Reportable
IN THE SUPREME COURT OF INDIA
CRIMINAL APPELLATE JURISDICTION
CRIMINAL APPEAL No. 948 OF 2006
Varghese K. Joseph .. Appellant
Versus
The Custodian & Ors. ..Respondents
JUDGMENT
GYAN SUDHA MISRA, J.
This appeal has been filed under Section 10 of
the Special Courts (Trial of Offences Relating to
Transactions in Securities) Act, 1992 (hereinafter referred to
as `the Special Court Act of 1992') challenging the order
dated 28.11.2005 passed by the Special Court constituted
under the Special Courts Act 1992 bearing Miscellaneous
Application No. 536 of 2005 whereby the Special Court was
pleased to reject the application summarily indicating that
the application of the appellant for certification of shares by
the respondent - Custodian had been received on 27.8.2005
after the cut off date for the certification due to which it
could not be entertained.
2. The question inter alia which arises for
consideration in this appeal may be crystallised and stated
as to whether the Special Court was right in rejecting the
application of the appellant-investor seeking certification of
the tainted shares on the ground of delay due to violation of
cut off date in spite of absence of a statutory provision to
that effect as also the fact that the appellant-investor
admittedly had no role or involvement in treatment of the
alleged equity shares as tainted which required certification
before payment of dividends on the same.
3. The substantial details and circumstances under
which this appeal arises indicate that the appellant herein
who is a small investor had purchased 100 equity shares of
the respondent No.2 Company namely Reliance Industries
Ltd. on 12.6.1989 and payment of the same was made
through his share broker - respondent No.4 - Abex and
Company which perhaps is not in existence now. However,
the payment for purchase of the shares had admittedly been
2
made through Union Bank of India by way of a demand
draft. It is the case of the appellant herein that the
respondent No.4 despite repeated enquiries never informed
the appellant regarding the status of his shares and hence
the appellant was absolutely in dark and had no clue about
the same. The appellant in the meantime was also living
abroad due to his professional obligation and could not
ascertain the fate of his shares.
4. However, when the appellant finally approached
respondent No.2 - Reliance Industries Ltd. seeking
dividend and other consequential benefits like issue of
rights and bonus on shares, it was informed to the
appellant by the respondent No.2 that the shares of the
appellant on which dividend was claimed, were found to be
tainted and hence it was unable to consider the request of
the appellant for payment of dividends. The appellant,
thereafter also learnt that there had been mutual
correspondence between the share broker companies i.e.
respondent No.3 Karvy Consultants Ltd. and respondent
No.4 - Abex and Company for taking the accounts of the
shares in question vide Annexure-P1 in order to complete
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certain procedural formalities. But as per the case of the
appellant, neither the respondent No.3 nor respondent No.4
cared to inform the appellant about the said development
through which he had purchased the shares. The appellant
has annexed the copy of the letter dated 12.7.1995 vide
annexure P-1 which was written by the respondent No.4 -
Abex and Company to Respondent No.3 - Karvy
Consultants Ltd.
5. Since the appellant had been informed by the
respondent No.2 - Reliance Industries Ltd. that the
dividends could not be paid to him as the shares were held
to be tainted, the appellant also tried to ascertain the status
of his shares purchased by him through respondent Nos. 3
and 4. However, it is alleged by the respondent No.3 -M/s.
Karvy Consultants Ltd. that it had informed the appellant to
submit appropriate application seeking certification of the
tainted shares as the equity shares in question stood in the
name of M/s. Fair Growth Financial Service Ltd. which
subsequently became the subject matter of attachment as
per the order of the Government of India since it was found
to be involved in some scam and hence the shares issued by
4
this company required certification by the Custodian as per
order of the Special Court (Trial of Offences relating to
Transactions in Securities) Act, 1992. But the appellant's
case is that he never received the said communication nor
the said letter indicated anything about the cut off date for
making application for certification of the tainted shares.
Annexure P-2 is the copy of the letter dated 5.1.2001 which
is allegedly written by the respondent No. 3- M/s. Karvy
Consultants Ltd. to the appellant directing him to file the
application seeking certification of shares.
