies Act. It is also important to note that Shri Nem Chand Jain, through whom the investment transactions were purported to have taken place, is a director in all these companies and according to Shri Nem Chand Jain, the companies are controlled by R. R. Modi. These investments never came before the board and when it came for the first time on December 6, 1996, it was after the petition was filed and from the board discussions it is not clear as to whether the shares were purchased in the market or the company subscribed to the shares. He also stated that some of the registered letters addressed to these companies have been returned as "not known" and he produced certain envelope to substantiate this. Further, referring to the annual reports for 1996-97, he pointed out that the auditors have made a note that the share scrips in respect of these companies have not been produced on the ground that they have been sent to the concerned companies for consolidation. He also pointed out that the board meeting in May, 1994, (page 637) does not talk about investment in these companies nor the appraisal for GDR indicates anything about these companies.
Therefore, according to him, the entire episode relating to investment in these companies is nothing but a sham transaction only for the purpose of siphoning off the funds of the company by MRC. Shri Vali : Supplementing the arguments of Shri Sarkar, Shri Vali stated that, as per letters written to the Regional Director, Department of Company Affairs at A-6 and A-7 of the petition, while the Gauhati Stock Exchange has intimated that Shri Nem Chand Jain was not a trading member of that exchange, the Calcutta Stock Exchange has reported that both Shri Nem Chand Jain and P.L. Mittal are not members of that exchange. Further, P.L. Narasimhan, respondent No. 3, has before the Enforcement Directorate and in his bail application, admitted that Rs. 90 crores were invested in these six companies according to the orders of M.RC. He also referred to pages 49 to 51 of the rejoinder to the second petition wherein the Central Board of Direct Taxes have stated that all these six Gauhati companies were found to be non-existent and that no books of account are available in the registered offices as indicated in the income-tax returns. Further, as per the records of the Gauhati Stock Exchange the transactions relating to purchase of shares in these companies have not gone through the exchange. The plea of SWC that these transactions were spot transactions has no basis and the relevant provisions of the Securities Contracts (Regulation) Act, 1956, has not been followed. Shri Nem Chand Jain has stated on oath that he has no knowledge about share broking business and he used to sign papers on the instructions of R.R. Modi, P.L. Narasimhan as well as Shri R.R. Modi have admitted on oath before the enforcement authorities that Rs. 70 crores were withdrawn in cash and given at the direction of MRC to some persons. The note also gives certain details as to how the money was withdrawn either directly from the accounts of brokers or from the alleged shareholders from whom the shares were purchased. Therefore, according to Shri Vali, the entire transaction is clouded with mystery and through a smoke screen, a substantial amount of Rs. 90 crores has been siphoned off and has been taken out of the country through "havala" route.
Shri Anil Diwan countered the arguments of counsel for the petitioners that these six Gauhati companies are either non-existent or paper companies. He produced before us the certificate of incorporation of these companies, the prospectus issued by these companies When they went in for public issues and also copies of stock exchange quotations in respect of the shares of these companies both before and after the shares were acquired by the subsidiaries of SWC. He also countered the statement of the Department of Revenue that these companies do not maintain any books of accounts by producing the income-tax assessment orders in respect of some of these companies. With reference to the statements attributed to Shri Narasimhan before the enforcement authorities, Shri Diwan stated that Shri Narasimhan has later disowned the statements. According to Shri Diwan, the main purpose of investment in these 'companies was with a view to diversify the activities of the company and 'since these companies were carrying on business in the North Eastern region wherein certain benefits meant for companies of North Eastern States would be available, investments were made in these companies. All these investments were made through recognised stock exchange brokers' and the present market value of the shares is more than the cost and as 'such there is no loss on account of these investments. The investment in' these companies was made before the company started facing financial problems and as such no further funds could be inducted into these companies to achieve the objects for which the investments were made, therefore, according to him, the investment in these companies was a business decision and not with any ulterior motive as alleged by the petitioners. While making the investment, the company had carried out due 'diligence audit of these companies and after finding that the net worth of the companies was intact. Even though the transactions to acquire the shares were through' recognised stock brokers, to avoid payment of huge brokerage, the transactions did not go through the floor of the exchange. He also mentioned that since these companies made further issue of shares which were acquired by five different companies, four of these six companies ceased to be the subsidiaries of SWC but the management and control of these companies is with SWC. S.B. Mookherjee, submitted that his client, MRC has not, as alleged diverted the money involved in acquisition of the shares through havala or otherwise. The investments were genuine investments.
According to him, since the shares were purchased from a number of shareholders, the question of anyone siphoning off the funds of the company through purchase of these shares, does not arise. Referring to the affidavit of K. Srinivasan, respondent No. 8, dated November 27, 1996, in which he has stated that the management of the company was to run according to the wishes and directions of MRC and that financial matters of the company were to be attended by Shri Narasimhan at the instance of MRC, Shri Mookherjee submitted that in the civil suit at the Calcutta High Court, Shri Srinivasan had taken an entirely different stand by defending MRC against such allegations in that suit. Similarly, in regard to the affidavit of Shri Pradeep Mathur, respondent No. 5 Shri Mookherjee stated that no credence should be given to this affidavit as Shri Mathur is an aggrieved person on account of this discharge from the employment of SWC. S.K. Kapur, senior, advocate, appearing for respondents No. 45/46 stated that his clients had nothing to do with MRC. The purchase of shares in these six companies went through them in their normal course of business. Since, no affidavit had been filed by these respondents, directions were given for filing, of affidavits and accordingly, they filed affidavits after the hearing was completed.
According to the affidavit filed by Shri Nem Chand Jain, respondent No. 45, he continues to be a registered stock broker of the Gauhati Stock Exchange and he had never acted as a conduit for siphoning off any of the funds of SWC. He had also enclosed a copy of the certificate of registration issued by the Gauhati Stock Exchange.
According to him, all these six companies were listed companies and the controlling interest in. these companies was acquired by the respondents in the ordinary and usual course of business for due consideration and that he was engaged to act as a share broker to acquire the shares and the same was done by his firm in accordance with law.
One K.C. Mittal, being the son and constituted attorney of respondent No. 46 has filed an affidavit on behalf of the said respondent in which he has, with reference to these six companies, by giving the dates of incorporation of all these companies, stated that these companies are still in existence and as such are not paper companies as alleged. He has further stated that between July,1993 and December, 1994, various shares of these companies were purchased through him and that payment for such purchases were made by cheques and these cheques were handed over to the concerned parties. These companies had nothing to do with the sale and purchase of their respective shares and that these transactions took place at arm's length in the ordinary and usual course of business and as such these transactions were legal and bona fide. No money was paid to his father out of the purchase consideration. Therefore, according to the deponent the allegations relating to acquisition of shares in these six companies do not merit any consideration.
(b) Purchase of software from Dunlop India Limited : Referring to para. 24 of the first petition, Shri Sarkar submitted that SWC was made to purchase some rejected software from Dunlop at a price of Rs. 30 crores while the value of which was not even 1/10th of this amount. To offset the financial impact on the financial result of the company, a corresponding dubious sale at a price of Rs. 47.5 crores was booked in the name of Jumbo Global, an MRC company.
However, the money from Jumbo is yet to be received. As a matter of fact Jumbo had already returned the software on some flimsy grounds and SWC has to naturally reverse the transaction thereby reducing" the profits in the subsequent year. Shri Sarkar submitted that the entire transactions of purchase and sale without any intention to implement was only with a view to show that both Dunlop and SWC had performed well showing handsome profit. Therefore, according to Shri Sarkar, this type of window dressing by artificial manipulation of accounts is not only against established business principles but also amounts to cheating the shareholders and the public.
Shri Diwan stated that it is not correct that SWC purchased worthless software from Dunlop. Dunlop India had purchased certain sophisticated software for system management and control from a leading software company. Dunlop had planned to carry out value addition to the software and to export the same in order to diversify its export product trade. However, due to delay in identification of export market, in view of funds requirement it decided to effect domestic sale of the value added software. Since SWC required the said software for its own use, considering the availability of requisite hardware people and resources, it purchased the same for Rs. 30 crore. After the purchase, SWC not only utilised the same for improving its internal system and control, but made some value addition suitable for export market. It had earlier exported a part of the software for about Rs. 10 crores and when Jumbo Global Limited needed this software in order to obtain "trading house" status; the balance software available with SWC was sold to Jumbo. Since Jumbo desired to have some credit facility to make payment for this sale, SWC agreed for the same.
However, on account of certain unforeseen problems faced by Jumbo in the export trade and also domestic sales tax implications, the said contract could not be implemented and Jumbo had returned the software to SWC which SWC is actively pursuing for sale in the domestic/export market. According to him, this was purely a business decision taken in the interest of the company which unfortunately could not materialise, (c) Disposal of shares of Maharashtra Distilleries Limited (MDL) : Another way of window dressing the accounts of the company was, according to Shri Sarkar, that, without receiving any consideration, about 74 per cent. shares in MDL held by SWC was shown to have been transferred to the subsidiaries of SWC. By taking credit for the sale consideration, the company was able to deflate the losses incurred by the company during the relevant period. If the shares had actually been transferred for valuable consideration, then such a transfer is completely against the interest of SWC inasmuch as MDL has always been described as the crown jewel of SWC. He referred to page 22 of C. A. No. 191 of 1996 dated September 24, 1996, wherein there is a note by Shri Pradeep Mathur, the company secretary of SWC, wherein he has noted that for transfer of MDL shares, funds for stamp duty has not been provided and that some of the subsidiaries are yet to pay the consideration for these shares. Therefore, according to Shri Sarkar, the transfer of shares of MDL to the subsidiaries is not only against the interest of the company but also is in violation of the provisions of Section 108 of the Companies Act. He also questioned the rationale of transferring these shares to the subsidiaries since the control of MDL will continue to be under SWC through its subsidiaries.
Shri Vali stated that even though as per the accounts of the company for 1994-95, SWC has sold the shares in MDL, no details as to the actual payment received are available leading to a suspicion that the transaction may have been manipulated for some ulterior purposes.
Shri Diwan gave a note on this issue and pointed out that the entire transaction relating to MDL was for the benefit of SWC. According to him, SWC originally held 100 per cent. shares of MDL and even after transferring 74 per cent. to its subsidiaries, SWC has retained control over MDL through its subsidiaries. He stated that the sale of the MDL shares has conferred on SWC substantial tax benefits and that the sale was a part of various financial restructuring exercises undertaken by SWC. The long term benefits of this sale has been that the company obtained a deductible long term capital loss In the income-tax assessment even though there was no loss on account of the share transfer. On the other hand, the sale resulted in substantial profit for SWC. This is one of the well thought decisions of the company resulting in huge benefits to SWC without losing control over MDL. He elaborated to state that, with a view to ensure that the shares of MDL continue to be under the control of SWC, the articles of the subsidiary companies to which the shares were sold, have been amended to provide that these companies cannot sell the shares of MDL without the unanimous decision of the board of SWC. Drawing our attention to the provisions of the Income-tax Act relating" to long term capital gains, he submitted that, the MDL share constituted long term capital assets in the hands of SWC since the shares were acquired by SWC prior to April 1, 1981. The fair market value of the shares as on April 1, 1981, was ascertained and this became the deemed cost of acquisition. The said deemed cost of acquisition, after being indexed upwards, as per Section 48 of the Income-tax Act, came to a very large amount of Rs. 802 per share as compared to the original cost of acquisition at Rs. 1.85 per share.
