CONSUMER PROTECTION COUNCIL vs State Bank of India

THIS group of 30 complaints in which parties are common involves common questions of law and facts. Therefore, for the sake of convenience, they are disposed of by this common judgment.

THE complainant in each of these complaints (complainant for short) is a public charitable trust registered under the Bombay Public Trust Act, 1950 and the Societies'' Registration Act, 1860. THE complainant is also a recognised consumer association. The case of the complainant is as follows: 3.1. State Bank of India, Opponent No. 1 in each of the complaints is a banking company constituted under the State Bank of India Act, 1955. It had offered to the public 1240 lakhs of equity shares of Rs. 10/- each at a premium of Rs. 90/- per share to collect share capital of 1240 crores on terms and conditions set out in the prospectus, gist whereof was printed on the application form issued by Opponent No. 1 which was to be submitted to acquire equity shares (shares for short) offered as stated above. The relevant instructions and guidelines for filling up application form, mode of payment, eligibility criteria for valid application, allotment criteria etc. were amongst other things stated in the gist of prospectus printed on the application form. Opponent No. 2 in each of the complaints is Registrar to the aforesaid public issue of equity shares of Opponent No. 1. Opponent No. 3 in each of the complaints is a statutory controlling and supervising authority empowered to issue guidelines and instructions in connection with issue and allotment of shares etc. Opponent No. 4 in each of the complaints is Stock Exchange under whose supervision the basis of allotment of shares is finalised.

3.2. The aforesaid public issue opened on December 15, 1993 and closed on December 24, 1993. The allotment/refund/partial refund orders, as the case may be, were required to be issued within 70 days from December 24, 1993. Therefore, such orders were expected to be received by investors within 8 days thereafter i.e., by March 12, 1994. Opponent No. 1 was liable to pay interest for payment delayed beyond March 12, 1994 unless further time was allowed to it by Opponent No. 3 on account of unforeseen circumstances. In the event of issue being oversubscribed as per para 15(c) of instructions, the basis of allotment of shares was to be finalised by Opponent No. 1 in consultation with Opponent No. 4 and representative of Opponent No. 3.

3.3. Persons whose names are included in Annexure-II to each complaint (applicants for short) applied for shares as mentioned in their applications and lodged their applications with the bankers to the issue appointed by Opponent No. 1 for the purpose of collecting applications for shares and application monies in form of cash or cheques or draft or stock invest. The details of the applications and payment made by each of the applicants are stated in Annexure-II to each complaint.

3.4. The issue was oversubscribed by 1.78 times and, therefore, basis of allotment of shares was to be made as per the guidelines issued by Opponent No. 3 and it was required to be finalised in consultation with Opponent No. 4 and representative of Opponent No. 3. The Opponent No. 3 had issued guidelines as regards the manner in which shares were to be allotted in the event of oversubscription of issue and such guidelines are at Annexure-III to each of the complaints.

3.5. The case of the complainant is that applicants had applied for shares in accordance with instructions contained in the application forms and, therefore, their applications were valid applications. They were, therefore, entitled to allotment of shares on the basis of allotment criteria finalised by Opponent Nos. 1 and 2 in consultation with Opponent Nos. 3 and 4. The criteria or the basis for allotment of shares was published in the newspapers by press note dated February 25, 1994 issued by Opponent No. 1. A copy of the press note is at Annexure IV to each of the complaints. By this press note Opponent Nos. 1 and 2 thanked the investing public for its overwhelming response to the public issue to shares and stated that 1660217 valid applications were received for the public issue resulting in an oversubscription of 1.78 times. The basis for allotment for public mutual funds and financial institutions were also stated in the press note. It is submitted that as per the said press note and public announcement each of the applicants was entitled to allotment of minimum number of shares on the basis of scheme of "firm allotment" according to the category in which his application fell. It is submitted that in spite of the above clear position, the applicants were refunded entire application money without assigning or giving any reason why no allotment of shares was made in their favour. It is submitted that the Opponent Nos. 1 and 2 have not applied their mind and acted arbitrarily in not allotting minimum number of shares to the applicants. The complainant wrote registered A.D. letter dated March 26, 1994 to Opponent Nos. 1 and 2 drawing their attention to the complaints received by it in regard to non-allotment of shares and seeking clarification for not following the scheme of "firm allotment" in making allotment of shares. However, no reply was received from Opponent Nos. 1 and 2. Copy of the said letter addressed to Opponent Nos. 1 and 2 is at Annexure VI to each of the complaints.

