Companies Act Case Laws LIC of India Vs Escorts Ltd

Companies Act Case Laws LIC of India Vs Escorts Ltd

PETITIONER:

LIFE INSURANCE CORPORATION OF INDIA

Vs.

RESPONDENT:
ESCORTS LTD. & ORS.

DATE OF JUDGMENT19/12/1985

BENCH:
REDDY, O. CHINNAPPA (J)
BENCH:
REDDY, O. CHINNAPPA (J)
VENKATARAMIAH, E.S. (J)
ERADI, V. BALAKRISHNA (J)
MISRA, R.B. (J)
KHALID, V. (J)

CITATION:
1986 AIR 1370 1985 SCR Supl. (3) 909
1986 SCC (1) 264 1985 SCALE (2)1289
CITATOR INFO :
R 1988 SC1737 (66)
E&F 1989 SC1642 (22,26,41)
D 1989 SC1713 (10)
RF 1990 SC 737 (27)
RF 1991 SC1191 (13)
R 1991 SC1420 (25,73)
RF 1992 SC 1 (45)
ACT:
A. Foreign Exchange Regulation Act, 1973, section
29(1)(b) – Whether the Reserve Bank of India had the power
or authority to give “ex-post facto” permission under
section 29(1)(b) of the Act for the purchase of shares in
India by a company not incorporated in India or whether such
permission had necessarily to be previous permission – Words
and Phrases “Permission” meaning of.
B. Corporate democracy, concept of, explained.
C. Company Law – Shares – Nature of the property in
shares – Law relating to transfer of property in shares
under the law and the effect of the provisions of the
Foreign Exchange Regulation Act explained – Companies Act,
1956, sections 2(46), 82, 84, 87, 106, 108(1), 108 (1-A) (a)
and (b), 108 to 108 H, 110, 111(1) & 3, 206, 207, 397, 398,
428, 439 and 475 read with section 27 of the Securities
Contracts (Regulation) Act, Sale of Goods Act, Sections 2
(7), 19, 20 to 24 and Transfer of Property Act, section 6.
D. Companies Act, 1956, sections 291-293 – Position and
nature of discretionary powers of the Directors in a
company.
E. Shares of a company, transfer of – Refusal to
transfer the shares, extent of – Whether the refusal to
transfer the shares by the company even after the permission
was granted by the Reserve Bank under the FERA, proper –
Companies Act, 1956 section 111(1) & (3).
F. Shares, Purchase of by the foreign investor of
Indian nationality/origin – On the facts of the instance
case, whether involved any contravention of Foreign Exchange
Regulation of the Non-Residents’ Investment Scheme.
G. Doctrine of lifting the corporate veil – Investments
by company owned by non-residents of Indian nationality in
accordance with the Foreign Exchange Regulations, the Non-
Residents
910
External Account Rules, 1970, the Portfolio Investment
Scheme, the Exchange Control Manual, Stock Exchange Control
(Regulation) Act, 1956 and its bylaws – Whether the Court
could pierce the veil of the transactions.
H. Shareholders’ right to call extraordinary general
meeting on requisition either to alter the Articles of
Association of removal/change of directors – State and its
instrumentalities being shareholders have the same rights of
an ordinary share-holder – Companies Act, 1956, sections
169, 172, 173(3), 284, – L.I.C. Act, Section 6.
I. Constitution of India, 1950, Articles 14, 19, 32,
226 read with order XXXIX Rule 1 – Whether the Courts can
interfere with the shareholder’s right to call a general
body meeting and grant injunctions – Judicial Review and
Article 14 explained.
J. Construct of statutes enacted in national interest,
explained.
K. English cases, reference to as external aids
permissibility – Forms, whether can control the Act.
L. Exchange Control Manual – Paras 24, 24 A-1 and 28 A-
1 Titled “Introduction to Foreign Investment in India –
Nature of – Whether statutory direction.
M. Foreign Exchange Regulation, 1973 – Grant of
permission by the Reserve Bank of India under the N.R.P.
scheme – Whether can be questioned by the company whose
shares are purchased by N.R.I. in a petition under Article
226 of the Constitution.
N. Rule against retrospectivity, applicability of.
O. Portfolio Investment Scheme by companies and
overseas bodies owned by non-residents of Indian
nationality/origin in accordance with circulars issued from
time to time by the Reserve Bank of India under section
73(3) of FERA and clarifications thereof contained in Press
Release dated 17.9.83 and the circular dated 19.9.83 (both)
issued by the Reserve Bank of India and the letter dated
19.9.83 issued by the Government of India, whether valid.
P. Mala fides, whether the Union of India, the Reserve
Bank of India and the Life Insurance Corporation of India be
said to
911
have acted malafides, in the matter of requisiting general
meeting and in the investment by purchase of shares made by
the Caparo companies, respectively.

 

HEADNOTE:
Indian economy which has to operate under the existing
world economic system needs lots of foreign exchange to meet
its developmental activities. For the purpose of earning,
conserving and building up a reservoir, thereof, and to
improve its proper utilisation Parliament and the executive
government including the Reserve Bank of India have been
taking several steps from time to time under the Foreign
Exchange Regulation Act, 1973 and other allied Acts and
Rules made thereunder. In exercise of the powers conferred
by section 79 of the Foreign Exchange Regulation Act, the
Central Government made Rules called the Non-Resident
External Account Rules, 1970. With a view to earn foreign
exchange by attracting non-resident individuals of Indian
nationality or origin to invest in shares of Indian
companies, the Government of India decided to provide
incentives to such individuals and formulated a “Portfolio
Investment Scheme”. This scheme was announced by the
Government on 27.2.1982 was incorporated in Circular No.9
dated 14.4.1982 of the Reserve Bank of India issued under
section 73(3) of the Foreign Exchange Regulation Act.
Paragraph 4(a) thereof provides that under the liberalised
policy non-residents of Indian nationality or origin will be
permitted to make portfolio investment in shares quoted on
stock exchanges in India with full benefits of repatriation
of capital invested and income earned subject to provisos
therein. This was followed by further circulars No. 10 dated
22.4.1982, No.15 dated 25.8.1982, No.27 dated 10.12.82,
No.12 dated 16.5.1983 and No.18 dt. 19.9.83.
The net result of all the circulars was that non-
resident individuals of Indian nationality/origin as well as
overseas companies, partnership firms, societies, trusts and
other corporate bodies which were owned by or in which the
beneficial interest vested in non-resident individuals of
Indian nationality/origin to the extent of not less than 60
per cent were entitled to invest, on a repatriation basis,
in the shares of Indian companies to the extent of one per
cent of the paid up equity capital of such Indian company
provided that the aggregate of such portfolio investment did
not exceed the ceiling of 5 per cent. It was immaterial
whether the investment was made directly or indirectly. What
was essential was that 60 per cent of the ownership or the
beneficial interest should be in the hands of non-resident
individuals of Indian nationality/origin. Though a
912
limit of one per cent was imposed on the acquisition of
shares by each investor there was no restriction on the
acquisition of shares to the extent of one per cent
separately by each individual member of the same family or
by each individual company of the same family (group) of
companies.
Desiring to take advantage of the Non-Resident
Portfolio Investment Scheme and to invest in the shares of
Escorts Ltd., (an Indian company), thirteen overseas
companies, twelve out of whose shares was owned 100% and the
thirteenth out of whose shares was owned 98 per cent by
Caparo Group Ltd., designated the Punjab National Bank as
their banker (authorised dealer) and M/s. Raja Ram Bhasin &
Co. as their broker for the purpose of such investment.
Their designated bankers M/s Punjab National Bank E.C.E.
Branch informed the Reserve Bank of India through their
letter dated 4.3.1983 that according to OAC & RPC forms
received the Caparo group of companies were incorporated in
England and that 61.6 per cent of the shares thereof are
held by the Swaraj Paul Family Trust, one hundred per cent
of whose beneficiaries are one Swaraj Paul and the members
of his family, all non-resident individuals of Indian origin
and requested the Reserve Bank to accord their approval for
opening Non-Resident External Accounts in the name of each
of thirteen companies for the purpose of “conducting
investment operations in India” through the agency of Raja
Ram Bhasin and Co. Stock Investment Adviser and member of
the Delhi Stock & Share Department Delhi. It was mentioned
in the letters to the Reserve Bank that the proposed
accounts would be “effected” by remittances from abroad
through normal banking channels and credits and debits would
be allowed only in terms of the scheme contained in the
scheme for investment by non-residents. Though a remittance
of $1,30,000 equivalent to Rs.19,63,000 made by Mr. Swaraj
Paul to the Punjab National Bank, Parliament Street Branch
on 28.1.1983 for the purpose of opening on N.R.E. account in
the name of Swaraj Paul, his bankers advised the Reserve
Bank that only four remittances had been received from
Caparo Group Ltd. the holding company on 9.3.83, 12.4.83,
13.4.83 and 23.3.83, of amounts equivalent to
Rs.1,35,36,000, Rs.2,36,59,000, Rs.76,35,000 and
Rs.1,31,38,681.13p.
Payments under the Stock Exchange Rules may be made
within two weeks after the purchases contracted for. M/s.
Raja Ram Bhasin & Co. had, therefore, purchased shares of
Escorts Ltd. worth Rs. 33,40,865 from Mangla & Co. prior to
9.3.83, the date of the first remittance as disclosed by
Punjab National Bank. However, the statements of purchases
of shares made by the said brokers show that even by
14.3.83, shares of Escorts Ltd. worth
913
Rs.3,85,920 had been purchased from Bharat Bhushan & Co. and
shares worth Rs.45,81,677 had been purchased from Mangla &
Co. The brokers had advised the designated bank that out of
75000 shares of Escorts Ltd. purchased upto 28.4.83, 35,560
shares purchased by each of the twelve companies and 35667
shares purchased by the thirteenth company were lodged by
them with Escorts Co. Ltd. in the names of H.C. Bhasin and
Mr. Bharat Bhushan for the purpose of transfer of the shares
in the books of the company. Under byelaw 242 of the Stock
Exchange Regulations which permit the brokers to lodge the
shares in their own names instead of their principals, if
they are unable to complete the formalities before the
closing of the books. In the meanwhile, on 31.5.83, Punjab
National Bank wrote to Escorts Ltd. informing them that the
thirteen companies had been making investments in shares of
Escorts Ltd. in terms of the scheme for Investment by
overseas corporate bodies predominantly owned by non-
residents of Indian nationality/origin to an extent of at
least 60% and that the thirteen overseas companies had
designated them as their banker and M/s Raja Ram Bhasin &
Co. as their brokers for the purpose of investment.
Escorts Ltd., sought detailed information from Punjab
National Bank and the brokers about the names of investors
and also whether the Reserve Bank of India had accorded
permission to them. As there was no response from either of
them, Escorts Ltd. constituted a committee to look into the
question of transfer of shares in their books and according
to its recommendations the Board of Directors passed a
resolution refusing to register the transfer of shares.
Escorts Ltd., although they had already refused to
register the transfer of shares, wrote to the Punjab
National Bank for information on several points as they
desired to make a representations to the Reserve Bank of
India, intervene and assist in the inquiry being conducted
by the Reserve Bank at the behest of the Government of
India. They also wrote several letters to the Reserve Bank
purporting to give information regarding various
irregularities committed in the purchase of shares of their
company by the thirteen foreign companies, suppressing the
fact that they have refused to register the transfer of
shares in their favour.
In accordance with the clarificatory letter dated
17.9.83 from the Government of India, its Press Release of
the same date and its circular No. 18 dated 19.9.83, the
Reserve Bank, by a telex message conveyed to the Punjab
National Bank their
914
permission to release the money remitted by Caparo Group
Ltd. from abroad for making payment against the shares of
DCM and Escorts Ltd. Subsequent to the grant of permission
by the Reserve Bank of India, another attempt was made to
have the transfer of shares registered. The request was
turned down once again by Escorts Ltd. who by their letter
dated 13.10.83 stated that apart from the question of
obtaining the permission of the Reserve Bank of India, the
decision of the Board to refuse to register the shares was
based on other grounds which contained to be valid.
Respondent No.19, therefore, preferred an appeal to the
Central Government under section 111(3) of the Companies
Act.
Escorts Ltd. alleging undue pressure from the financial
institutions like ICICI, IFC, LIC, IDBI and UTI for the
registration of the transfer of shares and explaining the
circumstances and instances commencing from the meeting held
on 18.10.83 onwards upto 29.12.83, filed Writ Petition
No.3068/83 on 29.12.83 under Article 226 of the Constitution
challenging the validity of Circular No.18 dated 19.9.83 and
the Press Release of the same date as arbitrary and
violative of not only Articles 14, 19(1)(c) and 19(1)(g) of
the Constitution, but also the provisions of Foreign
Exchange Regulations, the provisions of Securities Contract
Regulation Act etc.
Subsequent to the filing of the Writ Petition the Life
Insurance Corporation of India who along with other
financial institutions held as many as 52% of the total
number of shares in the company, issued a requisition dated
11.2.84 to the company to hold an extra ordinary general
meeting for the purpose of removing nine of the part-time
Directors of the company and for nominating nine others in
their place. Alleging that the action of the Life Insurance
Corporation of India was malafide and part of a concerted
action by the Union of India, the Reserve Bank of India and
the Caparo Group Ltd. to coerce the company to register the
transfer of shares and to withdraw the Writ Petition, the
Writ Petitioners sought to suitably amend the Writ Petition
and to add prayers (ia), (ib), (ic) and (id) to declare the
requisition to hold the meeting arbitrary, illegal, ultra
vires etc. The writ petition was amended. Paragraphs 149A(1)
to (44) were added as also prayers (ia), (ib), (ic) and
(id).
The High Court of Bombay allowed the writ petition and
granted reliefs in the following manner:-
“Section 29(1)(b) of FERA is mandatory. No Non-Resident
Indian Investor is authorised to purchase share in an Indian
915
Company without the prior permission of R.B.I. under section
29(1)(b) of FERA; any purchase of shares without such prior
permission is illegal: Neither the Union of India or the
R.B.I. is empowered to order otherwise either by issuing a
direction under section 75 or under section 73(3) of the
FERA; nor are they empowered to grant permission after the
shares are purchased without obtaining prior permission. The
Press Release dt. 17.9.83 (Ex.A.), the circular dt. 19.9.83
(Ex.B) and the letter dt. 19.9.83 (Ex.C) cannot operate
retrospectively so as to validate the purchase of shares
made by N.R.I. companies which were ineligible on the date
of purchase; nor can they authorise purchase of shares
without obtaining prior permission of the R.B.I. under
section 29(1)(b) of the FERA. In so far as the impugned
Press Release circular and letter permitting the respondent-
companies to hold the shares purchased without obtaining
prior permission of the R.B.I., they are ultra vires of
section 29(1)(b) of FERA and the powers vested in the Union
of India under section 75 and the R.B.I. under section 73(3)
of the FERA. To that extent they are void and inoperative
both prospectively and retrospectively. The impugned Press
Release and the circular, however, amount to amending the
Portfolio investment Scheme with full repatriation benefits
introduced under Circular No. 9 dated 14th April, 1982, and
such amendments operates only prospectively. The action of
respondent No.18 in issuing the impugned requisition notice
is contrary to the provisions of section 284 of the
Companies Act and ultra vires the powers vested in the
L.I.C. under section 6 of the L.I.C. Act and contrary to the
intendment of the provisions of the L.I.C. Act. The impugned
requisition notice offends the principles of natural
justice. The action of the L.I.C. in issuing the impugned
requisition notice is an arbitrary and mala fide action
taken for collateral purpose; it is violative of Article 14
of the Constitution of India. The Union of India and the
R.B.I., respondents Nos. 1 and 2, are in no way responsible
for the action of the L.I.C. in this regard. The allegation
of mala fides made against them and the Union Finance
Minister are unsubstantiated. The requisition notice and the
resolutions passed at the meeting held in pursuance of the
said notice are quashed”. Aggrieved by the said judgment and
decree the Life Insurance Corporation of India has come in
appeal, and cross-appeals have been filed by Escorts Ltd.
and Mr. Nanda, the Managing Director of Escorts.
Allowing CA 4598/84 filed by the Life Insurance
Corporation of India, Union of India and the Reserve Bank of
India and dismissing the cross appeals No.497-499/85 filed
by Escorts Ltd. and Nanda, the Court
916
^
HELD : 1.1 The action of the Life Insurance Corporation
of India in issuing the requisition notice dated 11.2.84 to
hold an extra ordinary general meeting of the Escorts
Company Ltd. for the purpose of removing nine of the part
time Directors of the company and for nominating nine others
in their place is neither contrary to the provisions of
section 284 of the Companies Act, 1956 nor ultra vires the
powers vested in the Life Insurance Corporation under
section 6 of the Life Insurance Corporation of India Act.
The notice does not offend the principle of natural justice.
The said action of the L.I.C. cannot be said to be arbitrary
and malafide and taken for collateral purpose or violative
of Article 14 of the Constitution of India. [1022 F]
1.2 A company is, in some respects, an institution like
a State functioning under its “basic constitution”
consisting of the Companies Act and the Memorandum of
Association. “The members in general meeting” and the
directorate are the two primary organs of a company
comparable with the legislative and the executive organs of
a Parliamentary democracy where legislative sovereignty
rests with Parliament, while administration is left to the
Executive government, subject to a measure of control by
Parliament through its power to force a change of
Government. Like the Government, the Directors will be
answerable to the Parliament constituted by the general
meeting. But in practice (again like the government), they
will exercise as much control over the parliament as that
exercises over them. Although it would be constitutionally
possible for the company in general meeting to exercise all
the powers of the company, it clearly would not be
practicable (except in the case of one or two-man companies)
for day to day administration to be undertaken by such a
cumbersome piece of machinery. So the modern practice is to
confer on the Directors the right to exercise all the
company’s powers except such as the general law expressly
provides must be exercised in general meeting. Of course,
powers which are strictly legislative are not affected by
the conferment of powers on the Directors as section 31 of
the Companies Act provides that an alteration of an article
would require a special resolution of the company in general
meeting. Under the Company Act, in many ways the position of
the Directorate vis-a-vis the company is more powerful than
that the Government vis-a-vis the Parliament. The strict
theory of Parliamentary sovereignty would not apply by
analogy to a company since under the Companies Act, there
are many powers exercisable by the Directors with which the
members in general meeting cannot interfere. The most they
can do is to dismiss the directorate and appoint others in
their place or alter the articles so as to restrict the
powers of the Directors for the future. The only effective
way the members in general
917
meeting can exercise their control over the Directorate in a
democratic manner is to alter the Articles of Association so
as to restrict the powers of the Directors for the future or
to dismiss the Directorate and appoint others in their
place. The holders of the majority of the stock of a
Corporation have the power to appoint, by election,
Directors of their choice and the power to regulate them by
a resolution for their removal. This is the essence of
corporate democracy. [1010 G-H; 1011 A-H]
In the instant case, the financial institutions which
held 52% of the shares of Escorts company had a very big
stake in its working and future and were aggrieved that the
management did not even choose to consult them or inform
them that a Writ Petition was proposed to be filed which
would launch and involve the company in difficult and
expensive litigation against the Government and the Reserve
Bank of India. The institutions were anxious to withdraw the
writ petition and discuss the matter further. As the
Management was not agreeable to this course, the Life
Insurance Corporation thought that it had no option but to
seek a removal of the non-Executive Directors so as to
enable the new Board to consider the question whether to
reverse the decision to pursue the litigation. Evidently the
financial institutions wanted to avoid a confrontation with
the Government and the Reserve Bank and adopt a more
conciliatory approach. At the same time, the resolution of
the Life Insurance Corporation did not seek removal of the
Executive Directors, obviously because they did not intend
to disturb the management of the company Therefore, the Life
Insurance Corporation of India cannot be said to have acted
mala fide in seeking to remove the nine non-Executive
Directors and to replace them by representatives of the
financial institutions. No aspersion was cast against the
Directors proposed to be removed. It was the only way by
which the policy which had been adopted by the Board in
launching into a litigation could be reconsidered and
reversed, if necessary. It was a wholly democratic process.
A minority of shareholders in the saddle of power could not
be allowed to pursue a policy of venturing into a litigation
to which the majority of the shareholders were opposed. That
is not how corporate democracy may function. [1010 A-G]
1.3 Every shareholder of a company has the right,
subject to statutorily prescribed procedural and numerical
requirements to call an extra ordinary general meeting in
accordance with the provisions of the Companies Act, 1956.
He cannot be restrained from calling a meeting and he is not
bound to disclose the
918
reasons for the resolution proposed to be moved at the
meeting. Nor are the reasons for the resolutions subject to
judicial review. [1016 B-C]
1.4 It is true that under section 173(2) of the
Companies Act, there shall be annexed to the notice of the
meeting a statement setting out all material facts
concerning each item of business to be transacted at the
meeting, including in particular, the nature of the concern
or the interest, if any therein, of every director, the
managing agent, if any, the secretaries and treasures, if
any, and the manager if any. That is a duty cast on the
management to disclose, in an explanatory note, all material
facts relating to the resolution coming up before the
general meeting to enable the shareholders calling a meeting
to disclose the reasons for the resolutions which they
propose to move at the meeting. The Life Insurance
Corporation of India, though an instrumentality of the
State, as a shareholder of Escorts Ltd. has the same right
as every shareholder to call an extraordinary general
meeting of the company for the purpose of moving a
resolution to remove some Directors and appoint others in
their place. The Life Insurance Corporation of India cannot
be restrained from doing so nor is bound to disclose its
reasons for moving the resolutions. [1016 C-F]
1.5 When a requisition is made by a shareholder calling
for a general meeting of the company under the provisions of
the companies Act validly to remove a director and appoint
another, an injunction cannot be granted by the Court to
restrain the holding of a general meeting. [1011 G-H]
Shaw & Sons (Salford) Ltd. v. Shaw [1935] 2 KB 113;
Isle of wight Railway Company v. Tabourdin (1883) 25 Ch.
D.320; Inderwick v. Snell 42 Eng. Rep.83; Bentley-Stevens v.
Jones [1974] 2 All E.R.653; Ebrabimi v. Westbourne Galleries
Ltd. [1972] 2 All E.R. 492 referred to.
1.6 Every action of the State or an instrumentality of
the State must be informed by reason. In appropriate cases,
actions uninformed by reason may be questioned as arbitrary
in proceedings under Article 226 or Article 32 of the
Constitution. But Article 14 cannot be construed as a
charter for judicial review of state action, to call upon
the State to account for its actions in its manifold
activities by stating reasons for such actions. If the
action of the State is political or sovereign in character,
the Court will keep away from it. The Court will not debate
academic matters or concern itself with the intricacies of
919
trade and commerce. If the action of the State is related to
contractual obligations or obligations arising out of tort,
the Court may not ordinarily examine it unless the action
has some public law character attracted to it. Broadly
speaking the Court will examine actions of State if they
pertain to the public law domain and refrain from examining
them if they pertain to the private law field. [1017 C-D; E-
G]
When the State or an instrumentality of the State
ventures into the corporate world and purchases shares of a
company it assumes to itself the ordinary role of a
shareholder and dons the robes of a shareholder, with all
the rights available to such a shareholder. Therefore, the
State as a shareholder should not be expected to state its
reasons when it seeks to change the management by a
resolution of the company, like any other shareholder. [1017
G-H; 1018 A-B]
O’Reilly v. Mackman [1982] 3 All E.R. 1124; Devy v.
Spelthonne [1983] 3 All E.R. 278; I Congress Del Partido
[1981] 2 All E.R. 1064; R. v. East Berkshire Health
Authority [1984] 3 All E.R. 425; and Radha Krishna Aggarwal
JUDGMENT:
2. It cannot be said that the attitude taken by the
Life Insurance Corporation of India in regard to (i) the
issue of Equity linked Debentures; (ii) Repayment of loans
to Indian Financial Institutions; and (iii) the proposal of
the merger of Goetze with Escorts were mala fide and an
attempt on its part to exert pressure on Escorts Ltd. to
register the shares of Caparo Group. The result of accepting
the proposal for the issue of Equity linked Debentures would
be that the L.I.C.’s holdings would be reduced from 30 per
cent to 18.14 per cent, while the holding of all the
financial institutions would be reduced from 52% to 31.21%
besides involving great financial loss to them. Similar
would be the position if the proposals for the merger of
Goetze with Escorts was accepted. None holding a majority of
the equity capital of a company would allow himself to be
hustled into becoming a minority shareholder. The object of
prepayment of loans was to get rid of the directors who the
financial institutions had a right to nominate. True Escorts
offered to appoint Mr. Davar as a Director even if the
financial institutions had no right to nominate him. But it
is one thing to have the right to nominate a director and
quite another thing to be a director at sufferance. [1018 D-
E; 1019 A-B; 1021 C-D]
3.1 On an overall view of the several statutory
provisions and judicial precedents, it is clear that a
shareholder has an
920
undoubted interest in a company, an interest which is
represented by his share holding. Share is movable property
with all the attributes of such property. The rights of a
share holder are (i) to elect directors and thus to
participate in the management through them; (ii) to vote on
resolutions at meetings of the company; (iii) to enjoy the
profits of the company in the shape of dividends; (iv) to
apply to the court for relief in the case of oppression; (v)
to apply to the court for relief in the case of
mismanagement; (vi) to apply to the court for winding up of
the company; and (vii) to share in the surplus on winding
up. [995 G-H; 996 A]
3.2 A share is transferable but while a transfer may be
effective between transferor and transferee from the date of
transfer, the transfer is truly complete and the transferee
becomes a shareholder in the true and full sense of the
term, with all the rights of a shareholder, only when the
transfer is registered in the company’s register. A transfer
effective between transferor and the transferee is not
effective as against the company and persons without notice
of the transfer until the transfer is registered in the
company’s register. Indeed until the transfer is registered
in the books of the company, the person whose name is found
in the register alone is entitled to receive the dividends,
notwithstanding that he has already parted with his interest
in the shares. However, on the transfer of shares, the
transferee becomes the owner of the beneficial interest
though the legal title continues with the transferor. The
relationship of trustee and ceatui que trust is established
and the transferor is bound to comply with all reasonable
directions that the transferee may give. He also becomes a
trustee of the dividends as also of the rights to vote. The
right of the transferee “to get on the register” must be
exercised with due diligence and the principle of equity
which makes the transferor a constructive trustee does not
extend to a case where a transferee takes no active interest
“to get on the register”. [996 A-D]
3.3 Where the transfer is regulated by a statute, as in
the case of transfer to a non-resident which is regulated by
the Foreign Exchange Regulation Act, the permission, if any,
prescribed by the statute must be obtained. In the absence
of the permission, the transfer will not clothe the
transferee with the “right to get on the register” unless
and until the requisite permission is obtained. A transferee
who has the right to get on the register, where no
permission is required or where permission has been
obtained, may ask the company to register the transfer and
the company who is so asked to register the transfer of
shares may not refuse to register the transfer, except for
bona
921
fide reasons, neither arbitrarily, nor for any collateral
purpose. The paramount consideration is the interest of the
company and the general interest of the shareholder. On the
other hand, where, the requisite permission under FERA is
not obtained, it is open to the company, and indeed, it is
bound to refuse to register the transfer of shares of an
Indian company if favour of a non-resident. [996 E-H]
But once permission is obtained, whether before or
after the purchase of the shares, the company cannot,
thereafter refuse to register the transfer of shares. Nor is
it open to the company or any other authority or individual
to take upon itself or himself, thereafter the task of
deciding whether the permission was rigthtly granted by
Reserve Bank of India. The FERA makes it its exclusive
privileges and function. The provisions of the Foreign
Exchange Regulation Act are so structured and woven as to
make it clear that it is for the Reserve Bank of India alone
to consider whether the requirements of the provisions of
the Foreign Exchange Regulation Act and the various rules,
directions and orders issued from time to time have been
fulfilled and whether permission should be granted or not.
The consequences of non-compliance with the provisions of
the Act and the rules, orders and directions issued under
the Act are mentioned in secs. 48, 50, 56 and 63 of the Act.
There is no provision of the Act which enables an individual
or authority functioning outside the Act to determine for
his own or its own purpose whether the Reserve Bank was
right or wrong in granting permission under section 29(1) of
the Act. Under the scheme of the Act, it is the “custodian-
general” of foreign exchange. The task of enforcement is
left to the Directorate of Enforcement, but it is the
Reserve Bank of India and the Reserve Bank of India alone
that has to decide whether permission may or may not be
granted under section 29(1) of the Act. The Act makes it its
exclusive privilege and function. No other authority is
vested with any power nor may it assume to itself the power
to decide the question whether permission may or may not be
granted or whether it ought or ought not to have been
granted. The question may not be permitted to be raised
either directly or collaterally before any Court. However,
the grant of permission by the Reserve Bank may be
questioned by an interested party in a proceeding under
Article 226 of the Constitution on the ground that it was
malafide or that there was no application of the mind or
that it was opposed to national interest as contemplated by
the Act. [996 H; 997 A-G]
922
3.5 It is certainly not open to a company whose shares
have been purchased by a non-resident company to refuse to
register the shares even after permission is obtained from
the Reserve Bank of India on the ground that permission
ought not to have been granted under the FERA. The
permission contemplated under section 29(1) of the Foreign
Exchange Regulation Act is neither intended to nor does it
impinge in any manner or any legal right of the company or
any of its shareholders. Conversely neither the company nor
any of its shareholders is clothed with any special right to
question any such permission. [997 G-H; 998 A]
3.6 Where the articles permitted the Directors to
decline to register the transfer of shares without assigning
reasons, the Court would not necessarily draw adverse
inference against the Directors but will assume that they
acted reasonably and bonafide. Where the Directors gave
reasons the Court would consider whether the reasons were
legitimate and whether the Directors proceeded on a right or
a wrong principle. If the articles permitted the Directors
not to disclose the reasons, they could be interrogated and
asked to disclose the reasons. If they failed to disclose
that reason adverse inference could be drawn against them.
[995 C-F]
Manekji Pestonji Bharucha and Anr. v. Wadilal Sherabhai
and Co. 52 I.A. 92; Bank of India v. Jamshetji A.R. Chinoy
A.I.R. 1950 Pc 90; In Re Fry [1946] 2 All E.R. 106; Swiss
Bank Corporation v. Lioyds Bank Ltd. [1982] A.C. 584;
Charanjit Lal Chaudhury v. Union of India A.I.R. 1951 S.C.
41; Mathalone and Ors. v. Bombay Life Assurance Company Ltd.
A.I.R. 1953 S.C. 385; Vasudev Ramachandra Shelat v. Pranlal
Jayanand Thakkar [1975] 1 S.C.R. 534; A.K. Ramiah v. Reserve
Bank (1970) 1 M.L.J. PI referred to.
4. The purchase of shares made by and or on behalf of
the Caparo Group Ltd. cannot be said to be in violation of
the Portfolio Scheme in as much as: (i) the permission of
the Reserve Bank contemplated by section 29(1)(b) of the
Foreign Exchange Regulation Act, 1973 need not be “prior” or
“previous” but the permission should be obtained at some
stage for the purchase of shares. It could be ex post facto,
subsequent and conditional; (ii) Payments under the Stock
Exchange Rules may be made within two weeks after the first
purchase and there would have been no difficulty in making
payments out of foreign remittances; (iii) the provisions of
sections 19(4), 29(1)(b), 47, 48, 50, 56 and 63 of the
Foreign Exchange Regulation Act do not stipulate that the
purchase of shares without obtaining the permission of the
923
Reserve Bank shall be void. On the other hand, legal
proceedings arising out of such transactions are
contemplated subject to the condition that no sum may be
recovered as debt, damage or otherwise, unless and until
requisite permission is obtained. If permission may be
granted ex post facto, the transaction cannot be a nullity
and without effect whatsoever; (iv) under section 27 of the
Securities Contracts (Regulation) Act, it shall be lawful
for the holder of the company issuing the said security to
receive and retain any dividend declared by the company in
respect thereof for any year, notwithstanding that the
security has already been transferred by him for
consideration, unless the transferee who claims the dividend
from the transferor has lodged the security and all other
documents relating to the transfer which may be required by
the company with the company for being registered in his
name within fifteen days of the date on which the dividend
became due; (v) Even under the Bye-law 242 of the Stock
Exchange Regulations the brokers are permitted to lodge the
shares purchased on behalf of their principals in their own
names, if they are unable to complete the formalities before
the closing of the books; and (vi) under the scheme, any
foreign company whose shares were owned to the extent of
more than 60% by persons of Indian nationality or origin
could avail the facility given by the scheme irrespective of
the fact whether the same group of shareholders figured in
the different companies. Where any of the purchases were
made subsequent to 2.5.83, they were subject to the ceiling
of 5% in the aggregate. Merely because more than 60% of the
shares of the several foreign companies who have applied for
permission are held by a Trust of which Mr. Swaraj Paul and
the members of his family are beneficiaries, the companies
cannot be denied the facilities of investing in Indian
companies. In fact, if such of the six beneficiaries of the
Trust had separately applied for permission to purchase
shares of Indian companies, they could not have been denied
such permission. Therefore, merely on this account it cannot
be said that there has been any violation of the Portfolio
Investment Scheme or that the permission granted is illegal.
[1022 B-C; 988 F-H; 989 A-B; 1004 A-H; 1005 A-B]
5. Generally and broadly speaking, the corporate veil
may be lifted where a statute itself contemplates lifting
the veil, or fraud or improper conduct is intended to be
prevented or a taxing statute or a beneficent statute is
sought to be evaded or where associated companies are
inextricably connected as to be in reality, part of one
concern. It is neither necessary nor desirable to enumerate
the classes of cases where lifting the corporate veil is
permissible, since that must necessarily depend
924
on the relevant statutory or other provisions the object
sought to be achieved, the impugned conduct, the involvement
of the element of the public interest, and the effect on the
parties who may be affected etc. In the instant case
“lifting the veil” is neither necessary nor permissible
beyond the essential requirement of the Foreign Exchange
Regulation Act and the Portfolio Investment Scheme. The
object of the Act is to conserve and regulate the flow of
foreign exchange and the object of the scheme is to attract
non-resident investors of Indian nationality or origin to
invest in shares of Indian companies. In the case of
individuals, there can be no difficulty in identifying their
nationality or origin. In the case of companies and other
legal personalities, there can be no question of nationality
or ethnicity of such company or legal personality. Who of
such non-resident companies or legal personalities may then
be permitted to invest in shares of Indian companies. The
answer is furnished by the scheme itself which provides for
“lifting the corporate veil” to find out if at least 60 per
cent of the shares are held by non-residents of Indian
nationality or origin. Lifting the veil is necessary to
discover the nationality or origin of the shareholders and
not to find out the individual identity of each of the
shareholders. The corporate veil may be lifted to that
extent only and no more. Further it would be beyond the
scope of the writ petition in the High Court. [1006 F-H;
1007 A-D]
Wallersteiner v. Moir, [1974] 3 All E.R. 217; Tata
Engineering and Locomotive Company Ltd. v. State of Bihar,
[1964] 6 S.C.R. 885; The Commissioner of Income Tax v.
Meenakshi Mills, A.I.R. 1967 S.C. 819; Workmen v. Associated
Rubber Ltd., [1985] 2 Scale 321; and Salomon v. A. Saloman &
Co. Ltd., [1897] A.C. 22 referred to.
6.1 The permission of the Reserve Bank contemplated by
the Foreign Exchange Regulation Act, 1973 need not be
“prior” or “previous” and it could be ex post facto
subsequent and conditional. [1021 H]
6.2 The expression used in section 29(1) of the Foreign
Exchange Act, 1973 is “general or special permission of the
Reserve Bank of India”. It is not qualified by the word
“prior” or “previous”. While the word “prior” or “previous”
may be implied if the contextual situation or the object and
design of the legislation demands if, there is no such
compelling circumstances justifying reading any such
implication into section 29(1). Though the Parliament has
not been unmindful of the need to clearly express its
intention by using the expression
925
“previous permission”. Whenever if thought previous
permission was necessary, as for example, sections 8(1),
8(2), 27(1), 30 and 31 of the Act, it deliberately avoided
the qualifying word “previous” in section 29(1) so as to
invest the Reserve Bank of India with a certain degree of
elasticity in the matter of granting permission to non-
resident companies to purchase shares in Indian companies.
Therefore, the word permission must be interpreted to mean
“permission previous or subsequent” – and that it is
necessary that the permission of the Reserve Bank of India
should be obtained at some stage for the purchase of shares
by non-resident companies. [979 F-H; 980 A-C]
6.3 The scheme of the Foreign Exchange Regulation Act
does not make previous permission imperative under section
29(1)(b), though failure to obtain prior permission may
expose the foreign investor to prosecution penalty,
conviction, confiscation, if permission is ultimately
refused. Even if permission is granted, it may be made
conditional. The expression “special permission” is wide
enough to take with in its stride a “conditional
permission”, the condition being relevant to the purpose of
the statute, in this case, the conservation and regulation
of foreign exchange. [981 F-H]
6.4 Nor is the Reserve Bank of India bound to give ex
post facto permission whenever it is found that business has
been started or shares have been purchased without its
previous permission. In such cases, wherever the Reserve
Bank of India suspects an oblique motive, it will not only
refuse permission but will further resort to action under
section 50, 61 and 63 not merely to punish the offender but
also confiscate the property involved. [981 E-F]
6.5 Parliament did not intend to lay down in absolute
terms that the permission contemplated by section 29(1) had
necessarily to be previous permission. The principal object
of section 29 is to regulate and not altogether to ban the
carrying on in India of the activity contemplated by clause
(a) and the acquisition of an undertaking or shares in India
of the character mentioned in clause (b). Hence, Parliament
left to the Reserve Bank of India as the saftest authority
to grant permission previous or ex post facto, conditional
or unconditional. And the Reserve Bank could be expected to
use the discretion wisely and in the best interests of the
country and in furtherance of declared Government fiscal
policy in the matter of foreign exchange. 1982 F; G-H]
926
6.6 Reading together sections 13 and 67 of the Foreign
Exchange Regulation Act and section 11 of the Customs Act,
it is seen that an order under section 13 FERA operates as a
prohibition and there, can therefore, be no question of the
Reserve Bank of India granting subsequent permission to
validate the importation of the prohibited goods and avoid
the consequences prescribed by the Customs Act. To accept
the analogy of section 13 to interpret sections 19 and 29,
therefore, is not possible. [983 D-E]
6.7 It is true that the consequences of not obtaining
the permission of the Reserve Bank or not to follow the
procedure prescribed are serious and even severe. It is also
true that the burden of proof is on the person proceeded
against and that mensrea may consequently be interpreted as
ruled out. But that cannot lead to the inevitable conclusion
that the permission contemplated by section 29 is
necessarily previous permission. [983 G-H; 984 A]
6.8 If it was the intention of Parliament to comprehend
both previous and subsequent permission, the word
“confirmation” as in section 19(5) would not do at all.
While it may be permissible to construe the word
“permission” widely, the word “confirmation” could never be
used to convey the meaning “previous permission”. The word
“confirmation” is totally misplaced in section 29. [984 E-F]
6.9 The rule against retrospectivity cannot be imported
into the situation presented here. The rule against
retrospectivity is a rule of interpretation aimed at
preventing with rights unless expressly provided or
necessarily implied. To invoke the rule against
retrospectivity in a situation where no vested rights are
involved is to give statutory status to a rule of
interpretation forgetting the reason for the rule. [984 G-H;
985 A-B]
6.10 Paragraph 24A.1 of the Exchange Control Manual is
neither a statutory direction nor is it a mandatory
instruction issued under section 73(3) of the Foreign
Exchange Regulation Act, but is in the nature of a comment
on section 29(1)(b). The paragraph is an explanatory
statement of guideline for the benefit of the authorised
dealers. It reads as if it is in the nature of and, indeed
it is, advice given to the authorised dealers that they
should obtain prior permission of the Reserve Bank of India,
so that there may be no later complications. It is a helpful
suggestion rather than a mandate. The Manual itself is a
sort of guide book for authorised dealers, money changers,
etc. and is a compendium or collection of various statutory
927
directions, administrative instructions, advisory opinions,
comments, notes, explanations, suggestions etc. The
expression “prior permission” used in paragraph 24.A(1) is
not meant to restrict the range of the expression “general
and special permission” found in sections 29(1)(b) and
19(1)(b). It is meant to indicate the ordinary procedure
which may be followed. [986 B-E]
6.11 The forms cannot control the Act, the Rules or the
directions. None of the prescribed forms, no doubt, provided
for the application and grant of subsequent permission, but
that is so because ordinarily one would expect permission to
be sought and given before the act. [986 E-F]
6.12 The Portfolio investment Scheme does not talk of
any prior or previous permission. Further a power possessed
by the Reserve Bank under a Parliamentary legislation cannot
be so cut down as to prevent its exercise altogether. It may
be open to subordinate legislating body to make appropriate
rules and regulations to regulate the exercise of a power
which the Parliament has vested in it so as to carry out the
purposes of the legislation, but it cannot divest itself of
the power. Therefore, the Reserve Bank, if it has the power
under the FERA to grant ex post facto permission cannot
divest itself of that power under the scheme. [987 A-D]
Shakir Hussain v. Candoo Lal & Ors., AIR 1931 All. 567,
Vasudev Ramachandra Shelat v. Pranlal Jayanand Thakur,
[1975] 1 S.C.R. 534 referred to.
7.1 When construing statutes enacted in the national
interest, the Courts must necessarily take the broad factual
situations contemplated by the Act and interpret its
provisions so as to advance and not to thwart the particular
national interest whose advancement is proposed by the
legislation. Traditional norms of statutory interpretation
must yield to broader notions of the national interest. [980
G-H; 981 A]
The object of the Foreign Exchange Regulation Act, is
to earn, conserve, regulate and store foreign exchange. The
entire scheme and design of the Act is directed towards that
end. Section 76 emphasises that every permission or licence
granted by the Central Government or the Reserve Bank of
India should be animated by a desire to conserve the foreign
exchange resources of a country. The Foreign Exchange
Regulation Act, is therefore, clearly a statute enacted in
the national interest. [980 C-G]
928
7.2 The proper way to interpret statutes is to give due
weight to the use as well as the omission to use the
qualifying words in different provisions of the Act. The
significance of the use of the qualifying word in one
provision and its non-use in another provision may not be
disregarded. [980 B-C]
7.3 Every word has different shades of meaning and
different words may have the same meaning. It all depends
upon the context in which the word is used. [984 E]
8. The Press Release (Ex.A) dated 17.9.83, the circular
(Ex.B) dated 19.9.83 and the letter (Ex.C) dated 19.9.83 are
all valid. [1022 A]
9. The Reserve Bank of India was not guilty of any
malafides in granting permission to the Caparo Group of
companies. Nor was it guilty of non-application of mind.
Every question involving investments by non-resident
companies and foreign exchange is bound to have different
facets which present themselves in different lights when
viewed from different angles. If after full discussion with
those in higher rungs of the Government who are concerned
with policy-making, the Reserve Bank of India changed its
former negative attitude to a more positive attitude in the
interests of the economy of the country, its decision cannot
be said to be the result of any pressure or non-application
of the mind. And merely because, the Reserve Bank of India
did not choose to send a reply to the communications
received from the company it did not follow that the Reserve
Bank of India was not acting bonafide. [999 E; G-H; 1000 B]
10. No malafides could be attributed to the Union of
India either. [1022 D]
11. There was a total and signal failure on the part of
Punjab National Bank in the discharge of their duties as
authorised dealers under the Foreign Exchange Regulation Act
and the Portfolio Investment Scheme with the result there
was no monitoring of the purchases of shares made on behalf
of the Caparo Group of companies. [1022 D-E]
12. The question that would involve the adduction of
evidence or as in the instant case a probe into individual
purchases of shares – Whether they were purchased with
foreign exchange or locally available funds would be beyond
the scope of the writ petition in the High Court under
Article 226 of the Constitution. [1004 G]
929

 

