minimum subscription would have to be calculated after taking into account the requests made for withdrawal of share application.

THE HIGH COURT OF DELHI AT NEW DELHI
SUBJECT : COMPANIES ACT
Judgment delivered on:  14.01.2013
WP(C) 1261/2002
THE SECURITIES & EXCHANGE BOARD
OF INDIA        ......PETITIONER
Vs
A.P.L. INDUSTRIES LTD. & ORS.           .....RESPONDENTS
                           
ADVOCATES WHO APPEARED IN THIS CASE:
For the  Petitioner: Ms. Maninder Acharya, Advocate
For the Respondents:  None
CORAM :-
HON'BLE MR JUSTICE RAJIV SHAKDHER
RAJIV SHAKDHER, J
1. This writ petition has been filed to assail the order of the Securities
Appellate Tribunal (in short SAT) dated 18.10.2010.
2. It may be pertinent to note that by the said order, SAT has reversed
the order dated 22.05.1998 passed by the Chairman, Security and Exchange
Board of India (in short SEBI).  
3. The challenge arises in the background of the following facts, most of
which are not in dispute :-
3.1 Respondent no.1/company had floated a prospectus for a public issue
of 30 Lakhs equity shares of a face value of Rs.10/- each, for cash at par
aggregating to a total sum of Rs.3 Crores.  The public issue opened on
26.02.1996.  The closing date for the issue was 08.03.1996. 3.2 Against the aforementioned public issue, respondent no.1/company
received 51,37,100 applications by the date of closure i.e., 08.03.1996.
3.3 Evidently, there were certain withdrawals as well as rejection of the
share applications filed with the Registrar to the  Share Issue (in short the
Registrar).  Undisputedly 23,13,800 share applications were withdrawn,
while 3,25,700 share applications were rejected on one ground or the other
by the Registrar.  Two important facts emerged by virtue of the aforesaid
events.  
3.4 First, that on the date of closure i.e., 08.03.1996, the public issue of
respondent no.1/company  was over-subscribed by almost 1.71 times.
However, if the rejected share applications were taken into account which,
as indicated above, numbered 3,25,700, on the date  of closure i.e.,
08.03.1996 the public issue was over-subscribed by  1.60 times as against
1.71 times, if all application forms were taken into account.  
3.5 Second, if, however, the share applications in respect of which request
for withdrawal had been received from the applicants were taken into
account the subscription to the public issue of respondent no.1 fell to 94%
of the total public issue.  Similarly, if both the rejected share applications
and the request for withdrawal of share applications was taken into account,
the subscription to the public issue fell to 83% of the total public issue made
by respondent no.1/company .  
4. It is in the background of these undisputed facts that the issue which
arises for consideration is whether the SEBI was right in directing refund of
the entire share application amount since, according to SEBI, respondent
no.1/company  had not been able to achieve the minimum subscription as
provided in its prospectus.  
4.1 It may be relevant, therefore to, extract the minimum subscription
clause as contained in the prospectus  :-
“..MINIMUM SUBSCRIPTION
IF THE COMPANY DOES NOT RECEIVE THE MINIMUM
SUBSCRIPTION AMOUNT OF 100% OF THE ISSUE AS
APPLICATION MONEY TILL THE CLOSURE OF THE ISSUE, THE
COMPANY SHALL FORTHWITH REFUND THE ENTIRE
SUBSCRIPTIOON AMOUNT REEIVED.  IF THERE IS A DELAY  IN
REFUND OF THE AMOUNT COLLECTED, THE COMPANY AND THE
DIRECTORS OF THE COMPANY SHALL BE JOINTLY AND
SEVERELY LIABLE TO REPAY THE AMOUNT BY WAY OF
REFUND WITH INTERST AT TEH RATE OF 15% PER ANNUM FOR THE DELAYED PERIOD BEYOND 78 DAYS FROM THE OPENING
OF THE ISSUE...”
4.2 As would be evident respondent no.1/company  was thus required to
achieve a minimum subscription of 100% of the issue as the application
money till the closure of the issue, failing which it was required to refund
the entire subscription amount received from the applicants for allotment of
shares.