3.6. It is submitted that Opponent Nos. 1 and 2 have acted in an arbitrary and unlawful manner by not allotting or allocating shares to the applicants as per the scheme of "firm allotment". Opponent Nos. 1 and 2 have acted in arbitrary manner in rejecting applications of the applicants without assigning or giving reasons for rejection of their applications and their action is violative of principles of natural justice and fundamental rights of the applicants. Therefore, according to the complainant. Opponent Nos. 1 and 2 have indulged in unfair trade practice and/or service rendered by them suffer from deficiency which have caused financial loss, mental torture, inconvenience, expenditure etc. to the applicants.

3.7. On the above grounds, the complainant has prayed that Opponent Nos. 1 and 2 be directed to allot minimum number of shares to each of the applicants under the scheme of "firm allotment" category-wise or to pay compensation/damages of Rs. 8,500/- to each applicant entitled to allotment of 50 shares calculated at Rs. 170/- per share being the difference between market price and the price at which each share was offered together with 18% interest and cost of the complaint.

Opponent No. 1 has submitted reply/ written statement Exh. 9 contesting the complaints and raising preliminary issues. It is submitted that having regard to the decision of the Supreme Court in Morgan Stanley Mutual Fund v. Kartick Das reported in II (1994) CPJ 7 (SC), the applicants on whose behalf complaints are filed are not consumers within the meaning of Consumer Protection Act, 1986 (Act for short) and, therefore, these complaints are not maintainable in law and they deserve to be dismissed in limine. It is further submitted that each of the applicants has separate cause of action, if any, and, therefore, common complaint cannot be filed on behalf of large number of applicants. Such clubbing which is not permissible under law has been done only with a view to bring the matter within the pecuniary jurisdiction of this Commission. Therefore, the complaints in the present form are not maintainable. It is further submitted that prayer for compensation made in the complaints makes it clear that the main grievance of the applicants is about the loss of profit which would have been made had shares been allotted and, therefore, the transaction being of commercial nature, would not come within the purview of the Act. The registered office of Opponent No. 1 is situate at Bombay and, therefore, this Commission has no jurisdiction to entertain the complaints. On the above preliminary grounds, Opponent No. 1 has prayed for dismissal of the complaints. It is submitted that if the preliminary issues are decided against Opponent No. 1, it reserved right to file further detailed reply/written statement.

IT may be mentioned that no reply/ written statement is filed on behalf of Oppo"nent No. 2. Opponent No. 3 has forwarded its submissions opposing the complaints by letter dated June 20, 1994. IT is submitted that Supreme Court in Morgan Stanley Mutual Fund''s case (supra) has held that a prospective investor like the applicants is not a consumer under the Act. Shares did not exist till allotment of shares takes place. Therefore, at the stage of application, there are no goods which are in existence. Under the circumstances, this Commission has no jurisdiction to entertain the complaints. Opponent No. 4 has filed written statement Exh. 8. It is submitted on its behalf that the complaints which are without any basis whatsoever, are unjustified and/or wholly misconceived and deserved to be dismissed. It is further submitted that there is no privity of contract between the complainants or applicants and Opponent No. 4. Opponent No. 4 is neither necessary nor a proper party to the complaints and no relief could be claimed against it. It is further submitted that there is no question of rendering service and the complainant or the applicants were not entitled to claim any compensation or damages under the Act. It, therefore, prayed that the complaints be dismissed.