6. The appellant in the meantime had also made
further enquiries in regard to the certification of the tainted
shares and also for consequential benefits which accrued on
the shares in question. He then learnt that he would have
to file an application before the Special Court seeking
direction to the Custodian for certification of shares as it
was reiterated that the shares in question stood in the name
of M/s. Fair Growth Financial Services Ltd. - respondent
No.5 which were the subject-matter of attachment as per
the Government of India order since they were found to be
tainted. A clarification also is alleged to have been issued
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by the respondent No.3 -Karvy Consultants Ltd. that in
order to do justice to the bonafide investors, the Special
Court in its orders dated 27.7.1992 and 31.7.1992 bearing
Misc. Application Nos. 1, 2 and 3 of 1992 laid down a
procedure for certification of the tainted shares through the
representative of the Custodian. It was informed that the
said Hon'ble Court had fixed the last date for submission of
such application for certification which was 16.8.1995 and
the Special Court had further directed that whoever fails to
submit application for certification on or before 16.8.1995,
the party would have to approach the Special Court directly
for certification. Subsequently, the cut-off date appears to
have been extended to 27.06.2005 as per order of the
Special Court on application having been made by the
custodian. Hence, it claims to have requested the appellant
- Mr. Joseph that he should file an application/petition
mentioning therein the reliefs/directions intended to be
sought from the Hon'ble Special Court (Torts) through the
advocate along with the documents, papers at the address
of the Special Court which was stated therein. It was
further requested to the appellant to forward the relevant
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order from the Special Court along with original share
certificates and transfer deeds to enable it to do the needful.
But the appellant's case is that he never received the said
communication etc.
7. As per the appellant's version the original shares
and transfer deeds had been delivered to the respondent
No.4 -Abex and Company - the share broker company
through whom the appellant had purchased the shares as
under the rules, the share certificates were not issued from
the company to the appellant but the same was lying in the
hands of respondent No.3 i.e. Karvy Consultants Ltd.
through respondent No.4 and so the appellant could not
produce the share certificates. However, the respondent
No.4 -Abex and Company had assured the appellant that it
would return the share along with the Clearance Certificate
from the Stock Exchange but the respondent No. 3 i.e.
Karvy Consultants Ltd. was unable to process the share
through respondent No.6 - Madras Stock Exchange as they
were tainted. The appellant, therefore, stated that he is a
bonafide purchaser and the owner of 100 tainted shares of
respondent No. 2 and the said shares were required to be
7
transferred in the name of the appellant along with all the
accrual till dates after certification. The appellant as
already stated also learnt that the tainted shares required
certification through respondent No.1 - the Custodian and
for this purpose he would be required to seek permission
from the Special Court under the Special Courts Act of
1992.
8. In view of the aforesaid position, the appellant
filed an application before the Special Court under the
provisions of Special Courts Act of 1992 wherein he prayed
for certification of the shares by the respondent No.1 -
Custodian and its release and payment of accruals but as
per the letter from the office of the Special Court it was
intimated that the last date to submit application for
certification was 27.6.2005 and hence it could not be
entertained.
9. The appellant, therefore, filed an application
before the Special Court on 27.08.2005 stating that he was
not aware of any cut off date regarding the filing of the
application for certification of shares by the Custodian and
was also not aware of the procedure or the last date of filing
8
any application for certification until he received the letter
on 22.8.2005. Hence, the appellant/applicant was not able
to file any application for certification of the tainted shares
within the time fixed by the Special Court.
10. The learned Judge of the Special Court however,
was pleased to dismiss the application on 28.11.2005
stating that the plea of the applicant that he was not aware
of the procedure laid down by the Special Court for
certification of the tainted securities etc. was devoid of
merit and the application seeking permission for
certification which was received on 27.8.2005 i.e. after the
cut off date which was subsequently extended to 27.6.2005
was not found fit to be entertained. Hence, the application
was dismissed by the Special Court against which this
appeal has been filed by the appellant under Section 10 of
the Special Courts Act of 1992 as already indicated
hereinbefore.
