Present: 1. Shri S. Balasubramanian, Vice-Chairman.
2. Shri K.K.Balu,
Member.
IN THE MATTER OF COMPANIES ACT, 1956 (1 OF 1956)
AND
IN THE MATTER OF M/S AMARAVATHI
SRI VENKATESA PAPER MILLS LIMITED
PETITIONER:
M/s
Cholamandalam Investment &
Finance
Company Limited
RESPONDENTS:
1. M/s Amaravathi Sri Venkatesa Paper Mills Limited
2. Dr. V. Genguswamy
3. Smt. G. Rajalakshmi
4. Shri G. Raveendran
5. Shri P. Veluswamy
Naidu
6. Shri A.G.S. Rambabu
PRESENT ON BEHALF OF PARTIES:
1. Shri N.R.
Sridharan, Practicing Chartered Accountant … for Petitioner.
and Authorised Representative
2. Shri P.H.
Arvindh Pandian, Advocate … for Petitioner.
3. Shri
R.Vidhya Shankar, Advocate … for Respondent Nos.1, 2 & 4.
4. Shri A.K.
Mylsamy, Advocate … for Respondent No.6.
O R D E R
(Date of Hearing: 5.6.2002)
K.K.
BALU:
1.
The petitioner holding 12 per
cent of the paid-up share capital of M/s Amaravathi Sri Venkatesa Paper Mills Limited (“the Company”) has
filed this petition under Sections 235/397/398 Schedule XI read with Sections
402 and 403 of the Companies Act, 1956 (“the Act”) alleging oppression and
mismanagement in the affairs of the Company.
The main acts of oppression and mismanagement relate to violations of
the provisions of the Act, non-compliance with the accounting standards issued
by the Institute of Chartered Accountants of India (ICAI), non-clarification of
huge cash balances at the end of the financial years, improper recording of
minutes of the annual general body meetings, inefficient management, imprudent
investment and dividend policies, poor cash management, improper drawing of the
Balance Sheet and Profit and Loss Account, non-adoption of uniform depreciation
policy, increase of operational cost, irrational import of raw materials at
huge cost etc., resulting in huge losses.
2.
Shri N.R. Sridharan, the whole-time Practicing Chartered
Accountant and Authorised Representative of the petitioner company, while
initiating hi s arguments submitted that the petitioner, being a non-banking
financial company used to make investments in shares and debentures of several
companies to derive benefits, like dividends, bonus etc. Accordingly, the petitioner has invested in
the equity shares of the Company in the year 1995 and presently holds 3,63,272
shares at a cost of Rs.44/- per share including a premium of Rs.34/- per share. The investments made in the equity shares of
the Company did not fetch any return for the last six years on account of
inefficient management of the Company.
The petitioner could neither get any representation on the Board of the
Company. The affairs of the Company are
being conducted against the interest of the members, the Company and public
interest. Shri Sridharan drew our
attention to several of the irregularities in day to day affairs of the Company
by making reference to audited balance sheet of the Company for the years ended
31.03.1998, 31.03.1999 & 30.06.2000 as under:
·
The Company failed to clarify the issues raised by the petitioner’s
representative at the annual general body meeting held on 29.12.2000, but,
recorded the minutes as though the resolutions passed unanimously at the said
AGM, violating the provisions of Section 193 of the Act.
· The net-worth of the Company has been sliding year after year
from Rs.1079.78 lakhs during the year ended with 31.03.1998 to Rs.986.12 lakhs
during the year ended 30.06.2000.
· The Company has incurred huge losses with
Rs.162.55 lakhs during the year 1998, Rs.33.52 lakhs in 1999 and Rs.72.43 lakhs
for the year ended with 30.06.2000.
· Though the production
and turn over of the Company marginally increased, the Company failed to
declare dividend for the years 1997-98, 1998-99 and 1999-2000 on account of
gross mismanagement of the affairs of the Company by the respondents 2 to 6.
· The huge investments
to the tune of Rs.83.82 lakhs made by the Company in its group companies have
not yielded any dividend for the last several years. The resolutions passed by the Company for these investments are
bald and violative of the provisions of old Section 372.
