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CASE NO.: Appeal (civil)  12640 of 1996

PETITIONER: Bhagwati Developers                                              

RESPONDENT: Peerless General Finance & Investment Co. & Ors.         

DATE OF JUDGMENT: 09/08/2005

BENCH: S. N. Variava & Dr. A. R. Lakshmanan

JUDGMENT: J U D G M E N T S. N. VARIAVA, J.

       This Appeal is against the Judgment dated 23rd August, 1995  passed by the Calcutta High Court.   Briefly stated the facts are as follows: The Respondents are an Investment Company.  The Reserve  Bank of India had issued certain directions to them.  The Respondents  had challenged the authority and power of the Reserve Bank of India  to issue such directions.  That challenge ultimately culminated in this  Court.  By the  Judgment reported in (1992) 2 SCC 343 [Peerless  General Finance and Investment Co. Limited vs. Reserve Bank of  India] this Court held that the Reserve Bank of India had authority and  power to issue direction in order to provide stable, identifiable and  monitor able method of operation.  This Court held that such directions  would ensure security to the depositors at all times and also make the  account of the company accurate, accountable and easy to monitor.     This Court held that the directions given by the Reserve Bank of India  were just, fair and reasonable not only to the depositors but, in the  long run, to the very existence of the Respondent Company and its  continued business itself.  One of the directions was that the  depositors’ monies must be shown, in their balance sheets, as a  "liability" instead of "income" as had been done by the Respondent  Company.   As this Court held that the directions issued by the  Reserve Bank of India were valid the Respondents became liable to  transfer Rs. 217.34 crores to the Depositors’ A/c by debiting the Profit  & Loss A/c with Rs. 217.34 crores.  The Reserve Bank of India had, by  a letter dated 11th March, 1992, called upon the Respondents to  prepare its Balance Sheet in conformity with its earlier directions.  It  seems that the Respondent Company did not immediately comply with  this direction but instead took a long period to show the Depositors’  money as liability.    The Respondent Company  issued a notice calling for an A.G.M.  to consider increasing the share capital of the company from Rs. 3  crores divided into 3,00,000 Equity Shares of  Rs. 100/- each to Rs. 35  crores divided into 35,00,000 Equity Shares of Rs. 100/- each.   The  Notice also provided as follows:

"RESOLVED"

(a)     That pursuant to the provisions of Article 182(1)  of the Articles of Association of the Company, a  sum of Rs. 31,08,36,000/- out of Rs.  73,82,87,261.60p. standing to the credit of  Revaluation Reserve as per the Audited Accounts  for the financial year ending on 31st March, 1994,  be capitalized and accordingly, the Directors of  the Company be and are hereby authorized and

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directed to appropriate the said sum of Rs.  31,08,36,000/- to and amongst the members of  the Company whose names shall appear on its  Register of Members on 7th November, 1994 being  the Record Date for this purpose (hereinafter  called "the said date") in proportion to the Equity  Shares held by them respectively in the Company  as on the said date and to apply the said sum of  Rs. 31,08,36,000/- in paying up in full of the  unissued Equity Shares of the Company of Rs.  100/- each at par, such shares (hereinafter  referred to as the "Bonus Shares") be allotted,  distributed and credited as fully paid up to and  amongst such members in proportion of 15  (Fifteen) Bonus Shares for every existing Equity  Share held by them respectively as on the said  date and that the Bonus Shares so distributed  shall, for all purposes be treated as an increase in  the nominal amount of the Capital of the  Company held by each such member and not as  income.

(b)     That the Bonus Shares so allotted shall always be  subject to the terms and conditions contained in  the Memorandum and Articles of Association of  the Company and the Guidelines for Bonus Shares  issued by SEBI.

(c)     That such allotment of Bonus Shares to non- resident shareholders of the Company shall be  subject to the approval of the Reserve Bank of  India under the Foreign Exchange Regulation Act,  1973, if any.

