TMI Blog1985 (12) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... F.S. Nariman, Soli J. Sorabjee, K.E. Venugopal, Anil B. Divan, O.P. Malhotra, R.F. Nariman, A. Chinoy, B.H. Antia, J.B. Dadachanji, Ravinder Narain, S.C. Mathur, Rajive Sawhney, Harish Salve, T.M. Ansari, Mrs. A.K. Verma, S.K. Mishra and Jool Pores, A.N. Ganguli, S.C. Maheshwari, H.S. Parihar, Mahendra Shah, A. Subba Rao for the Respondent. JUDGMENT 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 subjected 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-ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears by the existing procedures. There is now a public realisation of the growing weight of the judicial burden. The co-operation 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 requires our scrutiny, more particularly so because of a most singular and remarkable feature of the case, namely, the absence of the principal dramatis personae 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 exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for that purpose. Foreign exchange is defined by section 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; ( 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 by section 2( b ) to mean a person for the time being authorised under section 6 to deal in foreign exchange. Owner is defined by section 2( o ), 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 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, 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 other wise, 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 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 section 28 and section 47 and notwithstanding anything contained in any other provision of this Act or the provisions of the Companies Act, 1956, a person reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout the permission of the Central Government or the Reserve Bank of India, shall not render invalid any agreement to do that thing, if it is a term of the agreement that 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 and 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 an enquiry and the power to adjudicate. Section 52 provides for an appeal to the Appellate Board and section 54 for a further appeal to the High Court on questions of law. Section 56 provides for prosecutions, for con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 to 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 section 79 of the FERA, rules call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esirable 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. Paragrah 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 ., section 19, governing issue and transfer of securities in favour of nonresidents, section 29 g0verning establishment of a place of business by nonresidents for carrying on trading, commercial or industrial activity or acquiring such an undertaking or shares in such companies in India and section 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 the Foreign Exchange Regulation Act, 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies, 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 section 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-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 thereon provided that ( a ) the shares are purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 co-ordination and understanding between the designated bank and the investor's agents would be necessary for handling the investment procedures efficiently . Paragraph 11 prescribes, among 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 repat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionality/Origin Portfolio Investment Scheme in the following manner : Referring to Circular No. 9 which extended portfolio scheme to overseas companies, partnership 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 equity capital of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of one or more nonresident 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hase 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 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 section 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 Ltd., an Indian company, thirteen overseas companies, twelve out of whose shares were owned 100 per cent, 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 brokers for the purpose of such investment. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 April 23, 1983, Punjab National Bank addressed the Controller, Reserve Bank, Exchange Control Department, inviting their attention to their former letters dated March 4 and 12, 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 and Co., Share and 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 Ltd., the holding company, on March 9, 1983, April 12, 1983, April 13, 1983, and March 23, 1983, of amounts equivalent to ₹ 1,35,36,000, ₹ 2,36,59,000, ₹ 76,35,000 and ₹ 1,31,38,681.13. The Punjab National Bank also mentioned in the letter that although all necessary formalities prescribed by the Reserve Bank's Circular dated April 22, 1982, had been complied with, approval had not yet been accorded to their clients. It was requested that the appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 National Bank frankly confessed before us that the ECE 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 1,30,000 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, and if he has so done, get away with it in this bizarre way. The statements filed by Raja Ram Bhasin Co. show that prior to March 9, 1983, the date of the first remittance as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 March 4, 1983, and March 12, 1983. Theletter dated April 29,1983, 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 with out prior permission of the Reserve Bank. Thereafter, the Punjab National Bank wrote three letters to the Reserve Bank on May 6, 1983, May 19, 1983, and May 25, 1983, the purport of which was that the Swraj Paul Family Trust held 61.6% of the share capital of Caparo Group Ltd. 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 point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of Raja Ram Bhasin and Co., their designated brokers and power of attorney holders. So, the operations were executed by the Punjab National Bank through NRE account on various dates up to April 23, 1983, and thereafter. Payments were made, according to the bye-laws and regulations of Delhi Stock Exchange. On May 31, 1983, 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 April 28, 1983, they had purchased 80,000 equity shares of Delhi Cloth and General Mills Co. Ltd. and 75,000 equity shares of Escorts Ltd. on behalf of each one of the thirteen overseas companies predominantly owned by non-residents of Indian origin. On June 1, 1983, 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 the thirteen overseas companies, eleven of which were wholly owned by Caparo Group Ltd. which in turn was owned by the family trust of Mr. Swraj Paul to the extent of 61.6 %. In the twelfth company, Caparo Properties Ltd., Caparo Group Ltd. had a holding of 98 per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... got the necessary approval from the R.B.I, do not seem 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 issues as to whether such purchases on the stock exchange by overseas non-resident Indian Companies, etc , prior to May 2, 1983, are valid without the prior specific approval of the RBI. Your report should reach as quickly as possible in order to enable the Government to take decision. The importance of May 2, 1983, so frequently mentioned in the telex message is apparently because May 2,1983, 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 May 31, 1983, Punjab National Bank wrote to Escorts Ltd. informing them that the thirteen overseas companies had been making investments in shares of Escorts Ltd. in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly 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 if 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 probable 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 with in 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 Ltd. 