4.3 Continuing with the narrative, the request for  withdrawal of share
application had been received by the Registrar between 08.03.1996 to
14.05.1996.  Since the subscription had dropped to 83% of the total share
issue, the lead Manager to the public issue, issued a certificate stating
therein, inter alia, that respondent no.1/company had failed to achieve
minimum subscription.  It may be pertinent to note that the lead Manager to
the Share issue was one, Allianz Capital and Management Services Limited.  
4.4 Based on the aforesaid events, SEBI shot of a communication dated
07.06.1996, whereby it advised respondent no.1/company  to immediately
refund the share application money to the concerned applicants, and file a
status report with it, latest by 12.06.2012.  Respondent no.1/company  was
also put to notice that if it failed to do the needful, SEBI would be
constrained to take action against it, in accordance with the provisions of the
Securities & Exchange Board of India Act, 1992  and the Companies Act,
1956 (in short the Companies Act).   It may also be pertinent to note that
in this very communication of 07.06.1996, there was a discussion as to the
applicability of the provisions of Section 72(5) of the Companies Act.  SEBI
seems to have indicated in the said communication that, the applicant(s) who
were desirous of being allotted shares, could withdraw their application after
the expiry of the 5th day from the opening of the subscription list.  A
reference was also given to a previous precedent wherein SEBI had come to
the same conclusion.  A copy of the said appellate decision, in the case of
Vishwalaxmi Petro Products Limited, was also, evidently furnished to
respondent no.1/company .  
4.4 It appears that being aggrieved, respondent no.1/company  filed an
appeal with SAT which, by an order dated 20.11.1996, rejected the appeal
on the ground that the order impugned was not appealable as it was not an
order passed under the provisions of the SEBI Act.  Respondent
no.1/company was thus permitted to approach the Chairman of the SEBI for
redressal of its grievance.
4.5 Accordingly, respondent no.1/company  approached the Chairman of
the SEBI who by an order dated 22.05.1998  directed respondent no.1/company  to refund the monies received from the applicants against the
public issue.
4.6 It is this order which was assailed by respondent no.1/company before
SAT.  As indicated above, SAT by virtue of the impugned order dated
18.10.2000 reversed the order of the Chairman of SEBI dated 22.05.1998.  It
may only be recorded as a matter of fact that prior to approaching SAT
respondent no.1/company had approached the High Court of Punjab and
Haryana which in effect directed it to SAT, vide its order dated 14.10.1999
passed in CWP 10811/1998.
4.7 This resulted in SEBI being aggrieved by the order of SAT and hence
chose to take recourse to a writ petition.  For this purpose, a writ petition
was filed in the Bombay High Court, wherein respondent no.1/company
raised a preliminary objection with regard to the territorial jurisdiction,
whereupon SEBI withdrew its writ petition, with liberty to approach the
appropriate court.  This order was passed on 09.01.2002.  
4.8 Importantly, in the interregnum, the Bombay High Court had passed
an order on 11.05.2001, whereby the bankers to the  issue were restrained
from making over moneys to respondent no.1/company.
5. It is in this background that the captioned writ petition has been filed
in this court, by SEBI.  The captioned writ petition was moved on
20.02.2002, when this court while issuing notice issued a similar ad interim
direction, which was passed by the Bombay High Court, in effect,
restraining the bankers to the issue from releasing payment to respondent
no.1/company.
6. Pleadings in the writ petition are complete.  There is no appearance on
behalf of respondent no.1/company  today in court.    However, in pursuance
to the directions issued by this court, written synopsis have been filed on
behalf of the parties including respondent no.1/company.
6.1 The sum and substance of the respondent no.1/company’s defence is
as follows :-
(i). the prospectus constitutes an offer for subscription of shares and once
an application is made the contract is complete and hence, it cannot be
revoked by seeking withdrawal of the share application money.  In other
words, what is contended is that even after the 5th day of the opening of the
subscription list, there can be no unilateral withdrawal of the share
application money;
(ii). the withdrawal of the share application money can only be accepted
by the company i.e., in this case respondent no.1/company and not by the Registrar.  It is evidently the stand of respondent no.1/company that on the
date of closure the public issue was over-subscribed by 1.71 times which
was well over the minimum subscription of 100% as per the requirement
stipulated in respondent no.1/company’s prospectus  and therefore, the
condition prescribed therein was met.  The provisions of Rule 2(3) of the
SEBI, Registrar to an issue and Share Transfer Agents Rules 1993 are
sought to be invoked to establish that it was never within the remit of the
Registrar to permit withdrawal of the share applications.  It is sought to be
submitted that power, if any, to permit withdrawal of the share application
vested with the Board of Directors of respondent no.1/company, and that,
the Registrar in that regard had no power to return the share application
money to the subscribers.
