Companies Act Case Law R.D. Goyal & amp Anr Vs Reliance Industries Ltd.

Appeal (civil) 2490 of 1995

R.D. Goyal & Anr.

Reliance Industries Ltd.

DATE OF JUDGMENT: 20/11/2002

CJI., H.K. Sema & S.B. Sinha.



CIVIL APPEAL NOS 2071-2100 OF 1987
The core question in this batch of appeals is as to whether shares
or convertible debentures even before they are allotted can be considered
to be “goods” within the meaning of Section 2(e) of the Monopolies and
Restrictive Trade Practices Act, 1969 (the ‘M.R.T.P. Act’).

The appellants herein pursuant to or in furtherance of an invitation
to offer debentures linked with equity shares for public issue applied
therefor. The respondents are public limited companies. They had
offered capital for subscription but had linked the equity shares with the
accrued redeemable non-convertible debentures.

A complaint was made to the effect (which is the subject-matter of
Civil Appeal Nos. 2071-2100 of 1987) that the issue of equity shares tied
up with debentures is a restrictive trade practice within the meaning of
Sections 2(o)(ii), 33(1)(b) and 33(1)(g) of the M.R.T.P. Act. In Civil
Appeal No.2490 of 1995, the subject-matter of complaint was that the
public issue of debentures offered by the respondent therein upon certain
terms and conditions amounted to unfair trade practice as the respondent-
company in their prospectus for raising capital through the issue of
debentures made false and misleading claims.

The said complaints were inquired into by the Director General,
who upon finding a prima facie case, recommended for issuance of
notice; whereafter a proceeding was initiated by the Commission.

The respondents herein raised preliminary objection questioning
the jurisdiction of the Commission to deal with the subject-matter of such
complaints. The Commission on the said preliminary objection, raised
the following issues:

1.(a) Whether having regard to true legal nature and characteristics of
debentures, the same could be considered as “goods” within the
meaning of Section 2(e) of the M.R.T.P. Act, 1969 even before
they are allotted to the debenture-holder?

(b) Whether it makes any difference to the answer to the foregoing
question, if the debentures offered by the company are
compulsorily or optionally convertible into an equity share?

2. Assuming that debentures are even prior to their allotment
“goods”, whether any trade practice is involved where the
company simply invites applications for allotment of debenture for
the purpose of raising capital for its trade or business?

3. Whether the company provides or makes available any service to
the prospective investors where it simply issues debentures and
invites application therefor within the meaning of Section 2(r) of
the M.R.T.P. Act?

The said preliminary issues were determined by the Commission in
favour of the respondents herein and against the appellants.

Ms. Indira Jaising and Mr. Anup G. Choudhary, learned senior
counsel appearing on behalf of the appellants, inter alia, would submit
that the Commission committed a manifest error of law in passing the
impugned judgment insofar as it failed to properly construe the definition
of ‘goods’ contained in the Sale of Goods Act, 1930 vis–vis its
definition contained in Section 2(e) of the M.R.T.P. Amendment Act,
1991, as also the definition of service as contained in Section 2(r) thereof.
According to the learned counsel the action on the part of the respondents
herein involved unfair trade practice. The learned counsel would urge
that as the ‘stocks’ and ‘shares’ come within the purview of definition of
‘goods’, it cannot be said that only because they had not been allotted to
the respective applicants, they would not become so. In any event, it was
submitted, notice inviting offer for purchase of shares in lieu of
convertible debentures would amount to ‘rendition of service’ by the
Respondent. It was submitted that the expression ‘goods and service’
must be interpreted in a broad manner.

Ms. Indira Jaising further urged that it may be that the definition
of expression ‘goods’ had been amended in the year 1991 so as to bring
within its purview the shares and stocks including issue of shares before
allotment but such amendment being merely clarificatory in nature, the
Commission must be held to have misdirected itself in holding that shares
and debentures before they are issued do not come within the purview of
expression ‘goods’. It was argued that a public limited company offers
shares from time to time and thus an act of raising capital by allotment of
shares would be an act of ‘trade’ and consequently the same would
amount of ‘rendition of service’ within the meaning of Section 2 (r) of the
Act. Reliance in this connection has been placed in the case of Lucknow
Development Authority v. M.K.Gupta [(1994) 1 SCC 243].
It was further submitted that the decision of this Court in Morgan
Stanley Mutual Fund etc. v. Kartick Das etc. {(1994) 4 SCC 225},
whereupon the Commission has placed reliance is not applicable to the
fact of the present case as the same was rendered while considering a
matter interpreting the provisions of the Consumers Protection Act, 1986.
In any event, as therein various questions raised in these appeals had not
been considered, the matter may be referred to a larger Bench for an
authoritative pronouncement by this Court. Mr. Choudhary further
submitted that linking shares with debentures being ‘unfair trade
practice’, the question as to whether the shares or stocks would amount to
‘goods’ or not lose significance particularly when having regard to the
various provisions of the Companies Act, allotment of shares is not a
matter of much importance.