11. A show cause notice was issued to all the
respondents in this appeal but no one appeared except
respondent No.1 - the Custodian based at Mumbai who has
filed reply in this appeal. As per the reply of the Custodian
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- Respondent No.1 herein, the process of certification was
being done on a regular basis. But on 31.1.2005, the
Custodian gave a report to the Special Court that the
Custodian/Notified party receives accrual on shares which
were in the name of the notified party but the same were not
physically with the Custodian since such shares were with
the 3rd party. Further, in respect of shares which may not
be in the name of the notified party but which may have
been dealt with by the notified party, the dividends on such
shares were either kept in abeyance by the company or were
passed on to the Custodian by the companies pending
certification.
12. It is in view of the aforesaid procedure as also the
fact that the shares were found to be tainted, the
certification of the shares purchased through an
intermediary which in this case is respondent No.4 - Abex
and Company and respondent No. 3 -Karvy Consultants
Ltd., became necessary. But it appears that the Custodian
had been receiving applications for certification of the
tainted shares off and on which dividend was to be paid to
the party holding the shares and was to be disbursed to
1
them through the Custodian. It has been admitted by the
Custodian in his reply that the dividends which were
received by the Custodian came automatically from the
company either by way of dividend warrants or through the
Electronically Clearing System (ECS). The Custodian stated
that these dividends were not kept separately from other
moneys of the concerned notified party in the attached
accounts. It was therefore suggested that bonus shares
may be kept in abeyance by the companies or may be sent
to the Custodian by the concerned companies. In such
case also bonus shares received by the Custodian were
disposed of by the Custodian as per the procedure for sale
of shares laid down by the Special Court.
13. It was further stated by the custodian in his reply
that the distribution/ad hoc payments from the attached
account of the notified parties admittedly were made in
accordance with the order passed by the Special Court
from the moneys that were available in the attached bank
account of the notified parties as these attached accounts
also included accruals (dividends/sale proceeds of bonus
shares) which was not separate from other moneys in the
1
attached account. It was, therefore, submitted before the
Special Court by the Custodian in Miscellaneous Petition
No.1 in Bombay Stock Exchange vs. The Custodian and
Assistant Commissioner of Income Tax along with a batch of
several other analogous petitions that as there was no time
limit for the affected persons to approach the Hon'ble
Special Court for certification and such certification could
be directed by the Hon'ble Court (Special Court) at any
point of time, it was apprehended that in such
circumstance a situation might arise where shares may be
allowed to be certified by the Hon'ble Court even after
substantial payments were made either by way of
distribution or ad hoc payments due to which it would be
difficult for the Custodian to pay over the accruals on
certified shares for want of moneys in the attached
accounts. A direction, therefore, was sought by the
Custodian from the Special Court to the following effect:-
"(a) That a Pubic Advertisement be issued
by the Custodian calling upon all persons
holding "Tainted" shares (i.e. shares either
standing in the name of a notified party or
dealt with by the notified party) to submit
their applications for certification of such
1
shares to this Hon'ble Court within such
period as this Hon'ble Court considers
appropriate.
(b) That no applications for
certification will be entertained by the
Custodian or by this Hon'ble Court on the
expiry of such period as the Court may direct
under Clause (a).
(c) That no claims shall lie against the
Custodian or against a notified party for
payment of accruals on shares with the third
party unless such third party has filed his
application for certification within the period
specified in Clause (b).
(d) Any other orders/directions as
deemed fit by this Hon'ble Court in the
matter."
14. The Special Court taking an overall view of the
matter granted the request in terms of prayer clause (a), (b)
and (c). However, for the purpose of clause (a) 60 days
period was fixed.
15. Pursuant to the order dated 16.3.2005 notices
were issued in 32 dailies which stipulated that the
application for certification by the purchasers must be
made within 60 days from the date of issuance of the
notice. It was also clearly stipulated that no application for
certification would be entertained after the period of 60 days
1
from the date of notice and that no claims shall lie against
the Custodian or against the notified party after the lapse of
60 days of the notice. The public notice which were
published in 32 different newspapers is dated 29.4.2005.