&
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4598 of
1984.
From the Judgment and Order dated 9.11.1984 of the
Bombay High Court in Civil Writ No. 3063 of 1983.
K. Parasaran, Attorney General, M.K. Banerjee,
Additional Solicitor General, V.C. Kotwal, F.S. Nariman,
K.K. Venugopal, Soli J. Sorabjee, A.B. Divan, O.P. Malhotra,
T.R. Andhyarujina, Mahendra H. Shah, S.C. Maheshwari,
Shardul S. Shroff, Mrs. Pallavi S. Shroff, Cyril S. Shroff,
Amit Desai, Sasi Prabhu, Ms. Prema Baxi, Suresh A. Shroff,
M/s. J.B. Dadachanji, B.H. Antia, Aspi Chonay, Ravinder
Narain, O.C. Mathur, Rajive Sawhney, R.F. Nariman, Mrs. A.K.
Verma, Joel Peres, Miss Ratna Kapoor, D.N. Misra,
Talyarkhan, A.K. Ganguli, H.S. Parihar, A. Subba Rao, A.K.
Chakravarty, R.N. Poddar and R.D. Aggarwala for the
appearing parties.
The Judgment of the Court was delivered by
CHINNAPPA REDDY, J. Problems of high finance and broad
fiscal policy which truly are not and cannot be the province
of the court for the very simple reason that we lack the
necessary expertise and, which, in any case, are none of our
business are sought to be transformed into questions
involving broad legal principles in order to make them the
concern of the court. Similarly what may be called the
‘political’ processes of ‘corporate democracy’ are sought to
be subject to investigation by us by invoking the principle
of the Rule of Law, with emphasis on the rule against
arbitrary State action. An expose of the facts of the
present case will reveal how much legal ingenuity may
achieve by way of persuading courts, ingenuously, to treat
the variegated problems of the world of finance, as
litigable public-right-questions. Courts of justice are
well-tuned to distress signals against arbitrary action. So
corporate giants do not hesitate to rush to us with cries
for justice. The court room becomes their battle ground and
corporate battles are fought under the attractive banners of
justice, fair-play and the public interest. We do not deny
the right of corporate giants to seek our aid as well as any
Lilliputian farm labourer or pavement dweller though we
certainly would prefer to devote more of our time and
attention to the latter. We recognise that out of the dust
of the battles of giants occasionally emerge some new
principles, worth the while. That is how the law has been
progressing until recently. But not so now. Public interest
litigation and public assisted litigation are today taking
over many unexplored fields and the dumb are finding their
voice.
930
In the case before us, as if to befit the might of the
financial giants involved, innumerable documents were filed
in the High Court, a truly mountainous record was built up
running to several thousand pages and more have been added
in this court. Indeed, and there was no way out, we also had
the advantage of listening to learned and long drawn-out,
intelligent and often ingenious arguments, advanced and
dutifully heard by us. In the name of justice, we paid due
homage to the causes of the high and mighty by devoting
precious time to them, reduced, as we were, at times to the
position of helpless spectators. Such is the nature of our
judicial process that we do this with the knowledge that
more worthy causes of lesser men who have been long waiting
in the queue have blocked thereby and the queue has
consequently lengthened. Perhaps the time is ripe for
imposing a time-limit on the length of submissions and page-
limit on the length of judgments. The time is probably ripe
for insistence on brief written submissions backed by short
and time-bound oral submissions. The time is certainly ripe
for brief and modest arguments and concise and chaste
judgments. In this very case we heard arguments for 28 days
and our judgment runs to 181 pages and both could have been
much shortened. We hope that we are not hoping in vain that
the vicious circle will soon break and that this will be the
last of such mammoth cases. We are doing our best to
disentangle the system from a situation into which it has
been forced over the years by the existing procedures. There
is now a public realisation of the growing weight of the
judicial burden. The cooperation of the bar too is
forthcoming though in slow measure. Drastic solutions are
necessary. We will find them and we do hope to achieve
results sooner than expected. So much for sanctimonious
sermonising and now back to our case.
We do not for a moment doubt that this is a case which
require our scrutiny, more particularly so because of a most
singular and remarkable feature of the case namely the
absence of the principle dramatics personnae from the stage.
Mr. Swraj Paul, the hero of the drama, did not appear before
the High Court and did not appear before us; nor did his
broker and his power of attorney holder, Raja Ram Bhasin &
Co. Though the investments made and in question run into
several crores of rupees, they have acted as if they care a
tuppence for them. Obviously, Mr. Swraj Paul, a Foreign
National, does not want to submit himself to the
jurisdiction of Indian Courts and his broker Raja Ram Bhasin
& Co. has nothing to lose by keeping away from the court and
perhaps everything to gain by standing by the side of his
principal. These may be excellent reasons for them for not
choosing to appear before us, but their non-appearance and
abstemious
931
silence in court have certainly complicated the case and
embarrassed the Government of India, the Reserve Bank of
India and the Life Insurance Corporation of India to whose
lot it fell to defend the case since it was their policies,
decisions and actions that were assailed. We must however
express our strong condemnation of the conduct and tactics
employed by Swraj Paul and Raja Ram Bhasin which we consider
deplorable. The Punjab National Bank, the designated bank of
Mr. Swraj Paul’s companies did appear before us but their
appearance was of no assistance to the court. They had put
themselves in such a hapless situation. It was apparent to
us from the beginning that if there was much front-line
battle strategy, there was considerably more back stage
‘diplomatic’ manouvering, as may be expected when financial
giants clash, though we are afraid neither giant was greatly
concerned for justice or the public interest. For both of
them the court room was just another arena for their war,
except that one of the giants carefully kept himself at the
back behind a screen as it were. One was reminded of the
Mahabharta War where Arjuna kept Shikhandi in front of him
while fighting Bhishma, not that neither of the warriors in
this case can be compared with Bhishma or Arjuna nor can the
Government of India and Reserve Bank of India be downgraded
as Sikhandies. But the case does raise some questions which
do concern the public interest and we are greatly concerned
for the public interest and administration of administrative
justice in the public interest. It is from that angle alone
that we propose to examine the several questions arising in
the case.
The present state of India economy which has to operate
under the existing World Economic System is such that India
needs foreign exchange and, lots of it, to meet the demands
of its developmental activities. It has become necessary to
earn, conserve and build-up a reservoir of foreign exchange.
So the Parliament and the Executive Government have been
taking steps, from time to time, to regulate, to conserve
and improve the foreign exchange resources of the country
and the proper utilisation thereof in the interests of the
economic development of the country. The Foreign Exchange
Regulation Act, 1973 was enacted for that purpose.
‘Foreign Exchange’ is defined by sec. 2(h) of the Act
to mean foreign currency and includes –
“(i) all deposits, credits and balances payable in
any foreign currency and any drafts, traveller’s
cheques, letters of credit and bills of exchange,
expressed or drawn in Indian currency but payable
in any foreign currency;
932
(ii) any instrument payable, at the option of the
drawee or holder thereof or any other party
thereto, either in Indian currency or in foreign
currency or partly in one and partly in the
other.”
‘Authorised dealer’ is defined to mean a person for the
time being authorised under sec. 6 to deal with foreign
exchange.
‘Owner’ is defined by sec. 2(c), in relation to any
security, as including –
“any person who has power to sell or transfer the
security, or who has the custody thereof or who
receives, whether on his own behalf or on behalf
of any other person, dividends or interest
thereon, and who has any interest therein, and in
a case where any security is held on any trust or
dividends or interest thereon are paid into a
trust fund, also includes any trustee or any
person entitled to enforce the performance of the
trust or to revoke or vary, with or without the
consent of any other person, the trust or any
terms thereof, or to control the investment of the
trust money.”
Section 3 provides for the establishment of a
Directorate of Enforcement consisting of a Director of
Enforcement and other officers.
Section 6(1) enables the Reserve Bank on an application
made to it, to authorise any person to deal in foreign
exchange. Sec. 6(2) prescribes what may be authorised and
sec. 6(4) and sec. 6(5) prescribe the duties of the
authorised dealer.
Section 8(1) provides that, except with the previous
general or special permission of the Reserve Bank no person
other than the authorised dealer shall deal in foreign
exchange. Sec.8(2) provides that except with the previous
general or special permission of the Reserve Bank, no person
shall enter into any transaction which provides for the
conversion of Indian currency into foreign currency or
foreign currency into Indian currency at rates of exchange
other than those authorised by the Reserve Bank.
Section 13(1) prescribes that subject to such exemption
as may be specified, no person shall, except with the
general or
933
special permission of the Reserve Bank, bring or send into
India any gold or silver or any foreign exchange or any
Indian currency. Sec. 13(2) provides that no person shall,
except with the general or special permission of the Reserve
Bank or with the written permission of a person authorised
by the Reserve Bank take or send out of India any gold,
jewellery or precious stones or Indian currency or foreign
exchange other than foreign exchange obtained by him from an
authorised dealer or from a money-changer.
Section 19(1)(b) provides that no person shall, except
with the general or special permission of the Reserve Bank
of India, transfer any security or credit or transfer any
interest in the security to or in favour of a person
resident outside India.
Section 19(4) and (5) which are relevant for our
purpose are as follows :-
“(4) Notwithstanding anything contained in any
other law, no person shall, except with the
permission of the Reserve Bank-
(a) enter any transfer of securities in any
register or book in which securities are
registered or inscribed if he has any ground for
suspecting that the transfer involves any
contravention of the provisions of this section,
or
(b) enter in any such register or book, in respect
of any security, whether in connection with the
issue or transfer of the security or otherwise, an
address outside India except by way of
substitution for any such address in the same
country or for the purpose of any transaction for
which permission has been granted under this
section with knowledge that it involves entry of
the said address, or
(c) transfer any share from a register outside
India to a register in India.
(5) Notwithstanding anything contained in any
other law, no transfer of any share of a company
registered in India made by a person resident
outside India or by a national of a foreign State
to another person whether resident in India or
outside India shall be
934
valid unless such transfer is confirmed by the
Reserve Bank on an application made to it in this
behalf by the transferor or the transferee.”
Section 29(1) which is also relevant for the purposes
of this case is as follows:
“29(1) Without prejudice to the provisions of s.28
and s.47 and notwithstanding anything contained in
any other provision of this Act or the provisions
of the Companies Act, 1956, a person resident
outside India (whether a citizen of India or not)
or a person who is not a citizen of India but is
resident in India, or a company (other than a
banking company) which is not incorporated under
any law in force in India or in which the non-
resident interest is more than forty per cent, or
any branch of such company, shall not except with
the general or special permission of the Reserve
Bank-
(a) carry on in India, or establish in India a
branch, office or other place of business for
carrying on any activity of a trading, commercial
or industrial nature, other than an activity for
the carrying on of which permission of the Reserve
Bank has been obtained under sec. 28; or
(b) acquire the whole or any part of any
undertaking in India or any person or company
carrying on any trade, commerce or industry or
purchase the shares in India in any such company.”
Section 29(2) makes provision for applying for permission to
continue after the commencement of the Act any activity of
the nature mentioned in clause (a) of sec. 29(1) which was
being carried on at the commencement of the Act, while sec.
29(4) makes similar provision for applying for permission to
continue to hold after the commencement of the Act shares of
a company referred to in sec. 29(1) (b) which were held by a
person at the commencement of the Act.
Section 30 prescribes that no national of a foreign
State shall, without the previous permission of the Reserve
Bank-
(i) take up any employment in India, or
935
(ii) practise any profession or carry on any
occupation, trade or business in India.
Section 31 prohibits any person, who is not a citizen
of India or a company not incorporated in India or in which
the non-resident interest is more than 40 per cent, from
acquiring or holding or transferring or disposing of by
sale, mortgage, lease, gift, settlement or otherwise any
immovable property situate in India, except with the
previous general or special permission of the Reserve Bank.
Section 47 deals with contracts in evasion of the Act.
Sec. 47(1) prohibits any person from entering into a
contract or agreement which would directly or indirectly
evade or avoid in any way the operation of any provision of
the Act or of any rule, direction or order made thereunder.
Section 47(2) provides that any provision of the Act
requiring that a thing shall not be done without the
permission of the Central Government or Reserve Bank of
India, shall not render invalid any agreement to do that
thing if it is a term of the agreement that thing shall not
be done unless permission is granted. Where such a term is
not explicit, it is to be implied in every contract. Section
47(3) further provides that, subject to certain specified
conditions, legal proceedings may be instituted to recover
any sum which would be due, apart from and despite the
provisions of the Act or any term of the contract requiring
the permission of the Central Government or the Reserve Bank
of India for the doing of a thing.
Section 50 prescribes the levy of a penalty if any
person contravenes any of the provisions of the Act except
certain enumerated provisions, the adjudication is to be
made by the Director of Enforcement or an Officer not below
the rank of an Assistant Director of Enforcement, specially
empowered in that behalf. Section 51 provides for the
enquiry and the power to adjudicate. Section 52 provides for
an appeal to the Appellate Board and sec. 54 for a further
appeal to the High Court on questions of law. Section 56
provides for prosecutions, for contraventions of the
provisions of the Act and the rules, directions or orders
made thereunder. Section 57 makes the failure to pay the
penalty imposed by the adjudicating officer or the Appellate
Board or the High Court or the failure to comply with any
directions issued by those authorities, an offence
punishable with imprisonment. Section 59 prescribes a
presumption of mens-rea in prosecutions under the Act and
throws upon the accused the burden of proving that he had no
culpable mental
936
state with respect to the act charged in the prosecution.
Section 61 provides for cognizance of offences. Section
61(1)(ii) obliges the court not to take cognizance of any
offence punishable under section 56 or 57 except on a
complaint made in writing by – (a) the Director of
Enforcement; or (b) any officer authorised in writing in
this behalf by the Director of Enforcement or the Central
Government; or (c) any officer of the Reserve Bank
authorised by the Reserve Bank by a general or special
order. The proviso to this provision enjoins that no
complaint shall be made for the contravention of any of the
provisions of the Act, rule, direction or order made
thereunder which prohibits the doing of the Act without
permission, unless the person accused of the offence has
been given an opportunity of showing that he had such
permission. Section 63 empowers the adjudicating office
adjudging any contravention under sec. 51 and any court
trying a contravention under sec. 56, if he or it thinks fit
to direct the confiscation of any currency, security or any
other money or property in respect of which the
contravention has taken place.
Section 67 treats the restrictions imposed by secs. 13,
18(1)(a) and 19(1)(a) as restrictions under s.11 of the
Customs Act and makes all the provisions of the Customs Act
applicable accordingly.
Section 71(1) lays the burden of proving that he had
the requisite permission on the prosecuted or proceeded
against for contraventing any of the provisions of the Act
or rule or direction or order made thereunder which
prohibits him from being an Act without permission.
Section 73(3) enables the Reserve Bank of India to
“give directions in regard to the making of payments and the
doing of other acts by bankers authorised dealers, money-
changers, stock brokers, persons referred to in sub-sec.(1)
of sec. 32 or other persons, who are authorised by the
Reserve Bank to do anything in pursuance of this Act in the
course of their business, as appear to it to be necessary or
expedient for the purpose of securing compliance with the
provisions of this Act and of any rules, directions or
orders made thereunder.”
Section 75 enables the Central Government to give and
the Reserve Bank to comply with general or special
directions as the former may think fit.
937
Section 76 requires the Central Government or the
Reserve Bank, while giving or granting any permission or
licence under the Act, to have regard to all or any of the
following factors, namely,
(i) conservation of the foreign exchange resources
of the country;
(ii) all foreign exchange accruing to the country
is properly accounted for;
(iii) the foreign exchange resources of the
country are utilised as best subserve the common
good; and
(iv) such other relevant factors as the
circumstances of the case may require.
Section 79 invests the Central Government with the
power generally to make rules and in particular for various
specified purposes.
In exercise of the powers conferred by sec. 79 of the
FERA, rules called ‘the Non-Resident (External) Account
Rules, 1970’s have been made, Rule 3 enables, subject to the
provisions of the rules, any person resident outside India
to open and maintain in India an account with an authorised
dealer, to be called, a Non-Resident (External) Account.
Rule 4(1) prescribes that no amount other than the amounts
mentioned therein shall be credited to a Non-Resident
(External) Account. One such is ‘any amount remitted by the
account holder from outside India through normal banking
channels as an amount which may be credited to a Non-
Resident (External) Account’. Rule 4(4) provides that
amounts accruing by way of a dividend or interest on shares,
securities or deposits held in India, shall not be credited
on Non-Resident External Account unless certain conditions
are fulfilled. One of the conditions is that the account-
holder is the registered holder of such shares, securities
or deposits. Another condition is that the account-holder
has deposited the certificates relating to the shares with
an authorised dealer along with an undertaking in writing to
the effect that he will not dispose of any of the shares
except with the previous approval of the Reserve Bank. Rule
5 further prescribes that no such amount as is referred to
in rule 4(1) shall be credited to a Non-Resident (External)
Account unless the Reserve Bank having regard to the
desirability of permitting remittance of funds held in India
by Non-Residents, either by general or special order, gives
938
permission in this behalf. Rule 6 provides that a person
resident outside India who wishes to open Non-Resident
(External) Account, shall make an application in this behalf
to an authorised dealer. The authorised dealer, unless there
is a general or special order of the Reserve Bank so
directing, shall refer every such application to the Reserve
Bank together with the particulars.
The Exchange Control Manual published by the Reserve
Bank of India incorporates various statutory and
administrative instructions, advisory opinions, comments,
notes, explanations etc. issued from time to time. Paragraph
24.1(i) states,
“Investment in India by non-residents of Indian
nationality or origin is subject to a different
set of rules in order to give them wider
investment opportunities. Ordinarily investment is
allowed freely if the investment proposed to be
made is not of an undesirable nature, but subject
to the condition that no repatriation of capital
invested and income earned thereon will be
allowed. The non-resident investor is also
required to give an undertaking agreeing to forgo
the benefits of repatriation. Investment with
repatriation benefits is allowed only in
restricted fields subject to certain conditions.
The schemes under which such investments are
permitted are explained in this Chapter”.
Paragraph 24.1(ii), however, states
“Foreign investment in India is also subject to
regulation through the various provisions in the
Foreign Exchange Regulation Act, 1973, viz. Sec.
19 governing issue and transfer of securities in
favour of non-residents, sec. 29 governing
establishment of a place of business by non-
residents for carrying on trading, commercial or
industrial activities or acquiring such an
undertaking or shares in such companies in India
and sec. 31 governing acquisition, disposal, etc.
of immovable property in India. But once foreign
investment is permitted by Government under its
foreign investment and industrial policy,
requisite permissions under the relative sections
of Foreign Exchange Regulation Act, 1973, are more
or less automatically issued.”
939
“In terms of Section 29(1)(b) of Foreign Exchange
Regulation Act, 1973, no person resident outside
India whether an individual, firm or company (not
being a banking company) incorporated outside
India can acquire shares of any company carrying
on trading, commercial, or industrial activity in
India without prior permission of Reserve Bank.
Also, under sec. 19(1)(b) and 19(1)(d) of the Act,
the transfer and issue of any security (which
includes shares) in favour of or to a person
resident outside India require prior permission of
Reserve Bank. When permission has been granted for
transfer or issue of shares to non-resident
investor under sec. 19(1)(b) or sec. 19(1)(d), it
is automatically deemed to be permission under
sec. 29(1)(b) for purchase of shares by him. Non-
resident Indians are however permitted to invest
freely in securities of Central and State
Governments, Units of Unit Trust of India and
National Savings/Plan Certificates of Government
of India (see paragraph 24B.2). All other
investments requires specific permission of
Reserve Bank.”
Paragraph 28A.4 states,
“Authorised dealers may freely open a Non-Resident
(External) Account in the names of individuals of
Indian nationality or origin, resident of outside
India, provided funds for the purpose are
transferred to India in an approved manner from
country of residents of the prospective account-
holder or in other foreign country if the foreign
country of residence of the account holder and the
country from which remittance is received are both
in external group.”
Paragraph 28A.4(iii) however, prescribes that firms,
companies and other corporate bodies as well as institutions
and organisations resident abroad are not eligible to open
Non-Resident (External) Accounts in India. Paragraph
28.A8(ii) states that under sec. 29(1)(b) of the Foreign
Exchange Regulation Act, 1973, persons resident outside
India require prior permission of Reserve Bank for purchase
of shares in Indian companies. Investment of Non-Resident
(External) Account funds in shares of Indian companies is
not therefore permitted without prior approval of the
Reserve Bank.
940
With a view to earn foreign exchange by attracting non-
resident individuals of Indian nationality or origin to
invest in shares of Indian companies, the Government of
India decided to provide incentives to such individuals and
formulated a ‘portfolio investment scheme’ for investment by
non-residents of Indian nationality or origin. This scheme,
announced by the Government on February 27, 1982, was
incorporated in circular No.9 dated April 14, 1982 of the
Reserve Bank of India issued under sec.73(3) of the Foreign
Exchange Regulation Act. Paragraph 2 of the Circular
explains that in order to provide further incentives and
facilitate investment by non-residents of Indian nationality
or origin in shares of Indian companies existing facilities
had been liberalised and procedural formalities had been
simplified as explained in the subsequent paragraphs of the
circular. Paragraph 3 deals with investment without
repatriation benefits while paragraph 4 deals with
investment with repatriation benefits. Paragraph 4 (a)
provides that under the liberalised policy, non-residence of
Indian nationality or origin will be permitted to make
portfolio investment in shares quoted on stock exchanges in
India with full benefits of repatriation of capital invested
and income earned thereon provided that (a) the shares are
purchased through a stock exchange, (b) the purchase of
shares in any one company be each non-resident investor does
not exceed Rs. one lakh in face value or one per cent of the
paid up equity capital of the company, whichever is lower,
and (c) payment for such investments is made either by fresh
remittances from abroad or out of the funds held in the
investor’s non-resident (external) account/FCNR account with
a bank in India. It further provides that the Reserve Bank
will grant permission to designated banks authorised to deal
with any foreign exchange for purchasing shares through a
stock exchange on behalf of their non-resident customers of
Indian nationality/origin, subject, inter-alia, to the
limits and conditions mentioned. Paragraph 5 deals with
another significant relaxation in the existing policy and
provides “the entire gamut of the facilities of direct and
portfolio investments as outlined in paragraphs 3 and 4
above will now be extended to overseas companies,
partnership firms, trusts, societies and other corporate
bodies owned predominantly by non-residents individuals of
Indian nationality/origin. The criterion for determining
such predominant ownership is that at least 60% of the
ownership of these entities should be with non-residents of
Indian nationality/origin. It would be necessary for such
entities to submit a certificate in this regard in the
prescribed form OAC from Overseas Auditor/Chartered
Accountant/Certified Public Accountant, along with their
applications for investment in shares, to the Reserve Bank
of India either through the designated banks authorised to
deal in foreign exchange or the Indian companies offering
new issues, as the case may be.”
941
Applications from those entities for permission to
designated banks for investments with repatriation benefits
are required to submit form RPC to the Controller, Exchange
Control Department, Reserve Bank of India, Central Office
(Foreign Investment Division), Bombay. Paragraph 7 stresses
the importance of encouraging investments in India by non-
residents of Indian nationality/origin and overseas
companies, etc. predominantly owned by them and required
authorised dealers to render prompt and efficient service by
centralising their work in a few selected branches in places
where stock exchange facilities are readily available.
Paragraph 8 enables non-resident investors to appoint
residents in India (other than the authorised dealers) to be
their agents with appropriate power of attorney to arrange
purchase/sale of shares/securities. Such agents would
include recognised stock exchange brokers. It is however
made clear that ‘permission for Investment in shares on
behalf of such investors will, however be granted to the
designated banks authorised to deal in foreign exchange
since these banks would be responsible for compliance with
the relevant exchange control requirements. Proper
coordination and understanding between the designated bank
and the investor’s agents would be necessary for handling
the investment procedures efficiently’. Paragraph 11
prescribes amount other matters, the duty of designated
banks
“to maintain separately a proper record of the
investments made in shares with repatriation
benefits and without repatriation benefits on
account of each investor, showing the relevant
particulars including the numbers of share
certificates and distinctive numbers of shares.
Likewise, the designated branches of authorised
dealers should keep a systematic and up-to-date
investor-wise record of the Shares purchased by
them through stock exchange on repatriation basis
on behalf of their overseas customers of Indian
nationality/origin 80 that they are able to ensure
that the purchase of shares in any one company by
each non-resident Investor toes not exceed Rs. 1
lakh in face value or 1 per cent of the paid up
equity capital of the company, whichever 18 lower.
Circular No. 9 was followed by Circular No.10 dated
April 22, 1982 from the Reserve Bank to all authorised
dealers in foreign exchange. The purpose of the circular was
to ensure that the overseas companies, partnership firms,
societies, other h
942
corporate bodies and overseas trusts to whom the benefits of
the investment scheme formulated by circular No. 9 were
extended are owned to the extent of at least 60 per cent by
non-residents of Indian nationality/origin or in which at
least 60 per cent of the beneficial interest (in the case of
trusts) is irrevocably held by such persons. ‘In order to
ensure that the ownership interest in the overseas
company/firm/society or the irrevocable beneficial interest
in the trust held by persons of Indian nationality/origin is
not less than 60 per cent, authorised dealers are required
to obtain, along with the account opening form, a
certificate from an overseas Auditor/Chartered
Accountant/Certified Public Accountant in Form SOAC enclosed
with A.D. (M.A.Series) Circular No. 9 of 1982.’ ‘The account
holder is further required to submit such a certificate to
the authorised dealer on an annual basis so as to ensure
that the ownership/beneficial interest of the above persons
continues to be at or above the level of 60 per cent.’
By Circular No. 15 dated August 28, 1982, the Reserve
Bank partially relaxed Circular No. 9 dated April 14, 1982
by removing the monetary limit of Rs. One lakh on portfolio
investment in shares on repatriation basis. However, the
limit of one per cent of the paid-up capital of the company
was retained.
By Circular No. 27 dated December 10, 1982, it was
prescribed,
“Where permission is granted by the Reserve Bank
for purchase/sale of shares/debentures on stock
exchange in India by non-residents of Indian
nationality/origin, the transactions should be
effected at the ruling market price as may be
determined on the floor of the stock exchange by
normal bid and offer method only.
On May 16, 1983 the Reserve Bank clarified and modified
the ‘Non-residents of Indian nationality/origin Portfolio
Investment Scheme’ in the following manner: Referring to
Circular No. 9 which extended portfolio scheme to overseas
companies, partner ship firms, societies and other corporate
bodies which were owned to the extent of at least 60 per
cent by non-residents of Indian nationality/origin and to
overseas trusts in which at least 60 per cent of the
beneficial interest was irrevocably held by such persons,
Circular No. 12 dated May 16, 1983 imposed an overall
ceiling of (i) 5 per cent of the total paid-up capital of
the
943
company concerned and (ii) 5 per cent of the total paid-up
value of each series of the convertible debentures issue, as
the case may be. For the purpose of determining and
monitoring the 5 per cent ceiling the cut-off date was
prescribed as May 2, 1983, the date on which the policy was
announced in Parliament. It was made clear that purchase of
equity shares and convertible debentures in excess of 5 per
cent would require prior and specific approval of the
Reserve Bank. The procedure for making applications for
permission was prescribed and it was further provided that
where investment in excess of the 5 per cent ceiling is to
be made on behalf of the non-resident investor who has not
submitted any application to the Reserve Bank earlier is the
prescribed form, the initial application for such
investments should be made in the appropriate form giving
details of the equity shares/convertible debentures to be
purchased. Paragraph 3 of Circular No. 12 prescribed
procedure for monitoring the ceiling of 5 per cent.
authorised dealers through their link offices were required
to submit to the Reserve Bank a consolidated statement of
the total purchases and sales (company wise) of equity
shares/convertible debentures made by their designated
branches. The daily statements were to be serially numbered
and submitted to the Controller positively on the following
working day. It was further provided all purchases and sale
transactions for which a firm commitment has been made to
acquire or transfer equity shares/convertible debentures in
the form of the broker’s contract notes issued by recognised
stock exchange brokers should be included in the daily
statement irrespective of whether the actual deliveries have
been effected or not. It was further provided that with a
view to effectively monitor the 5 per cent ceiling, the
Reserve Bank would, as soon as the aggregate reached the
limit of 4 per cent, notify the fact to the link offices of
the authorised dealers in Bombay. Thereafter the link
offices were required to give the total number and value of
equity shares/convertible debentures proposed to be
purchased through the stock exchange during the next 15
days. Clearance for the purchase of equity
shares/convertible debentures would be granted by the
Reserve Bank after taking into account the purchases
proposed to be made under the Portfolio Investment Scheme by
all the authorised dealers from whom intimations have been
received.
On September 19, 1983, another circular (18) was issued
by the Reserve Bank of India advising all authorised dealers
in foreign exchange that the facilities made available to
the overseas companies, etc. by Circular No.9 dated April
14, 1982 were also available where such overseas bodies were
owned even indirectly to the extent of at least 60 per cent
by such
944
non-residents of Indian nationality/origin. What was
necessary, A was that the ultimate ownership of beneficial
interest in the overseas bodies to the extent of at least 60
per cent must be in the hands of one or more non-resident
individuals of Indian nationality/origin.
The net result of all the circulars was that non-
resident individuals of Indian nationality/origin as well as
overseas companies, partnership firms, societies, trusts and
other corporate bodies which were owned by or in which the
beneficial interest vested in non-resident individuals of
Indian nationality/origin to the extent of not less than 60
per cent were entitled to invest, on a repatriation basis,
in the shares of Indian companies to the extent of one per
cent of the paid-up equity capital of such Indian company
provided that the aggregate of such portfolio investment did
not exceed the ceiling of 5 per cent. It was immaterial
whether the investment was made directly or indirectly. What
was essential was that 60 per cent of the ownership or the
beneficial interest should be in the hands of non-resident
individuals of Indian nationality/origin. Curiously enough
though a limit of one per cent was imposed on the
acquisition of shares by each investor there was no
restriction on the acquisition of shares to the extent of
one per cent separately by each individual member of the
same family or by each individual company of the same family
(group) of companies. In the absence of any such
restriction, any non-resident determined to establish an
Indian Company could do 90 by forming a combination of
different individuals and companies each of whom could
separately obtain permission to purchase one per cent of the
shares of an Indian company. The authority authorised to
grant permission could not, for example, refuse to grant
permission to who has applied for permission in his own
right on the mere ground that permission has been granted to
his father A. Similarly permission could not be refused to
Company in which a non-resident Indian owns 20 per cent of
the share and another non-resident Indian owns 40 per cent
of the Shares on the ground that Company L in which owns 60
per cent of the shares has already been granted permission.
Would it make any difference if owns 60 per cent of the
shares in both Companies and L ? One can well imagine half a
dozen overseas companies in which a dozen non resident
individuals of Indian origin hold shares in varying
proportions but holding in the aggregate more than 60 per
cent of the shares of the overseas companies applying for
permission to purchase shares in an Indian Company. Could
permission be refused to them ? Is the Reserve Bank to
concern
945
itself with the individual identity of the share holders of
the A overseas companies or the nationality or origin of the
shareholders? Is the Reserve Bank to concern itself only
with the colour of the skin, as it were, and not with the
personality of the share holder of overseas company? We will
revert to this question later. Obviously, the one per cent
rule was introduced to prevent large-scale acquisition of
shares of Indian companies by non-residents and their
possible destabilisation. Also, obviously the rule was a
futile exercise as it was incapable of yielding the desired
result. Quite obviously therefore a better solution had to
be found and lt was found by the ‘aggregate of 5 per cent’
rule. This would automatically limit the total outside
holdings and effectively prevent destabilisation- Of course,
it would still be necessary to satisfy the requirements of
the Foreign exchange Regulation Act, more particularly the
requirement of sec. 29 of the Act providing for the general
of special permission of the Reserve Bank to purchase the
shares in India of the company. Though the ultimate
authority under the scheme is the Reserve Bank, an important
feature of the scheme is L that the monitoring of the
remittances and the investments has to be done by the
designated Bank, which is the authorised dealer.
Two of the principal questions argued before us were
whether the permission contemplated by sec.29 was previous
permission or whether the permission could be granted ex-
post-facto and whether the purchase of the shares by the
foreign investor of Indian nationality/origin in this case
involved any contravention of the FERA or the Non-Residents’
Investment Scheme. To appreciate how the questions arise it
is necessary to state here a few facts.
Desiring to take advantage of the Non-resident
Portfolio Investment Scheme and to invest in the shares of
Escorts Limited, an Indian company, thirteen overseas
companies, twelve out of whose shares was owned 100 per cent
and the thirteenth out of whose shares was owned 98 per cent
by Caparo Group Limited, designated the Punjab National Bank
as their banker(authorised dealer) and M/s. Raja Ram Bhasin
& Co. as their brokers for the purpose of such investment.
It must be mentioned here that 61.6 per cent of shares of
Caparo Group Limited are held by the Swraj Paul Family
Trust, one hundred per cent of whose beneficiaries are one
Swraj Paul and the members of his family, all non-resident
individuals of Indian origin. Their designated banker, the
Punjab National Bank, E.C.E. House Branch by their letter
dated 4th 1 March, 1983, but despatched on 9th March, 1983
and by another letter dated 12th March, 83, addressed the
Controller, Reserve Bank of India, Exchange Control
Department and requested
946
the Reserve Bank to accord their approval for opening Non
resident External accounts in the name of each thirteen
companies, three named in the First letter and ten named in
the second letter, for the purpose of ‘conducting investment
operations in India’ through the agency of Raja Ram Bhasin &
Co., Stock Investment Adviser, Member of Delhi Stock & Share
Department, Delhi. These letters were received by the
addressee on 14th and 18th March. It was mentioned in the
letters that the proposed accounts would be ‘effected’ by
remittances from abroad through normal banking channels and
debits and credits would be allowed only in terms of the
scheme contained in the scheme for investment by non-
residents. The first letter was in respect of (1) Caparo Tea
Company Limited, UK, (2) Empire Plantation and Investment
Limited, UR and (3) Assam Frontier Tea Holding PLC, UK,
while the second letter was in regard to (1) Caparo
Investments Limited, (2) Caparo Properties Limited, (3)
Steel Sales Limited, (4) Atlantic Merchants Limited, (5)
Buchanan Limited, (6) Scymour Shipping Limited, (7) Caparo
Group Limited, (8) Natural Gas Tube Limited, (9) Single
Holdings Limited and (10) Deborne Hotel Torkey Limited.
Forms RPC signed by each of the companies and forms OAC
signed by the auditors of the companies accompanied the two
letters. Each form RPC mentioned that the company was
incorporated in England and that 61.6% of the company was
owned by non-residents of Indian nationality/origin. In each
form OAC the auditor certified that the percentage of
holding of the company by persons of Indian
nationality/and/or origin was 61.6% and that the name of the
share-holder was ‘Swraj Paul Family Trust through their
interest in the holding company.’ The auditors certified
that the ownership interest of persons of Indian origin in
the company was 61,6% of the total ownership of interest as
on the date of certificate and that the entire beneficial
interest in the family trust was held irrevocably by persons
of Indian origin. On 23rd April, 83, Punjab National Bank
addressed the Controller, Reserve Bank of India, Exchange
Control Department, inviting their attention to their former
letters dated 4th and 12th March, 1983, which were
accompanied by the RPC and OAC forms relating to the 13
companies and advising the Reserve Bank that the investment
operations were being conducted through the company Raja Ram
Bhasin & Co., Share & Stock Investment Advisers, Member of
Delhi Stock Exchange Association Ltd. The Reserve Bank was
also advised that four remittances had been received from
Caparo Group Limited, the holding Company on 9.3.83,12.4.83,
13.4.83 and 23.3.83 of amounts equivalent to Rs.1,35,36,000,
Rs.2,36,59,000, Rs.76,35,000 and Rs.1,31,38,681. 13p. The
Punjab National Bank also mentioned in the letter that
947
although all necessary formalities prescribed by the Reserve
A Bank’s Circular dt. 22.4.82 had been complied with,
approval had not yet been accorded to their clients. It was
requested that the approval might be communicated to their
client by cable.
We would like to mention at this juncture that the
letters dated 4th March, 12th March and 23rd April, 1983 as
well as all other subsequent letters written by the Punjab
National Bank, E.C.E. House Branch to the Reserve Bank are
totally silent about a remittance of L 1,30,000 equivalent
to Rs. 19,63,000 made by Mr. Swraj Paul to the Punjab
National Bank, Parliament Street Branch on 28.1.1983 for the
purpose of opening an NRE account in the name of Mr. Swraj
Paul. The remittance was said to have been made pursuant to
the discussion of Mr. Swraj Paul with the Chairman of Punjab
National Bank. We have no information as to what those
instructions were. We are told that the cable and the letter
relating to the remittance were handed over to the judges
across the bar when the writ petition was being argued in
the High Court. We may further mention here that on 26th
January, 83, three of the Caparo Companies, namely, Assam
Frontier Tea Holding Public Limited Company, Caparo Tea
Company Limited and Empire Plantations and Investment
Limited addressed three identical letters to Raja Ram Bhasin
& Co. instructing the broker to purchase equity shares of
Delhi Cloth Mills Limited at the best market price on a
repatriation basis. Each letter mentioned that a letter
addressed to the Punjab National Bank, Parliament Street
authorising payment of an advance of Rs.20 lakhs was
enclosed. Delivery of shares could be given as and when they
were received from the market. It was also, mentioned that
the Bank would pay the full purchase value of the shares
delivered and the advance of Rs.20 lakhs would be adjusted
on the final delivery of the shares. Curiously enough, these
letters were tendered by the company Escorts Limited.
Letters to the Punjab National Bank said to accompany the
letters were not placed before us and the counsel for the
Punjab National Bank denies that any such letter was ever
received by the Punjab National Bank. Be that as it may, we
have the circumstance that a remittance of L 1,30,000 was
undoubtedly made to the Parliament Street Branch of the
Punjab National Bank, unbeknown or at any rate said to be
unknown to the ECL House Branch of the Punjab National
Branch. The record produced before us does not indicate what
was done with the amount of L 1,30,000 nor does it indicate
that the Reserve Bank of India was ever informed of this
remittance by the Punjab National Bank. The money appears to
have come in and disappeared like a will-o’-the-wisp. The
learned counsel for the Punjab H
948
National Bank frankly confessed before us that the EOE House
Branch of the Punjab National Bank which was monitoring NRE
accounts and the purchase of shares by the Caparo Group of
Companies was not aware of the remittances received by the
Parliament Street Branch. In other words, the right hand did
not know what the left hand was doing. It is surprising that
in a matter concerning valuable foreign exchange the Punjab
National Bank, a nationalised bank and an authorised dealer
under the Foreign Exchange Regulation Act, should have acted
in such an irresponsible manner. Whatever else requires a
probe by the Reserve Bank of India, the disappearance or the
expending of the amount of L 1,20,000 without the knowledge
of the Reserve Bank is a matter which requires thorough
investigation. No one should be allowed to break the law
with impunity, if he has so done, and get away with it in
this bizarre way.
The statements filed by Raja Ram Bhasin & Co. show that
prior to 9.3.1983, the date of the first remittance as
disclosed by Punjab National Bank to the Reserve Bank, Raja
Ram Bhasin & Co. had purchased shares of Escorts Limited
worth Rs.33,40,865.00 from Mangla & Co. We have already
mentioned that according to the correspondence which passed
between the Punjab National Bank and the Reserve Bank, the
remittances were made on 9.3.83, 24.3.83, 12.4.83, 15.4.83,
28.4.83 and 28.4.84. In the correspondence, there is no
mention of any remittance having been made prior to 9.3.83.
We may also notice here that the letter dated 4.3.83 from
the Punjab National Bank seeking permission for investment
in shares by three of the Caparo Group of Companies was
actually despatched on 9th and received by the Reserve Bank
on 14.3.83 only, while the letter dated 12.3.83 seeking
permission on behalf of the remaining Caparo Group of
Company was received by the Reserve Bank on 18.3.83. The
statements of purchases of shares made by Raja Ram Bhasin &
Co. show that even by 14.3.83, shares of Escorts Limited
worth Rs. 3,85,920.00 had been purchased from Bharat Bhushan
& Co. and shares worth Rs.45,81,677.00 had been purchased
from Mangla & Co. Based on the circumstances that shares
appeared to have been purchased even before remittances were
received a seemingly serious complaint has been made that
Rupee funds must have been freely used to purchase shares
for the Caparo Group under the Non-Resident Investment
Scheme. We do not think that there is any genuine basis for
the complaint. Payments under the Stock Exchange Rules may
be made within two weeks after the purchases contracted for.
In the present case the remittances from abroad started
coming in less than two weeks after the first purchase and
there would have been no difficulty in making payments out
of foreign remittances.
949
The Reserve Bank of India having been approached for A
permission to purchase shares on behalf of the thirteen
Caparc Group of companies by the letters of 4th and 12th
March, 1983, wrote to the Punjab National Bank on 29.4.83
seeking information regarding the exact percentage of
holding of (i) Mr. Swraj Paul and other Non-resident
individuals of Indian origin (ii) Family Trusts and (iii)
others separately in respect of each of the thirteen
companies. Information was also sought as to whether any
shares of Indian Companies had already been purchased by or
on behalf of their Indian clients. It is not clear why the
Reserve Bank wanted information as to the exact percentage
of holdings etc. since the relevant information had already
been furnished in the RPC and OAC forms sent along with the
letters dated 4.3.83 and 12.3.83. The letter dated 29.4.83
is also important for the reason that the Reserve Bank
merely wanted to know whether any shares of Indian Companies
had already been purchased but did not give any indication
that it would be objectionable to do so without prior
permission of the Reserve Bank. Thereafter the Punjab
National Bank wrote three letters to the L Reserve Bank on
6.5.83, 19.5.83 and 25.5.83, the purport of which was that
the Swraj Paul Family Trust held 61.6% of the share capital
of Caparo Group Limited which in turn held 100 per cent of
the Share Capital of eleven of the Companies and 98% of the
share capital of the twelfth Company. The names of the
beneficiaries of the Trust were given as Shri Swraj Paul,
Mrs. Aruna Paul, Mr. Amber Paul, Mr. Akash Paul, Miss Anjali
Paul and Mr. Angad Paul. In all the three letters it was
pointed out that the necessary RPC and OAC forms had already
been submitted. The request for expedition of approval was
reiterated. The Reserve Bank of India was also informed that
their non-resident clients had advised them that details of
shares of Indian Companies purchased by or on their behalf
would be supplied as soon as the purchases were complete. On
25.5.83 the Reserve Bank of India wrote to the Punjab
National Bank, in answer to the letter dated 23.4.83 and
without reference to any of the later letters, asking for
clarification as to how, without obtaining the Reserve
Bank’s permission for purchase of shares on behalf of
thirteen overseas companies, the purchase consideration of
the shares of Indian Companies was paid to Indian sellers
out of the Non-Resident External account of the overseas
purchasers. Information was once again sought regarding the
exact percentage of share holding of (i) Mr. Swraj Paul (ii)
other non-resident individuals of Indian nationality/origin
(if any), and (iii) Family Trust of such persons in Caparo
Group Limited in U.K. separately. On 28.5.83, the Punjab
National Bank sent a telegram to the Reserve Bank and
950
followed it up with a letter dated 30.5.83 to the effect
that the beneficial interest of Mr. Swraj Paul and his
family trust in Caparo Group Limited was 61.6% as already
clearly mentioned in forms RPC and certificates OAC
delivered to the Reserve Bank in February, 83. The other
non-residents of Indian origin who were members of the
Family Trust were Mrs. Aruna Paul, Mr. Akash Paul, Mr. Ambar
Paul, Mr. Angad Paul and Miss Anjali Paul, all members of
Mr. Swraj Paul’s family. It was further pointed out in the
letter that as required by the scheme which mentioned that
the Reserve Bank of India will grant permission on
application being made in the prescribed manner, the
thirteen companies had submit ted their applications
complying with all the formalities. The letter of 23.4.83
was also referred to and it was mentioned that all
particulars were given therein. The Punjab National Bank
further expressed its view that they were not required under
the provisions of the scheme to await the clearance of the
Reserve Bank before purchasing shares of Indian companies,
once proper applications had been submitted. The Reserve
Bank was informed that the remittances from Caparo Group
Limited were made in favour of Raja Ram Bhasin and Co.,
their designated brokers and power of Attorney holders. So
the operations were executed by Punjab National Bank through
NRE account on various date upto 23.4.83 and thereafter.
Payments were made according to the bye laws and regulations
of Delhi Stock Exchange. On 31.5.83, a further telegram was
sent by the Punjab National Bank to the Reserve Bank
informing them that they had been advised by the agent
brokers that up till 28.4.83 they had purchased 80,000
equity shares of Delhi Cloth and General Company Limited and
75,000 equity shares of Escorts Limited on behalf of each
one of the thirteen overseas companies predominantly owned
by non residents of Indian origin.
On 1.6.83, the Assistant Controller, Reserve Bank of
India, wrote to the Government of India informing them about
the receipt of applications from the Punjab National Bank on
behalf of thirteen overseas companies, eleven of which were
wholly owned by Caparo Group Limited which in turn owned by
Family Trust of Mr. Swraj Paul to the extent of 61.6%. In
the twelfth company, Caparo Properties Limited, Caparo Group
Limited had a holding of 98 per cent. Caparo Group Limited
was owned to the extent of 61.6% by the family trust of Mr.
Swraj Paul, the other members of the family trust being Mrs.
Aruna Paul, Mr. Akash Paul, Mr. Ambar Paul, Mr. Angad Paul
and Miss Anjali Paul. The Reserve Bank pointed out that it
was to be noticed that even the Caparo Group Limited was not
directly owned by non-resident individuals of Indian origin
but only indirectly to the extent of 61.6% through
951
the family trust whose beneficiaries were persons of Indian
A origin. The Reserve Bank appeared to be of the view that
the investment facilities under the scheme were intended to
be extended to Overseas Companies, Family Trusts etc. owned
predominantly non-residents of Indian Nationality/origin
atleast to the extent of 61.6% and that it was not the
intention to open these investment facilities to overseas
companies which were not directly owned by non-resident
individuals of Indian nationality/origin but owned by them
indirectly via some other trust or company. It was observed
that if investment facilities were to be extended to
overseas companies indirectly owned by non-residents of
Indian nationality/origin, it would be very difficult to
enforce the scheme and the conditions of FERA. The Reserve
Bank also informed the Government that their Legal
Department supported their view that none of the thirteen
overseas companies were eligible to invest in shares of
Indian companies and the existing policy. They, therefore,
proposed to reject the applications of all the thirteen
overseas companies. They requested the Government of India
to confirm by telex. To this L the Government of India
replied by telex on 8.6.83 in these words:
“REFERENCE D.O.NO. EC.CO. FID (II) 294/344-82/83
DATED NIL JUNE 1983 REGARDING APPLICATION FROM
THIRTEEN OVERSEAS COMPANIES FOR PURCHASING SHARES
ON OF INDIAN COMPANIES THROUGH THE STOCK EXCHANGE
WITH REPATRIATION RIGHTS UNDER THE PORTFOLIO
INVESTMENT SCHEME (.) IT IS REPORTED THAT SOME
PURCHASES HAVE ALREADY BEEN MADE IN TERMS OF THE
ABOVE PROPOSAL BY THE PUNJAB NATIONAL BANK(.)
ALTHOUGH IT DOES APPEAR THAT PRIOR TO SECOND MAY
1983 UNDER THE PORTFOLIO INVESTMENT SCHEME
AUTHORISED DEALERS COULD WITHOUT RBI’S PRIOR
APPROVAL PURCHASE SHARES THROUGH STOCK EXCHANGE ON
BEHALF OF THEIR NON RESIDENT CLIENTS, THE
CIRCUMSTANCES IN WHICH SOME SUCH PURCHASES WERE
ALREADY MADE BEFORE THE CONCERNED COMPANIES GOT
THE NECESSARY APPROVAL FROM THE R.B.I. DO NOT SEEN
TO BE CLEAR (.) THE RBI IS REQUESTED TO ENQUIRE
FURTHER INTO THE MATTER AND SUBMIT A DETAILED
REPORT TO THE GOVERNMENT COVERING ALL ASPECTS OF
THE MATTER INCLUDING THE DETAILS OF SUCH
PURCHASES, THE FINANCIAL STATUS AND THE ACTIVITIES
OF THE APPLICANT COMPANIES AND THEIR DATES OF
INCORPORATION AND ALSO THE GENERAL LEGAL ISSUE AS
TO WHETHER SUCH PURCHASES ON THE STOCK
952
A EXCHANGE BY OVERSEAS NON RESIDENT INDIAN
COMPANIES ETC. PRIOR TO SECOND MAY 1983 ARE VALID
WITHOUT THE PRIOR SPECIFIC APPROVAL OF THE RBI(.)
YOUR REPORT SHOULD REACH US QUICKLY AS POSSIBLE IN
ORDER TO ENABLE THE GOVERNMENT TO TAKE
DECISION(.)”
The importance of 2nd May, 1983 so frequently mentioned in
the telex message is apparently because 2nd May, 1983 was
fixed as the cut-off date for the introduction of the
ceiling of 5 per cent in shares of Indian companies by
foreign investors of Indian origin by the Circular No. 12
dated May 16, 1983 issued by the Reserve Bank of India.
In the meanwhile, on 31.5.83, Punjab National Bank
wrote to Escorts Limited informing them that the thirteen
overseas companies had been making investments in shares of
Escorts Limited in terms of the scheme for investment by
overseas corporate bodies predominantly owned by non-
residents of Indian nationality/origin to an extent to
atleast 60 per cent and that the thirteen overseas had
designated them as their banker and M/s Raja Ram Bhasin &
Co. had been designated as the brokers for the purpose of
investment. The brokers had advised the bank that upto 28th
April, 83, 75,000 equity shares of Escorts Limited had been
purchased by them for each of the thirteen overseas
companies. Out of the shares 80 purchased 35,560 shares
purchased by each of companies had been lodged by the
brokers with Escorts Limited in the names of H.C. Bhasin and
Mr. Bharat Bhushan for the purpose of transfer of the shares
in the books of the company. 35,667 shares purchased for the
13th company were also lodged for the purpose of transfer in
the name of Mr. H.C. Bhasin and Mr. Bharat Bhushan. Escorts
Limited replied on June 16th, 1983 and requested the Punjab
National Bank to furnish informations whether the non-
resident companies had executed and handed over applications
to be filed with Reserve Bank of India for prior permission
to purchase the shares of the company through them as the
designated bank and whether any permission had been granted
by the Reserve Bank of India to Punjab National Bank to
purchase shares on behalf of the thirteen companies
mentioned in the letter. Escorts Limited did not refer in
this letter to the circumstance that H.C. Bhasin and Bharat
Bhushan had lodged the shares with them for transfer in
their own names instead of the names of any of the overseas
companies. Escorts Limited obviously did not think in
strange that the brokers lodged the shares in their own
names instead of their principals, for the simple reason
that Bye-law 242 of the Stock Exchange Regulations permit
the brokers to do 80 if they are unable to complete the
formalities before the closing
953
of the books. They now seek to make a point of it. It is A
obviously without substance. In fact in their letter to
Punjab National Bank, Escorts Limited did not even think it
worthwhile mentioning that when they wrote to the brokers on
27.5.83 requesting information whether they were the
beneficial owners of the shares and whether the shares had
been purchased on behalf of non-residents of Indian origin
with the requisite permission of the Reserve Bank of India
they had been curtly refused the information by Mr. H.C.
Bhasin and Mr. Bharat Bhushan who had also questioned their
authority to ask for such information, and even threatened
legal action of the transfer was not registered. We are
unable to fathom the reason behind the attitude of the
brokers. We can but make a guess. It was probably they were
still awaiting the permission of the Reserve Bank of India.
That they had purchased the shares for overseas investors
was no secret since they had already so informed the Punjab
National Bank. They seem to have, thought that they were
within their rights under the Stock Exchange Regulations in
asking the shares to be transferred in their names. It was
suggested by the learned counsel for Escorts Limited that
the brokers were loath to disclose the names of their
principals as they had utilised rupee funds and wanted to
cover up that fact. The suggestion appears to be far fetched
as the funds remitted till then from abroad were more than
ample to cover the purchase of the shares until then lodged.
We must, however, notice that the record does not disclose
how Bharat Bhushan came into the picture, who authorised him
to purchase the shares on behalf of Caparo Group and who
directed him to deposit the shares in his own name? He was
not the stock broker designated to purchase shares on behalf
of the overseas companies. If so, one wonders what authority
he had to enter into transactions on behalf of overseas
companies! This is also a matter which may require
investigation by the Reserve Bank. As already mentioned the
Punjab National Bank wrote to Escorts Limited on 31.5.83
about purchase of shares by each of the thirteen companies
and the lodging of the shares with the company in the names
of H.C. Bhasin and Mr. Bharat Bhushan for the purpose of
transfer of shares in the books of the company. We have also
referred to the reply of Escorts Limited to Punjab National
Bank on 1.6.83. Punjab National Bank immediately wrote to
Escorts Limited on 2.6.83 that they had already informed the
company that the purchase of shares for the thirteen
companies had been handled by designated brokers M/s. Raja
Ram Bhasin & Co. and wanted to know the purpose for which
Escorts Limited was seeking information from them. They
however, stated that they
954
were designated as bankers of the thirteen companies and
that they had acted in terms of the procedure laid down by
the scheme. Without much further ado, that is, without
making any further enquiry either from M/s. Raja Ram Bhasin
or from the Punjab National Bank or without seeking any
information of guidance from the Reserve Bank of India,
Escorts Limited proceeded to consider the question of
registering the transfer of shares. A Committee was
constituted by Escorts Limited to scrutinize the transfer of
the shares. After taking expert legal opinion, the Committee
submitted a report to the Board of Directors of Escorts
Limited recommending against the registration of the
transfer of shares. The primary ground on which the
recommendation was based and with which we are now concerned
is ground No.5 which stated,
“that the company is prohibited by the provisions
of section 19 of FERA from registering transfer of
shares in its books when it has reasons to suspect
that there has been a violation of the provisions
of section 19 of FERA.”
The Committee reported that it had reasonable ground to
believe that the requisite permission of the Reserve Bank of
India has not been obtained for the purchase of the shares
in question. It was also mentioned in the report of the
Committee that they took serious notice of ‘attempts made to
intimidate and coerce the company to register the shares and
to pre-empt the free and proper exercise of the Board’s
discretion in accordance with the Articles of Association of
the Company and the provisions of Law.’ However, the report
did not mention what the attempts were that were made ‘to
intimidate and coerce the company to register the shares and
to pre-empt the free and proper exercise on the Board’s
discretion.
On 9.6.83, the Board of Directors of Escorts Ltd.
considered the Committee’s Report and passed a resolution
refusing to register the transfer of shares. m e resolution
was in the following terms: ” me Board considered the report
of the Share Scrutiny and Transfer Committee of Directors.
The Board further considered exhaustively all aspects of the
matter, all the materials which were gathered and placed
before the Board and legal opinions and records of legal
advice which had been secured by the Company on the points
in issue. The Board further considered whether – having
regard to the provisions of FERA and FERA
955
regulations and other relevant laws including the
Company Law, the Stamp Act, the Public Securities
Act and other regulations relating to the Stock
Exchange and transfer of shares – requirement of
law have been complied with. The Board further
considered the various statements reported in the
Press and made by the non-resident concerned, as
also by his associates in Delhi which are
contradictions to the policy of the Government
underlying the liberalised scheme for ‘Portfolio
Investment’ by eligible residents. m e Board
further considered whether the purchases of the
shares in question would qualify as ‘Portfolio
Investment’ as envisaged under the RBI Scheme. The
Board further considered whether it is in the
interest of the Company and its shareholders to
approve of the proposed transfers and whether it
is desirable in the aforesaid interests to accept
the proposed transferees as Shareholders. Upon
full discussion of the Share Scrutiny and Transfer
Committee’s Report – the Board L in acceptance
thereof adopted the same. Further after a full
examination of the issues legal as well as factual
and the circumstances and further on account of
the reasons contained in the Share Scrutiny and
Transfer Committee’s Report and in the light of
the said Committee’s recommendations and further
on account of the view of the Board of Directors
that it would not be in the interest of the
company or the General Body of shareholders to
register the transfer of the shares in question
and on account of the Board’s view that- the
transferees in question could not be approved for
purposes of admitting them as members in view of
the facts and circumstances taken note of by the
Board of Directors, the Board decided to refuse
registration of the shares under consideration
Accordingly it was-
Resolved that the transfer of 2,88,390 Equity
Shares in Rs.10 each fully paid-up lodged by Mr.
Harish Chander Bhasin and Rs.1,73,947 Equity
Shares of Rs.10 each fully paid-up lodged by Mr.
Bharat Bhushan as per distinctive Nos. appearing
in the lists marked Annexure A and respectively
placed before the Directors and initialled by the
Chairman for the h purpose of identification be
and is hereby refused.
956
Further resolved that Mr. Charanjit Singh, Vice
President and Secretary of the Company be and is
hereby authorised to give and send notices of the
refusal to the transferors under sec.111(2) of the
Companies Act, 1956 and take such other steps as
may be necessary and appropriate in the matter of
the above resolution.
The resolution was passed with all the 13
Directors (out of total 15 Directors of the
Company) present and voting for the resolution
excepting Mr. D.N. Davar, who did not take part of
the discussion and voting on the resolution. There
was no dissenting vote.”
In respect of another block of shares lodged with Escorts
Ltd. On 19th and 22nd August, 1983 for registration in the
name of the thirteen foreign non-resident companies, a
similar report was submitted by the committee on 29.9.83 and
a similar resolution was passed by the Board of Directors on
the same day.
Escorts Limited, although they had already refused to
register the transfer of shares, nonetheless, wrote to the
Punjab National Bank for information on various points as
they desired to make a representation to the Reserve Bank of
India in the enquiry being conducted by the Reserve Bank
under the directions of the Government. The Company wanted
to know whether the remittances were received from M/s.
Caparo Group Limited only and from none of the other twelve
foreign companies. me company also wanted to know why
4,62,337 shares only had been lodged with them for transfer
although it had been stated that 9.75 lakhs shares had been
purchased by thirteen non-resident companies. The Company
further wanted to know whether instructions to purchase the
shares were given to the brokers by the Punjab National Bank
and whether the non-resident companies indicated the maximum
price at which the shares might be bought. The company
further desired to know to whom the share scripts should be
returned as they had decided to refuse registration of the
transfer of shares. The Punjab National Bank, we may state
here, refused to receive the share scripts and suggested to
Escorts Limited that they should return the scripts to those
that had lodged them with the Company.
More important still is the fact that Escorts Limited,
having already rejected the registration of the transfer of
Shares, wrote to the Reserve Bank of India on 14th June,
1983, 20th June, 1983 and 23rd July, 1983 purporting to give
information regarding various illegalities committed in the
matter of
957
purchase of shares of their company by the thirteen foreign
companies, Caparo Group Limited, etc. It was stated that the
information was being furnished to the Reserve Bank because
it was understood that the Reserve Bank was holding an
enquiry in the matter of the purchase of shares in Indian
companies by the Caparo Group Companies. One remarkable
feature about the letters is that for some reason best known
to themselves, Escorts Limited did not disclose to the
Reserve Bank the circumstance that they had already refused
to register the transfer of shares. In the first letter, it
was stated that their information revealed that Caparo Group
Limited was the holding company and the remaining twelve
companies were its subsidiaries and that a majority of them
were in no financial position to make such large
investments. The Reserve Bank was particularly requested to
consider whether it was ever intended that an overseas
company could circumvent the stipulated ceiling of one per
cent by channelling investment through a dozen subsidiaries.
It was pointed out that a colourable device of that nature
would defeat the very purpose of the ceiling. The Reserve
Bank was also requested to take serious notice of the fact
that while the scheme permitted repatriation benefits to
investments upto the maximum of one per cent in an Indian
company, shares to the tune of over 7 per cent had been
acquired in the names of thirteen companies though funds
were remitted only by one company. It was also mentioned
that the stock-brokers and not the bank purchased the shares
and that the stock brokers unauthorisedly lodged for
registration their own names, the shares purchased on behalf
of non-residents. The Reserve Bank as requested to enquire
into the dates and rates of the purchases of the shares,
whether the shares were purchased on the floor of the stock
exchange, whether the delivery of shares was taken, whether
the bank had a day-today record of the transactions and 80
on. The Reserve Bank was also requested to seize the scrips
and the books of account in the possession of the stock
exchange. The next letter dated 20th June, 1983 drew
attention to the circumstances that though 9,75,000 shares
were purported to have been purchased before 28th April,
1983, only 4,62,337 shares had been lodged by 13th May, 1983
and therefore, it appeared that there were forward transac-
tions and the purchases were not in accordance with the
scheme. In their third letter dated 23rd July, 1983, Escorts
Limited asserted that a large amount of money to the tune of
about Rs. 2.61 crores were remitted from overseas to the
Punjab National Bank and was utilised to purchase shares in
addition to the shares purchased in the names of thirteen
companies. The provisions of the FERA were violated and the
ceilings of one per
958
cent and 5 per cent imposed under the scheme were also
circumvented. Rupee funds to the tune of Rs.4.0 crores
appeared to have been unauthorisedly diverted for the
purchase of the shares for and on behalf of the thirteen
non-resident companies in the two Indian Companies, that is,
Escorts Limited and Delhi Cloth and General Mills Limited.
Though the purchases made on behalf of the thirteen non-
resident companies were said to have been purchased before
28th April, 1983, only 4,62,337 shares were lodged with the
company for registration of transfer, leaving a shortfall of
5,12,663 shares. The non-lodgment of these shares raised a
doubt whether those shares had been purchased in accordance
with the scheme. It was pointed out that the share transfer
deeds lodged with Escorts Limited bore the date 28th April,
1983 and disclosed consideration of Rs.65 per share although
the highest rate at which sales of Escorts shares were
transacted at the Stock Exchange upto 28th April, 1983 was
Rs.55 only per share. This fact demonstrated that an
incorrect statement had been made that the shares had been
purchased prior to 28th April, 1983. Further the share
transfer deeds lodged with the companies in regard to the
9,75,000 shares of Escorts Limited and 10,30,000 shares of
Delhi Cloth Mills Limited said to have been purchased on
behalf of non-resident Indian companies showed that a total
amount of Rs.6,33,75,000 of non-resident funds was spent for
purchasing the shares of Escorts Limited and a sum of
R8.9,88,69,020 of non-resident funds was spent of purchasing
shares of Delhi Cloth Mills Limited making a grand total of
Rs.16,22,44,020. As against this a sum of Rs.13 crores only
had been remitted from abroad for the purchase of shares.
Out of the Rs.13 crores, a sum of Rupee One crore had been
frozen by the Reserve Bank of India making only a balance of
Rs.12 crores of non-resident funds available for purchase of
shares. There was thus a short-fall of Rs.2.61 crores which
was unaccounted. It was also brought to the notice of the
Reserve Bank that the brokers had lodged the shares for
registration of the transfers in their names of the foreign
companies. When asked by the company to disclose the names
of the principals, the brokers had refused to do so. The
company therefore, suggested various steps that should be
taken by the Reserve Bank to detect the several illegalities
committed and to prevent the circumvention of the one per
cent limit imposed by the scheme for acquisition of shares
by any single non-resident individual or company.
To none of these letters did the Reserve Bank of India
deign a reply or even the courtesy of an acknowledgement.
Though the Reserve Bank did not choose to write or make any
further enquiry from Escorts Limited, there is no doubt that
the Reserve Bank did
959
enquire in its own way into the allegations made by Escorts
A Limited against the Caparo Group of Companies. It was not
as if the Reserve Bank want only refused to worry itself in
regard to the allegations against the Caparo Group of
Companies. The Punjab National Bank was the designated bank
of the Caparo Group of Companies and it was an authorised
dealer under the FERA, owing a serious responsibility to the
Reserve Bank under the FERA and the Portfolio Investment
Scheme. It was, therefore, to the Punjab National Bank that
the Reserve Bank turned for elucidation in the matter.
On 11th June, 1983, the Reserve Bank of India wrote to
the Punjab National Bank advising them that mere submission
of an application under sec. 29 (1) (b) of FERA was not
sufficient to enable the non-resident Indian company to
purchase shares without the general or special permission of
the Reserve Bank. Reserve Bank permission had to be obtained
before buying any shares of Indian companies. The contention
of Punjab National Bank that submission of an application
was sufficient to enable a non-resident company to purchase
shares was non accepted as correct and the bank was told
that they had committed a serious irregularity in purchasing
shares. The Punjab National Bank was also asked to explain
as to how they had allowed the Non-Resident External Account
of Caparo Group Limited to be debited in contravention of
the provisions of paragraph 28B.9 of the Exchange Control
Manual. The Punjab National Bank was informed that the
applications of all the companies for approval of opening of
Non-Resident Accounts were pending with them and that until
specific permission for purchase of shares was granted, no
payment should be made out of the accounts for purchasing
shares on behalf of any of the thirteen companies. On the
same date, another letter was written by the Reserve Bank of
India to the Punjab National Bank asking for particulars of
the thirteen companies purchased by them and the dates of
remittances 80 far received from the thirteen companies. On
17th June, 1983 and 23rd June, 1983, the Punjab National
Bank sent their reply to the Reserve Bank by telex and by
letter. They stated in the telex message that consequent on
the letter of the Reserve Bank, they had withheld payment of
a sum of Rs.107,22,610 in favour of the brokers and that
they had advised the remitter about the same. It was stated
that the brokers had written to them asking for payment
stating that it would amount to default if payment pertained
to shares purchase prior to 2nd May, 1983 under the
portfolio investment scheme. By their letter dated 23rd
June, 1983, they informed the Reserve Bank that upto
December 1982 and h from 1st January. 1983 to 28th February,
1983 no shares on behalf
960
of the thirteen non-resident companies were purchased.
Between A 1st March, 1983 and 2nd May, 1983, 80,000 shares
of Delhi Cloth and General Mills Company Limited and 75,000
shares of Escorts Limited were purchased for each of the
thirteen companies. After 2nd May, 1983 no share was
purchased. All remittances were received through their
London Branch for the credit of M/s. Raja Ram Bhasin & Co.,
for purchase of shares on behalf of the thirteen companies.
On 9th March, 1983, 24th March, 12th April, 15th April, 28th
April and 28th April, 1983 remittances of Ks.1,35,36,000
Rs.1,31,38,681, Rs. 2,36,59,900, Rs.76,35,000,
Rs.1,56,76,000 and Rs.1,56,80,000 were received and
transferred to the account of Raja Ram Bhasin & Company from
the account of Caparo Group Limited. A balance of Rs.38,682
in the NRE account of Caparo Group Limited was allocated pro
rata to the thirteen accounts on 2nd June, 1983 in terms of
the letter of their broker M/s. Raja Ram Bhasin & Company.
The broker derived his authority in terms of the investors’
letters which were annexed to the letter of the bank. The
Punjab National Bank also stated that the broker had
confirmed by their letter dated 22nd June, 1983, a copy of
which was enclosed, that apart from the shares mentioned
they had not purchased any other shares for the thirteen
companies. Along with their letter the Punjab National Bank
also sent to the Reserve Bank, copies of the certificates of
incorporation, the memoranda of articles of associations and
the balance sheets of the thirteen companies. One of the
letters enclosed with the letter of the Punjab National Bank
was a letter from the Caparo Group Limited to the Punjab
National Bank confirming that they had appointed M/s. Raja
Ram Bhasin & Company as their designated brokers and that
the bank was authorised to act upon the instructions of the
aforesaid brokers, entirely at the risk and responsibility
of Caparo Group Limited. On 24th June, 1983, the Punjab
National Bank again wrote to the Reserve Bank in reply to
their letter of 11th June, 1983, they stated that they were
under the impression that the clause “……. RBI will grant
permission to designated bank…… ” meant that permission
would automatically be granted on the submission of
applications in the prescribed form by the NRE Investors,
accompanied by auditors’ certificates of the eligibility. As
a matter of abundant caution they had intimated the NRE
investors and their brokers that the transactions were being