While the indexed cost was excluded from computation of capital gain, the difference between the indexed cost of Rs. 802 and the price of Rs. 120 at which the shares were sold to the subsidiaries became a capital loss which could be adjusted for eight long years against any capital gain that may be earned by the company. In other words, according to him, while there was a profit on sale, the company also got the benefit of adjustment of capital gain for eight years against the loss in the sale of MDL shares. Therefore, according to him as a result of transfer of MDL shares, there has been no disadvantage to the company and on the contrary, it earned a huge tax benefit. As far as violation of the provisions of Section 108 is concerned, he submitted that originally the company was under the impression that on transfer of shares between the holding company and the subsidiaries, no stamp duty was payable and, therefore, no money was made available for stamp duty. Later, all the requirements of Section 108 have been complied with. In view of this he submitted that, the allegation that the company has lost control of MDL or that the entire transaction is illegal, etc. is not borne out by facts.
(d) Agreement with Golden Tobacco Company Limited (GTC) : Shri Sarkar, referring to para. 23 of the first petition stated that by a purported agreement for display of its stickers on cigarette packets manufactured by GTC, a sum of over Rs. 10 crores have been siphoned off. This agreement was a vehicle for an illegal transaction designed to suppress true profits of the company and bring about illegal gains to MRC especially when the purported advertisement never took place and it is only after the petition was filed that SWC issued a legal notice to GTC to fulfil the contractual obligations. Shri Sarkar submitted that even the board of SWC is under confusion inasmuch as in the board meeting held on December 16, 1996 (page 49 of volume 5) the board has noted that the agreement was for advertisement on the backside of match boxes manufactured by GTC and not on the cigarette packets. In other words, according to Shri Sarkar, a substantial sum of over Rs. 10 crores is alleged to have been paid to GTC without actually knowing for what purpose the same was paid.
On this allegation, Shri Diwan submitted that the payment of Rs. 10 crores (Rs. 14.09 crores) to GTC was a business decision taken in the ordinary course of business for the purpose of arranging advertisement and publicity for the products of SWC. This method of advertisement is common in respect of all consumer products. May be the company was negligent in not ensuring that GTC had complied with the contractual terms but no motive or any other allegation can be made against this bona fide business decision. He also stated that on coming to know of the failure of GTC to comply with the contractual terms, the company has already taken further steps in this matter by issuing a legal notice to GTC asking them to either fulfil the contractual obligation or otherwise refund the said amount at 24 per cent. interest. According to him, GTC is a reputed company which has accepted the payment and, therefore, the question of anybody siphoning off the funds through such purported contract for advertisement does not arise.
Purchase of SWC shares by M/s. Jumbo : Referring to para. 19 of the petition, Shri Sarkar stated that, not only in violation of the provisions of Sections 370 and 372 but also with a view to bestow undue advantage on MRC, respondent No. 50 which is owned by MRC, was advanced by SWC a sum of Rs. 4.5 crores without any consideration, which was later used by respondent No. 50 to purchase the shares of SWC. He also referred to copies of some of the contemporaneous share transfer forms lodged by respondent No. 50 as annexed and marked "B" to the petition. He also alleged that to avoid detection of purchase of SWC shares with its own funds, respondent No. 50 transferred these shares to respondent No. 51. Nearly 1.5 lakh shares of SWC were purchased by respondent No. 50 and thus by using the company's money, MRC is consolidating his position through respondent No. 50 which is wholly owned by him. He also drew our attention to para. 17 of the affidavit filed by the petitioners on September 24, 1996, wherein the company secretary of the company, S.C. Majumdar had narrated about lending of money to respondent No. 50 and purchase of shares of SWC out of the money so provided. According to him, purchase of shares in a company from out of the funds provided by the same company is in violation of the provisions of Section 77 of the Act. He also questioned the stand taken by the company that this amount of Rs. 4.5 crores was an investment in shares of respondent No. 50 and not money lent for purchase of shares of SWC as the balance-sheet of SWC does not mention this investment in the schedule of investments. According to Shri Sarkar this is one of the means adopted by MRC to siphon off the company funds.
Shri Anil Diwan, dealing with these allegations stated that SWC had not lent any money to respondent No. 50. It is actually an investment made in the shares of respondent No. 50. Among its various activities, the purchase and sale of shares is also one of the activities of respondent No. 50. This respondent in the course of its normal business purchased the shares of SWC and, therefore, the question of violation of Section 77 does not arise. He also pointed out, in regard to the alleged transfer of shares of respondent No. 50 to respondent No. 51, that both the respondents are one and the same person, i.e., the name of respondent No. 50 was changed from Jumbo Holdings (India) Ltd. to Jumbo Industries and Investments Limited. His complaint is that just for the sake of implicating MRC, the petitioners have not taken care even to see the real situation and have made this allegation which does not merit any enquiry.
(f) Sales Promotion Expenses : Referring to para. 21 of the first petition, Shri Sarkar pointed out that the company has incurred enormous sales promotion expenses right from 1989 and it increased six fold in 1993-94. If an investigation is ordered on the sales promotion commission paid to sales promoters and the benefit received by the company, it would reveal that the entire scheme was to defraud the company and siphon off the funds of the company.
Shri Vali pointing out with reference to paras. 2.63 to 2.65 of the second petition, stated that the remuneration paid to sales promoters went up from Rs. 25 lakhs in 1989-90 progressively to Rs. 11 crores in 1993-94. This is in addition to incurring an expenditure of Rs. 21.68 crores for publicity of branches. He also pointed out that these expenses have also been treated as deferred revenue expenses from 1995 onwards. Further, from the report of the Director of Enforcement as exhibited in pages 45, 46 and 51 of the Rejoinder, he submitted that a specific amount of cash is generated in the garb of sales promotion and super distributor commission. The modus operands followed is that SWC issues cheques for sales promotion expenses to the distributors who in turn after deducting 8 to 10 per cent. of the amount pay cash to a nominee of the SWC group of companies. Such cash collected has not been accounted for in the books of SWC. He also drew our attention to the report from CBDT wherein also similar statements have been made. Therefore, according to Shri Vali, the company's funds have been diverted and siphoned off in the garb of sales promotion expenses.
Shri Anil Diwan denied the allegation of exorbitant sates promotion commission and alleged kickback received by the company out of the sale commission paid. According to him, the sales promotion expenses cannot be seen in isolation without considering benefits accrued to the company by way of additional turnover. Referring to the inspection report of the inspector appointed under Section 209 of the Act, Shri Diwan stated that the inspector after comparing the expenses with the turnover came to the conclusion that there has been no abnormal payment of commission on sales. His only point was that the company has treated sales promotion expenses as deferred revenue expenditure. He stated that while sales promotion expenses and publicity is for brand building with a long-term view, the sales commission paid is for increasing the turnover in the present. Since sales promotion and publicity expenses are like capital expenditure for future benefits, the same is treated as deferred revenue expenditure as per accounting norms. Due to acute competition in the market, the company had paid adequate if not handsome commission which is practically in line with the industry. As far as the alleged kickback as reported by the ED/Income-tax authorities, Shri Diwan stated that the same has no basis.
(g) Sale of Tezpore Tea Limited : Shri Sarkar, referring to para. 32 of the first petition submitted that one of the prize businesses of SWC, viz., Tezpore Tea Limited was sold for Rs. 23 crores while as per the press report, the actual consideration received was Rs. 36 crores. Further, the company paid about Rs. 83 lakhs to P. L. Mittal for sale of the shares of this company and a further sum of Rs. 25.7 lakhs was paid as financial service charges. This is in addition to brokerage paid to Shri Shyam Sundar Dalmia. According to Shri Sarkar, when brokerage has been paid, there was no reason for the company to pay commission or any other remuneration to Shri Mittal.
This according to Shri Sarkar is an example of how the company is throwing away its funds without any reason or justification.
Shri Vali, also supported Shri Sarkar on this issue and he referred to paras. 2.76 and 2.77 of the second petition wherein the same allegation has been made. He also pointed out that since the company itself has not replied to this allegation, the allegation should be treated as admitted, Shri Diwan, stated that contrary to what is alleged by the petitioners, no brokerage was paid to Shyam Sunder Dalmia in respect of Tezpore Tea Company Ltd. The correct position is that an amount of Rs. 25.74 lakhs was paid by SWC to P.L. Mittal for liaison, finalisation and execution of take over of the controlling share interest of Pampasar Distillery Limited. Further, he also stated that the actual value received for the shares was Rs. 23 crores only (at the rate of Rs. 205 per share as against the market price of Rs. 165) and not Rs. 36 crores as alleged in the paper reports and as has been pointed out by the petitioners. He further stated that the shares in the company were sold because the tea gardens are located in Assam where due to Bodo problems, it was found difficult to manage the company. Further, this business was not the core area of the company and with a view to raise funds for investment in the core area, the board decided to dispose of the shares. The company made a handsome profit in the deal since the shares were sold at Rs. 205 per share as against market price of Rs. 145.
(h) Payment to subsidiaries : Referring to para. 21 of the first petition, Shri Sarkar pointed out that a scrutiny of the balance-sheet for the year 1993-94 shows that a sum of over Rs. 300 crores had been diverted by the company to its subsidiaries.
Further, a sum of over Rs. 46 crores on account of supplies made to subsidiaries remained unrecovered. A huge sum of interest is due from the subsidiaries to SWC which also remains unrecovered. He further stated that the moneys so advanced are utilised by the subsidiaries either for promoting their business or for acquiring shares in other companies. According to him, such advances to the subsidiaries have been used as a means to siphon off the funds of the company which have been borrowed at a high cost. He also stated that in many of the cases, the interest due on the advances had been written off and the worth of many of the subsidiaries is not ascertainable as they have not filed their accounts.
Shri Vali supplementing the arguments of Shri Sarkar stated that the company has not been in a position to explain the purpose for which money had been advanced to the subsidiaries. During the year 1994-95, the subsidiaries received about Rs. 124 crores from SWC while they have invested in the shares of new subsidiaries to the extent of only Rs. 20 crores. In other words, according to him, the stand of SWC that money was advanced to the subsidiaries for acquisition of shares in new subsidiaries is not founded on facts.
He further submitted that the turnover of the companies in which the subsidiaries invested the borrowed money is not commensurate with the investment made. He further stated that the way in which the company has been acquiring subsidiaries and hiving off subsidiaries shows that there is no consistent policy in the company and that the financial transactions involved in this process also raises doubts about the transactions. Further, the company has been charging the subsidiaries rates of interest on the loans given at rates much lower than the rates at which it has borrowed the funds and even this interest in many cases has been either written off or waived.
In other words, according to Shri Vali, one of the reasons for the company's financial difficulty is lending of loans to the subsidiaries without any benefit.