Thus, according to the respondent - Custodian no claim for
certification could have been entertained after the expiry of
60 days period which expired on 27.6.2005.
16. The appellant, however, filed an application
bearing Misc. Application No.536/2005 in the Special Court
at Bombay on 27.8.2005 praying therein for a direction to
the Custodian that the 100 shares purchased by the
appellant herein bearing Certificate Nos. 3489027 and
8170517, Distinctive Nos. D-915292605 to 654 and D-
114196259 to 308 of the notified company may be declared
as bonafide purchaser/owner of the said shares. A
direction was sought to the Custodian and/or company to
release/pay all the accruals declared from time to time till
date on the said 100 shares. As already stated, the
application was rejected by the Special Court by a
summary order indicating that the application could not be
1
entertained since the same had been received after the cut
off date of 27.6.2005.
17. Challenging the order passed by the Special
Court, the counsel for the appellant submitted that the
application filed by the appellant for certification of his
shares and thereafter granting consequential benefits
accruing on the 100 shares which were purchased by the
appellant, could not have been rejected only on the ground
that it had been filed beyond the cut off date i.e. 27.6.2005
as the appellant who was not in the country throughout
and was living abroad had not been informed at all by any
of the concerned respondents that the shares were tainted
which required certification within a cut off date and when
he made enquiries on his own, he could know of the
developments.
18. Learned counsel for the respondent - Custodian
however sought to justify when he submitted that the
rejection of the application by the Special court for
certification of the shares of the appellant was absolutely
correct as the Special Court itself had permitted the
Custodian to publish a notice inviting applications for
1
certification of the shares held by the public at large in
which 60 days time was granted to file such application
which expired on 27.6.2005. The counsel for the
respondent - Custodian submitted that the cut off date
having been laid down by the Special Court fixing a cut off
date for filing application for certification of the shares
through the Custodian, could not have been entertained
beyond the cut off date and hence even though the
appellant might be a bonafide purchaser of the shares of
respondent No. 2 - Reliance Industries Ltd. which was
purchased through respondent No.4 - Abex and Company,
the same could not have been entertained for certification
after the cut off date.
19. While testing the relative strength of the
submission of the learned counsel for the parties in the
light of the background, facts and circumstances of the
case, it could not be overlooked that the transaction of sale
of securities (as defined under the Securities (Control)
Regulation Act, 1956) by a notified person either as a
registered holder or as an intermediary purchaser is
deemed to be bonafide provided such a transaction under
1
the provisions of Securities Contracts (Regulation) Act,
1956 is effected through a number of stock exchanges
recognised under the provisions of Securities Contract Act
and is in accordance with the rules and bye-laws of the
stock exchanges. It further lays down that the purchase
will be deemed to be bonafide provided the sale is at the
price which is lower than the lowest price for which the
securities were traded on the date of the transaction
except in cases of discount given on bulk purchased by
the institutions and the full sale price relating to the
transaction is proved to have been received by the notified
persons.
20. The aforesaid position is clearly admitted by the
Custodian - Respondent No.1 himself which is borne out
from the reply filed by him. Thus the appellant who had
purchased the shares of the respondent No.2 - Reliance
Industries Ltd. through respondent No.4 - Abex and
Company whose affairs were later taken care of by
respondent No.3 - Karvy Consultants Ltd. also and perhaps
respondent No.5 - M/s. Fair Growth Financial Service Ltd.
would clearly be deemed to be bonafide purchase.
1
However, since the shares in question were held to be
tainted by order of the Government of India due to which it
was not honoured by the respondent No.2 - Reliance
Industries Ltd., the need arose for its certification through
the Custodian under the control and supervision of the
Special Court constituted under the Act of 1992.
Meanwhile, long time had elapsed between the date of
purchase and the application for certification of the shares
and obviously during this long period it is the respondent -
Custodian in coordination with the notified company and
the share brokers respondent Nos. 3 and 4 (Karvy
Consultants Ltd. and Abex and Company) who was
responsible to certify the shares of the notified company so
that the dividends accruing on the shares could be paid.