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 farfetched 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous 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 of the board's discretion. On June 9, 1983, the Board of Directors of Escorts Ltd. considered the committee's report and passed a resolution refusing to register the transfer of shares. The resolution was in the following terms : The 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 the FERA and the FERA regulations and other relevant laws including the company law, the Stamp Act, the Public Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the discussion and voting on the resolution. There was no dissenting vote. In respect of another block of shares lodged with Escorts Ltd. on August 19, 22, 1983, for registration in the names of the thirteen foreign non-resident companies, a similar report was submitted by the committee on September 29, 1983, and a similar resolution was passed by the board of directors on the same day. Escorts Ltd., although they had already refused to register the transfer of shares, none the less, 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 Ltd. only and from none of the other twelve foreign companies. The company also wanted to know why 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne 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 in their own names, the shares purchased on behalf of nonresidents. The Reserve Bank was 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-to-day record of the transactions and so 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 June 20, 1983, drew attention to the circumstances that though 9,75,000 shares were purported to have been purchased before April 28, 1983, only 4,62,337 shares had been lodged by May 13, 1983, and, therefore, it appeared that there were forward transactions and the purchases were not in accordance with the scheme. In their third letter dated July 23, 1983, Escorts Ltd. asserted that a large amount of money to the tune of about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistration of the transfers in their names only and not in the 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 nonresident individual or company. To none of these letters did the Reserve Bank deign a reply or even the courtesy of an acknowledgment. Though the Reserve Bank did not choose to write or make any further enquiry from Escorts Ltd., there is no doubt that the Reserve Bank did enquire in its own way into the allegations made by Escorts Ltd. against the Caparo Group of companies. It was not as if the Reserve Bank wantonly 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 Foreign Exchange Regulation Act, owing a serious responsibility to the Reserve Bank under the Foreign Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 982, and from January 1,1983, to February 28, 1983, no shares on behalf of the thirteen non-resident companies were purchased. Between March 1, 1983, and May 2, 1983, 80,000 shares of Delhi Cloth and General Mills Co. Ltd. and 75,000 shares of Escorts Ltd. were purchased for each of the thirteen companies. After May 2, 1983, no share was purchased. All remittances were received through their London branch for the credit of M/s. Raja Ram Bhasin and Co. for purchase of shares on behalf of the thirteen companies. On March 9, 1983, March 24, April 12, April 15, April 28, and April 28, 1983, remittances of ₹ 1,35,36,000, ₹ 1,31,38,681, ₹ 2,36,59,900, ₹ 76,35,000, ₹ 1,56,76,000 and ₹ 1,56,80,000 were received and transferred to the account of Raja Ram Bhasin and Co. from the account of Caparo Group Ltd. A balance of ₹ 38,682 in the non-resident external account of Caparo Group Ltd. was allocated pro rata to the thirteen accounts on June 2, 1983, in terms of the letter of their broker, M/s. Raja Ram Bhasin and Co. The broker derived his authority in terms of the investors' letters which were annexed to the letter of the bank. The Punjab Nation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies was eligible to invest in shares in 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 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 August 11, 1983, replied to the Reserve Bank's letter of July 6, 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 September 17,1983, the Government of India clarified the position and it was pointed out that the port ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly 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. Since this clarification merely reflects the original intention of the Government, the investments made by the applicants before May 2, 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. Manmohan 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of DCM Ltd. and Escorts Ltd. purchased on behalf of the 13 Caparo group of companies provided the shares in question were purchased up to and inclusive of May 2, 1983. It was also mentioned that the purchase of shares shall be deemed to have taken place up to and inclusive of May 2, 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. The 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 Ltd. and Escorts Ltd. to the extent of one per cent, of the paid up capital of the respective companies subject, where the purchase has been made after May 2, 1983, 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 May 2, 1983, were not subject to the 5 per cent, ceiling. Information was requested as to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clients, the Caparo Group of companies, with regard to the purchase of shares before May 2, 1983. The queries raised by the companies did not dispute the dates of purchases made by them up to April 28, 1983. The queries were misleading and were merely an attempt to create 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 stamp of the Registrar of Companies as the date of the contract. Deliveries could be taken even after April 28, 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 purchase or the date of delivery. The sale consideration shown in the transfer deed was for the purpose of computation of the stamp duty which had to be paid at the rate prevalent on the dates stated on the transfer deeds and not as on the actual date of purchase. No shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r proceeding the grounds of rejection contained in para 7 of the share scrutiny and transfer committee of directors report dated June 8, 1983, or in paras 6, 7 and 8 of the report dated August 29, 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 : In the rejoinder affidavit filed by petitioner No. 2, it was specifically pleaded that the petitioners do not want adjudication on the other grounds of refusal of registration of shares, and, as such, failure to obtain prior permission under section 29 of the FERA remained the sole ground for rejection. The respondents urge that since the 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 petitions mutatis mutandis. Whether there is a live issue for adjudication a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.' 