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TMI Blog1994 (8) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... claims. The respon- dents are hence liable to be proceeded against under section 36A of the MRTP Act, 1969 ('the Act'), they having indulged in unfair trade practices. Each of the respondents appeared in response to the Notices issued by the Commission and raised an objection questioning the jurisdiction of the Commission to deal with the subject matter on diverse grounds which will be elaborated in the discussion that follows. 2. The Benches before which these matters came up for consideration felt (hat having regard to the importance of the preliminary issue as to the jurisdiction of Commission, it would be appropriate that the same be considered and decided by a larger Bench as a preliminary issue. It was also observed by the then Chairman Mr. Justice G.R. Luthra, that while considering these issues the pronouncements of the Full Bench of this Commission in Consumer Education & Research Centre v. T.T.K. Pharma Ltd. [1990] 68 Comp. Cas. 89 (MRTPC) and of the Division Bench compris-ing Shri D.C. Aggarwal and Shri H.C. Gupta in J.P. Sharma v. Reliance Petrochemicals Ltd [1991] 70 Comp. Cas. 378 (MRTPC) may be kept in view. From a perusal of the referring orders passed by the vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to any trade;" Section 2(r) defines 'service' as: "'service' means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, chit fund, real estate, transport, processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service." Section 2(y) is important for our purpose and it provides: "words and expressions used but not defined in this Act and defined in the Companies Act, 1956 (1 of 1956), have the meanings respectively assigned to them in that Act." Clause (v) holds a clue when a question arises as to what meaning should be assigned to words and expressions used in the MRTP Act but not defined therein. The legislative intent seems to be that where words and expressions used are not defined in the present Act, that meaning should be assigned to those words and expressions as have found acceptance in Corporate Law. That seems to be the scheme of the Act in regard to the construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Now we find that there is an overwhelming authority for the proposition that except where debentures are secured by mortgage of immovable property or hypothecation or pledge of movable property they constitute actionable claims and there is complete unanimity on this point among the various authors. Mulla (Sixth edn.) on the Transfer of Property Act has made the following comments: "Actionable claims - In English law movable property was said to be either in possession and enjoyment and therefore a chose in possession; or out of possession, but realizable by action, and therefore a chose in action. A chose in action is in English law a term used to describe all personal rights of property which can only be claimed or enforced by action and not by physical possession. In Colonial Bank v. Whinney [1885]30 Ch.D. 261, the Court pointed out that the term was used in different ways to include not only the right to obtain something not in possession or enjoyment but also certain classes of incorporeal personal property. It is also used to denote a document evidencing a right or title. Accordingly choses in action included debts, benefits of contract, damages for breach of contract or tor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eces- sarily called on the face of it a debenture, and providing for the payment of a specified sum at a fixed rate with interest thereon. 7. These comments leave no manner of doubt that except where a debenture is secured by mortgage in respect of a specific property, debentures would constitute actionable claims and would, therefore, go outside the purview of the definition of 'goods'. 8. The next question which falls for consideration is whether debentures would be covered by the extended meaning assigned to the term 'goods' under the MRTP Act, namely, whether they can be comprehended within the words 'shares and stocks'. This controversy need not detain us as there is ample authority in support of the proposition that shares, stocks and debentures are distinctly different concepts. Section 2( 12) of the Compa-nies Act, 1956 defines debenture as: " 'debenture' includes debenture stock, bonds and any other securi- ties of a company, whether constituting a charge on the assets of the company or not;" In Sellar v. Charles Bright & Co. Ltd. [1904] KB 447, it was observed as follows: "The Judgments Act, 1838 (1 & 2 Vict. c. 110) section 14, speaks of 'any stock or shares of or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the debentures representing the loan capital. Shareholders are the owners of the company till the company is folded up fully while debenture holders are only creditors of the company - sometimes secured and sometimes unsecured and that too for a defined period. The rights of the shareholders and deben-ture holders are different as also their remedies. To the extent the comparison could bear between the two, the procedures are by and large the same for both in the matter of issue, allotment and transfers and forfeiture. Shares, therefore, are distinct from deben-tures, although in the usual parlance they both are grouped together in many legislations and referred to sometimes by the generic term of 'scrip'. It is on account of their free transferability and marketabil-ity, they are referred together. The stamp duty on the share certifi-cates and debenture certificates and on their transfers is totally different and bears no comparison. The incidents of debenture certificates as seen from our discussion above are different from the incidents of share certificates and hence bear no comparison. Therefore, there is no equation between shares and debentures except as referred to above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 Comp. Cas. 89 (MRTPC), it has been held by the Full Bench of this Commission that shares before allotment are not goods and that the allotment of shares does not mean distribution, sale and control of goods. In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd [1963] 33 Comp. Cas, 862 ; AIR 1964 SC 250, it has been held that in Company Law, 'allotment' means the appropriation out of the previously unappropriated capital of a company, of a certain number of shares to a person. Till such allotment, the shares do not exist as such; the same has to be the position with respect to debentures too which come into existence only on allotment and, therefore, section 36A on unfair trade practices, and even the provisions relating to restrictive trade practices cannot be brought into play with respect to the 'allotment' of shares or debentures." 