In the process, no doubt, the respondent No.1 - Custodian
encountered several procedural hassels as the claim of
payment were made at frequent intervals by large number
of investors holding the shares which were informed to be
tainted and hence required certification by the Custodian.
21. The respondent No.1 - Custodian, therefore,
although might have been justified in filing an application
1
before the Special Court requesting to fix a cut off date
during which it could facilitate certification of the tainted
shares, the cut off date sought by the custodian and
accepted by the Special Court cannot be construed so as to
have a binding effect of statutory nature under the
provisions of the Transaction of Sale of Securities Act, 1956,
wherein there is no fixed time limit for encashment of
shares nor there is prescribed procedure for certification
which emerged only on account of extraordinary situation
when certain shares were found to be tainted which were
floated by Respondent No.5 M/s. Fair Growth Financial
Services for Respondent No.2 - Reliance Industries and
were traded through share brokers like Respondent No.3
and 4 herein.
22. At this stage the salutary object and reasons of
the Act also will have to be taken into consideration while
interpreting and applying the provisions of a statute
wherein efforts are required to be made in construing the
different provisions so that each provision will have its play
and in the event of any conflict, a harmonious construction
is required to be made so that an honest and bonafide
1
investor is not duped of his hard earned money which he
invests by purchasing the equity shares of a company.
Admittedly, the Trial of Offences Relating to Transactions in
Securities Act, 1992 had been enacted and given effect to in
order to prevent undesirable transactions in securities by
regulating the business of dealing therein as also certain
other matters connected therewith which also provided for
the establishment of a special court for the trial of offences
relating to transactions in securities and for matters
connected therewith or incidental thereto. The courts
specially the Special Courts under the Act of 1992 has to
bear in mind the objects and reasons of this Act which
clearly indicate that in course of the investigations by the
Reserve Bank of India, large scale irregularities and mal
practices were noticed in transactions by both the
Government and other securities through some brokers in
collusion with the employees of banks, companies and
financial institutions. The other irregularities and
malpractices led to the divergence of funds from banks and
financial institutions to the individual accounts of certain
brokers. In order to deal with the situation and in
2
particular to ensure speedy recovery of the huge amount
involved, to punish the guilty and restore confidence and to
maintain the basic integrity and credibility of the banks and
financial institutions, the Special Courts (Trial of Offences
Relating to Transactions in Securities) Act, 1992 was
enacted for speedy trial of offences relating to transactions
in securities and disposal of properties attached. This Act
envisages the appointment of one or more custodians to
take steps for guarding the interests with a view to check
the diversion of funds invested in the form of shares by the
offenders which may be in the form of companies or share
brokers. Therefore, the duty of the custodian as also the
special court is to take into consideration that while the
plea of the custodian for facilitating certification of shares
by fixing cut off date might have been reasonable in the
given situation where large number of investors were filing
applications for certification of the tainted shares time and
again and hence cut off date might have been justified, it
was also expected to take care and guard the interest of the
investors who are based and live not merely within the
geographical boundaries of the Special Court which had
2
fixed the cut off date but also live far and wide even across
the boundaries of the country which is the fact in the
instant matter also. Hence, in our considered view, it was
obligatory on the part of the Special Court and the
Custodian to notice an important fact that when the shares
purchased by the appellant were reported to be tainted
which was issued through Respondent No.5-M/s. Fair
Growth Company by the share broker companies i.e.
Respondent No. 4 and 5 and the same was ordered to be
attached by the Custodian in view of the Government of
India Regulation it was clearly nefarious and dubious
activity on the part of the Respondent No.5-M/s. Fair
Growth Financial Service Ltd. due to which the
unnecessary hassle of certification of the shares issued in
the name of M/s. Fair Growth Company became essential.
The investors like the appellant herein had absolutely no
role in such activity and hence even if the cut off date was
fixed by the Special Court for certification of such shares,
the same could not have been enforced oblivious of its
repercussion on those investors who could not approach
the Special Court for certification for reasons beyond their
2
control as it has happened in the case of the appellant
herein who could not approach the Special Court for
certification of his tainted shares for reasons which have
been elaborated hereinbefore.
