Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

August 27, 2000

Court clears the sale of scam-tainted shares

After eight long years, the Custodian can finally show some recovery of scam money, but the judgment while crucial to unravelling the securities scam, remains just a small step

When the Special Court Act was promulgated in 1992 to try offences relating to the Securities Scam, it was to “ensure speedy recovery of huge amounts involved”. Ironically enough, on August 17, 2000, exactly eight years after the Act came into effect (August 18, 1992), Justice SH Kapadia, who now heads the Special Court, delivered a judgment clearing the sale of shares belonging to those notified under the Act.

The sale of shares in order to recover scam monies was the obvious course of action for the custodian. But the issue remained in limbo for eight long years, mainly because the custodian had to run the gauntlet of objections from various accused or those affected by the sale. The main objections were from the Harshad Mehta family and their group of companies and TB Ruia and his companies.

The Custodian had to first seek direction from the Supreme Court to sell the shares. The apex court asked it to draft a scheme which had to be approved by it and the government and then was sent back to the Special Court for detailed direction on implementation. Among the various objections issues raised was whether the shares could be sold at all, because distribution of assets depended on the disposal of all scam-related cases which were still under trial.

Another problem was the respondents claim that the income-tax liabilities had not been crystallised and were also vastly exaggerated (tax liability of Harshad Mehta alone is Rs 1,624 crore), hence the sale of assets was premature. They contended that if the income-tax dues were settled first there would be nothing left to pay other banks and financial institutions. The court pointed out that it had the powers to scale down the claims and these could still subsist allowing the tax authority to recover its dues.

Moreover, as Justice Kapadia points out in his order, the notified parties did their best to delay “the sale of shares on one ground or the other. The Harshad Mehta group, for instance, has declared the maximum assets after the scam, but over the last eight years they have simply refused to furnish relevant documents in connection with the registered, unregistered and benami shares to the court-appointed Chartered Accountants.

Finally, there were objections to the scheme itself. Under the scheme proposed by the custodian, it was to work out the modalities for sale of 6.65 crore shares in its possession. These include unregistered shares (1.89 crore), benami shares (80.74 lakh) as well as registered shares (3.95 crore worth Rs 658 crore).
The disposal committee was to comprise the Custodian as Chairman and representatives of the Director General - Investigation of the Department of Revenue, Managing Directors of UTI Securities and ICICI Brokerage and an official from the Mumbai branch of the Custodian was to decide on the sale which was to be executed by UTI Securities and ICICI Brokerage. The proceeds were to be invested in short-term deposits of nationalised banks.

There were two main objections to this. Firstly, several of the parties argued against UTI Securities and ICICI Brokerage being on the disposal committee. They claimed that since the broking firms were going to sell the shares and their parent institutions to be given preference as buyers, there would be conflict of interest. There is clearly a lot of merit in that argument. However, the Judge decided not to alter the scheme, but instead retained the right to supervise it and intervene in the case of certain categories of shares.

Another argument was that all shares cannot be clubbed together and disposed of in an identical manner. Some were bulk shares which would change the controlling powers of the company management and had to be treated differently. For instance, in the case of Killick Nixon, a company belonging to TB Ruia, it was argued that the sale of shares amounts to transfer of controlling stake and should not fall within the purview of the disposal committee.

Justice Kapadia partly accepted this and laid down some norms regarding lot preparation and sale of bulk shares. Broadly, the court has classified the shares into three parts: routine shares, bulk shares and controlling block. Routine shares are to be disposed of through the Disposal Committee while sale of bulk shares and controlling block of shares would have to be decided by the Special Court. Subject to these provisos, the Disposal Scheme has been approved in toto except that the Scheme shall not be implemented in respect of the registered shares of Apollo Tyres as the matter is pending in the Supreme Court. Notified parties have been directed to open demat accounts within four weeks from the date of judgment and the Custodian asked to release funds for these expenses.

As regards the bulk shares the court has said that shares in excess of five per cent of the paid up capital of a company would be construed as a “controlling block” and sold differently. For instance, Apollo Tyres had argued that the Harshad Mehta group shares constitute 35 to 40 per cent of the paid up capital. The court agreed to ensure that the sale of shares does not lead to the destabilisation of the management and has, hence, reserved the right to reject the highest bid without assigning any reasons.

In respect of controlling shares, like those of Dhanraj Mills in Killick Nixon, the Custodian has been directed to issue a public advertisement inviting bids for purchase of controlling shares. The offer should be for the entire block of shares and the purchaser will be responsible for complying with SEBI’s takeover rules. Justice Kapadia has said that the Court again reserves the right to accept or reject any of the highest offer or bid that may be received by it for purchase of the shares without assigning any reason whatsoever.

After eight long years, the Custodian can finally show some recovery of scam money, but the judgment while crucial to unravelling the securities scam, remains just a small step. The process of notifying persons involved in the securities scam has itself been faulty and arbitrary, but this is probably an issue that will never come up before the court. Also, the sale of shares will only become significant if the Special Court also prioritise cases according to their importance and forces various litigants to drop and settle frivolous litigation aimed at creating confusion and delay.