WITH the consent of the parties and at their request, we have taken up the hearing of the complaints only of preliminary issues raised by the opponents at this stage. It is agreed between the parries that the question of allotment of shares to the applicants will be required to be considered on merits only if the opponents fail on the preliminary issues. It is contended on behalf of the opponents that these complaints are not maintainable in view of the decision of the Supreme Court in the case of Morgan Stanley Mutual Fund (supra). It is submitted that the applicants had merely applied for shares and no shares were allotted to them. They are, therefore, not consumers within the meaning of ''consumer'' as defined under the Act. It is submitted that no question of deficiency of service or unfair trade practice is involved in these complaints. Therefore, as held by the Supreme Court, these complaints are not maintainable. On the other hand it is submitted on behalf of the complainant that said decision of Supreme Court has no application to the facts of the instant case and that in view of the principles settled by various decisions of the Supreme Court, National Commission and this Commission, the complaints are maintainable and the applicants are entitled to the reliefs as prayed for in the complaints. In Morgan Stanley''s case, the appellant before the Supreme Court was a domestic Mutual Fund registered with Securities and Exchange Board of India (Opponent No. 3 herein) under Registration No. M.F./905/93/ 1 dated 5.11.93. The appellant was managed by Board of Trustees. Pursuant to Opponent No. 3 (Mutual Fund) regulations, the investment management company of the appellant Morgan Stanley Asset Management India Private Limited was registered with Opponent No. 3 on 5.11.1993. Under such registration Morgan Stanley Asset Management India Private Limited was constituted as Asset Management Committee of the appellant. Morgan Stanley Asset Management India Private Limited was subsidiary of Morgan Stanley group Inc. which held 75% of equity, the balance being held by Indian shareholders such as Housing Development Finance Corporation (HDFC), Stock Holding Corporation of India etc. Morgan Stanley Estate Management India Private Limited was granted certificate of incorporation on 18.10.1993 by Registrar of Companies, Bombay. Memorandum and Articles of Association had been approved by Opponent No. 3 as per the provisions of the said regulations. The draft scheme of the appellant was approved by Board of Trustees by circular resolution dated 8.3.1993. This was forwarded to Opponent No. 3 for its approval on 10.11.1993. The scheme was only scrutinised and examined by Opponent No. 3 and Opponent No. 3 gave its approval and certain amendments were suggested. Upon receipt of such approval for the scheme the appellant and Investment Manager took necessary steps to begin marketing the scheme by issue of advertisements. All advertisements and publicity material were approved by Opponent No. 3 in writing before publication as required by the regulations. Pursuant to such approval, the appellant commenced advertising the public issue. On 18.12.1993 the advertisements and hoarding were released. One Piyush Agrawal filed a suit before the learned Sub-Judge, Tis Hazari Courts, Delhi for injunction restraining the public issue from being floated by the appellant. On 24th December, 1993 an interim order was passed. Aggrieved by the same, the appellant moved the High Court in C.M. (M) No. 543 of 1993. On 3rd January, 1994 the said order passed by learned Sub Judge was stayed. That was subsequently confirmed on 4th January, 1994. One Dr. Arvind Gupta filed Writ Petition No. 14 of 1994 against Opponent No. 3. In effect, he sought to stay the public issue from being floated. That Writ Petition was rejected.

ON the same grounds, as were urged in the Writ Petition, the respondent before the Supreme Court moved the Calcutta District Consumer Disputes Redressal Forum seeking to restrain the public issue from being floated. The principal grounds taken were that the appellants offering circular was not approved by Opponent No. 3. There were several irregularities in the same. The basis of allotment is arbitrary, unfair and unjust. The appellant was seeking to collect money by misleading the public. The Calcutta District Consumer Disputes Redressal Forum passed an order on 4.1.1994 as set out in the decision of the Supreme Court. Aggrieved by the said order Civil Appeal arising out of SLP (C) No. 272 of 1994 came to be preferred.

AGAINST the dismissal of Writ Petition No. 14 of 1994 by the High Court of Delhi, Civil Appeal arising out of SLP No. 381 of 1994 came to be preferred before Supreme Court. The following questions came up for consideration before the Supreme Court in the above matters:- (i) Whether the prospective investor could be a consumer within the meaning of the Act? (ii) Whether the appellant-company ''trades'' in shares? (iii) Does the Consumer Protection Forum have jurisdiction in matters of this kind? (iv) What are the guiding principles in relation to the grant of an ad-interim injunction in such areas of the functioning of the capital-market and public issues of the corporate sectors and whether certain ''venue restriction clauses'' would require to be evolved judicially as has been done in cases such as State of West Bengal & Ors. v. Swapan Kumar Guha and Others and Sanchaita Investments and Others, (1992) I SCC 561 etc.? (v) What is the scope of Section 14 of the Act?

The Supreme Court observed that answer to the above questions would decide not only the fate of Civil Appeal but also the appeal Arising out of SLP (C) No. 381 of 1994. The Supreme Court then proceeded to set out the factual matrix and took up for consideration question No. (i).