7. On the other hand, learned counsel for the petitioner, Ms. Acharya has
submitted that it is well settled that the prospectus is an invitation to offer
and that an applicant desirous of applying for shares, if any, of a listed
company or otherwise can withdraw his offer prior to its acceptance.  Ms.
Acharya submits that the offer of an applicant culminates into a contract
only upon allotment of the shares.  In this case, according to Ms. Acharya
withdrawal of the share application(s) took place before the  allotment and
therefore, as a matter of fact, in effect, the Registrar was only carrying out
what is a ministerial act.  Reliance was placed by her on the judgment of the
Bombay High Court in the case of Vishwalakshmi Petro Products Ltd. vs
Securities Exchange Board of India in WP(C) No. 728/1996 in the High
Court of Judicature at Bombay.
7.1. In the alternative, Ms. Acharya argues that the Registrar is empowered
to receive and permit withdrawal of the share applications.  In this regard,
Ms. Acharya places reliance on Rule 2(3)(i) and (iii)(b) of SEBI.  
7.2 Furthermore, Ms. Acharya thus submits that, in terms of Section 69 of
the Companies Act, the company which is respondent no.1 was prohibited
from making an allotment if, it did not receive  subscription equivalent to the
minimum amount prescribed in the prospectus.  
7.3. Mrs. Acharya also places reliance on Sub-Section (5) of Section 72 of
the Companies Act, to contend that the prohibition  on an applicant to
withdraw  his share application extends to the 5th  day from the date of
opening of the subscription list, and therefore, upon expiry of the said
period, an applicant can make a request for withdrawal, in respect of which,
neither the Registrar  nor the company can have any say. 8. Having heard learned counsel for the petitioner  and on perusal of
pleadings, record and the written submissions filed on behalf of respondent
no.1/company, what emerges is as follows :-
(i). That, on the date of closure of the share issue i.e., 08.03.1996, the
public issue of respondent no.1/company was over-subscribed.  The over
subscription was to the extent of 1.17 times;
(ii). There were both rejections and withdrawals;
(iii). If, rejections are taken into account, the over-subscription dropped to
1.60 times of the total public issue;
(iv). If, however, the withdrawals were also taken  into account, the
subscription to the share issue dropped to a figure below the minimum
subscription, which was equivalent to, in percentage terms 83% of the total
issue.
9. The question, therefore, arises as to whether the date of closure is to
be taken into account for determining whether or not the petitioner company
achieved the minimum subscription.  Undoubtedly, what can be said in
favour of respondent no.1/company that the clause pertaining to minimum
subscription, as appearing in the prospectus, did indicate that respondent
no.1/company was required to refund subscription amount received if it did
not receive 100% of the total issue amount till the date of closure of the
issue.  However, this contractual clause has to be understood in the context
of the transaction at hand.  The transaction at hand concerns an application
for shares which is made by an entity including an individual to a company,
pursuant to  a prospectus being issued, in this case by respondent
no.1/company.  
9.1. If  that be so a share application is like any other offer which would
require acceptance of the offer made.  The acceptance of an offer of this
nature can only be brought about, inter alia  by allotment of shares made in
favour of the applicant by some overt method.   Like in any other transaction
between two individuals before an offer is accepted, the offerer is entitled to
revoke the offer.   This is precisely what happened in the present case.   The
minimum subscription clause is inserted in a prospectus to protect the
interest of the investors, which is why Section 69  of the Companies Act
provides that if minimum subscription is not achieved, a company issuing
the prospectus cannot proceed to allotment of shares.  The purpose being
that it would be pointless to have investors provide capital to the recipient
company unless the minimum amount is received by such a company for the
purpose stated in the prospectus.   The argument advanced on behalf of
respondent no.1/company that on receipt of the share application form, a concluded contract came into existence, is a submission which is completely
misconceived because if it was so the concerned company would have to, as
of necessity, allot to the applicant, without fail, the exact number of shares
for which a request is lodged.  As is well known, on very many occasions
the opposite happens.  This is legitimate since in law, a share application is
only an offer.
