UNION BEARINGS (INDIA) LTD. vs STATE BANK OF INDIA

- THIS original petition is filed on 30.12.1996 by Union Bearings (India) Ltd. against State Bank of India alleging deficiency on the part of the opposite party in rendering services and resorting to unfair trade practice. Brief facts of the case are :

THE complainant floated a public issue of Rs. 210 lakhs to increase its share capital. The issue opened on 18th October, 1994 and closed on 25th October, 1994. Prior to the said public issue, the complainant entered into a contract dated 2.8.1994 with the opposite party who consented to act as the main "Bankers to the proposed issue". When the issue was over-subscribed, the excess amount was required to be refunded to the public in accordance with the provisions of Section 73 of the Companies Act, 1956. The State Bank of Saurashtra was appointed by the complainant to be the Refund Banker to the issue. As the Banker to the issue, the opposite party received applications for allotment of shares and the money for such allotment. In pursuance of the provisions of the Companies Act and also Clauses 3 and 9 of the Agreement of 2.8.1994, the opposite party was instructed by the complainant vide its letter dated 27.12.1994 to transfer the funds so collected to the Refund Bankers (i.e., State Bank of Saurashtra, Ahmedabad). The opposite party, State Bank of India, failed to transfer the funds collected to the Refund Banker. Instead the opposite party on 31.12.1994 adjusted Rs. 39 lakhs out of the total money collected against existing credit facilities given to the complainant-company. Hence this complaint.

THE complainant''s main case is that the moneys received from the public for shares is required to be kept in a separate account and the amount cannot be diverted till listing formalities are completed, i.e., till 3rd January, 1995. Hence, unilateral action by the opposite party in adjusting the sum of Rs. 39 lakhs out of the total amount collected from the public for specified purposes, is against Section 73(3A) of the Companies Act, 1956; SEBI (Bankers to an Issue) Rules, 1994 and Model Code of Conduct (Bankers to an Issue). Further, the opposite party agreed to lend its name to the prospectus by approving the draft prospectus, led the public to believe that the moneys collected from the public would be used for the purposes mentioned in the prospectus only and in accordance to the law. Subsequently, because of the illegal actions of the opposite party, in withdrawing the share amount the company suffered an unexpected paucity of funds which brought the business to almost a standstill, lost goodwill in the market and suffered mental stress and has sought a compensation of Rs. 550 lakhs.

THE case of the opposite party is that the complainant does not come under the definition of consumer and, therefore, complaint requires to be dismissed. For this the learned Counsel for the opposite parties relied on the case of Morgen Stanley Mutual Fund v. Kartick Das, II (1994) CPJ 7 (SC) = (1994) 4 SCC 2251. Further, on merits it is submitted that the complainant was sanctioned a credit limit aggregating to Rs. 57.50 lakhs in December, 1992. In violation of the agreed terms between the parties, the complainant availed finance from various other sources making it difficult for the opposite party to monitor various credit facilities sanctioned to it. The complainant did not operate the cash credit account regularly and committed gross financial indiscipline. Hence, the opposite party called off their advances vide letters dated 1.12.1994 and 29.12.1994.

SECONDLY , it is pointed out that the total collection public issue by opposite party Bank was only Rs. 39.91 lakhs. They made the inquiries with the refund Banker - the State Bank of Saurashtra which confirmed that enough money was received from the issue to make not only the refund payment orders in terms of SEBI guidelines but also to meet Saurashtra Bank''s Bridge loans of Rs. 85 lakhs granted against the public issue. It is contended that if the amount of Rs. 39.91 lakhs was not adjusted against the credit limit, the account would have become, "non-performing", and their recovery would have been impossible and would have resulted in public loss.

THE issues for decisions are: (a) Whether this Commission has jurisdiction to decide the case? (b) Whether the opposite party has committed any deficiency in service by transferring Rs. 39.91 lakhs from the public issue account to the complainant cash credit limit account? (c) If there is any deficiency in service, what is the loss caused to the complainant? Re. jurisdiction :

As far as jurisdiction is concerned, the opposite party had agreed to act as a "Banker to the Issue" and in that capacity it had received applications for allotment of shares and money for the same purpose from the public and held such moneys in a specified account. For this service, the opposite party had charged a fee. It is, therefore, a service contract and hence this Commission can examine whether there is a deficiency in performance of such service.

FURTHER , the decision rendered by the Apex Court in Morgan Stanley Mutual Fund''s case (supra) would have no bearing on the facts of this case. In that case, in para 26, the Court has specifically held that the definition of the word ''consumer'' is comprehensive and inclusive one so as to include anyone who consumes goods or services at the end of the chain of production and is aimed at covering every man who pays money as the price or cost of goods and services.

