Listing agreement wasn’t violated when use of proceeds of preferential issue for a different purpose was ratified in AGM; SAT

Case Details: Terrascope Ventures Ltd. v. Securities and Exchange Board of India - [2022] 142 taxmann.com 54 (SAT-Mumbai)

Judiciary and Counsel Details

• • Justice Tarun Agarwala, Presiding Officer & Ms Meera Swarup, Technical Member
  • Saurabhu Bachhawat, Shantibhushan Nirmal & Ms Sneha Ramnathan, Advs. for the Appellant.
  • Suraj Chaudhary, Ms Nidhi Singh, Ms Binjal Samani, Ms Aditi Palnitkar & Ms Moksha Kothari, Advs. for the Respondent.

Facts of the Case

In the instant case, an appeal lied before the Securities Appellate Tribunal (SAT) against the show cause notice issued by the Assessing Officer (AO) alleging that the appellants did not utilize the proceeds of the preferential issue in accordance with the Special Resolution passed under section 81(1A) of the Companies Act, 1956.

The Company made a preferential issue of the 63,50,000 shares at a price of Rs. 25/- per share to 42 persons in accordance with a Special Resolution passed under section 81(1A) of the Companies Act, 1956 on October 1, 2012. The proposed utilization of the proceeds of the preferential issue was informed to the shareholders in the notice of the Extra Ordinary General Meeting (EOGM) held on October 1, 2012.

The proceeds were apparently not utilized for the purposes made out in the notice to the EOGM held on October 1, 2012. The proceeds were utilized by the Company for purchasing shares of other companies and extending loans and advances to other companies and entities, which was not mentioned in the proposed utilization of the proceeds as mentioned in the notice of the EGM.

Subsequently, a Special Resolution dated September 29, 2017 was passed in the Annual General Meeting (AGM) of the Company whereby majority shareholders ratified and approved all acts, deeds and things done by the Company in entering into and giving effect to the utilization of proceeds pursuant to the preferential issue which was in variance to the original objects of the preferential issue stated in the notice of EOGM held on October 1, 2012.

Considering the variation made in the utilization of proceeds, a show cause notice dated April 27, 2018 was issued by the AO alleging that the appellants did not utilize the proceeds of the preferential issue in accordance with the Special Resolution passed under section 81(1A) of the Companies Act on October 1, 2012 and that the variance so made between projected utilization of funds and actual utilization of funds was not disclosed under clause 43 of the Listing Agreement.

The AO after considering the reply and material evidence that came on record held that the variance of the utilization of the proceeds from the preferential issue cannot be legitimized by a subsequent ratification by passing a Special Resolution by the shareholders of the Company

The AO further held that clause 43 of the Listing Agreement requires a Company to furnish on a quarterly basis, a statement to the Stock Exchange indicating the variations between projected utilization of funds and the actual utilization of funds. The AO found that the appellant did not comply with the requirement of clause 43 of the Listing Agreement and did not furnish the statement to the Stock Exchange with regard to the variation in the utilization of funds admittedly made by them.

The company submitted that admittedly, in the Special Resolution of the Company dated October 1, 2012 the proceeds were required to be utilized for various purposes as stated in the said Notice to the EOGM. Subsequently, the proceeds which were utilized for other purposes was ratified by the shareholders of the Company by a Special Resolution.

The shareholders ratified and approved all acts, deed and things done by the Company in entering into and giving effect to the utilization of the proceeds as received in the said preferential issue which was in variation to the objects as stated in the notice of EOGM held on October 1, 2012. Once this Special Resolution dated September 29, 2017 is passed, utilization made by the Company towards purchase of shares and giving loans and advances to other companies and entities becomes the object of utilization of the Company.

SAT Held

The SAT held that once the utilization of the proceeds have been ratified by the shareholders of the Company, the acts and deeds done by the Company becomes valid and authorized and therefore there was no variation of the utilization of the proceeds. The show cause notice alleging variation in the utilization of the proceeds was, thus, erroneous.

Therefore, the impugned orders passed by the AO was quashed.

List of Cases Reviewed

• • Ajay Jain v. Registrar of Companies NCT of Delhi & Haryana 2010 (119) DRJ 545
  • Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India AIR 1963 SC 1185 (para 14) distinguished.

List of Cases Referred to

• • National Institute of Technology v. Pannalal Choudhary [2015] 11 SCC 669 (para 10)
  • Ajay Jain v. Registrar of Companies NCT of Delhi & Haryana 2010 (119) DRJ 545 (para 14)
  • Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India AIR 1963 SC 1185 (para 14).