9.2 Therefore, in my opinion, the minimum subscription clause appearing
in the prospectus would have to yield to the right of an applicant to withdraw
his offer before its acceptance.  I may note here the argument of Ms.
Acharya, learned counsel for the petitioner, made on the same lines, that the
prospectus issued by a company was an invitation to offer and if the
application for shares is made, pursuant to issuance of a prospectus, it was
only an offer which could be withdrawn at any stage before its acceptance.  
I am in agreement with this submission of the learned counsel for the
petitioner.  [See AIR 1933 Madras 320, Official Liquidator of Bellary
Electric Supply Co. Ltd. Vs. Kanniram Rawoothmal and A. Sirkar vs Parjoar
Hosiery Mills Ltd. 1933 (3) Comp.Cas 454]
9.3 Therefore, in my opinion, minimum subscription  would have to be
calculated after taking into account the requests made for withdrawal of
share application.
9.4 There is another reason for coming to the same  conclusion.
Undoubtedly, in this case  like in other public issues, there are rejections by
a Registrar based on various technical grounds.  If as per the clause of
minimum subscription, the minimum subscription had to be calculated  as on
the date of closure, it would be well-nigh impossible to carry out that
exercise as more often than not the rejections are made even after the date of
closure.  
9.5 Therefore, if the minimum subscription amount is not reached, which
is the case in the present petition, then surely no allotment can be made.
There can be no dispute about this position in view of the provisions of
Section 69 of the Companies Act.  The minimum subscription, therefore,
would have to be calculated by taking into account the factum of number of
withdrawal request rejections made qua share application received. Since the
contract between the applicant and the company is concluded only on the
allotment of shares the withdrawal request can be made by an applicant well
before the said date.  There is no dispute vis-a-vis the fact that withdrawal
requests were made.
10. The other aspect of the matter which has come to fore  is, does the
request for withdrawal get triggered automatically  or does it require acceptance.  The stand of the respondent no.1/company which has been
accepted by SAT is that the withdrawal can only take place if its is accepted
by the company and since in the present case, the withdrawal request was
accepted by the Registrar the order of the Chairman SEBI had to be
reversed.  As rightly argued by Ms. Acharya, the fallacy in this conclusion is
that it is premised on the reasoning that a request for withdrawal of a share
application requires acceptance.  Once a request is triggered for withdrawal
of a share application, in law, it requires no acceptance.  The only bar which
is statutorily introduced, is one, provided under section 72(5) of the
Companies Act.  The bar is also put in place for a limited period of time i.e.,
till the closing  of the 5th day of the opening of the subscription list.  It is no
one’s case before the authorities below that withdrawal applications were
not received after the expiry of the eclipse period, as provided in section
72(5) of the Companies Act.  
11. Having regard to the aforesaid, I am of the view that the order of the
SAT deserves to be set aside.  It is ordered accordingly.  In that view of the
matter, the order of the Chairman SEBI dated 22.05.1998 would have to be
sustained and the directions contained therein for refund of the money to the
share applicants would have to be implemented.  It is ordered accordingly.
The SEBI shall ensure that refund is made to the share applicants, as
expeditiously as possible, in accordance with law.  Any interest earned on
the interregnum amongst the applicants in accordance with law.  Deficiency,
if any, shall be recovered from respondent no.1/company, once again, by
taking recourse to the relevant provisions of law.  
12. Before I conclude, I may also notice that there is something to be said
vis-a-vis the power of the Registrar to permit withdrawal of a share
application and consequent refund.   A reference in this regard may be made
to Rule 2(e)(i)(iii)(b) of the SEBI Rules.  It is quite clear if the Registrar has
the power to finalise the list, implicit in that power is the power to order
refund qua request for withdrawal of share application.  Accordingly the
order dated 20.02.2002 which was made absolute on 22.08.2005 is vacated.
13. The writ petition is, accordingly, disposed of.
        Sd/-
             RAJIV SHAKDHER, J  

JANUARY 14, 2013