THE Supreme Court after referring to the relevant provisions of the Act and the Sale of Goods Act, decision of Privy Council in Maneckji Pestonji Bharucha & Ors. v. Wadi Lal Sarabhai & Com., AIR 1926 PC 38 and the decision of Federal Court in Madho Lal Sindhu of Bombay v. Official Assignee of Bombay & Ors., AIR 1950 FC 21 observed as follows:-- "THErefore, at the stage of application it will not be goods. After allotment different considerations may prevail. A fortiori, an application for allotment of shares cannot constitute goods. In other words, before allotment of shares whether the applicant for such shares could be called a consumer? In Commissioner of Income Tax (Central) Calcutta v. Standard Vacuum Oil Co., AIR 1966 SC 1397 while defining shares, this Court observed "A share is not a sum of money; it represents an interest measured by a sum of money and made up of diverse rights contained in the contract evidenced by the articles of association of the Company."

THEreafter, the Supreme Court proceeded to conclude as follows: "THErefore, 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 on 27.4.1993. 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 preexistence 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. What is that he could complain of under the Act? This takes us to the definition of complaint under Section 2(c) which reads as follows:

"2(c) "complaint" means any allegation in writing made by a complainant that - (i) as a result of any unfair trade practice adopted by any trader, the complainant has suffered loss or damage; (ii) the goods mentioned in the complaint suffer from one or more defects; (iii) the services mentioned in the complaint suffer from deficiency in any respect; (iv) a trader has charged for the goods mentioned in the complaint a price in excess of the price fixed by or under any law for the time being in force or displayed on the goods or any package containing such goods, with a view to obtaining any relief provided by or under this Act." Certainly, Clauses 2 (iii) & (iv) of the Act do not arise in the case. THErefore, what requires to be examined is, whether any unfair trade practice has been adopted. THE expression trade practice as per rules shall have the same meaning as defined under Section 369(a) of Monopolies and Restrictive Trade Practices Act of 1969. That again cannot apply because the company is not trading in shares. THE share means a share in the capital. THE object of issuing the same is for building up capital. To raise capital, means making arrangements for carrying on the trade. It is not a practice relating to the carrying of any trade. Creation of share capital without allotment of shares does not bring shares into existence. THErefore, our answer is that a prospective investor like the respondent or the association is not a consumer under the Act."

The Supreme Court then proceeded to answer question Nos. (ii) and (iii). So far as question No. (ii) was concerned. Supreme Court held that it was clear from the above discussions that the question of appellant company trading in shares did not arise. Answering question No. (iii) the Supreme Court held that in view of answers to question Nos. (i) and (ii) it follows that Consumer Protection Forum has no jurisdiction whatsoever.

IN our opinion, the above decision of the Supreme Court in the case of Morgan Stanley Mutual Fund is a complete answer to the questions which are raised in the complaint. IN instant case also the applicants had only made applications for allotment of shares. As held by the Supreme Court, at the stage of application, there are no goods in existence. It is only after allotment that right may arise as per the contract (Articles of Association of the Company) but certainly not before allotment. At the stage of application, the applicant is only a prospective investor of furture goods. There is no purchase of goods for consideration nor again could he be called a hirer of services of the company for consideration. IN order to satisfy the requirement of definition of consumer contained in Section 2(d) of the Act, there must be a transaction of buying of goods for consideration under Clause 2(i) of the Act. The definition contemplates a pre-existence of completed transaction of sale and purchase. Therefore, prospective investor would not fall under the Act. There is also no question of hiring of service of Opponent No. 1 for consideration. As held by Supreme Court, the question of unfair trade practice also does not arise. Opponent No. 1 is not trading in shares. A share means a share in the capital. The object of issuing of shares is for building up capital. To raise capital, means making arrangements for carrying on the trade. It is not a practice relating to the carrying of any trade. Creation of share capital without allotment of shares does not bring shares into existence. Therefore also prospective investor like the applicants is not consumer under the Act. As pointed out above, the grievance which are made on behalf of the applicants by the complainant are, (1) there is unfair trade practice adopted by the opponents; and (2) services of opponents suffer from deficiency in various respects. As held by the Supreme Court these questions would not arise in case of the applicants who have merely made applications for allotment of shares. The applicants are not consumers as defined in the Act and, therefore, these complaints are not maintainable. IN our opinion, in view of the direct decision of the Supreme Court in the case of Morgan Stanley Mutual Fund on the questions involved in this complaint, we do not consider it necessary to refer to or deal with other contentions which are raised on behalf of the complainant and various decisions which are cited before us. These complaints, in our opinion deserve to be dismissed in view of the aforesaid decision of the Supreme Court. In the result, these complaints are dismissed. However, in the facts and circumstances of the case, there will be no order as to costs. Complaints dismissed.