· The Company has not
complied with the relevant accounting standard issued by ICAI relating to
valuation of the investments, namely, the diminution in value of investments
between market value and cost has not been provided in the financial statements
for the year ended 30.06.2000, in which case, the loss for the year in profit
and loss account is under stated, while the reserves in balance sheet to that
extent is over stated. This is in
violation of the provisions of Section 211(3C) of the Act.
· The Company has
paid a sum of Rs.20,76,000/- as sponsorship fee on the issue of equity shares
during the period ended with 30.06.2000 without any justification and in
violation of the provisions of the Act.
· The Company has been
keeping huge cash balances and unrealized cheques at the end of two years, viz.
31.03.1999 and 30.06.2000 and is poor in working capital management.
· In terms of
Accounting Standard 2 (revised), the Company has changed its method of
valuation of finished goods to include proper overheads as against the earlier
practice of valuing the finished goods at market rate, thereby the value of
finished goods is lower by Rs.45,05,849/- with a similar impact on the loss for
the relevant year.
· The Company valued
the finished goods in the past years at market price instead of market price or
cost whichever is lower. However, from
the balance sheet, it is observed that the finished goods were valued at cost
or net realizable value whichever is lower. Thus, the Company has been
following inconsistent and erratic methods of valuation of its finished goods.
· The Company has started
claiming since the year 1999-2000, excise duty element as part of cost for the
purpose of valuing closing stock of finished goods. But in the past, the Company was accounting excise duty only on
clearance of goods from the factory.
· The Company has shown
huge selling expenditure of Rs.213.07 lakhs, which includes the excise duty of
Rs.65.41 lakhs. However, the Company
has not given any break-up for the balance of expenditure amount incurred by
the Company.
· The expenses incurred
on account of discounts to the tune of Rs.761/- per tonne are rather exorbitant
which do not correlate with the sales effected by the Company. The
Company has neither furnished the basis for such huge discount and particulars
of the persons to whom discounts were allowed.
· The balance sheet of
the Company for the year ended 30.06.2000 shows that the Company has provided
an amount of Rs.1,86,536/- by way of “depreciation shortly provided previous
year”. This disclosure is not in accordance
with the relevant accounting standard.
Accordingly, the balance sheet and profit and loss account does not show
a true and fair view of the state of affairs of the Company.
· There is a huge
difference between book depreciation provided for by the Company and
depreciation under Section 350 of the Act year after year. The Company has been claiming a very low
depreciation in the books with the main intention of showing less book loss
while it was claiming a very high depreciation for arriving at more net
loss. This is not a good accounting
practice.
· The operational cost
of the Company has been increasing year after year and does not take effective
steps to control the cost reduction and the Company is unable to manage its
affairs efficiently.
· The Company has been
spending huge amounts in importing raw-materials instead of indigenous
raw-material which increased the cost of raw-material enormously. The Company has failed to induct qualified
and competent professionals either as the Managing Director or the whole-time
director.
· The respondents 3
& 4, close relatives of the second respondent having no knowledge of paper
industry are on the board of the Company.
· The Company failed to
send notice to the petitioner for the 40th annual general meeting
held on 29.12.2001.
3.
Shri R.Vidhya Shankar,
Advocate appearing for respondents 1, 2 & 4, while denying the acts of
oppression and mismanagement in the affairs of the Company, has submitted that
the petition is motivated and not in the interest of the Company or its members. The petitioner has been requesting the
Company to buy-back their shares from time to time, on refusal of which the
petitioner has come forward with the present petition, with a view to stifle
the promoters of the Company. He
pointed out that mere non-payment of dividend or lack of representation on the
Board by the petitioner cannot amount to an act of oppression and
mismanagement. The entire allegations
in the petitioner pertain to the accounts for the financial years ended
31.03.1998, 13.03.1999 and 30.06.2000.