Before adverting to the issues involved in these appeals, relevant
statutory provisions may be looked into.

‘Goods’ have been defined in the Sale of Goods Act, 1930 to mean

“every kind of moveable property other than
actionable claims and money; and includes stock and
shares, growing crops, grass, and things attached to or
forming part of the land which are agreed to be
severed before sale or under the contract of sale;”
The expression ‘goods’ was defined in Section 2(e) of the
M.R.T.P. Act to mean :

“goods” includes goods produced in India, and, in
relation to any goods, supplied, distributed or
controlled in India, also includes goods imported into
The aforesaid definition underwent an amendment in 1984 and again in
1991. Now it reads thus :

“goods” means goods as defined in the Sale of Goods
Act, 1930 (3 of 1930), and includes, –

(i) products manufactured, processed or mined in

(ii) shares and stocks including issue of shares
before allotment;

(iii) in relation to goods supplied, distributed or
controlled in India, goods imported into India;”
Section 2 (r) defines “Service” to mean :

“service which is made available to potential users and
includes the provisions of facilities in connection with
banking, financing, insurance, chit fund, real estate,
transport processing supply of electrical or other
energy, board or lodging or both, entertainment,
amusement or the purveying of news or other
information, but does not include the rendering of any
service free of charge or under a contract of personal

Section 2(s) defines the term ‘trade’ to mean

“any trade, business, industry, profession or occupation
relating to the production supply distribution, or
control of goods and includes the provision of any
Section 2(u) defines the expression “trade practice” as under :

“any practice relating to the carrying on of any trade,
and includes

(i) anything done by any person which controls or
affects the price charged by, or the method of
trading of, any trader or any class of traders,

(ii) a single or isolated action of any person in relation
to any trade;”
The expression ‘debenture’ however, is not defined in the Act.
The question therefore, which arises for consideration is as to whether
convertible debentures would be ‘goods’ within the meaning of
provisions of the MRTP Act.

Debentures, as ordinarily understood, in our considered view,
would not come within the purview of definition of goods as it is simply
an instrument of acknowledgement of debt by the company whereby it
undertakes to pay the amount covered by it and till then it undertakes
further to pay interest thereon to the debenture-holders.

It has been observed by the Company Law Committee in its report
quoted by Ramaiya at page 26 of his commentary :

“A debenture means a document which either
creates or acknowledges a debt. Ordinarily a
debenture constitutes a charge on the undertaking of
the company or some part of its property, but there
may be debentures without any such charge and under
the law, it is not necessary that the debentures should
create a charge. We have, therefore, brought the
definition of debentures, in line with that contained in
English Companies Act, 1948, which defines
‘debentures’ as including ‘debenture stock’ bonds and
other securities of a company, whether constituting a
charge on the assets of the company or not.”
Palmer on Company Law has made similar observations in
paragraph 44.02, 24th Edn. He said that in modern commercial usage, a
debenture denotes an instrument issued by the company normally but not
necessarily called on the face of it a debenture, and providing for the
payment of a specified sum at a fixed rate with interest thereon.

Debentures having regard to the definition of ‘actionable claim’ as
defined in Section 3 of the Transfer of Property Act would constitute
actionable claims except where they are secured by mortgage of
immovable property or hypothecation or pledge of immovable property.

It is true that when there exists a statutory definition in respect of
an expression, the dictionary meaning thereof cannot be applied. It is also
true that when a statutory definition uses the word ‘includes’, it provides
an extended meaning thereto but it is equally well-settled that the words
are required to be construed in terms of the legislative intent.

It is furthermore a well-settled principle of law that if the words
are general and not precise, their interpretations are to be restricted to the
fitness of matter.

The Commission in the instant case was dealing with the question
as to whether the respondents herein had resorted to unfair trade practice
or not? In the event they were found to be doing so, it inter alia, could
direct that such practice be discontinued. In a given case, the
Commission may grant temporary injunction or award compensation as
provided under Section 12A and 12B thereof. As by reason of the
provision of the said Act, the right of the traders can be controlled or
restricted, the provisions thereof must receive a strict construction.