put through entirely at their risk and responsibility.
Details of the remittances received and transferred to the
account of Raja Ram Bhasin & Company were once again given
and the request for permission
On 6th July, 1983, the Controller Foreign Exchange,
Reserve Bank of India, wrote to the Government of India
informing them that the relevant documents had been called
for and examined and
961
the report which was desired by the Government’s telex dated
8th June, 1983 was being submitted along with the letter. It
was stated that they had taken the legal opinion ‘an eminent
jurist and senior counsel’ Mr. H.M. Seervai, which was to
the effect that the circular did not grant general
permission to non-residents or their designated banks and
that oversees bodies where they were not directly owned by
non-resident individuals were not eligible to invest under
the liberalised scheme. It was, therefore, stated that none
of the thirteen overseas companies was eligible to invest in
shares of Indian companies under the scheme. The question of
further action in the matter of failure of the Punjab
National Bank to follow the relevant Exchange Control
Regulations would be taken up separately after a final
decision was taken on the applications, that is, the
applications of the overseas companies for permission to
purchase shares. The report of the Reserve Bank of India
which was sent along with their letter was not produced
before the High Court, nor has it been placed before us. The
Government of India, on 11th August, 1983, replied the
Reserve Bank’s letter of 6th July, 1983 communicating to the
latter the opinion given by the Attorney General and asked
the Reserve Bank to dispose of the applications made by the
Punjab National Bank in the light of the opinion of the
Attorney General. The Government of India also mentioned
that they agreed with the opinion of the Attorney General
who had given primary importance of the intention behind the
Government policy which was spelt out in the report of the
working group. By another letter dated 17th September, 1983,
the Government of India clarified the position and it was
pointed out that the portfolio investment scheme by
companies and overseas bodies owned by non-residents of,
Indian nationality/origin was introduced as part of a
package of measures to facilitate remittances and
investments by non-residents of Indian nationality/origin in
India in the overall context of the difficulties of our
balance of payments. It was pointed out that in formulating
the scheme, there were three paramount considerations:
(a) as much flexibility as possible should be
available to non-residents for bring foreign
exchange into India and the concern should be the
purpose of investments rather than legal entity of
the non-resident investor of Indian origin;
(b) it was to be ensured that the benefits of the
scheme should not be available to non-resident
persons or overseas bodies other than those of
Indian nationality/origin; and
962
(c) the investment of funds under the scheme
should not lead to take over of existing companies
through operations in the stock market.
It was in the context of the first two considerations that
it was insisted that the overseas companies etc. should be
owned by non-residents of Indian nationality/origin to the
extent of at least 60% and it was In the context of the
third consideration that a ceiling of one per cent of paid
up capital for each investor was imposed. Further to the
same considerations, in May, 1983, a ceiling of 5 per cent
on aggregate investment was also imposed. The Government of
India pointed out that the question of direct or indirect
ownership should be considered in the context of these
considerations. It was pointed out:
“In many countries there is no bar on the number
of companies an individual can pre dominantly own
directly or indirectly. A person of Indian origin
could, if he wished, set up a number of companies
directly owned by him and investment through each
of these companies upto one per cent of the paid
up capital of a company in India within the
framework of our portfolio Investment Scheme. This
situation is not different in its economic
implications than if the same amount of investment
was made by the same person in the same companies
in India by the same number of companies, which
were indirectly (and not directly) owned by him.
As such having regard to the objectives of the
scheme and the intention of the Government, the
fact whether a company is predominantly directly
owned or predominantly indirectly owned is not a
material consideration.
Taking the above consideration into account, and
in order to remove any doubt regarding the
eligibility of companies, it is clarified that
overseas bodies, whether owned directly or
indirectly, are eligible to invest under the
scheme so long as it is clear that the ultimate
ownership to the extent of at least 60 per cent is
in the hands of non-residents of Indian
nationality/origin. Each such applicant company is
eligible to make investment subject to the
existing ceiling of one per cent irrespective of
whether the ultimate ownership is in the hands of
one or more individuals.
963
Since this clarification merely reflects the
original intention of the Government, the
investments made by the applicants before 2nd May,
1983 but pending for approval should not be
subject to five per cent ceiling. Pending
applications may be disposed of accordingly.
This letter was apparently delivered personally to Dr.
Man Mohan Singh, Governor of the Reserve Bank of India and
he made the following endorsement on the letter :
“I have discussed this case with FS and FM. This
matter has been approved by CCPA. As such we
should faithfully carry out consequential action.
I have discussed with FS, FM and Principal
Secretary to PM the issue of Press Note regarding
clarification by the Government regarding the NRI
Scheme. It has been agreed that the Press Note
will be issued at 6.30 PM by RBI in Delhi itself.”
We are told that the letters FS stand for Finance Secretary,
FM for Finance Minister and CCPA for Cabinet Committee on
Political Affairs.
As mentioned in the note of Dr. Manmohan Singh, a Press
release was issued by the Reserve Bank the same day to the
effect that the Government, having regard to the objectives
of the scheme for investment by non-residents of Indian
nationality/origin had clarified that their original
intention was that the facilities of direct and portfolio
investments in shares/debentures of Indian companies and
deposits with public limited companies should be available
to the overseas companies, partnership firms, trusts,
societies and other bodies in which the ownership/beneficial
interest was indirectly but ultimately held to the extent of
at least 60 per cent by non-resident individuals of Indian
nationality or origin. It was further stated in the Press
release that the Government had also clarified that each
overseas body was eligible to invest up to one per cent of
the equity capital under the portfolio investment scheme
irrespective of whether the ultimate ownership/beneficial
interest in such body was in the hands of one or more
964
non-resident individuals of Indian nationality/origin
subject to an overall ceiling of 5 per cent of the total
paid up equity capital if the investment was made after 2nd
May, 1983. The overseas bodies desiring to make investment
under the scheme were required to submit their applications
to the Controller, Reserve Bank of India, Exchange Control
Department, Bombay. The overseas bodies were required to
maintain accounts with banks authorised to deal in foreign
exchange in India under the Non-resident (External) Account
Scheme.
On 19.9.1983, the Reserve Bank also issued Circular No.
18 under sec. 73(3) of FERA. We have already referred to the
Circular earlier. On the same day (19.9.1983), the Reserve
Bank by a telex message, conveyed to the Punjab National
Bank their permission to release the money remitted by the
Caparo Group of companies from abroad for making payment
against shares of DCM and Escorts Limited purchased on
behalf of the 13 Caparo Group of Companies provided the
shares in question were purchased up to and inclusive to 2nd
May, 1983. It was also mentioned that the purchase of shares
shall be deemed to have taken place up to and inclusive of
2nd May, 1983 if firm purchase commitments as evidenced by
brokers’ contract notes had been entered into and the shares
had been/would be taken delivery of pursuant to such firm
commitments at the price mentioned in the relative brokers’
contract notes. m e letter granting permission for purchase
of shares was stated to follow. A letter did follow on the
same day by which the 13 group of companies were given The
approval of the Reserve Bank ‘to make investments in and
hold shares of Delhi Cloth and General Mills Limited and
Escorts Limited to the extent of one per cent of the paid up
capital of the respective companies subject, where the
purchase had been made after 2nd May, 1983 subject to an
overall ceiling of 5 per cent of paid up equity capital of
each of the investee companies.’ Purchases made up to and
inclusive of 2nd May, 1983 were not subject to the 5 per
cent ceiling. Information was requested as to the number of
face value of the shares purchased up to 2nd May, 1983 as
also details of shares, if any, purchased after 2nd May,
1983. Permission was also accorded for purchase of
shares/debentures of other Indian companies on behalf of 13
non-resident companies, through stock exchanges in India at
the ruling market price subject to the condition that the
shares/debentures would be purchased out of fresh
remittances received from abroad and/or out of the funds
held in the applicant companies’ Non-Resident (External)
Account to be opened with the banker. Purchases of equity
shares with repatriation benefits could be purchased up to
965
one per cent of the total paid up equity capital of the
company, subject to the overall ceiling of 5 per cent.
Another condition was that the shares acquired under the
permission should be retained by the non-resident investor
company for a minimum period of one year from the date of
their registration with the Indian company. The permission
was to be valid for a period of three years from the date of
the letter.
In the meanwhile, Escorts Limited wrote several frantic
letters to the Reserve Bank of India and the Government of
India on 23.7.83, 5.9.1983, 16.9.1983 and 17.9.1983
reiterating the allegations in regard to the purchase of
shares by the 13 non-resident companies. Although the
Reserve Bank granted the requisite permission to the non-
resident companies on 19.9.83, the Reserve Bank of India, on
22.10.1983, perhaps in view of the persistence with which
Escorts Limited continued making allegations against the
non-resident companies and perhaps with a view to further
satisfy itself, wrote to the Punjab National Bank asking
them for a report on the issues raised in the letters of
Escorts Limited dated 5th and 17th September’83, the DCM’s
letters dated 11th and 24th August ’83 and the letters of
their advocates. Copies of the letters were forwarded to the
Punjab National Bank who in turn asked the brokers Raja Ram
Bhasin & co. to submit a report to them about the various
issues raised in the Reserve Bank’s letter. Raja Ram Bhasin
& Co. replied on 12.12.1983 and expressed their surprise
that these questions were being raised after the Reserve
Bank had granted its permission on 19.9.1983. However, they
explained that no illegality had been committed by them or
their clients the Caparo Group of Companies with regard to
the purchase of shares before 2.5.1983. The queries raised
by the companies did not dispute the date of purchases made
by them up to 28.4.1983. The queries were misleading and
were merely an attempt to create a confusion. The Reserve
Bank had satisfied itself and declared the eligibility of
the companies to invest. All contracts for the sale or
purchase of shares were made subject to the rules, bye-laws
and regulations of the stock exchange and delivery could be
made and accepted pursuant to the contracts earlier entered
into. It was not essential that the transfer deeds must bear
the date of stamp of the Registrar of Companies as the date
of the contract. Deliveries could be taken even after
28.4.1983 . The dates stated in the transfer deeds were the
dates of execution of the deeds of transfer by the
transferee and had no relevance to the date of
966
purchase of the date of delivery. The sale consideration
shown in the transfer deed was for the purpose of
computation of the stamp duty had to be paid at the rate
prevalent on the dates stated on the transfer deeds and not
as on the actual date or purchase. No shares were purchased
in the benami names. The queries for which answers were now
sought, were already before the Reserve Bank of India and
considered by them before permission was granted.
Raja Ram Bhasin & Co. wrote a further letter on
27.12.1983 with regard to the query whether shares were
purchased from rupee loan raised in India from the Reserve
Bank of India. It was stated that a remittance of about
Rs.107 crores was with-held by the Punjab National Bank
without disclosing any reason. Shares had already been
purchased and consequently, the brokers had to take delivery
from the seller broker and monies had to be paid to them.
Otherwise the brokers would be declared as defaulters for
non-payment. In the premises, the brokers had to take
deliveries and arrange payments. Reserve Bank’s permission
was not necessary for this purpose.
Thereafter, the Punjab National Bank wrote to the
Reserve Bank of India answering the queries raised by them
and reiterating that they had acted in accordance with the
instructions and guidelines contained in the Reserve Bank’s
letter dated 19.9.1983. All the other points raised by the
Escorts Limited and DCM Limited required answers from the
brokers. So they wrote to the brokers and the brokers had
replied to them stating that no illegality had been
committed. The comments of the brokers were summarised and
it was then added that a sum of Rs.1,05,30,000 was released
to the brokers in accordance with the directions of the RBI
as conveyed by their telex message and letter dated
19.9.1983.
Subsequent to the grant of permission by the Reserve
Bank of India another attempt was made to have the transfer
of shares registered. The request was turned down once again
by the Escorts Ltd. who by their letter 13.10.83 stated that
apart from the question of obtaining the permission of the
Reserve Bank of India the decision of the Board of Directors
to refuse to register the transfer of shares was based on
other grounds also which continued to be valid. We may
mention here that before the High Court, all the other
grounds mentioned by the Board of Directors were abandoned
except the ground relating to want of permission of the
Reserve Bank of India. Before the High Court, a resolution
passed by the Directors by Circulation was filet and it was
to this effect:-
967
“Resolved that it is not the Board’s intention to
get adjudicated in some other proceeding the
grounds of rejection contained in para 7 of the
Share Scrutiny ant Transfer Committee of Directors
Report dated 8th June, 1983 or in paras 6, 7 and 8
of the Report dated 29th August 1983 and the Board
hereby resolve not to rely on the said grounds in
any proceeding.”
The High Court also recorded the concession in the
following words :
“Para 214 : In the rejoinder affidavit filed by
petitioner No.2 it was specifically pleaded that
the petitioners do not want adjudication of the
other grounds of refusal of registration of
shares, and as such failure to obtain prior
permission under section 29 of the FERA retained
the sole ground for rejection. The respondents
urged that since other grounds of refusal to
register the shares are not now pressed and are
not required to be adjudicated in this Writ
Petition, the Court should refuse to go into this
question. That would amount to piece-meal
adjudication on the validity of the purchase and
refusal to register, which is not permissible even
in the case of a suit, which principle, according
to the learned Attorney-General, also applies to
Writ Petition mutatis mutandis.
Para 215 : Whether there is a live issue for
adjudication and whether the petitioners have
locus standi cannot be viewed in isolation or in
the abstract, divorced from the facts and
circumstances of the case.
Para 216 : In our view, in raising this contention
certain relevant factors are being overlooked. The
Union of India, the RBI and PNB and the other
respondents dispute the correctness of the
decision taken by the petitioners not to register
the transfer of shares purchased by respondents
Nos. 4 to 17. Respondent No.19 has preferred an
appeal under section
968
111 of the Companies Act before the Company Law
Board and the same is still pending. Respondent
Nos. 20 and 21, the stock-brokers, continue to
insist upon reconsideration of the decision taken
by the Board of Directors in regard to
registration of the shares. D.N. Davar, on behalf
of the financial institutions, put in written note
on 6.1.1984 signed by him demanding the Board of
Directors to reconsider its decision. Further the
petitioner-company has to pay dividend on these
shares accruing from time to time to the holders
of these shares. The dividend on these shares
amounting to Rs.7,50,000 per annum is obviously
payable to those in whose names the shares stand
registered in the books of the company. If the
dividend is not paid within the stipulated time,
the petitioner-company and its Directors would be
exposed to penalties under the Companies Act. The
question of payment of dividend would recur year
after year. In fact, on the question of payment of
interim dividend arose, while the respondent-
companies claim to be entitled to the payment of
the dividend because they have purchased the
shares, the petitioners object to payment because
the registration of transfer of shares purchased
without prior permission could not be effected and
the dividend cannot be paid to persons whose
shares are not registered. When petitioner No.2
addressed a letter dated 2nd December 1983 to D.N.
Davar, Executive Director, IFCI, inviting his
comments on the decision to withhold the interim
dividend with respect to shares purchased by the
respondent-companies, he replied through his
letter dated 17th December, 1983 inter alia as
follows:
“Since the payment of dividend in question, as
referred to in your letter under reply pertains to
interim dividend as resolved by the Board of
Directors on the 20th July 1983 there does not
appear to be legal bar in withholding the same
according to the second opinion. However in view
of the conflicting legal opinions on the issue, we
are referring the matter to the Ministry of Law,
Department of Company Affairs for their
clarification. On hearing from them, we shall
revert to you on the subject”.
969
Thus the matter was under reference to the
Government of India and the question whether
registration of transfer of shares should be
effected or not and who would be entitled to
receive dividend on these shares was a live issue
even on 17th December 1983 and was not decided
even by the time the writ petition was filed. None
of the respondents has taken back the shares
lodged with the petitioner-company for
registration of transfer. Upon the sale of the
shares and lodging of application for their
transfer with the petitioner-company, it had to
take a decision. The Company has rejected the
request for registration on grounds which,
according to the well considered opinion of their
legal advisers, are valid and justified. The RBI
as well as the other respondents and their legal
advisers seem to hold a different view. Of course,
as discussed above, that legal opinion has not
been placed before the court; nor is the Court
entitled to require them to disclose it. It must
be recorded that petitioners’ learned counsel, Kr.
Nariman, fairly conceded that it was an error on
the part of the petitioners to have referred in
the petitioner No.2’s affidavit to the legal
advice tendered to the respondent and requested
that lt may be treated as withdrawn. It was not
pressed at the bearing of the writ petition. Be
that as it may, the fact remains that the
respondents held a different view on this legal
issue and have pressed the same before this court.
The question whether prior permission is necessary
or not is thus not concluded by the rejection of
transfer of the shares purchased by respondents
Nos.4 to 16. It would arise from time to E time as
and when such purchases are made in future. The
petitioner-company itself would have to consider
the same whenever such shares are presented for
registration. Even the Solicitors of respondent
No.18 in their letter dated 27th February 1984
addressed to the Petitioners’ Solicitors stated :
“…… the controversy regarding transfer of
shares has been raging throughout the length and
breadth of
970
the country and various forums including the
shareholders associations, chambers of commerce
and other public bodies have been making
observations and suggestions on such issues..”
They also specifically said in that letter that
they would refer to that letter at the hearing of
the writ petition. This legal issue would arise
for decision whenever the action of the
petitioners not to register the shares is
questioned by any of the transferors or
transferees of the shares. If the respondents
could still insist upon the registration of the
shares and claim that permission granted to the
respondent companies by the respondent No.2
subsequent to the purchase of shares is valid
which claim is strongly supported by the stand
taken by respondents Nos. 1 and 2, the petitioners
are certainly entitled to seek a declaration in
this behalf. Whether such a declaratory relief in
this behalf could be granted or not will be
considered in due course, but certainly it cannot
be said that the petitioners have no cause of
action for seeking a declaration. Notwithstanding
the decision taken by the Board of Directors, the
company continues to be under pressure to transfer
the shares. If the stand taken by the petitioners
is incorrect, then they would be bound under the
statute as well as under the directions of the
RBI, to register the transfer of shares in the
books of the Company even now. While forwarding
the copy of the letter dated 27th September 1983
addressed by the PNB to the respondent No. 4
Company, Haresh Bhasin (respondent No.20) by his
letter dated 8th October 1983 addressed to the
petitioner-company and sent by Registered Post
A.D., had requested that the decision of the Board
of Directors dated 29th August 1983 refusing to
register the shares be reviewed. In reply the
petitioner company conveyed through its letter
dated 13th October 1983 that notwithstanding the
impugned Circular and the letter of the RBI, the
refusal to register continued to hold good for
various other reasons. In that letter the
petitioners-company also disputed the claim that
the thirteen non-resident companies hat purchased
the shares prior to 2nd May 1984. The petitioner-
company thus maintained that the permission
granted subsequently is not valid and that the
refusal to register the shares for other reasons
971
still holds good. Of course, at the hearing of the
writ petition, having regard to the decision of
the Supreme Court in Bajaj Auto Ltd. v. N.K.
Firodia A.I.R. 1971 S.C. 321 the learned counsel
Mr. Nariman conceded that the other grounds for
not registering the shares were not being pressed
in support of the refusal of registration. It was,
therefore, argued for the respondents that this
letter would indicate that even the petitioners at
that stage accepted that the permission granted
under Exh. “B” and Ext. “C” validated the purchase
and no longer stood in the way of registration of
the shares. We are unable to agree with this
contention; firstly because if under sec. 29 prior
permission was require for a valid purchase, any
such statement made in the letter on behalf of the
petitioner-company cannot validate such transfer
so as to entitled the purchase to claim
registration of the shares. Any registration of
transfer by the petitioner-company would steel be
in contravention of section 19 read with section
29 of the FERA; secondly the letter cannot be
interpreted to mean that the stand taken by the
company and its Board of Directors unanimously
that the purchase is invalid for not obtaining
prior permission was given up. Further even if
Exh.’B’ and Exh.’C’ are construed as a grant of
permission, lt would amount to granting permission
subsequent to the purchase. When the letter of the
petitioner-company expressly states that
“notwithstanding grant of the permission by the
RBI as refer by you”, it could only mean the grant
of permission subsequent to the purchase could not
hold good and that they were not prepared to
transfer the shares on the basis of that
permission. The fact that they actually proceeded
to challenge the very permission granted by way of
Writ Petition fully establishes that the company
repudiated its liability to transfer the shares on
the strength of the impugned Circular and letter.
While 80, it is the case of the petitioners that
D.N. Davar one of the Directors, armed with the
authority to speak for all the Financial
Institutions including the LIC continued to insist
that the writ petition be withdrawn. Apart from
the other pressures exerted on the petitioner
company and its Managing Director, already
discussed above, at the meeting of the Board of
Directors of the petitioner company held on 6th
January 1984, D.N. Davar tabled four pages of
972
signed note inter alia insisting upon the Board of
Director to recall the cheques lodged with the
institutions towards repayment of loans and to
withdraw the writ petition filed in the court and
not to take note of the correspondence exchanged
between the financial institutions and the
management. The Board of Director, however, did
not concur with his proposal; on the contrary, it
ratified the filing of the writ petition. Apart
from petitioner No.2 each of the other nine
Directors filed an affidavit in this court
supporting the filing of the writ petition. It is
also the allegation of the petitioners that
financial institutions, finding that
notwithstanding the unanimous request made on
their behalf by D.N. Davar at the meeting of the
Board of Directors, the Company and its Managing
Director were refusing to withdraw the Writ
Petition and effect the transfer of shares, with
the ulterior purpose of obtaining registration of
shares, requisitioned an EGM of the petitioner-
company so that they may secure a controlling
majority in the Board of Directors. The
petitioners allege that the action of the LIC
(respondent no. 18) which by itself holds 30% of
the shares and along with this other financial
institutions, collectively represented by Davar,
holds 52% shares, is mala fide and is calculated
to secure the registration of the shares which
were purchased in contravention of FERA. In the
circumstances referred to above, it cannot be said
that the company and its Managing Director had no
cause of action to file this Writ Petition hold
that there was no longer any live issue to be
adjudicated. The petitioner-company thus
maintained that the permission granted
subsequently is not valid and the refusal to
register the shares for other reasons still hold
good. Of course, at the hearing of the Writ
Petition, having regard to the decision of the
Supreme Court in Bajaj Auto Ltd. v. N.K. Firodia,
the learned counsel Mr. Nariman conceded that the
other grounds for not registering the shares were
not being pressed in support of the refusal of
registration.
In view of the rejoinder and the concession made before
the High Court, in regard to the refusal of the company to
register the transfer of shares, the only ground which it is
necessary for
973
us to consider is whether the permission granted by the
Reserve Bank of India was in order.
Escorts Limited having refused permission to register
the transfer of shares, one would have thought that lt was
thereafter upto the purchasers or the sellers of the shares,
if they were no minded to proceed to take further
appropriate action in the matter to have the transfer of
shares registered. however it was not they that moved but it
was the Escorts Limited that filed the writ petition out of
which the present appeals arise. They explain that the
pressure of circumstances was such that they had no option
except to go to court under Art.226 of the Constitution. It
appears that on 18.10.83, Escorts Limited met with the
representatives of the Financial Institutions, the ICICI,
the IFC, the IDBI and the UTI. It has to be mentioned here
that 30 per cent of the shares of Escorts Limited are held
by the Life Insurance Corporation, 16 per cent by the Unit
Trust of India and 6 per cent by the General Insurance
Corporation and its subsidiaries. According to Escorts
Limited, at this meeting L their representatives gave full
particulars of the various illegalities committed by the
Caparo Group of Companies in the purchase of shares of
Escorts Limited but they were repeatedly pressed by the
representatives of the institutions to get their Board of
Directors to reconsider their earlier refusal to register
the transfer of shares. It was said that Mr. Patel the
Chairman of the Unit Trust of India even said that the
Financial Institutions who owned 52 per cent of the shares
were in a position to remove the management at will. There
were other meetings also with the representatives of the
Financial Institutions. Mr. Nanda, the Chairman of Escorts
Limited was requested to meet with Mr. Punja, Chairman of
IDBI, and a Director of Life Insurance Corporation who had
just returned from abroad. At this meeting also, it was
said, Mr. Punja insisted that the transfer of shares
purchased by the thirteen Caparo Companies should be
registered. Again on 1.11.83 there was a meeting between the
lawyers of Escorts and the legal advisers of the Financial
Institutions. There was a further meeting between . Nanda
and Mr. Punja on 9.11.83 when Mr. Nanda of Escorts Limited
requested Mr. Punja to expedite the proposal for merger of
goetze India Limited with Escorts Limited and the proposal
for pre-payment of the outstanding loans of Escorts Limited
to the Financial Institutions at the inter-institutional
meeting to be held on the after¯ on of 9th. Mr. Nanda was
later informed by Mr. Davar that the proposals of Escorts
Limited had been discussed
974
and accepted but the formal clearance would have to await
Mr. Punja’s discussion with Mr. Nanda. Thereafter, it was
said, Mr. Nanda was informed by Mr. Punja that Escorts
Limited must register some shares purchased by the Caparo
Group of Companies. In answer Mr. Nanda informed Mr. Punja
that the RBI itself was enquiring into the purchase of
shares by Caparo Group of Companies and therefore Mr. Punja
should await the outcome of the investigation. On 10.11.83
Mr. Sen Gupta, the Controller of capital issues telephoned
to Mr. Nanda and insisted that Escorts Limited should
atleast register some shares purchased by the Caparo Group
immediately. On 12.11.83 Mr. Punja once more insisted that
some shares atleast should be registered immediately. On
16.11.83 Mr. Nanda met Mr. Nadkarni, the Chairman of ICICI
who informed him that Mr. Punja was most upset at the
refusal of Escorts Limited to register the transfer of
shares. Thereafter in the first week of December, the Unit
Trust of India wrote a letter to Escorts Limited to induct
their Dy. General Manager as a nominee Director on the Board
of Directors of Escorts Limited. On 13th December, 83 there
was a meeting between Mr. Nanda and the representatives of
Financial Institutions when once again there was renewed
insistence that the transfer of shares should be registered.
On 20.12.83 Mr. Nanda telephoned and had a discussion with
Mr. Punja who, it was said, informed him that the question
of clearance of the proposal of Escorts Limited for merger,
for pre-payment of loans and issue of debentures were inter-
linked with the question of register of transfer of shares
purchased by the Caparo Group of Companies. According to Mr.
Nanda this conversation was contemporaneously recorded by
him in a letter addressed by him to Mr. Punja that very day.
While so the ‘Telegraph’ and the ‘Financial Express’
published a statement by Mr. Swraj Paul that the fight was
now between the Government and the management of Escorts
Limited and that he would consider himself defeated if the
Government cleared the proposal of Escorts for the issue of
debentures without first settling the matter of registration
of transfer of the shares purchased by him. Mr. Swraj Paul
was also reported to have said that the Governor of the
Reserve Bank (Dr. Man Mohan Singh, a highly respected Civil
Servant of our country) was applying double standards and
was feeding wrong information to the Union Finance Minister.
(If the reported statement is correct, we can only
characterise it as saucy, rude and impudent coming as it
does from a foreign national seeking the permission of the
Reserve Bank to invest in shares of Indian Companies.
Perhaps those are the ways of the markets in which he
operates. People
975
afflicted with double vision are ready to see double
standards in others. We appreciate neither his conduct nor
his statements. Dr. Man Mohan Singh, we presume, could not
and did not think it proper to go to the press as readily as
Mr. Swraj Paul and involve himself in an unsavoury
controversy). On 24.12.83, there was a report of a speech of
the Union Finance Minister (Mr. Pranab Mukherjee), at the
Platinum Jubilee Celebration of the Calcutta Stock Exchange
in which he referred to the dominant position held by the
Financial Institutions in the equity shares of some large
private companies and added, I have a very effective
instrument under my command to end the uncertainty.
According to Escorts Limited it was in this factual
background, that they were compelled to file the writ
petition in the High Court of Bombay. One remarkable tactic
of Mr. Nanda of Escorts deserves special mention here. The
Writ Petition was filed on 29.12.83 and some interim
directions were also sought on the same day. On that very
day Mr. Nanda also had a meeting with the representatives of
the Financial Institutions at the Office of Mr. Punja at
which-. Mr. Nanda was asked to arrange for the induction of
a representative of the U.T.I. on the Board of Escorts and
was further informed that the proposal for merger of Goetze
Limited may not be acceptable as it would reduce the holding
of the financial institutions from 52 per cent to 49 percent
but that the matter was still under consideration. What is
remarkable and what may even be considered dubious conduct
on the part of Mr. Nanda is his failure to inform the
representatives of the financial institutions about the
filing of the Writ Petition that very day.
Writ Petition No.3063 of 83 thus filed in the High
Court of Bombay was perhaps both protective and a preemptive
strike. The writ petition is at once remarkable for its
length and the number of prayers. The Writ Petition runs to
as many as 172 pages and innumerable documents running into
several volumes are now placed before us. There were
originally thirteen prayers(a)…to (m). To these prayers
four more prayers were added subsequently. Prayer (a), (b)
and (c) seek declarations that Circular No.18 dated 19.9.83
are illegal and void as contrary to the provisions of the
Foreign Exchange Regulation Act as arbitrary and issued for
collateral purposes, as constituting in abuse of statutory
authority and as violative or Articles 14, 19(1)(c) and
19(1)(g) of the Constitution. Prayer (d) is for a
declaration that the purchases of shares made by and/or on
behalf of the Caparo Group
976
Limited are illegal and violative of the Foreign Exchange
Regulation Act, the circulars of the Reserve Bank of India
issued from time to time and the provisions of the
Securities Contracts Regulation Act and the bye-laws of the
Stock Exchange. Prayers (e),(f),(g),(h),(i) again relate to
Circular No. 18 dated 19.9.83 and the letter dated 19.9.83.
Prayer (j) is directed towards securing the relevant
documents. Prayer (k) is to restrain the first respondent
(Union of India) from pressuring the company to register the
transfer of shares. Prayer (1) is for ad-interim reliefs in
terms of prayers (j) and (k). Prayer (m) is for costs of the
Petition. It will be of interest to notice at this juncture
that the learned single judge before whom the writ petition
came up for preliminary hearing thought fit not to issue a
rule nisi in regard to prayer(d). The learned judge made a
speaking order refusing to issue a rule nisi in regard to
prayer (d). There was no appeal against that order by
Escorts Limited and the order became final so far as
prayer(d) was concerned. The entire cause of action of the
petitioner centres round the purchase of shares made by and
on behalf of Caparo Group Limited and if those purchases are
left unquestioned, one is left wondering what survives in
the writ petition, particularly in view of the fact that the
Board of Directors of the Company had already refused their
permission to register the transfer of shares. The prayers
relating to Circular No. 18 dated 19.9.83 and the letter
dated 19.9.83 were only in aid of prayer (d) which, as we
see it, was the main prayer in the writ petition. But we do
not propose to dispose of the case on any such preliminary
ground. Apparently, when the learned single judge refused to
issue a rule nisi in regard to prayer(d) what he meant was
that transactions of purchase of shares would not be allowed
to be separately and individually questioned as that would
involve adduction of evidence in regard to each of the
transactions and would be ordinarily outside the province of
a court exercising jurisdiction under Article 226 of the
Constitution. This becomes clear from what the learned judge
has himself stated. He has referred to the objection to
prayer(d) in the following words:
“It was also submitted that prayer (d) should not
be entertained and if the Petitioners wanted to
urge the contentions beyond those restricted to
Exhibit ‘B’ and ‘C’ they should be relegated to an
ordinary action or to urge these contentions in
the pending appeal before the Company Law Board.”
He has dealt with the objection and concluded :
977
“As stated earlier I think what is sought for in
prayer(d) must be regarded as ordinarily beyond
the function of the Writ Court but this should not
be taken to imply that there is no warrant in the
various complaints made by Escorts and Petitioner
No.2 in connection with this aspect of the matter.
Indeed it would be clear that what had been stated
by Petitioner No. 2 in his letter dated 19th
September 1983 was substantial and serious but
these allegations have not been gone into either
by the Government of India or the Reserve Bank of
India.”
Ex.B we may mention in the Circular dated 19.9.83 and Ex-C
in the permission granted by the Reserve Bank of India.
Subsequent to the filing of the Writ Petition the Life
Insurance Corporation of India (who later was impleaded as
the 18th respondent in the Writ Petition) who along with
other financial institutions held as many as 52 per cent of
the total number of shares in the Company, issued a
requisition dated 11.2.84 to the company to held an
extraordinary general meeting for the purpose of removing
nine of the part-time Directors of the Company and for
nominating nine others in their place. Alleging that the
action of the Life Insurance Corporation of India was
malafide and part of a concerted action by the Union of
India, the Reserve Bank of India and the Caparo Group
Limited to coerce the company to register the transfer of
shares and to withdraw the Writ Petition, the Writ
Petitioners sought to suitably amend the Writ Petition and
to add prayers (ia), (ib), (ic) and (id) to declare the
requisition to hold the meeting arbitrary, illegal, ultra
vires etc. The writ petition was amended. Paragraphs 149A(l)
to (44) were added as also prayers (ia), (ib), (ic) and
(id).
The High Court after an elaborate enquiry summarised
their conclusions and granted reliefs in the following
manner:
“Rule nisi is made absolute as under : Section
29(1)(b) of FERA is mandatory. No NRI Investor is
authorised to purchase shares in an Indian company
without prior permission of the RBI under section
29(1)(b) of FERA; any purchase of shares without
such
978
prior permission is illegal. Neither the Union of
India nor the RBI is empowered to order otherwise
either by issuing directions under section 75 or
under section 73(3) of the FERA; nor are they
empowered to grant permission after the shares are
purchased so as to validate such purchases or to
‘permit holding of the shares purchased without
obtaining prior permission. The press release
dated 17th September, 1983 (Exh. ‘A’), the
Circular dated 19th September, 1983 (Exh. ‘B’) and
the letter dated 19th September, 1983 (Exh. ‘C’)
cannot operate retrospectively so as to validate
the purchase of shares made by NRI Companies which
were ineligible on the date of purchase; nor Can
they authorise purchase of shares without
obtaining prior permission of the RBI under
section 29(1)(b) of the FERA. In so far as the
impugned press release, circular and the letter
permit the respondent companies to hold the shares
purchase without obtaining prior permission of the
RBI, they are ultra vires of section 29(1)(b) of
the FERA and the powers vested in the union of
India under section 75 and the RBI under sec.
73(3) of the FERA. To that extent, they are void
and inoperative both prospectively and
retrospectively. The impugned press release and
the Circular, however amount to amending the
Portfolio Investment Scheme with full repatriation
benefits introduced under Circular No. 9 dated
14th April, 1982 (Exh.’G’) and such amendment
operates only prospectively. A writ of mandamus
shall issue restraining respondents Nos. 1 and 2
from issuing any directions –
(a) to register transfer of shares purchased by
the respondent-companies (which form the subject-
matter of this writ petition) pursuant to the
letter dated 19th September, 1983 (Exh.’C’); and
(b) to further forbear from implementing the said
t Circular dated 19th September 1983 (Exh.’B’) and
the said letter dated 19th September 1983
(Exh.’C’) with respect to the shares purchased by
the respondent companies which form the subject-
matter of this writ petition.
979
There shall be a declaration that the action of
respondent No.18 in issuing the impugned
requisition notice is contrary to the provisions
of sec.284 of the Companies Act and ultra vires
the powers vested in the LIC under section 6 of
the LIC Act and contrary to the internment of the
provisions of the LIC Act. The impugned
requisition notice offends the principles of
natural justice. The action of the LIC in issuing
the impugned requisition notice is an arbitrary
and mala fide action taken for collateral purpose;
it is violative of Article 14 of the Constitution
of India. The Union of India and the RBI,
respondents Nos.1 and 2, are in no way responsible
for the action of the LIC in this regard. The
allegation of this mala fides made against them
and the Union Finance Minister are
unsubstantiated. The requisition notice and the
resolutions passed at the meeting held in
pursuance of the said notice are quashed. A writ
of mandamus shall issue restraining the
respondents from taking any steps or action in
pursuance of the resolutions passed any meeting
held pursuant to that notice any step or action on
or under or in furtherance of the impugned
requisition notice.”
From what has been narrated above, one of the principle
questions to be considered is seen to be whether the Reserve
Bank of India had the power or authority to give ex-post
facto permission under sec.29(1)(b) of the Foreign Exchange
Regulation Act for` the purchase of shares in India by a
company ¯ t incorporated in India or whether such permission
had necessarily to be previous permission.
We do not propose to refer to any dictionary to find
out the meaning of the word ‘permission’, whether the word
is comprehensive enough to include subsequent permission. We
will only refer to what Sir Shah Sulaiman, CJ. said in
Shakir Hussain v. Chandoo Lal & Ors., A.I.R. 1931 Allah,
567.
“Ordinarily the difference between approval and
permission is that in the first the act holds good
until disapproved, while in the other case, it
does not become effective until permission is
obtained. But permission subsequently obtained may
all the same validate the previous act.
980
We have already extracted sec.29(1) and we notice that
the expression used is “general or special permission of the
Reserve Bank of India” and that the expression is not
qualified by the word “previous” or “prior”. While we are
conscious that the word ‘prior” or “previous” may be implied
if the contextual situation or the object and design of the
legislation demands it, we find no such compelling
circumstances justifying reading any such implication into
sec.29(1). On the other hand, the indications are all to the
contrary. We find, on a perusal of the several, different
sections of the very Act, that the Parliament has no been
unmindful of the need to “clearly express its intention by
using the expression “previous permission” whenever it was
thought that “previous permission” was necessary. In
Secs.27(1) and 30, we find that the expression ‘permission’
is qualified by the word ‘previous’ and in sections 8(1),
8(2) and 31, the expression ‘general or special permission’
is qualified by the word “previous”, whereas in sections
13(2), 19(1), 19(4), 20, 21(3), 24, 25, 28(1) and 29, the
expressions ‘permission’ ant ‘general’ or ‘special
permission’ remain unqualified. The distinction made by
Parliament between permission simpliciter and previous
permission in the several provisions of the same Act cannot
be ignored or strained to be explained away by us. That is
not the way to interpret statutes. The proper way is to give
due weight to the use as well as the omission to use the
qualifying words in different provisions of the Act. The
significance of the use of the qualifying in one provision
and its non-use in another provision may not be disregarded.
In our view, the Parliament deliberately avoided the
qualifying word ‘previous ‘ in sec.29(1) so as to invest the
Reserve Bank of India with a certain degree of elasticity in
the matter of granting permission to non-resident companies
to purchase shares in Indian companies. The object of the
Foreign Exchange Regulation Act, as already explained by us,
undoubtedly, is to earn, conserve, regulate and stored
foreign exchange. The entire scheme and design of the Act is
directed towards that end. Originally the Foreign Exchange
Regulation Act, 1947 was enacted as a temporary measure, but
it was placed permanently on the Statute Book by the
Amendment Act of 1957. The Statement of Objects and Reasons
of the 1957 Amendment Act expressly stated, “India still
continues to be short of foreign exchange and it is
necessary to ensure that our foreign exchange resources are
conserved in the national interest.” In 1973, the old Act
was repealed and replaced by the Foreign Exchange Regulation
Act, 1973, the long title of which reads : “An Act to
consolidate and amend the law regulating certain payments,
dealings in foreign exchange ant securities, tran-
981
sactions indirectly affecting foreign exchange and the
import and export of currency and bullion, for the
conservation of foreign exchange resources of the country
and the proper utilisation thereof in the interest of the
economic development of the country.” We have already
referred to sec. 76 which emphasises that every permission
or licence granted by the Central Government or the Reserve
Bank of India should be animated by a desire to conserve the
foreign exchange resources of the country. The Foreign
Exchange Regulation Act is, therefore, clearly a statute
enacted in the national economic interest. When construing
statutes enacted in the national interest, we have
necessarily to take the broad factual situations
contemplated by the Act and interpret its provisions so as
to advance and not to thwart the particular national
interest whose advancement is proposed by the legislation.
Traditional norms of statutory interpretation must yield to
broader notions of the national interest. If the legislation
is viewed and construed from that perspective, as indeed it
is imperative that we do, we find no difficulty in
interpreting ‘permission’ to mean ‘permission’, previous or
subsequent, and we find no justification whatsoever for
limiting the expression ‘permission’ to ‘previous
permission’ only. In our view what is necessary is that the
permission of the Reserve Bank of India should be obtained
at some stage for the purchase of shares by non-resident
companies.
An argument was strenuously pressed before us by Shri
F.S. Nariman, learned Senior Advocate for the company, was
that the very scheme of the Act shows that the permission
contemplated by Sec. 29(1) could only be previous
permission, notwithstanding the circumstance that the word
‘previous’ does not qualify the expression ‘general or
special permission’ in sec. 29(1) though it does in several
other provisions. According to Sri Nariman, the Act was
designed not merely to attract but also to regulate the
inflow of Foreign Exchange. That was why, he said, the
provisions were very stringent. We have no hesitation in
agreeing with Mr. Nariman that while the inflow of Foreign
Exchange is welcomed by the Act, the inflow is also subject
to stringent checks as otherwise in no time the economy of
the country will be swamped with Foreign money and taken
over by giant multinationals. But that really does not
affect the interpretation of the expression ‘permission’ in
Sec. 29(1). The Reserve Bank of India is not bound to give
ex-post-facto permission whenever it is found that business
has been started or
982
shares have been purchased without its previous permission.
In such cases, wherever the Reserve Bank of India suspects
an oblique motive, we presume that the Reserve Bank of India
will not only refuse permission but will further resort to
action under sections 50, 61 and 63, not merely punish the
offender but also confiscate the property involved. We do
not think that the scheme of the Act makes previous
permission imperative under sec. 29(1) though the failure to
obtain prior permission may expose the foreign investor to
prosecution, penalty, conviction and confiscation if
permission is ultimately refused. Even if permission is
granted, it may be made conditional. The expression ‘special
permission is wide enough to take within its stride a
‘conditional permission’, the condition being relevant to
the purpose of the statute, in this case, the conservation
and regulation of foreign exchange. For example, ex-post-
facto permission may be granted subject to the condition
that the person purchasing the shares will not be entitled
to repatriation benefits.
Shri Nariman then suggested that even if we look st the
provisions of s. 29 by themselves it would clear that the
permission contemplated by s. 29 could only be ‘previous’.
He pointed out to us that while secs. 29(2) and 29(4) made
due provision for applying for permission to continue to
carry on any activity of the nature mentioned in s. 29(1)(a)
and continue to hold shares of a company of the character
mentioned in s. 29(1)(b) if such activity was carried on and
such shares were held on the date of the commencement of the
act, no such provision was found for the application for
permission to carry on such activity or to hold such shares
if such activity was commenced or if such shares were
acquired after the commencement of the Act but without the
previous permission of the Reserve Bank of India. It was
suggested that the very absence of any prescribed form for
the grant of permission for an activity started or shares
acquired subsequent to the commencement of the Act without
previous permission of the Reserve Bank of India, were
clearly indicative of the imperative nature of the need for
previous permission. It was submitted that whatever argument
was possible in regard to the acquisition of shares it was
clear that no activity of the nature mentioned in sec.
29(1)(a) could be commenced without the previous permission
of the Reserve Bank. Since the word ‘general or special
permission’ of the Reserve Bank occurring in sec. 29(1)
qualified both
983
clauses (a) and (b) the expression had to be given the same
meaning with reference to clause (b) as it had to be given
with A reference to clause (a) and that was that previous
permission was necessary. The argument is attractive and not
altogether without substance but it proceeds on the
assumption, for which there is no basis, that permission
required for carrying on business under sec. 29(1)(a) must
necessarily be previous permission. We do not think that the
Parliament intended to lay down in absolute terms that the
permission contemplated by sec. 29(1) had necessarily to be
previous permission. The principal object of sec. 29 is to
regulate and not altogether to ban the carrying on in India
of the activity contemplated by clause (a) and the
acquisition of an undertaking or shares in India of the
character mentioned in clause (b). The ultimate object is to
attract and regulate the flow of Foreign Exchange into
India. If that much is obvious, it becomes evident that the
Parliament did not intend to adopt too rigid an attitude in
the matter and it was, therefore, left to the Reserve Bank
of India, than whom there could be no safer authority in
whom the power may be vested, to grant permission, previous
or ex-post-facto, conditional or unconditional. The Reserve
Bank could be expected to use the discretion wisely and in
the best interests of the country and in furtherance of
declared Governmental fiscal policy in the matter of Foreign
Exchange.
It was contended on behalf of Escorts Limited that sec.
13 of the Foreign Exchange Regulation Act which enable the
Central Government, by a notification in the gazette, to
order that no person shall except with the general or
special permission of the Reserve Bank bring or send into
India any gold or silver or any Foreign Exchange or Indian
currency, would be rendered ineffective if the expression
‘general or special permission’ accruing in sec. 13 could be
construed to include subsequent permission. So, it was
urged, both in s. 13 and secs. 19 and 29 the expression
should be construed to exclude subsequent permission. There
is no force in this submission. Section 67 of the Foreign
Exchange Regulation Act provides that the restriction
imposed by or under sec. 13 is to be deemed to have been
imposed under sec. 11 of the Customs Act, and, further,
makes the provisions of the Customs Act applicable
accordingly. Section 11 of the Customs Act empowers the
Central Government to prohibit absolutely or subject to
conditions the import or export of goods of any specified
description. Reading together sections 13 and 67
984
of the Foreign Exchange Regulation Act and Section 11 of the
Customs Act, it is seen that an order under sec. 13 of the
Foreign Exchange Regulation Act operates as a prohibition
and there, can, therefore, be no question of the Reserve
Bank granting subsequent permission to validate the
importation of the prohibited goods and avoid the
consequences prescribed by the Customs Act. It is,
therefore, not possible to accept the analogy of section 13
to interpret sections 19 and 29.
Our attention was drawn to the very serious nature of
the consequences that follow the failure to obtain the
permission of the Reserve Bank, and the circumstance that
even the burden of proof that requisite permission had been
obtained, was on the person prosecuted or proceeded against
for contravening a provision of the Act or rule or direction
or order made under the Act thus ruling out mensrea as an
essential ingredient of an offence. It is true that the
consequences of not obtaining the requisite permission where
permission is prescribed are serious and even severe. It is
also true that the burden of proof is on the person
proceeded against and that mensrea may consequently be
interpreted as ruled out. But that cannot lead to the
inevitable conclusion that the permission contemplated by
section 29 is necessarily previous permission. Action under
section 50 or under section 56 is not obligatory and in the
case of a prosecution under section 56, the delinquent is
further protected by the requirement that the complaint has
to be made by one or other of the officers specified by
section 61(2)(ii) only and even then only after giving an
opportunity to the person accused of the offence of showing
that he had the necessary permission. We presume that when
called upon to show that he had the necessary permission,
the person accused of the offence could satisfy the officer
concerned that he had applied for permission as that there
was a reasonable prospect of his obtaining the permission.
We may further add here that ordinary prudence would warn a
foreign national who is man of the world, particularly of
the commercial world, to seek and obtain permission before
venturing to invest his money in shares of Indian Companies.
If not he would chance a refusal of permission and risk
other consequences. The chance and the risk, of course,
would not be there if everything was clean. Even if
permission is granted, it may be subject to a condition such
as withholding of repatriation benefits, which may not be
platable to him. That is another chance that he takes when
he seeks ex-post-facto permission. One
985
of the submissions of Shri Nariman was that the Parliament
took care to use the word ‘confirmation’ as distinguished
from the word ‘permission’ where lt thought such
confirmation was sufficient, as in sec. 19(5). The
Parliament, according to Shri Nariman, could well have made
a provision for confirming transactions coming into
existence after the commencement of the Act, if lt was 80
minded, but since, it did not do 60, but chose the word
permission’, it must follow that sec. 25 contemplates
previous permission only. We see no true foundation for this
submission. reference to any dictionary or any book of
synonyms will show that every word has different shades of
meaning and different words may have the same meaning. It
all depends upon the context in which the word is used. If
it was the intention of Parliament to comprehend both
previous and subsequent permission, the word ‘confirmation’
would not do at all. While it may be permissible to construe
the word ‘permission’ widely the word ‘confirmation’ could
never be used to convey the meaning ‘previous permission’.
The word confirmation would be totally misplaced in sec. 29.
It was also submitted on behalf of the company that if
the word ‘permission’ was construed to include ex-post-facto
permission, it would really amount to giving retrospective
operation to the permission. The Reserve Bank, it was said
was not competent to grant permission with retrospect
effect. In our view, the rule against retrospectivity cannot
be imported into the situation presented here. The rule
against retrospectivity is a rule of interpretation aimed at
preventing interference with vested rights unless expressly
provided or necessarily implied. To invoke the rule against
retrospectivity in a situation where no vested rights are
involved is to give statutory status to a rule of
interpretation forgetting the reason for a rule.
One of the submission very strenuously urged before us
was that the very authority which was primarily entrusted
with the task of administering the Foreign Exchange
Regulation Act, namely, the Reserve Bank of India was
itself, of the view that the ‘permission’ contemplated by
sec. 29(1)(b) of the Foreign Exchange Regulation Act was
‘prior permission. Our attention was invited to paragraph
24-A.1 of the Exchange Control Manual where the first three
sentences read as follows :-
In terms of sec. 29(1)(b) of Foreign Exchange
986
Regulation Act 1973, no person resident outside
India whether an individual, firm or company (nor
being a banking company) incorporated outside
India can acquire shares of any company carrying
on trading, commerce or industrial activity in
India without prior permission of Reserve Bank.
Also under sec. 19(1)(b) and 19(1)(d) of the Act,
the transfer and issue of any security (which
includes shares) in favour of or to any person
outside India require prior permission of the
Reserve Bank of India. When permission has been
granted for transfer or issue of shares to ¯ n-
resident investors under sec. 19(1)(b) or 19(1)(d)
it is automatically deemed to be permission under
sec. 29(1)(b) for purchase of shares by him.
The submission of Shri Nariman was two-fold. He urged that
paragraph 24-A.1 was a statutory direction issued under sec.
73(3) of the Foreign Exchange Regulation Act and, therefore,
had the force of law and required to be obeyed. Alternately
he urged that it was the official and contemporary
interpretation of the provision of the Act ant was,
therefore, entitled to our acceptance. The basis for the
first part of the submission was the statement in the
preface to the Exchange Control Manual to the effect:
“The present edition of the Manual incorporates
all the directions of a standing nature issued to
authorised dealers in the form of circulars upto
31st May, 1978. The directions have been issued
under sec. 73(3) of the Foreign Exchange
Regulation Act which empowers the Reserve Bank of
India to issue directions necessary or expedient
for the administration of exchange control.
Authorised dealers should hereafter be guided by
the provisions contained in this Manual.”
There is no force whatever in this part of the submission. A
perusal of the Manual shows that it is a sort of guide book
for authorised dealers, money changers etc. and is a
compendium or collection of various statutory directions,
administrative instructions, advisory opinions, comments,
notes, explanations suggestions, etc. For example, paragraph
24-A.1 is styled as Introduction to Foreign Investment in
India. There is nothing in
987
the whole of the paragraph which even remotely is suggestive
of a direction under sec. 73(3). Paragraph 24-A.1 itself
appears to be in the nature of a comment on sec. 29(1)(b),
rather than a direction under sec. 73(3). Directions under
sec. 73(3), we notice, are separately issued as circulars on
various dates. No Circular has been placed before us which
corresponds to any part of paragraph 24-A.1. We do not have
the slightest doubt that paragraph 24-A.1 is an explanatory
Statement of guideline for the benefit of the authorised
dealers. It is neither a statutory direction nor is it a
mandatory instruction. It reads as if it is in the nature of
and, indeed it is, advice given to authorised dealers that
they should obtain prior permission of the Reserve Bank of
India, so that there may be no later complications. It is a
helpful suggestion, rather than a mandate. The expression
‘prior permission’ used in paragraph 24-A.1 is not meant to
restrict the range of the expression ‘general and special
permission found in sections 29(1)(b) and 19(1)(b). It is
meant to indicate the ordinary procedure which may be
followed. Shri Nariman argued that none of the prescribed
forms provided for the application and grant of subsequent
permission. That may be so for the obvious reason that
ordinarily one would expect permission to be sought and
given before the act. Surely, the Form cannot control the
Act, the Rules or the directions. As one learned judge of
the Madras High Court was fond of saying ‘it is the dog that
wags the tail and not the tall that wags the dog.’ We may
add what this Court had occasion to say in Vasudev
Ramchandra Shelat v. Pranlal Jayanand Thakkar, [1975] 1
S.C.R. 534:
“The subservience of substance of a transaction to
some rigidly prescribed form required to be
meticulously observed, savours of archaic and
outmoded jurisprudence.”
According to Shri Nariman even if as found by us, the
permission to purchase shares of an Indian company by a non-
resident Investor of Indian origin or nationality under
section 29(1)(b) of the FERA could be obtained after the
purchase, the Reserve Bank ceased to have such power after
the formulation of the Portfolio Investment Scheme since it
did not reserve to itself any such power under the Portfolio
Investment Scheme promulgated in exercise of its powers
under sec. 73(3) of the Foreign Exchange Regulation Act. We
do not see any foundation for this argument in the scheme
itself. The scheme does not talk of any prior or previous
permission, nor are we able to
988
understand how a power possessed by the Reserve Bank under a
Parliamentary legislation can be so cut down as to prevent
its exercise altogether. It may be open to a subordinate
legislating body to make appropriate rules and regulations
to regulate the exercise of a power which the Parliament has
vested in it, so as to carry out the purposes of the
legislation, but it cannot divest itself of the power. We
are, therefore, unable to appreciate how the Reserve Bank,
if it has the power under the FERA to grant ex-post-facto
permission, can divest itself of that power under the
scheme. The argument was advanced with particular reference
to the forms prescribed under the scheme. We have already
pointed out that the forms under the scheme cannot abridge
the legislation itself.
Before proceeding further, it is just as well to have a
clear picture of the nature of the property in shares, the
law relating to transfer of property in shares under the law
and the effect of the provisions of the FERA. For that
purpose, it is desirable that we read together all the
relevant statutory provisions relating to the acquisition,
transfer and registration of shares. Besides referring to
the relevant statutory provisions, we will also refer to the
leading cases on the topic.
Section 2(46) of the Companies Act defines shares as
meaning share in the share capital of a company, and
includes stock except where a distinction between stocks and
shares is express or implied. Section 82 of the Companies
Act states the shares or other interests of any member in a
company shall be movable property transferable in the manner
prescribed by the articles of the company. Section 84 makes
a certificate, under the common seal of the company,
specifying any shares held by any member prima facie
evidence of the title of the member to such shares. Section
87 gives every member of the company holding any equity
share capital there-in a right to vote, in respect of such
capital, on every resolution placed before the company, his
voting right to be in proportion to his share of the paid-up
equity capital of the company. Section 106 makes provision
for ‘alteration of rights of holders of special classes of
shares’ under certain circumstances. Section 108(1)
prohibits a company from registering a transfer of shares in
a company unless a proper instrument of transfer duly
stamped and executed by or on behalf of the transfer or and
by or on behalf of the transferee
989
has been delivered to the company along with the certificate
relating to the shares. Section 108(1a)(a) provides for the
presentation of the instrument of transfer, in the
prescribed form, to the prescribed authority for the purpose
of having duly stamped on it the date of such presentation.
Section 108(1A)(b) provides for the delivery of the duly
stamped instrument to the company generally within two
months from the date of such presentation. Sections 108-A to
108-H impose certain restrictions on transfer of shares in
the company with which we are not concerned for the purpose
of this case. Section 110 provides for application for
transfer of shares. Section 111 (1) preserves the power of
the company under its articles to refuse to register the
transfer of any shares of the company, and sec. 111(3)
provides for an appeal to the Central Government against
such refusal to register. Section 206 obliges a company not
to pay the dividend in respect of any share except to the
registered holder of such share or to his order or to his
bankers or where a share warrant has been issued in respect
of the share to the bearer of such warrant or to his banker.
Default in payment of dividend is also made punishable under
sec. 207. A share-holder along with others, making a minimum
of one hundred members of the company or one-tenth of the
total number of members has the right to apply to the court
under sec. 397 for relief in case of oppression and under
sec. 398 for relief in case of mismanagement. Section 428
defines ‘contributory’ and it includes the holder of any
shares which are fully paid-up. The share-holder, as a
contributory, has also the right to apply for winding up of
the company under sec. 439. On winding up, sec. 475 enables
the court to adjust the rights of the contributories amongst
themselves and to distribute the surplus among the persons
entitled thereto.
We have also no notice here sec. 27 of the Securities
Contracts (Regulation) Act which provides that it shall be
lawful for the holder of any security, whose name appears on
the books of the company issuing the said security to
receive and retain any dividend declared by the company in
respect thereof for any year, notwithstanding that the said
security has already been transferred by him for
consideration, unless the transferee, who claims the
dividend from the transferer has lodged the security and all
other documents relating to the transfer which may be
required by the company with the company for being
registered in his name within fifteen days of the date on
which the dividend became due.
990
We have to further notice here that the sale of Goods
Act also applies to stocks and shares. Section 2(7) of the
Sale of Goods Act defines ‘goods’ as meaning “every kind of
movable 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 sold before sale or under the contract of sale.”
Section 19 prescribes that where there is a contract
for the sale of specific or ascertained goods the property
in them is transferred to the buyer at such time as the
parties to the contract intend it to be transferred.
Intention may be ascertained having regard to the terms of
the contract the conduct of the parties and the
circumstances of the case. Unless a different intention
appears, the rules contained in section 20 to 24 are to
determine the intention as to the time at which the property
in the goods is to pass to the buyer. Section 20 deals with
specific goods in a deliverable state. Section 21 deals with
specific goods to be put into a deliverable state. Section
22 deals with specific goods in a deliverable state when the
seller has to do anything thereto in order to ascertain the
price. Section 23 deals with sale of unascertained goods and
appropriation and section 24 deals with goods sent on
approval or “on sale or return”.
We have referred at the outset and indeed we have
extracted some of the important provisions of the Foreign
Exchange Regulation Act which have relevance to the case
before us. We have seen that while sec. 19(1)(b) prescribes
that no person shall, except with the general or special
provision of the Reserve Bank, transfer any security or
create or transfer any interest in a security, to or in
favour of a person resident outside India, sec. 29(1)(b)
provides that no person resident outside India (whether a
citizen of India or not) or a company is not incorporated
under any law in force in India or in which the non-resident
interest is more than 40 per cent, shall except with the
general or special permission of the Reserve Bank purchase
the shares in India or any company carrying on any trade,
commerce or industry. The provisions of sec. 29 are stated
to be without prejudice to the provisions of sec. 47 which
while prohibition any person from entering into any contract
or agreement which would directly or indirectly evade or
avoid in any way the operation of any provision of the Act
or rule or direction or order made thereunder
991
also provides that the provisions of the Act requiring that
anything for which the permission of the Central government
or the Reserve Bank is necessary shall not prevent legal
proceedings being brought in India to recover any sum which,
apart from the said provisions would be due as debt, damages
or otherwise, subject to the condition that no step shall be
taken for the purpose of enforcing any judgment or order for
the payment of any sum, unless the Central Government or the
Reserve Bank as the case may be, may permit the sum to paid.
We have also referred earlier to sec. 19(4) which stipulates
that no person shall, except with the permission of the
Reserve Bank, enter the transfer of securities in any
register if he has any ground for suspecting that the
transfer involves any contravention of the provisions of
sec. 19. Sections 48, 50, 56 and 63 prescribe the
consequences of non-compliance with the provisions of the
Act and the rules, orders and directions issued under the
Act and provide for penalties and prosecutions. The
provisions of the Foreign Exchange Regulation Act, to which
we have just now referred, do not appear to stipulate that
the purchase of shares without obtaining the permission of
the Reserve Bank shall be void. On the other hand, legal
proceedings arising out of such transactions are
contemplated subject to the condition that no sum may be
recovered as debt, damages or otherwise, unless and until
requisite permission is obtained. We have already held that
the permission may be ex-post-facto. If permission may be
granted ex-post-facto, quite obviously the transaction
cannot be a nullity and without any effect whatsoever.
In the course of the submissions we were referred to
Manekji Pestonji Bharucha and Anr. v. Wadilal Sarabhai and
Company 52 I.A. 92, Bank of India v. Jamshetji A.H. Chinoy,
A.I.R. 1950 P.C.90, In Re Fry, 1946 (2) All E.R. 106 Swiss
Bank Corporation v. Liodys Bank Ltd. 1982 A.C. 584,
Charanjit Lal Choudhury v. Union of India A.I.R 1951 S.C 41,
Mathalone and Ors. v. Bombay Life Assurance Company Limited
A.I.R. 1953 S.C. 385 and Vasudev Ramachandra Shelat v.
Pranlal Jayanand Thakkar, (supra) A.K. Ramiah v. Reserve
Bank of India 1970 (1) M.L.J. 1 and Baliv Chopra I.A.R. 1971
(2) Delhi 637. We have read all of them and we think it is
enough if we refer to some of them.
In Charanjit Lal Choudhary v. Union of India (supra),
Mukherjee, J. summarised the rights of a shareholder in a
company in the following manner :
“The petitioner as a shareholder has undoubtedly
an interest in the company. His interest is
represented by the share he holds and the share is
a movable
992
property according to the Indian companies Act,
with all the incidence of such property attached
to it. Ordinarily, he is entitled to enjoy the
income arising from the shares in the shape of
dividends; the share like any other marketable
commodity can be sold or transferred by way of
mortgage or pledge. The holding of the share in
his name gives him the right to vote at the
election of Directors and thereby take a part,
though indirectly in the management of the
company’s affairs. If the majority of share-
holders sides with him, he can have a resolution
passed which would be binding on the Company and
lastly, he can institute proceedings for winding
up of the Company which may result in a
distribution of the net assets among the share
holders.
It is interesting to notice that Mukherjee, J. in the course
of his opinion, expressed the view that a Corporation, which
is engaged in the production of a commodity vitally
essential to the community has a social character of its own
and it must not be regarded as the concern primarily or only
of these who invest their money in it.
In Mathalone and Ors. v. Bombay Life Assurance Company
Ltd. (supra), the question of relationship between the
transferor and transferee of shares before registration of
the transfer in the books of the company came to be
considered in connection with the right of the transferee to
the ‘right-shares’ issued by the company. On the transfer of
shares transferee became the owner of the beneficial
interest though the legal title was with the transferor the
relationship of trustee and ‘cestui que trust’ was
established and the transferor was bound to comply with all
the reasonable directions that the transferee might give and
that he became a trustee of dividends as also a trustee of
the right to vote. The relationship of trustee and cestui
que trust arose by reason of the circumstance that till the
name of the transferee was brought on the register of
shareholders in order to bring about a fair dealing between
the transferor and the transferee equity clothed the
transferor with the status of a constructive trustee and
this obliged him to transfer all the benefits of property
rights annexed to the sold shares of the cestui que trust.
The principle of equity could not be extended to cases where
the transferee had not taken active steps to get his name
registered as a member on the register of the company with
due diligence and in the meantime, certain other privileges
or opportunities arose for purchase of new shares in
consequences of
993
the ownership of the shares already acquired. The benefit
obtained by a transferor as a constructive trustee in
respect of the share sold by him cannot be retained by him
and must go to the beneficiary, but that cannot compel him
to make himself liable for the obligations attaching to the
new issues of shares and to make an application for the new
issue by making the necessary payments, unless specially
instructed to do so by the beneficiary.
In Vasudev Ramachandra Shelat v- Pranlal Jayanand
Thakkar (supra), the question arose this way, The donor
gifted certain shares in companies to the appellant by a
registered deed. She also signed several blank transfer
forms to enable the donee to obtain transfer of shares in
the register of companies. However, she died before the
shares could be transferred to the appellant in the books of
the companies. The respondent, a nephew of the donor, filed
the suit, claiming the shares on the ground that the gift
was incomplete for failure to comply with the formalities
prescribed by the Indian Companies Act 1913 for transfer of
shares. Noticing that in 53 Indian Appeals, 92 a distinction
was made between the title to go on the register and the
full property in the shares in a company the court expressed
the view that sec. 6 of the Transfer of Property Act also
justified such a splitting up of a right constituting
property on shares just as it was well recognised that
rights of ownership of property might be split up into a
right to the Corpus and another to the “usufruct” of the
property and then separately dealt with. On the delivery of
the registered deed of gift together with the share
certificate to the donee, the donation of the right to get
the share certificate transferred in the name of donee
became irrevocable by registration as well as by delivery.
Either was sufficient. The actual transfer in the registers
of the companies constituted more enforcement of this right
to enable the donee to exercise the rights of the
shareholder. The more fact that such transfers had to be
recorded in accordance with the Company Law did not detract
from the completeness of what was donated. Referring to
Regulation 18 of the first schedule to the Companies Act of
1913 which prescribed the mode of transfer of shares, it was
observed by the court that there was nothing either in the
Regulation or elsewhere to indicate that without strict
compliance with some rigidly prescribed form, the
transaction must fail to achieve its purpose. It was said,
the subservience of substances of a transaction to some
rigidly prescribed from required to be meticulously
observed, savours of archaic and outmoded jurisprudence. The
Court referred to the passage in Buckley on the Companies
Acts XXXI Edn. Page 813 :
994
“Non-registration of a transfer of shares made by a donor
does not render the gift-imperfect”, and the passage in
Palmar’s Common Law : 21st Edn. page 334 : A transfer is
incomplete until registered. Pending registration, the
transferor has only an equitable right to the shares
transferred to him. He does not become the legal owner until
his name is entered on the register in respect of these