(d)     That the Bonus Shares so allotted pursuant to this  resolution shall rank in all respects pari passu  with the existing fully paid Equity Shares of the  Company and shall also be entitled for the  dividend in respect of the financial year ending on  31st March, 1995.

               xxx                     xxx                     xxx"

                The Appellant, who is one of the shareholders of the Company,  filed a Suit against the Respondents for a declaration that they are not  entitled to issue Bonus Shares out of Revaluation Reserve.   In the Suit  it was prayed that the impugned notice be cancelled.  The Appellant  applied for interlocutory injunction which was refused by a single  Judge.  The Appellants then filed a Letters Patent Appeal.  The  Appellate Court also did not grant an injunction. It only directed that  the resolution passed at the Meeting would abide by the result of the  Appeal.  Accordingly the Meeting was held.  The Appellant attended  and objected to the Resolution being passed. But the Resolution was  passed by a majority.  The Appeal was subsequently withdrawn by the  Appellant with a liberty to file a fresh Appeal.  The Appellant then filed  a fresh Appeal, wherein he applied for an injunction restraining the  Respondents from issuing the Bonus Shares.  The Division Bench of  the Calcutta High Court permitted the Respondents to process all  formalities but not to effect the delivery of the Bonus share scrips  without obtaining prior leave of the Court. This Court refused to  interfere in the Special Leave Petition filed by the Appellant but  directed the High Court to dispose of the Appeal expeditiously.   The  Appeal was then disposed of by the impugned Judgment wherein it has  been held that the Respondents were entitled to issue Bonus Shares

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out of Revaluation Reserve.         The Appellant challenges the power of the Respondent Company  to issue Bonus Shares out of Revaluation Reserve on three grounds  viz. (a) that the Bonus Shares had been issued contrary to SEBI  guidelines, (b) their issue is contrary to the Circular of the Department  of Company Affairs dated 6th September, 1994 and (c) that the issue  could not have been made as it is contrary to Article 182 of the  Articles of Association of the Company.   The SEBI guidelines, which have been relied upon, were clarified  on 13th August, 1992 wherein it has been stated that these guidelines  do not apply to issue of securities by existing private/closely held and  other unlisted companies.  In view of this clarification, we see no  infirmity in the impugned Judgment wherein it has been held that the  SEBI guidelines were not applicable to the Respondent Company.            We are also in agreement with the observation, in the impugned  Judgment, to the effect that the Circular dated 6th September, 1994  does not have any mandatory effect.   These Circulars are merely  advisory in character.           The relevant portion of Article 182 of the Articles of Association  of the Company which has been strongly relied upon reads as follows: "182.(1) Any General Meeting may resolve that any  amounts standing to the credit of the shares premium  account or the Capital Redemption  Reserve Account or  any monies, investments or other assets forming part of  the undivided profits including profits or surplus monies  arising from the realization and (where permitted by law  from the appreciation in value of any capital assets of the  Company) standing to the credit of the General Reserve,  Reserve or any Reserve Fund or any other Fund of the  Company or in the hands of the Company and available for  dividend by capitalized :-

(i)     by the issue and distribution as fully paid up  of shares, debentures, debenture stock,  bonds or other obligations of the Company,  or (ii)    by crediting shares of the Company which  may have been issued and not fully paid up,  with the whole or any part of the sum  remaining unpaid thereon.

       Provided that any amounts standing to the credit of  the share premium account or the Capital Redemption  Reserve Account shall be applied only in crediting the  payment of capital on shares of the Company to be issued  to members (as herein provided) as fully paid bonus  shares.

       xxx                     xxx                     xxx         xxx                     xxx                     xxx"