23. In the instant matter, we have noticed that the
appellant/applicant had filed an application before the
Special Court seeking a direction for certification of the
shares on 27.8.2005 which even if counted from the cut off
date, would at the most was delayed by two months as the
appellant had not received any notice which could be
proved, indicating that the application for certification had
to be filed by 27.6.2005 although the same is asserted by
the respondent-Custodian, which cannot be accepted in
absence of appearance of respondent Nos. 3 and 4. But
even if it were so, the Court should have certainly
considered the circumstance whether a bonafide purchaser
of shares could be denied his due merely on the ground of
violation of a cut off date which clearly did not have its
existence in the statute and hence had no statutory force.
The order sought from the Special Court to fix a cut off date
for receiving application for certification was, therefore,
2
based merely on the theory of convenience of the custodian
clearly ignoring its ramification on the bonafide investor. It
is common knowledge that when public at large invest in
securities by purchasing shares of a notified company, it
purchases through various modes including the modern
tools and technique of internet and many other modern
modes and methods. But thereafter, if the shares are held
to be tainted which is clearly beyond the control of the
appellant/investor and its certification is required, it is
surely the custodian in co-ordination with the company
floating shares as also the share broker company or the
stock exchange, which has the onus and responsibility to
take care of the interest of the investors under the
supervision of the Special Court in view of the provision of
the Special Courts Act of 1992. The `Custodian' therefore
cannot shirk away from his function and the duty cast
upon him by limiting his responsibilities and seeking a cut
off date during which only he could perform the duty of
certification, oblivious of its consequence and other
ramification on the investors which include small
investors also who put in their hard earned money in the
2
shares of the company and later comes to know that the
shares were tainted on which the investor has absolutely no
role or control.
24. Even if we were to appreciate certain limitations
on the discharge of duties of certification by the Custodian,
the Special Court clearly had the duty to ensure that in
absence of a statutory time limit prescribed for certification
of shares under the Act of 1956, read with the Special
Courts Act of 1992, the Special Court was duty bound to
guard the interest of the investors through the Custodian
at least in case of those investors who had bonafide
purchased the shares of a notified company which for
reasons beyond the control of investors, was held to be
tainted.
25. Hence, in our considered opinion, the appellant
under the facts and existing circumstances of the case
where he ended up buying tainted shares for no fault on
his part but had to seek its certification from the Custodian
under compelling circumstance which was not his creation
and also had no control, could not have been denied his
due on the ground of delay in filing the application for
2
certification specially when the appellant had sought
certification of his shares only after two months of the cut
off date for reasons beyond his control which cut off date
has no statutory effect or legal force. The appellant on the
one hand was saddled with the tainted shares for no fault
on his part through respondent Nos. 4, 5 and 6 on which he
had no control or any role to play and on the top of it, when
he sought a remedy of certification for claiming dividends,
he had to suffer an order by which his application was
rejected on the ground that he had not moved an
application within the cut off date which had no statutory
force as the same had been fixed at the instance of the
Custodian seeking approval from the Special Court.
26. As a consequence of the aforesaid discussion, we
set aside the impugned order of the Special Court and allow
this appeal as a result of which the respondent - Custodian
shall entertain the application filed before the Special Court
for certification of his shares and verify the claim of the
appellant in regard to the shares bearing Certificate Nos.
3489027 and 8170517 Distinctive Nos. D-915292605 to
654 and D-114196259 to 308 and ensure payment of
2
dividends on those shares after certification by the
respondent No.2. If necessary the Custodian may co-
ordinate with the concerned stock exchange and the share
broker companies i.e. respondent No.4 - Abex and Company
as also respondent No.3 - Karvy Consultants Limited for
ensuring release of payment accruing as dividend on the
shares noted hereinbefore. In case of default in any manner,
it shall be the duty of the Custodian to take recourse to the
remedy against any defaulting party in accordance with law.
The appeal accordingly is allowed.
....................................J
(Markandey Katju)
....................................J
(Gyan Sudha Misra)
New Delhi,
January 31, 2011
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