BHAGWATI DEVELOPERSversusPEERLESS GENERAL FINANCE & INVESTMENT CO. LTD. AND ORS.

A                          BHAGWATI DEVELOPERS
                                         v.
        PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD.
                           AND ORS.

                                AUGUST 9, 2005
B
             [S.N. VARIAVA AND DR. AR. LAKSHMANAN, JJ.]

         Companies Act, 1956 :

         S. 205-Issue of Bonus Shares-Permissibility of-Peerless General
c Finance and Investment Company-Article of Association-Articles 2 and
    182-Company issuing bonus shares out of Revaluation Reserve-Held,
    Companies Act specifically permits utilization of reserve arising from
    revaluation of assets for purpose of issuing fully paid up bonus shares-
    Accordingly, Article 182 authorises the Company to issue Bonus Shares out
    of reserve arising from revaluation of capital assets.
D
          Reserve Bank of India issued directions to investment companies,
    inter alia, that depositors' monies must be shown in their balance-sheets
    as a "liability" instead of income. Accordingly, Respondent No. I, being
    such investment company, become liable to transfer certain amount to
E   depositors' Account by debiting the Profit and Loss Account with the
    equal amount. The Reserve Bank oflndia asked the respondent to prepare
    its balance-sheet in conformity with its directions. In order to increase the
    share capital, the company proposed to issue Bonus Shares out of
    Revaluation Reserve. The appellant, one of the share-holders of the
    Company, challenged the move the respondent by filing a suit for
F   declaration that the respondent was not entitled to issue Bonus Shares out
    of Revaluation Reserve. He later filed an api:;eal before the High Court
    and prayed for an injunction restraining the respondent from issuing
    Bonus shares. The appeal was disposed of by the Division Bench of the
    High Court holding that the respondent was entitled to issue Bonus shares
    out of Revaluation Reserve. Aggrieved, the share-holder filed the present
G
    appeal.

         Dismissing the appeal, the Court

         HELD : 1.1. Section 205 of the Companies Act, 1956 provides that
H   the dividend could only be issued out of profits of the company. The
                                        502
   BHAGWATI DEVELOPERS v. PEERLESS GEN. FIN. & INVT. CO. LTD.503

proviso to sub-s.(3) of s.205 permits capitalization of profits or re,erve        A
of a company for the purpose of issuing fully paid up bonus shares or
paying up any amount for the time being unpaid or 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, Articles 182
of Articles of Association of the respondent-company authorizes the               B
company to issue Bonus shares out of reserves arising from revaluation
of capital assets. [509-C-E]

      1.2. The word 'dividend' as defined in Article 2 of Articles of
Association of the Company includes 'bonus'. Thus the words 'available
for dividends' appearing in Article 182 would necessarily mean "available         c
for dividend/bonus". Further, the words, "available for dividends" would
be applicable to all categories of funds mentioned in the said Article.
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.        D
                                                [507-F-G; 509-A-B; D-E)

      •Peerless General Finance and Investment Co. Ltd v. Reserve Bank of
India, [1992) 2 SCC 343, referred to.

     2. The SEBI guidelines, which have been relied upon by the appellant,        E
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, there is no
infirmity in the impugned judgment wherein it has been held thatthe SEBI
guidelines were not applicable to the Respondent Company. [506-F-G)
                                                                                  F
    3. There is nothing wrong in the observation, in the impugned
judgment, to the effect that the Circular dated 6th September, 1994 does
not have any mandatory effect. This circular is merely advisory in
character.

     CIVIL APPELLATE JURISDICTION : Civil Appeal No. 12640 of                     G
1996.

     From the Judgment and Order dated 23.8.95 of the Calcutta High Court
in A. No. 665 of 1994.
     C. Mukund, Ashok Jain, Pankaj Jain and Bijoy Kumar Jain for the              H
    504                   SUPREME COURT REPORTS [2005] SUPP. 2 S.C.R.