IN the facts of that case, the Court held that an application for allotment of shares cannot constitute sale of goods and before allotment of shares the applicant of such shares would not be a consumer. The Court held that the definition of the word ''consumer'' contemplates the pre-existence of a completed transaction of a sale and purchase and that no prospective investor would fall under the Act. Hence, the contention that this Commission is not having jurisdiction to deal with the matter is rejected. Admitted facts : The public issue was closed on 25.10.1994. The issue was over-subscribed by about three times. Allotment of shares was completed and approved by the Stock Exchange on 27th December, 1994. The Stock Exchange gave permission under Section 73(1) of the Companies Act, 1956 allowing the Stock Exchanges to deal in the shares (known as listing formalities) on 3rd January, 1995. The opposite party (Bank) instead of transferring the money collected by it to the Refund Bank, had appropriated it on 31.12.1994 towards liquidating the existing credit limit being enjoyed by the company. This was done after giving a notice dated 1.12.1994 and another notice dated 29.12.1994.

IT is the say of the Bank that the public issue was opened on 18.10.1994 and was closed on 25.10.1994. That the issue allotment was finalised on 27.12.1994. Hence, after the allotment of shares and refund of the over-subscription, the amount received through public issue is the amount of the company and not of the public after allotment of share. The Bank having general lien has rightly credited the amount in the cash credit account of the company, on 31.12.1994, i.e., much after the allotment of shares in order to reduce the liability of the Bank.

IT is the further case of the opposite party, as given in their written statement, that the complainant has, without obtaining its permission, been borrowing money from various sources thus diluting the securities offered against the credit limits, and that the formalities of allotting the shares, and allocating moneys towards the refund payment orders were completed by 27th December, 1994. It is, therefore, argued that the amount collected through public issue by the Bank belongs to the public till the allotment was finalised and that the Bank had acted as a trustee of the public till such period. However, after allotment of shares, i.e., on 27.12.1994, the trust is extinguished under Section 77A of the Trust Act since the purpose of allotment of shares is completely fulfilled. Thereafter, the money is of the company and since the company did not pay the amount owned in spite of notice, the amount was credited on 31.12.1994 to the complainant''s cash credit account. The learned Counsel for the Bank further submitted that the SEBI guidelines provide for suspension or cancellation of registration of the Bankers to the issue in case of any default. If there was real default or breach of Section 73 of the Companies Act, SEBI would have suspended or cancelled the registration. But, that was not done by the SEBI because lead Bank was having the general lien and had a legal right to adjust the outstanding of the company. It is contended that Sub-section (3A) of Section 73 of the Companies Act would apply as long as allotment of shares is not done and the refund of over-subscription is not made. In the present case, allotment of shares was done and the refund of over-subscription was also made. Therefore, Section 73(3A) would not be applicable.

HE submitted that at page 19 of the Prospectus, the complainant admitted that Rs. 147.43 lakhs out of public issue receipts was to be kept as additional margin money for working capital. Since such a provision has been made, he had adjusted Rs. 39.91 lakhs after making sure that the Bank of Saurashtra has necessary funds for meeting liability of refund to the public. Findings:

MUCH reliance was placed on Section 73 of the Companies Act by the learned Counsel for the complainant. In our view, it is rightly pointed out that the said provision would have no bearing on the facts of the present case as it directs the company not to utilised the funds received for share/debenture application for any other purpose till a particular event. Section 73 of the Companies Act, 1956 deals with allotment of shares and debentures to be dealt in on a stock exchange and procedure is prescribed to the effect that company intending to offer shares or debentures to the public for subscription by the issue of prospectus is required to make an application to recognised stock exchange for such permission. Thereafter, till the permission is granted the company is required to keep subscribed amount in a separate Bank account maintained with the scheduled Bank with a specific direction to the company not to utilised the same except the purposes mentioned in Sub-section (3A). The relevant sub-sections are as under : "(3). All moneys received as aforesaid shall be kept in a separate Bank account maintained with a scheduled Bank until the permission has been granted, or where an appeal has been preferred against the refusal to grant such permission, until the disposal of the appeal, and the money standing in such separate account shall, where the permission has not been applied for as aforesaid or has not been granted, be repaid within the time and in the manner specified in Sub-section (2); and if default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees. (3A). Moneys standing to the credit of the separate Bank account referred to in Sub-section (3) shall not be utilised for any purpose other than the following purposes, namely � (a) adjustment against allotment of shares, where the shares have been permitted to be dealt in on the stock exchange or each stock exchange specified in the prospectus; or (b) repayment of moneys received from applicants in pursuance of the prospectus, where shares have not been permitted to be dealt in on the stock exchange or each stock exchange specified in the prospectus, as the case may be, or, where the company is for any other reason unable to make the allotment of share."