Furthermore, the expressions ‘debentures’ and ‘shares’ convey
distinct and separate meaning although they belong to the same genesis.
In “All About Debentures” by Mr. T.M. Sen and Mr. C. Chandrasekhar,
the distinction between the ‘shares’ and ‘debentures’ has been stated thus:

“Debentures distinguished from:

(a) Shares Although shares and debentures belong to
the same genesis yet they have distinct and
different characteristics. The Companies Act, 1956
deals with the issue of debentures in the same
manner as it deals with the issue of shares, but the
similarity ends with the mode and manner of issue,
their allotment, their transferability and in the
applicability of forfeiture provisions. The corpus
of the two issues forms two different segments of
capital – shares representing the share capital and
the debentures representing the loan capital.
Shareholders are the owners of the company till the
company is folded up fully while debenture-
holders are only creditors of the company
sometimes secured and sometimes unsecured and
that too for a defined period. The rights of the
shareholders and debenture-holders are different as
also their remedies. To the extent the comparison
could bear between the two, the procedures are by
and large the same for both in the matter of issue,
allotment and transfers and forfeiture. Shares,
therefore, are distinct from debentures, although in
the usual parlance they both are grouped together
in many legislations and referred to some times by
the generic term of ‘scrip’. It is on account of their
free transferability and marketability, they are
referred together. The stamp duty on the share
certificates and debenture certificates and on their
transfers is totally different and bears no
comparison. The incidents of debenture
certificates as seen from our discussion about
above are different from the incidents of shares
certificates and hence bear no comparison.
Therefore, there is no equation between shares and
debentures except as referred to above.”
‘Share’ has been defined in Section 2(46) of the Companies Act to
mean a share in the share capital of a company which in turn would mean
that it would represent contribution of the share-holder towards the share
capital of the company. On the other hand, a debenture is an instrument
of debt executed by the company acknowledging its receipt to repay the
same at a specified rate and also carrying an interest. It is in sum and
substance a certificate of loan or a bond evidencing the fact that the
company is liable to pay a specified amount with interest and although
the money raised by the debentures becomes a part of the company’s
capital structure yet it does not become a share capital. In any event, a
debenture would not come within the purview of definition of goods, in
as much as, although the shares and stocks are included in the definition
of goods but debentures are not.

We may also note that having regard to the provisions contained
in Section 36A of the M.R.T.P. Act, there cannot be any doubt
whatsoever that an inquiry proceeding can be initiated when an element
of unfair trade practice arises in the matter of promoting sale, or use of
any goods. Shares before their allotment, in our opinion, are not goods.
In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd.
[AIR 1964 SC 250], it has been held that in Company law “allotment”
means the appropriation out of the previously unappropriated capital of a
company, of a certain number of shares to a person. Till allotment is
made, shares do not exist as such. It is only on allotment in this sense
that the shares come into existence. Therefore, till the shares are actually
issued, the question of the company having issued debentures as
transferable property would not arise and thus there cannot be any doubt
whatsoever that the shares before their allotment would not come into
existence and they cannot be regarded as goods. Debentures would also
not come within the purview of definition of stock. In Sellar v. Charles
Bright & Co. Ltd. reported in (1904), King’s Bench Division at page 447,
the law is stated in the following terms :

“The Judgments Act, 1838 (1 & 2 Vict. C. 110)
s.14, speaks of “any stock or shares of or in any public
company in England.” Debentures are neither “stock”
nor “shares”. A distinction is drawn between
“debenture stock” and “shares or stock” of a company
by the Companies Clauses Act, 1863 (26 & 27 Vict.
C.118) s. 23. The meaning of “stock” in the section is
indicated by its collocation with “shares” as being
something ejusdem generis therewith. If debenture
stock would not be within the section, a fortiori
debentures are not: see Palmer’s Company Precedents,
8th ed. Part III. P. 5. Debentures are clearly not shares.
They are simply specially debts due from the company,
which may nor may not be secured by a charge on the
company’s assets. A debenture-holder as such is not a
member, but a creditor of the company. He has no
share in the capital of the company, and his right to
payment is not dependent on its profits. He has not, as
a shareholder has, a voice in the management of the
company’s affairs. In the case of In re Bodman (1) it
was held by Chitty J. that a bequest of all the testator’s
shares in a gas company would not pass debenture
stock of that company. He said in giving judgment
“Debenture stock therefore stands in a materially
different position from that occupied by proprietary or
capital stock of the company: in other words,
debenture stock is borrowed money capitalized for
purposes of convenience. The words used by this
testator aptly and correctly describe his shares in this
gas company, and I should be improperly extending
the meaning of the word ‘shares’, if I were to hold that
it included debenture stock, which, as I have already
explained, is property of a different kind altogether
from the ordinary or proprietary stock of a company.”
The matter may be considered from another angle. Under
Sections 44(2) and 56 of the Companies Act, 1956, in the prospectus to
be filed with the Registrar, a statement has to be made as regards amount
payable on application of allotment of each share. One of the particulars
required to be mentioned in the prospectus is the price to be paid for
shares or debentures subscribed for under the options or right.
“Subscription” is an amount of money subscribed for acquiring any
periodical or even to acquire right of membership in a company or in a
club. When a subscriber of any periodical receives the periodical it is
nothing short of purchasing it for a price.

