M J Antony: Stitch in time, once again

OUT OF COURT

Though the Supreme Court has deprecated sneak assaults on IPOs, the companies seem to be still vulnerable.

For more than a decade, the threat of last-minute injunctions against public issues has been a recurring nightmare in corporate circles. The alarm goes off usually in a civil court in a remote town. But it is enough to create panic in the company and the stock exchanges and confuse the investors all over the country. It happens somewhat like the appearance of comets; there is no regularity, the choice of victims is at random and it is hard to find a rationale for the whole drama. The Supreme Court had laid down rules to prevent the recurrence of this phenomenon in the Morgan Stanley case in 1995. However, the malady reappeared this month when the Reliance Power IPO was about to be launched. The Supreme Court again intervened to let the issue proceed. After it was closed with record response, the petition against it was quietly withdrawn and the problem was swept under the carpet once again.

There have been at least six earlier cases in the Supreme Court alone which dealt with eleventh-hour injunctions against public issues. The series started when the economy was liberalised in the early 1990s. In Morgan Stanley vs Kartick Das, it was a consumer forum in West Bengal which passed an injunction against the public issue. The company moved the Supreme Court at the last moment and vacated the injunction. It ruled that the consumer forums had no power to stop public issues. The company proceeded with the offer successfully. But the consumer court later insisted that the apex court was ignorant of an amendment to the Consumer Protection Act made in 1993, which granted power to the consumer forums "to remove the defects and deficiencies in the services".

The Supreme Court dealt with another such case in Bloom Dekor Ltd vs Subhash Desai in the same year. In this case, suits were filed one after the other in a dozen courts in Gujarat and some of them passed injunctions against allotment of shares. The company moved the high court to get them vacated. The cases ultimately landed in the Supreme Court. Imposing fine on the three petitioners who started it all, the judgement said: "By resorting to successive suits and obtaining interim orders, they have caused immense damage to the company... It is not difficult to perceive that all these actions are nothing but attempts by caucus of person to baulk the company from issuing or dealing with shares; the petitioners having little stake."

Around the same time, the Monopolies and Restrictive Trade Practices Commission had imposed cost on three petitioners who had filed injunction applications against the offer of equity shares by two Reliance companies. The judgement stated that "the entire submissions advanced in support of the applications is based on conjectures and surmises not warranted by the facts established on record."

The ghost of last minute injunctions reappeared soon thereafter in the case, Kamala Tea vs S P Chatterjee. A local court stayed the opening of the issue five days before the due date. The order was not known to the company as it was passed ex parte. Only the bank was served the court notice. When the company came to know about the ruinous order, it moved the Supreme Court which gave it the green signal. The court also took the unusual step of extending the date of the closure as the company had suffered due to the untimely injunction. Describing the order of the lower court "extraordinary and wholly unjustified", the court imposed a fine on the petitioner.

Three years ago, the Gauhati high court passed an injunction in the case of the IPO of Shoppers' Stop Ltd, without hearing the affected company. The drama was repeated in the Supreme Court. It stated in its order that in the "peculiar facts and circumstances of these cases we stay the order and further direct that until further orders no other court or authority shall make any interim ex parte orders on this subject matter." The above order was repeated in another case last year in K Raheja Corp (P) Ltd vs North East Investors Association. The court deprecated such practice in Troika Pharmaceuticals vs Wockhardt Ltd.

Despite this series of judgements and orders over the past decade, one cannot be too sure of the next incidence of litigative terrorism. The civil courts below appear not to have heard of the Supreme Court orders on these matters, or they might just be choosing to hear a different drummer.