Shri Diwan dealing with this allegation stated that making of loans and advances by a company to its wholly owned subsidiaries is a recognised, settled and accepted commercial practice. The assets and business of the subsidiaries are commercially regarded as a part of the assets and businesses of the parent company. Many a time, the subsidiaries may not be in a position to raise the requisite funds on its own. However, the strength and clout of a strong parent company would enable such a parent company to raise requisite finances to be made available to the subsidiaries. In such cases, since the subsidiary is a part and parcel of the parent company, there is nothing wrong in not charging the subsidiary any, interest.
However, in spite of this general commercial practice, SWC has been charging the subsidiaries, interest mostly at the market rates.
However, taking into consideration the financial strength of SWC, the board of, directors of the company decided to waive a part of the interest for the period up to March 31, 1993, and there has been no waiver of interest after this period. Even the decision to waive part of the interest was taken for the reason that these loans have been given for acquisition of new businesses which could be expected to generate appreciable returns only after a gestation period of 2-3 years. Shri Diwan also pointed out that some of the subsidiaries to which loans have been given had already been proposed to merge with SWC and the approvals of the High Courts in which the proposals had been pending for nearly ten years have finally been received recently. Since the amalgamation would be retrospective from the appointed date, the question of charging interest on the loans given to these subsidiaries does not arise. In regard to the benefits derived by SWC on the loans given to the subsidiaries, he submitted that many of these subsidiaries acquired through such advances have contributed to the growth in the turnover of the company over a period of time even though at the time when the accounts for 1994-95 were finalised, there were no visible benefits arising out of these acquisitions. He further submitted that the board of directors of the company, for various reasons acquired new businesses through the subsidiaries instead of directly acquiring the same and for this purpose lent money to the subsidiaries. If the company itself had directly acquired the new companies without routing the money through the subsidiaries, the position would not have changed in any way. Under these circumstances, Shri Diwan submitted that the company has not violated any provisions in routing these investments through subsidiaries, nor has it by such method jeopardized the interest of the company as a group.
(i) Fictitious payments to Raj Laminates Private Ltd.: Shri Sarkar, referring to para. 2.75 of the second petition stated that for raising a loan of Rs. 11.5 crores from Peerless General Insurance Finance and Investment Company Limited, SWC not only paid a sum of Rs. 1.6 crores to Peerless, it also paid a sum of Rs. 51.75 lakhs to Raj Laminates Private Limited at 4.5 per cent. brokerage. According to him, when the company was directly dealing with Peerless, the lender, there was no need for payment to Raj Laminates. This according to him is diversion of a substantial sum of money of the company.
On this allegation, Shri Diwan, stated that the company availed of a term loan facility of Rs. 11.5 crores from Peerless as per the approval of the board in its meeting on August 27, 1993. The agreement with Peerless was that the loan would carry an interest of 21 per cent. and a brokerage of 4.5 per cent. was to be paid to Raj Laminates. Since the company was in need of urgent funds and; therefore, even after payment of 4.5 per cent. brokerage to Raj Laminates, the total impact on Rs. 11.5 crores came to only 24 per cent. per annum which was much lower than the prevailing interest rates, the company had no option but to agree to the said payment, In other words, according to Shri Diwan, the payment of 4.5 per cent. brokerage to Raj Laminates was at the behest of Peerless.
(j) Payment to Bhalotia Veneers Private Limited and Niagra Investment Co. Ltd. : Referring to paras. 2.70 to 2.74 of the second petition, Shri Sarkar stated that, the company, unmindful of the cost of borrowing, has been throwing away the company's funds by payment of huge finance charges, consultancy charges, brokerage and commitment charges. He stated that for 14 per cent. debentures worth Rs. 5 crores mobilised from Peerless General Finance and Investment Co. Ltd., the company paid a sum of Rs. 1.58 crores, of which Rs. 17.5 lakhs was paid to Bhalotia as service charges and a sum of Rs. 30 lakhs to Niagra as loan processing fees. According to him, these payments are unwarranted especially when the company has paid Rs. 70 lakhs as commitment charges and Rs. 38 lakhs as proceeding charges to Peerless. Since, the debentures were placed privately such a huge expenditure of Rs. 1.58 crores amounting to 30 per cent. of the total amount raised is nothing but an act of diversion of funds of the company. He further stated that as seen from the averment of the Central Government in this regard the bona fides of the payments to Niagra are doubtful. Perhaps, he stated, this money has also been siphoned off.
In regard to this allegation, Shri Diwan, relied on the reply given by the company to the inspector appointment under Section 209A of the Companies Act to say that the amount of Rs. 5 crores was taken on 14 per cent. secured redeemable non-convertible debentures in 1991-92 redeemable after October, 1998 and that the cost incurred on raising this amount, if spread over the period of repayment, the total commitment for the company comes to about 21 per cent. which is much lower than the prevailing market rates. Therefore, he submitted that the cost of fund generation can not be considered to be excessive and as such he stated that the inspector was convinced of the explanation given by the company. He also added to state that these payments had to be made at the behest of Peerless and the company had no option but to do so.
(k) Annual reports : Referring to the annual report of 1996-97, Shri Sarkar, drew our attention to various qualifications subject to which the auditors have certified the annual accounts of the company. He also drew our attention to para. 5 at page 21 of the annual report wherein the auditors have stated as follows : "we further report that in view of our observation in paragraphs 3 and 4 above, we are unable to express an opinion whether the balance-sheet and the profit and loss account together with the notes thereon and attached thereto, give a true and fair view of the state of the company's affairs as at June 30, 1997 and its results for the year ended on that date. The said accounts subject to aforesaid paragraph, give in the prescribed manner the information required by the Companies Act, 1956 and proper books of account have been kept as required by law". This qualification, according to Shri Sarkar is a disclaimer and such a disclaimer by the statutory watchdog is something which has to be taken a very serious note of as it reflects that all is not well with the affairs of the company. He also submitted that the various qualifications on which the auditors have disclaimed the accounts show that the entire accounting system is in a mess brought out by the mistakes and mishandling of the financial affairs of the company by the management. Therefore, he submitted that the report of the auditors itself would justify the removal of the present management.
19. Shri Vali also dealt with each and every qualification that has been made in the auditors report for 1995-96 and 1996-97 to state that the claim of the company that there has been a lot of improvement in the functioning of the company in the last three years is not borne out by the annual reports. According to him, the qualifications subject to which the reports have been certified by the auditors, is so alarming that such qualifications cover practically every area of operation of the company. He drew our attention to the qualifications by the auditors (1995-96 report) at 2.6, 2.7, 2.8, 2.10, 2.11, 2.17, 4.7, etc.
He also pointed out to para. 3 of the auditors' report for this year wherein the auditors have made a similar observation by way of disclaimer as they have done in the report for 1996-97. Similarly, going through the report for 1996-97, he pointed out that there have been additional qualifications in this report and as a matter of fact the auditors expressed the view that in view of such qualifications, they were not in a position to ascertain the net-worth of the company.
He also stated that in both the years, the auditors have expressed their inability to comment whether the company is a sick company as per the SICA. Drawing our attention to the notes on accounts in both the reports, Shri Vali stated that the company has not incorporated many transactions in the books of account as being unascertainable. Thus, the overall position that emerges is that all is not well with the company. Therefore, he submitted that the claim of the company that the affairs of the company are in proper shape is not correct and that it is high time that Government directors are appointed on the board.
20. Shri Ganesh appearing for respondent No. 1 stated that the qualifications made by the auditors have been considered by the board of directors and they have annexed the report in pursuance of Section 217(3) of the Companies Act which is self-explanatory. He submitted that in spite of full explanation to the auditors with the request that instead of disclaimer, the auditors may expressman opinion subject to any specific qualification or reservation, the auditors have disclaimed expressing an opinion. Since, such a disclaimer seems to be on the basis of their apprehension that there could be diminution in the value of certain significant assets, the company got an evaluation of the value of strategic investment through an independent firm of chartered accountants according to whom, the value of the investment and future earning therefrom would be sufficient to insulate the company from any material losses. He further submitted that the company being a multi unit company, the problem relating to coordination and collation of accounts cannot be completely eliminated and the auditors' qualifications/disclaimer cannot be construed to mean that all is not well with the company.
21. Summing up his arguments, Shri Sarkar submitted that MRC is controlling the company from Dubai. He has also appointed his daughter in a controversial manner as an alternate director. He is also exercising all executive powers notwithstanding the fact that he is only a non-executive chariman. He is the master mind behind all the ill deeds of the company and as such deserves to be removed as a director/chairman of the company. According to him, the main culprit for the company going down the drain is MRC who because of his controlling shareholding in the company, is in a position to completely subvert and suppress the will and the professional judgment of the executive members of the board. In case these directors do not fall in line, then, they are removed by MRC and new pliable directors are inducted. According to Shri Sarkar, MRC is the de facto managing director of the company carrying on the affairs of the company in a dictatorial manner throwing to the winds all the democratic norms and business ethics. In support of this claim that MRC is all in all in the company, he referred to volume III page 122 to state that it was MRC who was authorised by the board to sell these shares of DIL and CCL. In the same way, he referred to the other documents (volume I pages 241-247, 253, volume IIA page 227) to show that while some of the resolutions authorise collective action by a committee of directors, many of the board resolutions authorise MRC to take independent decision on financial matters. The circumstances under which many financial transactions have taken place without the approval of the board show that, it is MRC who is the brain behind all these transactions. Relying on Sahasrangsu Sen v. Bhramaputra Fertilizers and Distributors P. Ltd.  81 CWN 82 when the circumstances show that a particular person is in virtual control of a company, there need be no direct evidence to prove the same. He submitted that, many other companies under the control of MRC are in severe financial difficulties on account of his style of management and he also referred to the decision of the Company Law Board in Gammon India Ltd., In re  3 Comp LJ 89 (CLB) wherein the CLB held that taking over that company by MRC would not be in the interest of the company. He also further stated that not only the directors should be removed, MRC, being a director of the company, having failed in his fiduciary duties be directed to compensate the company for all the losses it had incurred in addition to repay whatever he has siphoned off from the company. For this proposition he relied on Markway Bros. Ltd. v. CPN Diesels (7 Australian Company Law Reports 425). Countering the stand of the respondents that the petitioners hold negligible percentage shares in the company, Shri Sarkar pointed out that nominal shareholding is an irrelevant consideration as long as the petitioners satisfy the requirements of Section 399. Relying on Killick Nixon Ltd. v. Bank of India  57 Comp Cas 831 (Bom), he submitted that the petitioners need not allege any personal grievance and that personal prejudice is irrelevant. He also stated that the financial institutions who hold 26 per cent. shares in SWC have supported the stand of the petitioners for removal of MRC from the board by voting against the election of MRC as director in the annual general meeting for 1996 and they also voted against the nominee of the management in the annual general meeting for 1997. Therefore, he submitted that the motive for the petitioners to present the petition is only to safeguard the interest of the company and the public interest.