‘Price’ has been defined in Section 2(l) of the M.R.T.P. Act in the
following terms :

“Price”, in relation to the sale of any goods or to the
performance of any services, includes every valuable
consideration, whether direct or indirect, and includes
any consideration which in effect relates to the sale of
any goods or to the performance of any services although
ostensibly relating to any other matter or thing;”
The act of inviting offer shares of any company does not get
translated into a kind of service qua the allottee subscriber. Subscription,
therefore, is not in the nature of valuable consideration for any service.

Reliance on Lucknow Development Authority’s case (supra) by
Ms. Jaising is misplaced. In that case, the National Consumers’ Disputes
Redressal Commission was concerned with the question of interpretation
of the term “consumer” within the meaning of the Consumer Protection
Act, 1986. It was held that :

“The right thus to approach the Commission
or the Forum vests in consumer for unfair trade
practice or defect in supply of goods or deficiency in
service. The word ‘consumer’ is a comprehensive
expression. It extends from a person who buys any
commodity to consume either as eatable or otherwise
from a shop, business house, corporation, store, fair
price shop to use of private or public services. In
Oxford Dictionary a consumer is defined as, “a
purchaser of goods or services”. In Black’s Law
Dictionary it is explained to mean, “one who
consumes. Individuals who purchase, use, maintain,
and dispose of products and services. A member of
that broad class of people who are affected by pricing
policies, financing practices, quality of goods and
services, credit reporting, debt collection, and other
trade practices for which state and federal consumer
protection laws are enacted..”
In the instant case, the action on the part of the company, in our
opinion, does not involve any sale of goods or rendition of any service.

The pointed issue is squarely covered by a decision of this Court
in Morgan Stanley Mutual Fund (supra). Therein this Court was
considering a question as to whether share for allotment of which only an
application has been made was goods as defined under Section 2(1)(i) of
the Consumer Protection Act, 1986. The said section reads as under :

” ‘goods’ means goods as defined in the Sale of Goods
Act, 1930.”
The definition of ‘goods’ as contained in the aforementioned
provision is in pari-materia with the provisions of the said
Act. It was held that :

“As to the scope of this clause, reference may
be made to Maneckji Pestonji Bharucha v. Wadilal
Sarabhai & Co.. It was observed thus:

“The Company is entitled to deal with the
shareholder who is on the register, and only a person
who is on the register is in the full sense of the word
owner of the share. But the title to get on the register
consists in the possession of a certificate together with
a transfer signed by the registered holder. This is what
Bharucha had. He had the certificates and blank
transfers, signed by the registered holders. It would be
an upset of all Stock Exchange transactions if it were
suggested that a broker who sold shares by general
description did not implement his bargain by supplying
the buyer with the certificates and blank transfers,
signed by the registered holders of the shares
described. Bharucha sold what he had got. He could
sell no more. He sold what in England would have
been choses in action, and he delivered choses in
action. But in India, by the terms of the Contract Act,
these choses in action are goods. By the definition of
goods as every kind of moveable property it is clear
that not only registered shares, but also this class of
choses in action, are goods. Hence equitable
considerations not applicable to goods do not apply to
share in India.”

29. Again in Madholal Sindhu of Bombay v.
Official Assignee of Bombay it was held thus :

“A sale according to the Sale of Goods Act
(and in India goods include shares of joint stock
companies) takes place when the property passes from
the seller to the buyer.”

Therefore, at the stage of application it will not
be goods. After allotment different considerations may

30. 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 CIT v. Standard
Vacuum Oil Co. 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.”