shares. The two statements of law were reconciled by the
court and its was stated the transferee under a gift of
shares, cannot function as a shareholder recognised by
Company Law until his name is formally brought upon the
register of a company and he obtain a share certificate as
already indicated above. Indeed, there may be restrictions
on transfers of shares either by gift or by sale in the
articles of association.” It was pointed out that, a
transfer of property rights in shares, recognised by the
transfer of Property Act, may be antecedent to the actual
vesting of all or the full rights of ownership of shares and
exercise of the rights of shareholders in accordance with
the provisions of the Company law, and that while transfer
of property in general was not the subject matter of the
companies Act, it deals with transfers of shares only
because they give certain rights to the legally recognised
share holders and imposes some obligations upon them with
regard to the companies in which they hold shares. A share
certificate not merely entitles the shareholder whose name
is found on it to interest on the share hold but also to
participate in certain proceedings relating to the company
concerned.
In Re Fry, (supra), F, a resident of the United States
of America desiring to make a gift to his son of certain
shares of an English company, executed a deed of transfer
and sent it to the company for registration. As the Defence
(Finance) Regulations prohibited any transfer of any
securities or any interest in securities held by a non-
resident without permission from the Treasury, the company
wrote to that certain forms had to be completed by him and
the transferee and that a licence had to be obtained from
the Treasury. Before could apply and obtain the permission
of the Treasury, he died. The question arose whether F’s son
was entitled to require F’s personal representatives to
obtain for him legal and beneficial position of the shares.
It was held that the permission of the Treasury not having
been obtained, the company could not register the transfer
and, therefore, the son acquired no legal title to the
shares in question. Nor was there a complete gift of the
equitable interest in the shares to the son because had not
995
obtained the consent of the Treasury and had, therefore, not
done all that was necessary to divest himself of his
equitable interest in favour of his son. The son was,
therefore, not entitled to sue the father’s personal
representatives to obtain for him legal and beneficial
position of the shares.
In Swiss Bank Corporation v. Lioyds Bank Ltd. & Ors.,
(supra), the question was about the consequence of an
authorised depository under s. 16(2) of the Exchange Control
Act, parting with a certificate relating to a foreign
currency security without the permission of the Treasury
contrary to Bank of England Exchange Control Notice E.C.7.
In the court of appeal, Buckley L.J. Observed :
“….the Bank of England, we must assume for
sufficient reasons, declined to validate the
transfer of custody. It must consequently be
treated as having been made in contravention of
section 16(2), which, as I have already mentioned,
is conceded; but an act done in contravention of a
statute is not necessarily nullity. Whether it is
so or not must depend upon the terms and effect of
the statute, and may depend upon the policy of the
statute and the nature of the act itself. By
section 34 of the act effect is given to the
provisions of Schedule 5 to the Act for the
purposes of the enforcement of the Act. Paragraph
1(1) of Part II of that Schedule provides that any
person in or resident in the United Kingdom who
contravenes any restriction or requirement imposed
by or under the Act shall be guilty of an offence
punishable under the part of that Schedule. The
subsequent provisions of that part of the Schedule
impose maximum penalties by way of imprisonment or
find for such offence –
“In my judgment, offences under the Act are
clearly mala prohibita, not mala in se; they are
not acts the validity of which the law refuses to
countenance for any purpose. As such they are not
devoid of any effect; they merely expose the
culprits to the penalties prescribed by the Act
none of which, so far as I am aware, has been
exacted or sought to be exacted in this
case………………………….. ………..
If the legislature had intended that such a
security, if transferred from the custody of the
one authorised depository to the custody of
another
996
without compliance with all the conditions of any
relevant permission, should not be treated as
being in the custody of the latter depository, one
would. I think, expect to find an express
provision to that effect, for otherwise the
consequences of an irregular transfer of custody
is left in doubt.
Earlier we mentioned that S. 111 of the Companies Act
preserves the power of the company under its articles to
refuse to register the transfer of any shares of the
company. The nature and extent of the power of the company
to refuse to register the transfer of shares has been
explained by this court in Bajaj Auto Limited v. N.K.
Ferodia and Anr. 41 Company Cases 1 = [1971] 2 S.C.R. 4C. It
was said that even if the article of the company provided
that the directors might at their absolute and uncontrolled
discretion decline to register any transfer of shares, such
discretion does not mean a bare affirmation or negation of a
proposal. Discretion implies just and proper consideration
of the proposal in the facts and circumstances of the case.
In the exercise of that discretion, the Directors will act
for the general interest of the shareholders because the
Directors are in a fiduciary position both towards the
company and towards every shareholder. The Directors, are,
therefore, required to act bona fide and not arbitrarily and
not for any collateral motives Where the articles permitted
the Directors to decline to register the transfer of shares
without assigning reasons, the court would not necessarily
draw adverse inference against the Directors but will assume
that the acted reasonably and bona fide. Where the Directors
gave reasons the court would consider whether the reasons
were legitimate and whether the Directors proceeded on a
right or wrong principle. If the articles permitted the
Directors not to disclose the reasons, they could be
interrogated and asked to disclose the reasons. If they
failed to disclose that reason, adverse presumption could be
drawn against them.
On a overall view of the several statutory provisions
and judicial precedents to which we have referred we find
that a shareholder has an undoubted interest in a Company,
an interest which is represented by his share-holding. Share
is movable property, with all the attributes of such
property. The rights of a shareholders are (i) to elect
directors and thus to participate in the management through
them; (ii) to vote on resolutions at meetings of the
company; (iii) to enjoy the profits of the Company in the
shape of dividends; (iv) to apply to the Court for
997
relief in the case of oppression; (v) to apply to the Court
for relief in the case of mismanagement; (vi) to apply to
the Court for winding up of the Company; (vii) to share in
the surplus on winding up. A share is transferable but while
a transfer may be effective between transferor and
transferee from the date of transfer, the transfer is truly
complete and the transferee becomes a shareholder in the
true and full sense of the term, with all the rights of a
shareholder, only when the transfer is registered in the
company’s register. A transfer effective between the
transferor and the transferee is not effective as against
the company and persons without notice of the transfer until
the transfer is registered in the company’s register. Indeed
until the transfer is register in the books of the company
the person whose name is found in the register alone is
entitled to receive the dividends, notwithstanding that he
has already parted with his interest in the shares. However,
on the transfer of shares, the transferee becomes the owner
of the beneficial interest though the legal title continues
with the transferor. The relationship of trustee and ‘cestui
que trust’ is established and the transferor is bound to
comply with all the reasonable directions that the
transferee may give. he also becomes a trustee of the
dividends as also of the right to vote. The right of the
transferee ‘to get on the register’ must be exercised with
due diligence and the principle of equity which makes the
transferor a constructive trustee does not extend to a case
where a transferee takes no active interest ‘to get on the
register’. Where the transfer is regulated by a statute, as
in the case of a transfer to a non-resident which is
regulated by the Foreign Exchange Regulation Act, the
permission, if any, prescribed by the statute must be
obtained. In the absence of the permission, the transfer
will not clothe the transferee with the right to ‘get on the
register’ unless and until the requisite permission is
obtained. A transferee who has the right to get on the
register, where no permission is required or where
permission has been obtained, may ash the company to
register the transfer and the company who is so asked to
register the transfer of shares may not refuse to register
the transfer except for a bona fide reason, neither
arbitrarily nor for any collateral purpose. The paramount
consideration is the interest of the company and the general
interest of the shareholder. On the other hand, where, for
instance, the requisite permission under the FERA is not
obtained, it is open to the company and, indeed, it is bound
to refuse to register the transfer of shares of an Indian
company in favour of a non-resident. But once permission is
obtained, whether before or after the purchase of the
shares, the company cannot, thereafter, refuse to register
the transfer of shares.
998
Nor is it open to the company or any other authority or
individual to take upon itself or himself, thereafter, the
task of deciding whether the permission was rightly granted
by the Reserve Bank of India. The provisions of the Foreign
Exchange Regulation Act are so structured and woven as to
make it clear that it is for the Reserve Bank of India alone
to consider whether the requirements of the provisions of
the Foreign Exchange Regulation Act and the various rules,
directions and orders from time to time have been fulfilled
and whether permission should be granted or not. The
consequences of noncompliance with the provisions of the Act
and the rules, orders and directions issued under the Act
are mentioned in secs. 48, 50, 56 and 63 of the Act. There
is no provision of the Act which enables an individual or
authority functioning outside the Act to determine for his
own or its own purpose whether the Reserve Bank was right or
wrong in granting permission under sec. 29(1) of the Act. As
we said earlier, under the scheme of the Act, it is the
Reserve Bank of India that is constituted and entrusted with
the task of regulating and conserving foreign exchange. If
one may use such an expression, it is the ‘custodian-
general’ of foreign exchange. The task of enforcement is
left to the Directorate of Enforcement, but it is the
Reserve Bank of India and the Reserve Bank of India alone
that has to decide whether permission may or may not be
granted under sec. 29(1) of the Act. The Act makes it its
exclusive privilege and function. No other authority is
vested with any power nor may it assume to itself the power
to decide the question whether permission may or may not be
granted or whether it ought or ought not to have been
granted. The question may not be permitted to be raised
either directly or collaterally. We do not, however, rule
out the limited class of cases where the grant of permission
by the Reserve Bank of India may be questioned, by an
interested party in a proceeding under Art. 226 of the
Constitution, on the ground that it was mala fide or that
there was no application of the mind or that it was opposed
to the national interest as contemplated by the Act, being
in contravention of the provisions of the Act and the rules,
orders and directions issued under the Act. Once permission
is granted by the Reserve Bank of India, ordinarily it is
not open to anyone to go behind the permission and seek to
question it. It is certainly not open to a company whose
shares have been purchased by a non-resident company to
refuse to register the shares even after permission is
obtained from the Reserve Bank of India on the ground that
permission ought not to have been granted under the FERA. It
is necessary to remind ourselves that the permission
contemplated by sec. 29(1) of the Foreign Exchange
Regulation Act is neither intended to nor does
999
it impinge in any manner or any legal right of the company
or any of its shareholders. Conversely neither the company
nor any of its shareholders is clothed with any special
right to question any such permission.
Much was said before us about the mala fides of the
Government of India and the Reserve Bank of India and the
non-application of mind by the Reserve Bank of India which
was said to amount to legal Mala fides. Though Shri Nariman
learned counsel for the company, now and then, in the course
of his argument mentioned that Shri Swraj Paul had been
issuing press statements which were generally followed up,
according to him, by some action or the other by the
Government or the Reserve Bank, he properly refrained from
reading to us the press statements said to have been made by
Shri Swraj Paul. however, the gist of some of the press
statements and releases of Shri Swraj Paul has been included
in the pleadings which were read out to us. It may be that
Shri Swraj Paul was ever ready and anxious to issue press
releases for his own ends either because he had an inkling
or made a guess of what course of action the Government or
the Reserve Bank was likely to pursue or because he, like
every interested party, was interested in making statements
which may find some respective ears some where. There is
nothing whatever to indicate that Shri Swraj Paul had any
access to anyone who was in a position to take a decision in
the matter or influence a decision in the matter. We do not
think we can attach any importance to the vainglorious and
grandiloquent press statements and releases made by Shri
Swraj Paul. They deserve to be ignored as the over-rated
statements of a person, who rated himself very high. The
most important circumstance on which reliance was placed on
behalf of the company in support of the argument relating to
mala fides was the ‘turn-about of the attitude of the
Reserve Bank of India in the matter. It was said that in the
beginning, the Reserve Bank of India had serious
reservations on the question whether indirect purchase of
shares by non-residents of Indian nationality/origin was
permissible under the original scheme. Later after the
Governor of the Reserve Bank had discussions with the
Finance Secretary, Finance Minister and the Personal
Secretary to the Prime Minister the Reserve Bank of India
changed its attitude and issued the impugned circular and
the permission. Our attention was particularly invited to
the letter dated June 1, 1983 from the Reserve Bank of India
to the Government of India in which the Reserve Bank
appeared to take the view that the scheme did not
contemplate indirect
1000
investment by non-resident individuals of Indian nationality
origin and proposed to reject the application of all the 13
overseas companies, but sought the confirmation of the
Government of India, (ii) the reply dated September 17, 1983
of the Government of India to the Reserve Bank of India and
(iii) the endorsement made on the letter dated 17.9.83 by
the Governor or the Reserve Bank of India. We have already
referred to the contents of (i) and (ii), the two letters in
the proceeding paragraphs. We have also extracted the
endorsement of Dr. Man Mohan Singh in full. The inference
sought to be drawn from (i), (ii) and (iii) is that though
the Reserve Bank of India had expressed itself strongly in
(i), it was under the pressure of the Finance Secretary,
Finance Minister and the Personal Secretary to the Prime
Minister that the Governor of the Reserve Bank of India
finally agreed to adopt the line suggested by the Government
in its letter dated 17.9.83 and that the decision of the
Reserve Bank of India was not that of a free agent. The
Circular issued by the Reserve Bank of India and the
permission granted by it, it was suggested, were so issued
and granted under the pressure of the Government of India.
We do not think that we will be justified in drawing any
such inference. It would be wholly unfair and uncharitable
to Dr. Man Mohan Singh. An enormous amount of foreign
exchange vital to the economy of the country was involved.
Though the Reserve Bank of India appeared to have taken, in
the beginning, a certain position in the matter, it thought
it necessary to consult and seek the advice of the
Government of India in the matter. mere were high level
discussions obviously because of the amount of foreign
exchange and the question of policy involved and the matter
had also attracted considerable attention from the Press as
the public. If after high level discussions the Reserve Bank
of India changed its views, it would be unreasonable and
impermissible to hold that it was done under pressure. Every
question of this nature is bound to have different facets
which present themselves in different lights when viewed
from different angles. If after full discussion with those
in the higher rungs of the Government who are concerned with
policy-making, the Reserve Bank of India changed its former
negative attitude to a ¯ re positive attitude in the
interests of the economy of the country, one fails to see
how its decision can be said to be the result of any
pressure.
It was argued that, from time to time, the company had
addressed several communications to the Reserve Bank of
India drawing the latter’s attention to several
irregularities and illegalities, which it claimed, had been
committed by Mr. Swraj
1001
Paul and the Caparo Group of Companies, but to no avail, as
the Reserve Bank failed to respond and make any enquiry into
the matter. It was said that the Reserve Bank of India was
guilty of total non-application of the mind and, therefore,
mala fides in law could be attributed to it. We are unable
to agree with this submission. Merely because the Reserve
Bank of India did not choose to send a reply to the
communications received from the company, it did not follow
that the Reserve Bank of India was not acting bonafide.
While we may say that the Reserve Bank would have done well
to acknowledge the communications received from the company
and to reply to them, we are unable to infer malafide from
their failure to do so. It was not as if the Reserve Bank
ignored the complaints of the company. They did enquire into
the matter in their own way. As already mentioned by us
during the course of the narration of events, the Reserve
Bank pursued its enquiry by seeking information from the
Punjab National Bank, who was an authorised dealer appointed
under the provisions of the Foreign Exchange Regulation Act
and who, therefore, could be expected to supply the Reserve
Bank with full and accurate information. At that stage,
there was nothing to doubt the bona fides and the ineptitude
of the Punjab National Bank. The company also in its several
communications to the Reserve Bank did not make any
allegations against the Punjab National Bank. In those
circumstances, if the Reserve Bank thought fit to seek
information from the Punjab National Bank and proceeded to
act on the information obtained from the Punjab National
Bank, the Reserve Bank cannot be accused to non-application
of mind. The Reserve Bank was entitled to rely on the Punjab
National Bank and the information supplied by that bank as
the bank held a statutory position under the Foreign
Exchange Regulation Act. It may be that the Punjab National
Bank did not act with that degree of competence and
diligence as should be expected from it, but at that stage,
there was nothing to provoke any suspicion in the mind of
the Reserve Bank. We will revert to the part played by the
Punjab National Bank presently, but there is no reason to
change the Reserve Bank with want of bona fides and non-
application of mind merely because it placed reliance upon
the Punjab National Bank and the information supplied by it
although with the aid of some of the material now brought
out during the hearing, we perceive that the Reserve Bank
could have acted with greater wisdom than to rely on the
Punjab National Bank. But that would really be speaking with
‘hind-sight’.
Earlier we referred to the failure of the Punjab
National Bank to inform the Reserve Bank, as it was bound to
do, about the remittance of L 1,30,000 received from Mr.
Swraj Paul by their
1002
Parliament Street Branch. It was a sorry confession to hear
from the Punjab National Bank that their ECE House Branch
which was monitoring the NRE Accounts and the purchase of
shares by the Caparo Group of Companies was not aware of the
remittance received by the Parliament Street Branch. We are
now told that this amount of L 1,30,000 was also utilised
for purchasing shares for the Caparo Group of Companies. If
that was so, the ECE House Branch should have known about
it. Otherwise, one wonders what was the monitoring that was
done by the ECE House Branch, if it was not even aware that
a large remittance of L 1,30,000 received by their
Parliament House Branch had been utilised for purchase of
shares for the Caparo Group of Companies. If the amount was
not utilised for the purchase of shares for the Caparo Group
of Companies, it must necessarily follow that locally
available funds and not foreign remittances must have been
utilised for purchasing some of the shares. The fact that
this large sum had been remitted by Shri Swraj Paul and
received by the Punjab National Bank was never brought to
the notice of the Reserve Bank of India who was apparently
kept in the dark about it. We consider this a serious matter
which requires further probe by the Reserve Bank. We find
that the entire conduct of the Punjab National Bank in this
affair has been most irresponsible. They had been appointed
as authorised dealers under the Foreign Exchange Regulation
Act and by virtue of such appointment great confidence had
been reposed in them for the purpose of regulating the flow
and conserving the foreign exchange and protecting the
national interest. The Portfolio Investment Scheme provided
that the banks which were designated as authorised dealers
could purchase shares on behalf of their non-resident
customers of Indian nationality/origin through a stock
exchange. The applications of the foreign investors for
permission to invest in shares of Indian companies were in
fact to be made through the designated banks. By paragraph
11 of Circular No. 9 dated April 14, 1982 the designated
banks were required to maintain separately a proper record
of the investment made in shares, with and without
repatriation benefits, on account of the investor, showing
all relevant particulars including the numbers of share
certificates and distinctive numbers of shares. They were
required to keep a systematic and uptodate record of the
shares purchased by them for each investor through the stock
exchange so that they would be able to ensure that the
purchase of shares in any one company by a single investor
would not exceed Rs. One lakh in face value of the company.
Again by circular No. 10 of April 22, 1982, the authorised
dealer (designated bank) was required to obtain from the
investing overseas companies a certificate from an
auditor/chartered accountant/certified public
1003
accountant in form OAC. The certificate was to be obtained
by the authorised dealer every year. When by circular No. 12
of May 16, 1983, an overall ceiling of 5 per cent of the
total paid-up equity capital of the company was imposed, it
was prescribed, for the purpose of monitoring the ceiling of
5 per cent, that authorised dealers who were permitted to
purchase shares under the Portfolio Investment Scheme on
behalf of the eligible non-resident investors should
nominate a link office in Bombay for the purpose of
coordinating the purchases and sales of equity shares made
by their designated branches on a daily basis and notify the
same to the Controller, Control Exchange Department, Reserve
Bank of India. The link officers were required to submit a
consolidated statement of the total purchases and sales of
equity shares Lade by the designated branches in the
prescribed form. The daily statements were to be submitted
to the Controller positively on the succeeding day. We may
straight away say that the Punjab National Bank, apart from
receiving the remittances from the Caparo Group Limited and
passing on the amounts to the stock brokers, Rajaram Bhasin
& Co. did nothing whatsoever to discharge their prescribed
duties as authorised dealers. It is now admitted that they
did not give any instructions to Rajaram Bhasin & Co.
regarding the purchase of shares, that they never maintained
any systematic, uptodate and proper record of the
investments made in shares and that they did not submit
daily statements of purchases and sales of shares to the
Controller. Of course, in the beginning, they submitted the
applications of the Caparo Group of Companies to the Reserve
Bank for permission to purchase shares in Indian Companies.
That was on the 4th and the 12th of March, 1983. Thereafter,
they wrote to the Reserve Bank on April 23, 19&3 reminding
the latter about the applications of their customers for
permission end informing them about the receipt of four
remittances on 9.3.1983, 12.4.1983, 13.4.1983 and 23.3.1983.
They also mentioned that investment operations were being
conducted through Raja Ram Bhasin & Co. What shares, how
many, and for what amount, these details were not mentioned,
not even the total number of shares purchased and the amount
expended till then. Therefore, in answer to a letter from
the Reserve Bank, they wrote on May 6, 1983 that they had
been advised that Mr. Swraj Paul and family members hold
61.6 per cent of share capital of Caparo Group Limited and
that Caparo Group hold 100 per cent of share capital of the
remaining companies except Caparo Properties in which the
holding was 98 per cent. In this letter, it was expressly
stated “As regards details of shares of Indian Companies
purchased by or on behalf of said non-resident clients, they
have advised us that the same would be supplied when the
purchases were complete.” This statement appears to us
1004
to be in complete breach of the duties of the authorised
dealer under the Portfolio Investment Scheme. The letter
shows that not only the sales were not put through by the
authorised dealers, the authorised dealers were not even
aware of the transactions that had taken place till then,
though we are now told that all the shares had been
purchased by April 28, 1983. It was only on 31.5.1983 that
the Punjab National Bank sent a telegram to the Reserve Bank
of India that they had been advised by the brokers that up
to 28.4.83, 75,000 equity shares of Escorts Limited had been
purchased on behalf of and for the benefit of each of the
thirteen overseas companies. The Reserve Bank sought
information by their letter dated 11.6.1983 of the purchases
of shares made for the benefit of the overseas companies,
(i) upto December, 1982; (ii) from 1.1.83 to 28.2.83; (iii)
from 1.3.83 to 2.5.83; and (iv) after 2.5.83. Details of
purchases including the total number and face value of the
shares were required to be given. The Punjab National Bank
replied on 23.6.83 to the effect that their brokers had
informed them by their letter dated 22.6.83 that 75,000
shares of Escorts Limited had been purchased for each of the
thirteen companies during the period from 1.3.83 to 2.5.83,
but none were purchased before or after. It was also stated
that the brokers had confirmed that no other purchases had
been made besides these shares. This letter again discloses
how casual they were in the discharge of their duties as
authorised dealers. Not only did they not maintain upto date
and proper record of the purchases made on behalf of each of
the companies, not only did they not submit daily statements
to the Controller, they were not even aware of the
transactions which had taken place but were solely dependant
on the information supplied to them once in a way by Raja
Ram Bhasin & Co. Though the Reserve Bank did make some
enquiries from the Punjab National Bank, the Reserve Bank
did not pursue the matter as vigorously as they might have
done but, apparently, preferred to rely upon the Punjab
National Bank probably for the reason that they were
authorised dealers under the Foreign Exchange Regulation Act
and could be expected to have been doing everything properly
and in a manner authorised and contemplated by the Act and
the scheme. It has to be remembered that Escorts Limited
also had made no complaint regarding the Punjab National
Bank. It is only now it has come to light that the Punjab
National Bank acted no better than a mere dumb, dummy and
signally failed to discharge the functions entrusted to them
under the Act and the scheme.
1005
The result of the dereliction of duty on the part of
the Punjab National Bank is that there had been no proper
monitoring of the purchase of shares by the thirteen Caparo
Group of Companies. While we are unable to hold that the
Reserve Bank of India did not act bona fide or apply its
mind to the relevant facts and circumstances which were
required to be considered by it before granting permission,
because, it did bona fide apply its mind to whatever
material was then available to it and supplied to it by the
Punjab National Bank, we must hold on the material now
available to US that their implicit reliance on the Punjab
National bank was entirely misplaced. That further action
must be taken on that finding is a question which we have to
consider. We will do so later after considerating the other
questions argued before us.
Shri Nariman contended that there were several
circumstances in the record which established that a large
number of shares were purchased with funds which were made
available locally and not funds remitted from abroad and
also that the shares were purchased subsequent to 2.5.83.
The circumstances were : (i) the purchase of shares
commenced before the remittances started; (ii) the price at
which the shares were available in the market showed that
funds in excess of what was remitted must have been utilised
for purchasing the shares and this could only have been with
rupee funds; (iii) the company was able to obtain two
brokers’ notes from two of the sellers’ brokers which showed
that the sales were made long subsequent to 2.5.83 and (iv)
out of the total number of shares purchased on behalf of the
thirteen companies, 4,62,000 shares only were lodged with
the company on 14.5.83 for registering the transfers.
3,68,463 shares were lodged on 19.8.83, that is 3-1/2 months
after 2.5.83, which was the cut-off date fixed for the
imposition of the ceiling of 5 per cent. 1,44,200 shares
were not lodged at all with the company. The failure to
lodge the shares within a reasonable period at 28.4.83 which
was supposed to be the date by which all the purchases had
been made indicated that the purchases must have been made
long afterwards. Everyone of these circumstances is capable
of some explanation, adequate or not, we do not have the
necessary material to say on the record now before us. The
question will involve a probe into individual purchases and
the adduction of evidence. That would be beyond the scope of
the writ petition in the High Court. It is to be remembered
that the high Court refused to issue a rule nisi in regard
to prayer (d), obviously as it was thought that the court
exercising jurisdiction under Article 226 of the
Constitution should not explore the evidence
1006
to determine the dates of the various transactions of
purchase of shares and whether they were purchased with
foreign exchange or locally available funds. We consider
that it is really a matter for the consideration of the
final monitoring authority, namely, the Reserve Bank of
India. We will later indicate what we propose to do about
this aspect of the matter.
It was submitted that the thirteen Caparo Companies
were thirteen companies in name only; they were but one and
that one was an individual, Mr. Swraj Paul. One had only to
pierce the corporate veil to discover Mr. Swraj Paul lurking
behind. It was submitted that thirteen applications were
made on behalf of thirteen companies in order to circumvent
the scheme which prescribed a ceiling of one per cent on
behalf of each non-resident of Indian nationality or origin
of each company 60 per cent of whose shares were owned by
non-residents of Indian nationality/origin. Our attention
was drawn to the picturesque pronouncement of Lord Denning
M.R. in Wallersteiner v. Moir 1974 3 All E.R. 217, and the
decisions of this court in Tata Engineering and Locomotive
Company Ltd. v. State of Bihar 1964 6 S.C.R. 885, me
Commissioner of Income Tax v. Meenakshi Mills A.I.R. 1967
S.C. 819, and Workmen v. Associated Rubber Ltd. 1985 2 Scale
321. While it is firmly established ever since Salomon v.
A. Saloman & Co. Limited 1897 A.C. 22, was decided that a
company has an independent and legal personality distinct
from the individuals who are its members, it has since been
held that the corporate veil may be lifted, the corporate
personality may be ignored and the individual members
recognised for who they are in certain exceptional
circumstances. Pennington in his Company Law (Fourth
Edition) states :
“Four inroads have been made by the law on the
principle of the separate legal personality of
companies. By far the most extensive of these has
been made by legislation imposing taxation. The
Government, naturally enough, does not willingly
suffer schemes for the avoidance of taxation which
depend for their success on the employment of the
principle of separate legal personality, and in
fact legislation has gone so far that in certain
circumstances taxation can be heavier if companies
are employed by the tax-payer in an attempt to
minimise his tax liability than if he uses other
means to give effect to his wishes. Taxation of
Companies is a complex subject, and is outside the
scope of this book. The reader who wishes
1007
to pursue the subject is referred to the many
standard text books on Corporation Tax, Income
Tax, Capital Gains Tax and Capital Transfer Tax.
“The other inroads on the principle of separate
corporate personality have been made by two
section of the Companies Act, 1948, by judicial
disregard of the principle where the protection of
public interests is of paramount importance, or
where the company has been formed to evade
obligations imposed by the law, and by the courts
implying in certain cases that a company is an
agent or trustee for its members.”
In Palmer’s Company Law (Twenty-third Edition), the present
position in England is stated and the occasions when the
corporate veil may be lifted have been enumerated and
classified into fourteen categories. Similarly in Gower’s
Company Law (Fourth Edition), a chapter is devoted to
‘lifting the veil’ and the various occasions when that may
be done are discussed. In Tata Engineering and Locomotives
Co. Ltd. (supra), the company wanted the corporate veil to
be lifted 80 as to sustain the maintainability of the
petition, filed by the company under Art. 32 of the
Constitution, by treating it as one filed by the
shareholders of the company. The request of the company was
turned down on the ground that it was not possible to treat
the company as a citizen for the purposes of Art. 19. In
Commissioner of Income Tax v. Meenakshi Mills (supra), the
corporate veil was lifted and evasion of income tax
prevented by paying regard to the economic realities behind
the legal facade. In Workmen v. Association Rubber Industry
(supra), resort was had to the principle of lifting the veil
to prevent devices to avoid welfare legislation. It was
emphasised that regard must be had to substance and not the
form of a transaction. Generally and broadly speaking, we
may say that the corporate veil may be lifted where a
statute itself contemplates lifting the veil, or fraud or
improper conduct is intended to be prevented, or a taxing
statute or a beneficent statute is sought to be evaded or
where associated companies are inextricably connected as to
be, in reality, part of one concern. It is neither necessary
nor desirable to enumerate the classes of cases where
lifting the veil is permissible, since that must necessarily
depend on the relevant statutory or other provisions, the
object sought to be achieved, the impugned conduct, the
involvement of the element of the public interest, the
effect on parties who may be affected etc.
1008
In the present case, we do not think ‘lifting the veil’
is necessary or permissible beyond the essential requirement
of the Foreign Exchange Regulation Act and the Portfolio
Investment Scheme. We have noticed that the object of the
Act is to conserve and regulate the flow of foreign exchange
and the object of the scheme is to attract non-resident
investors of Indian nationality or origin to invest in
shares of Indian companies. In the case of individuals,
there can be no difficulty in identifying their nationality
or origin. In the case of companies and other legal
personalities, there can be no question of nationality or
ethnicity of such company or legal personality. Who of such
non-resident companies or legal personalities may then be
permitted to invest in shares of Indian companies? The
answer is furnished by the scheme itself which provides for
‘lifting the corporate veil’ to find out if at least 60 per
cent of the shares are held by non-residents of Indian
nationality or origin. Lifting the veil is necessary to
discover the nationality or origin of the shareholders and
not to find out the individual identity of each of the
shareholders. The corporate veil may be lifted to that
extent only and no more.
The particulars of the scheme have already been
extracted by us. First, a ceiling of one per cent of the
equity capital of the Indian company was imposed on the
purchase of its shares by any single foreign investor. The
obvious object of the imposition of the ceiling was the
prevention of destabilisation of the Indian company by
foreign investors purchasing large blocks of shares and
attempting to take over the Indian company. We have already
explained the futility of the imposition of the one per cent
ceiling since that would not effectively prevent a group of
foreign investors of Indian origin from investing in shares
of the Indian company by each of them purchasing one per
cent of the shares. We also pointed out that different
Foreign companies in which several different groups of
resident Indians with one individual common to all together
held more than 60 per cent of the shares could not be denied
the facility of investing in shares of Indian companies
merely because the Foreign companies were dominated by the
single common non-resident individual. That would be unfair
to the other non-resident Indian shareholders of the Foreign
companies who would otherwise be entitled to the benefit of
investment in Indian companies, via the Foreign companies in
which they held shares. Clearly, it was the realisation of
the futility of the one per cent limit that led to the
imposition of the five per cent aggregate limit. The five
per cent aggregate limit would effectively prevent any
single foreign
1009
investor or a combination of foreign investors from
attempting to destabilise Indian companies by purchasing
large blocks of shares. If this is borne in mind it will be
clear that the lifting of the corporate veil is necessary
and permissible in the present case, only to find out the
nationality or origin of the shareholders of the Foreign
companies seeking to invest in shares of Indian companies
and not to explore the individual identity of the
shareholders. We do not think that merely because more than
60 per cent of the shares of the several Foreign companies
who have applied for permission are held by a trust of which
Mr. Swraj Paul and the members of his family are the
beneficiaries, the companies can be denied the facility of
investing in Indian companies. In fact, if each of the six
beneficiaries of the trust had separately applied for
permission to purchase shares of Indian companies, they
could not have been denied such permission. It cannot,
therefore, be said that there has been any violation of the
Portfolio Investment Scheme merely on that account or that
the permission granted is illegal.
We now turn to the case of Escorts Limited against the
Life Insurance Corporation of India. While narrating the
sequence of events, we referred to the impleading of the
Life Insurance Corporation of India as a respondent to the
Writ Petition a few months after it was originally filed.
The primary allegation which led to the impleading of the
Life Insurance Corporation of India was that there was
confabulation between the Government of India, Reserve Bank
of India and the Life Insurance Corporation to pressurise
the Escorts Limited to register the transfer of shares in
favour of the Caparo Group of Companies. The inference of
collusion and conspiracy was sought to be drawn from the
sequence of certain events which we will mention
immediately. A few days before the filing of the writ
petition there was the report of a speech of the Finance
Minister, to which we have earlier made a reference, to the
effect that he has in his possession an effective weapon to
end the uncertainty. After the writ petition was filed and
before it was admitted, there was a meeting of the Board of
Directors of Escorts Limited on 6th January, 1984 at which
Mr. D.N. Davar, claiming to speak for the financial
institutions holding 52 per cent of the shares of Escorts
Limited, circulated three notes and moved resolutions the
purport of which was that the writ petition should be
withdrawn as it had been filed without consulting the
financial institutions and that the matter should be placed
before the Board for careful consideration of all aspects of
the case and that the cheques sent in part payment of
certain institutions loans should be recalled as the
1010
question was still under consideration. The resolutions
proposed by Mr. Davar were rejected. On 9th January, 1984
Mr. Nanda wrote to Mr. Punja informing him about the events
that took place at the Board meeting on 6.1.1984 and
pointing out that in the last 20 years, there had not been a
single occasion on which the financial institutions had even
a single word to say against any decision taken or proposed
by the Management. Complete confidence was reposed in each
other in the past by the management of Escorts Limited and
the Financial Institutions. Mr. Nanda explained the position
of the Management of Escorts Limited in regard to pre-
payment of loans of financial Institutions and the filing of
the writ petition. Mr. Nanda pointed out that though the
Reserve Bank had granted permission to the Caparo Group of
Companies to purchase shares, it had not condoned any of the
illegalities that had already been committed and it was
strange that the financial institutions should continue to
press the company to register the shares. It was also stated
by Mr. Nanda that he had repeatedly drawn the attention of
Mr. Punja and others to the fact that funds far in excess of
those remitted by the Caparo Group of Companies had been
invested in the purchase of shares and, therefore,
repatriation benefits in foreign exchange could not be
allowed to such shares by registering their transfer. Mr.
Nanda complained that he was forced to believe that the
institutions were adopting this attitude against the company
because of external pressures brought upon the institutions
as a result of the non-registration of the shares purchased
by Mr. Swraj Paul’s companies. There was no reply to this
letter by Mr. Punja. But on 13.1.1984, Mr. Punja informed
Escorts that the financial institutions had decided to
accept the proposal of Escorts Limited for pre-payment of
the outstanding loan. At this stage, that is on 7.1.19&4, a
meeting of the Board of the Life Insurance Corporation was
held and it was resolved that a requisition should be served
on Escorts Limited to convene an extraordinary general
meeting to pass resolutions for the removal of the nine non-
Executive Directors and for the appointment as new
Directors, officers and nominees of the financial
institutions, in their place. This subject was not one of
the matters listed in the agenda for the meeting of the
Board of Life Insurance Corporation. The resolution was
considered after all the officers of the Corporation, except
one, left the meeting. The minutes of the meeting did not
record any discussion. But the minutes do show that Mr.
Punja of the I.D.B.I. was present in his capacity as a
Director of the Life Insurance Corporation. It was
thereafter that the Life Insurance Corporation served a
requisition on Escorts Limited to call an extraordinary
general meeting of the company.
1011
What does the sequence of events go to show? It shows
that the financial institutions which held 52% of the shares
of the company and, therefore, had a very big stake in its
working and future were aggrieved that the management did
not even choose to consult them or inform them that a writ
petition was proposed to be filed which would launch and
involve the company in difficult and expensive litigation
against the Government and Reserve Bank of India. The
financial institutions must have been struck by the
duplicity of Mr. Nanda who was holding discussions with them
while he was simultaneously launching the company of which
they were the majority shareholders into a possibly trouble
some litigation without even informing them. The financial
institutions were instrumentalities of the State and so was
the Reserve Bank and it must have been thought unwise to
launch into such a litigation. The institutions were,
therefore, anxious to withdraw the writ petition and discuss
the matter further. As the Management was not agreeable to
this course, the Life Insurance Corporation thought that it
had no option but to seek a removal of the non-Executive
Directors so as to enable the new Board to consider the
question whether to reverse the decision to pursue the
litigation. Evidently the financial institutions wanted to
avoid a confrontation with the Government and the Reserve
Bank and adopt a reconciliatory approach. At the same time
the resolution of the Life Insurance Corporation did not
seek removal of the Executive Directors, obviously because
they did not intend to disturb the management of the
company. It is, therefore, difficult to accuse the Life
Insurance Corporation of India of having acted mala fide in
seeking to remove the nine non-Executive Directors and to,
replace them by representatives of the financial
institutions. No aspersion was cast against the Directors
proposed to be removed. It was the only way by which the
policy which had been adopted by the Board in launching into
a litigation could be reconsidered and reversed, if
necessary. It was a wholly democratic process. A minority of
shareholders in the saddle of power could not be allowed to
pursue a policy of venturing into a litigation to which the
majority of the share-holders were opposed. That is not how
corporate democracy may function.
A Company is, in some respects, an institution like as
State functioning under its ‘basis Constitution’ consisting
of the Companies Act and the memorandum of Association.
Carrying the analogy of constitutional law a little further,
Gower describes “the members in general meeting” and the
directorate as the two primary organs of a company and
compares them with the legis-
1012
lative and the executive organs of a Parliamentary democracy
where legislative sovereignty rests with Parliament, while
administration is left to the Executive Government, subject
to a measure of control by Parliament through its power to
force a change of Government. Like the Government, the
Directors will be answerable to the ‘Parliament’ constituted
by the general meeting. But in practice (again like the
Government), they will exercise as much control over the
Parliament as that exercises over them. Although it would be
constitutionally possible for the company in general meeting
to exercise all the powers of the company, it clearly would
not be practicable (except in the case of one or two – man –
companies) for day-to-day administration to be undertaken by
such a cumbersome piece of machinery. So the modern practice
is to confer on the Directors the right to exercise all the
company’s powers except such as general law expressly
provides must be exercised in general meeting. Gower’s
Principles of Modern Company Law. Of course, powers which
are strictly legislative are not affected by the conferment
of powers on the Directors as section 31 of the Companies
Act provides that an alteration of an article would require
a special resolution of the company in general meeting. But
a perusal of the provisions of the Companies Act itself
makes it clear that in many ways the position of the
directorate vis-a-vis the company is more powerful than that
of the Government vis-a-vis the Parliament. The strict
theory of Parliamentary sovereignty would not apply by
analogy to a company since under the Companies Act, there
are many powers exercisable by the Directors with which the
members in general meeting cannot interfere. The most they
can do is to dismiss the Directorate and appoint others in
their place, or alter the articles so as to restrict the
powers of the Directors for the future. Gower himself
recognises that the analogy of the legislature and the
executive in relation to the members in general meeting and
the Directors of a Company is an over-simplification and
states “to some extent a more exact analogy would be the
division of powers between the Federal and the State
Legislature under a Federal Constitution.” As already
noticed, the only effective way the members in general
meeting can exercise their control over the Directorate in a
democratic manner is to alter the articles so as to restrict
the powers of the Directors for the future or to dismiss the
Directorate and appoint others in their place. The holders
of the majority of the stock of a corporation have the power
to appoint, by election, Directors of their choice and the
power to regulate them by a resolution for their removal.
And, an injunction cannot be granted to restrain the holding
of a general meeting to remove a director and appoint
another.
1013
In Shaw & Sons (Salford) Ltd. v. Shaw 1935 2 K.B. 113,
Greer, L.J. expressed :
“The only way in which the general body of the
shareholders can control-the exercise of powers
vested by the articles in the Directors is by
altering the articles or, if opportunity arises
under the articles, by refusing to re-elect the
Directors on whose action they disapproved.”
In Isle of Wight Railway Company v. Tahourdin (1883) 25
Chancery Division 320, Cotton L.J. said :
“Then there is a second object, “To remove (if
deemed necessary or expedient) any of the present
directors, and to elect directors to fill any
vacancy in the board.” The learned Judge below
thought that too indefinite, but in my opinion a
notice to remove “any of the present directors”
would justify a resolution for removing all who
are directors at the present time; any” would
involve “all”. I think that a notice in that form
is quite sufficient for all practical purpose.”
Fry, L.J. said.
“The second objection was, that a requisition to
call a meeting “To remove (if deemed necessary or
expedient) any of the present directors” is too
vague. I think that it is not. It appears to me
that there is a reasonably sufficient
particularity in that statement. It is said that
each director does not know whether he is attacked
or not. The answer is, all the directors know that
they are laid open to attack. I think that any
other form of requisition would have been
embarrassing, because it is obvious that the
meeting might think fit to remove a director or
allow him to remain, according to his behaviour
and demeanour at the meeting with regard to the
proposals made at it.
In the same case considering the question whether an
injunction should be granted to restrain the holding of
general meeting, one of the purposes of the meeting being
the appointment of a committee to reorganise the management
of the company, Cotton L.J. Said :
1014
“It is a very strong thing indeed to prevent
shareholders from holding a meeting of the
company, when such a meeting is the only way in
which they can interfere if the majority of them
think that the course taken by the Director, in a
matter intra vires of the Directors, is not for
the benefit of the company.
In Inderwick v. Snell. 42 English Reports 83, the deed
of settlement of a company provided for the removal of any
director “for negligence, misconduct in office or any other
reasonable cause”. Some directors were removed and others
were appointed. The directors who were removed sued for the
injunction to prevent the new directors from acting on the
ground that there was no reasonable cause for their removal.
The Court negatived the claim for judicial review of the
reasons for removal and made the following interesting
observations:-
“The argument for the Plaintiffs rested on the
allegation that the general cause of removal
referred to in the clause being expressed to be
‘reasonable’ prevents the power referred to from
being a power to remove at pleasure arbitrarily or
capriciously, and made it requisite that the
proceeding for exercising the power should be in
its nature judicial, and that the reasonable cause
should be such as a Court of Justice would
consider good and sufficient. If this argument
could be sustained, all proceedings at such
meetings would be subject to the review of the
Courts of Justice, which would have to inquire
whether the cause of removal which was charged was
in their reasonable, whether the charges were bona
fide brought forward, whether they were
substantiated by such evidence as the nature of
the case required, and whether the conclusion was
come to upon a due consideration of the charge and
evidence. But the deed is silent as to these
matters, and the question is whether any such
power of control in the Courts of Justice is to be
inferred from the words “reasonable cause”
contained in the 27th clause; whether the
expression “reasonable clause” contained in such a
deed of a trading partnership can be held to be
such a cause, as upon investigation in a Court of
Justice must be held to be bona fide founded on
sufficient evidence and just; or whether it ought
not to be held to mean such cause as in the
opinion of the
1015
share-holders duly assembled shall be deemed
reasonable. We think the latter is the true
construction and effect of the deed.
In a moral point of view, no doubt every charge of
a cause of removal ought to be made bona fide
substantiated by sufficient evidence, and
determined on a due consideration of the charge
and evidence; and those who act on other
principles may be guilty of a moral offence; they
may be very unjust, and those who (being misled by
the statements made to them, have no doubt a just
right to complain that they have been led to
concur in an unjust act. But the question is,
whether by this deed the shares holders duly
assembled at a general meeting might not, or had
not a right to, remove a director for a cause
which they thought reasonable, without its being
incumbent upon them to prove to this or any other
Court of justice that the charge was true and the
decision just, or that the case was substantiated
after a due consideration of the evidence and
charge. We cannot take upon ourselves to say that
in the case of a trading partnership like this,
this Court has upon such a clause in the deed of
partnership jurisdiction or authority to determine
whether, by the unfounded speech of any supporter
of the charge, the shareholders present may not
have been misled or unduly influenced.
All such meetings are liable to be misled by false
or erroneous statements, and the amount of error
or injustice thereby occasioned can rarely, if
ever, be appreciated. This Court might inquire
whether the meeting was regularly held, and in
cases of fraud clearly proved, might perhaps
interfere with the acts done; but supposing the
meeting to be regularly convened and held the
shareholders assembled at such meeting may
exercise the powers given them by the deed. The
effect of speeches and representations cannot be
estimated, and for those who think themselves
aggrieved by such representations, or think the
conclusion unreasonable, it would seem that the
only remedy is present defence by stating the
truth and demanding time for investigation and
proof, or the calling of another meeting, at which
the whole matter may be re-considered. The
Plaintiff, objecting to this
1016
Meeting and considering it illegal, protested
against it, but abstained from attending and,
therefore, made no answer or defence to, and
required no proof of, the charges made against
them. The adoption of this course was unfortunate,
but toes not afford any grounds for the
interference of this Court.”
Again in Bentley-Stevens v. Jones, 1971 (2) All E.R.
653, it was held that a share holder had a statutory right
to move a resolution to remove a Director and that the court
was not entitled to grant an injunction restraining him from
calling a meeting to consider such a resolution. A proper
remedy of the Director was to apply for a winding-up order
on the ground that it was ‘just and equitable’ for the court
to make such an order. The case of Ebrahimi v. Westbourne
Galleries Ltd., 1972 (2) All E.R. 492, was explained as a
case where a winding-up of order was sought. In the case of
Ebrahimi v. Westbourne Galleries Ltd. (supra), the absolute
right of the general meeting to remove the directors was
recognised and it was pointed out that it would be open to
the Director sought to be removed to ask the Company Court
for an order for winding-up on the ground that it would be
‘just and equitable’ to do so. The House of Lords said,
“My Lords, this is an expulsion case, and I must
briefly justify the application in such case of
the just and equitable clause………………..
The law of companies recognises the right, in many
way, to remove a director from the board. Section
184 of the Companies Act 1948 confers this right
on the company in general meeting whatever the
articles may say. Some articles may prescribed
other methods, for example, a governing director
may have the power to remove (of Re Wondoflex
Textiles Pvt. Ltd.). And quite apart from removal
powers, there are normally provisions for
retirement of directors by rotation so that their
re-election can be opposed and defeated by a
majority, or even by a casting vote. In all these
days a particular director-member may find himself
no longer a director, through removal, or non-re-
election: this situation he must normally accept,
unless he undertakes the burden of providing fraud
or mala fides. The just and equitable provision
nevertheless comes to his assistance if he can
point to, and prove, some special underlying
obligation of his fellow member(s) in good faith,
or confidence, that so long as the business
continues he shall be entitled to management
participation, an obligation so
1017
basic that if broken, the conclusion must be that
the association must be dissolved.
Thus, we see that every shareholder of a company has
the right, subject to statutorily prescribed procedural and
numerical requirements, to call an extraordinary general
meeting in accordance with the provisions of the Companies
Act. He cannot be restrained from calling-a meeting and he
is not bound to disclose the reasons for the resolutions
proposed to be moved at the meeting. hor are the reasons for
the resolutions subject to judicial review. It is true that
under s. 173(2) of the Companies Act, there shall be annexed
to the notice of the meeting a statement setting out all
material facts concerning each item of business to be
transacted at the meeting including, in particular, the
nature of the concern or the interest, if any, therein, of
every director, the managing agent if any, the secretaries
and treasurers, if any, and the manager, if any. This is a
duty cast on the management to disclose, in an explanatory
note, all material facts relating to the resolution coming
up before the general meeting to enable the shareholders to
form a judgment on the business before them. It does not
require the shareholders calling a meeting to disclose the
reasons for the resolutions which they propose to move at
the meeting. The Life Insurance Corporation of India, as a
shareholder of Escorts Limited, has the same right as every
shareholder to call an extraordinary general meeting of the
company for the purpose of moving a resolution to remove
some Directors and appoint others in their place. The Life
Insurance Corporation of India cannot be restrained from
doing so nor is it bound to disclose its reasons its reasons
for moving the resolutions.
It was, however, urged by the learned counsel for the
company that the Life Insurance Corporation was an
instrumentality of the State and was, therefore, debarred by
Art. 14 from acting arbitrarily. It was, therefore, under an
obligation to state to the court its reasons for the
resolution once a rule nisi was issued to it. If it failed
to disclose its reasons to the court, the court would
presume that it had no valid reasons to give and its action
was, therefore, arbitrary. The learned counsel relied on the
decisions of this court in Sukhdev Singh, Maneka Gandhi,
International Airport Authority and Ajay Hasia. The learned
Attorney General, on the other hand, contended that actions
of the State or an instrumentality of the State which do not
properly belong to the field of public law but belong to the
field of private law are not liable to be subjected to
judicial review. He relied on O’Reilly v. Mackman [1982] 3
All E.R. 1124,
1018
Davy v. Spelthonne [1983] 3 All E.R. 278, I Congress del
Partido 1981 2 All E.R. 1064, R. v. East Berkshire Health
Authority [1984] 3 All E.R. 425, and Radha Krishna Aggarwal
and Ors. v. State of Bihar [1977] 3 S.C.R. 249. While we do
find considerable force in the contention of the learned
Attorney General it may not be necessary for us to enter
into any lengthy discussion of the topic, as we shall
presently see. We also desire to warn ourselves against
readily referring to English cases on questions of
Constitutional law, Administrative Law and Public Law as the
law in India in these branches has forged ahead of the law
in England, guided as we are by our Constitution and
uninhibited as we are by the technical rules which have
hampered the development of the English law. While we do not
for a moment doubt that every action of the State or an
instrumentality of the State must be informed by reason and
that, in appropriate cases, actions uninformed by reason may
be questioned as arbitrary in proceedings under Art. 226 or
Art. 32 of the Constitution, we do not construe Art. 14 as a
charter for judicial review of State actions and to call
upon the State to account for its actions in its manifold
activities by stating reasons for such actions.
For example, if the action of the State is political or
sovereign in character, the court will keep away from it.
The court will not debate academic matters or concern itself
with the intricacies of trade and commerce. If the action of
the State is related to contractual obligations or
obligations arising out of the tort, the court may not
ordinarily examine it unless the action has some public law
character attached to it. Broadly speaking, the court will
examine actions of State if they pertain to the public law
domain and refrain from examining them if they pertain to
the private law field. The difficulty will lie in
demarcating the frontier between the public law domain and
the private law field. It is impossible to draw the line
with precision and we do not want to attempt it. The
question must be decided in each case with reference to the
particular action, the activity in which the State or the
instrumentality of the State is engaged when performing the
action, the public law or private law character of the
action and a host of other relevant circumstances. When the
State or an instrumentality of the State ventures into the
corporate world and purchases the shares of a company, it
assumes to itself the ordinary role of a shareholder, and
dons the robes of a shareholder, with all the rights
available to such a shareholder. There is no reason why the
State as a shareholder should be expected to state its
reasons when it seeks to change the management, by a
resolution of the Company like any other shareholder.
1019
In the instant case the reason for the resolution
stares one in the face. The financial institutions who held
the majority of the stock were not only not told by the
management about the filing of the Writ Petition in the High
Court but were deliberately kept in the dark about it. The
matter was not even discussed at a meeting of the directors
before the Writ Petition was filed. It was filed in a
furtive manner even as Mr. Nanda was purporting to hold
discussions with Mr. Punja and others. And that was not all.
Mr. Nanda was also unduly exerting himself in certain
matters to the detriment of the majority shareholders. We
will immediately refer to those matters.
One of the circumstances relied upon to establish the
mala fides of the Life Insurance Corporation of India, a
consideration of which leads us to the conclusion that the
boot was on the other leg, was the attitude taken by the
Life Insurance Corporation of India in regard to (i) the
issue of Equity-Linked-Debentures; (ii) Repayment of loans
to Indian Financial Institutions; and (iii) the proposal for
the merger of Goetze with Escorts. It was argued that the
facts clearly disclosed an attempt on the part of the Life
Insurance Corporation of India to exert pressure on Escorts
Limited. It is impossible to agree with the submission.
In regard to the proposal for the issue of Equity-
Linked-Debentures, the facts are as follows : Escorts
obtained the approval of the Government under the M.R.T.P.
Act to establish a new undertaking to manufacture motor
cycles/scooters. According to Escorts, the proposal for the
issue of Equity-Linked-Debentures was conceived to meet the
cost of the new project. According to the Life Insurance
Corporation, the issue was solely motivated by an anxiety to
reduce the percentage of the holdings of the Life Insurance
Corporation and other financial institutions in the equity
capital of the company. The barest scrutiny of the proposal
as it finally emerged from Escorts Limited is sufficient to
expose the game of Escorts Limited. The proposal, as it
finally emerged from Escorts Limited, was to issue
debentures 17,50,000 Secured Redeemable Debentures of
Rs. 100 each and equity shares of the value of Rs. 17.50
crores divided into 87,50,000 equity shares of Rs. 10 each
for cash at a premium of Rs. 10 per share. It was proposed
that 20 per cent of the new issue would be offered on
preferential basis to existing resident equity share holders
of Escorts Limited and Goetze Limited (in accordance with
amalgamation proposal) subject to maximum allotment of 100
debentures and 500 equity shares to any single shareholder.
The Promoters, Directors and their friends and relatives.
business associates and employees were to be
1020
offered 15 per cent of the new issue on a preferential
basis, but in their case there was to be no ceiling on the
number of shares which might be allotted to any one cf them.
30 per cent of the new issue was to be offered to the
public. having regard to the ceiling of 500 shares proposed
to be imposed in the case of allotment to existing equity
shareholders, the Life Insurance Corporation,
notwithstanding the fact that it owned 30 per cent Of the
shares of Escorts Limited would be entitled to a meagre 500
shares in the new issue. The result would be that its
holding would be reduced from 30 per cent to 18.14 per cent.
The holding of all the financial institutions would be
reduced from 51.62 to 31.21 per cent. Not merely would it
result in the reduction of the percentage of the holding of
the financial institutions in the capital stock of the
company, but it would also result in great financial loss to
the institutions in the following manner: if the existing
shareholders were to be given preferential allotment in the
new issue on the basis of their existing holdings, without
any ceiling, the Life Insurance Corporation and other
financial institutions would be entitled not to the meagre
500 shares each, but to some tons of thousands of shares in
the new issue. Taking the market value of the shares into
account at Rs. 50 per share, the loss to the financial
institutions would be in the neighbourhood of about Rs. 10
crores. We do not think that any financial institution with
the slightest business acumen could possibly accept the
proposal as it finally emerged from Escorts Limited. No man
of ordinary prudence would have accepted the proposal. To
expect the financial institutions to agree to the proposal,
we must say, was sheer audacity on the part of these that
made the proposal. That was evidently the reason why at all
the initial stages, the details of the proposal were never
put to the financial institutions or before the Board of
Directors. It was urged by Shri Nariman that Mr. Davar, who
represented the financial institutions in the Board of
Directors also voted in favour of the proposal at earlier
stages, and, therefore, it must be inferred that the later
change of attitude on the part of the financial institutions
was not bonafide. We are afraid we cannot agree with Mr.
Nariman. The resolution of the Board of Directors merely
accepted in principle the issue of convertible debentures to
raise finances required by the company, subject to the
approval of financial institutions. At that stage no details
of the proposal were placed before the Board and even then
there was the reservation that it was subject to the
approval of the financial institutions. We think that it was
too much for Mr. Nanda and his associates to expect the
financial institutions or for that matter any other
shareholder having large holdings in the company to agree to
the proposal as it finally emerged. We reach the limit when
we hear the complaint of
1021
Mr. Nanda and his associates that the refusal of the
financial institutions to accept their proposal was mala
fide. It is a clear case of an attempt on the part of Mr.
Nanda and his associates to over reach themselves. we do,
not think it is necessary for us to go into any further
details in regard to the Equity-Lined-Debenture issue.
The proposal to merge Goetze with Escorts Limited was
also agreed to in principle in the first instance. However,
the share exchange ratio had apparently not been agreed to
by the financial institutions even at that time. This is
evident from the letter dated 3.12.1983 of Mr. Nanda to Mr.
Nadharna ICICI in which he stated :
“The proposals together with the report of the
Chartered Accountants and the Resolution of the
Board of Directors are with ICICI and IFCI and we
understand that the matter has been discussed in
the Inter-Institutional meeting of the Financial
Institutions. We have been eagerly waiting and
have made several requests to all the financial
institutions to expedite their approval so that
the other processes of the merger including the
permission of the High Court followed by the
Extraordinary Shareholders meeting of both the
Companies may proceed. Yesterday’s meeting with
the Chairman and Senior Executive of the Financial
Institutions, I was informed, for the first time,
that the financial Institutions were still
examining our request for approval they were
primarily concerned about the 53% holding of all
the investing financial institutions (LIC, GIC,
UTI) post merger coming down close to 49 per
cent.”
It is seen from the letter that Mr. Nanda was not proceeding
on the basis that the financial institutions had already
agreed to the proposal for merger, but was in fact awaiting
their approval. When he learnt the reason for the hesitation
of the financial institution to agree to the proposal, he
wrote a letter on 30.12.1983 explaining his views and
requesting the financial institutions to expedite the
approval of the proposal. It is, therefore, futile for Mr.
Nanda to centend that the proposal for merger of Goetze with
Escorts Limited was a lever which the Financial Institutions
were using to exert pressure on him to agree to register the
transfer of shares in favour of the Caparo Group of
Companies. It is difficult to understand why anyone holding
a majority of the equity capital of a company should h allow
himself to be hustled into becoming a minority shareholder.
1022
The proposal for pre-payment of institutional loans,
though finally agreed to by the institutions, was not quite
as straight as claimed by Escorts. In the first place,
Escorts asked for pre-payment of loans by Indian financial
institutions, but not the foreign currency loan. In the
second place, the Cost of pre-payment of institutional loans
was to be met by part of the debenture issue which would
entail payment of interest at the rate of 14 per cent
whereas the institutional loans carried interest at the rate
of 10 per cent only. It certainly could not be said to be in
the interests of the company to pay interest at a higher
rate than that payable to Indian financial institutions.
Obviously the object of pre-payment was to get rid of the
directors who the financial institutions had a right to
nominate. True Escorts offered to appoint Mr. Davar as a
Director even if the financial institutions had no right to
nominate him. But it is one thing to have the right to
nominate a director and quite another thing to the director
on sufferance.
We do not think that it is necessary to discuss these
proposals at greater length than we have done. The
correspondence which passed between the parties and which
has been read to us shows that Mr. Nanda was certainly
trying to hustle the financial institutions into accepting
the proposals.
We have discussed the submission made to us in broad
perspective. We have not referred to the myriad minutiae
which were presented to us, as we consider it unnecessary to
do so and we do not wish to further lengthen an already long
judgment. This does not mean that we have not taken into
account all the little submissions and trifling details
which were brought to our notice.
We may now state our conclusions as follows :
1. The permission of the Reserve Bank contemplated by
the FERA could be ex-post-facto and conditional.
2. The press release (Ex.A) dated 17.9.83, the circular
(Ex.B) dated 19.9.83 and the letter (Ex.C) dated 19.9.83 are
all valid.
3. Under the scheme, any foreign company whose shares
were owned to the extent of more than 63 per cent by persons
of Indian nationality or origin could avail the facility
given by the scheme irrespective of the fact whether the
same group of share holders figured in the different
companies.
1023
4. Where any of the purchases were made subsequent to
2.5.83, they were subject to the 5 per cent ceiling in the
aggregate.
5. The Reserve Bank of India was not guilty of any mala
fides in granting permission to the Caparo Group of
Companies. Nor was it guilty of non-application of mind.
6. No mala fides could be attributed to the Union of
India either.
7. There was a total and signal failure on the part of
the Punjab National bank in the discharge of their duties as
authorised dealers under the FERA and the scheme with the
result that there was no monitoring of the purchases of
shares made on behalf of the Caparo Group of Companies.
8. The allegation of mala fides against the Life
Insurance Corporation of India was baseless.
9. The notice requisitioning a meeting of the Company
the Life Insurance Corporation of India was not liable to be
questioned of any of the grounds on which it was sought to
be questioned in the writ petition.
On our finding that there was no monitoring whatsoever
of the purchase of shares made on behalf of the Caparo Group
of Companies by the Punjab National Bank and on our further
finding that though the Reserve Bank of India was not
actuated by malice and was not guilty of non-application of
mind, the reliance placed by the Reserve Bank of India on
the Punjab National Bank was misplaced in the event, the
Punjab National Bank having totally abandoned its duties as
authorised dealer, it follows that the permission granted by
the Reserve Bank must be reconsidered by the Reserve Bank in
the light of the failure of the Punjab National Bank to
discharge its duties. Therefore, while allowing the appeals
of the Union of India, the Reserve Bank of India and the
Life Insurance Corporation of India and dismissing the
appeal of Escorts Limited and setting aside the judgment of
the High Court, we direct the Reserve Bank of India to make
a full and detailed enquiry into the purchase of shares of
Escorts Limited by the Caparo Group of Companies and
consider afresh the question whether permission ought or
ought not to have been granted. If the Reserve Bank of India
is satisfied that permission ought not to have been granted,
it may cancel the permission already granted and take such
further action as may be necessary under the FERA if it
considers that there has been any infraction
1024
of the FERA or the scheme: if the Reserve Bank of India is
of the view that the permission may be granted subject to
restrictions, it may impose such restrictions and conditions
as it may think fit, in addition to the condition that
either the capital or the profits or both cannot be
repatriated. We further direct Respondents 3 to 17, 20 and
21 (in the Writ Petition), that is the Punjab National Bank,
the thirteen Caparo Group of Companies, Mr. Swraj Paul, M/s
Raja Ram Bhasin and Co. and M/s Bharat Bhushan and Co., to
make available to the Reserve Bank of India each and every
document in their possession pertaining to the remittances
made for the purchase of shares on behalf of thirteen Caparo
Group of Companies and the purchase of shares made on their
behalf. They are also directed to produce every document
which the Reserve Bank of India may require them to produce.
The enquiry by the Reserve Bank should be concluded within
three months from today.
We also direct the Reserve Bank of India to enquire
into the conduct of Punjab National Bank and take such
action as may be necessary including cancellation of the
authorisation granted under sec. 6 of the Foreign Exchange
Regulation Act. In regard to costs, the Union of India, the
Reserve Bank of India and the Life Insurance Corporation of
India are certainly entitled to their costs. We do not see
any reason why the company Escorts Limited should be mulcted
with costs. The litigation was launched by Mr. Nanda and he
should be personally made liable for the costs. We also
think that the litigation has been unnecessarily complicated
by the failure of Mr. Swraj Paul and Raja Ram Bhasin & Co.
to cooperate by appearing before the court. We think that
they should also be liable for a portion of the costs. So
also the Punjab National Bank. The appeals filed by the
Union of India, the Life Insurance Corporation of India and
the Reserve Bank of India are allowed with costs payable as
follows : Three-fifths of the taxed costs in each case will
be payable by Har Prasad Nanda, one-fifth by Swraj Paul and
one-fifth by the Punjab National Bank. The cross appeal
filed by Escorts Limited and Nanda is dismissed with the
costs of the Union of India, the RESERVE Bank of India and
the Life Insurance Corporation of India. The Union of India,
the Reserve Bank of India and the Life Insurance Corporation
of India are entitled to their costs in the High Court,
three-fifths payable by Nanda, one-fifth by Swraj Paul and
one-fifth by Punjab National Bank. In modification of our
order dt. 4.4.85 in C.M.P No. 12832/85, we direct Shri H.P.
Nanda and Rajan Nanda to continue as Managing Directors
until the Board of Directors takes a decision in the matter.
1025