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 alive issue even on December 17,1983, 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 applications 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 befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a copy of the letter dated September 27, 1983, addressed by the PNB to respondent No. 4-com-pany. Haresh Bhasin (respondent No. 20) by his letter dated October 8,1983, addressed to the petitioner-company, and sent by registered post A.D., had requested that the decision of the board of directors dated August 29, 1983, refusing to register the shares be reviewed. In reply, the petitioner-company conveyed through its letter dated October 13, 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 petitioner-company also disputed the claim that the 13 non-resident companies had purchased the shares prior to May 2, 1983. The petitioner-company thus maintained that the permission granted subsequently is not valid and that the refusal to register the shares for other reasons still holds good. Of course, at the hearing of the writ petition, having regard to the decision of the Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 directors, 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 the 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 this action of the LIC (respondent No. 18) which by itself holds 30% of the shares and along with the other financial institutions, collectively represented by Davar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance 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 November 1, 1983, there was a meeting between the lawyers of Escorts and the legal advisers of the financial institutions. There was a further meeting between Mr. Nanda and Mr. Punja on November 9, 1983, when Mr. Nanda of Escorts Ltd. requested Mr. Punja to expedite the proposal for merger of Goetze India Ltd. with Escorts Ltd. and the proposal for prepayment of the outstanding loans of Escorts Ltd. to the financial institutions at the inter-institutional meeting to be held on the afternoon of 9th. Mr. Nanda was later informed by Mr. Davar that the proposals of Escorts Ltd. had been discussed 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 Ltd. 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, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouble 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 December 24,1983, there was a report of the 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 Ltd., 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 December 29, 1983, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue a rule nisi in regard to prayer ( d ). There was no appeal against that order by Escorts Ltd. 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 Ltd. 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 September 19, 1983, and the letter dated September 19, 1983, 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 adducing of evidence in regard to each of the transactions and would be ordinarily outside the province of a court exercising jurisd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate 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 the FERA; any purchase of shares without such 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 September 17, 1983 (exhibit 'A'), the Circular dated September 19, 1983 (exhibit 'B'), and the letter dated September 19, 1983 (exhibit '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 im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or under or in furtherance of the impugned requisition notice. From what has been narrated above, one of the principal 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 section 29(1)( b ) of the Foreign Exchange Regulation 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. 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, Actg. C.J., said in Shakir Husain v. Chandoo Lal, AIR 1931 All. 567 (headnote): Ordinarily, the difference between the 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. We have already extracted section 29(1) and we notice that the expression used is general or special permission of the Reserve Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and securities, transactions indirectly affecting foreign exchange and the import and export of currency and bullion, for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country. We have already referred to section 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 at the provisions of section 29 by themselves, it would be clear that the permission contemplated by section 29 could only be previous . He pointed out to us that while sections 29(2) and 29(4) made due provision for applying for permission to continue to carry on any activity of the nature mentioned in section 29(1)( a ) and continue to hold shares of a company of the character mentioned in section 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 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 occurring in section 13 could be construed to include subsequent permission. So, it was urged, both in section 13 and sections 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 section 13 is to be deemed to have been imposed under section 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 of the Foreign Exchange Regulation Act and section 11 of the Customs Act, it is seen that an order under section 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k care to use the word confirmation as distinguished from the word permission where it thought such confirmation was sufficient, as in section 19(5). Parliament, according to Shri Nariman, could well have made a provision for confirming transactions coming into existence after the commencement of the Act, if it was so minded, but, since, it did not do so, but chose the word permission , it must follow that section 29 contemplates previous permission only. We see no true foundation for this submission. A 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 section 29. It was also submitted on behalf of the company that if the word permission was construed to include ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange 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 up to May 31, 1978. The directions have been issued under section 73(3) of the Foreign Exchange Regulation Act, 1973, which empowers the Reserve Bank 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 24A.1 is styled as Introduction to Foreign Investment in India . There is nothing in the whole of the paragraph which even remotely is suggestive of a direction under section 73(3). Paragraph 24A.1 itself appears to be in the nature of a comment on section 29(1)( b ), rather than a direction under section 73(3). Directions unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk 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 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 Foreign Exchange Regulation Act 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 Foreign Exchange Regulation Act. 