31. 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 (sic in) future
Furthermore, as noticed hereinbefore, the expression ‘goods’,
underwent an amendment in the year 1991. The relevant notes on clauses
as contained in the Statement of Objects and Reasons of the Monopolies
and Restrictive Trade Practices (Amendment) Bill, 1991 (Bill No.198 of
1991) speaks thus :-

“Clause 2 seeks to enlarge the definition of ‘goods’ by
including issue of shares before allotment. The scope
of the definition of ‘service’ is also being enlarged by
including chit-fund. An explanation has also been
added that any deals in real estate shall be deemed to
be included in ‘service'”
It is, therefore, evident that the said amendment is not explanatory
or clarificatory in nature. By reason thereof, the definition of goods was
sought to be enlarged which will have prospective operation. The very
fact that the Parliament in its wisdom sought to enlarge the definition of
goods by including the issue of shares by allotment as also the service is a
clear pointer to the fact that thereby the mischief which was existing in
the said provision was sought to be remedied.

It is, therefore, axiomatic that before the said definition of ‘goods’
was amended, the matter relating to issue of shares before allotment was
not included therein.
In Shree Gopal Paper Mills Ltd. v. Commissioner of Income-tax,
Central, Calcutta [(1967) 37 Comp.Cas 240], the question which fell for
consideration before a Bench of the Calcutta High Court was the meaning
and scope of the words “share”, “issue of share” vis–vis “bonus share”
issued to them. The Calcutta High Court noticed the decision of this
Court in Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association
Ltd. [(1963) 33 Comp.Cas.862] wherein it was held that allotment of
share means appropriation of unissued shares to a specified number of
persons. It was further held that issue of shares is something distinct from
allotment and is subsequent act whereby the title of the allottee becomes

The matter thence came up before this Court in Shree Gopal Paper
Mills Ltd. v. Commissioner of Income-tax, Central, Calcutta [(1970) 77
I.T.R.543]. It was held by the High Court that a share cannot be held to
have been issued unless a share certificate is given to the concerned
person. This Court, however, disagreed with the view of the High Court
only to the aforementioned extent.

It was noticed:

“The words “allot” and “distribute” found in clause
(b) of the resolution do not carry the matter further.
Their meaning should be gathered from the context in
which they were used. Clauses (b) and (c) of the
resolution must be read harmoniously with clause (a).
The word “allotment” has not been defined in the
Companies Act. The meaning of the word “allot” or
“allotment” will have to be gathered from the context in
which those words are used. This court considered the
meaning of the word “allotment” in Sri Gopal Jalan and
Co. v. Calcutta Stock Exchange Association Ltd.
Therein, it referred to a large number of English
decisions which have considered the meaning of that
word. In that decision this Court referred to the
observations of Chitty J. in In re Florence Land and
Public Works Co.:

“To my mind there is no magic whatever in the
term ‘allotment’ as used in these circumstances. It is
said that the allotment is an appropriation of a specific
number of shares. It is an appropriation, not of specific
shares, but of a certain number of shares.”

In Sri Gopal Jalan’s case Sarkar J (as he then
was) quoted with approval the following passage from
Farwell L.J. in Mosley v. Koffyfontain Mines Ltd.:


“As regards the construction of these particular
articles, it is plain that the words ‘creation’, ‘issue’
and ‘allotment’ are used with three different meanings
familiar to business people as well as to lawyers.
There are three steps with regard to new capital; first,
it is created; till it is created the capital does not exist
at all. When it is created it may remain unissued for
years, as indeed it was here; the market did not allow
of a favourable opportunity of placing it. When it is
issued it may be issued on such terms as appear for the
moment expedient. Next comes allotment. To take
the words of Sterling J. in Spitzel v. Chinese
Corporation, he says: ‘What is an allotment of shares.
Broadly speaking, it is an appropriation by the
directors or the managing body of the company of
shares to a particular person'”

After examining the various decisions, Sarkar J. observed :
“It is beyond doubt from the authorities to which we
have earlier referred, and there are many more which
could be cited to show the same position, that in
company law ‘allotment’ means the appropriation out
of the previously unappropriated capital of a company,
of a certain number of shares to a person. Till such
allotment the shares do not exist as such. It is on
allotment in this sense that the shares come into
In view of the aforementioned authoritative pronouncement of this
Court it must be held that shares pending allotment in view of the
provisions of law as thence existed could not be said to be goods.

For the aforementioned reasons, it is not necessary to go into the
other questions raised at the Bar.



For the views, we have taken, the judgment of the Commission
cannot be found fault with.

These appeals are dismissed accordingly. No costs.


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