       Reference must also be made to the definition of "Dividend"  under Article 2, wherein it has been stated that the word "Dividend"  includes "Bonus".  On behalf of the Appellant it has been submitted  that Article 182 permits capitalization of profits by issuance and  distribution of fully paid up shares, debentures, debenture stock  amongst others out of the Revaluation of Capital Assets only in such  cases where the "funds are available for dividends".  It was submitted  that the words "available for dividends" under Article 182 cover all the  categories of funds which could be capitalized for the purpose of issue  of fully paid up shares.  It was submitted that any fund which was not  available for dividend could not be used for purposes of issue of fully  paid up shares.  Reliance was then placed upon Article 175 wherein it  was provided that no dividend would be payable except out of profits

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arising from the business of the company.  It was submitted that both  the Articles have to be read together and, if read together, it is clear  that dividends as well as issue of fully paid up shares could only be  made out of profits arising from the business of the company and not  from the revaluation of capital assets.  It was submitted that the High  Court erred in holding that the words "available for dividends" only  applied to words "other funds of the company or in the hands of the  company" and that it did not apply or restrict the other categories laid  down under Article 182.         On the other hand, on behalf of the Respondents it is submitted  that the High Court was right in coming to the conclusion that the  words "available for dividends" did not apply to any other categories  except the category of funds of the company in the hands of the  company.            Both sides have also relied on various provisions of the  Companies Act, some other Articles in the Articles of Association and  various authorities. In our view it is not necessary to set those out or  deal with them as the decision will have to be based on an  interpretation of Article 182. For consideration of the rival arguments  Article 182 would have to be broken up in the following manner:  "Any General Meeting may resolve that any amounts standing to the  credit of  (a)     Share Premium Account,  (b)     Capital Redemption Reserve Account and  (c)     any monies, investments of other assets forming part of the  undivided profits including profit or surplus monies arising  from (i) realization and (ii) where permitted by law, from the  appreciation in value of any capital assets standing to the  credit of General Reserve, Reserve or any Reserve Fund or  any other Fund of the Company or in the hands of the  Company and available for dividends."    If read in this manner it is clear that the words "available for  dividends" would be applicable to all categories.  The High Court was  thus wrong in concluding that these words only applied to the last  category i.e. funds of the company or in the hands of the company.   However, it must be seen that the word "Dividend" wherever it  appears in the Articles also includes "Bonus".  Thus the words  "available for dividends" would necessarily mean "available for  dividend/bonus".  Article 182 itself provides that where the law  permits issuing of bonus from appreciation of value in the capital  assets the same could be done. If read in the  manner suggested by  the Appellants this portion of Article 182 i.e. issuing of bonus out of  Revaluation Reserves would be rendered otiose. So would certain  other portions of Article 182 viz. the provision regarding issuing of  bonus out of Share Premium Account and Capital Redemption Reserve  Account.  Section 205 of the Companies Act provides that the dividend  could only be issued out of profits of the company.  The proviso to  sub-section 3 of Section 205 permits capitalization of profits or reserve  of a company for the purpose of issuing fully paid up bonus shares or  paying up any amount for the time being unpaid on any shares held by  the members  of the company.   Thus the Companies Act specifically  permits utilization of reserve arising from revaluation of assets for  purpose of issuing fully paid up bonus shares.  When the law so  permits, Article 182 authorizes the company to issue Bonus shares out  of reserves arising from revaluation of capital assets.  Thus, even  though the interpretation given by the High Court on Article 182 is not  correct, still the final conclusion that Article 182 does not prohibit  issuance of Bonus shares is correct and requires no interference. It was next submitted on behalf of the Appellant that as the  directions of the Reserve Bank of India had not been complied with the  balance sheet of the Company did not reflect the true picture and in  actual fact when the bonus shares were sought to be issued the  Company was in a loss. On the other hand it was submitted on behalf  of the Respondents that the Company had complied with the directions  and had been granted time of 7 years to regularize its accounts. In our

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view it is not necessary for us to go into this controversy as it will  always be open to the Reserve Bank of India to take such action as is  available to it in law, if it feels that its directions were not complied  with.         In this view of the matter, we see no reason to interfere.  The  Appeal stands dismissed.  There will be no order as to costs.