 

 

PETITIONER:
LIFE INSURANCE CORPORATION OF INDIA

Vs.

RESPONDENT:
ESCORTS LTD. & ORS.

DATE OF JUDGMENT19/12/1985

BENCH:
REDDY, O. CHINNAPPA (J)
BENCH:
REDDY, O. CHINNAPPA (J)
VENKATARAMIAH, E.S. (J)
ERADI, V. BALAKRISHNA (J)
MISRA, R.B. (J)
KHALID, V. (J)

CITATION:
1986 AIR 1370 1985 SCR Supl. (3) 909
1986 SCC (1) 264 1985 SCALE (2)1289
CITATOR INFO :
R 1988 SC1737 (66)
E&F 1989 SC1642 (22,26,41)
D 1989 SC1713 (10)
RF 1990 SC 737 (27)
RF 1991 SC1191 (13)
R 1991 SC1420 (25,73)
RF 1992 SC 1 (45)
ACT:
A. Foreign Exchange Regulation Act, 1973, section
29(1)(b) – Whether the Reserve Bank of India had the power
or authority to give “ex-post facto” permission under
section 29(1)(b) of the Act for the purchase of shares in
India by a company not incorporated in India or whether such
permission had necessarily to be previous permission – Words
and Phrases “Permission” meaning of.
B. Corporate democracy, concept of, explained.
C. Company Law – Shares – Nature of the property in
shares – Law relating to transfer of property in shares
under the law and the effect of the provisions of the
Foreign Exchange Regulation Act explained – Companies Act,
1956, sections 2(46), 82, 84, 87, 106, 108(1), 108 (1-A) (a)
and (b), 108 to 108 H, 110, 111(1) & 3, 206, 207, 397, 398,
428, 439 and 475 read with section 27 of the Securities
Contracts (Regulation) Act, Sale of Goods Act, Sections 2
(7), 19, 20 to 24 and Transfer of Property Act, section 6.
D. Companies Act, 1956, sections 291-293 – Position and
nature of discretionary powers of the Directors in a
company.
E. Shares of a company, transfer of – Refusal to
transfer the shares, extent of – Whether the refusal to
transfer the shares by the company even after the permission
was granted by the Reserve Bank under the FERA, proper –
Companies Act, 1956 section 111(1) & (3).
F. Shares, Purchase of by the foreign investor of
Indian nationality/origin – On the facts of the instance
case, whether involved any contravention of Foreign Exchange
Regulation of the Non-Residents’ Investment Scheme.
G. Doctrine of lifting the corporate veil – Investments
by company owned by non-residents of Indian nationality in
accordance with the Foreign Exchange Regulations, the Non-
Residents
910
External Account Rules, 1970, the Portfolio Investment
Scheme, the Exchange Control Manual, Stock Exchange Control
(Regulation) Act, 1956 and its bylaws – Whether the Court
could pierce the veil of the transactions.
H. Shareholders’ right to call extraordinary general
meeting on requisition either to alter the Articles of
Association of removal/change of directors – State and its
instrumentalities being shareholders have the same rights of
an ordinary share-holder – Companies Act, 1956, sections
169, 172, 173(3), 284, – L.I.C. Act, Section 6.
I. Constitution of India, 1950, Articles 14, 19, 32,
226 read with order XXXIX Rule 1 – Whether the Courts can
interfere with the shareholder’s right to call a general
body meeting and grant injunctions – Judicial Review and
Article 14 explained.
J. Construct of statutes enacted in national interest,
explained.
K. English cases, reference to as external aids
permissibility – Forms, whether can control the Act.
L. Exchange Control Manual – Paras 24, 24 A-1 and 28 A-
1 Titled “Introduction to Foreign Investment in India –
Nature of – Whether statutory direction.
M. Foreign Exchange Regulation, 1973 – Grant of
permission by the Reserve Bank of India under the N.R.P.
scheme – Whether can be questioned by the company whose
shares are purchased by N.R.I. in a petition under Article
226 of the Constitution.
N. Rule against retrospectivity, applicability of.
O. Portfolio Investment Scheme by companies and
overseas bodies owned by non-residents of Indian
nationality/origin in accordance with circulars issued from
time to time by the Reserve Bank of India under section
73(3) of FERA and clarifications thereof contained in Press
Release dated 17.9.83 and the circular dated 19.9.83 (both)
issued by the Reserve Bank of India and the letter dated
19.9.83 issued by the Government of India, whether valid.
P. Mala fides, whether the Union of India, the Reserve
Bank of India and the Life Insurance Corporation of India be
said to
911
have acted malafides, in the matter of requisiting general
meeting and in the investment by purchase of shares made by
the Caparo companies, respectively.

 

HEADNOTE:
Indian economy which has to operate under the existing
world economic system needs lots of foreign exchange to meet
its developmental activities. For the purpose of earning,
conserving and building up a reservoir, thereof, and to
improve its proper utilisation Parliament and the executive
government including the Reserve Bank of India have been
taking several steps from time to time under the Foreign
Exchange Regulation Act, 1973 and other allied Acts and
Rules made thereunder. In exercise of the powers conferred
by section 79 of the Foreign Exchange Regulation Act, the
Central Government made Rules called the Non-Resident
External Account Rules, 1970. With a view to earn foreign
exchange by attracting non-resident individuals of Indian
nationality or origin to invest in shares of Indian
companies, the Government of India decided to provide
incentives to such individuals and formulated a “Portfolio
Investment Scheme”. This scheme was announced by the
Government on 27.2.1982 was incorporated in Circular No.9
dated 14.4.1982 of the Reserve Bank of India issued under
section 73(3) of the Foreign Exchange Regulation Act.
Paragraph 4(a) thereof provides that under the liberalised
policy non-residents of Indian nationality or origin will be
permitted to make portfolio investment in shares quoted on
stock exchanges in India with full benefits of repatriation
of capital invested and income earned subject to provisos
therein. This was followed by further circulars No. 10 dated
22.4.1982, No.15 dated 25.8.1982, No.27 dated 10.12.82,
No.12 dated 16.5.1983 and No.18 dt. 19.9.83.
The net result of all the circulars was that non-
resident individuals of Indian nationality/origin as well as
overseas companies, partnership firms, societies, trusts and
other corporate bodies which were owned by or in which the
beneficial interest vested in non-resident individuals of
Indian nationality/origin to the extent of not less than 60
per cent were entitled to invest, on a repatriation basis,
in the shares of Indian companies to the extent of one per
cent of the paid up equity capital of such Indian company
provided that the aggregate of such portfolio investment did
not exceed the ceiling of 5 per cent. It was immaterial
whether the investment was made directly or indirectly. What
was essential was that 60 per cent of the ownership or the
beneficial interest should be in the hands of non-resident
individuals of Indian nationality/origin. Though a
912
limit of one per cent was imposed on the acquisition of
shares by each investor there was no restriction on the
acquisition of shares to the extent of one per cent
separately by each individual member of the same family or
by each individual company of the same family (group) of
companies.
Desiring to take advantage of the Non-Resident
Portfolio Investment Scheme and to invest in the shares of
Escorts Ltd., (an Indian company), thirteen overseas
companies, twelve out of whose shares was owned 100% and the
thirteenth out of whose shares was owned 98 per cent by
Caparo Group Ltd., designated the Punjab National Bank as
their banker (authorised dealer) and M/s. Raja Ram Bhasin &
Co. as their broker for the purpose of such investment.
Their designated bankers M/s Punjab National Bank E.C.E.
Branch informed the Reserve Bank of India through their
letter dated 4.3.1983 that according to OAC & RPC forms
received the Caparo group of companies were incorporated in
England and that 61.6 per cent of the shares thereof are
held by the Swaraj Paul Family Trust, one hundred per cent
of whose beneficiaries are one Swaraj Paul and the members
of his family, all non-resident individuals of Indian origin
and requested the Reserve Bank to accord their approval for
opening Non-Resident External Accounts in the name of each
of thirteen companies for the purpose of “conducting
investment operations in India” through the agency of Raja
Ram Bhasin and Co. Stock Investment Adviser and member of
the Delhi Stock & Share Department Delhi. It was mentioned
in the letters to the Reserve Bank that the proposed
accounts would be “effected” by remittances from abroad
through normal banking channels and credits and debits would
be allowed only in terms of the scheme contained in the
scheme for investment by non-residents. Though a remittance
of $1,30,000 equivalent to Rs.19,63,000 made by Mr. Swaraj
Paul to the Punjab National Bank, Parliament Street Branch
on 28.1.1983 for the purpose of opening on N.R.E. account in
the name of Swaraj Paul, his bankers advised the Reserve
Bank that only four remittances had been received from
Caparo Group Ltd. the holding company on 9.3.83, 12.4.83,
13.4.83 and 23.3.83, of amounts equivalent to
Rs.1,35,36,000, Rs.2,36,59,000, Rs.76,35,000 and
Rs.1,31,38,681.13p.
Payments under the Stock Exchange Rules may be made
within two weeks after the purchases contracted for. M/s.
Raja Ram Bhasin & Co. had, therefore, purchased shares of
Escorts Ltd. worth Rs. 33,40,865 from Mangla & Co. prior to
9.3.83, the date of the first remittance as disclosed by
Punjab National Bank. However, the statements of purchases
of shares made by the said brokers show that even by
14.3.83, shares of Escorts Ltd. worth
913
Rs.3,85,920 had been purchased from Bharat Bhushan & Co. and
shares worth Rs.45,81,677 had been purchased from Mangla &
Co. The brokers had advised the designated bank that out of
75000 shares of Escorts Ltd. purchased upto 28.4.83, 35,560
shares purchased by each of the twelve companies and 35667
shares purchased by the thirteenth company were lodged by
them with Escorts Co. Ltd. in the names of H.C. Bhasin and
Mr. Bharat Bhushan for the purpose of transfer of the shares
in the books of the company. Under byelaw 242 of the Stock
Exchange Regulations which permit the brokers to lodge the
shares in their own names instead of their principals, if
they are unable to complete the formalities before the
closing of the books. In the meanwhile, on 31.5.83, Punjab
National Bank wrote to Escorts Ltd. informing them that the
thirteen companies had been making investments in shares of
Escorts Ltd. in terms of the scheme for Investment by
overseas corporate bodies predominantly owned by non-
residents of Indian nationality/origin to an extent of at
least 60% and that the thirteen overseas companies had
designated them as their banker and M/s Raja Ram Bhasin &
Co. as their brokers for the purpose of investment.
Escorts Ltd., sought detailed information from Punjab
National Bank and the brokers about the names of investors
and also whether the Reserve Bank of India had accorded
permission to them. As there was no response from either of
them, Escorts Ltd. constituted a committee to look into the
question of transfer of shares in their books and according
to its recommendations the Board of Directors passed a
resolution refusing to register the transfer of shares.
Escorts Ltd., although they had already refused to
register the transfer of shares, wrote to the Punjab
National Bank for information on several points as they
desired to make a representations to the Reserve Bank of
India, intervene and assist in the inquiry being conducted
by the Reserve Bank at the behest of the Government of
India. They also wrote several letters to the Reserve Bank
purporting to give information regarding various
irregularities committed in the purchase of shares of their
company by the thirteen foreign companies, suppressing the
fact that they have refused to register the transfer of
shares in their favour.
In accordance with the clarificatory letter dated
17.9.83 from the Government of India, its Press Release of
the same date and its circular No. 18 dated 19.9.83, the
Reserve Bank, by a telex message conveyed to the Punjab
National Bank their
914
permission to release the money remitted by Caparo Group
Ltd. from abroad for making payment against the shares of
DCM and Escorts Ltd. Subsequent to the grant of permission
by the Reserve Bank of India, another attempt was made to
have the transfer of shares registered. The request was
turned down once again by Escorts Ltd. who by their letter
dated 13.10.83 stated that apart from the question of
obtaining the permission of the Reserve Bank of India, the
decision of the Board to refuse to register the shares was
based on other grounds which contained to be valid.
Respondent No.19, therefore, preferred an appeal to the
Central Government under section 111(3) of the Companies
Act.
Escorts Ltd. alleging undue pressure from the financial
institutions like ICICI, IFC, LIC, IDBI and UTI for the
registration of the transfer of shares and explaining the
circumstances and instances commencing from the meeting held
on 18.10.83 onwards upto 29.12.83, filed Writ Petition
No.3068/83 on 29.12.83 under Article 226 of the Constitution
challenging the validity of Circular No.18 dated 19.9.83 and
the Press Release of the same date as arbitrary and
violative of not only Articles 14, 19(1)(c) and 19(1)(g) of
the Constitution, but also the provisions of Foreign
Exchange Regulations, the provisions of Securities Contract
Regulation Act etc.
Subsequent to the filing of the Writ Petition the Life
Insurance Corporation of India who along with other
financial institutions held as many as 52% of the total
number of shares in the company, issued a requisition dated
11.2.84 to the company to hold an extra ordinary general
meeting for the purpose of removing nine of the part-time
Directors of the company and for nominating nine others in
their place. Alleging that the action of the Life Insurance
Corporation of India was malafide and part of a concerted
action by the Union of India, the Reserve Bank of India and
the Caparo Group Ltd. to coerce the company to register the
transfer of shares and to withdraw the Writ Petition, the
Writ Petitioners sought to suitably amend the Writ Petition
and to add prayers (ia), (ib), (ic) and (id) to declare the
requisition to hold the meeting arbitrary, illegal, ultra
vires etc. The writ petition was amended. Paragraphs 149A(1)
to (44) were added as also prayers (ia), (ib), (ic) and
(id).
The High Court of Bombay allowed the writ petition and
granted reliefs in the following manner:-
“Section 29(1)(b) of FERA is mandatory. No Non-Resident
Indian Investor is authorised to purchase share in an Indian
915
Company without the prior permission of R.B.I. under section
29(1)(b) of FERA; any purchase of shares without such prior
permission is illegal: Neither the Union of India or the
R.B.I. is empowered to order otherwise either by issuing a
direction under section 75 or under section 73(3) of the
FERA; nor are they empowered to grant permission after the
shares are purchased without obtaining prior permission. The
Press Release dt. 17.9.83 (Ex.A.), the circular dt. 19.9.83
(Ex.B) and the letter dt. 19.9.83 (Ex.C) cannot operate
retrospectively so as to validate the purchase of shares
made by N.R.I. companies which were ineligible on the date
of purchase; nor can they authorise purchase of shares
without obtaining prior permission of the R.B.I. under
section 29(1)(b) of the FERA. In so far as the impugned
Press Release circular and letter permitting the respondent-
companies to hold the shares purchased without obtaining
prior permission of the R.B.I., they are ultra vires of
section 29(1)(b) of FERA and the powers vested in the Union
of India under section 75 and the R.B.I. under section 73(3)
of the FERA. To that extent they are void and inoperative
both prospectively and retrospectively. The impugned Press
Release and the circular, however, amount to amending the
Portfolio investment Scheme with full repatriation benefits
introduced under Circular No. 9 dated 14th April, 1982, and
such amendments operates only prospectively. The action of
respondent No.18 in issuing the impugned requisition notice
is contrary to the provisions of section 284 of the
Companies Act and ultra vires the powers vested in the
L.I.C. under section 6 of the L.I.C. Act and contrary to the
intendment of the provisions of the L.I.C. Act. The impugned
requisition notice offends the principles of natural
justice. The action of the L.I.C. in issuing the impugned
requisition notice is an arbitrary and mala fide action
taken for collateral purpose; it is violative of Article 14
of the Constitution of India. The Union of India and the
R.B.I., respondents Nos. 1 and 2, are in no way responsible
for the action of the L.I.C. in this regard. The allegation
of mala fides made against them and the Union Finance
Minister are unsubstantiated. The requisition notice and the
resolutions passed at the meeting held in pursuance of the
said notice are quashed”. Aggrieved by the said judgment and
decree the Life Insurance Corporation of India has come in
appeal, and cross-appeals have been filed by Escorts Ltd.
and Mr. Nanda, the Managing Director of Escorts.
Allowing CA 4598/84 filed by the Life Insurance
Corporation of India, Union of India and the Reserve Bank of
India and dismissing the cross appeals No.497-499/85 filed
by Escorts Ltd. and Nanda, the Court
916
^
HELD : 1.1 The action of the Life Insurance Corporation
of India in issuing the requisition notice dated 11.2.84 to
hold an extra ordinary general meeting of the Escorts
Company Ltd. for the purpose of removing nine of the part
time Directors of the company and for nominating nine others
in their place is neither contrary to the provisions of
section 284 of the Companies Act, 1956 nor ultra vires the
powers vested in the Life Insurance Corporation under
section 6 of the Life Insurance Corporation of India Act.
The notice does not offend the principle of natural justice.
The said action of the L.I.C. cannot be said to be arbitrary
and malafide and taken for collateral purpose or violative
of Article 14 of the Constitution of India. [1022 F]
1.2 A company is, in some respects, an institution like
a State functioning under its “basic constitution”
consisting of the Companies Act and the Memorandum of
Association. “The members in general meeting” and the
directorate are the two primary organs of a company
comparable with the legislative and the executive organs of
a Parliamentary democracy where legislative sovereignty
rests with Parliament, while administration is left to the
Executive government, subject to a measure of control by
Parliament through its power to force a change of
Government. Like the Government, the Directors will be
answerable to the Parliament constituted by the general
meeting. But in practice (again like the government), they
will exercise as much control over the parliament as that
exercises over them. Although it would be constitutionally
possible for the company in general meeting to exercise all
the powers of the company, it clearly would not be
practicable (except in the case of one or two-man companies)
for day to day administration to be undertaken by such a
cumbersome piece of machinery. So the modern practice is to
confer on the Directors the right to exercise all the
company’s powers except such as the general law expressly
provides must be exercised in general meeting. Of course,
powers which are strictly legislative are not affected by
the conferment of powers on the Directors as section 31 of
the Companies Act provides that an alteration of an article
would require a special resolution of the company in general
meeting. Under the Company Act, in many ways the position of
the Directorate vis-a-vis the company is more powerful than
that the Government vis-a-vis the Parliament. The strict
theory of Parliamentary sovereignty would not apply by
analogy to a company since under the Companies Act, there
are many powers exercisable by the Directors with which the
members in general meeting cannot interfere. The most they
can do is to dismiss the directorate and appoint others in
their place or alter the articles so as to restrict the
powers of the Directors for the future. The only effective
way the members in general
917
meeting can exercise their control over the Directorate in a
democratic manner is to alter the Articles of Association so
as to restrict the powers of the Directors for the future or
to dismiss the Directorate and appoint others in their
place. The holders of the majority of the stock of a
Corporation have the power to appoint, by election,
Directors of their choice and the power to regulate them by
a resolution for their removal. This is the essence of
corporate democracy. [1010 G-H; 1011 A-H]
In the instant case, the financial institutions which
held 52% of the shares of Escorts company had a very big
stake in its working and future and were aggrieved that the
management did not even choose to consult them or inform
them that a Writ Petition was proposed to be filed which
would launch and involve the company in difficult and
expensive litigation against the Government and the Reserve
Bank of India. The institutions were anxious to withdraw the
writ petition and discuss the matter further. As the
Management was not agreeable to this course, the Life
Insurance Corporation thought that it had no option but to
seek a removal of the non-Executive Directors so as to
enable the new Board to consider the question whether to
reverse the decision to pursue the litigation. Evidently the
financial institutions wanted to avoid a confrontation with
the Government and the Reserve Bank and adopt a more
conciliatory approach. At the same time, the resolution of
the Life Insurance Corporation did not seek removal of the
Executive Directors, obviously because they did not intend
to disturb the management of the company Therefore, the Life
Insurance Corporation of India cannot be said to have acted
mala fide in seeking to remove the nine non-Executive
Directors and to replace them by representatives of the
financial institutions. No aspersion was cast against the
Directors proposed to be removed. It was the only way by
which the policy which had been adopted by the Board in
launching into a litigation could be reconsidered and
reversed, if necessary. It was a wholly democratic process.
A minority of shareholders in the saddle of power could not
be allowed to pursue a policy of venturing into a litigation
to which the majority of the shareholders were opposed. That
is not how corporate democracy may function. [1010 A-G]
1.3 Every shareholder of a company has the right,
subject to statutorily prescribed procedural and numerical
requirements to call an extra ordinary general meeting in
accordance with the provisions of the Companies Act, 1956.
He cannot be restrained from calling a meeting and he is not
bound to disclose the
918
reasons for the resolution proposed to be moved at the
meeting. Nor are the reasons for the resolutions subject to
judicial review. [1016 B-C]
1.4 It is true that under section 173(2) of the
Companies Act, there shall be annexed to the notice of the
meeting a statement setting out all material facts
concerning each item of business to be transacted at the
meeting, including in particular, the nature of the concern
or the interest, if any therein, of every director, the
managing agent, if any, the secretaries and treasures, if
any, and the manager if any. That is a duty cast on the
management to disclose, in an explanatory note, all material
facts relating to the resolution coming up before the
general meeting to enable the shareholders calling a meeting
to disclose the reasons for the resolutions which they
propose to move at the meeting. The Life Insurance
Corporation of India, though an instrumentality of the
State, as a shareholder of Escorts Ltd. has the same right
as every shareholder to call an extraordinary general
meeting of the company for the purpose of moving a
resolution to remove some Directors and appoint others in
their place. The Life Insurance Corporation of India cannot
be restrained from doing so nor is bound to disclose its
reasons for moving the resolutions. [1016 C-F]
1.5 When a requisition is made by a shareholder calling
for a general meeting of the company under the provisions of
the companies Act validly to remove a director and appoint
another, an injunction cannot be granted by the Court to
restrain the holding of a general meeting. [1011 G-H]
Shaw & Sons (Salford) Ltd. v. Shaw [1935] 2 KB 113;
Isle of wight Railway Company v. Tabourdin (1883) 25 Ch.
D.320; Inderwick v. Snell 42 Eng. Rep.83; Bentley-Stevens v.
Jones [1974] 2 All E.R.653; Ebrabimi v. Westbourne Galleries
Ltd. [1972] 2 All E.R. 492 referred to.
1.6 Every action of the State or an instrumentality of
the State must be informed by reason. In appropriate cases,
actions uninformed by reason may be questioned as arbitrary
in proceedings under Article 226 or Article 32 of the
Constitution. But Article 14 cannot be construed as a
charter for judicial review of state action, to call upon
the State to account for its actions in its manifold
activities by stating reasons for such actions. If the
action of the State is political or sovereign in character,
the Court will keep away from it. The Court will not debate
academic matters or concern itself with the intricacies of
919
trade and commerce. If the action of the State is related to
contractual obligations or obligations arising out of tort,
the Court may not ordinarily examine it unless the action
has some public law character attracted to it. Broadly
speaking the Court will examine actions of State if they
pertain to the public law domain and refrain from examining
them if they pertain to the private law field. [1017 C-D; E-
G]
When the State or an instrumentality of the State
ventures into the corporate world and purchases shares of a
company it assumes to itself the ordinary role of a
shareholder and dons the robes of a shareholder, with all
the rights available to such a shareholder. Therefore, the
State as a shareholder should not be expected to state its
reasons when it seeks to change the management by a
resolution of the company, like any other shareholder. [1017
G-H; 1018 A-B]
O’Reilly v. Mackman [1982] 3 All E.R. 1124; Devy v.
Spelthonne [1983] 3 All E.R. 278; I Congress Del Partido
[1981] 2 All E.R. 1064; R. v. East Berkshire Health
Authority [1984] 3 All E.R. 425; and Radha Krishna Aggarwal
JUDGMENT:
2. It cannot be said that the attitude taken by the
Life Insurance Corporation of India in regard to (i) the
issue of Equity linked Debentures; (ii) Repayment of loans
to Indian Financial Institutions; and (iii) the proposal of
the merger of Goetze with Escorts were mala fide and an
attempt on its part to exert pressure on Escorts Ltd. to
register the shares of Caparo Group. The result of accepting
the proposal for the issue of Equity linked Debentures would
be that the L.I.C.’s holdings would be reduced from 30 per
cent to 18.14 per cent, while the holding of all the
financial institutions would be reduced from 52% to 31.21%
besides involving great financial loss to them. Similar
would be the position if the proposals for the merger of
Goetze with Escorts was accepted. None holding a majority of
the equity capital of a company would allow himself to be
hustled into becoming a minority shareholder. The object of
prepayment of loans was to get rid of the directors who the
financial institutions had a right to nominate. True Escorts
offered to appoint Mr. Davar as a Director even if the
financial institutions had no right to nominate him. But it
is one thing to have the right to nominate a director and
quite another thing to be a director at sufferance. [1018 D-
E; 1019 A-B; 1021 C-D]
3.1 On an overall view of the several statutory
provisions and judicial precedents, it is clear that a
shareholder has an
920
undoubted interest in a company, an interest which is
represented by his share holding. Share is movable property
with all the attributes of such property. The rights of a
share holder are (i) to elect directors and thus to
participate in the management through them; (ii) to vote on
resolutions at meetings of the company; (iii) to enjoy the
profits of the company in the shape of dividends; (iv) to
apply to the court for relief in the case of oppression; (v)
to apply to the court for relief in the case of
mismanagement; (vi) to apply to the court for winding up of
the company; and (vii) to share in the surplus on winding
up. [995 G-H; 996 A]
3.2 A share is transferable but while a transfer may be
effective between transferor and transferee from the date of
transfer, the transfer is truly complete and the transferee
becomes a shareholder in the true and full sense of the
term, with all the rights of a shareholder, only when the
transfer is registered in the company’s register. A transfer
effective between transferor and the transferee is not
effective as against the company and persons without notice
of the transfer until the transfer is registered in the
company’s register. Indeed until the transfer is registered
in the books of the company, the person whose name is found
in the register alone is entitled to receive the dividends,
notwithstanding that he has already parted with his interest
in the shares. However, on the transfer of shares, the
transferee becomes the owner of the beneficial interest
though the legal title continues with the transferor. The
relationship of trustee and ceatui que trust is established
and the transferor is bound to comply with all reasonable
directions that the transferee may give. He also becomes a
trustee of the dividends as also of the rights to vote. The
right of the transferee “to get on the register” must be
exercised with due diligence and the principle of equity
which makes the transferor a constructive trustee does not
extend to a case where a transferee takes no active interest
“to get on the register”. [996 A-D]
3.3 Where the transfer is regulated by a statute, as in
the case of transfer to a non-resident which is regulated by
the Foreign Exchange Regulation Act, the permission, if any,
prescribed by the statute must be obtained. In the absence
of the permission, the transfer will not clothe the
transferee with the “right to get on the register” unless
and until the requisite permission is obtained. A transferee
who has the right to get on the register, where no
permission is required or where permission has been
obtained, may ask the company to register the transfer and
the company who is so asked to register the transfer of
shares may not refuse to register the transfer, except for
bona
921
fide reasons, neither arbitrarily, nor for any collateral
purpose. The paramount consideration is the interest of the
company and the general interest of the shareholder. On the
other hand, where, the requisite permission under FERA is
not obtained, it is open to the company, and indeed, it is
bound to refuse to register the transfer of shares of an
Indian company if favour of a non-resident. [996 E-H]
But once permission is obtained, whether before or
after the purchase of the shares, the company cannot,
thereafter refuse to register the transfer of shares. Nor is
it open to the company or any other authority or individual
to take upon itself or himself, thereafter the task of
deciding whether the permission was rigthtly granted by
Reserve Bank of India. The FERA makes it its exclusive
privileges and function. The provisions of the Foreign
Exchange Regulation Act are so structured and woven as to
make it clear that it is for the Reserve Bank of India alone
to consider whether the requirements of the provisions of
the Foreign Exchange Regulation Act and the various rules,
directions and orders issued from time to time have been
fulfilled and whether permission should be granted or not.
The consequences of non-compliance with the provisions of
the Act and the rules, orders and directions issued under
the Act are mentioned in secs. 48, 50, 56 and 63 of the Act.
There is no provision of the Act which enables an individual
or authority functioning outside the Act to determine for
his own or its own purpose whether the Reserve Bank was
right or wrong in granting permission under section 29(1) of
the Act. Under the scheme of the Act, it is the “custodian-
general” of foreign exchange. The task of enforcement is
left to the Directorate of Enforcement, but it is the
Reserve Bank of India and the Reserve Bank of India alone
that has to decide whether permission may or may not be
granted under section 29(1) of the Act. The Act makes it its
exclusive privilege and function. No other authority is
vested with any power nor may it assume to itself the power
to decide the question whether permission may or may not be
granted or whether it ought or ought not to have been
granted. The question may not be permitted to be raised
either directly or collaterally before any Court. However,
the grant of permission by the Reserve Bank may be
questioned by an interested party in a proceeding under
Article 226 of the Constitution on the ground that it was
malafide or that there was no application of the mind or
that it was opposed to national interest as contemplated by
the Act. [996 H; 997 A-G]
922
3.5 It is certainly not open to a company whose shares
have been purchased by a non-resident company to refuse to
register the shares even after permission is obtained from
the Reserve Bank of India on the ground that permission
ought not to have been granted under the FERA. The
permission contemplated under section 29(1) of the Foreign
Exchange Regulation Act is neither intended to nor does it
impinge in any manner or any legal right of the company or
any of its shareholders. Conversely neither the company nor
any of its shareholders is clothed with any special right to
question any such permission. [997 G-H; 998 A]
3.6 Where the articles permitted the Directors to
decline to register the transfer of shares without assigning
reasons, the Court would not necessarily draw adverse
inference against the Directors but will assume that they
acted reasonably and bonafide. Where the Directors gave
reasons the Court would consider whether the reasons were
legitimate and whether the Directors proceeded on a right or
a wrong principle. If the articles permitted the Directors
not to disclose the reasons, they could be interrogated and
asked to disclose the reasons. If they failed to disclose
that reason adverse inference could be drawn against them.
[995 C-F]
Manekji Pestonji Bharucha and Anr. v. Wadilal Sherabhai
and Co. 52 I.A. 92; Bank of India v. Jamshetji A.R. Chinoy
A.I.R. 1950 Pc 90; In Re Fry [1946] 2 All E.R. 106; Swiss
Bank Corporation v. Lioyds Bank Ltd. [1982] A.C. 584;
Charanjit Lal Chaudhury v. Union of India A.I.R. 1951 S.C.
41; Mathalone and Ors. v. Bombay Life Assurance Company Ltd.
A.I.R. 1953 S.C. 385; Vasudev Ramachandra Shelat v. Pranlal
Jayanand Thakkar [1975] 1 S.C.R. 534; A.K. Ramiah v. Reserve
Bank (1970) 1 M.L.J. PI referred to.
4. The purchase of shares made by and or on behalf of
the Caparo Group Ltd. cannot be said to be in violation of
the Portfolio Scheme in as much as: (i) the permission of
the Reserve Bank contemplated by section 29(1)(b) of the
Foreign Exchange Regulation Act, 1973 need not be “prior” or
“previous” but the permission should be obtained at some
stage for the purchase of shares. It could be ex post facto,
subsequent and conditional; (ii) Payments under the Stock
Exchange Rules may be made within two weeks after the first
purchase and there would have been no difficulty in making
payments out of foreign remittances; (iii) the provisions of
sections 19(4), 29(1)(b), 47, 48, 50, 56 and 63 of the
Foreign Exchange Regulation Act do not stipulate that the
purchase of shares without obtaining the permission of the
923
Reserve Bank shall be void. On the other hand, legal
proceedings arising out of such transactions are
contemplated subject to the condition that no sum may be
recovered as debt, damage or otherwise, unless and until
requisite permission is obtained. If permission may be
granted ex post facto, the transaction cannot be a nullity
and without effect whatsoever; (iv) under section 27 of the
Securities Contracts (Regulation) Act, it shall be lawful
for the holder of the company issuing the said security to
receive and retain any dividend declared by the company in
respect thereof for any year, notwithstanding that the
security has already been transferred by him for
consideration, unless the transferee who claims the dividend
from the transferor has lodged the security and all other
documents relating to the transfer which may be required by
the company with the company for being registered in his
name within fifteen days of the date on which the dividend
became due; (v) Even under the Bye-law 242 of the Stock
Exchange Regulations the brokers are permitted to lodge the
shares purchased on behalf of their principals in their own
names, if they are unable to complete the formalities before
the closing of the books; and (vi) under the scheme, any
foreign company whose shares were owned to the extent of
more than 60% by persons of Indian nationality or origin
could avail the facility given by the scheme irrespective of
the fact whether the same group of shareholders figured in
the different companies. Where any of the purchases were
made subsequent to 2.5.83, they were subject to the ceiling
of 5% in the aggregate. Merely because more than 60% of the
shares of the several foreign companies who have applied for
permission are held by a Trust of which Mr. Swaraj Paul and
the members of his family are beneficiaries, the companies
cannot be denied the facilities of investing in Indian
companies. In fact, if such of the six beneficiaries of the
Trust had separately applied for permission to purchase
shares of Indian companies, they could not have been denied
such permission. Therefore, merely on this account it cannot
be said that there has been any violation of the Portfolio
Investment Scheme or that the permission granted is illegal.
[1022 B-C; 988 F-H; 989 A-B; 1004 A-H; 1005 A-B]
5. Generally and broadly speaking, the corporate veil
may be lifted where a statute itself contemplates lifting
the veil, or fraud or improper conduct is intended to be
prevented or a taxing statute or a beneficent statute is
sought to be evaded or where associated companies are
inextricably connected as to be in reality, part of one
concern. It is neither necessary nor desirable to enumerate
the classes of cases where lifting the corporate veil is
permissible, since that must necessarily depend
924
on the relevant statutory or other provisions the object
sought to be achieved, the impugned conduct, the involvement
of the element of the public interest, and the effect on the
parties who may be affected etc. In the instant case
“lifting the veil” is neither necessary nor permissible
beyond the essential requirement of the Foreign Exchange
Regulation Act and the Portfolio Investment Scheme. The
object of the Act is to conserve and regulate the flow of
foreign exchange and the object of the scheme is to attract
non-resident investors of Indian nationality or origin to
invest in shares of Indian companies. In the case of
individuals, there can be no difficulty in identifying their
nationality or origin. In the case of companies and other
legal personalities, there can be no question of nationality
or ethnicity of such company or legal personality. Who of
such non-resident companies or legal personalities may then
be permitted to invest in shares of Indian companies. The
answer is furnished by the scheme itself which provides for
“lifting the corporate veil” to find out if at least 60 per
cent of the shares are held by non-residents of Indian
nationality or origin. Lifting the veil is necessary to
discover the nationality or origin of the shareholders and
not to find out the individual identity of each of the
shareholders. The corporate veil may be lifted to that
extent only and no more. Further it would be beyond the
scope of the writ petition in the High Court. [1006 F-H;
1007 A-D]
Wallersteiner v. Moir, [1974] 3 All E.R. 217; Tata
Engineering and Locomotive Company Ltd. v. State of Bihar,
[1964] 6 S.C.R. 885; The Commissioner of Income Tax v.
Meenakshi Mills, A.I.R. 1967 S.C. 819; Workmen v. Associated
Rubber Ltd., [1985] 2 Scale 321; and Salomon v. A. Saloman &
Co. Ltd., [1897] A.C. 22 referred to.
6.1 The permission of the Reserve Bank contemplated by
the Foreign Exchange Regulation Act, 1973 need not be
“prior” or “previous” and it could be ex post facto
subsequent and conditional. [1021 H]
6.2 The expression used in section 29(1) of the Foreign
Exchange Act, 1973 is “general or special permission of the
Reserve Bank of India”. It is not qualified by the word
“prior” or “previous”. While the word “prior” or “previous”
may be implied if the contextual situation or the object and
design of the legislation demands if, there is no such
compelling circumstances justifying reading any such
implication into section 29(1). Though the Parliament has
not been unmindful of the need to clearly express its
intention by using the expression
925
“previous permission”. Whenever if thought previous
permission was necessary, as for example, sections 8(1),
8(2), 27(1), 30 and 31 of the Act, it deliberately avoided
the qualifying word “previous” in section 29(1) so as to
invest the Reserve Bank of India with a certain degree of
elasticity in the matter of granting permission to non-
resident companies to purchase shares in Indian companies.
Therefore, the word permission must be interpreted to mean
“permission previous or subsequent” – and that it is
necessary that the permission of the Reserve Bank of India
should be obtained at some stage for the purchase of shares
by non-resident companies. [979 F-H; 980 A-C]
6.3 The scheme of the Foreign Exchange Regulation Act
does not make previous permission imperative under section
29(1)(b), though failure to obtain prior permission may
expose the foreign investor to prosecution penalty,
conviction, confiscation, if permission is ultimately
refused. Even if permission is granted, it may be made
conditional. The expression “special permission” is wide
enough to take with in its stride a “conditional
permission”, the condition being relevant to the purpose of
the statute, in this case, the conservation and regulation
of foreign exchange. [981 F-H]
6.4 Nor is the Reserve Bank of India bound to give ex
post facto permission whenever it is found that business has
been started or shares have been purchased without its
previous permission. In such cases, wherever the Reserve
Bank of India suspects an oblique motive, it will not only
refuse permission but will further resort to action under
section 50, 61 and 63 not merely to punish the offender but
also confiscate the property involved. [981 E-F]
6.5 Parliament did not intend to lay down in absolute
terms that the permission contemplated by section 29(1) had
necessarily to be previous permission. The principal object
of section 29 is to regulate and not altogether to ban the
carrying on in India of the activity contemplated by clause
(a) and the acquisition of an undertaking or shares in India
of the character mentioned in clause (b). Hence, Parliament
left to the Reserve Bank of India as the saftest authority
to grant permission previous or ex post facto, conditional
or unconditional. And the Reserve Bank could be expected to
use the discretion wisely and in the best interests of the
country and in furtherance of declared Government fiscal
policy in the matter of foreign exchange. 1982 F; G-H]
926
6.6 Reading together sections 13 and 67 of the Foreign
Exchange Regulation Act and section 11 of the Customs Act,
it is seen that an order under section 13 FERA operates as a
prohibition and there, can therefore, be no question of the
Reserve Bank of India granting subsequent permission to
validate the importation of the prohibited goods and avoid
the consequences prescribed by the Customs Act. To accept
the analogy of section 13 to interpret sections 19 and 29,
therefore, is not possible. [983 D-E]
6.7 It is true that the consequences of not obtaining
the permission of the Reserve Bank or not to follow the
procedure prescribed are serious and even severe. It is also
true that the burden of proof is on the person proceeded
against and that mensrea may consequently be interpreted as
ruled out. But that cannot lead to the inevitable conclusion
that the permission contemplated by section 29 is
necessarily previous permission. [983 G-H; 984 A]
6.8 If it was the intention of Parliament to comprehend
both previous and subsequent permission, the word
“confirmation” as in section 19(5) would not do at all.
While it may be permissible to construe the word
“permission” widely, the word “confirmation” could never be
used to convey the meaning “previous permission”. The word
“confirmation” is totally misplaced in section 29. [984 E-F]
6.9 The rule against retrospectivity cannot be imported
into the situation presented here. The rule against
retrospectivity is a rule of interpretation aimed at
preventing with rights unless expressly provided or
necessarily implied. To invoke the rule against
retrospectivity in a situation where no vested rights are
involved is to give statutory status to a rule of
interpretation forgetting the reason for the rule. [984 G-H;
985 A-B]
6.10 Paragraph 24A.1 of the Exchange Control Manual is
neither a statutory direction nor is it a mandatory
instruction issued under section 73(3) of the Foreign
Exchange Regulation Act, but is in the nature of a comment
on section 29(1)(b). The paragraph is an explanatory
statement of guideline for the benefit of the authorised
dealers. It reads as if it is in the nature of and, indeed
it is, advice given to the authorised dealers that they
should obtain prior permission of the Reserve Bank of India,
so that there may be no later complications. It is a helpful
suggestion rather than a mandate. The Manual itself is a
sort of guide book for authorised dealers, money changers,
etc. and is a compendium or collection of various statutory
927
directions, administrative instructions, advisory opinions,
comments, notes, explanations, suggestions etc. The
expression “prior permission” used in paragraph 24.A(1) is
not meant to restrict the range of the expression “general
and special permission” found in sections 29(1)(b) and
19(1)(b). It is meant to indicate the ordinary procedure
which may be followed. [986 B-E]
6.11 The forms cannot control the Act, the Rules or the
directions. None of the prescribed forms, no doubt, provided
for the application and grant of subsequent permission, but
that is so because ordinarily one would expect permission to
be sought and given before the act. [986 E-F]
6.12 The Portfolio investment Scheme does not talk of
any prior or previous permission. Further a power possessed
by the Reserve Bank under a Parliamentary legislation cannot
be so cut down as to prevent its exercise altogether. It may
be open to subordinate legislating body to make appropriate
rules and regulations to regulate the exercise of a power
which the Parliament has vested in it so as to carry out the
purposes of the legislation, but it cannot divest itself of
the power. Therefore, the Reserve Bank, if it has the power
under the FERA to grant ex post facto permission cannot
divest itself of that power under the scheme. [987 A-D]
Shakir Hussain v. Candoo Lal & Ors., AIR 1931 All. 567,
Vasudev Ramachandra Shelat v. Pranlal Jayanand Thakur,
[1975] 1 S.C.R. 534 referred to.
7.1 When construing statutes enacted in the national
interest, the Courts must necessarily take the broad factual
situations contemplated by the Act and interpret its
provisions so as to advance and not to thwart the particular
national interest whose advancement is proposed by the
legislation. Traditional norms of statutory interpretation
must yield to broader notions of the national interest. [980
G-H; 981 A]
The object of the Foreign Exchange Regulation Act, is
to earn, conserve, regulate and store foreign exchange. The
entire scheme and design of the Act is directed towards that
end. Section 76 emphasises that every permission or licence
granted by the Central Government or the Reserve Bank of
India should be animated by a desire to conserve the foreign
exchange resources of a country. The Foreign Exchange
Regulation Act, is therefore, clearly a statute enacted in
the national interest. [980 C-G]
928
7.2 The proper way to interpret statutes is to give due
weight to the use as well as the omission to use the
qualifying words in different provisions of the Act. The
significance of the use of the qualifying word in one
provision and its non-use in another provision may not be
disregarded. [980 B-C]
7.3 Every word has different shades of meaning and
different words may have the same meaning. It all depends
upon the context in which the word is used. [984 E]
8. The Press Release (Ex.A) dated 17.9.83, the circular
(Ex.B) dated 19.9.83 and the letter (Ex.C) dated 19.9.83 are
all valid. [1022 A]
9. The Reserve Bank of India was not guilty of any
malafides in granting permission to the Caparo Group of
companies. Nor was it guilty of non-application of mind.
Every question involving investments by non-resident
companies and foreign exchange is bound to have different
facets which present themselves in different lights when
viewed from different angles. If after full discussion with
those in higher rungs of the Government who are concerned
with policy-making, the Reserve Bank of India changed its
former negative attitude to a more positive attitude in the
interests of the economy of the country, its decision cannot
be said to be the result of any pressure or non-application
of the mind. And merely because, the Reserve Bank of India
did not choose to send a reply to the communications
received from the company it did not follow that the Reserve
Bank of India was not acting bonafide. [999 E; G-H; 1000 B]
10. No malafides could be attributed to the Union of
India either. [1022 D]
11. There was a total and signal failure on the part of
Punjab National Bank in the discharge of their duties as
authorised dealers under the Foreign Exchange Regulation Act
and the Portfolio Investment Scheme with the result there
was no monitoring of the purchases of shares made on behalf
of the Caparo Group of companies. [1022 D-E]
12. The question that would involve the adduction of
evidence or as in the instant case a probe into individual
purchases of shares – Whether they were purchased with
foreign exchange or locally available funds would be beyond
the scope of the writ petition in the High Court under
Article 226 of the Constitution. [1004 G]
929

 

