Saturday, February 12, 2011

Supreme Court on Tainted Securities

In Varghese Joseph v The Custodian, the Supreme Court was called on to clarify the approach to be adopted in relation to tainted securities under the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992. Although there is not much by way of company law principles of even statutory interpretation to be gleaned from the decision, it is of importance due to the investor friendly approach the Court appears to have adopted.

The appellant was a small investor who had purchased 100 equity shares of Reliance Industries Ltd through a broker. He was living abroad, and despite repeated inquiries, was not told of the status of his shares by his broker. When he made a demand with Reliance for dividend and other consequential benefits like issue of rights and bonus on shares, he was informed that his shares were tainted, and hence he was not eligible for those benefits. When he made further inquiries, he was informed by the share broker that a notice had been sent to him for applying for the certification of the shares, which were tainted by virtue of being in the name of a company which subsequently had become the subject matter of attachment as per the order of the Government of India since it was found to be involved in some scam. As a result, the shares issued by this company required certification by the Custodian. The appellant contended that he had not received this letter. When he attempted to procure the necessary certification from the Special Court, he was informed that the last date for the application had expired, and no certification was now permissible. He challenged this on the ground that he was not aware of this cut-off date, but his challenge was rejected as being without merit. Reversing the decision of the lower Courts, the Supreme held upheld the shareholder’s plea. It observes that the Act should be interpreted in a way “that an honest and bonafide investor is not duped of his hard earned money which he invests by purchasing the equity shares of a company”.


It was obligatory on the part of the Special Court and the Custodian to notice an important fact that when the shares purchased by the appellant were reported to be tainted which was issued through Respondent No.5-M/s. Fair Growth Company by the share broker companies i.e. Respondent No. 4 and 5 and the same was ordered to be attached by the Custodian in view of the Government of India Regulation it was clearly nefarious and dubious activity on the part of the Respondent No.5-M/s. Fair Growth Financial Service Ltd. due to which the unnecessary hassle of certification of the shares issued in the name of M/s. Fair Growth Company became essential. The investors like the appellant herein had absolutely no role in such activity and hence even if the cut off date was fixed by the Special Court for certification of such shares, the same could not have been enforced oblivious of its repercussion on those investors who could not approach the Special Court for certification for reasons beyond their control.

The delay here was of a mere two months and “the Court should have certainly considered the circumstance whether a bonafide purchaser of shares could be denied his due merely on the ground of violation of a cut off date which clearly did not have its existence in the statute and hence had no statutory force”.

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