He further pointed out that the accounts for the period ended 30.06.2000
were unanimously adopted at the annual general body meeting held on 29.12.2000
after clarifying and considering the queries raised by the petitioner’s
representative. The petitioner is a
party to the resolution for adoption of the accounts at the annual general
meeting held on 29.12.2000. The
petitioner is, therefore, estopped from questioning the accounts for the period
ended 30.06.2000. He further pointed
out that the Company had sent notices to all its members including the
petitioner for the 40th general body meeting held on 29.12.2001 and
also caused public notice in local newspapers.
The petitioner was aware of the said AGM, but did not participate in the
annual general body meeting of members of the Company for which the Company
cannot be blamed. He further pointed
out that the petitioner had secured return on their investment by way of two
bonus issues and dividends declared for the years, ended 31.03.1995, 31.03.1996
and 31.03.1997. The petitioner cannot
have any grievances that he has not been taken of the board of directors of the
Company, especially when it is the prerogative of the general body to decide
the constitution of the Board. The
performance of the Company has been adversely affected on account of the
recession faced by the paper industry since the year 1997. Consequently, the average price realization
per metric tonne was declining from time to time till the year 1999-2000. The drop in price realization was common in
the paper industry for the last four years.
Simultaneously, there was a substantial increase in the raw-material
cost and in power tariff over the years, resulting in the huge losses incurred
by the Company. In this connection, he
pointed out that the big mills were not able to make profits in the year
1999-2000 and could make profits only during the financial year 2000-2001. He pointed out that quite a few mills became
sick companies. The Company after
having suffered all these years could make a profit of about Rs.30 lakhs and
also increase the surplus reserve during the financial year ended
31.03.2001. In regard to the
investments, he pointed out that the Company has not violated the accounting
standard No.13 and accordingly the balance sheet as at 30.06.2000 has accounted
for the investment as long term investment at cost. Any temporary decline in the value of the investment need not be
provided for in the accounts as per clause 32 of the A.S.13. Moreover, as per note 7 on accounts of the
Schedule 17 investments stated at cost and temporary diminution in their value
is not recognized. He drew support from
the Note-15 in the Auditor’s Report on accounts which states that no provision
is made in the account for the difference between the cost and market value,
since the difference is considered to be of a temporary nature and not of a
permanent one. The Company made
investments in the group companies after passing the requisite resolution under
the relevant provisions of the Act. The
book value per share of three of the group companies is more than the cost of
the investment. He justified the
investments in other companies. The
recessionary trend has affected these companies also and therefore, there is no
fault in the investment policy of the Company.
The Company paid the sponsorship fees for the services rendered by
Indbank Merchant Banking Services Limited in the matter of private placing of
equity shares and in taking steps to list the shares of the Company on OTCEI. This sponsorship fee is the subject matter
of disclosure in the balance sheets for the year 1994-95. The accounts have been duly adopted and at
the respective annual general meeting with the petitioner’s representative
voting of adoption of accounts. This
issue cannot be re-agitated in the petition. The Company is justified in
keeping cash balances to meet lorry fright charges in relation to its four
branches and seven depots. He pointed
out that there is no misstatement in the balance sheet in respect of valuation
of closing stock, finished goods etc.
During the years from 1969 to 1999, the Company had valued stores,
spares, raw materials etc at cost, finished goods at actual price/market price. After 1.4.1999, the finished goods are
valued at cost or net realizable value whichever is less, stores and spares
etc. are valued at cost in terms of Accounting Standard No.2. Accordingly, finished goods are valued in
the balance sheet as at 30.06.2000 at cost.
As per Guidance Note on Accounting Treatment on Excise Duty, the value
of excise duty has to be added to the value of closing stock of finished goods,
in which case, the excise duty payable has to be shown as expenditure in the
Profit and Loss Account in order to set forth the true and fair view in the
Profit and Loss Account. The
depreciation for the year ended 30.06.2000 has been duly charged in accordance
with accepted accounting practice after duly providing for the depreciation
short-charged for the previous year.
The depreciation short-charged aggregating Rs.1,86,536/- was on account
of an error in calculation in the previous year. Shri Vidhya Shankar justified increase in costs of operation
during the years 1997-98, 1998-99 and 1999-2000. According to him, the balance sheet as at 30.06.2000 is for 15
months period when the prior year balance sheets are for 12 months period. Moreover, the production for the year
1999-2000 was also higher in comparison to the previous years, he further
justified the increase in cost for the following reasons: -
(a) The increase in cost of power and fuel is attributable to
the increase in tariff.
