BREAKING| Karnataka High Court Dismisses Plea Of Kerala CM's Daughter's Company Challenging SFIO Probe

A bench of Justice M Nagaprasanna dismissed the petition filed by Exalogic Solutions challenging the direction issued by the Union Ministry of Corporate Affairs asking the SFIO to investigate the affairs of the company.

The order will be uploaded tomorrow.

On February 12, while reserving the order, the Court verbally asked the SFIO to not take any coercive action against the company till the order was pronounced. The Court also asked the company to provide the documents sought for by the SFIO.

Arguments by the petitioner

Senior Advocate Arvind P Datar, appearing for the petitioner company, submitted that an investigation by the Registrar of the Companies under Section 210 of the Companies Act 2013 was already underway against the company. While that investigation is pending, the Centre issued another order invoking Section 212 of the Companies Act asking SFIO to investigate the company.

He contended that there cannot be two parallel investigations at the same time against the company.

While agreeing to cooperate with the Section 210 enquiry, Datar said that the SFIO probe must be stopped. When the Court asked what was the objection to the SFIO probe, Datar said that it is "more draconian" and likened it to the "UAPA". Under the SFIO process, there can be arrests of persons and attachment of properties.

Datar said that SFIO is intended to investigate cases of serious fraud like the Sahara scam involving hundreds of crores and not matters like the present case, where the allegation is about non-disclosure of a transaction of Rs 1.76 crores.

He argued that there are no factual circumstances indicating a "serious fraud" so as to warrant SFIO probe. The allegation is that the transaction with another company, CMRL, regarding the supply of software services, was not recorded.

Datar also submitted that the Registrar has submitted an "interim status report" under Section 210. He contended that an interim status report is unheard of in the company law and that it was prepared as an "afterthought" to justify the SFIO probe.

"Sec 212 is a draconian provision meant to be used in extraordinary circumstances like Sahara etc. Not in this case. If one software company has given software to another company and has not recorded it, it does not come under "public interest"....If Sahara company goes under and crores are affected, there is public interest...here, there is nothing to indicate "serious fraud"...This is no way a fraud but a non-reporting of a party transaction...Let 210 inquiry go on but let them not invoke 212," Datar submitted. He relied on the doctrine of proportionality and cited the Supreme Court judgments in Modern Dental College and Anuradha Bhasin case.

Respondent's arguments

Additional Solicitor General Arvind Kamath, appearing for the Central Government, submitted that the SFIO is a multidisciplinary body which can seamlessly gather information. When the Court asked about the status of the Section 210 proceedings after the commencement of the SFIO enquiry, the counsel replied that the SFIO will take over all the documents.

During the course of the investigation, it was found that Rs.135 crores was given by CMRL to various political functionaries. Rs 1.72 crores was paid by CMRL to Exalogic under the guise of a software agreement even though no software was actually provided.

"When 135 crore is involved, there are a lot of transactions which look shady. Officers said we cannot get information from the income tax department and it may be placed before SFIO. Union Govt need not hear petitioner before ordering an investigation," the ASG submitted.

Details of the petition

The petitioner argued that an investigation under Section 212 of the Act cannot be ordered before the conclusion of the investigation under Section 210 (Investigation into affairs of company) of the Act.

Further, it is said the Impugned Order is arbitrary, devoid of any reasons and suffers from gross non-application of mind. Moreover, the order is violative of the principles of natural justice and amounts to malice in law, thereby violating Articles 14 and 21 of the Constitution.

The plea states that in 2021, the petitioner received a communication from the Registrar of Companies Bangalore, stating that an inquiry under section 206(4) of the Act, was sought to be initiated against the petitioner to examine its compliance under various provisions of the Act in respect of the transactions between Cochin Minerals and Rutile Limited (CMRL) and the Petitioner.

The petitioner duly filed its response dated 15.02.2021 and on 22.02.2021 furnished all the documents as sought for in the abovementioned notice.

However, on October 1, 2021, the ROC, once again issued a communication dated alleging that the documents furnished by the petitioner were improper and further directing the Petitioner to submit documents within 7 days failing which action would be initiated.

The petitioner submitted its response to the ROC, along with all the relevant documents/ details as sought by the ROC. The petitioner also sought an opportunity for personal hearing.

On June 24, 2022, the ROC issued a communication calling upon the petitioner to appear in person on 06.07.2022 at the office. The petitioner through its duly authorised representative appeared before the ROC.

On July 22, 2022, the Director of the company, Veena, appeared before the ROC and provided all the necessary clarifications on all the inquiries raised by the ROC.

However, in August 2023, the ROC issued a show cause notice alleging inter-related party transactions in light of the fact that Kerala State Industrial Development Corporation (KSIDC') owns 13.4% shareholding of Cochin Minerals and Rutile Ltd ("CMRL") and that KSIDC allegedly acted as per the directions of Chief Minister of Kerala, who happens to be the father of the director of the petitioner company.

The company issued a response to the said show cause notice. Following this, the order under Section 210(1)(c) of the Act dated 12.01.2024 was passed by the 2nd Respondent initiating an investigation into affairs of CMRL, KSIDC and the Petitioner.

Later on January 31, the impugned order was passed and on February 6, the petitioner company received a Notice dated 02.02.2024 from one of the Inspectors, Prabhu K., appointed under the Impugned Order, directing the production of certain documents. In response to the same, the company requested for additional time to furnish documents.

In a related news, the KSIDC has approached the Kerala High Court against the SFIO probe in connection with the CMRL transactions. Last month, the Kerala High Court had asked the Centre if an SFIO investigation was required against Exalogic.

Exalogic Solutions came under controversy following reports of payment of Rs 1.72 crore by Cochin Minerals and Rutile Ltd to Exalogic Solutions over three years since 2017. Based on an order passed by the Income Tax Interim Board of Settlement, which suggested that the amount was paid by CMRL to Exalogic without availing any services, allegations surfaced that the kickbacks were routed to the company of CM's daughter under the guise of consideration for IT services.

Appearance: Advocates Manu Kulkarni, Mrinal Shankar, Dharmendra Chatur, Ishi Prakash for Petitioner.

Addl SG Arvind Kamath A/w DSG Shanthi Bhushan.H for Respondents.