A.S.CHOWDARY vs V.N.RAO

M/s. Navabharat Enterprises Limited issued prospectus on 5.9.1994 for public issue of 52,73,400 Equity Shares of the face value of Rs. 10/- each on 29.9.1994 with a premium of Rs. 40/- per share. Shri V.N. Rai the complainant applied for 2,100 shares and a sum of Rs. 1,05,000/- and on allotment of 2,100 shares he paid a further sum of Rs. 5,000/- evidenced by Ex. A 2 and the share certificates were issued to the complainant as evidenced by the copies of the share certificates Exs. A3 to A23. Thereafter, he received as shareholder the 36th Annual Report for the financial year 1993-95 i.e. Ex. A24. According to the complainant, on a careful scrutiny of the said report, he came to the conclusion that the statement made in the prospectus was false, baseless and concocted and with an intention to cheat the prospective investors. He, therefore, filed the Complaint O.P. 833/96 in the District Forum, Hyderabad against M/s. Navabharat Enterprises Limited, the 1st opposite party and Sri A.S. Choudhary, Chairman and Managing Director and eight other Directors i.e. opposite parties 2 to 10 and SEBI and Hyderabad Stock Exchange, Himayatnagar, Hyderabad were added as opposite parties 11 and 12. As the opposite parties vowed to the prospective investors like the complainant the duty to disclose truely and correctly the affairs of the Company and its future prospects and as opposite parties 2 to 10 being signatories to the prospectus, where under they suppressed the truth and correct position of the Company and painted a rosy picture in order to enthuse the prospective investors to invest their amounts, amounting to deficiency of service and unfair trade practice, the complainant claimed against opposite parties 2 to 10 a direction to the opposite parties 2 to 10 for refund of the amount of Rs. 1,05,000/- with interest @ 21% per annum, damages of Rs. 1,00,000/- and costs of Rs. 5,000/-.

THE opposite parties 1 to 10 in their counter stated that since the complainant had purchased the shares for resale, the complainant is not a consumer and that there is no defect in the shares or deficiency of service or unfair trade practice on their part, secondly the profit and loss account was drawn up by the auditors of the opposite party No. 1 Company and the statements were accordingly made taking profits and income into account and the complainant being an Auditor should have known the meaning and purport of the term ''other income'' set out in the prospectus; thirdly the SEBI watched the prospectus and specified the stringent standards fixed by it; fourthly there was no mis-statement made by the opposite parties 2 to 10 and the prospectus did not paint a rosy picture nor made a reckless misstatement and hence the complaint is liable to be dismissed. THE opposite parties 11 and 12 remained ex-parte. The complainant filed his affidavit and Exs. Al to A28 were marked on his behalf and for the opposite parties no oral or documentary evidence was adduced.

The District Forum, held that merely because the complainant purchased 2,100 shares it does not necessarily follow that they are purchased for resale, as the shares could be purchased for dividend and other benefits such as expectation of issue of bonus shares. Hence, in the absence of any evidence to show that the complainant purchased the shares for resale, it cannot be said that the complainant is not a consumer. It also did not accept the contention of the opposite parties that being a share holder and therefore a co-owner of the share capital of the Company, the complainant cannot be a consumer against his own Company, on the ground that the share holder and the Company are two different persons and when the Company commits unfair trade practice, there is no reason why the share holder should not file a complaint under the Consumer Protection Act. On merits it held that although the SEBI gave permission, it does not absolve the Directors who signed the prospectus of the liability to give a correct picture as to past performance and future projections of the Company and that as in the prospectus at page 23, the gross sales in the said financial year were projected at Rs. 116.10 crores is intended to mislead the general public as the total sales in the first six months of the financial year i.e. 31.3.1994 were only Rs. 178629 crores and calculating at that rate the total sales could not have exceeded Rs. 58 crores in the financial year but instead the prospectus projected sales of Rs. 116.10 crores. It further held that the opposite parties 2 to 10 were not statutorily entitled to include the profit on sale of capital assets as revenue income in the regular profit and loss account and the projection of profit of Rs. 7.59 crores was also made with a clear intention to mislead the general public. It, therefore, concluded that on scrutiny of the projections of sales, profit and average earning per share (EPS) in the light of actual facts and trends made a mis-statement in the prospectus with an intention to induce prospective investors and hence the opposite parties 2 to 10 indulged in an unfair trade practice. The District Forum allowed the complaint in part and directed the opposite parties 2 to 10 jointly and severally, (i) at their option, to be exercised, in writing within one month from the date of the order to buy back 2,100 shares of the opposite party No. 1 Company from the complainant, and to refund to him, Rs. 1,05,000/with interest @ 18% per annum thereon from the date of payment, or in the event of nonexercise of the said option given to them within the said period, to pay to the complainant compensation of Rs. 97,230/with interest @ 18% per annum thereon from the date of payment within one month after the expiry of the period given above for the exercise of the said option; and (ii) to pay to the complainant compensation of Rs. 15,000/- with costs of Rs. 1,500/- and dismissed the complaint against the opposite parties 1, 11 and 12 without costs.