22. Rounding off his arguments, Shri Diwan highlighted the performance of the company during the period from 1994-95 to 1997-98. According to him during this period the profits of operation grew by 134 per cent., capacity in liquor and beer went up by 210 per cent.; 12 units which were sick have been turned around and are generating profits ; SWC won various awards during this period and that during this period, the company has discharged its liabilities of over Rs. 175 crores. However, he stated that it is a fact that the financial position of the company is critical and precarious. At the same time, during the course of management for the past two years, the company has been generating cash profit of over Rs. 10 crores and the same is being utilised for meeting its liabilities towards the creditors. Due to lifting of prohibition in Haryana and other States, the two breweries set up in these States have also started doing very well generating surplus. Because of high costs, even the improved financial position has not helped the company to the desired results and, therefore, the company has already filed a petition before the Calcutta High Court under Section 391 of the Companies Act proposing a scheme of repayment to its creditors which once it goes through would greatly reduce the financial crisis that the company is facing. He further submitted that the sale of the consumer products division and Calcutta Chemicals Limited for a sum of Rs. 51 crores together with the proposed rights issue of Rs. 60 crores and ECB of Rs. 40 crores would all go a long way in reducing the debt burden of the company. He also stated that MRC has committed to subscribing to all his right shares and also the unsubscribed rights of others also.
The same way, the Jumbo Group of MRC have agreed to give counter guarantee for the ECB. In other words, Shri Diwan submitted that MRC, being the largest shareholder of the company is committed to improve the financial position of the company. Therefore, he pleaded that at this critical juncture when the company is taking all steps on all sides to come out of the debt trap and also to improve the profits of the company, no order that is likely to upset the existing management should be passed. He also submitted that in Section 397/398 proceeding's, the CLB's utmost consideration should be the interest of the company. Since the present management of the company has taken all steps to turn the corner, even assuming that there have been some mistakes in the past, since corrective action has already been taken, no relief as sought for by the petitioners in both the petitions should be granted. Further, he also submitted that since the first petition is a motivated one and the petitioners being employees of the company have been putting a lot of hurdles in the functioning of the company and any relief sought by them if granted would only mean that the petitioners would be achieving something which they sought for an ulterior motive.
He also made a plea that to put an end to the long dispute between the petitioners, in the first petition and the promoters of the company, the CLB should order purchase of the shares of the petitioner by the management group.
23. S.B. Mookherjee summed up his arguments by reiterating most of what he had submitted in his opening arguments. He, referring to page 75 of volume IIA wherein there is a note from Shri Pradeep Mathur, respondent No. 8 that the chairman (MRC) has directed development of an action plan for redefining corporate goals and re-energising the organisation, stated that this shows that MRC is not involved in the day-to-day affairs of the company as alleged and that this note is clear that the averments in the affidavit of Shri Pradeep Mathur that MRC is all in all in the company. He also stated that the income-tax demand for Rs. 192 crores raised against the company has now been set aside by the Income-tax Appellate Tribunal. He also recapitulated various case law to which he had earlier referred and stated that under Section 408 of the Companies Act, there is no scope for removing any existing director.
24. S.N. Mookherjee, advocate for respondents Nos. 1 to 6, while referring to the affidavit filed by respondent No. 6 stated that he is a highly competent professional manager as is evident from his job profile as indicated in the affidavit and that he had no prior connection with MRC and his employment in SWC is purely on account of his professional competence. He is not the puppet of MRC nor is he influenced by the latter, He further submitted that all the acts alleged in the petition relate to periods before his client was inducted into the board. He also stated, referring to Thakur Hotel (Simla) Co. Pvt. Ltd., In re  33 Comp Cas 1029 (Punj) that mismanagement or misconduct of directors during the earlier years is no ground for winding up a company under the just and equitable clause or making an order under Section 397. He also submitted that Shri Srinivasan, respondent No. 8, has filed an affidavit implicating MRC in the present proceedings, while he filed an affidavit before the Calcutta High Court supporting MRC. Therefore, he argued that no reliance should be placed on the affidavit of Shri Srinivasan in the present proceeding's.
25. Shri Kapur, senior advocate appearing for respondents Nos. 45 and 46 submitted that the allegations against his clients that they have been parties to the alleged siphoning off of funds in relation to the Gauhati companies are false. According to him, his clients had rendered legitimate professional services to the subsidiaries of SWC in acquiring shares in these companies and that the entire consideration for the shares was paid to the respective shareholders through cheques and as such the question of siphoning off of funds does not arise.
26. We have considered the pleadings and arguments of counsel in respect of both these petitions. Before we deal with the merits of the cases, it is essential to deal with certain preliminary points raised by both Shri Mookherjee and Shri Diwan. Shri Mookherjee raised an issue whether the two petitions--one under Section 397/398 and another under Section 408--could be pursued at the same time in respect of the same company. According to him, it cannot be done. We are not in agreement with him for the reasons that the statute has bestowed upon the shareholders the right to complain about oppression and mismanagement in the affairs of a company. As long as they have enough material to allege oppression and mismanagement, they have every right to do the same for relief. On the other hand, the Central Government being the custodian of public interest has been empowered under Section 408 to seek appointment of Government directors on the board of a company in circumstances as envisaged in that section. May be that the foundation of both the petitions may be on the same set of allegations, but the relief that could be granted, while in a Section 397/398 petition is wide with far reaching consequences, the relief in a petition under Section 408 is limited to appointment of Government directors.
Therefore, when the statute specifically bestows certain rights on two different sets of persons/entities, both are equally placed to pursue their rights. Therefore, we do not find anything wrong in the two petitions being filed by different persons/entities under different sections of the Companies Act on the same set of allegations. In P.S.Nunawati v. Jaipur Metals and Electricals Ltd.  69 Comp Cas 769 (Raj) relied on by Shri Mookherjee for the proposition that two petitions--one under Section 397/398 and another under Section 408 cannot lie together, it is to be noted that in that case the same petitioner filed both the petitions. First he moved the Central Government under Section 408 and later filed a petition before the High Court. The allegations were common in both the petitions. That is why the court held that a person cannot pursue two remedies simultaneously.
However, in the cases before us, the petitioners are different. Anyway we also find that even though there are certain similar/common allegations in both the petitions, there are yet certain independent/ separate allegations in these petitions.
27. Another objection taken by Shri Mukerjee is that certain other share holders had already filed a suit in the Calcutta High Court on the similar allegations and as such the same allegations should not be gone through by the CLB. He also handed over a chart indicating the commonality of allegations in the present petition and the suit. While we concur with him that multiplicity of proceedings on the same issues should not be encouraged, we find that the petitioners in that suit are different from the petitioners in the present petitions. They have come before us, as already stated in the earlier paragraphs, by virtue of the rights conferred on them by statute. Under these circumstances, we have to perforce deal with these allegations notwithstanding the pending suit. Further; we also note that there are quite a few allegations which are not in the suit that have been included in these two petitions.
28. The most repeated another objection by both counsel for the respondents has been that the shareholders in the first petition hold insignificant percentage of shares and are alleging mismanagement while a large section of the shareholders have no such grievances. This objection, at the outset, we would like to reject on the ground that the number of petitioners being more than 100 qualify under Section 399 to present this petition. Further, in a listed company, if higher percentage of shareholding is insisted upon for filing a petition ignoring the number of petitioners, no petition under Section 397/398 could be filed.
29. Yet another objection is that the first petition is a motivated one and that the same has been filed at the behest of some interested person, i.e., K.R. Chhabria, younger brother of MRC, who is inimical to MRC and for achieving certain collateral purpose inasmuch as the relation between the company and the petitioners is that of master and servant. Shri Diwan also produced some documents to show that the cost of litigation in respect of the first petition was being met by someone else other than the petitioners, who are not in a position to finance the same. We do agree that the motive behind a Section 397/398 petition is an important aspect to be taken into consideration, but that would arise only when we examine the reliefs sought to be obtained. If the relief sought and granted would be fulfilling the achievement of an ulterior objective, notwithstanding the merits of the case such relief could be refused. Whether a petition is motivated or not depends on the content and nature of allegations. Unless and otherwise the allegations are examined with reference to the defence taken, it would not be possible to find out whether the allegations are motivated or not. From the allegations made it is seen that they are all based on occurrence of certain events which have been confirmed by the respondent-company also in its reply. The only difference between the allegations and the defence is that according to the petitioners they are all acts of mismanagement while according to the respondent-company they are all acts of business decisions. May be that, with an ulterior motive/ wrong perception, the petitioners might have brought these allegations before this forum; but as long as the facts alleged are real, we have to examine them. In Bellador Silk Ltd., In re  1 All ER 667 (Ch D) on which Shri Mookherjee relied on to state that the motive for filing a petition should be kept in mind, the court dismissed the petition with the following observation (page 672): "A petition which is launched not with the genuine object of obtaining the relief claimed, but with the object of exerting pressure in order to achieve a collateral purpose is, in my judgment, an abuse of the process of the court". In that case the plaintiff, while in the witness box made a statement that he was not interested in the relief sought in the petition but was interested in the loan given by him to the company, repaid. That is why, the court made the above observation. In the present case, the petitioners in the first petition are vehemently demanding the grant of the reliefs sought in the petition.
30. Shri Anil Diwan cited a large number of cases to state that when proper materials have not been placed on the allegations of fraud, etc., such allegations should not be looked into and the respondents should not be made to disprove the allegations. This being an established principle of law, we do concur with him. But we find that in spite of this objection, he has produced before us enormous material with a view to disprove the allegations of fraud, etc. In view of this, while noting down his objection, we do not propose to ignore giving findings on those allegations on the basis of the material produced before us. Shri Diwan also stated, with reference to the additional affidavit filed by the petitioners in the first petition with which certain fresh documents were filed and also to the documents attached with the rejoinder to the second petition, that we should not take cognizance of the same as the petitioners should make out a case on the basis of facts transpiring on the date of the petition for winding up, of the company on just and equitable grounds. For this proposition, he relied on Kalinga Tubes Ltd. v. Shanti Prasad Jain, AIR 1963 Orissa 189 Lundie Brothers Ltd., In re  35 Comp Cas 827 ;  2 All ER 692 (Ch D) and Fildes Brothers Ltd., In re  40 Comp Cas 908 ;  1 All ER 923 (Ch D). We are in full agreement with the said submissions. We ourselves have held in some other cases likewise. But we feel that the situation in the present case is different. We have gone through the documents filed with the additional affidavit in the first petition and also the documents in the rejoinder to the second petition. We find that no new pleadings have been taken in these affidavits or documents filed to allege new facts. They are all found to be related to the allegations already made in the petitions and by producing the documents, the petitioners have attempted to substantiate the earlier allegations.
31. We have given serious consideration to the various allegations made in these two petitions. On an overall examination of the pleadings and arguments which we have already elaborated in detail, we find that while in respect of some of the allegations, enough materials have not been placed before us to come to a conclusion either way, in certain matters the materials placed before us show that the allegations have not been proved and in some cases, further examination is warranted. In some cases, we have agreed with the petitioners. We shall now deal with each of the main allegations.
(a) Gauhati companies : The stand of the petitioners in the first petition is that these companies are paper companies with negligible intrinsic worth. There is no mention about these companies in the second petition. However, during the arguments, Shri Sarkar doubted the existence of these companies and alleged that through the purported investment in these companies, money has been siphoned off. The Central Government, vide annexing the report of the ED and the Department of Revenue has taken a stand on the basis of these reports that these companies are paper companies inasmuch as no books of account are found in the registered offices of these companies. Shri Sarkar also placed before us certain letters addressed to these companies having been returned as "not known".
