Maruthamuthu J.
1. Company Petition No. 93 of 1984 has been filed by two erstwhile directors of the Investment Trust of India Ltd. The other Company Petition
No. 101 of 1984 has also been filed by another director of the same company. Both the petitions have been filed u/s 633(2) of the Companies
Act, 1956, for directions regarding notice under rule 23C of the Companies (Court) Rules, 1959. Both the petitions may be disposed of together
by a common order.
2. The averments contained in both the applications are generally that these petitioners were the directors of the Investment Trust of India Ltd., a
company having its registered office at Kothari Buildings, 117, Nungambakkam, Madras-600 034, from June 9, 1980, to July 4, 1983; from June
9, 1980 to August 26, 1982 and from June 2, 1977 to June 23, 1982, respectively. The aforesaid company was incorporated in the year 1946
with the sole object of carrying on the business of the investment trust by investing in shares, stocks, debentures and other types of securities. The
memorandum of association will clearly bring out the aforesaid object and, accordingly, the shares and other securities were bought for investment
and were kept for long-term and sold only rarely. In the year 1975, the objects clause of the memorandum of the company was enlarged,
empowering the company to undertake certain other activities like hire-purchase, leasing, industrial financing, etc. However, even after such
amendment, the basic character of the company as an investment company continued unchanged, and the company continued to acquire shares as
a result of which, the earnings from investments rose from 0.91 lakhs in 1976 to 2.42 lakhs in 1979. Further, this company has also been classified
by the Central Government as an investment and trust company in the Central Government publication Directory of Joint Stock Companies issued
in 1980. While so, the respondent, the Registrar of Companies, by letter dated January 6, 1982, raised a query whether the company''s investment
in shares of other companies are within the limits of section 372 of the Companies Act. For the same, a detailed reply was sent on January 29,
1982, stating that the company is an investment company and that the provisions regarding the ceiling prescribed u/s 372 of the Companies Act are
not applicable to it. It was further submitted that after being satisfied by this explanation there was no further query by the respondent, nor was any
action taken by the respondent against the company or its directors.
3. Again, by letter dated September 26, 1984, addressed to the directors of the company, the respondent stated, that from the balance-sheets of
the company as on December 31, 1979, December 31, 1980, December 31, 1981, and December 31, 1982, and from the paid-up capital
reflected in the balance-sheets, it was noticed that the investments made by the company were in excess of the limits specified in the first proviso to
section 372(2) of the Companies Act, 1956. It was further stated since these investments were made without following the provisions of sub-
section (4) of section 372 of the Act, why penal action should not be initiated against the company and the directors for contravention of the
aforesaid provisions of the Act. For the same, the company has also sent a detailed reply dated October 29, 1984. However, as the petitioners
apprehend that the respondent may initiate action, the petitioners have filed the present company petition praying this court to exercise its powers
u/s 633, sub-section (2) of the Act and relieve the petitioners from any liabilities arising from the contravention of the first proviso to section 372,
sub-section (2) and section 372, sub-section (4) of the Companies Act, 1956, as set out, in the show-cause notice dated September 26, 1984.
4. The respondent, Registrar of Companies filed counters raising the following contentions. At the outset, the petition u/s 633(2) of the Act filed by
the petitioners is not maintainable, since as per the aforesaid section, every officer claiming relief u/s 633(2) has to file a separate petition and
establish to the satisfaction of the court, that he has acted honestly and reasonably. Further, the claim of the petitioner-company as an investment
company is not maintainable in law. After diversification of its business in 1975, the company''s income from investments is meagre and ranks III or
IV place as per the details given in the counter. Inasmuch as the company is changed to a financial company and the income from the financial
business is the major income of the company, the company is not an investment company. Again, regarding the term ""Principal business"" though
there is no definition under the Act as commonly understood, principal business means the prime business carried on by the company at the
relevant point of time and the major source of income, etc. Applying these principles and also as revealed by the company''s own account that the
income from investment business forms only a negligible part in the total turnover of the company, the company ceased to be an investment
company. Clauses 7, 8, 8A and 8B of the memorandum of association referred to by the petitioners are in the nature of incidental objects with
wide clauses covering many business. However, since the company is not engaged in the business of financing the financial enterprises in India as
seen from its balance-sheet, there is no question of applying section 372(14) for exemption. It is incorrect to state that the petitioners have acted
honestly and reasonably. As there are no convincing reasons for the grant of such relief, the powers u/s 633(2) of the Act cannot be exercised by
the court. In the circumstances, the respondent would pray for the dismissal of the aforesaid company petitions.