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 sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the bearer of such warrant or to his banker. Default in payment of dividend is also made punishable under section 207. A shareholder 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 section 397 for relief in case of oppression and under section 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 shareholder, as a contributory, has also the right to apply for winding-up of the company under section 439. On winding-up, section 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 to notice here section 27 of the Securities Contracts (Regulation) Act, 1956, 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permission of the Reserve Bank purchase the shares in India of any company carrying on any trade, commerce or industry. The provisions of section 29 are stated to the without prejudice to the provisions of section 47 which while prohibiting 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 there under 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 be paid. We have also referred earlier to section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 the directors and thereby take a part, though indirectly, in the management of the company's affairs. If the majority of shareholders sides with him, he can have a resolution passed which would be binding on the company and, lastly, he can institute proceedings for the winding up of the company which may result in a distribution of the net assets among the shareholders. It is interesting to notice that Mukherjea 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 those who invest their money in it. In R. Mathalone v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp. Cas. 1 (SC), 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 tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... register and the full property in the shares in a company , the court expressed the view that section 6 of the Transfer of Property Act also justified such a splitting up of a right constituting property in shares just as it was well recognised that rights of ownership of a 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 the donee became irrevocable by registration as well as by delivery. Either was sufficient. The actual transfer in the registers of the companies constituted a mere enforcement of this right to enable the donee to exercise the rights of the shareholder. The mere 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 Indian 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n securities held by a non-resident without permission from the treasury, the company wrote to F that certain forms had to be completed by him and the transferee and that a licence had to be obtained from the treasury. Before F 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 possession 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 F had not 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 possession of the shares. In Swiss Bank Corporation v. Lloyds Bank Ltd. [1981] 2 WLR 893; [1981] 2 All ER 449 ; [1982] AC 584 (HL) the question was about the consequenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to refuse to register the transfer of shares has been explained by this court in Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp. Cas. 1 , 6, 7 (SC). It was said that even if the articles 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 paramount interest of the company and 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 motive. 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 bona fide. Where the directors gave reasons, the court would consider whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quity 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 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 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 shareholders. On the other hand, where, for instance, the requisite permission under the Foreign Exchange Regulation Act is not obtained, it is open to the company and, indeed, it is bound to refuse to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 on the ground that permission ought not to have been granted under the Foreign Exchange Regulation Act. It is necessary to remind ourselves that the permission contemplated by section 29(1) of the Foreign Exchange Regulation Act is neither intended to nor does it impinge in any manner on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , of the Government of India to the Reserve Bank of India, and ( iii ) the endorsement made on the letter dated September 17, 1983, by the Governor of the Reserve Bank. We have already referred to the contents of ( i ) and ( ii ), the two letters in the preceding paragraphs. We have also extracted the endorsement of Dr. Manmohan Singh in full. The inference sought to be drawn from ( i ), ( ii ) and ( iii ) is that though the Reserve Bank 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 finally agreed to adopt the line suggested by the Government in its letter dated September 17, 1983, and that the decision of the Reserve Bank 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. Manmohan Singh. An enormous amount of foreign exchange vital to the economy of the country ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 it 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 of 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 charge the Reserve Bank with want of bona fides and non-application of mind merely because it placed reliance upon the Punja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign 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 up-to-date record of the shares purchased by them for each investor through 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 ₹ 1 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es except Caparo Properties in which the holding was 98 percent. In this letter, it was expressly stated as regards details of shares of Indian companies purchased by or on behalf of the said non-resident clients, they have advised us that the same would be supplied when the purchases were complete. This statement appears to us to be in complete breach of the duties of an 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 May 31, 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 April 28, 1983, 75,000 equity shares of the Escorts Ltd. had been purchased on behalf of and for the benefit of each of the thirteen overseas companies. The Reserve Bank sought information by their letters dated June 11, 1983, of the purchases of shares made for the benefit of the overseas companies, ( i ) up to December, 1982 ; ( ii ) from J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e must hold on the material now available to us that their implicit reliance on the Punjab National Bank was entirely misplaced. What further action must be taken on that finding is a question which we have to consider. We will do so later after considering 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 May 2, 1983. 