(b) The increase in repairs and maintenance expenditure on
account of age of the machinery as well the increase in production.
(c) Selling expenditure of Rs.213.70 lakhs for the period ended
30.06.2000 includes the excise duty amount of Rs.65.41 lakhs payable on the
closing stock of the finished goods in accordance with the new accounting
standards.
(d) Increase in travelling and vehicle maintenance is virtually
on account of increase in the fuel prices.
(e) The Company was constrained to offer discounts during the
financial year 1998-99 and 1999-2000 in consonance with the trend in the paper
industry, without which, the Company would not have been able to liquidate the
stock, which would have resulted in administrative overheads.
(f) The continuous operation of effluent water treatment plant
resulted in power consumption, tariff of which has increased from time to time.
Shri Vidhya Shankar has urged that the increase in cost is not
on account of any mismanagement of the affairs of the Company. Shri Vidhya Shankar justified the import of
waste paper on the ground that the quality of the waste paper is superior, the
waste paper could be secured in bulk quantities on soft credit terms. The price is also very competitive. He
further pointed out that the second respondent, being the promoter holding 51
per cent of the equity share capital of the Company was appointed as Managing
Director at the 39th annual general meeting of the Company. He was mainly responsible for the increased
production during the years 1990-1997, who cannot be blamed on account of
recession in the industry. The
petitioner’s representative is also a party to the resolution for reappointment
of the second respondent as the Managing Director and therefore the petitioner
cannot now question the appointment of second respondent as Managing
Director. Similarly, the respondents 3
& 4 were appointed as directors by the shareholders at the annual general
meeting. He further pointed out that
the third respondent and fourth respondents with vast experience in the paper
industry, have been directors of the Company since inception and 1984
respectively. Shri Vidhya Shankar
pointed out that the allegations made in the petition entirely relate to the
details disclosed in the balance sheet of the Company and that the petitioners
have not made out any act of oppression and mismanagement in the affairs of the
Company. According to him, mere
non-compliance with the provisions of the Statute and unintended violations
cannot amount to acts of oppression and mismanagement, in support of which he
relied upon the following decisions:
(i)
(1970) 40 CC 119 – Mohta
Bros. (P) Ltd. And others Vs. Calcutta Landing and Shipping Co. Ltd. And others
– to state that full particulars must
be given by a petitioner in an application of alleged acts of oppression or
mismanagement. The vague and uncertain
allegations of oppression or mismanagement do not entitle a petitioner to ask
the Court to embark upon an investigation into the affairs of a company in the
hope that in consequence of such investigation, something will turn up which
will enable the court to grant relief to the petitioner.
(ii)
(1984) 55 CC 702 –
Chander Krishan Gupta Vs. Pannalal Girdhari Lal Private Ltd. And others - to state that there
must have been continuous acts on the part of the majority shareholders
oppressive to the minority to grant any relief under Section 397 and mere
isolated acts and stray illegal acts could not amount to oppression.
(iii)
(1996) 86 CC 657 – M.M.
Dua and others Vs. Indian Dairy and Allied Services Pvt. Ltd. And others – to show that the petitioner must set out full particulars of
allegations of oppression or mismanagement to claim relief under Section
397/398.
4. Shri
A.K.Mylsamy, Advocate appearing for the sixth respondent has denied the
allegations of acts of oppression and mismanagement put forth by the
petitioner. He categorically stated
that the Company has rectified the defects pointed out by the petitioner and
that the violations do not continue any more.
He further pointed out that the Company has been carrying out the
business in accordance with the decision taken by the Board of Directors from
time to time. The proceedings of the
general meetings and board meetings are being duly conducted and the minutes
are properly recorded, in which case, the decisions taken at such meetings are
validly made and cannot be questioned by the petitioner in 397/398
proceedings. He, therefore, sought for
dismissal of the petition.
5. We
have considered the pleadings and oral submissions made by Counsel for the
petitioner as well as respondents.