AGGRIEVED by the said order, the opposite parties 2 to 10 preferred this appeal. It is submitted by the learned Counsel Mr. C. Kodanda Ram appearing for the appellant that there is no relationship of consumer and trader between the opposite parties 2 to 10 and the complainant and that the complainant is merely a prospective purchaser of shares when he offered to purchase the shares, since allegations in the complaint are that on account of un-true statements made in the prospectus, he being a prospective and careful investor was misled by those statements resulting in investment of huge money. The complainant in this complaint is not claiming any right as a shareholder of the Company, but his contention is that he is misled by the untrue statements made with regard to existing working of the Company and also un-founded future projections which led him to invest his money. It was held by the Supreme Court of India in Morgan Stanley Mutual Fund v. Kartick Das and Dr. Arvind Gupta v. Securities & Ex-change Board of India & Others, II (1994) CPJ 7 (SC) that it is after allotment, rights may arise as per the contract (Article of Association of Company). But certainly not before allotment. "At that stage, he is only a prospective investor of future goods. The issue was yet to open. There is no purchase of goods for a consideration nor again could he be called the hirer of the services of the Company for a consideration. In order to satisfy the requirement of above definition of consumer, it is clear that there must be a transaction of buying goods for consideration under Clause 2(i) of the said Act. The definition contemplates the pre-existence of a completed transaction of a sale and purchase. If regard is had to the definition of complaint under the Act, it will be clear that no prospective investor could fall under the Act." As the substance of the charge in the complaint is that he was being misled due to the statements made by the opposite parties 2 to 10 in the prospectus, at that stage he cannot be said to be a consumer. We, therefore, see sufficient force in the aforesaid contention.