11. The provisions of the Companies Act also support the same view. A debenture is issued to a debenture holder in accordance with sections 72 and 73 of the Companies Act and thereafter under section 113 of the Companies Act, a certificate of debenture is issued. Before a certificate of debenture is issued a charge has to be created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt of Appeal in the case of Sellar ( supra)]. 13. Dr. S.R. Khanna as well as other learned counsel representing the DG (I&R) and other complainants in this group of cases, however, vehemently contended that the term 'stock' should be given a wider meaning than assigned to it under the Corporate Law. It was urged that we are dealing with the Corporate Law concerned with trade practices both in goods as well as services and, consequently, words and phrases used in the MRTP Act and not defined therein must be given the meaning as understood in commercial transactions relating to securities of all types including debentures. He also invited our attention to Butterworth's Dictionary of Economic Terms, fourth edn. as well as some other dictionaries on the subject. 14. We regret our inability to accept the contention in view of a clear indication in the MRTP Act itself as regards the meanings to be assigned to words and expressions not defined in the MRTP Act. Section 2( y) of the Act states : "words and expressions used but not defined in this Act and defined in the Companies Act, 1956 (1 of 1956), have the meanings respectively assigned to them in that Act." In relation to words a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to shares before allotment prior to the 1991 amendment would continue to be the same as perceived by the Full Bench with the decision of which we respectfully entirely agree. What was true of shares before allotment would apply a fortiori to debentures before allotment. 18. Even under the amended law the position of debentures before allotment shall remain the same so far as the issue whether they constitute goods is concerned. We have already seen that ordinary debentures in its classic sense are only an instrument of debt in the hands of the companies till they are allotted, and certificates, delivered to the debenture holders. Being actionable claims such debentures would stand automatically excluded from the definition of 'goods' upon the plain terms of section 2(7) of the Sale of Goods Act. 19. There is then the other classes of debentures which are convertible, either at the option of the debenture holder or compulsorily according to the terms and conditions of offer. In either case, there would invariably be a hiatus between the issue of debentures and their conversion. In the case of optionally convertible debentures they would continue to retain their essential charac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s involved, the guidelines treat these as 'equity'. This is clear from Guidelines IV(i) read with IV(iii) of the Guidelines for Issue of Cumulative Convertible Preference Shares and Guidelines Nos. 8 and 11 of the Employees Stock Option Guidelines. These two sets of Guidelines clearly indicate that any instrument which is compulsorily convertible into shares is regarded as 'equity' and not as a loan or debt......" These observations were made by their Lordships of the Supreme Court wholly in a different context while considering a challenge to a public issue on the ground that the company issuing the debentures had not complied with the guidelines framed by the Controller of Capital Issues. On an analysis of the guidelines it was ruled by the Supreme Court vide its observations at page 2179 that "wherever the concept of compulsorily convertible debentures is involved, the guidelines treat these as 'equity'. This is clear from guidelines IV(i) read with IV(iii) of the guidelines for issue of Cumulative Convertible Preference Shares and guidelines Nos. 8 and 11...". The question involved was whether the impugned debentures offered by the company had violated these guidelines for not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Morgan Stanley Mutual Fund v. Kartick Dass [1994] 1 SCL 19 . Consumer Protection and Trade Practices Journal 385. Their Lordships have ruled that shares before allotment are not goods. On a parity of reasoning the ratio will apply with greater validity to debentures as these are issued primarily to raise loan. 25. In the premise our answer to Issue No. l(a) is in the negative and we hold that debentures are not goods within the meaning of section 2(e) before they are allotted to the debenture-holder. Issue No. 1(b) is also answered in the negative, i.e., till they are allotted debentures are not 'goods' even if they are convertible whether compulsorily or optionally, whether partly or fully. 26. That brings us to the second and the all important issue whether the company issuing the debentures carries on any trade practice with respect thereto. The Full Bench of this Commission in the case of T.T.K. Pharma Ltd. (supra) was directly concerned with this question and it has dealt with it in considerable depth. After analysing the definition of the term 'trade' and 'trade practice', the learned Chairman (Mr. Justice G.R. Luthra) observed as follows: "Now, we have to see if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly agree with the opinion expressed by the learned Chairman on this aspect and hold that the mere act of issuing shares or debentures by a company does not constitute trade practice within the meaning of the MRTP Act. We also agree that issue of debentures is but a mode to raise capital with the aid of which the company proposes to carry on the projects indicated in the prospectus. It is, however, unnecessary to delve deeper into this aspect in view of the recent pronouncement of the Supreme Court in the case of Morgan Stanley Mutual Fund ( supra). In the above case, their Lordships were considering an identical contro-versy. Morgan Stanley Mutual Fund managed by the Morgan Stanley Asset Management India (P.) Limited had come out with a public issue after obtaining the requisite approval from the Securities and Exchange Board