Shri Diwan, not only produced before us the incorporation certificates of these companies but also the prospectus issued by them and photo copies of the Gauhati stock exchange quotations to show that at the relevant time the shares of these companies were being quoted in that stock exchange. In addition, he also produced copies of the income-tax assessment orders in respect of some of these companies as follows : It is not only surprising but also distressing to note that the Department of Revenue should have made a report that these companies are paper companies while another wing of the same Department has assessed these companies for income-tax purposes which fact the Department of Revenue should have taken into consideration before sending its report on February 7, 1997, before which date Kamalkal Ltd. order had been issued and the proceedings in respect of the other two were pending with the assessment authorities. Further Shri Sarkar placed before us a list of creditors which has been filed before the Calcutta High Court in connection with an application made to that court by the companies under Section 391 of the Act wherein the names of some of these companies appear as creditors.
With this overwhelming material placed before us on the existence/functioning of these companies, we have to reject the allegation that these companies are paper companies or they, are not in existence.
In regard to the allegation of siphoning off of funds through the alleged investment in these companies, the second petition does not contain any such allegation. In paragraph 2.78 of the second petition, on the basis of a report in the Financial Express dated July 1, 1996, regarding payment of Rs. 50 lakhs to N.C. Jain by the company, the Regional Director was asked to report and in the report sent by him, he has stated that even though Shri Jain was a member of the Gauhati Stock Exchange, no transactions had been booked in his name and that the company had intimated that the amount of Rs. 50 lakhs paid to him as advance was later adjusted against a total outlay of Rs. 18 crores for purchase of certain investments. The allegation of the Central Government in this regard, as seen in the petition, is that the substantial amount had been paid to Shri Jain who is not a trading member of the exchange. Later, in the rejoinder, the Central Government had relied on the report of the ED and the Department of Revenue and during the hearing, Shri Vali argued that through the purported investment, a substantial amount has been routed through hawala. The petitioners in the first petition have complained that these investments have been made without the board's approval and that such investments are in violation of various provisions of the Act and that by dubious means, the funds have been siphoned off in favour of MRC. However, no particulars to substantiate the allegation of siphoning off of funds are found in the petition. After the Central Government filed its rejoinder, counsel placed heavy reliance on this and alleged that the investment was a route to siphon off substantial funds of the company.
We have two issues to examine in regard to this allegation. One is whether any investment was actually made and the second is whether the same was a smoke screen designed to siphon off the money. The stand of the company is that the shares were acquired from a large number of shareholders ranging from 1,025 in respect of Manipur Pharmaceutical Limited to 2,051 in the case of Das Apartments Ltd. and as such the question of siphoning off of funds does not arise.
On our directions to file complete details in respect of these investments, the company furnished certain details from which it is seen that a sum of Rs. 85.65 crores was invested in the shares of these companies from July, 1993 to December 1994, at an average price per share ranging from Rs. 19.96 in respect of Das Apartments to Rs. 22.25 in respect of Raksha Audio Limited. The total number of shares thus purchased was 383 lakhs of the face value of Rs. 10 each. The total premium paid over the face value was Rs. 47.36 crores. The payment of this premium, according to the company was in line with the stock exchange quotations, the details of which have been furnished. In these circumstances, if the money has been siphoned off, according to us, it could have been possible in only two ways. The fact of purchase of shares is not disputed by anyone and as a matter of fact that is the foundation of this allegation.
Since the shares are reported to have been bought from a large number of shareholders, the one way of siphoning off the funds could be to pay a much higher price than the quoted rate with the understanding that the difference between the quoted rate and the amount paid is paid back and the other way is to show as if a larger number of shares had been purchased than what was actually purchased and diverting the difference. In any event, there is no possibility of the entire amount of Rs. 85 crores being siphoned off. If we examine the rates at which the shares were bought, they are fairly comparable to the stock exchange quotations assuming that the quoted rates had not been artificially inflated just before acquisition of the controlling interest as it sometimes happens. As far as the number of shares purchased, the statutory auditors of the subsidiary companies which have invested in these shares have stated that the certificates were not available for physical verification as they were reported to have been sent for consolidation. As far as the prospectus issued by these companies as produced during the hearing, each of these companies had gone in for public issue of six lakhs shares each during the last quarter of 1989 except Pulp Products and Gulmohar which went in for public issue, in January, 1990. The subsidiaries of SWC acquired shares in these companies during the period from July, 1993 to December, 1994. Since the number of shares acquired in these companies ranges from 30 lakhs in case of Kamalkar and 100 lakhs in respect of Pulp Products and Manipur Pharma, these companies should have issued additional shares between the dates of issue of shares as indicated above and the dates of acquisition of the shares. No documents have been produced before us to show that these companies have gone in for additional issue of shares to enable investment in such large number of shares. When in spite of the objection that the petitioners had not furnished full particulars on the allegation relating to these two investments in these companies, SWC chose to produce some details but not in full.
Coupled with this explanation of the company that these transactions had not gone through the floor of the stock exchange to avoid brokerage is not convincing. While we refrain from taking cognisance of the reports of the ED and the Revenue Departments which are based on certain statements made by Shri Narasimhan from which he had later retracted that substantial money had been siphoned off especially, when the investigations are still going on, we feel that there are certain circumstances which cloud these transactions.
Substantial money has been invested in a short span of about 18 months. None of them is in the core area of business of this company. The businesses of some of these companies are not in line with the plan of action envisaged in "Vision 2000". There is commonality of Shri Jain being on the board of all these companies at the time of acquisition of the shares. These transactions have not gone through the floor of the stock exchange. The share certificates are not available for physical verification and from the assessment orders produced during the hearing in respect of three companies, it is seen that they are not in the line of business in which they are purported to have been and which prompted acquisition of the shares of these companies. It is seen from the assessment orders that these three companies have been carrying on the business of investment and sale and purchase of shares. During the hearing, certain information relating to the paid-up capital of these companies was furnished according to which the total paid-up capital came to about Rs. 29 crores. Further, we do not find any board approval for such substantial investment, even though the board has noted these companies becoming subsidiaries of SWC in their meeting held on May 26, 1994, and August 25, 1994, and that this fact has also been incorporated in the directors' report for the year ended March 31, 1994. It is also worthwhile noting that the board of directors in their 567th meeting held on December 16, 1996, vide Item No. 32, have noted that the investments made in these companies had not been placed before the board for their approval and that the board was of the opinion that the investment was commercially a bad decision apart from irregularities. Further, the same had been discussed in the next board meeting on February 21, 1997, where the board had expressed its concern over the company's investments in the share capital of these six companies and that appropriate audit be carried out. Thus, notwithstanding the various arguments in defence of the investment, the board itself has now noted, after filing of this petition that all is not well with the process of investment in these companies. Further, the reports of ED and the income-tax authorities even though are not conclusive evidence since they are still in the process of the investigation, have sown a seed of doubt in our mind about the genuineness of these investments. Further, even though more than one counsel was present for respondents Nos. 45 and 46 on many of the days of the hearing, these respondents through whom the shares were purported to have been purchased, did not file any reply to the petition in which allegations have been made against them. Only when counsel for these respondents opened his arguments, we advised him that these respondents should file their replies, which they did after the conclusion of the hearing on the petitions. The replies of these respondents have not assisted us much to come to a conclusion in one way or the other on the allegations relating to the Gauhati companies. While we concur with Shri Mookherjee that on the basis of suspicion and doubt, no prima facie findings should be given, we feel that in the interest of the company itself, the matter has to be gone into in detail, as the board of the company itself has felt so in the board meetings as indicated above. We shall be giving appropriate directions on this matter later.
(b) Purchase of software from Dunlop : On this allegation which does not talk of siphoning off of funds, the company's explanation is most unsatisfactory. From the company's narration of the events we have no doubt that the entire transaction between Dunlop, SWC and Jumbo has been done for the only purpose of window dressing the accounts of SWC and Dunlop. This has been possible only because all the three entities are under a common control. In the fast changing software field, which are mostly customer-oriented, we fail to understand how SWC could have agreed to purchase software from Dunlop for Rs. 30 crores (the cost of acquisition by Dunlop as per the ED report is Rs. 3 crores) and within a short period, sold to a trading company for Rs. 47 crores. For a software, as far as our knowledge goes, the price of Rs. 30 crores/Rs. 47 crores is astronomical. The very fact that Jumbo had returned the software after some time, that is after the financial year is over, makes us conclude that the entire transaction was purely for the purpose of showing a rosy picture about the performance of Dunlop and SWC. While window dressing, to an extent, is practised by many companies, the extent to which SWC has gone in this is unheard of While SWC has shown a handsome profit of Rs. 17 crores in this uncompleted deal, the extent of profit shown by Dunlop is not known as it depends on the acquisition cost. May be, as claimed by SWC, it may be able to find an alternate purchaser at the same or a higher price but the transaction as such does not bring laurels to the management as this is definitely a grave act of manipulating the accounts of the company to show artificial profits, having its own adverse effect against the interest of the company as such attempt would also have taxation implications.
(c) MDPL shares : The allegation of the petitioners in the first petition is that the sale of the shares of MDPL is against the interest of SWC and that by taking credit for the sale SWC has deflated the losses incurred. According to the Central Government it is not clear whether SWC has received the sale consideration. There is no allegation in either petition that any money has been siphoned off or diverted. We find from the details furnished by Shri Diwan, that the company has adopted an innovative, tax plan measure together with recording considerable profit on the transaction. At the same time, it has also ensured that it continues its control over this so called crown jewel. The whole transaction has gone through; after proper appreciation of the effects of the transaction and is found to be legitimate and beneficial to the company. Under these circumstances, we are satisfied with the explanation given by SWC and its counsel that the, interest of SWC has not at all been affected by this transaction. In case SWC has not received the full consideration for the shares, it should ensure that the same is received at the earliest which will go a long way in discharging its outstanding dues.
(d) GTC deal : In the allegation in this regard in the first petition it is stated that the deal is unholy and that probably money has been siphoned off. We find from certain documents handed over by Shri Diwan during the hearing, SWC issued a letter to GTC on September 8, 1993, agreeing for GTC's advertising the brands of SWC on fast moving brands of cigarettes of GTC at the rate of Re. 1 per pack on which stickers highlighting the brands of SWC would be fixed. The arrangement was to be for a period of two quarters ending December, 1993 and March, 1994. The payment was to be on the basis of a certificate duly audited confirming despatches. There were certain other terms and conditions in that letter. GTC accepted the offer vide its letter dated September 16, 1993. We also find that there have been certificates from auditors dated January 6, 1994, and April 8, 1994, on the dispatches made during these two quarters.
From the legal notice, it is seen that GTC has produced auditors certificate without actually having dispatched the packets with stickers. In other words, it appears that by producing false certificates, GTC seems to have obtained this amount. GTC does not seem to have refuted the outstanding. Under these circumstances, GTC being one of the leading cigarette companies, not established to have any link with MRC or other company executives, it is not possible for us to convince ourselves that the money has been paid for the purpose of siphoning off funds. It only shows that the internal control system and the supervisory system in the company are not at a desirable level. This is quite obvious that SWC came to know of this only after receipt of notice from the Income-tax Department which had conducted a raid on the premises of GTC and that the IT authorities have decided to recover Rs. 4.94 crores as assessee in default from GTC. Now that the company has taken remedial steps, it should ensure that the same is pursued to the logical conclusion. It is not uncommon as stated by Shri Diwan, that for promoting consumer products, various means of advertisements are adopted and the business of SWC being in liquor, perhaps advertisement through cigarette packets was attempted as liquor and cigarette mostly go together. Therefore, we cannot fault the company in resorting to this advertisement, but as already pointed out, the company should have been more vigilant in ensuring that the money paid got its worth.