&
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4598 of
1984.
From the Judgment and Order dated 9.11.1984 of the
Bombay High Court in Civil Writ No. 3063 of 1983.
K. Parasaran, Attorney General, M.K. Banerjee,
Additional Solicitor General, V.C. Kotwal, F.S. Nariman,
K.K. Venugopal, Soli J. Sorabjee, A.B. Divan, O.P. Malhotra,
T.R. Andhyarujina, Mahendra H. Shah, S.C. Maheshwari,
Shardul S. Shroff, Mrs. Pallavi S. Shroff, Cyril S. Shroff,
Amit Desai, Sasi Prabhu, Ms. Prema Baxi, Suresh A. Shroff,
M/s. J.B. Dadachanji, B.H. Antia, Aspi Chonay, Ravinder
Narain, O.C. Mathur, Rajive Sawhney, R.F. Nariman, Mrs. A.K.
Verma, Joel Peres, Miss Ratna Kapoor, D.N. Misra,
Talyarkhan, A.K. Ganguli, H.S. Parihar, A. Subba Rao, A.K.
Chakravarty, R.N. Poddar and R.D. Aggarwala for the
appearing parties.
The Judgment of the Court was delivered by
CHINNAPPA REDDY, J. Problems of high finance and broad
fiscal policy which truly are not and cannot be the province
of the court for the very simple reason that we lack the
necessary expertise and, which, in any case, are none of our
business are sought to be transformed into questions
involving broad legal principles in order to make them the
concern of the court. Similarly what may be called the
‘political’ processes of ‘corporate democracy’ are sought to
be subject to investigation by us by invoking the principle
of the Rule of Law, with emphasis on the rule against
arbitrary State action. An expose of the facts of the
present case will reveal how much legal ingenuity may
achieve by way of persuading courts, ingenuously, to treat
the variegated problems of the world of finance, as
litigable public-right-questions. Courts of justice are
well-tuned to distress signals against arbitrary action. So
corporate giants do not hesitate to rush to us with cries
for justice. The court room becomes their battle ground and
corporate battles are fought under the attractive banners of
justice, fair-play and the public interest. We do not deny
the right of corporate giants to seek our aid as well as any
Lilliputian farm labourer or pavement dweller though we
certainly would prefer to devote more of our time and
attention to the latter. We recognise that out of the dust
of the battles of giants occasionally emerge some new
principles, worth the while. That is how the law has been
progressing until recently. But not so now. Public interest
litigation and public assisted litigation are today taking
over many unexplored fields and the dumb are finding their
voice.
930
In the case before us, as if to befit the might of the
financial giants involved, innumerable documents were filed
in the High Court, a truly mountainous record was built up
running to several thousand pages and more have been added
in this court. Indeed, and there was no way out, we also had
the advantage of listening to learned and long drawn-out,
intelligent and often ingenious arguments, advanced and
dutifully heard by us. In the name of justice, we paid due
homage to the causes of the high and mighty by devoting
precious time to them, reduced, as we were, at times to the
position of helpless spectators. Such is the nature of our
judicial process that we do this with the knowledge that
more worthy causes of lesser men who have been long waiting
in the queue have blocked thereby and the queue has
consequently lengthened. Perhaps the time is ripe for
imposing a time-limit on the length of submissions and page-
limit on the length of judgments. The time is probably ripe
for insistence on brief written submissions backed by short
and time-bound oral submissions. The time is certainly ripe
for brief and modest arguments and concise and chaste
judgments. In this very case we heard arguments for 28 days
and our judgment runs to 181 pages and both could have been
much shortened. We hope that we are not hoping in vain that
the vicious circle will soon break and that this will be the
last of such mammoth cases. We are doing our best to
disentangle the system from a situation into which it has
been forced over the years by the existing procedures. There
is now a public realisation of the growing weight of the
judicial burden. The cooperation of the bar too is
forthcoming though in slow measure. Drastic solutions are
necessary. We will find them and we do hope to achieve
results sooner than expected. So much for sanctimonious
sermonising and now back to our case.
We do not for a moment doubt that this is a case which
require our scrutiny, more particularly so because of a most
singular and remarkable feature of the case namely the
absence of the principle dramatics personnae from the stage.
Mr. Swraj Paul, the hero of the drama, did not appear before
the High Court and did not appear before us; nor did his
broker and his power of attorney holder, Raja Ram Bhasin &
Co. Though the investments made and in question run into
several crores of rupees, they have acted as if they care a
tuppence for them. Obviously, Mr. Swraj Paul, a Foreign
National, does not want to submit himself to the
jurisdiction of Indian Courts and his broker Raja Ram Bhasin
& Co. has nothing to lose by keeping away from the court and
perhaps everything to gain by standing by the side of his
principal. These may be excellent reasons for them for not
choosing to appear before us, but their non-appearance and
abstemious
931
silence in court have certainly complicated the case and
embarrassed the Government of India, the Reserve Bank of
India and the Life Insurance Corporation of India to whose
lot it fell to defend the case since it was their policies,
decisions and actions that were assailed. We must however
express our strong condemnation of the conduct and tactics
employed by Swraj Paul and Raja Ram Bhasin which we consider
deplorable. The Punjab National Bank, the designated bank of
Mr. Swraj Paul’s companies did appear before us but their
appearance was of no assistance to the court. They had put
themselves in such a hapless situation. It was apparent to
us from the beginning that if there was much front-line
battle strategy, there was considerably more back stage
‘diplomatic’ manouvering, as may be expected when financial
giants clash, though we are afraid neither giant was greatly
concerned for justice or the public interest. For both of
them the court room was just another arena for their war,
except that one of the giants carefully kept himself at the
back behind a screen as it were. One was reminded of the
Mahabharta War where Arjuna kept Shikhandi in front of him
while fighting Bhishma, not that neither of the warriors in
this case can be compared with Bhishma or Arjuna nor can the
Government of India and Reserve Bank of India be downgraded
as Sikhandies. But the case does raise some questions which
do concern the public interest and we are greatly concerned
for the public interest and administration of administrative
justice in the public interest. It is from that angle alone
that we propose to examine the several questions arising in
the case.
The present state of India economy which has to operate
under the existing World Economic System is such that India
needs foreign exchange and, lots of it, to meet the demands
of its developmental activities. It has become necessary to
earn, conserve and build-up a reservoir of foreign exchange.
So the Parliament and the Executive Government have been
taking steps, from time to time, to regulate, to conserve
and improve the foreign exchange resources of the country
and the proper utilisation thereof in the interests of the
economic development of the country. The Foreign Exchange
Regulation Act, 1973 was enacted for that purpose.
‘Foreign Exchange’ is defined by sec. 2(h) of the Act
to mean foreign currency and includes –
“(i) all deposits, credits and balances payable in
any foreign currency and any drafts, traveller’s
cheques, letters of credit and bills of exchange,
expressed or drawn in Indian currency but payable
in any foreign currency;
932
(ii) any instrument payable, at the option of the
drawee or holder thereof or any other party
thereto, either in Indian currency or in foreign
currency or partly in one and partly in the
other.”
‘Authorised dealer’ is defined to mean a person for the
time being authorised under sec. 6 to deal with foreign
exchange.
‘Owner’ is defined by sec. 2(c), in relation to any
security, as including –
“any person who has power to sell or transfer the
security, or who has the custody thereof or who
receives, whether on his own behalf or on behalf
of any other person, dividends or interest
thereon, and who has any interest therein, and in
a case where any security is held on any trust or
dividends or interest thereon are paid into a
trust fund, also includes any trustee or any
person entitled to enforce the performance of the
trust or to revoke or vary, with or without the
consent of any other person, the trust or any
terms thereof, or to control the investment of the
trust money.”
Section 3 provides for the establishment of a
Directorate of Enforcement consisting of a Director of
Enforcement and other officers.
Section 6(1) enables the Reserve Bank on an application
made to it, to authorise any person to deal in foreign
exchange. Sec. 6(2) prescribes what may be authorised and
sec. 6(4) and sec. 6(5) prescribe the duties of the
authorised dealer.
Section 8(1) provides that, except with the previous
general or special permission of the Reserve Bank no person
other than the authorised dealer shall deal in foreign
exchange. Sec.8(2) provides that except with the previous
general or special permission of the Reserve Bank, no person
shall enter into any transaction which provides for the
conversion of Indian currency into foreign currency or
foreign currency into Indian currency at rates of exchange
other than those authorised by the Reserve Bank.
Section 13(1) prescribes that subject to such exemption
as may be specified, no person shall, except with the
general or
933
special permission of the Reserve Bank, bring or send into
India any gold or silver or any foreign exchange or any
Indian currency. Sec. 13(2) provides that no person shall,
except with the general or special permission of the Reserve
Bank or with the written permission of a person authorised
by the Reserve Bank take or send out of India any gold,
jewellery or precious stones or Indian currency or foreign
exchange other than foreign exchange obtained by him from an
authorised dealer or from a money-changer.
Section 19(1)(b) provides that no person shall, except
with the general or special permission of the Reserve Bank
of India, transfer any security or credit or transfer any
interest in the security to or in favour of a person
resident outside India.
Section 19(4) and (5) which are relevant for our
purpose are as follows :-
“(4) Notwithstanding anything contained in any
other law, no person shall, except with the
permission of the Reserve Bank-
(a) enter any transfer of securities in any
register or book in which securities are
registered or inscribed if he has any ground for
suspecting that the transfer involves any
contravention of the provisions of this section,
or
(b) enter in any such register or book, in respect
of any security, whether in connection with the
issue or transfer of the security or otherwise, an
address outside India except by way of
substitution for any such address in the same
country or for the purpose of any transaction for
which permission has been granted under this
section with knowledge that it involves entry of
the said address, or
(c) transfer any share from a register outside
India to a register in India.
(5) Notwithstanding anything contained in any
other law, no transfer of any share of a company
registered in India made by a person resident
outside India or by a national of a foreign State
to another person whether resident in India or
outside India shall be
934
valid unless such transfer is confirmed by the
Reserve Bank on an application made to it in this
behalf by the transferor or the transferee.”
Section 29(1) which is also relevant for the purposes
of this case is as follows:
“29(1) Without prejudice to the provisions of s.28
and s.47 and notwithstanding anything contained in
any other provision of this Act or the provisions
of the Companies Act, 1956, a person resident
outside India (whether a citizen of India or not)
or a person who is not a citizen of India but is
resident in India, or a company (other than a
banking company) which is not incorporated under
any law in force in India or in which the non-
resident interest is more than forty per cent, or
any branch of such company, shall not except with
the general or special permission of the Reserve
Bank-
(a) carry on in India, or establish in India a
branch, office or other place of business for
carrying on any activity of a trading, commercial
or industrial nature, other than an activity for
the carrying on of which permission of the Reserve
Bank has been obtained under sec. 28; or
(b) acquire the whole or any part of any
undertaking in India or any person or company
carrying on any trade, commerce or industry or
purchase the shares in India in any such company.”
Section 29(2) makes provision for applying for permission to
continue after the commencement of the Act any activity of
the nature mentioned in clause (a) of sec. 29(1) which was
being carried on at the commencement of the Act, while sec.
29(4) makes similar provision for applying for permission to
continue to hold after the commencement of the Act shares of
a company referred to in sec. 29(1) (b) which were held by a
person at the commencement of the Act.
Section 30 prescribes that no national of a foreign
State shall, without the previous permission of the Reserve
Bank-
(i) take up any employment in India, or
935
(ii) practise any profession or carry on any
occupation, trade or business in India.
Section 31 prohibits any person, who is not a citizen
of India or a company not incorporated in India or in which
the non-resident interest is more than 40 per cent, from
acquiring or holding or transferring or disposing of by
sale, mortgage, lease, gift, settlement or otherwise any
immovable property situate in India, except with the
previous general or special permission of the Reserve Bank.
Section 47 deals with contracts in evasion of the Act.
Sec. 47(1) prohibits any person from entering into a
contract or agreement which would directly or indirectly
evade or avoid in any way the operation of any provision of
the Act or of any rule, direction or order made thereunder.
Section 47(2) provides that any provision of the Act
requiring that a thing shall not be done without the
permission of the Central Government or Reserve Bank of
India, shall not render invalid any agreement to do that
thing if it is a term of the agreement that thing shall not
be done unless permission is granted. Where such a term is
not explicit, it is to be implied in every contract. Section
47(3) further provides that, subject to certain specified
conditions, legal proceedings may be instituted to recover
any sum which would be due, apart from and despite the
provisions of the Act or any term of the contract requiring
the permission of the Central Government or the Reserve Bank
of India for the doing of a thing.
Section 50 prescribes the levy of a penalty if any
person contravenes any of the provisions of the Act except
certain enumerated provisions, the adjudication is to be
made by the Director of Enforcement or an Officer not below
the rank of an Assistant Director of Enforcement, specially
empowered in that behalf. Section 51 provides for the
enquiry and the power to adjudicate. Section 52 provides for
an appeal to the Appellate Board and sec. 54 for a further
appeal to the High Court on questions of law. Section 56
provides for prosecutions, for contraventions of the
provisions of the Act and the rules, directions or orders
made thereunder. Section 57 makes the failure to pay the
penalty imposed by the adjudicating officer or the Appellate
Board or the High Court or the failure to comply with any
directions issued by those authorities, an offence
punishable with imprisonment. Section 59 prescribes a
presumption of mens-rea in prosecutions under the Act and
throws upon the accused the burden of proving that he had no
culpable mental
936
state with respect to the act charged in the prosecution.
Section 61 provides for cognizance of offences. Section
61(1)(ii) obliges the court not to take cognizance of any
offence punishable under section 56 or 57 except on a
complaint made in writing by – (a) the Director of
Enforcement; or (b) any officer authorised in writing in
this behalf by the Director of Enforcement or the Central
Government; or (c) any officer of the Reserve Bank
authorised by the Reserve Bank by a general or special
order. The proviso to this provision enjoins that no
complaint shall be made for the contravention of any of the
provisions of the Act, rule, direction or order made
thereunder which prohibits the doing of the Act without
permission, unless the person accused of the offence has
been given an opportunity of showing that he had such
permission. Section 63 empowers the adjudicating office
adjudging any contravention under sec. 51 and any court
trying a contravention under sec. 56, if he or it thinks fit
to direct the confiscation of any currency, security or any
other money or property in respect of which the
contravention has taken place.
Section 67 treats the restrictions imposed by secs. 13,
18(1)(a) and 19(1)(a) as restrictions under s.11 of the
Customs Act and makes all the provisions of the Customs Act
applicable accordingly.
Section 71(1) lays the burden of proving that he had
the requisite permission on the prosecuted or proceeded
against for contraventing any of the provisions of the Act
or rule or direction or order made thereunder which
prohibits him from being an Act without permission.
Section 73(3) enables the Reserve Bank of India to
“give directions in regard to the making of payments and the
doing of other acts by bankers authorised dealers, money-
changers, stock brokers, persons referred to in sub-sec.(1)
of sec. 32 or other persons, who are authorised by the
Reserve Bank to do anything in pursuance of this Act in the
course of their business, as appear to it to be necessary or
expedient for the purpose of securing compliance with the
provisions of this Act and of any rules, directions or
orders made thereunder.”
Section 75 enables the Central Government to give and
the Reserve Bank to comply with general or special
directions as the former may think fit.
937
Section 76 requires the Central Government or the
Reserve Bank, while giving or granting any permission or
licence under the Act, to have regard to all or any of the
following factors, namely,
(i) conservation of the foreign exchange resources
of the country;
(ii) all foreign exchange accruing to the country
is properly accounted for;
(iii) the foreign exchange resources of the
country are utilised as best subserve the common
good; and
(iv) such other relevant factors as the
circumstances of the case may require.
Section 79 invests the Central Government with the
power generally to make rules and in particular for various
specified purposes.
In exercise of the powers conferred by sec. 79 of the
FERA, rules called ‘the Non-Resident (External) Account
Rules, 1970’s have been made, Rule 3 enables, subject to the
provisions of the rules, any person resident outside India
to open and maintain in India an account with an authorised
dealer, to be called, a Non-Resident (External) Account.
Rule 4(1) prescribes that no amount other than the amounts
mentioned therein shall be credited to a Non-Resident
(External) Account. One such is ‘any amount remitted by the
account holder from outside India through normal banking
channels as an amount which may be credited to a Non-
Resident (External) Account’. Rule 4(4) provides that
amounts accruing by way of a dividend or interest on shares,
securities or deposits held in India, shall not be credited
on Non-Resident External Account unless certain conditions
are fulfilled. One of the conditions is that the account-
holder is the registered holder of such shares, securities
or deposits. Another condition is that the account-holder
has deposited the certificates relating to the shares with
an authorised dealer along with an undertaking in writing to
the effect that he will not dispose of any of the shares
except with the previous approval of the Reserve Bank. Rule
5 further prescribes that no such amount as is referred to
in rule 4(1) shall be credited to a Non-Resident (External)
Account unless the Reserve Bank having regard to the
desirability of permitting remittance of funds held in India
by Non-Residents, either by general or special order, gives
938
permission in this behalf. Rule 6 provides that a person
resident outside India who wishes to open Non-Resident
(External) Account, shall make an application in this behalf
to an authorised dealer. The authorised dealer, unless there
is a general or special order of the Reserve Bank so
directing, shall refer every such application to the Reserve
Bank together with the particulars.
The Exchange Control Manual published by the Reserve
Bank of India incorporates various statutory and
administrative instructions, advisory opinions, comments,
notes, explanations etc. issued from time to time. Paragraph
24.1(i) states,
“Investment in India by non-residents of Indian
nationality or origin is subject to a different
set of rules in order to give them wider
investment opportunities. Ordinarily investment is
allowed freely if the investment proposed to be
made is not of an undesirable nature, but subject
to the condition that no repatriation of capital
invested and income earned thereon will be
allowed. The non-resident investor is also
required to give an undertaking agreeing to forgo
the benefits of repatriation. Investment with
repatriation benefits is allowed only in
restricted fields subject to certain conditions.
The schemes under which such investments are
permitted are explained in this Chapter”.
Paragraph 24.1(ii), however, states
“Foreign investment in India is also subject to
regulation through the various provisions in the
Foreign Exchange Regulation Act, 1973, viz. Sec.
19 governing issue and transfer of securities in
favour of non-residents, sec. 29 governing
establishment of a place of business by non-
residents for carrying on trading, commercial or
industrial activities or acquiring such an
undertaking or shares in such companies in India
and sec. 31 governing acquisition, disposal, etc.
of immovable property in India. But once foreign
investment is permitted by Government under its
foreign investment and industrial policy,
requisite permissions under the relative sections
of Foreign Exchange Regulation Act, 1973, are more
or less automatically issued.”
939
“In terms of Section 29(1)(b) of Foreign Exchange
Regulation Act, 1973, no person resident outside
India whether an individual, firm or company (not
being a banking company) incorporated outside
India can acquire shares of any company carrying
on trading, commercial, or industrial activity in
India without prior permission of Reserve Bank.
Also, under sec. 19(1)(b) and 19(1)(d) of the Act,
the transfer and issue of any security (which
includes shares) in favour of or to a person
resident outside India require prior permission of
Reserve Bank. When permission has been granted for
transfer or issue of shares to non-resident
investor under sec. 19(1)(b) or sec. 19(1)(d), it
is automatically deemed to be permission under
sec. 29(1)(b) for purchase of shares by him. Non-
resident Indians are however permitted to invest
freely in securities of Central and State
Governments, Units of Unit Trust of India and
National Savings/Plan Certificates of Government
of India (see paragraph 24B.2). All other
investments requires specific permission of
Reserve Bank.”
Paragraph 28A.4 states,
“Authorised dealers may freely open a Non-Resident
(External) Account in the names of individuals of
Indian nationality or origin, resident of outside
India, provided funds for the purpose are
transferred to India in an approved manner from
country of residents of the prospective account-
holder or in other foreign country if the foreign
country of residence of the account holder and the
country from which remittance is received are both
in external group.”
Paragraph 28A.4(iii) however, prescribes that firms,
companies and other corporate bodies as well as institutions
and organisations resident abroad are not eligible to open
Non-Resident (External) Accounts in India. Paragraph
28.A8(ii) states that under sec. 29(1)(b) of the Foreign
Exchange Regulation Act, 1973, persons resident outside
India require prior permission of Reserve Bank for purchase
of shares in Indian companies. Investment of Non-Resident
(External) Account funds in shares of Indian companies is
not therefore permitted without prior approval of the
Reserve Bank.
940
With a view to earn foreign exchange by attracting non-
resident individuals of Indian nationality or origin to
invest in shares of Indian companies, the Government of
India decided to provide incentives to such individuals and
formulated a ‘portfolio investment scheme’ for investment by
non-residents of Indian nationality or origin. This scheme,
announced by the Government on February 27, 1982, was
incorporated in circular No.9 dated April 14, 1982 of the
Reserve Bank of India issued under sec.73(3) of the Foreign
Exchange Regulation Act. Paragraph 2 of the Circular
explains that in order to provide further incentives and
facilitate investment by non-residents of Indian nationality
or origin in shares of Indian companies existing facilities
had been liberalised and procedural formalities had been
simplified as explained in the subsequent paragraphs of the
circular. Paragraph 3 deals with investment without
repatriation benefits while paragraph 4 deals with
investment with repatriation benefits. Paragraph 4 (a)
provides that under the liberalised policy, non-residence of
Indian nationality or origin will be permitted to make
portfolio investment in shares quoted on stock exchanges in
India with full benefits of repatriation of capital invested
and income earned thereon provided that (a) the shares are
purchased through a stock exchange, (b) the purchase of
shares in any one company be each non-resident investor does
not exceed Rs. one lakh in face value or one per cent of the
paid up equity capital of the company, whichever is lower,
and (c) payment for such investments is made either by fresh
remittances from abroad or out of the funds held in the
investor’s non-resident (external) account/FCNR account with
a bank in India. It further provides that the Reserve Bank
will grant permission to designated banks authorised to deal
with any foreign exchange for purchasing shares through a
stock exchange on behalf of their non-resident customers of
Indian nationality/origin, subject, inter-alia, to the
limits and conditions mentioned. Paragraph 5 deals with
another significant relaxation in the existing policy and
provides “the entire gamut of the facilities of direct and
portfolio investments as outlined in paragraphs 3 and 4
above will now be extended to overseas companies,
partnership firms, trusts, societies and other corporate
bodies owned predominantly by non-residents individuals of
Indian nationality/origin. The criterion for determining
such predominant ownership is that at least 60% of the
ownership of these entities should be with non-residents of
Indian nationality/origin. It would be necessary for such
entities to submit a certificate in this regard in the
prescribed form OAC from Overseas Auditor/Chartered
Accountant/Certified Public Accountant, along with their
applications for investment in shares, to the Reserve Bank
of India either through the designated banks authorised to
deal in foreign exchange or the Indian companies offering
new issues, as the case may be.”
941
Applications from those entities for permission to
designated banks for investments with repatriation benefits
are required to submit form RPC to the Controller, Exchange
Control Department, Reserve Bank of India, Central Office
(Foreign Investment Division), Bombay. Paragraph 7 stresses
the importance of encouraging investments in India by non-
residents of Indian nationality/origin and overseas
companies, etc. predominantly owned by them and required
authorised dealers to render prompt and efficient service by
centralising their work in a few selected branches in places
where stock exchange facilities are readily available.
Paragraph 8 enables non-resident investors to appoint
residents in India (other than the authorised dealers) to be
their agents with appropriate power of attorney to arrange
purchase/sale of shares/securities. Such agents would
include recognised stock exchange brokers. It is however
made clear that ‘permission for Investment in shares on
behalf of such investors will, however be granted to the
designated banks authorised to deal in foreign exchange
since these banks would be responsible for compliance with
the relevant exchange control requirements. Proper
coordination and understanding between the designated bank
and the investor’s agents would be necessary for handling
the investment procedures efficiently’. Paragraph 11
prescribes amount other matters, the duty of designated
banks
“to maintain separately a proper record of the
investments made in shares with repatriation
benefits and without repatriation benefits on
account of each investor, showing the relevant
particulars including the numbers of share
certificates and distinctive numbers of shares.
Likewise, the designated branches of authorised
dealers should keep a systematic and up-to-date
investor-wise record of the Shares purchased by
them through stock exchange on repatriation basis
on behalf of their overseas customers of Indian
nationality/origin 80 that they are able to ensure
that the purchase of shares in any one company by
each non-resident Investor toes not exceed Rs. 1
lakh in face value or 1 per cent of the paid up
equity capital of the company, whichever 18 lower.
Circular No. 9 was followed by Circular No.10 dated
April 22, 1982 from the Reserve Bank to all authorised
dealers in foreign exchange. The purpose of the circular was
to ensure that the overseas companies, partnership firms,
societies, other h
942
corporate bodies and overseas trusts to whom the benefits of
the investment scheme formulated by circular No. 9 were
extended are owned to the extent of at least 60 per cent by
non-residents of Indian nationality/origin or in which at
least 60 per cent of the beneficial interest (in the case of
trusts) is irrevocably held by such persons. ‘In order to
ensure that the ownership interest in the overseas
company/firm/society or the irrevocable beneficial interest
in the trust held by persons of Indian nationality/origin is
not less than 60 per cent, authorised dealers are required
to obtain, along with the account opening form, a
certificate from an overseas Auditor/Chartered
Accountant/Certified Public Accountant in Form SOAC enclosed
with A.D. (M.A.Series) Circular No. 9 of 1982.’ ‘The account
holder is further required to submit such a certificate to
the authorised dealer on an annual basis so as to ensure
that the ownership/beneficial interest of the above persons
continues to be at or above the level of 60 per cent.’
By Circular No. 15 dated August 28, 1982, the Reserve
Bank partially relaxed Circular No. 9 dated April 14, 1982
by removing the monetary limit of Rs. One lakh on portfolio
investment in shares on repatriation basis. However, the
limit of one per cent of the paid-up capital of the company
was retained.
By Circular No. 27 dated December 10, 1982, it was
prescribed,
“Where permission is granted by the Reserve Bank
for purchase/sale of shares/debentures on stock
exchange in India by non-residents of Indian
nationality/origin, the transactions should be
effected at the ruling market price as may be
determined on the floor of the stock exchange by
normal bid and offer method only.
On May 16, 1983 the Reserve Bank clarified and modified
the ‘Non-residents of Indian nationality/origin Portfolio
Investment Scheme’ in the following manner: Referring to
Circular No. 9 which extended portfolio scheme to overseas
companies, partner ship firms, societies and other corporate
bodies which were owned to the extent of at least 60 per
cent by non-residents of Indian nationality/origin and to
overseas trusts in which at least 60 per cent of the
beneficial interest was irrevocably held by such persons,
Circular No. 12 dated May 16, 1983 imposed an overall
ceiling of (i) 5 per cent of the total paid-up capital of
the
943
company concerned and (ii) 5 per cent of the total paid-up
value of each series of the convertible debentures issue, as
the case may be. For the purpose of determining and
monitoring the 5 per cent ceiling the cut-off date was
prescribed as May 2, 1983, the date on which the policy was
announced in Parliament. It was made clear that purchase of
equity shares and convertible debentures in excess of 5 per
cent would require prior and specific approval of the
Reserve Bank. The procedure for making applications for
permission was prescribed and it was further provided that
where investment in excess of the 5 per cent ceiling is to
be made on behalf of the non-resident investor who has not
submitted any application to the Reserve Bank earlier is the
prescribed form, the initial application for such
investments should be made in the appropriate form giving
details of the equity shares/convertible debentures to be
purchased. Paragraph 3 of Circular No. 12 prescribed
procedure for monitoring the ceiling of 5 per cent.
authorised dealers through their link offices were required
to submit to the Reserve Bank a consolidated statement of
the total purchases and sales (company wise) of equity
shares/convertible debentures made by their designated
branches. The daily statements were to be serially numbered
and submitted to the Controller positively on the following
working day. It was further provided all purchases and sale
transactions for which a firm commitment has been made to
acquire or transfer equity shares/convertible debentures in
the form of the broker’s contract notes issued by recognised
stock exchange brokers should be included in the daily
statement irrespective of whether the actual deliveries have
been effected or not. It was further provided that with a
view to effectively monitor the 5 per cent ceiling, the
Reserve Bank would, as soon as the aggregate reached the
limit of 4 per cent, notify the fact to the link offices of
the authorised dealers in Bombay. Thereafter the link
offices were required to give the total number and value of
equity shares/convertible debentures proposed to be
purchased through the stock exchange during the next 15
days. Clearance for the purchase of equity
shares/convertible debentures would be granted by the
Reserve Bank after taking into account the purchases
proposed to be made under the Portfolio Investment Scheme by
all the authorised dealers from whom intimations have been
received.
On September 19, 1983, another circular (18) was issued
by the Reserve Bank of India advising all authorised dealers
in foreign exchange that the facilities made available to
the overseas companies, etc. by Circular No.9 dated April
14, 1982 were also available where such overseas bodies were
owned even indirectly to the extent of at least 60 per cent
by such
944
non-residents of Indian nationality/origin. What was
necessary, A was that the ultimate ownership of beneficial
interest in the overseas bodies to the extent of at least 60
per cent must be in the hands of one or more non-resident
individuals of Indian nationality/origin.
The net result of all the circulars was that non-
resident individuals of Indian nationality/origin as well as
overseas companies, partnership firms, societies, trusts and
other corporate bodies which were owned by or in which the
beneficial interest vested in non-resident individuals of
Indian nationality/origin to the extent of not less than 60
per cent were entitled to invest, on a repatriation basis,
in the shares of Indian companies to the extent of one per
cent of the paid-up equity capital of such Indian company
provided that the aggregate of such portfolio investment did
not exceed the ceiling of 5 per cent. It was immaterial
whether the investment was made directly or indirectly. What
was essential was that 60 per cent of the ownership or the
beneficial interest should be in the hands of non-resident
individuals of Indian nationality/origin. Curiously enough
though a limit of one per cent was imposed on the
acquisition of shares by each investor there was no
restriction on the acquisition of shares to the extent of
one per cent separately by each individual member of the
same family or by each individual company of the same family
(group) of companies. In the absence of any such
restriction, any non-resident determined to establish an
Indian Company could do 90 by forming a combination of
different individuals and companies each of whom could
separately obtain permission to purchase one per cent of the
shares of an Indian company. The authority authorised to
grant permission could not, for example, refuse to grant
permission to who has applied for permission in his own
right on the mere ground that permission has been granted to
his father A. Similarly permission could not be refused to
Company in which a non-resident Indian owns 20 per cent of
the share and another non-resident Indian owns 40 per cent
of the Shares on the ground that Company L in which owns 60
per cent of the shares has already been granted permission.
Would it make any difference if owns 60 per cent of the
shares in both Companies and L ? One can well imagine half a
dozen overseas companies in which a dozen non resident
individuals of Indian origin hold shares in varying
proportions but holding in the aggregate more than 60 per
cent of the shares of the overseas companies applying for
permission to purchase shares in an Indian Company. Could
permission be refused to them ? Is the Reserve Bank to
concern
945
itself with the individual identity of the share holders of
the A overseas companies or the nationality or origin of the
shareholders? Is the Reserve Bank to concern itself only
with the colour of the skin, as it were, and not with the
personality of the share holder of overseas company? We will
revert to this question later. Obviously, the one per cent
rule was introduced to prevent large-scale acquisition of
shares of Indian companies by non-residents and their
possible destabilisation. Also, obviously the rule was a
futile exercise as it was incapable of yielding the desired
result. Quite obviously therefore a better solution had to
be found and lt was found by the ‘aggregate of 5 per cent’
rule. This would automatically limit the total outside
holdings and effectively prevent destabilisation- Of course,
it would still be necessary to satisfy the requirements of
the Foreign exchange Regulation Act, more particularly the
requirement of sec. 29 of the Act providing for the general
of special permission of the Reserve Bank to purchase the
shares in India of the company. Though the ultimate
authority under the scheme is the Reserve Bank, an important
feature of the scheme is L that the monitoring of the
remittances and the investments has to be done by the
designated Bank, which is the authorised dealer.
Two of the principal questions argued before us were
whether the permission contemplated by sec.29 was previous
permission or whether the permission could be granted ex-
post-facto and whether the purchase of the shares by the
foreign investor of Indian nationality/origin in this case
involved any contravention of the FERA or the Non-Residents’
Investment Scheme. To appreciate how the questions arise it
is necessary to state here a few facts.
Desiring to take advantage of the Non-resident
Portfolio Investment Scheme and to invest in the shares of
Escorts Limited, an Indian company, thirteen overseas
companies, twelve out of whose shares was owned 100 per cent
and the thirteenth out of whose shares was owned 98 per cent
by Caparo Group Limited, designated the Punjab National Bank
as their banker(authorised dealer) and M/s. Raja Ram Bhasin
& Co. as their brokers for the purpose of such investment.
It must be mentioned here that 61.6 per cent of shares of
Caparo Group Limited are held by the Swraj Paul Family
Trust, one hundred per cent of whose beneficiaries are one
Swraj Paul and the members of his family, all non-resident
individuals of Indian origin. Their designated banker, the
Punjab National Bank, E.C.E. House Branch by their letter
dated 4th 1 March, 1983, but despatched on 9th March, 1983
and by another letter dated 12th March, 83, addressed the
Controller, Reserve Bank of India, Exchange Control
Department and requested
946
the Reserve Bank to accord their approval for opening Non
resident External accounts in the name of each thirteen
companies, three named in the First letter and ten named in
the second letter, for the purpose of ‘conducting investment
operations in India’ through the agency of Raja Ram Bhasin &
Co., Stock Investment Adviser, Member of Delhi Stock & Share
Department, Delhi. These letters were received by the
addressee on 14th and 18th March. It was mentioned in the
letters that the proposed accounts would be ‘effected’ by
remittances from abroad through normal banking channels and
debits and credits would be allowed only in terms of the
scheme contained in the scheme for investment by non-
residents. The first letter was in respect of (1) Caparo Tea
Company Limited, UK, (2) Empire Plantation and Investment
Limited, UR and (3) Assam Frontier Tea Holding PLC, UK,
while the second letter was in regard to (1) Caparo
Investments Limited, (2) Caparo Properties Limited, (3)
Steel Sales Limited, (4) Atlantic Merchants Limited, (5)
Buchanan Limited, (6) Scymour Shipping Limited, (7) Caparo
Group Limited, (8) Natural Gas Tube Limited, (9) Single
Holdings Limited and (10) Deborne Hotel Torkey Limited.
Forms RPC signed by each of the companies and forms OAC
signed by the auditors of the companies accompanied the two
letters. Each form RPC mentioned that the company was
incorporated in England and that 61.6% of the company was
owned by non-residents of Indian nationality/origin. In each
form OAC the auditor certified that the percentage of
holding of the company by persons of Indian
nationality/and/or origin was 61.6% and that the name of the
share-holder was ‘Swraj Paul Family Trust through their
interest in the holding company.’ The auditors certified
that the ownership interest of persons of Indian origin in
the company was 61,6% of the total ownership of interest as
on the date of certificate and that the entire beneficial
interest in the family trust was held irrevocably by persons
of Indian origin. On 23rd April, 83, Punjab National Bank
addressed the Controller, Reserve Bank of India, Exchange
Control Department, inviting their attention to their former
letters dated 4th and 12th March, 1983, which were
accompanied by the RPC and OAC forms relating to the 13
companies and advising the Reserve Bank that the investment
operations were being conducted through the company Raja Ram
Bhasin & Co., Share & Stock Investment Advisers, Member of
Delhi Stock Exchange Association Ltd. The Reserve Bank was
also advised that four remittances had been received from
Caparo Group Limited, the holding Company on 9.3.83,12.4.83,
13.4.83 and 23.3.83 of amounts equivalent to Rs.1,35,36,000,
Rs.2,36,59,000, Rs.76,35,000 and Rs.1,31,38,681. 13p. The
Punjab National Bank also mentioned in the letter that
947
although all necessary formalities prescribed by the Reserve
A Bank’s Circular dt. 22.4.82 had been complied with,
approval had not yet been accorded to their clients. It was
requested that the approval might be communicated to their
client by cable.
We would like to mention at this juncture that the
letters dated 4th March, 12th March and 23rd April, 1983 as
well as all other subsequent letters written by the Punjab
National Bank, E.C.E. House Branch to the Reserve Bank are
totally silent about a remittance of L 1,30,000 equivalent
to Rs. 19,63,000 made by Mr. Swraj Paul to the Punjab
National Bank, Parliament Street Branch on 28.1.1983 for the
purpose of opening an NRE account in the name of Mr. Swraj
Paul. The remittance was said to have been made pursuant to
the discussion of Mr. Swraj Paul with the Chairman of Punjab
National Bank. We have no information as to what those
instructions were. We are told that the cable and the letter
relating to the remittance were handed over to the judges
across the bar when the writ petition was being argued in
the High Court. We may further mention here that on 26th
January, 83, three of the Caparo Companies, namely, Assam
Frontier Tea Holding Public Limited Company, Caparo Tea
Company Limited and Empire Plantations and Investment
Limited addressed three identical letters to Raja Ram Bhasin
& Co. instructing the broker to purchase equity shares of
Delhi Cloth Mills Limited at the best market price on a
repatriation basis. Each letter mentioned that a letter
addressed to the Punjab National Bank, Parliament Street
authorising payment of an advance of Rs.20 lakhs was
enclosed. Delivery of shares could be given as and when they
were received from the market. It was also, mentioned that
the Bank would pay the full purchase value of the shares
delivered and the advance of Rs.20 lakhs would be adjusted
on the final delivery of the shares. Curiously enough, these
letters were tendered by the company Escorts Limited.
Letters to the Punjab National Bank said to accompany the
letters were not placed before us and the counsel for the
Punjab National Bank denies that any such letter was ever
received by the Punjab National Bank. Be that as it may, we
have the circumstance that a remittance of L 1,30,000 was
undoubtedly made to the Parliament Street Branch of the
Punjab National Bank, unbeknown or at any rate said to be
unknown to the ECL House Branch of the Punjab National
Branch. The record produced before us does not indicate what
was done with the amount of L 1,30,000 nor does it indicate
that the Reserve Bank of India was ever informed of this
remittance by the Punjab National Bank. The money appears to
have come in and disappeared like a will-o’-the-wisp. The
learned counsel for the Punjab H
948
National Bank frankly confessed before us that the EOE House
Branch of the Punjab National Bank which was monitoring NRE
accounts and the purchase of shares by the Caparo Group of
Companies was not aware of the remittances received by the
Parliament Street Branch. In other words, the right hand did
not know what the left hand was doing. It is surprising that
in a matter concerning valuable foreign exchange the Punjab
National Bank, a nationalised bank and an authorised dealer
under the Foreign Exchange Regulation Act, should have acted
in such an irresponsible manner. Whatever else requires a
probe by the Reserve Bank of India, the disappearance or the
expending of the amount of L 1,20,000 without the knowledge
of the Reserve Bank is a matter which requires thorough
investigation. No one should be allowed to break the law
with impunity, if he has so done, and get away with it in
this bizarre way.
The statements filed by Raja Ram Bhasin & Co. show that
prior to 9.3.1983, the date of the first remittance as
disclosed by Punjab National Bank to the Reserve Bank, Raja
Ram Bhasin & Co. had purchased shares of Escorts Limited
worth Rs.33,40,865.00 from Mangla & Co. We have already
mentioned that according to the correspondence which passed
between the Punjab National Bank and the Reserve Bank, the
remittances were made on 9.3.83, 24.3.83, 12.4.83, 15.4.83,
28.4.83 and 28.4.84. In the correspondence, there is no
mention of any remittance having been made prior to 9.3.83.
We may also notice here that the letter dated 4.3.83 from
the Punjab National Bank seeking permission for investment
in shares by three of the Caparo Group of Companies was
actually despatched on 9th and received by the Reserve Bank
on 14.3.83 only, while the letter dated 12.3.83 seeking
permission on behalf of the remaining Caparo Group of
Company was received by the Reserve Bank on 18.3.83. The
statements of purchases of shares made by Raja Ram Bhasin &
Co. show that even by 14.3.83, shares of Escorts Limited
worth Rs. 3,85,920.00 had been purchased from Bharat Bhushan
& Co. and shares worth Rs.45,81,677.00 had been purchased
from Mangla & Co. Based on the circumstances that shares
appeared to have been purchased even before remittances were
received a seemingly serious complaint has been made that
Rupee funds must have been freely used to purchase shares
for the Caparo Group under the Non-Resident Investment
Scheme. We do not think that there is any genuine basis for
the complaint. Payments under the Stock Exchange Rules may
be made within two weeks after the purchases contracted for.
In the present case the remittances from abroad started
coming in less than two weeks after the first purchase and
there would have been no difficulty in making payments out
of foreign remittances.
949
The Reserve Bank of India having been approached for A
permission to purchase shares on behalf of the thirteen
Caparc Group of companies by the letters of 4th and 12th
March, 1983, wrote to the Punjab National Bank on 29.4.83
seeking information regarding the exact percentage of
holding of (i) Mr. Swraj Paul and other Non-resident
individuals of Indian origin (ii) Family Trusts and (iii)
others separately in respect of each of the thirteen
companies. Information was also sought as to whether any
shares of Indian Companies had already been purchased by or
on behalf of their Indian clients. It is not clear why the
Reserve Bank wanted information as to the exact percentage
of holdings etc. since the relevant information had already
been furnished in the RPC and OAC forms sent along with the
letters dated 4.3.83 and 12.3.83. The letter dated 29.4.83
is also important for the reason that the Reserve Bank
merely wanted to know whether any shares of Indian Companies
had already been purchased but did not give any indication
that it would be objectionable to do so without prior
permission of the Reserve Bank. Thereafter the Punjab
National Bank wrote three letters to the L Reserve Bank on
6.5.83, 19.5.83 and 25.5.83, the purport of which was that
the Swraj Paul Family Trust held 61.6% of the share capital
of Caparo Group Limited which in turn held 100 per cent of
the Share Capital of eleven of the Companies and 98% of the
share capital of the twelfth Company. The names of the
beneficiaries of the Trust were given as Shri Swraj Paul,
Mrs. Aruna Paul, Mr. Amber Paul, Mr. Akash Paul, Miss Anjali
Paul and Mr. Angad Paul. In all the three letters it was
pointed out that the necessary RPC and OAC forms had already
been submitted. The request for expedition of approval was
reiterated. The Reserve Bank of India was also informed that
their non-resident clients had advised them that details of
shares of Indian Companies purchased by or on their behalf
would be supplied as soon as the purchases were complete. On
25.5.83 the Reserve Bank of India wrote to the Punjab
National Bank, in answer to the letter dated 23.4.83 and
without reference to any of the later letters, asking for
clarification as to how, without obtaining the Reserve
Bank’s permission for purchase of shares on behalf of
thirteen overseas companies, the purchase consideration of
the shares of Indian Companies was paid to Indian sellers
out of the Non-Resident External account of the overseas
purchasers. Information was once again sought regarding the
exact percentage of share holding of (i) Mr. Swraj Paul (ii)
other non-resident individuals of Indian nationality/origin
(if any), and (iii) Family Trust of such persons in Caparo
Group Limited in U.K. separately. On 28.5.83, the Punjab
National Bank sent a telegram to the Reserve Bank and
950
followed it up with a letter dated 30.5.83 to the effect
that the beneficial interest of Mr. Swraj Paul and his
family trust in Caparo Group Limited was 61.6% as already
clearly mentioned in forms RPC and certificates OAC
delivered to the Reserve Bank in February, 83. The other
non-residents of Indian origin who were members of the
Family Trust were Mrs. Aruna Paul, Mr. Akash Paul, Mr. Ambar
Paul, Mr. Angad Paul and Miss Anjali Paul, all members of
Mr. Swraj Paul’s family. It was further pointed out in the
letter that as required by the scheme which mentioned that
the Reserve Bank of India will grant permission on
application being made in the prescribed manner, the
thirteen companies had submit ted their applications
complying with all the formalities. The letter of 23.4.83
was also referred to and it was mentioned that all
particulars were given therein. The Punjab National Bank
further expressed its view that they were not required under
the provisions of the scheme to await the clearance of the
Reserve Bank before purchasing shares of Indian companies,
once proper applications had been submitted. The Reserve
Bank was informed that the remittances from Caparo Group
Limited were made in favour of Raja Ram Bhasin and Co.,
their designated brokers and power of Attorney holders. So
the operations were executed by Punjab National Bank through
NRE account on various date upto 23.4.83 and thereafter.
Payments were made according to the bye laws and regulations
of Delhi Stock Exchange. On 31.5.83, a further telegram was
sent by the Punjab National Bank to the Reserve Bank
informing them that they had been advised by the agent
brokers that up till 28.4.83 they had purchased 80,000
equity shares of Delhi Cloth and General Company Limited and
75,000 equity shares of Escorts Limited on behalf of each
one of the thirteen overseas companies predominantly owned
by non residents of Indian origin.
On 1.6.83, the Assistant Controller, Reserve Bank of
India, wrote to the Government of India informing them about
the receipt of applications from the Punjab National Bank on
behalf of thirteen overseas companies, eleven of which were
wholly owned by Caparo Group Limited which in turn owned by
Family Trust of Mr. Swraj Paul to the extent of 61.6%. In
the twelfth company, Caparo Properties Limited, Caparo Group
Limited had a holding of 98 per cent. Caparo Group Limited
was owned to the extent of 61.6% by the family trust of Mr.
Swraj Paul, the other members of the family trust being Mrs.
Aruna Paul, Mr. Akash Paul, Mr. Ambar Paul, Mr. Angad Paul
and Miss Anjali Paul. The Reserve Bank pointed out that it
was to be noticed that even the Caparo Group Limited was not
directly owned by non-resident individuals of Indian origin
but only indirectly to the extent of 61.6% through
951
the family trust whose beneficiaries were persons of Indian
A origin. The Reserve Bank appeared to be of the view that
the investment facilities under the scheme were intended to
be extended to Overseas Companies, Family Trusts etc. owned
predominantly non-residents of Indian Nationality/origin
atleast to the extent of 61.6% and that it was not the
intention to open these investment facilities to overseas
companies which were not directly owned by non-resident
individuals of Indian nationality/origin but owned by them
indirectly via some other trust or company. It was observed
that if investment facilities were to be extended to
overseas companies indirectly owned by non-residents of
Indian nationality/origin, it would be very difficult to
enforce the scheme and the conditions of FERA. The Reserve
Bank also informed the Government that their Legal
Department supported their view that none of the thirteen
overseas companies were eligible to invest in shares of
Indian companies and the existing policy. They, therefore,
proposed to reject the applications of all the thirteen
overseas companies. They requested the Government of India
to confirm by telex. To this L the Government of India
replied by telex on 8.6.83 in these words:
“REFERENCE D.O.NO. EC.CO. FID (II) 294/344-82/83
DATED NIL JUNE 1983 REGARDING APPLICATION FROM
THIRTEEN OVERSEAS COMPANIES FOR PURCHASING SHARES
ON OF INDIAN COMPANIES THROUGH THE STOCK EXCHANGE
WITH REPATRIATION RIGHTS UNDER THE PORTFOLIO
INVESTMENT SCHEME (.) IT IS REPORTED THAT SOME
PURCHASES HAVE ALREADY BEEN MADE IN TERMS OF THE
ABOVE PROPOSAL BY THE PUNJAB NATIONAL BANK(.)
ALTHOUGH IT DOES APPEAR THAT PRIOR TO SECOND MAY
1983 UNDER THE PORTFOLIO INVESTMENT SCHEME
AUTHORISED DEALERS COULD WITHOUT RBI’S PRIOR
APPROVAL PURCHASE SHARES THROUGH STOCK EXCHANGE ON
BEHALF OF THEIR NON RESIDENT CLIENTS, THE
CIRCUMSTANCES IN WHICH SOME SUCH PURCHASES WERE
ALREADY MADE BEFORE THE CONCERNED COMPANIES GOT
THE NECESSARY APPROVAL FROM THE R.B.I. DO NOT SEEN
TO BE CLEAR (.) THE RBI IS REQUESTED TO ENQUIRE
FURTHER INTO THE MATTER AND SUBMIT A DETAILED
REPORT TO THE GOVERNMENT COVERING ALL ASPECTS OF
THE MATTER INCLUDING THE DETAILS OF SUCH
PURCHASES, THE FINANCIAL STATUS AND THE ACTIVITIES
OF THE APPLICANT COMPANIES AND THEIR DATES OF
INCORPORATION AND ALSO THE GENERAL LEGAL ISSUE AS
TO WHETHER SUCH PURCHASES ON THE STOCK
952
A EXCHANGE BY OVERSEAS NON RESIDENT INDIAN
COMPANIES ETC. PRIOR TO SECOND MAY 1983 ARE VALID
WITHOUT THE PRIOR SPECIFIC APPROVAL OF THE RBI(.)
YOUR REPORT SHOULD REACH US QUICKLY AS POSSIBLE IN
ORDER TO ENABLE THE GOVERNMENT TO TAKE
DECISION(.)”
The importance of 2nd May, 1983 so frequently mentioned in
the telex message is apparently because 2nd May, 1983 was
fixed as the cut-off date for the introduction of the
ceiling of 5 per cent in shares of Indian companies by
foreign investors of Indian origin by the Circular No. 12
dated May 16, 1983 issued by the Reserve Bank of India.
In the meanwhile, on 31.5.83, Punjab National Bank
wrote to Escorts Limited informing them that the thirteen
overseas companies had been making investments in shares of
Escorts Limited in terms of the scheme for investment by
overseas corporate bodies predominantly owned by non-
residents of Indian nationality/origin to an extent to
atleast 60 per cent and that the thirteen overseas had
designated them as their banker and M/s Raja Ram Bhasin &
Co. had been designated as the brokers for the purpose of
investment. The brokers had advised the bank that upto 28th
April, 83, 75,000 equity shares of Escorts Limited had been
purchased by them for each of the thirteen overseas
companies. Out of the shares 80 purchased 35,560 shares
purchased by each of companies had been lodged by the
brokers with Escorts Limited in the names of H.C. Bhasin and
Mr. Bharat Bhushan for the purpose of transfer of the shares
in the books of the company. 35,667 shares purchased for the
13th company were also lodged for the purpose of transfer in
the name of Mr. H.C. Bhasin and Mr. Bharat Bhushan. Escorts
Limited replied on June 16th, 1983 and requested the Punjab
National Bank to furnish informations whether the non-
resident companies had executed and handed over applications
to be filed with Reserve Bank of India for prior permission
to purchase the shares of the company through them as the
designated bank and whether any permission had been granted
by the Reserve Bank of India to Punjab National Bank to
purchase shares on behalf of the thirteen companies
mentioned in the letter. Escorts Limited did not refer in
this letter to the circumstance that H.C. Bhasin and Bharat
Bhushan had lodged the shares with them for transfer in
their own names instead of the names of any of the overseas
companies. Escorts Limited obviously did not think in
strange that the brokers lodged the shares in their own
names instead of their principals, for the simple reason
that Bye-law 242 of the Stock Exchange Regulations permit
the brokers to do 80 if they are unable to complete the
formalities before the closing
953
of the books. They now seek to make a point of it. It is A
obviously without substance. In fact in their letter to
Punjab National Bank, Escorts Limited did not even think it
worthwhile mentioning that when they wrote to the brokers on
27.5.83 requesting information whether they were the
beneficial owners of the shares and whether the shares had
been purchased on behalf of non-residents of Indian origin
with the requisite permission of the Reserve Bank of India
they had been curtly refused the information by Mr. H.C.
Bhasin and Mr. Bharat Bhushan who had also questioned their
authority to ask for such information, and even threatened
legal action of the transfer was not registered. We are
unable to fathom the reason behind the attitude of the
brokers. We can but make a guess. It was probably they were
still awaiting the permission of the Reserve Bank of India.
That they had purchased the shares for overseas investors
was no secret since they had already so informed the Punjab
National Bank. They seem to have, thought that they were
within their rights under the Stock Exchange Regulations in
asking the shares to be transferred in their names. It was
suggested by the learned counsel for Escorts Limited that
the brokers were loath to disclose the names of their
principals as they had utilised rupee funds and wanted to
cover up that fact. The suggestion appears to be far fetched
as the funds remitted till then from abroad were more than
ample to cover the purchase of the shares until then lodged.
We must, however, notice that the record does not disclose
how Bharat Bhushan came into the picture, who authorised him
to purchase the shares on behalf of Caparo Group and who
directed him to deposit the shares in his own name? He was
not the stock broker designated to purchase shares on behalf
of the overseas companies. If so, one wonders what authority
he had to enter into transactions on behalf of overseas
companies! This is also a matter which may require
investigation by the Reserve Bank. As already mentioned the
Punjab National Bank wrote to Escorts Limited on 31.5.83
about purchase of shares by each of the thirteen companies
and the lodging of the shares with the company in the names
of H.C. Bhasin and Mr. Bharat Bhushan for the purpose of
transfer of shares in the books of the company. We have also
referred to the reply of Escorts Limited to Punjab National
Bank on 1.6.83. Punjab National Bank immediately wrote to
Escorts Limited on 2.6.83 that they had already informed the
company that the purchase of shares for the thirteen
companies had been handled by designated brokers M/s. Raja
Ram Bhasin & Co. and wanted to know the purpose for which
Escorts Limited was seeking information from them. They
however, stated that they
954
were designated as bankers of the thirteen companies and
that they had acted in terms of the procedure laid down by
the scheme. Without much further ado, that is, without
making any further enquiry either from M/s. Raja Ram Bhasin
or from the Punjab National Bank or without seeking any
information of guidance from the Reserve Bank of India,
Escorts Limited proceeded to consider the question of
registering the transfer of shares. A Committee was
constituted by Escorts Limited to scrutinize the transfer of
the shares. After taking expert legal opinion, the Committee
submitted a report to the Board of Directors of Escorts
Limited recommending against the registration of the
transfer of shares. The primary ground on which the
recommendation was based and with which we are now concerned
is ground No.5 which stated,
“that the company is prohibited by the provisions
of section 19 of FERA from registering transfer of
shares in its books when it has reasons to suspect
that there has been a violation of the provisions
of section 19 of FERA.”
The Committee reported that it had reasonable ground to
believe that the requisite permission of the Reserve Bank of
India has not been obtained for the purchase of the shares
in question. It was also mentioned in the report of the
Committee that they took serious notice of ‘attempts made to
intimidate and coerce the company to register the shares and
to pre-empt the free and proper exercise of the Board’s
discretion in accordance with the Articles of Association of
the Company and the provisions of Law.’ However, the report
did not mention what the attempts were that were made ‘to
intimidate and coerce the company to register the shares and
to pre-empt the free and proper exercise on the Board’s
discretion.
On 9.6.83, the Board of Directors of Escorts Ltd.
considered the Committee’s Report and passed a resolution
refusing to register the transfer of shares. m e resolution
was in the following terms: ” me Board considered the report
of the Share Scrutiny and Transfer Committee of Directors.
The Board further considered exhaustively all aspects of the
matter, all the materials which were gathered and placed
before the Board and legal opinions and records of legal
advice which had been secured by the Company on the points
in issue. The Board further considered whether – having
regard to the provisions of FERA and FERA
955
regulations and other relevant laws including the
Company Law, the Stamp Act, the Public Securities
Act and other regulations relating to the Stock
Exchange and transfer of shares – requirement of
law have been complied with. The Board further
considered the various statements reported in the
Press and made by the non-resident concerned, as
also by his associates in Delhi which are
contradictions to the policy of the Government
underlying the liberalised scheme for ‘Portfolio
Investment’ by eligible residents. m e Board
further considered whether the purchases of the
shares in question would qualify as ‘Portfolio
Investment’ as envisaged under the RBI Scheme. The
Board further considered whether it is in the
interest of the Company and its shareholders to
approve of the proposed transfers and whether it
is desirable in the aforesaid interests to accept
the proposed transferees as Shareholders. Upon
full discussion of the Share Scrutiny and Transfer
Committee’s Report – the Board L in acceptance
thereof adopted the same. Further after a full
examination of the issues legal as well as factual
and the circumstances and further on account of
the reasons contained in the Share Scrutiny and
Transfer Committee’s Report and in the light of
the said Committee’s recommendations and further
on account of the view of the Board of Directors
that it would not be in the interest of the
company or the General Body of shareholders to
register the transfer of the shares in question
and on account of the Board’s view that- the
transferees in question could not be approved for
purposes of admitting them as members in view of
the facts and circumstances taken note of by the
Board of Directors, the Board decided to refuse
registration of the shares under consideration
Accordingly it was-
Resolved that the transfer of 2,88,390 Equity
Shares in Rs.10 each fully paid-up lodged by Mr.
Harish Chander Bhasin and Rs.1,73,947 Equity
Shares of Rs.10 each fully paid-up lodged by Mr.
Bharat Bhushan as per distinctive Nos. appearing
in the lists marked Annexure A and respectively
placed before the Directors and initialled by the
Chairman for the h purpose of identification be
and is hereby refused.
956
Further resolved that Mr. Charanjit Singh, Vice
President and Secretary of the Company be and is
hereby authorised to give and send notices of the
refusal to the transferors under sec.111(2) of the
Companies Act, 1956 and take such other steps as
may be necessary and appropriate in the matter of
the above resolution.
The resolution was passed with all the 13
Directors (out of total 15 Directors of the
Company) present and voting for the resolution
excepting Mr. D.N. Davar, who did not take part of
the discussion and voting on the resolution. There
was no dissenting vote.”
In respect of another block of shares lodged with Escorts
Ltd. On 19th and 22nd August, 1983 for registration in the
name of the thirteen foreign non-resident companies, a
similar report was submitted by the committee on 29.9.83 and
a similar resolution was passed by the Board of Directors on
the same day.
Escorts Limited, although they had already refused to
register the transfer of shares, nonetheless, wrote to the
Punjab National Bank for information on various points as
they desired to make a representation to the Reserve Bank of
India in the enquiry being conducted by the Reserve Bank
under the directions of the Government. The Company wanted
to know whether the remittances were received from M/s.
Caparo Group Limited only and from none of the other twelve
foreign companies. me company also wanted to know why
4,62,337 shares only had been lodged with them for transfer
although it had been stated that 9.75 lakhs shares had been
purchased by thirteen non-resident companies. The Company
further wanted to know whether instructions to purchase the
shares were given to the brokers by the Punjab National Bank
and whether the non-resident companies indicated the maximum
price at which the shares might be bought. The company
further desired to know to whom the share scripts should be
returned as they had decided to refuse registration of the
transfer of shares. The Punjab National Bank, we may state
here, refused to receive the share scripts and suggested to
Escorts Limited that they should return the scripts to those
that had lodged them with the Company.
More important still is the fact that Escorts Limited,
having already rejected the registration of the transfer of
Shares, wrote to the Reserve Bank of India on 14th June,
1983, 20th June, 1983 and 23rd July, 1983 purporting to give
information regarding various illegalities committed in the
matter of
957
purchase of shares of their company by the thirteen foreign
companies, Caparo Group Limited, etc. It was stated that the
information was being furnished to the Reserve Bank because
it was understood that the Reserve Bank was holding an
enquiry in the matter of the purchase of shares in Indian
companies by the Caparo Group Companies. One remarkable
feature about the letters is that for some reason best known
to themselves, Escorts Limited did not disclose to the
Reserve Bank the circumstance that they had already refused
to register the transfer of shares. In the first letter, it
was stated that their information revealed that Caparo Group
Limited was the holding company and the remaining twelve
companies were its subsidiaries and that a majority of them
were in no financial position to make such large
investments. The Reserve Bank was particularly requested to
consider whether it was ever intended that an overseas
company could circumvent the stipulated ceiling of one per
cent by channelling investment through a dozen subsidiaries.
It was pointed out that a colourable device of that nature
would defeat the very purpose of the ceiling. The Reserve
Bank was also requested to take serious notice of the fact
that while the scheme permitted repatriation benefits to
investments upto the maximum of one per cent in an Indian
company, shares to the tune of over 7 per cent had been
acquired in the names of thirteen companies though funds
were remitted only by one company. It was also mentioned
that the stock-brokers and not the bank purchased the shares
and that the stock brokers unauthorisedly lodged for
registration their own names, the shares purchased on behalf
of non-residents. The Reserve Bank as requested to enquire
into the dates and rates of the purchases of the shares,
whether the shares were purchased on the floor of the stock
exchange, whether the delivery of shares was taken, whether
the bank had a day-today record of the transactions and 80
on. The Reserve Bank was also requested to seize the scrips
and the books of account in the possession of the stock
exchange. The next letter dated 20th June, 1983 drew
attention to the circumstances that though 9,75,000 shares
were purported to have been purchased before 28th April,
1983, only 4,62,337 shares had been lodged by 13th May, 1983
and therefore, it appeared that there were forward transac-
tions and the purchases were not in accordance with the
scheme. In their third letter dated 23rd July, 1983, Escorts
Limited asserted that a large amount of money to the tune of
about Rs. 2.61 crores were remitted from overseas to the
Punjab National Bank and was utilised to purchase shares in
addition to the shares purchased in the names of thirteen
companies. The provisions of the FERA were violated and the
ceilings of one per
958
cent and 5 per cent imposed under the scheme were also
circumvented. Rupee funds to the tune of Rs.4.0 crores
appeared to have been unauthorisedly diverted for the
purchase of the shares for and on behalf of the thirteen
non-resident companies in the two Indian Companies, that is,
Escorts Limited and Delhi Cloth and General Mills Limited.
Though the purchases made on behalf of the thirteen non-
resident companies were said to have been purchased before
28th April, 1983, only 4,62,337 shares were lodged with the
company for registration of transfer, leaving a shortfall of
5,12,663 shares. The non-lodgment of these shares raised a
doubt whether those shares had been purchased in accordance
with the scheme. It was pointed out that the share transfer
deeds lodged with Escorts Limited bore the date 28th April,
1983 and disclosed consideration of Rs.65 per share although
the highest rate at which sales of Escorts shares were
transacted at the Stock Exchange upto 28th April, 1983 was
Rs.55 only per share. This fact demonstrated that an
incorrect statement had been made that the shares had been
purchased prior to 28th April, 1983. Further the share
transfer deeds lodged with the companies in regard to the
9,75,000 shares of Escorts Limited and 10,30,000 shares of
Delhi Cloth Mills Limited said to have been purchased on
behalf of non-resident Indian companies showed that a total
amount of Rs.6,33,75,000 of non-resident funds was spent for
purchasing the shares of Escorts Limited and a sum of
R8.9,88,69,020 of non-resident funds was spent of purchasing
shares of Delhi Cloth Mills Limited making a grand total of
Rs.16,22,44,020. As against this a sum of Rs.13 crores only
had been remitted from abroad for the purchase of shares.
Out of the Rs.13 crores, a sum of Rupee One crore had been
frozen by the Reserve Bank of India making only a balance of
Rs.12 crores of non-resident funds available for purchase of
shares. There was thus a short-fall of Rs.2.61 crores which
was unaccounted. It was also brought to the notice of the
Reserve Bank that the brokers had lodged the shares for
registration of the transfers in their names of the foreign
companies. When asked by the company to disclose the names
of the principals, the brokers had refused to do so. The
company therefore, suggested various steps that should be
taken by the Reserve Bank to detect the several illegalities
committed and to prevent the circumvention of the one per
cent limit imposed by the scheme for acquisition of shares
by any single non-resident individual or company.
To none of these letters did the Reserve Bank of India
deign a reply or even the courtesy of an acknowledgement.
Though the Reserve Bank did not choose to write or make any
further enquiry from Escorts Limited, there is no doubt that
the Reserve Bank did
959
enquire in its own way into the allegations made by Escorts
A Limited against the Caparo Group of Companies. It was not
as if the Reserve Bank want only refused to worry itself in
regard to the allegations against the Caparo Group of
Companies. The Punjab National Bank was the designated bank
of the Caparo Group of Companies and it was an authorised
dealer under the FERA, owing a serious responsibility to the
Reserve Bank under the FERA and the Portfolio Investment
Scheme. It was, therefore, to the Punjab National Bank that
the Reserve Bank turned for elucidation in the matter.
On 11th June, 1983, the Reserve Bank of India wrote to
the Punjab National Bank advising them that mere submission
of an application under sec. 29 (1) (b) of FERA was not
sufficient to enable the non-resident Indian company to
purchase shares without the general or special permission of
the Reserve Bank. Reserve Bank permission had to be obtained
before buying any shares of Indian companies. The contention
of Punjab National Bank that submission of an application
was sufficient to enable a non-resident company to purchase
shares was non accepted as correct and the bank was told
that they had committed a serious irregularity in purchasing
shares. The Punjab National Bank was also asked to explain
as to how they had allowed the Non-Resident External Account
of Caparo Group Limited to be debited in contravention of
the provisions of paragraph 28B.9 of the Exchange Control
Manual. The Punjab National Bank was informed that the
applications of all the companies for approval of opening of
Non-Resident Accounts were pending with them and that until
specific permission for purchase of shares was granted, no
payment should be made out of the accounts for purchasing
shares on behalf of any of the thirteen companies. On the
same date, another letter was written by the Reserve Bank of
India to the Punjab National Bank asking for particulars of
the thirteen companies purchased by them and the dates of
remittances 80 far received from the thirteen companies. On
17th June, 1983 and 23rd June, 1983, the Punjab National
Bank sent their reply to the Reserve Bank by telex and by
letter. They stated in the telex message that consequent on
the letter of the Reserve Bank, they had withheld payment of
a sum of Rs.107,22,610 in favour of the brokers and that
they had advised the remitter about the same. It was stated
that the brokers had written to them asking for payment
stating that it would amount to default if payment pertained
to shares purchase prior to 2nd May, 1983 under the
portfolio investment scheme. By their letter dated 23rd
June, 1983, they informed the Reserve Bank that upto
December 1982 and h from 1st January. 1983 to 28th February,
1983 no shares on behalf
960
of the thirteen non-resident companies were purchased.
Between A 1st March, 1983 and 2nd May, 1983, 80,000 shares
of Delhi Cloth and General Mills Company Limited and 75,000
shares of Escorts Limited were purchased for each of the
thirteen companies. After 2nd May, 1983 no share was
purchased. All remittances were received through their
London Branch for the credit of M/s. Raja Ram Bhasin & Co.,
for purchase of shares on behalf of the thirteen companies.
On 9th March, 1983, 24th March, 12th April, 15th April, 28th
April and 28th April, 1983 remittances of Ks.1,35,36,000
Rs.1,31,38,681, Rs. 2,36,59,900, Rs.76,35,000,
Rs.1,56,76,000 and Rs.1,56,80,000 were received and
transferred to the account of Raja Ram Bhasin & Company from
the account of Caparo Group Limited. A balance of Rs.38,682
in the NRE account of Caparo Group Limited was allocated pro
rata to the thirteen accounts on 2nd June, 1983 in terms of
the letter of their broker M/s. Raja Ram Bhasin & Company.
The broker derived his authority in terms of the investors’
letters which were annexed to the letter of the bank. The
Punjab National Bank also stated that the broker had
confirmed by their letter dated 22nd June, 1983, a copy of
which was enclosed, that apart from the shares mentioned
they had not purchased any other shares for the thirteen
companies. Along with their letter the Punjab National Bank
also sent to the Reserve Bank, copies of the certificates of
incorporation, the memoranda of articles of associations and
the balance sheets of the thirteen companies. One of the
letters enclosed with the letter of the Punjab National Bank
was a letter from the Caparo Group Limited to the Punjab
National Bank confirming that they had appointed M/s. Raja
Ram Bhasin & Company as their designated brokers and that
the bank was authorised to act upon the instructions of the
aforesaid brokers, entirely at the risk and responsibility
of Caparo Group Limited. On 24th June, 1983, the Punjab
National Bank again wrote to the Reserve Bank in reply to
their letter of 11th June, 1983, they stated that they were
under the impression that the clause “……. RBI will grant
permission to designated bank…… ” meant that permission
would automatically be granted on the submission of
applications in the prescribed form by the NRE Investors,
accompanied by auditors’ certificates of the eligibility. As
a matter of abundant caution they had intimated the NRE
investors and their brokers that the transactions were being