of India and other statutory authorities. A prospective investor of that issue chose to challenge the issue before the Calcutta District Consumer Disputes Redressal Forum under the Consumer Protection Act, 1986 on diverse grounds and also succeeded in obtaining in an interim injunction. The injunction was assailed by the Morgan Stanley by way of a Special Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply because the company is not trading in shares. The share means a share in the capital. The object of issuing the same is for building up capital. To raise capital, means making arrangements for carrying on the trade. It is not a practice relating to the carrying of any trade. Creation of share capital without allotment of shares does not bring shares into existence. Therefore, our answer is that a prospective investor like the respondent or the association is not a consumer under the Act." 29. It will be seen that their Lordships were directly concerned with the precise issue which is involved in the present case, namely, whether a company is indulging in any trade or trade practice when it offers a public issue of shares with a view to building up capital for the purpose of carrying on its main trade or business. The definitions of 'trade', 'trade practices' and 'goods' in the Consumer Protection Act are the same as those in the MRTP Act, except that after the 1991 amendment shares even before allotment are included in the definition of section 2(e). As noted above, the present group of cases before us relates to a period prior to the 1991 amendment. However, the pronouncemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 2(r), as it stood at the relevant time, reads as follows: " 'Service' means service of any description which is made available to potential users and includes the provisions of facilities in connection with [banking, financing, insurance, transport, processing], supply of electrical or other energy, board or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service;" In our opinion, the impugned action does not fall within the purview of this provision either. The activity of inviting public to participate in the share capital or to subscribe to debentures offered by a company by making an application for allotment thereof does not involve provision of any facility, in the context of the present case, of the nature contemplated under section 2(r), as we will presently demonstrate. 33. In fact this point also stands concluded by the decision of the Supreme Court in Morgan Stanley Mutual Fund's case (supra) which specifically ruled that the prospective investor who makes an application for allot- ment of shares neither purchases any 'goods' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old that at the stage of the application for allotment the prospective investor neither purchases any 'goods' nor hires 'the services' of the company for a consideration. 35. Even otherwise we are of the opinion that where, as here, the company offering a public issue is not engaged in the trade or business of buying and selling shares or debentures and it is simply inviting the public to subscribe to its share capital enabling it to carry on its trade or business it does not thereby do any business oV trade as the statute stands at present. The mere act of inviting applications for allotment of deben- tures would not by itself involve rendering of any service for consider- ation within the meaning of section 2(r). Be that as it may, on the limited issue whether the prospective investor hires any service of the company in circumstances similar to those obtaining in the present case, the pronouncement of the Supreme Court must be regarded as conclusive on the subject. 36. While on this issue we may deal with an argument advanced by Shri B.B. Ahuja representing the Director General on the interpretation of section 2(r). It was urged that section 2(r) does not refer to the term 'tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany on its incorporation is: To establish, promote, conduct, manage, maintain, improve, regulate, run, work and control the different types of schemes for encouraging the habit of savings and wise economy amongst the public on scientific, practical lines and also help men, women and children for their economical, social and educational welfare through its scheme........" It was in furtherance of this object that the respondent had invited people to make deposits in accordance with the terms of the scheme floated by the company and the complaint was that the company had breached the terms and conditions thereof. In that background there could possibly be no scope for any doubt that the respondent was providing service to the investors in the course of its business. 40. Dr. Khanna on the other hand cited the decision of the National Consumer Disputes Redressal Commission, dated 28-8-1993 - Nila Vasant Raje v. Amogh Industries. This case again is distinguishable inasmuch as the respondent's business was to collect deposits from the public on promise of attractive rates of interest as security of investment and prompt payment of the principal after the stipulated time. In the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is provided or made available to the prospective investors for consideration where the company simply issues the debentures for subscription. The Full Bench of this Commission in T.T.K. Pharma Ltd.'s case (supra) was, therefore, right in holding that raising of capital by way of equity does not amount to carrying on of a trade. 43. In view of our answers, we hold that none of the enquiries or the compensation applications is maintainable in law as the Commission does not have jurisdiction to deal with the subject matters thereof. The preliminary issues are answered accordingly in favour of the respondent. The enquiry proceedings and the compensation applications are conse-quently closed/dismissed. There will, however, be no order as to costs. 44. The Commission places on record its deep appreciation of the valuable assistance which it received in these matters from Shri Ashok Desai, Shri M.H. Baig, Shri A.N. Haksar, the learned senior counsel for the respondents and Shri B.B. Ahuja and Shri O.P. Dua for the Director General as well as Dr. S.R. Khanna, for the complainant and Shri S.S. Kumar, the then President of the MRTPC Bar Association who appeared amicus curae and assisted th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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