5. The following points arise for consideration in these petitions :
(1) Whether the petitioner company continues to be an investment company and could claim that the first proviso to section 372(2) of the Act will
not be applicable to it ?
(2) Whether the petitioner company can invoke exemption u/s 372(14) of the Act ?
(3) Whether the petitioners have acted honestly and reasonably and are entitled to any relief u/s 633 of the Act ?
6. It is an admitted fact that the company in question was originally started as an investment company and was investing in shares, debentures and
securities. But, in the year 1975, the said activities of the company have been extended to other fields such as hire-purchase, leasing, etc., and,
accordingly, the memorandum of association was also amended. It is not in dispute that pursuant to such amendment, the company extended its
activities to the financial lines. Now, the dispute leading to the filing of the present petitions arose from a letter communicated by the Registrar of
Companies dated January 6, 1982, in respect of the accounts filed foe the year 1979, seeking a query whether the company''s investment in shares
of other companies was within the limits of section 372 of the Companies Act. The company has sent a reply on January 29, 1982, thereto stating
that the company being an investment company, the provisions of section, 372(2) and (4) of the Companies Act, are not applicable to it. However,
it seems that there was no further communication between the parties till September 26, 1984, when the respondent sent a show-cause notice to
the petitioners and the other directors, and the company, stating that it is reflected from the balance-sheets of the company as on December 31,
1979, December 31, 1980, December 31, 1981, and December 31, 1982, and from the subsidiary capital (originally stated in the show-cause
notice as paid-up capital which is admitted by the respondent in the counter-affidavit as mistake) the investments made by the company in the other
companies, were in excess of limits specified in the first proviso to Section 372(2) of the Companies Act, 1956, and that those investments were
made without following the procedures mentioned in section 372(4). Consequently, the respondent directed the petitioners to show cause why
penal proceedings should not be initiated against the company for such violations.
7. The petitioner-company seems to have sent a detailed reply on October 29, 1984, followed by a further reply dated January 12, 1985, stating
that the show-cause notice issued by the respondent is not sustainable on several grounds as stated in the reply letters. Notwithstanding the sending
of such replies, the petitioners would apprehend that the respondent may initiate criminal proceedings and so they have approached this court,
praying that this court should exercise its powers u/s 633(2) of the Companies Act, and relieve the petitioners from any liability resulting from the
contravention of the proviso to section 372(2) and section 372(4) of the Companies Act as set out in the respondent''s show-cause notice dated
September 26, 1984.
8. Learned senior counsel, Mr. Govindaswaminathan, appearing for the petitioners, submitted that the show-cause notice dated September 26,
1984, issued by the respondent is not sustainable on several grounds. He stated that the company in question is an investment company primarily
with the object to carry on business of investment in shares, debentures and securities and that the shares were purchased and kept for long time.
He added that the memorandum of association will also clearly prove that the object of the company is to make investment in shares, etc., and also
basically, the company is an investment company. It was further submitted that it was no doubt in the year 1975, the activities of the company were
enlarged to other fields such as hire-purchase, etc., as shown in the memorandum of association, but that notwithstanding such change of enlarging
such activities, the investment in shares figured as prime business and hence the character of the business, i.e., investment on shares, was
unchanged, and that, therefore, the company still continues to be an investment company. In support of this contention, learned senior counsel
would rely on the Central Government publication entitled Directory of Joint Stock Companies issued in 1980 and also the classification issued by
the Ministry of Law and Justice and Company Affairs, stating that the words in section 372 ""whose principal business is the acquisition of shares
would imply that the company concerned is expected to hold the shares acquired by it for a reasonable time. Further, on the earlier occasion when
the respondent raised such a query by his letter dated January 6, 1982, for which the petitioner-company has given a detailed reply dated January
29, 1982, the respondent was satisfied with the explanations and did not raise any further query, and that being so, the respondent cannot take up
the issue again. It was submitted that as there is no change of circumstances warranting such revival of the proceedings, the company still continues
to be an investment company and that the restrictions prescribed in the proviso to section 372(2) will not apply to the petitioner company in view
of the provisions of section 372(13).