IT is next submitted that after the purchase and allotment of shares being the shareholder of the Company he owns it alongwith other shareholders, it cannot be said that the complainant hired the services of the Company for any consideration. IT was held by National Commission that it cannot be said that the shareholder of the Company hired the services of Company for any consideration and therefore, it cannot be said there is any deficiency of services on the part of the opposite parties. But in the instant case, the basis of the complainant is that being a prospective investor, he was misled by the incorrect statement in the prospectus resulting in the investment of his money. Hence, this question may not arise for consideration. There is also no evidence to show that the complainant purchased the shares for his sake and hence it cannot be said that the complainant is not a consumer. The main question for consideration, therefore, is whether the opposite parties 2 to 10 have made any un-true statement in the prospectus which misled the complainant in investing huge amounts amounting to unfair trade practice or deficiency in service. The District Forum, Chandigarh held in para 21.5 of its order that the performance of the opposite parties No. 1 Company from 1988 to 31st March, 1994 was really encouraging and in para 26, it held that there is no doubt that in the earlier financial years, the performance of the opposite party No. 1 Company has been encouraging as to draw the prospective investors to its fold. It, therefore, cannot be said that so far as the earlier performance of the Company is concerned that there is any untrue statement made by the opposite parties 2 to 10. The District Forum held that the financial year of the Company is 18 months commencing from 1.10.1993 to 31.3.1995 and the prospectus issued on 5.9.1994 i.e. 11 months after the commencement of the financial year is in question. At page 15 of the prospectus, it had shown the total sales within the first six months of the financial year i.e. 31.3.1994 at Rs. 17.86 crores and calculating the total sales in the entire financial year could not be expected to exceed to Rs. 58.0 crores. It further held that on page 23 of the prospectus in the audited Profit & Loss Account for the said financial year, given at page 15th of the 36th Annual Report for the financial year 1993-95, profit before taxation is shown at Rs. 87,21,968/-, balance of profit from the previous year accounting to Rs. 1,72,54,412/and excess provision for income tax made in the earlier years accounting to Rs. 14,74,081/- and the Profit and Loss Account discloses that the profit was worked out by including other income of Rs. 18,30,96,939/- in the income which is the amount of the proceeds of sale of office building of the opposite party No. 1 in Hyderabad and they wanted to include profit on sale of capital assets as revenue income in the regular profit and loss account. Thus the position as on the date of the issue of prospectus is not so encouraging and if these items were excluded the Company cannot make much profit. But the opposite parties by adding the income from the sale of the building as other income made an untrue statement though statutorily it should not include in the Profit and Loss Account. But it has to be seen that the Profit and Loss Account is prepared by an Auditor who certifies it to be true and correct statement and no statutory provision was mentioned in the order of the District Forum, prohibiting showing of the profit realised by sale of building of the Company as other income. We are, therefore, of the view that the present picture basing on the auditor''s report as mentioned in the prospectus cannot be said to be untrue statement made by the opposite parties 2 to 10 with regard to the working of the Company. The District Forum, further found that the opposite parties should not have projected by the end of the Financial year Rs. 116.10 crores and the net profit after tax at Rs. 7.59 crores. The reasoning given by the District Forum for coming to the conclusion that the opposite parties 2 to 10 purposefully inflated the future sales and no profits and that having regard to the actual sales made during the first 11 months of the financial year and the profit earned by the opposite parties should not have given/stated the future transactions of the Company by giving rosy picture. But it has to be seen, if the profit and loss amounts rightly be included in the profit and loss Account from regular business, the District Forum is not justified on in coming to the conclusion that the prospectus had in reality suffered a loss of Rs. 12.0 crores, if the profit on sale of assets was excluded and therefore adopted a window dressing tactics to exploit general public and get the shares listed on the Stock Exchange so that their private share holdings of several lakh shares including bonus shares could be easily marketed. It has to be seen that on page 16 of the prospectus, the opposite parties have disclosed the reasons for the increase in the sales and in the net profits. It was stated that "NBL has revised its marketing strategy and exports are now contemplated through third world countries. Further, the debt repayment obligations on Government-to-Government basis in case of Russia and India consequent to Rupee-Rouble parity arrived at is expected to be in the region of Rs. 2,500/ - crores per annum. This adjustment would mostly be through commodity export and NBL is confident of maintaining its exports to Russia and of further growth in that market." It is well known that the Company''s main exports are cigarettes, tea, tobacco, etc. It rightly thought having regard to the Rupee-parity arrived at by the Government of India and the Government of Russia, its exports will be considered an increase. But, unfortunately, due to some political changes they could not export the expected quantity to Russia. But, it cannot be said that if due to un-foreseen contingencies, the exports of the Company were adversely affected, it amounts to an untrue statement in the prospectus issued by the opposite party. The future projections need not be exclusively based on the sales effected during the six months of the financial year, but the Company can also look into the future avenues and strategies and the arrangement between the Government which can reasonably be expected to enhance the exports of the Company. Since the projection of profit after tax depends on the sales and as the Company reasonably can expect lot of exports to Russia, it also cannot be said that the projection of profits after tax or the projected average of earning per share in the next three years at Rs. 19.26 is a false statement. It may be that the Company ultimately could not make profits if it cannot succeed in exports. But that by itself cannot be a circumstance for holding that the statement made with regard to future projects are false and fraudulent. We are, therefore, not inclined to accept the finding of the District Forum that the opposite parties intentionally made a reckless statement and with the help of false projections, painted a rosy picture of its future prospects to induce the investors to part with their monies.

IT is next observed that to exploit the general public, it painted a rosy picture to invest their amounts and the shares listed on the Stock Exchange to be able to sell their shares, inclusive of bonus shares in the market at an artificially high rate and make a fortune for themselves at the expense of the subscribers. The opposite parties 2 to 10 got allotted to themselves shares inclusive of bonus shares worth several lakhs of rupees. But this observation is not based on any evidence except the statement of the complainant himself.

IT is next contended that u /Section 62 of the Companies Act, there is a civil liability of the Directors who signed in the prospectus if the subscribers of the shares on the faith of the prospectus suffered any loss or damage by reason of such untrue statement, whether the Directors made it intentionally and fraudulently certain untrue statement, require voluminous evidence particularly, the examination of witnesses in order to show that the Directors have intentionally and evidently made such untrue statement. The liability under the Companies Act is that of civil liability and elaborate enquiry has to be made on the basis of oral and documentary evidence. IT is also the circumstance to be taken into account that SEBI has vetted the prospectus. Though such act is not a conclusive proof of the corrections of the statement made in the prospectus but prima facie it shows that the prospectus issued was in confirmity with all the legal requirements. But no oral evidence was adduced in this case and the complainant filed only copy of the prospectus, annual report and the legal notice and paper cuttings. We are of the view that with the said evidence on record, it is not possible to go into the complicated questions of fact and law. We are, therefore, of the view even on this ground the District Forum ought to have referred the parties to civil suit, with regard to quantum of compensation awarded, although, we are not inclined to go into the question. For all the aforesaid reasons, the appeal is allowed and the order of the District Forum is set aside. There shall be no order as to costs in this appeal. Appeal allowed.