A   Appellant.

        Ashok Desai, Bhaskar P. Gupta, Abhijit Chatterjee, S. Sukumaran, A.
    Deb Kumar, Ramesh Babu M.R., Ms. Radha Rangaswamy and Pradeep
    Kumar Malik for the Respondents.

B         The Judgment of the Court was delivered by

        S. N. VARIA VA, J. : This Appeal is against the Judgment dated 23rd
    August, I 995 passed by the Calcutta High Court.

          Briefly stated the facts are as follows:
c
           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 oflndia 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
D
    v. Reserve Bank ofIndia] this Court held that the Reserve Bank of India had
    authority and power to issue direction in order to provide stable, identifiable
    and monitorable 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
E   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
F
    Reserve Bank of India were valid the Respondents became liable to transfer
    Rs. 217.34 crores to the Depositors' Ale by debiting the Profit & Loss
    Ale with Rs. 217.34 crores. The Reserve Bank of India had, by a letter dated
     I 1th March, 1992, called upon the Respondents to prepare its Balance Sheet
    in conformity with its earlier directions. It seems that the Respondent
G   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
H
       BHAGWATI DEVELOPERS v. PEERLESS GEN. FIN. & INVT. CO. LTD. [VARIAVA] 505

    into 35,00,000 Equity Shares of Rs. 100 each. The Notice also provided as          A
    follows:

            "RESOLVED"

            (a)   That pursuant to the provisions of Article 182(1) of the
                  Articles of Association of the Company, a sum of Rs.                 B
                  31,08,36,000 out of Rs. 73,82,87,26l.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 directed to appropriate the said sum of        C
                  Rs. 3 l,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         D
                  up in full of the unissued Equity Shares of the Company of Rs.
                   l 00 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       E
                  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        F
                  the terms and conditions contained in the Memorandum and
                  Articles of Association of the Company and the Guidelines for
                  Bonus Shares issued by SEBJ.

            (c)   That such allotment of Bonus Shares to non-resident



-           (d)
                  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.

                  That. the Bonus Shares so allotted pursuant to this resolution
                                                                                       G



                  shall rank in all respects pari passu with the existing fully paid   H
    506                   SUPREME COURT REPORTS [2005] SUPP. 2 S.C.R.

A                  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"

B           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
c     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
D     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
E     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 out of Revaluation Reserve.

          The Appellant challenges the power of the Respondent Company to
F   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.

G        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
H   applicable to the Respondent Company.
        BHAGWATI DEVELOPERS v. PEERLESS GEN. FIN. & INVT. CO. LTD. (VARIAVA) 507

         We are also in agreement with the observation, in the impugned               A
    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:
                                                                                      B
             "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
                                                                                      c
             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,    D
                         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.                           E
                  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.                                                            F
                   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
                                                                                      G



    of Capital Assets only in such cases where the "funds are available for
    dividends". It was submitted that the words "available for dividends" under
                                                                                      H
    508                    SUPREME COURT REPORTS [2005] SUPP. 2 S.C.R.

A   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
    arising from the business of the company. It was submitted that both the
B   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
c   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
D   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
E   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
F
              (a)   Share Premium Account,

             (b)    Capital Redemption Reserve Account and

             (c)    any monies, investments of other assets forming part of the
G                   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."
H
    BH..\GWATI DEVELOPERS v. PEERLESS GEN. FIN. & INVT. CO_ LTD. [VARIAVA] 509

If read in this manner it is clear that the words "available for dividends"          A
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
                                                                                     B
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 Pre1nium Account and               c
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              D
utilization of reserve arising fro1n 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      E
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                   F
complied with the directions and had been granted time of 7 years to
regularize its accounts. In our 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.
                                                                                     G
     In this view of the matter, we see no reason to interfere. The Appeal
stands dismissed. There will be no order as to costs.

R.P.                                                          Appeal dismissed.