6. A careful perusal of the records reveal
that the petitioner being a non-banking financial company has been making
investments in shares and debentures of several companies from time to time
with the object of reaping the benefits like dividend, bonus etc. The petitioner, in the course of its normal
business has invested in the shares of the first respondent company and at
present the petitioner is holding 3,63,272 shares of the Company which includes
the bonus shares made by the Company.
The grievances of the petitioner are that the investment made in the
equity shares of the Company did not fetch any return for the last six years
and that the petitioner could not get any representation on the Board of the
Company. It appears that the petitioner
was concerned with his investment in the Company as borne out by its letter
dated 29.09.1999 addressed to the Company (R-1 enclosed to the Counter). It is not disputed that the Company made two
bonus issues in October, 1995 and May, 1996 by virtue of which the original
shareholding of the petitioner has increased from 1,33,200 equity shares to
3,63,272 equity shares. It is also not
disputed that the Company declared dividend for the years ended 31.03.1995,
31.03.1996 and 31.03.1997. Admittedly,
the Company started making losses from 1997 onwards. There are materials made available to show that the paper
industry was hit by the economic recession since the year 1997 and that the
Company is not an exception. The price
realization of the Company was found to be decreasing from year to year. The functioning of the Company adversely
affected on account of among other things increase in the raw material cost,
power tariff resulting in the losses suffered by the Company till the period
1999. Though the Company could make a
marginal profits for the year ended 31.03.2001, it could not declare dividend
at the intervention of its bankers. The
minutes of the 39th annual general meeting held on 29.12.2000 of the
Company (Annexure R-3) reveal that the petitioner’s representative had raised
certain queries in relation to the valuation of the closing stock, the hike in
prices in purchase of waste paper, increase in discounts, advances in
group/associated companies, increase in selling expenses, purchase of waste
paper from any group/associated company etc.
It further reveals that the Chairman of the meeting clarified the
queries raised by the petitioner’s representative in detail and thereafter the
resolution adopting the director’s report, profits and loss account ended
30.06.2000 together with balance sheet and the audited report was unanimously
passed. At the very same annual general
meeting, the second respondent was elected as the Managing Director and the
respondents 3 & 5 were elected as directors of the Company. We find that the petitioner is agitating the
very same issues raised and resolved at the annual general meeting held on
29.12.2000. The minutes of the 38th
annual general meeting of the Company (Annexure R-2) held on 27.09.1999 also
reveal that profit and loss account together with the balance sheet for the
year ended 31.03.1999 was unanimously adopted at the said meeting, wherein the
petitioner’s representative was present.
In the circumstances, the petitioner cannot have any grievance in regard
to the accounts of the Company for these years. The investments made by the Company do not seem to have violated
the accounting standards as borne out by the report of the auditors. It is left to the wisdom of the board of
directors of the Company to make investments, provided they adhere to the
statutory norms. The mere fact that
such investments do not bring profits to the Company cannot be a ground for
oppression. However, it is observed
that the investments made by the Company yield dividend for certain period,
which is not disputed by the Company.
The grievances of the petitioner on account of payment of sponsorship
fees keeping huge cash balances, valuation of closing stock of finished goods,
increase in cost of operation on account of power and fuel, repairs and
maintenance, selling expenditure, traveling and vehicle maintenance and
extending of discounts, import of waste paper, in our view, cannot be construed
to be the acts of mismanagement. The
petitioner has merely culled these details from the annual accounts for the
period ended with 31.03.2000, which, in our view, satisfactorily explained by
the Company. The accounts have been duly
adopted at the respective annual general meeting of the Company. The appointment of the Managing Director and
directors has been made duly at the relevant annual general meeting of the
Company, which cannot be re-agitated in the petition. These acts do not amount to acts of oppression. Shri Mylsamy has categorically stated that
the violations pointed out by the petitioner do not continue. For violations, if any, of provisions of the
Act, the regulatory authority will initiate such action as may be deemed
fit. In the circumstances, the
petition does not survive and accordingly dismissed, without any order as to
costs.
(K.K. BALU) (S.BALASUBRAMANIAN)
Dated this the 9th day of August, 2002