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 May 2, 1983 ; 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 157 ITR 77; 67FJR 196. While it is firmly established ever since Salomon v. A. Salomon and Co. Ltd. [1897] AC 22 (HL) 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 taxpayer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory 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 . 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. Which 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. Lif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Ltd. 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 and the Life Insurance Corporation to pressurise Escorts Ltd. 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 immedia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst 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 January 13, 1984, Mr. Punja informed Escorts Ltd. that the financial institutions had decided to accept the proposal of Escorts Ltd. for pre-payment of the outstanding loan. At this stage, that is, on January 7, 1984, a meeting of the board of the Life Insurance Corporation was held and it was resolved that a requisition should be served on Escorts Ltd. 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 the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation to which the majority of the shareholders were opposed. That is not how a corporate democracy may function. 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. 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 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 Parliament constituted by the general meeting. But in practice (again like the Government), they will exercise as much control over 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) f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articles or, if opportunity arises under the articles, by refusing to re-elect the directors of whose action they disapproved. In Isle of Wight Railway Co. v. Tahourdin [1884] 25 Ch 320 (Ch D) Cotton L. J. said (at p. 332): 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 purposes. Fry L.J. said (at p. 335): 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 attac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atters 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 cause' 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 shareholders 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 shareholders duly assembled at a general meeting might not, or had not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a winding-up order was sought. In the case of Ebrahimi v. West-bourne Galleries Ltd. [1972] 2 WLR 1289 ; [1972] 2 All ER 492 (HL), 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 the just and equitable to do so. The House of Lords said (at p. 500 of [1972] 2 All ER): My Lords, this is an expulsion case, and I must briefly justify the application in such cases of the just and equitable clause...The law of companies recognises the right, in many ways, 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 prescribe other methods, for example, a governing director may have the power to remove (of In re Wondoflex Textiles P. Ltd. [1951] VLR 458). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was, therefore, debarred by article 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 v. Bhagatram Sardar Singh Raghu-vanshi [1975] 45 Comp. Cas. 285; AIR 1975 SC 1331; Maneka Gandhi v. Union of India AIR 1978 SC 597, Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628, and Ajai Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487. 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 WLR 1096 ; [1982] 3 All ER 1124 (HL), Davy v. Spelthorne Borough Council [1983] 3 WLR 742 ; [1983] 3 All ER 278 ; [1984] AC 262 (HL), I Congreso del Parido [1981] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State ventures into 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 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. 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 these matters. One of the circumstances relied upon to establish the mala fides of the Life Insurance Corporation, a consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d., would be entitled to a meagre 500 shares in the new issue. The result would be that its holdings 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 tens of thousands of shares in the new issue. Taking the market value of the shares into account at ₹ 50 per share, the loss to the financial institutions would be in the neighbourhood of about ₹ 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 Ltd. No man of ordinary prudence would have accepted the proposal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rger 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 executives 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% (52%) 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 institutions to agree to the proposal, he wrote a letter on December 30, 1983, explaining his views and requesting the financial institutions to expedite the approval of the proposal. It is, therefore, futile for Mr. Nanda to contend that the proposal for merger of Goetze with Escorts Ltd. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ality or origin could avail of the facility given by the scheme irrespective of the fact whether the same group of shareholders figured in the different companies. (4)Where any of the purchases were made subsequent to May 2, 1983, they were subject to the 5 per cent ceiling in the aggregate. (5)The Reserve Bank was not guilty of any mala fides in granting per mission 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 by the Life Insurance Corporation was not liable to be questioned on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cancellation of the authorisation granted under section 6 of the Foreign Exchange Regulation Act. In regard to costs, the Union of India, the Reserve Bank and the Life Insurance Corporation are certainly entitled to their costs. We do not see any reason why the company, Escorts Ltd., should be mulcted with costs. The litigation was launched by Mr. Nanda and he should personally be 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 co-operate 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 and the Reserve Bank 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 Ltd. and Nanda is dismissed with the costs of the Union of India, the Reserve Bank and the Life Insurance Corporation. The Union of India, the Reserve Bank and the Life Insurance Corporation ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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