(e) Advance to Jumbo : It is admitted by the company that a sum of Rs. 4.5 crores was paid to Jumbo Holdings (India) Limited (respondent No. 50) and that it purchased shares of SWC. Whether this amount was an advance paid by SWC to Jumbo for purchase of shares of SWC as claimed by Shri Sarkar or whether it was an investment made in the shares of Jumbo as claimed by Shri Diwan is a matter of fact. From the note of Shri Majumdar, company secretary of SWC at page 135 of volume 2A, it is seen that the intention of paying this amount was for subscription to the shares of Jumbo Industries and Investments Limited (respondent No. 51) (JIIL).
There have been changes in the proposal of shareholdings in this company and from the note it is not very clear what was the ultimate com position of the shareholders of JIIL and when shares were allotted to the shareholders. We do not find any reference in that note to respondent No. 50 inasmuch as according to Shri Diwan, respondents Nos. 50 and 51 are one and the same person as the name of respondent No. 50 was changed to the name of respondent No. 51.
From the said note it is seen that Shri Majumdar had cautioned that various matters relating to JIIL had to be sorted out. While from the note, the intention of advancing Rs. 4.5 crores appears to be towards shares subscription advance, in the absence of details of allotment of shares and the purchase of shares in SWC by JIIL, it is not possible to come to any conclusion whether purchase of shares of SWC by utilising this money could be a violation of Section 77 of the Companies Act. Anyway, should there be any violation, it is for the concerned authorities to take further action in this matter, as violation of provisions of law, per se, is not a ground for grant of relief under Section 397/398. This is what has been held by courts as cited by Shri Diwan. Needle Indus tries case  51 Comp Cas 743 ; AIR 1981 SC 1298 and Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd.  34 Comp Cas 777 (Guj).
(f) Sales promotion expenses: The allegation in the first petition is that there has been a steep increase in the sales promotion expenses from 1989 onwards registering about six fold increase in 1993-94 of which substantial amounts have been paid to sales promoters. It is alleged in the petition that if an enquiry is conducted on the justification for appointment of sales promoters and the benefits received by the company, it would reveal an unholy transaction to defraud the company's funds. In the second petition the allegation has been that while sales promotion expenses increased from Rs. 4.7 crores in 1989-90 to Rs. 21.8 crores in 1993-94, remuneration paid to sales promoters went up from Rs. 23 lakhs to Rs. 11 crores during the corresponding period. During the arguments, counsel for both the petitioners relied on the report of the ED and the Income-tax Department to state that sizeable amount paid as sales promotion expenses had been received as kickback without bringing the same into the books of account of the company.
We find from the report of the inspector appointed under Section 209A that after analysing the explanation given by the company on the increased amount of sales promotion expenses and comparing the same with the turnover, he had come to the conclusion that there was no abnormality in such higher sales promotion expenses, Same is the position with payment to sales promoters, to whom monies have been paid on the basis of certain agreements, a copy of which is found to have been enclosed with the inspector's report. On the issue whether there have been any kickbacks, we find that certain other authorities have already been looking into this matter and as such we do not propose to make any comment on the same on the basis of certain interim reports filed by these authorities.
(g) Sale of shares of Tezpore Tea Limited : The allegations in regard to this are that the actual consideration was about Rs. 36 crores while only a sum of Rs. 23 crores has been accounted for. In regard to this, it is necessary to refer to a press report annexed at page 269 of volume 1 wherein C.K. Dhanuka who acquired the shares himself had indicated that he acquired the shares at Rs. 205 per share and the inspector's report also confirms that at this rate the total amount comes to Rs. 23 crores. Therefore, we do not find any substance in this allegation of short accounting of the consideration received. As far as the need for sale of these shares, we are convinced with the explanation given by Shri Diwan. In regard to the payment of service charges of Rs. 83.48 lakhs to P.L. Mittal in addition to the payment of usual brokerage to S.S. Dalmia, the stand taken by the petitioners in both the petitions is that payment to Shri Mittal appears to be quite unnecessary and as such the same is not in the interest of the company and the company has squandered its funds. The company has explained that no brokerage was paid to Shri Dalmia for these transactions and that the service charges paid to Shri Mittal was for liaison, finalisation of the entire transaction and as such the same was justified. Here, there is no allegation in either of the petitions that any money has been siphoned off. The payment to Shri Mittal works out to about 4 per cent. of the total consideration received. When the company states that no other expenditure have been incurred other than payment to Shri Mittal in connection with this transaction, in the absence of any material to the contrary, we have to go by the statement of the company.
(h) Payment to subsidiaries : It is an admitted position that a huge amount of money has been paid to subsidiaries both as intercorporate deposits as well as advances. The ICDs stood at Rs. 153.8 crores in 1994-95 and the advances at Rs. 16.4 crores (pages 298/299 of volume B). Up to 1994-95, the company had raised ICDs worth Rs. 410.9 crores (page 319 of volume B). The ICDs raised were at the interest rates ranging from 26 per cent. to 32 per cent. maturing between 90 days to 180 days. The petitioners in both the petitions have raised two issues. One is that the need for lending money to the subsidiaries out of the monies borrowed and the second is that charging a lesser rate of interest to the subsidiaries than the rate at which the money has been borrowed and in certain cases waiving of interest payable by the subsidiaries altogether. Shri Diwan explained that the purpose of lending the money to the subsidiaries was either to acquire new breweries/distilleries through the subsidiaries or to increase the capacity of the manufacturing facilities of the subsidiaries. He further stated that subsidiaries on their own would not have been in a position to raise funds and SWC because of its market standing was in a position to raise the funds. Shri Diwan has shown us the details of growth in the businesses of these subsidiaries in the recent past from which it is seen that these subsidiaries are doing fairly well. Therefore, we do not find any reasonable ground to object to the method adopted by SWC in this regard. Some of the subsidiaries (14) in respect of which there was an amalgamation proposal with SWC pending for a long time, the final sanctions from the respective High Courts have been received recently. Since on requisite sanctions, the amalgamation would take effect from the appointed elate, the question of charging any interest during the period from the appointed date and the date of receipt of sanction does not arise, as pleaded by Shri Diwan by citing Marshall Sons Co. (India) Ltd. v. ITO  223 ITR 809 (SC), State of U. P. v. Renusagar Power Co., AIR 1988 SC 1737 ;  70 Comp Cas 127, Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd.  59 Comp Cas 134 ; AIR 1986 SC 1. In regard to waiving of interest, we find from the explanation given that after March, 1994, no interest has been waived. In regard to charging of interest on funds given to subsidiaries, there had been no single general practice followed by the holding companies.
In some cases, holding companies charge normal rates of interest on the money advanced to subsidiaries and in some cases no interest is charged. Whether to charge interest or not is purely a business decision inasmuch as both subsidiaries and the holding company are always considered to be a single group. However, this is applicable only in case where the subsidiaries are wholly owned subsidiaries.
When a subsidiary is not a wholly owned subsidiary, then the question of either not charging the interest or waiving the interest does not arise. From the details furnished we are not in a position to know as to how many subsidiaries which are not wholly owned by SWC have been lent money. In case the company has not charged adequate rate of interest on loans given to subsidiaries which are not wholly owned or if the company has waived interest in respect of these companies, SWC should take immediate remedial action to ensure that adequate rate of interest is charged and interest waived is recovered.
(i) Payment to Raj Laminates, Bhalotia Niagra : On an overall assessment of the allegation and the explanation given and taking into consideration the overall cost of borrowings spread over a period of time, we do not find that the payment to these entities should be either considered as abnormal or a way of siphoning off funds of the company as no details supporting such alleged siphoning off have been furnished by the petitioners.
33. There are yet a few other allegations which were passingly referred to by counsel. (a) One relates to purchase of high cost items like jewellery, etc. for a large amount by the company/its subsidiaries.
Shri Diwan explained that being a multi unit large company, occasions arise for giving some gifts to customers, suppliers, visitors, etc., and such practice is normal in all large corporate entities. Other than advising the company not to incur huge expenditure on this practice in future, we have nothing else to say on this allegation. (b) Another was treating a part of the sales promotion expenses as deferred revenue expenses. According to Shri Diwan, since substantial amount of expenditure was incurred to promote certain brands, the benefit of which would accrue over a period of time, the company decided to treat such expenditure as deferred revenue expenditure to be Charged in the profit and loss accounts over a period of time. When and how an expenditure should be treated as a deferred revenue expenditure, there are accounting guidelines and it is for the statutory auditors to examine this issue. (c) Another allegation related to non-competition fee of about Rs. 10 crores paid while acquiring two breweries. We have come across in some cases before us, when a business is acquired, the consideration is split into two segments--one is for the business taken over and the other for non-competition fees. This, we were given to understand is for the purpose of some tax benefits in the hands of the seller. As long as the total consideration is not abnormal or not related to the worth of the business taken over, which has not actually been alleged in the petitions, we do not give any adverse findings on the same. (d) In the first petition, there is an allegation that, when prohibition was being introduced in Andhra Pradesh, the company unwisely invested about Rs. 15 crores to set up a brewery in that State. Shri Diwan, furnished us details to show that, after prohibition was lifted recently, this unit has been doing extremely well. We have seen, in the recent past, many State Governments having changed their prohibition policy often and the fortunes of liquor business depend on the policies adopted by these State Governments. As long as a decision of the company to establish a new unit is bona fide, we cannot find fault with the management in taking a business risk, which in any way, in this case, turned out to be for the long-term benefit of the company.
34. Having examined the preliminary objections and the allegations in detail, we shall now examine the reliefs sought. In the first petition, among various reliefs sought, Shri Sarkar laid more stress on the removal of the board particularly of MRC and ordering an investigation into the affairs of the company. On our repeated query to Shri Vali, whether the Central Government, being a supporter of the first petition, also supported the stand of Shri Sarkar on the relief, his answer, instead of being direct, initially was that we should direct the Central Government to appoint eight directors on the board so that it would have majority on the board. Later, he submitted that in view of two nominees of the CLB and the nominee of the financial institutions being on the board, it would suffice if we allow the Central Government to appoint five directors on the board. His stand was that mere appointment of a few directors by the Central Government would not suffice as without being in the majority, they would not be in a position to safeguard the interest of the company.
35. Now let us consider the question of supersession of the board. When the petition was filed, there were ten directors, all of whom have been impleaded in both the petitions. Two whole time directors and two part time directors have already resigned. The present composition of the board is MRC, Shri Venkatesan, Shri Narasimhan, Shri Jain, Shri Rao and our nominee, Shri Hazari. Shri Ravi Jain was inducted into the board sometime in April, 1995, and most of the allegations in both the petitions relate to the period before he joined the board and further there are no direct allegations against him in either of these petitions. From his bio-data we find that he is a professional manager having varied experience. Nothing has been produced to show that he has been inducted into the board for any other reason than his professional experience. Shri Venkatesan was inducted into the board after filing of these petitions even though he has been coming and going as a director from March, 1990, onwards. P.J. Rao joined the board in November, 1995, and his are credentials as professional manager is not in any doubt.