9. In reply to this argument, Mr. V. Srinivasamoorthy, learned counsel appearing for the respondent, would submit that it is incorrect to state that
the company continues to be an investment company. He submitted that even though the company originally carried on the business of investment
in shares, debentures and securities, it has, however, in the year 1975, changed its activities to those of hire-purchase, leasing, real estate, etc., and
that from a perusal of the balance-sheets submitted by the company at the relevant point of time it will undoubtedly reveal that financial activities
other than investments have become the prime business. He, therefore, contended that the company had lost its character or an investment
company. In support of the contention, learned counsel for the respondent would rely upon the following figures :
10. In view of the above, learned counsel would contend that the petitioner company ceased to be an investment company and that hence the
company cannot seek protection u/s 372(12) of the Act. On a careful consideration of arguments of both sides, I am inclined to accept the case of
the respondent. Even though the company was originally incorporated with the principal object of carrying on the business of investments in shares,
debentures and securities and which it carried on for quite some time, the business of the company in the other fields are comparatively extensive
as borne out from the balance-sheets, after the expansion of its activities in the year 1975 in the other fields such as hire-purchase, etc. Therefore,
even though the prime object of investments stand on record, at the relevant point of time, in practical aspect, the principal business of the
company has changed into other activities, attracting the application of the provisions of section 372(2) and (4) of the Companies Act. The
contention of learned senior counsel for the petitioners that since the respondent did not initiate further proceedings on the earlier occasion pursuant
to the first letter dated January 6, 1982, and the company''s reply dated January 29, 1982, consequently, the respondent cannot initiate action
pursuant to the present show-cause notice, is not sustainable. I am of the view that the company in question is not an investment company and hold
this point against the petitioner.
11. Mr. Govindaswaminathan, learned counsel appearing for the petitioners, next contended that even assuming that the company had lost the
character of investment company due to the subsequent enlargement of its financial activities, still in view of the exemption granted u/s 372(14), the
company is exempt from the purview of section 372, sub-sections (2) and (4), and that on this ground also, the impugned action taken by the
respondents is not sustainable in law. Section 372, sub-section (14) reads :
372(14). This section shall not apply -
(a) to any banking or insurance company;
(b) to a private company, unless it is a subsidiary of a public company;
(c) to any company established with the object of financing, whether by way of making loans or advances to, or subscribing to the capital of,
private industrial enterprises in India, in any case where the Central Government has made or agreed to make to the company a special advance
for the purpose or has guaranteed or agreed to guarantee the payment of moneys borrowed by the company from any institution outside India;
(d) to investments by a holding company in its subsidiary;
12. A perusal of the above provision will make it clear that unless the company is established with the object of financing private industrial
enterprises in India, the question of seeking exemption will not arise. In the present case, the balance-sheets of the company will reveal that the
company, of course, engaged in financing, but not to any private industrial enterprises in India to any company and so, it is not a subsidiary of any
public company as mentioned in sub-section (14) of section 372. In the circumstances, there can be no basis or justification in seeking exemption
u/s 372(14). The grant of exemption u/s 372(14) cannot apply to the petitioners. On a careful consideration, I hold this point also against the
petitioner company.
13. Learned senior counsel would finally argue that in any case even assuming that the petitioner-company is not an investment company or is not
coming within the purview of exemption provision, still the alleged violation of the provisions of the first proviso to section 372, sub-sections (2)
and (4) could be treated only as a technical violation at the worst, and taking into consideration the circumstances under which such violation could
have been made, i.e., on the bona fide impression that the company is an investment company, the petitioners must be deemed to have acted
honestly and reasonably. It was submitted that having regard to all the circumstances of the case, they may fairly be excused by exercising the
powers of this court u/s 633 and be relieved from any liability as mentioned in the show-cause notice dated September 26, 1984. But, learned
counsel for the respondent submitted that since the petitioner were fully aware of the fact that the nature of their business substantially changed,
and, consequently, the company has lost the character of investment company, it cannot be said that they acted honestly or reasonably and that,
therefore, the question of invoking the jurisdiction of this court u/s 633 is not justified. On a consideration of the facts and circumstances of the
case, I find that no doubt the company was started with the main object of carrying on the business of investments in shares, debentures and
securities, but later, due to enlargement of its activities, the main object of the company had switched over to other than investments, which the
petitioners were fully aware of and which led to the loss of the character of the company as an investment company and that they cannot claim to
have acted honestly or reasonably. The petitioners who must be aware of the procedures as well as the restrictions made in the Companies Act,
ought to have taken care to follow the provisions of amendments of the Act and the guidelines given by the Registrar of Companies. I have no
other option except to reject the contentions of the petitioners.
14. In the result, both the petitions, C.P. Nos. 93 and 101 of 1984, are dismissed, but without costs.