Sub-section (3) of Section 73 makes it obligatory that all moneys received shall be kept in separate account until the stock exchange/exchanges grant permission to deal in shares. In this particular case such permission was given only on 3rd January, 1995. Sub-section 3(A) also provided that moneys standing in that account shall not be used for any purposes other than the purposes of, (a) adjustment against allotment of shares; (b) repayment of moneys received from the applicant in pursuance of the prospectus. The opposite party had opened a separate account and all moneys received from the public had been credited to that account. No moneys were withdrawn from that account till 31st December, 1994.

FURTHER , it is rightly pointed out that the company agreed and never objected to square up working capital finance and that is stated in its 8th Annual Report for the year 1994-95. The complainant company, under the heading ''finance'' has admitted as under : "On successful implementation of the project, surplus available out of the funds mobilised through public issue was utilised to square up working capital finance availed from State Bank of India and the account was closed due to non-cooperation from the Bank".

Hence, heavy reliance is rightly placed by the learned Counsel of the opposite party that complainant company had agreed for utilisation of surplus fund mobilised through public issue to square up the working capital finance availed from the opposite party Bank.

HENCE , the conditions contemplated under the aforesaid section would apply only to the company for the amount received for the shares or debentures from the public. In any case the period for keeping the same in a separate account as prescribed under Sub-section (3) is until the permission has been granted by the stock exchange. After obtaining the permission from the stock exchange and issuing refund order or warrants, there is no question of continuing with the Bank account for the subscription received for the allotment of shares/debentures. As stated above, that permission from the stock exchange was obtained. It is, therefore, rightly pointed out by the Bank that the amount lying with the Bank was the capital of the company which could be utilised for adjustment towards credit facility obtained by the company. It is true that the complainant wrote to the opposite party on 27th December, 1994 to transfer all the moneys to the Refund Bank-State Bank of Saurashtra. It is also true that the opposite party did not comply with this direction. But it is also equally true that on 27th December, 1994 itself the allotment of shares was completed and was approved by the Stock Exchange. This money (share capital of Rs. 210 lakhs) has become the money of the complainant company. Since the issue was over-subscribed by about three times, the money available with the State Bank of Saurashtra was enough to take care of the refund. Not only this, the money available with the State Bank of Saurashtra was enough to recover/adjust towards the Bridge loan advanced by the said Bank to meet the costs of public issue. Therefore, the fact that the opposite party did not transfer the money with it to State Bank of Saurashtra had not caused any real loss to the complainant - in the sense that it has not created any constraints on him in refunding the excess collection to the public.

IT is possible that there may be a technical non-compliance with the provisions of Section 73(3A) on the part of the opposite party but we are not deciding that issue. If there is any such technical non-compliance with the provisions of Companies Act, 1956, the right Forums for the complainant to agitate issues are the Civil Court or the SEBI. As far as substantive compliance with the scheme of handling of moneys received from the public for subscription to share capital, under the Companies Act, 1956 is concerned, we reiterate that there has been such compliance by the opposite party. The Bank which is a custodian of public funds has to take care of recovery of its advances, especially where the client is seen to be borrowing from various other sources without the permission of the lead Bank. The amount was transferred to the credit facility account after giving due notice to the complainant on 1.12.1994 and 29.12.1994. The fact that the complainant owed a large sum of money to another Bank. Canara Bank, also has to be noted though this fact may have come to the notice of opposite party at a later date.

FROM the aforesaid discussion, it is apparent that : (a) in the audited annual report of the complainant for the year 1994-95 it has been specifically admitted that funds mobilised through public issue was utilised to square of working capital finance availed from the State Bank of India; (b) secondly, Sub-sections (3) and (3A) of Section 73 of the Companies Act, 1956 give mandate to the company not to utilised the subscription amount until application is made for permission for the shares or debentures to be dealt with in one or more recognised stock exchanges, is granted. Therefore, there is no bar for utilisation of funds; (c) the opposite party informed the complainant on 1.12.1994 and 27.12.1994 for squaring up of working capital finance. In this view of the matter, there is no substance in the complaint and is, therefore, dismissed. There shall be no order as to costs.