Shri Pandit, against whom allegations have been made that in spite his being the nominee of the financial institutions, he never protested against any of the alleged acts of financial mismanagement and that he toed the line with the board, is no longer a member of the board as he was not elected in the annual general meeting held recently. Thus, there are only two directors presently on the board, namely, Shri Narasimhan and MRC against whom allegations can be established warranting action. Therefore, the question of supersession of the entire board does not arise.
36. According to the petitioners, the entire financial affairs of the company are being looked after by Shri Narasimhan in accordance with the dictates of MRC, mostly with a view to siphon off the funds of the company. We find that he has not filed any affidavit of his own (he has filed an affidavit on behalf of the company at the initial stage), nor was he represented by any counsel. As the director in charge of finance, if any financial irregularities are found in the affairs of the company, he has to shoulder the responsibility.
37. In regard to MRC, the main grouse of the petitioners in the first petition is that being in control of the single largest block of shares in the company, MRC has been managing the affairs of the company through remote control with the submissive role played by the executives of the company and in the process he has been able to siphon off a large amount of money. This allegation raises two important issues. One is the right of a shareholder having the largest percentage of shares in taking part in the affairs of a company and the other is the nature of such a role.
38. All over the world, more particularly in India, it is an undisputed state of affairs that the largest shareholder, with variation in degrees, whether in the board or not, does have a commanding say in the management of the affairs of a company. Such a role could be either direct or indirect. Such a shareholder is always in a position to influence the composition of the board and the board mostly, if not always, gives utmost consideration to the wishes of such a shareholder.
It is irrespective of the fact whether the company is professionally managed or not. This is a position of reality and we should not shy away from recognising the same. In other words, no one can complain that the largest shareholder is playing a major role in conducting the affairs of a company. This is perhaps one of the reasons that now there is a clamour for evolving a code on corporate governance. Till such a time an appropriate code is evolved, we have to carry on with the present style of management.
39. Having said that the largest shareholder cannot be shut from having a major role to play in the affairs of a company, we hasten to add that such a right or privilege cannot be used to subvert the interest of the company or for the purpose of enriching himself. There has to be absolute transparency whatever he does and in whatever manner he is in a position to influence the decision-making process. In the present case before us, MRC is undoubtedly controlling 39 per cent. shares in the company. In spite of the contention of Shri Mookherjee, counsel for MRC, that there has been delegation of powers in the company and that MRC cannot be singled out to hold that he is controlling the affairs of the company, no one can deny the fact that his control over the company is all pervasive as is evident from page 280 of volume B wherein the company in its reply dated September 22, 1995, to the inspector has stated : "Though, the routine day-today administration of the company is under the supervision and control of the board of directors and such powers are exercised by the executive directors, but in the greater interest of the company, the supervision, control and guidance for the chairman is an integral part of the overall management..... The group chairman, in the greater interest of the company is visiting India more frequently as compared to earlier years to exercise along with the team of directors, greater control over the affairs of the group". Anyway as we have already pointed out, his active involvement cannot be held against him. The only enquiry we have to make is whether through such a control he has acted in a manner which is against the interest of the company or by acting so, he has benefited himself either monetarily or otherwise at the cost of the company. One aspect we would like to observe with regard to the transparency in the affairs of the company is that a perusal of various minutes of the board shows that the minutes are recorded in an extensive manner on various aspects of the affairs of the company and as a matter of fact even decisions relating to subsidiaries are being taken by the board of SWC. Of the various acts of mismanagement as alleged in both the petitions, some of them are found to have been discussed in the board meetings and decisions reached. How ever, the notable exceptions are the decision to invest in the Gauhati companies and raising of ICDs. From the quantum involved in the investments and borrowings, the raising of ICDs and lending to subsidiaries, we are unable to convince ourselves that such things could have happened without the knowledge and the approval of MRC.There is yet one other allegation which we have held may require further probe is regarding sales promotion expenses/commission and alleged kickback arising out of the same. In the absence of clear indication as to the division of responsibilities relating to sales promotion--whether delegated to departmental heads or individuals on the board, we are not in a position to pinpoint, even assuming there have been kickbacks, this allegation on MRC. In other words, we do not have sufficient materials to establish that MRC has utilised his commanding share controlling position to either act against the interest of the company or to enrich himself at the cost of the company. A person deserves to be removed as a director if it is established that he has misused his fiduciary position as a director or he is guilty of fraud, misfeasance or breach of trust. While certain doubts have been raised against the conduct of MRC, nothing conclusive has been established. In this connection, the decisions of courts in Omar Salay Mohamed Sait v. CIT  37 ITR 151 (SC) and Dhirajlal Girdharilul v. CIT  26 ITR 736 (SC), as cited by Shri Diwan become relevant, wherein the courts have observed that a tribunal should not base its findings on suspicion, surmises or conjectures or it should not act on no evidence. Further, we, note that he has undertaken to subscribe not only to his entitled rights shares in the proposed issue but also has undertaken to subscribe to all unsubscribed shares. In addition, he has also undertaken to give, through one of his companies, corporate guarantee for the ECB to be raised. This indicates his commitment to the company and in the absence of any conclusive proof of his having siphoned off funds of the company, we do not consider it appropriate to remove him from the board. Should the enquiries which are in the process implicate him conclusively, the law will take its own course.
40. As far as the other prayer pressed by Shri Sarkar that an order of investigation should be made, any such order has to be with reference to our findings on the various allegations made in the petition. In respect of each allegation, we have given our findings. These findings are based on materials placed before us. May be that an investigation may throw better light on some of the allegations, but as held in Mohta Bros. (P.) Ltd. v. Calcutta Landing and Shipping Co. Ltd.  40 Comp Cas 119 (Cal) cited by Shri Diwan it would not be proper to order a roving enquiry. Anyway there are only two allegations which may require further probe. They are the investment in the Gauhati companies and the other is the alleged kickback in payment of sales commission.
In regard to both, there are investigations being conducted by specialised agencies. We do not propose to add one more agency to do the same investigation.
41. Now the issue is whether any other order is required to be passed on the first petition and whether there is any scope for passing any order on the second petition. Even though, we have already indicated our view on the major relief claimed in the first petition, viz., supersession of the board, removal of MRC from the board and ordering of investigation, we cannot hold that this petition is devoid of any justification for passing appropriate other orders. In addition, we have the prayer of the Central Government for appointment of Government directors.
42. The first petition is a composite petition under Section 397/398.
From the pleadings and as rightly pointed out by Shri Mookherjee, there are no allegations in the petition which can be classified to fall in the general nature of acts of oppression against members of the company. Practically every allegation relates to purported acts of mismanagement particularly in the area of financial affairs of the company. In other words, this petition is essentially a petition under Section 398 and as such the decisions in some of the cases cited by counsel for the respondents which related to petitions under Section 397 wherein the courts have held that there is a need to establish that there are grounds for winding up on just and equitable grounds do not apply to the present proceedings before us. In view of this, we restrict our scrutiny only to the provisions of Section 398. As per Section 398(1)(a), the complaint has to be that the affairs of the company are being conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interest of the company. If the CLB were to come to such a conclusion then it can take recourse to the provisions of Section 402 to mould appropriate relief. The powers under Section 402 are twofold. One is to set right the wrongs committed and the second is to prevent such instances in future. In other words, our order may provide for both corrective and preventive action.
43. In Section 408, the underlying purpose is to effectively safeguard the interest of the company or its shareholders or the public interest by appointment of Government directors with a view to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interest of the company or public interest. This section, thus, provides for safeguarding the various interests as specified in this section and also speaks of the means by which it could be done.
44. Since we are dealing with both the petitions together, we shall examine whether the affairs of the company are being carried on in a manner prejudicial to the interest of the company or public interest or oppressive to the members of the company and if so, how the same could be prevented and how their interest could be safeguarded.
45. It has now been established in various cases, some of which have been cited during the proceedings, that the CLB cannot travel beyond the pleadings in coming to a conclusion on the affairs of a company. We have already given our findings on most of the allegations. While giving the findings, we have skipped earlier from giving findings on two important issues, viz., the auditor's qualifications in the annual reports and the general financial position of the company which is actually the foundation of both the petitions. On some of the allegations, we have not given any conclusive findings. Our final order on these petitions will be based on our findings on these matters.
46. It is an undisputed fact and as a matter of fact a much publicised fact, that the company is in great financial difficulties brought about by the acts of the management during the last few years. Whether this situation has arisen out of financial mismanagement with or without motive or due to circumstances beyond the control of the management or otherwise is a question as to how one perceives the same. For our purpose, we do not propose to enter into this controversy other than recognising the situation that the company is in dire financial difficulties. But for its being in the liquor business and its past market standing, we are doubtful whether the company could have survived at all. We are making this observation, as it is in the knowledge of every one in business circles that certain companies, after the liberalisation process started in 1991, unmindful of the financial implications, embarked upon substantial expansion/diversification on all fronts and after some time failed, resulting in even the core business in which they were initially engaged coming to a halt. Even though Shri Diwan strenuously argued with various contemporaneous records/reports that the reason for the company being in financial difficulties was on account of its failure to mobilise long-term low cost finance due to reasons beyond the control of the company and that the ICDs taken as bridge finance at high cost could not be liquidated due to investment on acquisition of new entities, and that failure of business decisions cannot be a ground for relief under Sections 397/398 and 408, we feel that all has not been well with the financial management of the company. In spite of the tall claim made by the company through elaborate pleadings; we find quite a few disturbing factors. There does not seem to have been any transparency in mobilising such huge ICDs/loans or in giving loans and advances to the subsidiaries. This is evident from the minutes of the board meeting held on January 24, 1996, where the board has decided not to ratify the ICDs accepted or given. In other words, the company has accumulated a huge debt without the knowledge and approval of the board. While acceptance of high cost short-term funds is normally resorted to for working capital needs, it is rather surprising that the company should have mobilised such huge funds of hundreds of crores of rupees for long-term investment purposes. No doubt, there are some valid reasons for doing so as explained by Shri Diwan, yet the amount involved is so high, that we feel such mobilisation of large amount for long term investment is definitely against all norms of financial propriety. The present state of the company is obviously due to the ambitious plan of the company to reach the height of success in the shortest possible span of time, but unmindful of the cost it has to pay. Further, there has been heavy turnover of directors on the board during the last few years. In such a large company like SWC which is a multi unit, multi product company, continuity of directors is a must and this type of turnover of directors is highly undesirable.
47. Another disturbing factor is the qualifications made by the auditors in the last two annual reports. The nature and contents of the various qualifications, according to us, fully justifies the auditor's disclaimer. A balance-sheet is a formal agreement of facts and figures in an intelligible manner, showing the total value of assets owned and the total amount of liabilities owed by a business on a particular date so that the net worth of the business may be ascertained. The only media through which the affairs of a company could be appreciated by any one is the annual report of the company comprising the directors' report, balance-sheet and the profit and loss account- According to the auditors, many of the assets were not ascertainable nor the liabilities and a perusal of the qualifications shows that such unascertainable amounts run into crores of rupees. May be as suggested by Shri Ganesh, due to the largeness and the complexities of the business of the company, collation and collection has become difficult, but in times of communication revolution, we cannot accept this excuse. The company has also indulged in manipulating the accounts to show, artificial profits through fictitious transactions. Further, from the periodical reports oh statutory compliance, copies of which were filed during the hearing, we find that in this area also a lot is to be done.