put through entirely at their risk and responsibility.
Details of the remittances received and transferred to the
account of Raja Ram Bhasin & Company were once again given
and the request for permission
On 6th July, 1983, the Controller Foreign Exchange,
Reserve Bank of India, wrote to the Government of India
informing them that the relevant documents had been called
for and examined and
961
the report which was desired by the Government’s telex dated
8th June, 1983 was being submitted along with the letter. It
was stated that they had taken the legal opinion ‘an eminent
jurist and senior counsel’ Mr. H.M. Seervai, which was to
the effect that the circular did not grant general
permission to non-residents or their designated banks and
that oversees bodies where they were not directly owned by
non-resident individuals were not eligible to invest under
the liberalised scheme. It was, therefore, stated that none
of the thirteen overseas companies was eligible to invest in
shares of Indian companies under the scheme. The question of
further action in the matter of failure of the Punjab
National Bank to follow the relevant Exchange Control
Regulations would be taken up separately after a final
decision was taken on the applications, that is, the
applications of the overseas companies for permission to
purchase shares. The report of the Reserve Bank of India
which was sent along with their letter was not produced
before the High Court, nor has it been placed before us. The
Government of India, on 11th August, 1983, replied the
Reserve Bank’s letter of 6th July, 1983 communicating to the
latter the opinion given by the Attorney General and asked
the Reserve Bank to dispose of the applications made by the
Punjab National Bank in the light of the opinion of the
Attorney General. The Government of India also mentioned
that they agreed with the opinion of the Attorney General
who had given primary importance of the intention behind the
Government policy which was spelt out in the report of the
working group. By another letter dated 17th September, 1983,
the Government of India clarified the position and it was
pointed out that the portfolio investment scheme by
companies and overseas bodies owned by non-residents of,
Indian nationality/origin was introduced as part of a
package of measures to facilitate remittances and
investments by non-residents of Indian nationality/origin in
India in the overall context of the difficulties of our
balance of payments. It was pointed out that in formulating
the scheme, there were three paramount considerations:
(a) as much flexibility as possible should be
available to non-residents for bring foreign
exchange into India and the concern should be the
purpose of investments rather than legal entity of
the non-resident investor of Indian origin;
(b) it was to be ensured that the benefits of the
scheme should not be available to non-resident
persons or overseas bodies other than those of
Indian nationality/origin; and
962
(c) the investment of funds under the scheme
should not lead to take over of existing companies
through operations in the stock market.
It was in the context of the first two considerations that
it was insisted that the overseas companies etc. should be
owned by non-residents of Indian nationality/origin to the
extent of at least 60% and it was In the context of the
third consideration that a ceiling of one per cent of paid
up capital for each investor was imposed. Further to the
same considerations, in May, 1983, a ceiling of 5 per cent
on aggregate investment was also imposed. The Government of
India pointed out that the question of direct or indirect
ownership should be considered in the context of these
considerations. It was pointed out:
“In many countries there is no bar on the number
of companies an individual can pre dominantly own
directly or indirectly. A person of Indian origin
could, if he wished, set up a number of companies
directly owned by him and investment through each
of these companies upto one per cent of the paid
up capital of a company in India within the
framework of our portfolio Investment Scheme. This
situation is not different in its economic
implications than if the same amount of investment
was made by the same person in the same companies
in India by the same number of companies, which
were indirectly (and not directly) owned by him.
As such having regard to the objectives of the
scheme and the intention of the Government, the
fact whether a company is predominantly directly
owned or predominantly indirectly owned is not a
material consideration.
Taking the above consideration into account, and
in order to remove any doubt regarding the
eligibility of companies, it is clarified that
overseas bodies, whether owned directly or
indirectly, are eligible to invest under the
scheme so long as it is clear that the ultimate
ownership to the extent of at least 60 per cent is
in the hands of non-residents of Indian
nationality/origin. Each such applicant company is
eligible to make investment subject to the
existing ceiling of one per cent irrespective of
whether the ultimate ownership is in the hands of
one or more individuals.
963
Since this clarification merely reflects the
original intention of the Government, the
investments made by the applicants before 2nd May,
1983 but pending for approval should not be
subject to five per cent ceiling. Pending
applications may be disposed of accordingly.
This letter was apparently delivered personally to Dr.
Man Mohan Singh, Governor of the Reserve Bank of India and
he made the following endorsement on the letter :
“I have discussed this case with FS and FM. This
matter has been approved by CCPA. As such we
should faithfully carry out consequential action.
I have discussed with FS, FM and Principal
Secretary to PM the issue of Press Note regarding
clarification by the Government regarding the NRI
Scheme. It has been agreed that the Press Note
will be issued at 6.30 PM by RBI in Delhi itself.”
We are told that the letters FS stand for Finance Secretary,
FM for Finance Minister and CCPA for Cabinet Committee on
Political Affairs.
As mentioned in the note of Dr. Manmohan Singh, a Press
release was issued by the Reserve Bank the same day to the
effect that the Government, having regard to the objectives
of the scheme for investment by non-residents of Indian
nationality/origin had clarified that their original
intention was that the facilities of direct and portfolio
investments in shares/debentures of Indian companies and
deposits with public limited companies should be available
to the overseas companies, partnership firms, trusts,
societies and other bodies in which the ownership/beneficial
interest was indirectly but ultimately held to the extent of
at least 60 per cent by non-resident individuals of Indian
nationality or origin. It was further stated in the Press
release that the Government had also clarified that each
overseas body was eligible to invest up to one per cent of
the equity capital under the portfolio investment scheme
irrespective of whether the ultimate ownership/beneficial
interest in such body was in the hands of one or more
964
non-resident individuals of Indian nationality/origin
subject to an overall ceiling of 5 per cent of the total
paid up equity capital if the investment was made after 2nd
May, 1983. The overseas bodies desiring to make investment
under the scheme were required to submit their applications
to the Controller, Reserve Bank of India, Exchange Control
Department, Bombay. The overseas bodies were required to
maintain accounts with banks authorised to deal in foreign
exchange in India under the Non-resident (External) Account
Scheme.
On 19.9.1983, the Reserve Bank also issued Circular No.
18 under sec. 73(3) of FERA. We have already referred to the
Circular earlier. On the same day (19.9.1983), the Reserve
Bank by a telex message, conveyed to the Punjab National
Bank their permission to release the money remitted by the
Caparo Group of companies from abroad for making payment
against shares of DCM and Escorts Limited purchased on
behalf of the 13 Caparo Group of Companies provided the
shares in question were purchased up to and inclusive to 2nd
May, 1983. It was also mentioned that the purchase of shares
shall be deemed to have taken place up to and inclusive of
2nd May, 1983 if firm purchase commitments as evidenced by
brokers’ contract notes had been entered into and the shares
had been/would be taken delivery of pursuant to such firm
commitments at the price mentioned in the relative brokers’
contract notes. m e letter granting permission for purchase
of shares was stated to follow. A letter did follow on the
same day by which the 13 group of companies were given The
approval of the Reserve Bank ‘to make investments in and
hold shares of Delhi Cloth and General Mills Limited and
Escorts Limited to the extent of one per cent of the paid up
capital of the respective companies subject, where the
purchase had been made after 2nd May, 1983 subject to an
overall ceiling of 5 per cent of paid up equity capital of
each of the investee companies.’ Purchases made up to and
inclusive of 2nd May, 1983 were not subject to the 5 per
cent ceiling. Information was requested as to the number of
face value of the shares purchased up to 2nd May, 1983 as
also details of shares, if any, purchased after 2nd May,
1983. Permission was also accorded for purchase of
shares/debentures of other Indian companies on behalf of 13
non-resident companies, through stock exchanges in India at
the ruling market price subject to the condition that the
shares/debentures would be purchased out of fresh
remittances received from abroad and/or out of the funds
held in the applicant companies’ Non-Resident (External)
Account to be opened with the banker. Purchases of equity
shares with repatriation benefits could be purchased up to
965
one per cent of the total paid up equity capital of the
company, subject to the overall ceiling of 5 per cent.
Another condition was that the shares acquired under the
permission should be retained by the non-resident investor
company for a minimum period of one year from the date of
their registration with the Indian company. The permission
was to be valid for a period of three years from the date of
the letter.
In the meanwhile, Escorts Limited wrote several frantic
letters to the Reserve Bank of India and the Government of
India on 23.7.83, 5.9.1983, 16.9.1983 and 17.9.1983
reiterating the allegations in regard to the purchase of
shares by the 13 non-resident companies. Although the
Reserve Bank granted the requisite permission to the non-
resident companies on 19.9.83, the Reserve Bank of India, on
22.10.1983, perhaps in view of the persistence with which
Escorts Limited continued making allegations against the
non-resident companies and perhaps with a view to further
satisfy itself, wrote to the Punjab National Bank asking
them for a report on the issues raised in the letters of
Escorts Limited dated 5th and 17th September’83, the DCM’s
letters dated 11th and 24th August ’83 and the letters of
their advocates. Copies of the letters were forwarded to the
Punjab National Bank who in turn asked the brokers Raja Ram
Bhasin & co. to submit a report to them about the various
issues raised in the Reserve Bank’s letter. Raja Ram Bhasin
& Co. replied on 12.12.1983 and expressed their surprise
that these questions were being raised after the Reserve
Bank had granted its permission on 19.9.1983. However, they
explained that no illegality had been committed by them or
their clients the Caparo Group of Companies with regard to
the purchase of shares before 2.5.1983. The queries raised
by the companies did not dispute the date of purchases made
by them up to 28.4.1983. The queries were misleading and
were merely an attempt to create a confusion. The Reserve
Bank had satisfied itself and declared the eligibility of
the companies to invest. All contracts for the sale or
purchase of shares were made subject to the rules, bye-laws
and regulations of the stock exchange and delivery could be
made and accepted pursuant to the contracts earlier entered
into. It was not essential that the transfer deeds must bear
the date of stamp of the Registrar of Companies as the date
of the contract. Deliveries could be taken even after
28.4.1983 . The dates stated in the transfer deeds were the
dates of execution of the deeds of transfer by the
transferee and had no relevance to the date of
966
purchase of the date of delivery. The sale consideration
shown in the transfer deed was for the purpose of
computation of the stamp duty had to be paid at the rate
prevalent on the dates stated on the transfer deeds and not
as on the actual date or purchase. No shares were purchased
in the benami names. The queries for which answers were now
sought, were already before the Reserve Bank of India and
considered by them before permission was granted.
Raja Ram Bhasin & Co. wrote a further letter on
27.12.1983 with regard to the query whether shares were
purchased from rupee loan raised in India from the Reserve
Bank of India. It was stated that a remittance of about
Rs.107 crores was with-held by the Punjab National Bank
without disclosing any reason. Shares had already been
purchased and consequently, the brokers had to take delivery
from the seller broker and monies had to be paid to them.
Otherwise the brokers would be declared as defaulters for
non-payment. In the premises, the brokers had to take
deliveries and arrange payments. Reserve Bank’s permission
was not necessary for this purpose.
Thereafter, the Punjab National Bank wrote to the
Reserve Bank of India answering the queries raised by them
and reiterating that they had acted in accordance with the
instructions and guidelines contained in the Reserve Bank’s
letter dated 19.9.1983. All the other points raised by the
Escorts Limited and DCM Limited required answers from the
brokers. So they wrote to the brokers and the brokers had
replied to them stating that no illegality had been
committed. The comments of the brokers were summarised and
it was then added that a sum of Rs.1,05,30,000 was released
to the brokers in accordance with the directions of the RBI
as conveyed by their telex message and letter dated
19.9.1983.
Subsequent to the grant of permission by the Reserve
Bank of India another attempt was made to have the transfer
of shares registered. The request was turned down once again
by the Escorts Ltd. who by their letter 13.10.83 stated that
apart from the question of obtaining the permission of the
Reserve Bank of India the decision of the Board of Directors
to refuse to register the transfer of shares was based on
other grounds also which continued to be valid. We may
mention here that before the High Court, all the other
grounds mentioned by the Board of Directors were abandoned
except the ground relating to want of permission of the
Reserve Bank of India. Before the High Court, a resolution
passed by the Directors by Circulation was filet and it was
to this effect:-
967
“Resolved that it is not the Board’s intention to
get adjudicated in some other proceeding the
grounds of rejection contained in para 7 of the
Share Scrutiny ant Transfer Committee of Directors
Report dated 8th June, 1983 or in paras 6, 7 and 8
of the Report dated 29th August 1983 and the Board
hereby resolve not to rely on the said grounds in
any proceeding.”
The High Court also recorded the concession in the
following words :
“Para 214 : In the rejoinder affidavit filed by
petitioner No.2 it was specifically pleaded that
the petitioners do not want adjudication of the
other grounds of refusal of registration of
shares, and as such failure to obtain prior
permission under section 29 of the FERA retained
the sole ground for rejection. The respondents
urged that since other grounds of refusal to
register the shares are not now pressed and are
not required to be adjudicated in this Writ
Petition, the Court should refuse to go into this
question. That would amount to piece-meal
adjudication on the validity of the purchase and
refusal to register, which is not permissible even
in the case of a suit, which principle, according
to the learned Attorney-General, also applies to
Writ Petition mutatis mutandis.
Para 215 : Whether there is a live issue for
adjudication and whether the petitioners have
locus standi cannot be viewed in isolation or in
the abstract, divorced from the facts and
circumstances of the case.
Para 216 : In our view, in raising this contention
certain relevant factors are being overlooked. The
Union of India, the RBI and PNB and the other
respondents dispute the correctness of the
decision taken by the petitioners not to register
the transfer of shares purchased by respondents
Nos. 4 to 17. Respondent No.19 has preferred an
appeal under section
968
111 of the Companies Act before the Company Law
Board and the same is still pending. Respondent
Nos. 20 and 21, the stock-brokers, continue to
insist upon reconsideration of the decision taken
by the Board of Directors in regard to
registration of the shares. D.N. Davar, on behalf
of the financial institutions, put in written note
on 6.1.1984 signed by him demanding the Board of
Directors to reconsider its decision. Further the
petitioner-company has to pay dividend on these
shares accruing from time to time to the holders
of these shares. The dividend on these shares
amounting to Rs.7,50,000 per annum is obviously
payable to those in whose names the shares stand
registered in the books of the company. If the
dividend is not paid within the stipulated time,
the petitioner-company and its Directors would be
exposed to penalties under the Companies Act. The
question of payment of dividend would recur year
after year. In fact, on the question of payment of
interim dividend arose, while the respondent-
companies claim to be entitled to the payment of
the dividend because they have purchased the
shares, the petitioners object to payment because
the registration of transfer of shares purchased
without prior permission could not be effected and
the dividend cannot be paid to persons whose
shares are not registered. When petitioner No.2
addressed a letter dated 2nd December 1983 to D.N.
Davar, Executive Director, IFCI, inviting his
comments on the decision to withhold the interim
dividend with respect to shares purchased by the
respondent-companies, he replied through his
letter dated 17th December, 1983 inter alia as
follows:
“Since the payment of dividend in question, as
referred to in your letter under reply pertains to
interim dividend as resolved by the Board of
Directors on the 20th July 1983 there does not
appear to be legal bar in withholding the same
according to the second opinion. However in view
of the conflicting legal opinions on the issue, we
are referring the matter to the Ministry of Law,
Department of Company Affairs for their
clarification. On hearing from them, we shall
revert to you on the subject”.
969
Thus the matter was under reference to the
Government of India and the question whether
registration of transfer of shares should be
effected or not and who would be entitled to
receive dividend on these shares was a live issue
even on 17th December 1983 and was not decided
even by the time the writ petition was filed. None
of the respondents has taken back the shares
lodged with the petitioner-company for
registration of transfer. Upon the sale of the
shares and lodging of application for their
transfer with the petitioner-company, it had to
take a decision. The Company has rejected the
request for registration on grounds which,
according to the well considered opinion of their
legal advisers, are valid and justified. The RBI
as well as the other respondents and their legal
advisers seem to hold a different view. Of course,
as discussed above, that legal opinion has not
been placed before the court; nor is the Court
entitled to require them to disclose it. It must
be recorded that petitioners’ learned counsel, Kr.
Nariman, fairly conceded that it was an error on
the part of the petitioners to have referred in
the petitioner No.2’s affidavit to the legal
advice tendered to the respondent and requested
that lt may be treated as withdrawn. It was not
pressed at the bearing of the writ petition. Be
that as it may, the fact remains that the
respondents held a different view on this legal
issue and have pressed the same before this court.
The question whether prior permission is necessary
or not is thus not concluded by the rejection of
transfer of the shares purchased by respondents
Nos.4 to 16. It would arise from time to E time as
and when such purchases are made in future. The
petitioner-company itself would have to consider
the same whenever such shares are presented for
registration. Even the Solicitors of respondent
No.18 in their letter dated 27th February 1984
addressed to the Petitioners’ Solicitors stated :
“…… the controversy regarding transfer of
shares has been raging throughout the length and
breadth of
970
the country and various forums including the
shareholders associations, chambers of commerce
and other public bodies have been making
observations and suggestions on such issues..”
They also specifically said in that letter that
they would refer to that letter at the hearing of
the writ petition. This legal issue would arise
for decision whenever the action of the
petitioners not to register the shares is
questioned by any of the transferors or
transferees of the shares. If the respondents
could still insist upon the registration of the
shares and claim that permission granted to the
respondent companies by the respondent No.2
subsequent to the purchase of shares is valid
which claim is strongly supported by the stand
taken by respondents Nos. 1 and 2, the petitioners
are certainly entitled to seek a declaration in
this behalf. Whether such a declaratory relief in
this behalf could be granted or not will be
considered in due course, but certainly it cannot
be said that the petitioners have no cause of
action for seeking a declaration. Notwithstanding
the decision taken by the Board of Directors, the
company continues to be under pressure to transfer
the shares. If the stand taken by the petitioners
is incorrect, then they would be bound under the
statute as well as under the directions of the
RBI, to register the transfer of shares in the
books of the Company even now. While forwarding
the copy of the letter dated 27th September 1983
addressed by the PNB to the respondent No. 4
Company, Haresh Bhasin (respondent No.20) by his
letter dated 8th October 1983 addressed to the
petitioner-company and sent by Registered Post
A.D., had requested that the decision of the Board
of Directors dated 29th August 1983 refusing to
register the shares be reviewed. In reply the
petitioner company conveyed through its letter
dated 13th October 1983 that notwithstanding the
impugned Circular and the letter of the RBI, the
refusal to register continued to hold good for
various other reasons. In that letter the
petitioners-company also disputed the claim that
the thirteen non-resident companies hat purchased
the shares prior to 2nd May 1984. The petitioner-
company thus maintained that the permission
granted subsequently is not valid and that the
refusal to register the shares for other reasons
971
still holds good. Of course, at the hearing of the
writ petition, having regard to the decision of
the Supreme Court in Bajaj Auto Ltd. v. N.K.
Firodia A.I.R. 1971 S.C. 321 the learned counsel
Mr. Nariman conceded that the other grounds for
not registering the shares were not being pressed
in support of the refusal of registration. It was,
therefore, argued for the respondents that this
letter would indicate that even the petitioners at
that stage accepted that the permission granted
under Exh. “B” and Ext. “C” validated the purchase
and no longer stood in the way of registration of
the shares. We are unable to agree with this
contention; firstly because if under sec. 29 prior
permission was require for a valid purchase, any
such statement made in the letter on behalf of the
petitioner-company cannot validate such transfer
so as to entitled the purchase to claim
registration of the shares. Any registration of
transfer by the petitioner-company would steel be
in contravention of section 19 read with section
29 of the FERA; secondly the letter cannot be
interpreted to mean that the stand taken by the
company and its Board of Directors unanimously
that the purchase is invalid for not obtaining
prior permission was given up. Further even if
Exh.’B’ and Exh.’C’ are construed as a grant of
permission, lt would amount to granting permission
subsequent to the purchase. When the letter of the
petitioner-company expressly states that
“notwithstanding grant of the permission by the
RBI as refer by you”, it could only mean the grant
of permission subsequent to the purchase could not
hold good and that they were not prepared to
transfer the shares on the basis of that
permission. The fact that they actually proceeded
to challenge the very permission granted by way of
Writ Petition fully establishes that the company
repudiated its liability to transfer the shares on
the strength of the impugned Circular and letter.
While 80, it is the case of the petitioners that
D.N. Davar one of the Directors, armed with the
authority to speak for all the Financial
Institutions including the LIC continued to insist
that the writ petition be withdrawn. Apart from
the other pressures exerted on the petitioner
company and its Managing Director, already
discussed above, at the meeting of the Board of
Directors of the petitioner company held on 6th
January 1984, D.N. Davar tabled four pages of
972
signed note inter alia insisting upon the Board of
Director to recall the cheques lodged with the
institutions towards repayment of loans and to
withdraw the writ petition filed in the court and
not to take note of the correspondence exchanged
between the financial institutions and the
management. The Board of Director, however, did
not concur with his proposal; on the contrary, it
ratified the filing of the writ petition. Apart
from petitioner No.2 each of the other nine
Directors filed an affidavit in this court
supporting the filing of the writ petition. It is
also the allegation of the petitioners that
financial institutions, finding that
notwithstanding the unanimous request made on
their behalf by D.N. Davar at the meeting of the
Board of Directors, the Company and its Managing
Director were refusing to withdraw the Writ
Petition and effect the transfer of shares, with
the ulterior purpose of obtaining registration of
shares, requisitioned an EGM of the petitioner-
company so that they may secure a controlling
majority in the Board of Directors. The
petitioners allege that the action of the LIC
(respondent no. 18) which by itself holds 30% of
the shares and along with this other financial
institutions, collectively represented by Davar,
holds 52% shares, is mala fide and is calculated
to secure the registration of the shares which
were purchased in contravention of FERA. In the
circumstances referred to above, it cannot be said
that the company and its Managing Director had no
cause of action to file this Writ Petition hold
that there was no longer any live issue to be
adjudicated. The petitioner-company thus
maintained that the permission granted
subsequently is not valid and the refusal to
register the shares for other reasons still hold
good. Of course, at the hearing of the Writ
Petition, having regard to the decision of the
Supreme Court in Bajaj Auto Ltd. v. N.K. Firodia,
the learned counsel Mr. Nariman conceded that the
other grounds for not registering the shares were
not being pressed in support of the refusal of
registration.
In view of the rejoinder and the concession made before
the High Court, in regard to the refusal of the company to
register the transfer of shares, the only ground which it is
necessary for
973
us to consider is whether the permission granted by the
Reserve Bank of India was in order.
Escorts Limited having refused permission to register
the transfer of shares, one would have thought that lt was
thereafter upto the purchasers or the sellers of the shares,
if they were no minded to proceed to take further
appropriate action in the matter to have the transfer of
shares registered. however it was not they that moved but it
was the Escorts Limited that filed the writ petition out of
which the present appeals arise. They explain that the
pressure of circumstances was such that they had no option
except to go to court under Art.226 of the Constitution. It
appears that on 18.10.83, Escorts Limited met with the
representatives of the Financial Institutions, the ICICI,
the IFC, the IDBI and the UTI. It has to be mentioned here
that 30 per cent of the shares of Escorts Limited are held
by the Life Insurance Corporation, 16 per cent by the Unit
Trust of India and 6 per cent by the General Insurance
Corporation and its subsidiaries. According to Escorts
Limited, at this meeting L their representatives gave full
particulars of the various illegalities committed by the
Caparo Group of Companies in the purchase of shares of
Escorts Limited but they were repeatedly pressed by the
representatives of the institutions to get their Board of
Directors to reconsider their earlier refusal to register
the transfer of shares. It was said that Mr. Patel the
Chairman of the Unit Trust of India even said that the
Financial Institutions who owned 52 per cent of the shares
were in a position to remove the management at will. There
were other meetings also with the representatives of the
Financial Institutions. Mr. Nanda, the Chairman of Escorts
Limited was requested to meet with Mr. Punja, Chairman of
IDBI, and a Director of Life Insurance Corporation who had
just returned from abroad. At this meeting also, it was
said, Mr. Punja insisted that the transfer of shares
purchased by the thirteen Caparo Companies should be
registered. Again on 1.11.83 there was a meeting between the
lawyers of Escorts and the legal advisers of the Financial
Institutions. There was a further meeting between . Nanda
and Mr. Punja on 9.11.83 when Mr. Nanda of Escorts Limited
requested Mr. Punja to expedite the proposal for merger of
goetze India Limited with Escorts Limited and the proposal
for pre-payment of the outstanding loans of Escorts Limited
to the Financial Institutions at the inter-institutional
meeting to be held on the after¯ on of 9th. Mr. Nanda was
later informed by Mr. Davar that the proposals of Escorts
Limited had been discussed
974
and accepted but the formal clearance would have to await
Mr. Punja’s discussion with Mr. Nanda. Thereafter, it was
said, Mr. Nanda was informed by Mr. Punja that Escorts
Limited must register some shares purchased by the Caparo
Group of Companies. In answer Mr. Nanda informed Mr. Punja
that the RBI itself was enquiring into the purchase of
shares by Caparo Group of Companies and therefore Mr. Punja
should await the outcome of the investigation. On 10.11.83
Mr. Sen Gupta, the Controller of capital issues telephoned
to Mr. Nanda and insisted that Escorts Limited should
atleast register some shares purchased by the Caparo Group
immediately. On 12.11.83 Mr. Punja once more insisted that
some shares atleast should be registered immediately. On
16.11.83 Mr. Nanda met Mr. Nadkarni, the Chairman of ICICI
who informed him that Mr. Punja was most upset at the
refusal of Escorts Limited to register the transfer of
shares. Thereafter in the first week of December, the Unit
Trust of India wrote a letter to Escorts Limited to induct
their Dy. General Manager as a nominee Director on the Board
of Directors of Escorts Limited. On 13th December, 83 there
was a meeting between Mr. Nanda and the representatives of
Financial Institutions when once again there was renewed
insistence that the transfer of shares should be registered.
On 20.12.83 Mr. Nanda telephoned and had a discussion with
Mr. Punja who, it was said, informed him that the question
of clearance of the proposal of Escorts Limited for merger,
for pre-payment of loans and issue of debentures were inter-
linked with the question of register of transfer of shares
purchased by the Caparo Group of Companies. According to Mr.
Nanda this conversation was contemporaneously recorded by
him in a letter addressed by him to Mr. Punja that very day.
While so the ‘Telegraph’ and the ‘Financial Express’
published a statement by Mr. Swraj Paul that the fight was
now between the Government and the management of Escorts
Limited and that he would consider himself defeated if the
Government cleared the proposal of Escorts for the issue of
debentures without first settling the matter of registration
of transfer of the shares purchased by him. Mr. Swraj Paul
was also reported to have said that the Governor of the
Reserve Bank (Dr. Man Mohan Singh, a highly respected Civil
Servant of our country) was applying double standards and
was feeding wrong information to the Union Finance Minister.
(If the reported statement is correct, we can only
characterise it as saucy, rude and impudent coming as it
does from a foreign national seeking the permission of the
Reserve Bank to invest in shares of Indian Companies.
Perhaps those are the ways of the markets in which he
operates. People
975
afflicted with double vision are ready to see double
standards in others. We appreciate neither his conduct nor
his statements. Dr. Man Mohan Singh, we presume, could not
and did not think it proper to go to the press as readily as
Mr. Swraj Paul and involve himself in an unsavoury
controversy). On 24.12.83, there was a report of a speech of
the Union Finance Minister (Mr. Pranab Mukherjee), at the
Platinum Jubilee Celebration of the Calcutta Stock Exchange
in which he referred to the dominant position held by the
Financial Institutions in the equity shares of some large
private companies and added, I have a very effective
instrument under my command to end the uncertainty.
According to Escorts Limited it was in this factual
background, that they were compelled to file the writ
petition in the High Court of Bombay. One remarkable tactic
of Mr. Nanda of Escorts deserves special mention here. The
Writ Petition was filed on 29.12.83 and some interim
directions were also sought on the same day. On that very
day Mr. Nanda also had a meeting with the representatives of
the Financial Institutions at the Office of Mr. Punja at
which-. Mr. Nanda was asked to arrange for the induction of
a representative of the U.T.I. on the Board of Escorts and
was further informed that the proposal for merger of Goetze
Limited may not be acceptable as it would reduce the holding
of the financial institutions from 52 per cent to 49 percent
but that the matter was still under consideration. What is
remarkable and what may even be considered dubious conduct
on the part of Mr. Nanda is his failure to inform the
representatives of the financial institutions about the
filing of the Writ Petition that very day.
Writ Petition No.3063 of 83 thus filed in the High
Court of Bombay was perhaps both protective and a preemptive
strike. The writ petition is at once remarkable for its
length and the number of prayers. The Writ Petition runs to
as many as 172 pages and innumerable documents running into
several volumes are now placed before us. There were
originally thirteen prayers(a)…to (m). To these prayers
four more prayers were added subsequently. Prayer (a), (b)
and (c) seek declarations that Circular No.18 dated 19.9.83
are illegal and void as contrary to the provisions of the
Foreign Exchange Regulation Act as arbitrary and issued for
collateral purposes, as constituting in abuse of statutory
authority and as violative or Articles 14, 19(1)(c) and
19(1)(g) of the Constitution. Prayer (d) is for a
declaration that the purchases of shares made by and/or on
behalf of the Caparo Group
976
Limited are illegal and violative of the Foreign Exchange
Regulation Act, the circulars of the Reserve Bank of India
issued from time to time and the provisions of the
Securities Contracts Regulation Act and the bye-laws of the
Stock Exchange. Prayers (e),(f),(g),(h),(i) again relate to
Circular No. 18 dated 19.9.83 and the letter dated 19.9.83.
Prayer (j) is directed towards securing the relevant
documents. Prayer (k) is to restrain the first respondent
(Union of India) from pressuring the company to register the
transfer of shares. Prayer (1) is for ad-interim reliefs in
terms of prayers (j) and (k). Prayer (m) is for costs of the
Petition. It will be of interest to notice at this juncture
that the learned single judge before whom the writ petition
came up for preliminary hearing thought fit not to issue a
rule nisi in regard to prayer(d). The learned judge made a
speaking order refusing to issue a rule nisi in regard to
prayer (d). There was no appeal against that order by
Escorts Limited and the order became final so far as
prayer(d) was concerned. The entire cause of action of the
petitioner centres round the purchase of shares made by and
on behalf of Caparo Group Limited and if those purchases are
left unquestioned, one is left wondering what survives in
the writ petition, particularly in view of the fact that the
Board of Directors of the Company had already refused their
permission to register the transfer of shares. The prayers
relating to Circular No. 18 dated 19.9.83 and the letter
dated 19.9.83 were only in aid of prayer (d) which, as we
see it, was the main prayer in the writ petition. But we do
not propose to dispose of the case on any such preliminary
ground. Apparently, when the learned single judge refused to
issue a rule nisi in regard to prayer(d) what he meant was
that transactions of purchase of shares would not be allowed
to be separately and individually questioned as that would
involve adduction of evidence in regard to each of the
transactions and would be ordinarily outside the province of
a court exercising jurisdiction under Article 226 of the
Constitution. This becomes clear from what the learned judge
has himself stated. He has referred to the objection to
prayer(d) in the following words:
“It was also submitted that prayer (d) should not
be entertained and if the Petitioners wanted to
urge the contentions beyond those restricted to
Exhibit ‘B’ and ‘C’ they should be relegated to an
ordinary action or to urge these contentions in
the pending appeal before the Company Law Board.”
He has dealt with the objection and concluded :
977
“As stated earlier I think what is sought for in
prayer(d) must be regarded as ordinarily beyond
the function of the Writ Court but this should not
be taken to imply that there is no warrant in the
various complaints made by Escorts and Petitioner
No.2 in connection with this aspect of the matter.
Indeed it would be clear that what had been stated
by Petitioner No. 2 in his letter dated 19th
September 1983 was substantial and serious but
these allegations have not been gone into either
by the Government of India or the Reserve Bank of
India.”
Ex.B we may mention in the Circular dated 19.9.83 and Ex-C
in the permission granted by the Reserve Bank of India.
Subsequent to the filing of the Writ Petition the Life
Insurance Corporation of India (who later was impleaded as
the 18th respondent in the Writ Petition) who along with
other financial institutions held as many as 52 per cent of
the total number of shares in the Company, issued a
requisition dated 11.2.84 to the company to held an
extraordinary general meeting for the purpose of removing
nine of the part-time Directors of the Company and for
nominating nine others in their place. Alleging that the
action of the Life Insurance Corporation of India was
malafide and part of a concerted action by the Union of
India, the Reserve Bank of India and the Caparo Group
Limited to coerce the company to register the transfer of
shares and to withdraw the Writ Petition, the Writ
Petitioners sought to suitably amend the Writ Petition and
to add prayers (ia), (ib), (ic) and (id) to declare the
requisition to hold the meeting arbitrary, illegal, ultra
vires etc. The writ petition was amended. Paragraphs 149A(l)
to (44) were added as also prayers (ia), (ib), (ic) and
(id).
The High Court after an elaborate enquiry summarised
their conclusions and granted reliefs in the following
manner:
“Rule nisi is made absolute as under : Section
29(1)(b) of FERA is mandatory. No NRI Investor is
authorised to purchase shares in an Indian company
without prior permission of the RBI under section
29(1)(b) of FERA; any purchase of shares without
such
978
prior permission is illegal. Neither the Union of
India nor the RBI is empowered to order otherwise
either by issuing directions under section 75 or
under section 73(3) of the FERA; nor are they
empowered to grant permission after the shares are
purchased so as to validate such purchases or to
‘permit holding of the shares purchased without
obtaining prior permission. The press release
dated 17th September, 1983 (Exh. ‘A’), the
Circular dated 19th September, 1983 (Exh. ‘B’) and
the letter dated 19th September, 1983 (Exh. ‘C’)
cannot operate retrospectively so as to validate
the purchase of shares made by NRI Companies which
were ineligible on the date of purchase; nor Can
they authorise purchase of shares without
obtaining prior permission of the RBI under
section 29(1)(b) of the FERA. In so far as the
impugned press release, circular and the letter
permit the respondent companies to hold the shares
purchase without obtaining prior permission of the
RBI, they are ultra vires of section 29(1)(b) of
the FERA and the powers vested in the union of
India under section 75 and the RBI under sec.
73(3) of the FERA. To that extent, they are void
and inoperative both prospectively and
retrospectively. The impugned press release and
the Circular, however amount to amending the
Portfolio Investment Scheme with full repatriation
benefits introduced under Circular No. 9 dated
14th April, 1982 (Exh.’G’) and such amendment
operates only prospectively. A writ of mandamus
shall issue restraining respondents Nos. 1 and 2
from issuing any directions –
(a) to register transfer of shares purchased by
the respondent-companies (which form the subject-
matter of this writ petition) pursuant to the
letter dated 19th September, 1983 (Exh.’C’); and
(b) to further forbear from implementing the said
t Circular dated 19th September 1983 (Exh.’B’) and
the said letter dated 19th September 1983
(Exh.’C’) with respect to the shares purchased by
the respondent companies which form the subject-
matter of this writ petition.
979
There shall be a declaration that the action of
respondent No.18 in issuing the impugned
requisition notice is contrary to the provisions
of sec.284 of the Companies Act and ultra vires
the powers vested in the LIC under section 6 of
the LIC Act and contrary to the internment of the
provisions of the LIC Act. The impugned
requisition notice offends the principles of
natural justice. The action of the LIC in issuing
the impugned requisition notice is an arbitrary
and mala fide action taken for collateral purpose;
it is violative of Article 14 of the Constitution
of India. The Union of India and the RBI,
respondents Nos.1 and 2, are in no way responsible
for the action of the LIC in this regard. The
allegation of this mala fides made against them
and the Union Finance Minister are
unsubstantiated. The requisition notice and the
resolutions passed at the meeting held in
pursuance of the said notice are quashed. A writ
of mandamus shall issue restraining the
respondents from taking any steps or action in
pursuance of the resolutions passed any meeting
held pursuant to that notice any step or action on
or under or in furtherance of the impugned
requisition notice.”
From what has been narrated above, one of the principle
questions to be considered is seen to be whether the Reserve
Bank of India had the power or authority to give ex-post
facto permission under sec.29(1)(b) of the Foreign Exchange
Regulation Act for` the purchase of shares in India by a
company ¯ t incorporated in India or whether such permission
had necessarily to be previous permission.
We do not propose to refer to any dictionary to find
out the meaning of the word ‘permission’, whether the word
is comprehensive enough to include subsequent permission. We
will only refer to what Sir Shah Sulaiman, CJ. said in
Shakir Hussain v. Chandoo Lal & Ors., A.I.R. 1931 Allah,
567.
“Ordinarily the difference between approval and
permission is that in the first the act holds good
until disapproved, while in the other case, it
does not become effective until permission is
obtained. But permission subsequently obtained may
all the same validate the previous act.
980
We have already extracted sec.29(1) and we notice that
the expression used is “general or special permission of the
Reserve Bank of India” and that the expression is not
qualified by the word “previous” or “prior”. While we are
conscious that the word ‘prior” or “previous” may be implied
if the contextual situation or the object and design of the
legislation demands it, we find no such compelling
circumstances justifying reading any such implication into
sec.29(1). On the other hand, the indications are all to the
contrary. We find, on a perusal of the several, different
sections of the very Act, that the Parliament has no been
unmindful of the need to “clearly express its intention by
using the expression “previous permission” whenever it was
thought that “previous permission” was necessary. In
Secs.27(1) and 30, we find that the expression ‘permission’
is qualified by the word ‘previous’ and in sections 8(1),
8(2) and 31, the expression ‘general or special permission’
is qualified by the word “previous”, whereas in sections
13(2), 19(1), 19(4), 20, 21(3), 24, 25, 28(1) and 29, the
expressions ‘permission’ ant ‘general’ or ‘special
permission’ remain unqualified. The distinction made by
Parliament between permission simpliciter and previous
permission in the several provisions of the same Act cannot
be ignored or strained to be explained away by us. That is
not the way to interpret statutes. The proper way is to give
due weight to the use as well as the omission to use the
qualifying words in different provisions of the Act. The
significance of the use of the qualifying in one provision
and its non-use in another provision may not be disregarded.
In our view, the Parliament deliberately avoided the
qualifying word ‘previous ‘ in sec.29(1) so as to invest the
Reserve Bank of India with a certain degree of elasticity in
the matter of granting permission to non-resident companies
to purchase shares in Indian companies. The object of the
Foreign Exchange Regulation Act, as already explained by us,
undoubtedly, is to earn, conserve, regulate and stored
foreign exchange. The entire scheme and design of the Act is
directed towards that end. Originally the Foreign Exchange
Regulation Act, 1947 was enacted as a temporary measure, but
it was placed permanently on the Statute Book by the
Amendment Act of 1957. The Statement of Objects and Reasons
of the 1957 Amendment Act expressly stated, “India still
continues to be short of foreign exchange and it is
necessary to ensure that our foreign exchange resources are
conserved in the national interest.” In 1973, the old Act
was repealed and replaced by the Foreign Exchange Regulation
Act, 1973, the long title of which reads : “An Act to
consolidate and amend the law regulating certain payments,
dealings in foreign exchange ant securities, tran-
981
sactions indirectly affecting foreign exchange and the
import and export of currency and bullion, for the
conservation of foreign exchange resources of the country
and the proper utilisation thereof in the interest of the
economic development of the country.” We have already
referred to sec. 76 which emphasises that every permission
or licence granted by the Central Government or the Reserve
Bank of India should be animated by a desire to conserve the
foreign exchange resources of the country. The Foreign
Exchange Regulation Act is, therefore, clearly a statute
enacted in the national economic interest. When construing
statutes enacted in the national interest, we have
necessarily to take the broad factual situations
contemplated by the Act and interpret its provisions so as
to advance and not to thwart the particular national
interest whose advancement is proposed by the legislation.
Traditional norms of statutory interpretation must yield to
broader notions of the national interest. If the legislation
is viewed and construed from that perspective, as indeed it
is imperative that we do, we find no difficulty in
interpreting ‘permission’ to mean ‘permission’, previous or
subsequent, and we find no justification whatsoever for
limiting the expression ‘permission’ to ‘previous
permission’ only. In our view what is necessary is that the
permission of the Reserve Bank of India should be obtained
at some stage for the purchase of shares by non-resident
companies.
An argument was strenuously pressed before us by Shri
F.S. Nariman, learned Senior Advocate for the company, was
that the very scheme of the Act shows that the permission
contemplated by Sec. 29(1) could only be previous
permission, notwithstanding the circumstance that the word
‘previous’ does not qualify the expression ‘general or
special permission’ in sec. 29(1) though it does in several
other provisions. According to Sri Nariman, the Act was
designed not merely to attract but also to regulate the
inflow of Foreign Exchange. That was why, he said, the
provisions were very stringent. We have no hesitation in
agreeing with Mr. Nariman that while the inflow of Foreign
Exchange is welcomed by the Act, the inflow is also subject
to stringent checks as otherwise in no time the economy of
the country will be swamped with Foreign money and taken
over by giant multinationals. But that really does not
affect the interpretation of the expression ‘permission’ in
Sec. 29(1). The Reserve Bank of India is not bound to give
ex-post-facto permission whenever it is found that business
has been started or
982
shares have been purchased without its previous permission.
In such cases, wherever the Reserve Bank of India suspects
an oblique motive, we presume that the Reserve Bank of India
will not only refuse permission but will further resort to
action under sections 50, 61 and 63, not merely punish the
offender but also confiscate the property involved. We do
not think that the scheme of the Act makes previous
permission imperative under sec. 29(1) though the failure to
obtain prior permission may expose the foreign investor to
prosecution, penalty, conviction and confiscation if
permission is ultimately refused. Even if permission is
granted, it may be made conditional. The expression ‘special
permission is wide enough to take within its stride a
‘conditional permission’, the condition being relevant to
the purpose of the statute, in this case, the conservation
and regulation of foreign exchange. For example, ex-post-
facto permission may be granted subject to the condition
that the person purchasing the shares will not be entitled
to repatriation benefits.
Shri Nariman then suggested that even if we look st the
provisions of s. 29 by themselves it would clear that the
permission contemplated by s. 29 could only be ‘previous’.
He pointed out to us that while secs. 29(2) and 29(4) made
due provision for applying for permission to continue to
carry on any activity of the nature mentioned in s. 29(1)(a)
and continue to hold shares of a company of the character
mentioned in s. 29(1)(b) if such activity was carried on and
such shares were held on the date of the commencement of the
act, no such provision was found for the application for
permission to carry on such activity or to hold such shares
if such activity was commenced or if such shares were
acquired after the commencement of the Act but without the
previous permission of the Reserve Bank of India. It was
suggested that the very absence of any prescribed form for
the grant of permission for an activity started or shares
acquired subsequent to the commencement of the Act without
previous permission of the Reserve Bank of India, were
clearly indicative of the imperative nature of the need for
previous permission. It was submitted that whatever argument
was possible in regard to the acquisition of shares it was
clear that no activity of the nature mentioned in sec.
29(1)(a) could be commenced without the previous permission
of the Reserve Bank. Since the word ‘general or special
permission’ of the Reserve Bank occurring in sec. 29(1)
qualified both
983
clauses (a) and (b) the expression had to be given the same
meaning with reference to clause (b) as it had to be given
with A reference to clause (a) and that was that previous
permission was necessary. The argument is attractive and not
altogether without substance but it proceeds on the
assumption, for which there is no basis, that permission
required for carrying on business under sec. 29(1)(a) must
necessarily be previous permission. We do not think that the
Parliament intended to lay down in absolute terms that the
permission contemplated by sec. 29(1) had necessarily to be
previous permission. The principal object of sec. 29 is to
regulate and not altogether to ban the carrying on in India
of the activity contemplated by clause (a) and the
acquisition of an undertaking or shares in India of the
character mentioned in clause (b). The ultimate object is to
attract and regulate the flow of Foreign Exchange into
India. If that much is obvious, it becomes evident that the
Parliament did not intend to adopt too rigid an attitude in
the matter and it was, therefore, left to the Reserve Bank
of India, than whom there could be no safer authority in
whom the power may be vested, to grant permission, previous
or ex-post-facto, conditional or unconditional. The Reserve
Bank could be expected to use the discretion wisely and in
the best interests of the country and in furtherance of
declared Governmental fiscal policy in the matter of Foreign
Exchange.
It was contended on behalf of Escorts Limited that sec.
13 of the Foreign Exchange Regulation Act which enable the
Central Government, by a notification in the gazette, to
order that no person shall except with the general or
special permission of the Reserve Bank bring or send into
India any gold or silver or any Foreign Exchange or Indian
currency, would be rendered ineffective if the expression
‘general or special permission’ accruing in sec. 13 could be
construed to include subsequent permission. So, it was
urged, both in s. 13 and secs. 19 and 29 the expression
should be construed to exclude subsequent permission. There
is no force in this submission. Section 67 of the Foreign
Exchange Regulation Act provides that the restriction
imposed by or under sec. 13 is to be deemed to have been
imposed under sec. 11 of the Customs Act, and, further,
makes the provisions of the Customs Act applicable
accordingly. Section 11 of the Customs Act empowers the
Central Government to prohibit absolutely or subject to
conditions the import or export of goods of any specified
description. Reading together sections 13 and 67
984
of the Foreign Exchange Regulation Act and Section 11 of the
Customs Act, it is seen that an order under sec. 13 of the
Foreign Exchange Regulation Act operates as a prohibition
and there, can, therefore, be no question of the Reserve
Bank granting subsequent permission to validate the
importation of the prohibited goods and avoid the
consequences prescribed by the Customs Act. It is,
therefore, not possible to accept the analogy of section 13
to interpret sections 19 and 29.
Our attention was drawn to the very serious nature of
the consequences that follow the failure to obtain the
permission of the Reserve Bank, and the circumstance that
even the burden of proof that requisite permission had been
obtained, was on the person prosecuted or proceeded against
for contravening a provision of the Act or rule or direction
or order made under the Act thus ruling out mensrea as an
essential ingredient of an offence. It is true that the
consequences of not obtaining the requisite permission where
permission is prescribed are serious and even severe. It is
also true that the burden of proof is on the person
proceeded against and that mensrea may consequently be
interpreted as ruled out. But that cannot lead to the
inevitable conclusion that the permission contemplated by
section 29 is necessarily previous permission. Action under
section 50 or under section 56 is not obligatory and in the
case of a prosecution under section 56, the delinquent is
further protected by the requirement that the complaint has
to be made by one or other of the officers specified by
section 61(2)(ii) only and even then only after giving an
opportunity to the person accused of the offence of showing
that he had the necessary permission. We presume that when
called upon to show that he had the necessary permission,
the person accused of the offence could satisfy the officer
concerned that he had applied for permission as that there
was a reasonable prospect of his obtaining the permission.
We may further add here that ordinary prudence would warn a
foreign national who is man of the world, particularly of
the commercial world, to seek and obtain permission before
venturing to invest his money in shares of Indian Companies.
If not he would chance a refusal of permission and risk
other consequences. The chance and the risk, of course,
would not be there if everything was clean. Even if
permission is granted, it may be subject to a condition such
as withholding of repatriation benefits, which may not be
platable to him. That is another chance that he takes when
he seeks ex-post-facto permission. One
985
of the submissions of Shri Nariman was that the Parliament
took care to use the word ‘confirmation’ as distinguished
from the word ‘permission’ where lt thought such
confirmation was sufficient, as in sec. 19(5). The
Parliament, according to Shri Nariman, could well have made
a provision for confirming transactions coming into
existence after the commencement of the Act, if lt was 80
minded, but since, it did not do 60, but chose the word
permission’, it must follow that sec. 25 contemplates
previous permission only. We see no true foundation for this
submission. reference to any dictionary or any book of
synonyms will show that every word has different shades of
meaning and different words may have the same meaning. It
all depends upon the context in which the word is used. If
it was the intention of Parliament to comprehend both
previous and subsequent permission, the word ‘confirmation’
would not do at all. While it may be permissible to construe
the word ‘permission’ widely the word ‘confirmation’ could
never be used to convey the meaning ‘previous permission’.
The word confirmation would be totally misplaced in sec. 29.
It was also submitted on behalf of the company that if
the word ‘permission’ was construed to include ex-post-facto
permission, it would really amount to giving retrospective
operation to the permission. The Reserve Bank, it was said
was not competent to grant permission with retrospect
effect. In our view, the rule against retrospectivity cannot
be imported into the situation presented here. The rule
against retrospectivity is a rule of interpretation aimed at
preventing interference with vested rights unless expressly
provided or necessarily implied. To invoke the rule against
retrospectivity in a situation where no vested rights are
involved is to give statutory status to a rule of
interpretation forgetting the reason for a rule.
One of the submission very strenuously urged before us
was that the very authority which was primarily entrusted
with the task of administering the Foreign Exchange
Regulation Act, namely, the Reserve Bank of India was
itself, of the view that the ‘permission’ contemplated by
sec. 29(1)(b) of the Foreign Exchange Regulation Act was
‘prior permission. Our attention was invited to paragraph
24-A.1 of the Exchange Control Manual where the first three
sentences read as follows :-
In terms of sec. 29(1)(b) of Foreign Exchange
986
Regulation Act 1973, no person resident outside
India whether an individual, firm or company (nor
being a banking company) incorporated outside
India can acquire shares of any company carrying
on trading, commerce or industrial activity in
India without prior permission of Reserve Bank.
Also under sec. 19(1)(b) and 19(1)(d) of the Act,
the transfer and issue of any security (which
includes shares) in favour of or to any person
outside India require prior permission of the
Reserve Bank of India. When permission has been
granted for transfer or issue of shares to ¯ n-
resident investors under sec. 19(1)(b) or 19(1)(d)
it is automatically deemed to be permission under
sec. 29(1)(b) for purchase of shares by him.
The submission of Shri Nariman was two-fold. He urged that
paragraph 24-A.1 was a statutory direction issued under sec.
73(3) of the Foreign Exchange Regulation Act and, therefore,
had the force of law and required to be obeyed. Alternately
he urged that it was the official and contemporary
interpretation of the provision of the Act ant was,
therefore, entitled to our acceptance. The basis for the
first part of the submission was the statement in the
preface to the Exchange Control Manual to the effect:
“The present edition of the Manual incorporates
all the directions of a standing nature issued to
authorised dealers in the form of circulars upto
31st May, 1978. The directions have been issued
under sec. 73(3) of the Foreign Exchange
Regulation Act which empowers the Reserve Bank of
India to issue directions necessary or expedient
for the administration of exchange control.
Authorised dealers should hereafter be guided by
the provisions contained in this Manual.”
There is no force whatever in this part of the submission. A
perusal of the Manual shows that it is a sort of guide book
for authorised dealers, money changers etc. and is a
compendium or collection of various statutory directions,
administrative instructions, advisory opinions, comments,
notes, explanations suggestions, etc. For example, paragraph
24-A.1 is styled as Introduction to Foreign Investment in
India. There is nothing in
987
the whole of the paragraph which even remotely is suggestive
of a direction under sec. 73(3). Paragraph 24-A.1 itself
appears to be in the nature of a comment on sec. 29(1)(b),
rather than a direction under sec. 73(3). Directions under
sec. 73(3), we notice, are separately issued as circulars on
various dates. No Circular has been placed before us which
corresponds to any part of paragraph 24-A.1. We do not have
the slightest doubt that paragraph 24-A.1 is an explanatory
Statement of guideline for the benefit of the authorised
dealers. It is neither a statutory direction nor is it a
mandatory instruction. It reads as if it is in the nature of
and, indeed it is, advice given to authorised dealers that
they should obtain prior permission of the Reserve Bank of
India, so that there may be no later complications. It is a
helpful suggestion, rather than a mandate. The expression
‘prior permission’ used in paragraph 24-A.1 is not meant to
restrict the range of the expression ‘general and special
permission found in sections 29(1)(b) and 19(1)(b). It is
meant to indicate the ordinary procedure which may be
followed. Shri Nariman argued that none of the prescribed
forms provided for the application and grant of subsequent
permission. That may be so for the obvious reason that
ordinarily one would expect permission to be sought and
given before the act. Surely, the Form cannot control the
Act, the Rules or the directions. As one learned judge of
the Madras High Court was fond of saying ‘it is the dog that
wags the tail and not the tall that wags the dog.’ We may
add what this Court had occasion to say in Vasudev
Ramchandra Shelat v. Pranlal Jayanand Thakkar, [1975] 1
S.C.R. 534:
“The subservience of substance of a transaction to
some rigidly prescribed form required to be
meticulously observed, savours of archaic and
outmoded jurisprudence.”
According to Shri Nariman even if as found by us, the
permission to purchase shares of an Indian company by a non-
resident Investor of Indian origin or nationality under
section 29(1)(b) of the FERA could be obtained after the
purchase, the Reserve Bank ceased to have such power after
the formulation of the Portfolio Investment Scheme since it
did not reserve to itself any such power under the Portfolio
Investment Scheme promulgated in exercise of its powers
under sec. 73(3) of the Foreign Exchange Regulation Act. We
do not see any foundation for this argument in the scheme
itself. The scheme does not talk of any prior or previous
permission, nor are we able to
988
understand how a power possessed by the Reserve Bank under a
Parliamentary legislation can be so cut down as to prevent
its exercise altogether. It may be open to a subordinate
legislating body to make appropriate rules and regulations
to regulate the exercise of a power which the Parliament has
vested in it, so as to carry out the purposes of the
legislation, but it cannot divest itself of the power. We
are, therefore, unable to appreciate how the Reserve Bank,
if it has the power under the FERA to grant ex-post-facto
permission, can divest itself of that power under the
scheme. The argument was advanced with particular reference
to the forms prescribed under the scheme. We have already
pointed out that the forms under the scheme cannot abridge
the legislation itself.
Before proceeding further, it is just as well to have a
clear picture of the nature of the property in shares, the
law relating to transfer of property in shares under the law
and the effect of the provisions of the FERA. For that
purpose, it is desirable that we read together all the
relevant statutory provisions relating to the acquisition,
transfer and registration of shares. Besides referring to
the relevant statutory provisions, we will also refer to the
leading cases on the topic.
Section 2(46) of the Companies Act defines shares as
meaning share in the share capital of a company, and
includes stock except where a distinction between stocks and
shares is express or implied. Section 82 of the Companies
Act states the shares or other interests of any member in a
company shall be movable property transferable in the manner
prescribed by the articles of the company. Section 84 makes
a certificate, under the common seal of the company,
specifying any shares held by any member prima facie
evidence of the title of the member to such shares. Section
87 gives every member of the company holding any equity
share capital there-in a right to vote, in respect of such
capital, on every resolution placed before the company, his
voting right to be in proportion to his share of the paid-up
equity capital of the company. Section 106 makes provision
for ‘alteration of rights of holders of special classes of
shares’ under certain circumstances. Section 108(1)
prohibits a company from registering a transfer of shares in
a company unless a proper instrument of transfer duly
stamped and executed by or on behalf of the transfer or and
by or on behalf of the transferee
989
has been delivered to the company along with the certificate
relating to the shares. Section 108(1a)(a) provides for the
presentation of the instrument of transfer, in the
prescribed form, to the prescribed authority for the purpose
of having duly stamped on it the date of such presentation.
Section 108(1A)(b) provides for the delivery of the duly
stamped instrument to the company generally within two
months from the date of such presentation. Sections 108-A to
108-H impose certain restrictions on transfer of shares in
the company with which we are not concerned for the purpose
of this case. Section 110 provides for application for
transfer of shares. Section 111 (1) preserves the power of
the company under its articles to refuse to register the
transfer of any shares of the company, and sec. 111(3)
provides for an appeal to the Central Government against
such refusal to register. Section 206 obliges a company not
to pay the dividend in respect of any share except to the
registered holder of such share or to his order or to his
bankers or where a share warrant has been issued in respect
of the share to the bearer of such warrant or to his banker.
Default in payment of dividend is also made punishable under
sec. 207. A share-holder along with others, making a minimum
of one hundred members of the company or one-tenth of the
total number of members has the right to apply to the court
under sec. 397 for relief in case of oppression and under
sec. 398 for relief in case of mismanagement. Section 428
defines ‘contributory’ and it includes the holder of any
shares which are fully paid-up. The share-holder, as a
contributory, has also the right to apply for winding up of
the company under sec. 439. On winding up, sec. 475 enables
the court to adjust the rights of the contributories amongst
themselves and to distribute the surplus among the persons
entitled thereto.
We have also no notice here sec. 27 of the Securities
Contracts (Regulation) Act which provides that it shall be
lawful for the holder of any security, whose name appears on
the books of the company issuing the said security to
receive and retain any dividend declared by the company in
respect thereof for any year, notwithstanding that the said
security has already been transferred by him for
consideration, unless the transferee, who claims the
dividend from the transferer has lodged the security and all
other documents relating to the transfer which may be
required by the company with the company for being
registered in his name within fifteen days of the date on
which the dividend became due.
990
We have to further notice here that the sale of Goods
Act also applies to stocks and shares. Section 2(7) of the
Sale of Goods Act defines ‘goods’ as meaning “every kind of
movable 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 sold before sale or under the contract of sale.”
Section 19 prescribes that where there is a contract
for the sale of specific or ascertained goods the property
in them is transferred to the buyer at such time as the
parties to the contract intend it to be transferred.
Intention may be ascertained having regard to the terms of
the contract the conduct of the parties and the
circumstances of the case. Unless a different intention
appears, the rules contained in section 20 to 24 are to
determine the intention as to the time at which the property
in the goods is to pass to the buyer. Section 20 deals with
specific goods in a deliverable state. Section 21 deals with
specific goods to be put into a deliverable state. Section
22 deals with specific goods in a deliverable state when the
seller has to do anything thereto in order to ascertain the
price. Section 23 deals with sale of unascertained goods and
appropriation and section 24 deals with goods sent on
approval or “on sale or return”.
We have referred at the outset and indeed we have
extracted some of the important provisions of the Foreign
Exchange Regulation Act which have relevance to the case
before us. We have seen that while sec. 19(1)(b) prescribes
that no person shall, except with the general or special
provision of the Reserve Bank, transfer any security or
create or transfer any interest in a security, to or in
favour of a person resident outside India, sec. 29(1)(b)
provides that no person resident outside India (whether a
citizen of India or not) or a company is not incorporated
under any law in force in India or in which the non-resident
interest is more than 40 per cent, shall except with the
general or special permission of the Reserve Bank purchase
the shares in India or any company carrying on any trade,
commerce or industry. The provisions of sec. 29 are stated
to be without prejudice to the provisions of sec. 47 which
while prohibition any person from entering into any contract
or agreement which would directly or indirectly evade or
avoid in any way the operation of any provision of the Act
or rule or direction or order made thereunder
991
also provides that the provisions of the Act requiring that
anything for which the permission of the Central government
or the Reserve Bank is necessary shall not prevent legal
proceedings being brought in India to recover any sum which,
apart from the said provisions would be due as debt, damages
or otherwise, subject to the condition that no step shall be
taken for the purpose of enforcing any judgment or order for
the payment of any sum, unless the Central Government or the
Reserve Bank as the case may be, may permit the sum to paid.
We have also referred earlier to sec. 19(4) which stipulates
that no person shall, except with the permission of the
Reserve Bank, enter the transfer of securities in any
register if he has any ground for suspecting that the
transfer involves any contravention of the provisions of
sec. 19. Sections 48, 50, 56 and 63 prescribe the
consequences of non-compliance with the provisions of the
Act and the rules, orders and directions issued under the
Act and provide for penalties and prosecutions. The
provisions of the Foreign Exchange Regulation Act, to which
we have just now referred, do not appear to stipulate that
the purchase of shares without obtaining the permission of
the Reserve Bank shall be void. On the other hand, legal
proceedings arising out of such transactions are
contemplated subject to the condition that no sum may be
recovered as debt, damages or otherwise, unless and until
requisite permission is obtained. We have already held that
the permission may be ex-post-facto. If permission may be
granted ex-post-facto, quite obviously the transaction
cannot be a nullity and without any effect whatsoever.
In the course of the submissions we were referred to
Manekji Pestonji Bharucha and Anr. v. Wadilal Sarabhai and
Company 52 I.A. 92, Bank of India v. Jamshetji A.H. Chinoy,
A.I.R. 1950 P.C.90, In Re Fry, 1946 (2) All E.R. 106 Swiss
Bank Corporation v. Liodys Bank Ltd. 1982 A.C. 584,
Charanjit Lal Choudhury v. Union of India A.I.R 1951 S.C 41,
Mathalone and Ors. v. Bombay Life Assurance Company Limited
A.I.R. 1953 S.C. 385 and Vasudev Ramachandra Shelat v.
Pranlal Jayanand Thakkar, (supra) A.K. Ramiah v. Reserve
Bank of India 1970 (1) M.L.J. 1 and Baliv Chopra I.A.R. 1971
(2) Delhi 637. We have read all of them and we think it is
enough if we refer to some of them.
In Charanjit Lal Choudhary v. Union of India (supra),
Mukherjee, J. summarised the rights of a shareholder in a
company in the following manner :
“The petitioner as a shareholder has undoubtedly
an interest in the company. His interest is
represented by the share he holds and the share is
a movable
992
property according to the Indian companies Act,
with all the incidence of such property attached
to it. Ordinarily, he is entitled to enjoy the
income arising from the shares in the shape of
dividends; the share like any other marketable
commodity can be sold or transferred by way of
mortgage or pledge. The holding of the share in
his name gives him the right to vote at the
election of Directors and thereby take a part,
though indirectly in the management of the
company’s affairs. If the majority of share-
holders sides with him, he can have a resolution
passed which would be binding on the Company and
lastly, he can institute proceedings for winding
up of the Company which may result in a
distribution of the net assets among the share
holders.
It is interesting to notice that Mukherjee, J. in the course
of his opinion, expressed the view that a Corporation, which
is engaged in the production of a commodity vitally
essential to the community has a social character of its own
and it must not be regarded as the concern primarily or only
of these who invest their money in it.
In Mathalone and Ors. v. Bombay Life Assurance Company
Ltd. (supra), the question of relationship between the
transferor and transferee of shares before registration of
the transfer in the books of the company came to be
considered in connection with the right of the transferee to
the ‘right-shares’ issued by the company. On the transfer of
shares transferee became the owner of the beneficial
interest though the legal title was with the transferor the
relationship of trustee and ‘cestui que trust’ was
established and the transferor was bound to comply with all
the reasonable directions that the transferee might give and
that he became a trustee of dividends as also a trustee of
the right to vote. The relationship of trustee and cestui
que trust arose by reason of the circumstance that till the
name of the transferee was brought on the register of
shareholders in order to bring about a fair dealing between
the transferor and the transferee equity clothed the
transferor with the status of a constructive trustee and
this obliged him to transfer all the benefits of property
rights annexed to the sold shares of the cestui que trust.
The principle of equity could not be extended to cases where
the transferee had not taken active steps to get his name
registered as a member on the register of the company with
due diligence and in the meantime, certain other privileges
or opportunities arose for purchase of new shares in
consequences of
993
the ownership of the shares already acquired. The benefit
obtained by a transferor as a constructive trustee in
respect of the share sold by him cannot be retained by him
and must go to the beneficiary, but that cannot compel him
to make himself liable for the obligations attaching to the
new issues of shares and to make an application for the new
issue by making the necessary payments, unless specially
instructed to do so by the beneficiary.
In Vasudev Ramachandra Shelat v- Pranlal Jayanand
Thakkar (supra), the question arose this way, The donor
gifted certain shares in companies to the appellant by a
registered deed. She also signed several blank transfer
forms to enable the donee to obtain transfer of shares in
the register of companies. However, she died before the
shares could be transferred to the appellant in the books of
the companies. The respondent, a nephew of the donor, filed
the suit, claiming the shares on the ground that the gift
was incomplete for failure to comply with the formalities
prescribed by the Indian Companies Act 1913 for transfer of
shares. Noticing that in 53 Indian Appeals, 92 a distinction
was made between the title to go on the register and the
full property in the shares in a company the court expressed
the view that sec. 6 of the Transfer of Property Act also
justified such a splitting up of a right constituting
property on shares just as it was well recognised that
rights of ownership of property might be split up into a
right to the Corpus and another to the “usufruct” of the
property and then separately dealt with. On the delivery of
the registered deed of gift together with the share
certificate to the donee, the donation of the right to get
the share certificate transferred in the name of donee
became irrevocable by registration as well as by delivery.
Either was sufficient. The actual transfer in the registers
of the companies constituted more enforcement of this right
to enable the donee to exercise the rights of the
shareholder. The more fact that such transfers had to be
recorded in accordance with the Company Law did not detract
from the completeness of what was donated. Referring to
Regulation 18 of the first schedule to the Companies Act of
1913 which prescribed the mode of transfer of shares, it was
observed by the court that there was nothing either in the
Regulation or elsewhere to indicate that without strict
compliance with some rigidly prescribed form, the
transaction must fail to achieve its purpose. It was said,
the subservience of substances of a transaction to some
rigidly prescribed from required to be meticulously
observed, savours of archaic and outmoded jurisprudence. The
Court referred to the passage in Buckley on the Companies
Acts XXXI Edn. Page 813 :
994
“Non-registration of a transfer of shares made by a donor
does not render the gift-imperfect”, and the passage in
Palmar’s Common Law : 21st Edn. page 334 : A transfer is
incomplete until registered. Pending registration, the
transferor has only an equitable right to the shares
transferred to him. He does not become the legal owner until
his name is entered on the register in respect of these
shares. The two statements of law were reconciled by the
court and its was stated the transferee under a gift of
shares, cannot function as a shareholder recognised by
Company Law until his name is formally brought upon the
register of a company and he obtain a share certificate as
already indicated above. Indeed, there may be restrictions
on transfers of shares either by gift or by sale in the
articles of association.” It was pointed out that, a
transfer of property rights in shares, recognised by the
transfer of Property Act, may be antecedent to the actual
vesting of all or the full rights of ownership of shares and
exercise of the rights of shareholders in accordance with
the provisions of the Company law, and that while transfer
of property in general was not the subject matter of the
companies Act, it deals with transfers of shares only
because they give certain rights to the legally recognised
share holders and imposes some obligations upon them with
regard to the companies in which they hold shares. A share
certificate not merely entitles the shareholder whose name
is found on it to interest on the share hold but also to
participate in certain proceedings relating to the company
concerned.
In Re Fry, (supra), F, a resident of the United States
of America desiring to make a gift to his son of certain
shares of an English company, executed a deed of transfer
and sent it to the company for registration. As the Defence
(Finance) Regulations prohibited any transfer of any
securities or any interest in securities held by a non-
resident without permission from the Treasury, the company
wrote to that certain forms had to be completed by him and
the transferee and that a licence had to be obtained from
the Treasury. Before could apply and obtain the permission
of the Treasury, he died. The question arose whether F’s son
was entitled to require F’s personal representatives to
obtain for him legal and beneficial position of the shares.
It was held that the permission of the Treasury not having
been obtained, the company could not register the transfer
and, therefore, the son acquired no legal title to the
shares in question. Nor was there a complete gift of the
equitable interest in the shares to the son because had not
995
obtained the consent of the Treasury and had, therefore, not
done all that was necessary to divest himself of his
equitable interest in favour of his son. The son was,
therefore, not entitled to sue the father’s personal
representatives to obtain for him legal and beneficial
position of the shares.
In Swiss Bank Corporation v. Lioyds Bank Ltd. & Ors.,
(supra), the question was about the consequence of an
authorised depository under s. 16(2) of the Exchange Control
Act, parting with a certificate relating to a foreign
currency security without the permission of the Treasury
contrary to Bank of England Exchange Control Notice E.C.7.
In the court of appeal, Buckley L.J. Observed :
“….the Bank of England, we must assume for
sufficient reasons, declined to validate the
transfer of custody. It must consequently be
treated as having been made in contravention of
section 16(2), which, as I have already mentioned,
is conceded; but an act done in contravention of a
statute is not necessarily nullity. Whether it is
so or not must depend upon the terms and effect of
the statute, and may depend upon the policy of the
statute and the nature of the act itself. By
section 34 of the act effect is given to the
provisions of Schedule 5 to the Act for the
purposes of the enforcement of the Act. Paragraph
1(1) of Part II of that Schedule provides that any
person in or resident in the United Kingdom who
contravenes any restriction or requirement imposed
by or under the Act shall be guilty of an offence
punishable under the part of that Schedule. The
subsequent provisions of that part of the Schedule
impose maximum penalties by way of imprisonment or
find for such offence –
“In my judgment, offences under the Act are
clearly mala prohibita, not mala in se; they are
not acts the validity of which the law refuses to
countenance for any purpose. As such they are not
devoid of any effect; they merely expose the
culprits to the penalties prescribed by the Act
none of which, so far as I am aware, has been
exacted or sought to be exacted in this
case………………………….. ………..
If the legislature had intended that such a
security, if transferred from the custody of the
one authorised depository to the custody of
another
996
without compliance with all the conditions of any
relevant permission, should not be treated as
being in the custody of the latter depository, one
would. I think, expect to find an express
provision to that effect, for otherwise the
consequences of an irregular transfer of custody
is left in doubt.
Earlier we mentioned that S. 111 of the Companies Act
preserves the power of the company under its articles to
refuse to register the transfer of any shares of the
company. The nature and extent of the power of the company
to refuse to register the transfer of shares has been
explained by this court in Bajaj Auto Limited v. N.K.
Ferodia and Anr. 41 Company Cases 1 = [1971] 2 S.C.R. 4C. It
was said that even if the article of the company provided
that the directors might at their absolute and uncontrolled
discretion decline to register any transfer of shares, such
discretion does not mean a bare affirmation or negation of a
proposal. Discretion implies just and proper consideration
of the proposal in the facts and circumstances of the case.
In the exercise of that discretion, the Directors will act
for the general interest of the shareholders because the
Directors are in a fiduciary position both towards the
company and towards every shareholder. The Directors, are,
therefore, required to act bona fide and not arbitrarily and
not for any collateral motives Where the articles permitted
the Directors to decline to register the transfer of shares
without assigning reasons, the court would not necessarily
draw adverse inference against the Directors but will assume
that the acted reasonably and bona fide. Where the Directors
gave reasons the court would consider whether the reasons
were legitimate and whether the Directors proceeded on a
right or wrong principle. If the articles permitted the
Directors not to disclose the reasons, they could be
interrogated and asked to disclose the reasons. If they
failed to disclose that reason, adverse presumption could be
drawn against them.
On a overall view of the several statutory provisions
and judicial precedents to which we have referred we find
that a shareholder has an undoubted interest in a Company,
an interest which is represented by his share-holding. Share
is movable property, with all the attributes of such
property. The rights of a shareholders are (i) to elect
directors and thus to participate in the management through
them; (ii) to vote on resolutions at meetings of the
company; (iii) to enjoy the profits of the Company in the
shape of dividends; (iv) to apply to the Court for
997
relief in the case of oppression; (v) to apply to the Court
for relief in the case of mismanagement; (vi) to apply to
the Court for winding up of the Company; (vii) to share in
the surplus on winding up. A share is transferable but while
a transfer may be effective between transferor and
transferee from the date of transfer, the transfer is truly
complete and the transferee becomes a shareholder in the
true and full sense of the term, with all the rights of a
shareholder, only when the transfer is registered in the
company’s register. A transfer effective between the
transferor and the transferee is not effective as against
the company and persons without notice of the transfer until
the transfer is registered in the company’s register. Indeed
until the transfer is register in the books of the company
the person whose name is found in the register alone is
entitled to receive the dividends, notwithstanding that he
has already parted with his interest in the shares. However,
on the transfer of shares, the transferee becomes the owner
of the beneficial interest though the legal title continues
with the transferor. The relationship of trustee and ‘cestui
que trust’ is established and the transferor is bound to
comply with all the reasonable directions that the
transferee may give. he also becomes a trustee of the
dividends as also of the right to vote. The right of the
transferee ‘to get on the register’ must be exercised with
due diligence and the principle of equity which makes the
transferor a constructive trustee does not extend to a case
where a transferee takes no active interest ‘to get on the
register’. Where the transfer is regulated by a statute, as
in the case of a transfer to a non-resident which is
regulated by the Foreign Exchange Regulation Act, the
permission, if any, prescribed by the statute must be
obtained. In the absence of the permission, the transfer
will not clothe the transferee with the right to ‘get on the
register’ unless and until the requisite permission is
obtained. A transferee who has the right to get on the
register, where no permission is required or where
permission has been obtained, may ash the company to
register the transfer and the company who is so asked to
register the transfer of shares may not refuse to register
the transfer except for a bona fide reason, neither
arbitrarily nor for any collateral purpose. The paramount
consideration is the interest of the company and the general
interest of the shareholder. On the other hand, where, for
instance, the requisite permission under the FERA is not
obtained, it is open to the company and, indeed, it is bound
to refuse to register the transfer of shares of an Indian
company in favour of a non-resident. But once permission is
obtained, whether before or after the purchase of the
shares, the company cannot, thereafter, refuse to register
the transfer of shares.
998
Nor is it open to the company or any other authority or
individual to take upon itself or himself, thereafter, the
task of deciding whether the permission was rightly granted
by the Reserve Bank of India. The provisions of the Foreign
Exchange Regulation Act are so structured and woven as to
make it clear that it is for the Reserve Bank of India alone
to consider whether the requirements of the provisions of
the Foreign Exchange Regulation Act and the various rules,
directions and orders from time to time have been fulfilled
and whether permission should be granted or not. The
consequences of noncompliance with the provisions of the Act
and the rules, orders and directions issued under the Act
are mentioned in secs. 48, 50, 56 and 63 of the Act. There
is no provision of the Act which enables an individual or
authority functioning outside the Act to determine for his
own or its own purpose whether the Reserve Bank was right or
wrong in granting permission under sec. 29(1) of the Act. As
we said earlier, under the scheme of the Act, it is the
Reserve Bank of India that is constituted and entrusted with
the task of regulating and conserving foreign exchange. If
one may use such an expression, it is the ‘custodian-
general’ of foreign exchange. The task of enforcement is
left to the Directorate of Enforcement, but it is the
Reserve Bank of India and the Reserve Bank of India alone
that has to decide whether permission may or may not be
granted under sec. 29(1) of the Act. The Act makes it its
exclusive privilege and function. No other authority is
vested with any power nor may it assume to itself the power
to decide the question whether permission may or may not be
granted or whether it ought or ought not to have been
granted. The question may not be permitted to be raised
either directly or collaterally. We do not, however, rule
out the limited class of cases where the grant of permission
by the Reserve Bank of India may be questioned, by an
interested party in a proceeding under Art. 226 of the
Constitution, on the ground that it was mala fide or that
there was no application of the mind or that it was opposed
to the national interest as contemplated by the Act, being
in contravention of the provisions of the Act and the rules,
orders and directions issued under the Act. Once permission
is granted by the Reserve Bank of India, ordinarily it is
not open to anyone to go behind the permission and seek to
question it. It is certainly not open to a company whose
shares have been purchased by a non-resident company to
refuse to register the shares even after permission is
obtained from the Reserve Bank of India on the ground that
permission ought not to have been granted under the FERA. It
is necessary to remind ourselves that the permission
contemplated by sec. 29(1) of the Foreign Exchange
Regulation Act is neither intended to nor does
999
it impinge in any manner or any legal right of the company
or any of its shareholders. Conversely neither the company
nor any of its shareholders is clothed with any special
right to question any such permission.
Much was said before us about the mala fides of the
Government of India and the Reserve Bank of India and the
non-application of mind by the Reserve Bank of India which
was said to amount to legal Mala fides. Though Shri Nariman
learned counsel for the company, now and then, in the course
of his argument mentioned that Shri Swraj Paul had been
issuing press statements which were generally followed up,
according to him, by some action or the other by the
Government or the Reserve Bank, he properly refrained from
reading to us the press statements said to have been made by
Shri Swraj Paul. however, the gist of some of the press
statements and releases of Shri Swraj Paul has been included
in the pleadings which were read out to us. It may be that
Shri Swraj Paul was ever ready and anxious to issue press
releases for his own ends either because he had an inkling
or made a guess of what course of action the Government or
the Reserve Bank was likely to pursue or because he, like
every interested party, was interested in making statements
which may find some respective ears some where. There is
nothing whatever to indicate that Shri Swraj Paul had any
access to anyone who was in a position to take a decision in
the matter or influence a decision in the matter. We do not
think we can attach any importance to the vainglorious and
grandiloquent press statements and releases made by Shri
Swraj Paul. They deserve to be ignored as the over-rated
statements of a person, who rated himself very high. The
most important circumstance on which reliance was placed on
behalf of the company in support of the argument relating to
mala fides was the ‘turn-about of the attitude of the
Reserve Bank of India in the matter. It was said that in the
beginning, the Reserve Bank of India had serious
reservations on the question whether indirect purchase of
shares by non-residents of Indian nationality/origin was
permissible under the original scheme. Later after the
Governor of the Reserve Bank had discussions with the
Finance Secretary, Finance Minister and the Personal
Secretary to the Prime Minister the Reserve Bank of India
changed its attitude and issued the impugned circular and
the permission. Our attention was particularly invited to
the letter dated June 1, 1983 from the Reserve Bank of India
to the Government of India in which the Reserve Bank
appeared to take the view that the scheme did not
contemplate indirect
1000
investment by non-resident individuals of Indian nationality
origin and proposed to reject the application of all the 13
overseas companies, but sought the confirmation of the
Government of India, (ii) the reply dated September 17, 1983
of the Government of India to the Reserve Bank of India and
(iii) the endorsement made on the letter dated 17.9.83 by
the Governor or the Reserve Bank of India. We have already
referred to the contents of (i) and (ii), the two letters in
the proceeding paragraphs. We have also extracted the
endorsement of Dr. Man Mohan Singh in full. The inference
sought to be drawn from (i), (ii) and (iii) is that though
the Reserve Bank of India had expressed itself strongly in
(i), it was under the pressure of the Finance Secretary,
Finance Minister and the Personal Secretary to the Prime
Minister that the Governor of the Reserve Bank of India
finally agreed to adopt the line suggested by the Government
in its letter dated 17.9.83 and that the decision of the
Reserve Bank of India was not that of a free agent. The
Circular issued by the Reserve Bank of India and the
permission granted by it, it was suggested, were so issued
and granted under the pressure of the Government of India.
We do not think that we will be justified in drawing any
such inference. It would be wholly unfair and uncharitable
to Dr. Man Mohan Singh. An enormous amount of foreign
exchange vital to the economy of the country was involved.
Though the Reserve Bank of India appeared to have taken, in
the beginning, a certain position in the matter, it thought
it necessary to consult and seek the advice of the
Government of India in the matter. mere were high level
discussions obviously because of the amount of foreign
exchange and the question of policy involved and the matter
had also attracted considerable attention from the Press as
the public. If after high level discussions the Reserve Bank
of India changed its views, it would be unreasonable and
impermissible to hold that it was done under pressure. Every
question of this nature is bound to have different facets
which present themselves in different lights when viewed
from different angles. If after full discussion with those
in the higher rungs of the Government who are concerned with
policy-making, the Reserve Bank of India changed its former
negative attitude to a ¯ re positive attitude in the
interests of the economy of the country, one fails to see
how its decision can be said to be the result of any
pressure.
It was argued that, from time to time, the company had
addressed several communications to the Reserve Bank of
India drawing the latter’s attention to several
irregularities and illegalities, which it claimed, had been
committed by Mr. Swraj
1001
Paul and the Caparo Group of Companies, but to no avail, as
the Reserve Bank failed to respond and make any enquiry into
the matter. It was said that the Reserve Bank of India was
guilty of total non-application of the mind and, therefore,
mala fides in law could be attributed to it. We are unable
to agree with this submission. Merely because the Reserve
Bank of India did not choose to send a reply to the
communications received from the company, it did not follow
that the Reserve Bank of India was not acting bonafide.
While we may say that the Reserve Bank would have done well
to acknowledge the communications received from the company
and to reply to them, we are unable to infer malafide from
their failure to do so. It was not as if the Reserve Bank
ignored the complaints of the company. They did enquire into
the matter in their own way. As already mentioned by us
during the course of the narration of events, the Reserve
Bank pursued its enquiry by seeking information from the
Punjab National Bank, who was an authorised dealer appointed
under the provisions of the Foreign Exchange Regulation Act
and who, therefore, could be expected to supply the Reserve
Bank with full and accurate information. At that stage,
there was nothing to doubt the bona fides and the ineptitude
of the Punjab National Bank. The company also in its several
communications to the Reserve Bank did not make any
allegations against the Punjab National Bank. In those
circumstances, if the Reserve Bank thought fit to seek
information from the Punjab National Bank and proceeded to
act on the information obtained from the Punjab National
Bank, the Reserve Bank cannot be accused to non-application
of mind. The Reserve Bank was entitled to rely on the Punjab
National Bank and the information supplied by that bank as
the bank held a statutory position under the Foreign
Exchange Regulation Act. It may be that the Punjab National
Bank did not act with that degree of competence and
diligence as should be expected from it, but at that stage,
there was nothing to provoke any suspicion in the mind of
the Reserve Bank. We will revert to the part played by the
Punjab National Bank presently, but there is no reason to
change the Reserve Bank with want of bona fides and non-
application of mind merely because it placed reliance upon
the Punjab National Bank and the information supplied by it
although with the aid of some of the material now brought
out during the hearing, we perceive that the Reserve Bank
could have acted with greater wisdom than to rely on the
Punjab National Bank. But that would really be speaking with
‘hind-sight’.
Earlier we referred to the failure of the Punjab
National Bank to inform the Reserve Bank, as it was bound to
do, about the remittance of L 1,30,000 received from Mr.
Swraj Paul by their
1002
Parliament Street Branch. It was a sorry confession to hear
from the Punjab National Bank that their ECE House Branch
which was monitoring the NRE Accounts and the purchase of
shares by the Caparo Group of Companies was not aware of the
remittance received by the Parliament Street Branch. We are
now told that this amount of L 1,30,000 was also utilised
for purchasing shares for the Caparo Group of Companies. If
that was so, the ECE House Branch should have known about
it. Otherwise, one wonders what was the monitoring that was
done by the ECE House Branch, if it was not even aware that
a large remittance of L 1,30,000 received by their
Parliament House Branch had been utilised for purchase of
shares for the Caparo Group of Companies. If the amount was
not utilised for the purchase of shares for the Caparo Group
of Companies, it must necessarily follow that locally
available funds and not foreign remittances must have been
utilised for purchasing some of the shares. The fact that
this large sum had been remitted by Shri Swraj Paul and
received by the Punjab National Bank was never brought to
the notice of the Reserve Bank of India who was apparently
kept in the dark about it. We consider this a serious matter
which requires further probe by the Reserve Bank. We find
that the entire conduct of the Punjab National Bank in this
affair has been most irresponsible. They had been appointed
as authorised dealers under the Foreign Exchange Regulation
Act and by virtue of such appointment great confidence had
been reposed in them for the purpose of regulating the flow
and conserving the foreign exchange and protecting the
national interest. The Portfolio Investment Scheme provided
that the banks which were designated as authorised dealers
could purchase shares on behalf of their non-resident
customers of Indian nationality/origin through a stock
exchange. The applications of the foreign investors for
permission to invest in shares of Indian companies were in
fact to be made through the designated banks. By paragraph
11 of Circular No. 9 dated April 14, 1982 the designated
banks were required to maintain separately a proper record
of the investment made in shares, with and without
repatriation benefits, on account of the investor, showing
all relevant particulars including the numbers of share
certificates and distinctive numbers of shares. They were
required to keep a systematic and uptodate record of the
shares purchased by them for each investor through the stock
exchange so that they would be able to ensure that the
purchase of shares in any one company by a single investor
would not exceed Rs. One lakh in face value of the company.
Again by circular No. 10 of April 22, 1982, the authorised
dealer (designated bank) was required to obtain from the
investing overseas companies a certificate from an
auditor/chartered accountant/certified public
1003
accountant in form OAC. The certificate was to be obtained
by the authorised dealer every year. When by circular No. 12
of May 16, 1983, an overall ceiling of 5 per cent of the
total paid-up equity capital of the company was imposed, it
was prescribed, for the purpose of monitoring the ceiling of
5 per cent, that authorised dealers who were permitted to
purchase shares under the Portfolio Investment Scheme on
behalf of the eligible non-resident investors should
nominate a link office in Bombay for the purpose of
coordinating the purchases and sales of equity shares made
by their designated branches on a daily basis and notify the
same to the Controller, Control Exchange Department, Reserve
Bank of India. The link officers were required to submit a
consolidated statement of the total purchases and sales of
equity shares Lade by the designated branches in the
prescribed form. The daily statements were to be submitted
to the Controller positively on the succeeding day. We may
straight away say that the Punjab National Bank, apart from
receiving the remittances from the Caparo Group Limited and
passing on the amounts to the stock brokers, Rajaram Bhasin
& Co. did nothing whatsoever to discharge their prescribed
duties as authorised dealers. It is now admitted that they
did not give any instructions to Rajaram Bhasin & Co.
regarding the purchase of shares, that they never maintained
any systematic, uptodate and proper record of the
investments made in shares and that they did not submit
daily statements of purchases and sales of shares to the
Controller. Of course, in the beginning, they submitted the
applications of the Caparo Group of Companies to the Reserve
Bank for permission to purchase shares in Indian Companies.
That was on the 4th and the 12th of March, 1983. Thereafter,
they wrote to the Reserve Bank on April 23, 19&3 reminding
the latter about the applications of their customers for
permission end informing them about the receipt of four
remittances on 9.3.1983, 12.4.1983, 13.4.1983 and 23.3.1983.
They also mentioned that investment operations were being
conducted through Raja Ram Bhasin & Co. What shares, how
many, and for what amount, these details were not mentioned,
not even the total number of shares purchased and the amount
expended till then. Therefore, in answer to a letter from
the Reserve Bank, they wrote on May 6, 1983 that they had
been advised that Mr. Swraj Paul and family members hold
61.6 per cent of share capital of Caparo Group Limited and
that Caparo Group hold 100 per cent of share capital of the
remaining companies except Caparo Properties in which the
holding was 98 per cent. In this letter, it was expressly
stated “As regards details of shares of Indian Companies
purchased by or on behalf of said non-resident clients, they
have advised us that the same would be supplied when the
purchases were complete.” This statement appears to us
1004
to be in complete breach of the duties of the authorised
dealer under the Portfolio Investment Scheme. The letter
shows that not only the sales were not put through by the
authorised dealers, the authorised dealers were not even
aware of the transactions that had taken place till then,
though we are now told that all the shares had been
purchased by April 28, 1983. It was only on 31.5.1983 that
the Punjab National Bank sent a telegram to the Reserve Bank
of India that they had been advised by the brokers that up
to 28.4.83, 75,000 equity shares of Escorts Limited had been
purchased on behalf of and for the benefit of each of the
thirteen overseas companies. The Reserve Bank sought
information by their letter dated 11.6.1983 of the purchases
of shares made for the benefit of the overseas companies,
(i) upto December, 1982; (ii) from 1.1.83 to 28.2.83; (iii)
from 1.3.83 to 2.5.83; and (iv) after 2.5.83. Details of
purchases including the total number and face value of the
shares were required to be given. The Punjab National Bank
replied on 23.6.83 to the effect that their brokers had
informed them by their letter dated 22.6.83 that 75,000
shares of Escorts Limited had been purchased for each of the
thirteen companies during the period from 1.3.83 to 2.5.83,
but none were purchased before or after. It was also stated
that the brokers had confirmed that no other purchases had
been made besides these shares. This letter again discloses
how casual they were in the discharge of their duties as
authorised dealers. Not only did they not maintain upto date
and proper record of the purchases made on behalf of each of
the companies, not only did they not submit daily statements
to the Controller, they were not even aware of the
transactions which had taken place but were solely dependant
on the information supplied to them once in a way by Raja
Ram Bhasin & Co. Though the Reserve Bank did make some
enquiries from the Punjab National Bank, the Reserve Bank
did not pursue the matter as vigorously as they might have
done but, apparently, preferred to rely upon the Punjab
National Bank probably for the reason that they were
authorised dealers under the Foreign Exchange Regulation Act
and could be expected to have been doing everything properly
and in a manner authorised and contemplated by the Act and
the scheme. It has to be remembered that Escorts Limited
also had made no complaint regarding the Punjab National
Bank. It is only now it has come to light that the Punjab
National Bank acted no better than a mere dumb, dummy and
signally failed to discharge the functions entrusted to them
under the Act and the scheme.
1005
The result of the dereliction of duty on the part of
the Punjab National Bank is that there had been no proper
monitoring of the purchase of shares by the thirteen Caparo
Group of Companies. While we are unable to hold that the
Reserve Bank of India did not act bona fide or apply its
mind to the relevant facts and circumstances which were
required to be considered by it before granting permission,
because, it did bona fide apply its mind to whatever
material was then available to it and supplied to it by the
Punjab National Bank, we must hold on the material now
available to US that their implicit reliance on the Punjab
National bank was entirely misplaced. That further action
must be taken on that finding is a question which we have to
consider. We will do so later after considerating the other
questions argued before us.
Shri Nariman contended that there were several
circumstances in the record which established that a large
number of shares were purchased with funds which were made
available locally and not funds remitted from abroad and
also that the shares were purchased subsequent to 2.5.83.
The circumstances were : (i) the purchase of shares
commenced before the remittances started; (ii) the price at
which the shares were available in the market showed that
funds in excess of what was remitted must have been utilised
for purchasing the shares and this could only have been with
rupee funds; (iii) the company was able to obtain two
brokers’ notes from two of the sellers’ brokers which showed
that the sales were made long subsequent to 2.5.83 and (iv)
out of the total number of shares purchased on behalf of the
thirteen companies, 4,62,000 shares only were lodged with
the company on 14.5.83 for registering the transfers.
3,68,463 shares were lodged on 19.8.83, that is 3-1/2 months
after 2.5.83, which was the cut-off date fixed for the
imposition of the ceiling of 5 per cent. 1,44,200 shares
were not lodged at all with the company. The failure to
lodge the shares within a reasonable period at 28.4.83 which
was supposed to be the date by which all the purchases had
been made indicated that the purchases must have been made
long afterwards. Everyone of these circumstances is capable
of some explanation, adequate or not, we do not have the
necessary material to say on the record now before us. The
question will involve a probe into individual purchases and
the adduction of evidence. That would be beyond the scope of
the writ petition in the High Court. It is to be remembered
that the high Court refused to issue a rule nisi in regard
to prayer (d), obviously as it was thought that the court
exercising jurisdiction under Article 226 of the
Constitution should not explore the evidence
1006
to determine the dates of the various transactions of
purchase of shares and whether they were purchased with
foreign exchange or locally available funds. We consider
that it is really a matter for the consideration of the
final monitoring authority, namely, the Reserve Bank of
India. We will later indicate what we propose to do about
this aspect of the matter.
It was submitted that the thirteen Caparo Companies
were thirteen companies in name only; they were but one and
that one was an individual, Mr. Swraj Paul. One had only to
pierce the corporate veil to discover Mr. Swraj Paul lurking
behind. It was submitted that thirteen applications were
made on behalf of thirteen companies in order to circumvent
the scheme which prescribed a ceiling of one per cent on
behalf of each non-resident of Indian nationality or origin
of each company 60 per cent of whose shares were owned by
non-residents of Indian nationality/origin. Our attention
was drawn to the picturesque pronouncement of Lord Denning
M.R. in Wallersteiner v. Moir 1974 3 All E.R. 217, and the
decisions of this court in Tata Engineering and Locomotive
Company Ltd. v. State of Bihar 1964 6 S.C.R. 885, me
Commissioner of Income Tax v. Meenakshi Mills A.I.R. 1967
S.C. 819, and Workmen v. Associated Rubber Ltd. 1985 2 Scale
321. While it is firmly established ever since Salomon v.
A. Saloman & Co. Limited 1897 A.C. 22, was decided that a
company has an independent and legal personality distinct
from the individuals who are its members, it has since been
held that the corporate veil may be lifted, the corporate
personality may be ignored and the individual members
recognised for who they are in certain exceptional
circumstances. Pennington in his Company Law (Fourth
Edition) states :
“Four inroads have been made by the law on the
principle of the separate legal personality of
companies. By far the most extensive of these has
been made by legislation imposing taxation. The
Government, naturally enough, does not willingly
suffer schemes for the avoidance of taxation which
depend for their success on the employment of the
principle of separate legal personality, and in
fact legislation has gone so far that in certain
circumstances taxation can be heavier if companies
are employed by the tax-payer in an attempt to
minimise his tax liability than if he uses other
means to give effect to his wishes. Taxation of
Companies is a complex subject, and is outside the
scope of this book. The reader who wishes
1007
to pursue the subject is referred to the many
standard text books on Corporation Tax, Income
Tax, Capital Gains Tax and Capital Transfer Tax.
“The other inroads on the principle of separate
corporate personality have been made by two
section of the Companies Act, 1948, by judicial
disregard of the principle where the protection of
public interests is of paramount importance, or
where the company has been formed to evade
obligations imposed by the law, and by the courts
implying in certain cases that a company is an
agent or trustee for its members.”
In Palmer’s Company Law (Twenty-third Edition), the present
position in England is stated and the occasions when the
corporate veil may be lifted have been enumerated and
classified into fourteen categories. Similarly in Gower’s
Company Law (Fourth Edition), a chapter is devoted to
‘lifting the veil’ and the various occasions when that may
be done are discussed. In Tata Engineering and Locomotives
Co. Ltd. (supra), the company wanted the corporate veil to
be lifted 80 as to sustain the maintainability of the
petition, filed by the company under Art. 32 of the
Constitution, by treating it as one filed by the
shareholders of the company. The request of the company was
turned down on the ground that it was not possible to treat
the company as a citizen for the purposes of Art. 19. In
Commissioner of Income Tax v. Meenakshi Mills (supra), the
corporate veil was lifted and evasion of income tax
prevented by paying regard to the economic realities behind
the legal facade. In Workmen v. Association Rubber Industry
(supra), resort was had to the principle of lifting the veil
to prevent devices to avoid welfare legislation. It was
emphasised that regard must be had to substance and not the
form of a transaction. Generally and broadly speaking, we
may say that the corporate veil may be lifted where a
statute itself contemplates lifting the veil, or fraud or
improper conduct is intended to be prevented, or a taxing
statute or a beneficent statute is sought to be evaded or
where associated companies are inextricably connected as to
be, in reality, part of one concern. It is neither necessary
nor desirable to enumerate the classes of cases where
lifting the veil is permissible, since that must necessarily
depend on the relevant statutory or other provisions, the
object sought to be achieved, the impugned conduct, the
involvement of the element of the public interest, the
effect on parties who may be affected etc.
1008
In the present case, we do not think ‘lifting the veil’
is necessary or permissible beyond the essential requirement
of the Foreign Exchange Regulation Act and the Portfolio
Investment Scheme. We have noticed that the object of the
Act is to conserve and regulate the flow of foreign exchange
and the object of the scheme is to attract non-resident
investors of Indian nationality or origin to invest in
shares of Indian companies. In the case of individuals,
there can be no difficulty in identifying their nationality
or origin. In the case of companies and other legal
personalities, there can be no question of nationality or
ethnicity of such company or legal personality. Who of such
non-resident companies or legal personalities may then be
permitted to invest in shares of Indian companies? The
answer is furnished by the scheme itself which provides for
‘lifting the corporate veil’ to find out if at least 60 per
cent of the shares are held by non-residents of Indian
nationality or origin. Lifting the veil is necessary to
discover the nationality or origin of the shareholders and
not to find out the individual identity of each of the
shareholders. The corporate veil may be lifted to that
extent only and no more.
The particulars of the scheme have already been
extracted by us. First, a ceiling of one per cent of the
equity capital of the Indian company was imposed on the
purchase of its shares by any single foreign investor. The
obvious object of the imposition of the ceiling was the
prevention of destabilisation of the Indian company by
foreign investors purchasing large blocks of shares and
attempting to take over the Indian company. We have already
explained the futility of the imposition of the one per cent
ceiling since that would not effectively prevent a group of
foreign investors of Indian origin from investing in shares
of the Indian company by each of them purchasing one per
cent of the shares. We also pointed out that different
Foreign companies in which several different groups of
resident Indians with one individual common to all together
held more than 60 per cent of the shares could not be denied
the facility of investing in shares of Indian companies
merely because the Foreign companies were dominated by the
single common non-resident individual. That would be unfair
to the other non-resident Indian shareholders of the Foreign
companies who would otherwise be entitled to the benefit of
investment in Indian companies, via the Foreign companies in
which they held shares. Clearly, it was the realisation of
the futility of the one per cent limit that led to the
imposition of the five per cent aggregate limit. The five
per cent aggregate limit would effectively prevent any
single foreign
1009
investor or a combination of foreign investors from
attempting to destabilise Indian companies by purchasing
large blocks of shares. If this is borne in mind it will be
clear that the lifting of the corporate veil is necessary
and permissible in the present case, only to find out the
nationality or origin of the shareholders of the Foreign
companies seeking to invest in shares of Indian companies
and not to explore the individual identity of the
shareholders. We do not think that merely because more than
60 per cent of the shares of the several Foreign companies
who have applied for permission are held by a trust of which
Mr. Swraj Paul and the members of his family are the
beneficiaries, the companies can be denied the facility of
investing in Indian companies. In fact, if each of the six
beneficiaries of the trust had separately applied for
permission to purchase shares of Indian companies, they
could not have been denied such permission. It cannot,
therefore, be said that there has been any violation of the
Portfolio Investment Scheme merely on that account or that
the permission granted is illegal.
We now turn to the case of Escorts Limited against the
Life Insurance Corporation of India. While narrating the
sequence of events, we referred to the impleading of the
Life Insurance Corporation of India as a respondent to the
Writ Petition a few months after it was originally filed.
The primary allegation which led to the impleading of the
Life Insurance Corporation of India was that there was
confabulation between the Government of India, Reserve Bank
of India and the Life Insurance Corporation to pressurise
the Escorts Limited to register the transfer of shares in
favour of the Caparo Group of Companies. The inference of
collusion and conspiracy was sought to be drawn from the
sequence of certain events which we will mention
immediately. A few days before the filing of the writ
petition there was the report of a speech of the Finance
Minister, to which we have earlier made a reference, to the
effect that he has in his possession an effective weapon to
end the uncertainty. After the writ petition was filed and
before it was admitted, there was a meeting of the Board of
Directors of Escorts Limited on 6th January, 1984 at which
Mr. D.N. Davar, claiming to speak for the financial
institutions holding 52 per cent of the shares of Escorts
Limited, circulated three notes and moved resolutions the
purport of which was that the writ petition should be
withdrawn as it had been filed without consulting the
financial institutions and that the matter should be placed
before the Board for careful consideration of all aspects of
the case and that the cheques sent in part payment of
certain institutions loans should be recalled as the
1010
question was still under consideration. The resolutions
proposed by Mr. Davar were rejected. On 9th January, 1984
Mr. Nanda wrote to Mr. Punja informing him about the events
that took place at the Board meeting on 6.1.1984 and
pointing out that in the last 20 years, there had not been a
single occasion on which the financial institutions had even
a single word to say against any decision taken or proposed
by the Management. Complete confidence was reposed in each
other in the past by the management of Escorts Limited and
the Financial Institutions. Mr. Nanda explained the position
of the Management of Escorts Limited in regard to pre-
payment of loans of financial Institutions and the filing of
the writ petition. Mr. Nanda pointed out that though the
Reserve Bank had granted permission to the Caparo Group of
Companies to purchase shares, it had not condoned any of the
illegalities that had already been committed and it was
strange that the financial institutions should continue to
press the company to register the shares. It was also stated
by Mr. Nanda that he had repeatedly drawn the attention of
Mr. Punja and others to the fact that funds far in excess of
those remitted by the Caparo Group of Companies had been
invested in the purchase of shares and, therefore,
repatriation benefits in foreign exchange could not be
allowed to such shares by registering their transfer. Mr.
Nanda complained that he was forced to believe that the
institutions were adopting this attitude against the company
because of external pressures brought upon the institutions
as a result of the non-registration of the shares purchased
by Mr. Swraj Paul’s companies. There was no reply to this
letter by Mr. Punja. But on 13.1.1984, Mr. Punja informed
Escorts that the financial institutions had decided to
accept the proposal of Escorts Limited for pre-payment of
the outstanding loan. At this stage, that is on 7.1.19&4, a
meeting of the Board of the Life Insurance Corporation was
held and it was resolved that a requisition should be served
on Escorts Limited to convene an extraordinary general
meeting to pass resolutions for the removal of the nine non-
Executive Directors and for the appointment as new
Directors, officers and nominees of the financial
institutions, in their place. This subject was not one of
the matters listed in the agenda for the meeting of the
Board of Life Insurance Corporation. The resolution was
considered after all the officers of the Corporation, except
one, left the meeting. The minutes of the meeting did not
record any discussion. But the minutes do show that Mr.
Punja of the I.D.B.I. was present in his capacity as a
Director of the Life Insurance Corporation. It was
thereafter that the Life Insurance Corporation served a
requisition on Escorts Limited to call an extraordinary
general meeting of the company.
1011
What does the sequence of events go to show? It shows
that the financial institutions which held 52% of the shares
of the company and, therefore, had a very big stake in its
working and future were aggrieved that the management did
not even choose to consult them or inform them that a writ
petition was proposed to be filed which would launch and
involve the company in difficult and expensive litigation
against the Government and Reserve Bank of India. The
financial institutions must have been struck by the
duplicity of Mr. Nanda who was holding discussions with them
while he was simultaneously launching the company of which
they were the majority shareholders into a possibly trouble
some litigation without even informing them. The financial
institutions were instrumentalities of the State and so was
the Reserve Bank and it must have been thought unwise to
launch into such a litigation. The institutions were,
therefore, anxious to withdraw the writ petition and discuss
the matter further. As the Management was not agreeable to
this course, the Life Insurance Corporation thought that it
had no option but to seek a removal of the non-Executive
Directors so as to enable the new Board to consider the
question whether to reverse the decision to pursue the
litigation. Evidently the financial institutions wanted to
avoid a confrontation with the Government and the Reserve
Bank and adopt a reconciliatory approach. At the same time
the resolution of the Life Insurance Corporation did not
seek removal of the Executive Directors, obviously because
they did not intend to disturb the management of the
company. It is, therefore, difficult to accuse the Life
Insurance Corporation of India of having acted mala fide in
seeking to remove the nine non-Executive Directors and to,
replace them by representatives of the financial
institutions. No aspersion was cast against the Directors
proposed to be removed. It was the only way by which the
policy which had been adopted by the Board in launching into
a litigation could be reconsidered and reversed, if
necessary. It was a wholly democratic process. A minority of
shareholders in the saddle of power could not be allowed to
pursue a policy of venturing into a litigation to which the
majority of the share-holders were opposed. That is not how
corporate democracy may function.
A Company is, in some respects, an institution like as
State functioning under its ‘basis Constitution’ consisting
of the Companies Act and the memorandum of Association.
Carrying the analogy of constitutional law a little further,
Gower describes “the members in general meeting” and the
directorate as the two primary organs of a company and
compares them with the legis-
1012
lative and the executive organs of a Parliamentary democracy
where legislative sovereignty rests with Parliament, while
administration is left to the Executive Government, subject
to a measure of control by Parliament through its power to
force a change of Government. Like the Government, the
Directors will be answerable to the ‘Parliament’ constituted
by the general meeting. But in practice (again like the
Government), they will exercise as much control over the
Parliament as that exercises over them. Although it would be
constitutionally possible for the company in general meeting
to exercise all the powers of the company, it clearly would
not be practicable (except in the case of one or two – man –
companies) for day-to-day administration to be undertaken by
such a cumbersome piece of machinery. So the modern practice
is to confer on the Directors the right to exercise all the
company’s powers except such as general law expressly
provides must be exercised in general meeting. Gower’s
Principles of Modern Company Law. Of course, powers which
are strictly legislative are not affected by the conferment
of powers on the Directors as section 31 of the Companies
Act provides that an alteration of an article would require
a special resolution of the company in general meeting. But
a perusal of the provisions of the Companies Act itself
makes it clear that in many ways the position of the
directorate vis-a-vis the company is more powerful than that
of the Government vis-a-vis the Parliament. The strict
theory of Parliamentary sovereignty would not apply by
analogy to a company since under the Companies Act, there
are many powers exercisable by the Directors with which the
members in general meeting cannot interfere. The most they
can do is to dismiss the Directorate and appoint others in
their place, or alter the articles so as to restrict the
powers of the Directors for the future. Gower himself
recognises that the analogy of the legislature and the
executive in relation to the members in general meeting and
the Directors of a Company is an over-simplification and
states “to some extent a more exact analogy would be the
division of powers between the Federal and the State
Legislature under a Federal Constitution.” As already
noticed, the only effective way the members in general
meeting can exercise their control over the Directorate in a
democratic manner is to alter the articles so as to restrict
the powers of the Directors for the future or to dismiss the
Directorate and appoint others in their place. The holders
of the majority of the stock of a corporation have the power
to appoint, by election, Directors of their choice and the
power to regulate them by a resolution for their removal.
And, an injunction cannot be granted to restrain the holding
of a general meeting to remove a director and appoint
another.
1013
In Shaw & Sons (Salford) Ltd. v. Shaw 1935 2 K.B. 113,
Greer, L.J. expressed :
“The only way in which the general body of the
shareholders can control-the exercise of powers
vested by the articles in the Directors is by
altering the articles or, if opportunity arises
under the articles, by refusing to re-elect the
Directors on whose action they disapproved.”
In Isle of Wight Railway Company v. Tahourdin (1883) 25
Chancery Division 320, Cotton L.J. said :
“Then there is a second object, “To remove (if
deemed necessary or expedient) any of the present
directors, and to elect directors to fill any
vacancy in the board.” The learned Judge below
thought that too indefinite, but in my opinion a
notice to remove “any of the present directors”
would justify a resolution for removing all who
are directors at the present time; any” would
involve “all”. I think that a notice in that form
is quite sufficient for all practical purpose.”
Fry, L.J. said.
“The second objection was, that a requisition to
call a meeting “To remove (if deemed necessary or
expedient) any of the present directors” is too
vague. I think that it is not. It appears to me
that there is a reasonably sufficient
particularity in that statement. It is said that
each director does not know whether he is attacked
or not. The answer is, all the directors know that
they are laid open to attack. I think that any
other form of requisition would have been
embarrassing, because it is obvious that the
meeting might think fit to remove a director or
allow him to remain, according to his behaviour
and demeanour at the meeting with regard to the
proposals made at it.
In the same case considering the question whether an
injunction should be granted to restrain the holding of
general meeting, one of the purposes of the meeting being
the appointment of a committee to reorganise the management
of the company, Cotton L.J. Said :
1014
“It is a very strong thing indeed to prevent
shareholders from holding a meeting of the
company, when such a meeting is the only way in
which they can interfere if the majority of them
think that the course taken by the Director, in a
matter intra vires of the Directors, is not for
the benefit of the company.
In Inderwick v. Snell. 42 English Reports 83, the deed
of settlement of a company provided for the removal of any
director “for negligence, misconduct in office or any other
reasonable cause”. Some directors were removed and others
were appointed. The directors who were removed sued for the
injunction to prevent the new directors from acting on the
ground that there was no reasonable cause for their removal.
The Court negatived the claim for judicial review of the
reasons for removal and made the following interesting
observations:-
“The argument for the Plaintiffs rested on the
allegation that the general cause of removal
referred to in the clause being expressed to be
‘reasonable’ prevents the power referred to from
being a power to remove at pleasure arbitrarily or
capriciously, and made it requisite that the
proceeding for exercising the power should be in
its nature judicial, and that the reasonable cause
should be such as a Court of Justice would
consider good and sufficient. If this argument
could be sustained, all proceedings at such
meetings would be subject to the review of the
Courts of Justice, which would have to inquire
whether the cause of removal which was charged was
in their reasonable, whether the charges were bona
fide brought forward, whether they were
substantiated by such evidence as the nature of
the case required, and whether the conclusion was
come to upon a due consideration of the charge and
evidence. But the deed is silent as to these
matters, and the question is whether any such
power of control in the Courts of Justice is to be
inferred from the words “reasonable cause”
contained in the 27th clause; whether the
expression “reasonable clause” contained in such a
deed of a trading partnership can be held to be
such a cause, as upon investigation in a Court of
Justice must be held to be bona fide founded on
sufficient evidence and just; or whether it ought
not to be held to mean such cause as in the
opinion of the
1015
share-holders duly assembled shall be deemed
reasonable. We think the latter is the true
construction and effect of the deed.
In a moral point of view, no doubt every charge of
a cause of removal ought to be made bona fide
substantiated by sufficient evidence, and
determined on a due consideration of the charge
and evidence; and those who act on other
principles may be guilty of a moral offence; they
may be very unjust, and those who (being misled by
the statements made to them, have no doubt a just
right to complain that they have been led to
concur in an unjust act. But the question is,
whether by this deed the shares holders duly
assembled at a general meeting might not, or had
not a right to, remove a director for a cause
which they thought reasonable, without its being
incumbent upon them to prove to this or any other
Court of justice that the charge was true and the
decision just, or that the case was substantiated
after a due consideration of the evidence and
charge. We cannot take upon ourselves to say that
in the case of a trading partnership like this,
this Court has upon such a clause in the deed of
partnership jurisdiction or authority to determine
whether, by the unfounded speech of any supporter
of the charge, the shareholders present may not
have been misled or unduly influenced.
All such meetings are liable to be misled by false
or erroneous statements, and the amount of error
or injustice thereby occasioned can rarely, if
ever, be appreciated. This Court might inquire
whether the meeting was regularly held, and in
cases of fraud clearly proved, might perhaps
interfere with the acts done; but supposing the
meeting to be regularly convened and held the
shareholders assembled at such meeting may
exercise the powers given them by the deed. The
effect of speeches and representations cannot be
estimated, and for those who think themselves
aggrieved by such representations, or think the
conclusion unreasonable, it would seem that the
only remedy is present defence by stating the
truth and demanding time for investigation and
proof, or the calling of another meeting, at which
the whole matter may be re-considered. The
Plaintiff, objecting to this
1016
Meeting and considering it illegal, protested
against it, but abstained from attending and,
therefore, made no answer or defence to, and
required no proof of, the charges made against
them. The adoption of this course was unfortunate,
but toes not afford any grounds for the
interference of this Court.”
Again in Bentley-Stevens v. Jones, 1971 (2) All E.R.
653, it was held that a share holder had a statutory right
to move a resolution to remove a Director and that the court
was not entitled to grant an injunction restraining him from
calling a meeting to consider such a resolution. A proper
remedy of the Director was to apply for a winding-up order
on the ground that it was ‘just and equitable’ for the court
to make such an order. The case of Ebrahimi v. Westbourne
Galleries Ltd., 1972 (2) All E.R. 492, was explained as a
case where a winding-up of order was sought. In the case of
Ebrahimi v. Westbourne Galleries Ltd. (supra), the absolute
right of the general meeting to remove the directors was
recognised and it was pointed out that it would be open to
the Director sought to be removed to ask the Company Court
for an order for winding-up on the ground that it would be
‘just and equitable’ to do so. The House of Lords said,
“My Lords, this is an expulsion case, and I must
briefly justify the application in such case of
the just and equitable clause………………..
The law of companies recognises the right, in many
way, to remove a director from the board. Section
184 of the Companies Act 1948 confers this right
on the company in general meeting whatever the
articles may say. Some articles may prescribed
other methods, for example, a governing director
may have the power to remove (of Re Wondoflex
Textiles Pvt. Ltd.). And quite apart from removal
powers, there are normally provisions for
retirement of directors by rotation so that their
re-election can be opposed and defeated by a
majority, or even by a casting vote. In all these
days a particular director-member may find himself
no longer a director, through removal, or non-re-
election: this situation he must normally accept,
unless he undertakes the burden of providing fraud
or mala fides. The just and equitable provision
nevertheless comes to his assistance if he can
point to, and prove, some special underlying
obligation of his fellow member(s) in good faith,
or confidence, that so long as the business
continues he shall be entitled to management
participation, an obligation so
1017
basic that if broken, the conclusion must be that
the association must be dissolved.
Thus, we see that every shareholder of a company has
the right, subject to statutorily prescribed procedural and
numerical requirements, to call an extraordinary general
meeting in accordance with the provisions of the Companies
Act. He cannot be restrained from calling-a meeting and he
is not bound to disclose the reasons for the resolutions
proposed to be moved at the meeting. hor are the reasons for
the resolutions subject to judicial review. It is true that
under s. 173(2) of the Companies Act, there shall be annexed
to the notice of the meeting a statement setting out all
material facts concerning each item of business to be
transacted at the meeting including, in particular, the
nature of the concern or the interest, if any, therein, of
every director, the managing agent if any, the secretaries
and treasurers, if any, and the manager, if any. This is a
duty cast on the management to disclose, in an explanatory
note, all material facts relating to the resolution coming
up before the general meeting to enable the shareholders to
form a judgment on the business before them. It does not
require the shareholders calling a meeting to disclose the
reasons for the resolutions which they propose to move at
the meeting. The Life Insurance Corporation of India, as a
shareholder of Escorts Limited, has the same right as every
shareholder to call an extraordinary general meeting of the
company for the purpose of moving a resolution to remove
some Directors and appoint others in their place. The Life
Insurance Corporation of India cannot be restrained from
doing so nor is it bound to disclose its reasons its reasons
for moving the resolutions.
It was, however, urged by the learned counsel for the
company that the Life Insurance Corporation was an
instrumentality of the State and was, therefore, debarred by
Art. 14 from acting arbitrarily. It was, therefore, under an
obligation to state to the court its reasons for the
resolution once a rule nisi was issued to it. If it failed
to disclose its reasons to the court, the court would
presume that it had no valid reasons to give and its action
was, therefore, arbitrary. The learned counsel relied on the
decisions of this court in Sukhdev Singh, Maneka Gandhi,
International Airport Authority and Ajay Hasia. The learned
Attorney General, on the other hand, contended that actions
of the State or an instrumentality of the State which do not
properly belong to the field of public law but belong to the
field of private law are not liable to be subjected to
judicial review. He relied on O’Reilly v. Mackman [1982] 3
All E.R. 1124,
1018
Davy v. Spelthonne [1983] 3 All E.R. 278, I Congress del
Partido 1981 2 All E.R. 1064, R. v. East Berkshire Health
Authority [1984] 3 All E.R. 425, and Radha Krishna Aggarwal
and Ors. v. State of Bihar [1977] 3 S.C.R. 249. While we do
find considerable force in the contention of the learned
Attorney General it may not be necessary for us to enter
into any lengthy discussion of the topic, as we shall
presently see. We also desire to warn ourselves against
readily referring to English cases on questions of
Constitutional law, Administrative Law and Public Law as the
law in India in these branches has forged ahead of the law
in England, guided as we are by our Constitution and
uninhibited as we are by the technical rules which have
hampered the development of the English law. While we do not
for a moment doubt that every action of the State or an
instrumentality of the State must be informed by reason and
that, in appropriate cases, actions uninformed by reason may
be questioned as arbitrary in proceedings under Art. 226 or
Art. 32 of the Constitution, we do not construe Art. 14 as a
charter for judicial review of State actions and to call
upon the State to account for its actions in its manifold
activities by stating reasons for such actions.
For example, if the action of the State is political or
sovereign in character, the court will keep away from it.
The court will not debate academic matters or concern itself
with the intricacies of trade and commerce. If the action of
the State is related to contractual obligations or
obligations arising out of the tort, the court may not
ordinarily examine it unless the action has some public law
character attached to it. Broadly speaking, the court will
examine actions of State if they pertain to the public law
domain and refrain from examining them if they pertain to
the private law field. The difficulty will lie in
demarcating the frontier between the public law domain and
the private law field. It is impossible to draw the line
with precision and we do not want to attempt it. The
question must be decided in each case with reference to the
particular action, the activity in which the State or the
instrumentality of the State is engaged when performing the
action, the public law or private law character of the
action and a host of other relevant circumstances. When the
State or an instrumentality of the State ventures into the
corporate world and purchases the shares of a company, it
assumes to itself the ordinary role of a shareholder, and
dons the robes of a shareholder, with all the rights
available to such a shareholder. There is no reason why the
State as a shareholder should be expected to state its
reasons when it seeks to change the management, by a
resolution of the Company like any other shareholder.
1019
In the instant case the reason for the resolution
stares one in the face. The financial institutions who held
the majority of the stock were not only not told by the
management about the filing of the Writ Petition in the High
Court but were deliberately kept in the dark about it. The
matter was not even discussed at a meeting of the directors
before the Writ Petition was filed. It was filed in a
furtive manner even as Mr. Nanda was purporting to hold
discussions with Mr. Punja and others. And that was not all.
Mr. Nanda was also unduly exerting himself in certain
matters to the detriment of the majority shareholders. We
will immediately refer to those matters.
One of the circumstances relied upon to establish the
mala fides of the Life Insurance Corporation of India, a
consideration of which leads us to the conclusion that the
boot was on the other leg, was the attitude taken by the
Life Insurance Corporation of India in regard to (i) the
issue of Equity-Linked-Debentures; (ii) Repayment of loans
to Indian Financial Institutions; and (iii) the proposal for
the merger of Goetze with Escorts. It was argued that the
facts clearly disclosed an attempt on the part of the Life
Insurance Corporation of India to exert pressure on Escorts
Limited. It is impossible to agree with the submission.
In regard to the proposal for the issue of Equity-
Linked-Debentures, the facts are as follows : Escorts
obtained the approval of the Government under the M.R.T.P.
Act to establish a new undertaking to manufacture motor
cycles/scooters. According to Escorts, the proposal for the
issue of Equity-Linked-Debentures was conceived to meet the
cost of the new project. According to the Life Insurance
Corporation, the issue was solely motivated by an anxiety to
reduce the percentage of the holdings of the Life Insurance
Corporation and other financial institutions in the equity
capital of the company. The barest scrutiny of the proposal
as it finally emerged from Escorts Limited is sufficient to
expose the game of Escorts Limited. The proposal, as it
finally emerged from Escorts Limited, was to issue
debentures 17,50,000 Secured Redeemable Debentures of
Rs. 100 each and equity shares of the value of Rs. 17.50
crores divided into 87,50,000 equity shares of Rs. 10 each
for cash at a premium of Rs. 10 per share. It was proposed
that 20 per cent of the new issue would be offered on
preferential basis to existing resident equity share holders
of Escorts Limited and Goetze Limited (in accordance with
amalgamation proposal) subject to maximum allotment of 100
debentures and 500 equity shares to any single shareholder.
The Promoters, Directors and their friends and relatives.
business associates and employees were to be
1020
offered 15 per cent of the new issue on a preferential
basis, but in their case there was to be no ceiling on the
number of shares which might be allotted to any one cf them.
30 per cent of the new issue was to be offered to the
public. having regard to the ceiling of 500 shares proposed
to be imposed in the case of allotment to existing equity
shareholders, the Life Insurance Corporation,
notwithstanding the fact that it owned 30 per cent Of the
shares of Escorts Limited would be entitled to a meagre 500
shares in the new issue. The result would be that its
holding would be reduced from 30 per cent to 18.14 per cent.
The holding of all the financial institutions would be
reduced from 51.62 to 31.21 per cent. Not merely would it
result in the reduction of the percentage of the holding of
the financial institutions in the capital stock of the
company, but it would also result in great financial loss to
the institutions in the following manner: if the existing
shareholders were to be given preferential allotment in the
new issue on the basis of their existing holdings, without
any ceiling, the Life Insurance Corporation and other
financial institutions would be entitled not to the meagre
500 shares each, but to some tons of thousands of shares in
the new issue. Taking the market value of the shares into
account at Rs. 50 per share, the loss to the financial
institutions would be in the neighbourhood of about Rs. 10
crores. We do not think that any financial institution with
the slightest business acumen could possibly accept the
proposal as it finally emerged from Escorts Limited. No man
of ordinary prudence would have accepted the proposal. To
expect the financial institutions to agree to the proposal,
we must say, was sheer audacity on the part of these that
made the proposal. That was evidently the reason why at all
the initial stages, the details of the proposal were never
put to the financial institutions or before the Board of
Directors. It was urged by Shri Nariman that Mr. Davar, who
represented the financial institutions in the Board of
Directors also voted in favour of the proposal at earlier
stages, and, therefore, it must be inferred that the later
change of attitude on the part of the financial institutions
was not bonafide. We are afraid we cannot agree with Mr.
Nariman. The resolution of the Board of Directors merely
accepted in principle the issue of convertible debentures to
raise finances required by the company, subject to the
approval of financial institutions. At that stage no details
of the proposal were placed before the Board and even then
there was the reservation that it was subject to the
approval of the financial institutions. We think that it was
too much for Mr. Nanda and his associates to expect the
financial institutions or for that matter any other
shareholder having large holdings in the company to agree to
the proposal as it finally emerged. We reach the limit when
we hear the complaint of
1021
Mr. Nanda and his associates that the refusal of the
financial institutions to accept their proposal was mala
fide. It is a clear case of an attempt on the part of Mr.
Nanda and his associates to over reach themselves. we do,
not think it is necessary for us to go into any further
details in regard to the Equity-Lined-Debenture issue.
The proposal to merge Goetze with Escorts Limited was
also agreed to in principle in the first instance. However,
the share exchange ratio had apparently not been agreed to
by the financial institutions even at that time. This is
evident from the letter dated 3.12.1983 of Mr. Nanda to Mr.
Nadharna ICICI in which he stated :
“The proposals together with the report of the
Chartered Accountants and the Resolution of the
Board of Directors are with ICICI and IFCI and we
understand that the matter has been discussed in
the Inter-Institutional meeting of the Financial
Institutions. We have been eagerly waiting and
have made several requests to all the financial
institutions to expedite their approval so that
the other processes of the merger including the
permission of the High Court followed by the
Extraordinary Shareholders meeting of both the
Companies may proceed. Yesterday’s meeting with
the Chairman and Senior Executive of the Financial
Institutions, I was informed, for the first time,
that the financial Institutions were still
examining our request for approval they were
primarily concerned about the 53% holding of all
the investing financial institutions (LIC, GIC,
UTI) post merger coming down close to 49 per
cent.”
It is seen from the letter that Mr. Nanda was not proceeding
on the basis that the financial institutions had already
agreed to the proposal for merger, but was in fact awaiting
their approval. When he learnt the reason for the hesitation
of the financial institution to agree to the proposal, he
wrote a letter on 30.12.1983 explaining his views and
requesting the financial institutions to expedite the
approval of the proposal. It is, therefore, futile for Mr.
Nanda to centend that the proposal for merger of Goetze with
Escorts Limited was a lever which the Financial Institutions
were using to exert pressure on him to agree to register the
transfer of shares in favour of the Caparo Group of
Companies. It is difficult to understand why anyone holding
a majority of the equity capital of a company should h allow
himself to be hustled into becoming a minority shareholder.
1022
The proposal for pre-payment of institutional loans,
though finally agreed to by the institutions, was not quite
as straight as claimed by Escorts. In the first place,
Escorts asked for pre-payment of loans by Indian financial
institutions, but not the foreign currency loan. In the
second place, the Cost of pre-payment of institutional loans
was to be met by part of the debenture issue which would
entail payment of interest at the rate of 14 per cent
whereas the institutional loans carried interest at the rate
of 10 per cent only. It certainly could not be said to be in
the interests of the company to pay interest at a higher
rate than that payable to Indian financial institutions.
Obviously the object of pre-payment was to get rid of the
directors who the financial institutions had a right to
nominate. True Escorts offered to appoint Mr. Davar as a
Director even if the financial institutions had no right to
nominate him. But it is one thing to have the right to
nominate a director and quite another thing to the director
on sufferance.
We do not think that it is necessary to discuss these
proposals at greater length than we have done. The
correspondence which passed between the parties and which
has been read to us shows that Mr. Nanda was certainly
trying to hustle the financial institutions into accepting
the proposals.
We have discussed the submission made to us in broad
perspective. We have not referred to the myriad minutiae
which were presented to us, as we consider it unnecessary to
do so and we do not wish to further lengthen an already long
judgment. This does not mean that we have not taken into
account all the little submissions and trifling details
which were brought to our notice.
We may now state our conclusions as follows :
1. The permission of the Reserve Bank contemplated by
the FERA could be ex-post-facto and conditional.
2. The press release (Ex.A) dated 17.9.83, the circular
(Ex.B) dated 19.9.83 and the letter (Ex.C) dated 19.9.83 are
all valid.
3. Under the scheme, any foreign company whose shares
were owned to the extent of more than 63 per cent by persons
of Indian nationality or origin could avail the facility
given by the scheme irrespective of the fact whether the
same group of share holders figured in the different
companies.
1023
4. Where any of the purchases were made subsequent to
2.5.83, they were subject to the 5 per cent ceiling in the
aggregate.
5. The Reserve Bank of India was not guilty of any mala
fides in granting permission to the Caparo Group of
Companies. Nor was it guilty of non-application of mind.
6. No mala fides could be attributed to the Union of
India either.
7. There was a total and signal failure on the part of
the Punjab National bank in the discharge of their duties as
authorised dealers under the FERA and the scheme with the
result that there was no monitoring of the purchases of
shares made on behalf of the Caparo Group of Companies.
8. The allegation of mala fides against the Life
Insurance Corporation of India was baseless.
9. The notice requisitioning a meeting of the Company
the Life Insurance Corporation of India was not liable to be
questioned of any of the grounds on which it was sought to
be questioned in the writ petition.
On our finding that there was no monitoring whatsoever
of the purchase of shares made on behalf of the Caparo Group
of Companies by the Punjab National Bank and on our further
finding that though the Reserve Bank of India was not
actuated by malice and was not guilty of non-application of
mind, the reliance placed by the Reserve Bank of India on
the Punjab National Bank was misplaced in the event, the
Punjab National Bank having totally abandoned its duties as
authorised dealer, it follows that the permission granted by
the Reserve Bank must be reconsidered by the Reserve Bank in
the light of the failure of the Punjab National Bank to
discharge its duties. Therefore, while allowing the appeals
of the Union of India, the Reserve Bank of India and the
Life Insurance Corporation of India and dismissing the
appeal of Escorts Limited and setting aside the judgment of
the High Court, we direct the Reserve Bank of India to make
a full and detailed enquiry into the purchase of shares of
Escorts Limited by the Caparo Group of Companies and
consider afresh the question whether permission ought or
ought not to have been granted. If the Reserve Bank of India
is satisfied that permission ought not to have been granted,
it may cancel the permission already granted and take such
further action as may be necessary under the FERA if it
considers that there has been any infraction
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of the FERA or the scheme: if the Reserve Bank of India is
of the view that the permission may be granted subject to
restrictions, it may impose such restrictions and conditions
as it may think fit, in addition to the condition that
either the capital or the profits or both cannot be
repatriated. We further direct Respondents 3 to 17, 20 and
21 (in the Writ Petition), that is the Punjab National Bank,
the thirteen Caparo Group of Companies, Mr. Swraj Paul, M/s
Raja Ram Bhasin and Co. and M/s Bharat Bhushan and Co., to
make available to the Reserve Bank of India each and every
document in their possession pertaining to the remittances
made for the purchase of shares on behalf of thirteen Caparo
Group of Companies and the purchase of shares made on their
behalf. They are also directed to produce every document
which the Reserve Bank of India may require them to produce.
The enquiry by the Reserve Bank should be concluded within
three months from today.
We also direct the Reserve Bank of India to enquire
into the conduct of Punjab National Bank and take such
action as may be necessary including cancellation of the
authorisation granted under sec. 6 of the Foreign Exchange
Regulation Act. In regard to costs, the Union of India, the
Reserve Bank of India and the Life Insurance Corporation of
India are certainly entitled to their costs. We do not see
any reason why the company Escorts Limited should be mulcted
with costs. The litigation was launched by Mr. Nanda and he
should be personally made liable for the costs. We also
think that the litigation has been unnecessarily complicated
by the failure of Mr. Swraj Paul and Raja Ram Bhasin & Co.
to cooperate by appearing before the court. We think that
they should also be liable for a portion of the costs. So
also the Punjab National Bank. The appeals filed by the
Union of India, the Life Insurance Corporation of India and
the Reserve Bank of India are allowed with costs payable as
follows : Three-fifths of the taxed costs in each case will
be payable by Har Prasad Nanda, one-fifth by Swraj Paul and
one-fifth by the Punjab National Bank. The cross appeal
filed by Escorts Limited and Nanda is dismissed with the
costs of the Union of India, the RESERVE Bank of India and
the Life Insurance Corporation of India. The Union of India,
the Reserve Bank of India and the Life Insurance Corporation
of India are entitled to their costs in the High Court,
three-fifths payable by Nanda, one-fifth by Swraj Paul and
one-fifth by Punjab National Bank. In modification of our
order dt. 4.4.85 in C.M.P No. 12832/85, we direct Shri H.P.
Nanda and Rajan Nanda to continue as Managing Directors
until the Board of Directors takes a decision in the matter.

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