48. Under these circumstances, what should be our order on these petitions? Shri Diwan and Shri Mookherjee cited a number of cases to show as to under what circumstances the Central Government can appoint directors on the board of a company. S.N. Mukherjee, counsel for respondents Nos. 5 and 6 went on further to state that past and concluded, transactions cannot be a ground for granting any relief either under Section 397/398 or under Section 408. As a legal proposition, we are unable to accept the same. One could claim an act either as an oppression or mismanagement only if he comes to know that such act has taken place. If the intention is to oppress by committing an act, the process of commission of the act could never he transparent to enable the person oppressed to seek relief against such commissioning. Similar is the case in regard to mismanagement also.
Courts have held that even a single act of oppression/mismanagement, if it has continuing effect then, such act could come under the purview of Section 397/398. The acts of commission and omission have been going on in the affairs of the company, especially in the matter of financial management and the effect of the same is all pervasive. The existence of the company is under threat due to a large number of winding up petitions. The threat is real notwithstanding the arrangement proposal pending in the Calcutta High Court. Thus we have no hesitation to come to the conclusion that there could have never been a better case wherein our intervention is called for than the present case to safeguard the interest of the company. We, as a judicial body mandated by statute to safeguard the interest of a company, much less a company like SWC, which at the beginning of this order we have stated, is a blue chip company with over 100 years of history, will be failing in our mandated duty if we don't make appropriate orders in these petitions for safeguarding the interest of the company. By safeguarding the interests of the company we would be in a position to safeguard the interest of the members of the company as well as the public interest.
49. During the last two years, after filing of these petitions and on our appointing two of our nominees on the board, not only has there been transparency in the affairs of the company, there have been some checks and balances. Confidence building is the need of the day as far as this company is concerned. The company has proposed a scheme of arrangement to the Calcutta High Court and as per the scheme, the liabilities are to be discharged over a period, of time. The company has also proposed certain measures of raising finance. For all these attempts to be successful, which would put the company back on the rails without any impediment, it is essential that the creditors, lenders and the public at large repose faith and confidence in the management of the company, which unfortunately is at the lowest ebb today. The effect of whatever happened earlier continues as on date and is likely to continue for some more time, which will be against the interest of the company. The main object of Sections 397/398 and 408 is to safeguard a company by suitable remedial measures. Thus, we find that there is every justification to restructure the board of directors of the company so that the interest of the company is safeguarded.
50. This restructuring can be done either under Section 402 or Section 408 or under both. Shri Diwan and Shri Mookherjee cited a large number of cases which were all decided before entrustment of the jurisdiction under Section 408 to the Company Law Board. Before the 1988 amendment came into force, it was the Central Government, on its becoming satisfied that there were circumstances prevailing in the affairs of the company justifying appointment of Government directors, that could do so. However, after the 1988 amendment, the Central Government can only make an application to the CLB, seeking appointment of Government directors and the CLB, may, after making necessary enquiries, if satisfied that there is need to have Government directors on the board of a company, direct the Central Government to appoint such directors.
In other words, presently the Central Government could make appointment of Government directors only on a direction from a judicial body, i.e., the CLB on its satisfaction, after enquiry, that Government directors should be appointed to safeguard the interests of the company.
51. In none of the cases cited by these counsel, are the facts similar to the one in the present proceedings. In South India Viscose Ltd. v.Union of India  52 Comp Cas 247 (Delhi), the ground for setting aside the order of the CLB was on account of the CLB (as a delegate of the Central Government) appointing Government directors on the ground that the management was guilty of contravention of certain provisions of the Act. That is why, the court set aside the appointment stating that the contravention of provisions of law is not a ground for appointment of Government directors. It also held that events of misjudgment or failure of business decisions or imprudent acts will not justify action under Section 408 and that the power under Section 408 is extraordinary and to be exercised sparingly and only when the conditions laid down in that section are fulfilled. In Sakthi Trading Co. Pvt. Ltd. v. Union of India  57 Comp Cas 789 (Delhi), the court held (page 804) "the powers of the Central Government under Sections 408 and 409 are preventive in nature. The powers are exercised in order to see that in future the affairs of the company are conducted in a manner which is not prejudicial to the interest of the company, its members or to the public interest. An order under Section 408 may not be able to cure the illegal or prejudicial acts which may have already been performed by the company and its directors, but it can try and prevent repetition of such acts in future by appointing the directors on the company". In Vinod Kumar v. Union of India  52 Comp Cas 211 (Delhi), the issue was whether the Central Government could have re-appointed Government directors without giving a hearing to the shareholders. The court held that such powers can be exercised only after making such enquiry as it deems fit and that the conditions to be satisfied before making an order, or similar to the conditions which have to be satisfied before the court exercises its powers under Section 397/398. In Peerless General Finance and Investment Co. Ltd. v.Union of India  71 Camp Cas 300 (Cal), the court held that appointment of Government directors in a finance company was without jurisdiction as it was the Reserve Bank of India which could issue directions for regulating the schemes of a financial company. In that case the court also ruled that on speculative findings, no order under Section 408 could be passed.
52. As we have already pointed out, in none of these cases, due to acts of commission and omission, any of the companies involved therein had been placed in a situation as SWC has been placed today. If we examine the way in which the affairs of the company have been conducted bringing the company to a near financial collapse, the ratio in Sakthi Trading Co. Pvt. Ltd.'s case  57 Comp Cas 789 (Delhi) is directly applicable. In that case, as already stated, it was held that an order under Section 408 may not cure the illegal or prejudicial acts which may have already been performed by the company but preventive steps could be taken to ensure that such repetitions do not recur, by appointment of Government directors. In this connection, it is worthwhile to examine whether relief under Sections 397/ 398 and 408 can be granted only if it is shown that there is an element of fraud, misfeasance or breach of trust in the conduct of affairs of the company to bring the same within the definition of mismanagement. In none of these sections, the word "mismanagement" has been used except that the title to Chapter VI of Part IV of the Companies Act under which these sections appear, reads as "prevention of oppression and mismanagement".
All these sections speak of the affairs of the company being conducted in a manner prejudicial to the interest of the company, or to the members or, to the. public interest. Therefore, what we have to examine is, whether, the conduct of the affairs of a company is prejudicial to the interest of the company, etc. The manner and nature of such conducting the affairs, in our view, is not the foundation for grant of relief under these sections. No doubt, in some of the cases, cited by counsel for the respondents, the courts have held otherwise but, such observation might have been with reference to the facts and circumstances of those cases. In our considered view, the only examination that is necessary under these sections, is whether, a case has been made out to show that the affairs of a company are being conducted in a manner prejudicial to the interest of the company, shareholders or the public interest and one way of making out a case is showing that the state of affairs of a company on the date of presentation of the petition is such that the same is prejudicial to the interest of the company and that such state of affairs has been brought about by acts of commission and omission by the directors/company. Should the petitioners be in a position to show that such state has been brought about by acts of fraud, misfeasance or breach of trust, then of course, relief in drastic nature might be called for. Therefore, we are of the view that in addition to whatever grounds the courts have held to justify appointment of Government directors, we may add that when the acts of directors/company have brought the affairs of a company to a stage wherein its existence is under threat due to financial difficulties, then such a situation would definitely be prejudicial to the interest of the company and its members satisfying the parameters of Sections 408 and 398.
53. Thus, we have no doubt that the board should be restructured to safeguard the interest of the company, its members and the public interest. We have very carefully considered as to what should be the structure. Shri Vali vehemently argued that the number of independent directors should be in the majority on the board and he suggested that there should be five Government directors (as against the prayer for eight directors in the petition) in addition to two of our nominees, and the nominee of the financial institution then already on the board to safeguard the interest of the company. Shri Diwan countered the same that when the policy of the Government is non-interference in the corporate affairs, no Government director should be appointed. As a rule, the claim for appointment of Government directors to constitute the majority on the board cannot be rejected and may become necessary in the facts of a particular case. In the present case, we have already held that there is no justification for supersession of the board which amounts to removal of all the members of the board. If the Government directors are to constitute the majority on the board, it means an indirect way of supersession of the present board, which in the facts and circumstances of the case is not warranted as majority Government directors would mean, practically taking over the control of the company. Therefore, we consider that in addition to the five directors already on the board (other than Shri Hazari), we should appoint four more directors on the board, thus, taking the total number to 9. In the present state of affairs of the company, we feel the directors that are proposed to be appointed should be in a position to guide and assist the board in proper conduct of the affairs of the company. Therefore, in the fitness of things, each such directors should be an expert/well versed in one area of what the company is in need of today. According to us it needs experts in the areas of taxation, auditing and accountancy, general business management, and institutional finance.
54. Since we have two petitions before us--one under Section 398 and another under Section 408, we have decided to appoint two directors on the board under Section 398 by virtue of the provisions of Section 402 and direct the Central Government under Section 408 to appoint two directors. The CLB nominees on the board will comprise experts in taxation and business management areas and the Central Government will appoint directors in the areas of audit and accounts and institutional finance. Accordingly, our nominees are Shri Hazari, who is already on the board and who has wide experience in business management and H.Venkatraman former Chairman of the Income-tax Settlement Commission.
The Central Government will appoint two directors in the areas which we have already specified within 15 days from the date of receipt of this order. As far as the tenure of their appointment, we find from the scheme of arrangement proposed by the company before the Calcutta High Court, that the company would discharge its liabilities towards ICDs, etc., within 18 months of the effective date, provided the High Court sanctions the scheme. Therefore the tenure of these directors will have to be initially at least for a period of two years. Accordingly, this period of two years, subject to review later, will commence from the date on which the first board meeting of the company consisting of all these directors is held. (We note that under Section 408, the tenure of Government directors could be up to three years on any one occasion and in exercising powers under Section 402, there is no stipulation on the time limit).
55. Further, in exercise of powers under Section 402, we give the following directions to regulate the conduct of the company's affairs during this period : (1) Notwithstanding anything contained in the Companies Act or the articles of association of the company the total number of directors of the board is frozen at nine including our nominees and the Government directors.
(2) None of the directors shall be liable for retirement by rotation during this period.
(3) After the board is reconstituted as above, the board shall appoint two committees of directors, one to look into the borrowings and investments made in various companies, including the Gauhati companies and the other to look into the entire accounting system to ensure that all the qualifications made by the auditors are rectified.
(4) The board will also constitute two committees, one a management committee and another an audit committee with suitable mandate of responsibilities.
(5) No investment/disinvestment or borrowings/lending shall be made except in the ordinary course of business, without the prior approval of the board.
(6) In addition to the nine directors, the board is authorised to appoint executive directors as may be necessary but while these additionally appointed executive directors will have a right to participate in the board meetings they will not have any voting rights in the board meetings and they need not hold any qualification shares.
(7) The directors appointed by us and to be appointed by the Central Government shall send a collective quarterly report to the CLB and the Central Government on the performance of the company.