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2015 (9) TMI 190 - DELHI HIGH COURT

2015 (9) TMI 190 - DELHI HIGH COURT - TMI - Denial of security clearance - rejection of the application for pre-qualification for the e-auction of the first batch of private FM Radio Channels (Phase III) - Lifting of corporate veil - Held that:- whether the security assessment in respect of Shri Dayanidhi Maran and Shri Kalanithi Maran is germane to the requirements of security clearance prescribed in clause 3.8 of the NIA. Clause 3.8 stipulates the requirement of a security clearance of the .....

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refer to the concept of control over the company it has done so specifically as would be evident from clauses 3.2.1(b), 3.6 and 3.9 as pointed out earlier in this judgment. It therefore follows that there is no explicit reference to shareholders of the company in clause 3.8 of the NIA. But, this does not mean that the respondent is prevented from looking behind the corporate identity of the applicant company. - There is no allegation that the petitioner companies were created as a camouflag .....

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ing security issues. - petitioner companies themselves have not been alleged to be vehicles of any transgression of law. They have been functioning since 2002 / 2003 without there being any allegation regarding their functioning resulting in any security concerns. - we quash the impugned decision denying security clearance to the petitioner companies. The said petitioner companies shall be entitled to participate in the e-auction subject to other conditions being fulfilled. - Decided in favour o .....

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ty Director, Ministry of Information & Broadcasting. JUDGMENT BADAR DURREZ AHMED 1. These writ petitions raise identical issues and are, therefore, being considered together. The facts in both the petitions are virtually the same with some minor differences. We shall refer to the facts in WPC 6891/2015 [Digital Radio (Mumbai) Broadcasting Limited & Anr v. Union of India] in which the petitioner no.1 has been and is currently running the Red FM 93.5 channel for Mumbai [under Phases I and .....

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(in both petitions) denying security clearance to the petitioner no.1 and rejecting the application for pre-qualification for the e-auction of the first batch of private FM Radio Channels (Phase - III). The impugned letter dated 15.07.2015 in respect of the Mumbai company is reproduced hereinbelow (the letter dated 15.07.2015 in respect of the Delhi company is identical):- No.N-38014/10/2015-FM/594 Government of India Ministry of Information and Broadcasting (FM Cell) Shastri Bhavan, New Delhi D .....

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nment issued a Notice Inviting Applications (NIA) on March 2, 2015, for pre-qualification for e-auction of first Batch of Private FM Radio Phase-III channels, wherein the last date for receipt of applications was prescribed as 5 P.M. on 27.03.2015; Whereas, clause 3.8 of the NIA stipulates that The Company a well as all Directors on the Board shall be security cleared. Ministry shall take security clearance of the company as well its Directors from relevant Government Authorities. The informatio .....

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mpanies and Companies having same management i.e M/s SUN TV Network Ltd., M/s South Asia FM Ltd., M/s Udaya FM Private Ltd., M/s Digital Radio (Delhi) Broadcasting Ltd., M/s Digital Radio (Kolkata) Broadcasting Ltd., M/s Metro Digital Networks (Hyderabad) Pvt Ltd., M/s Optimum Media Services Pvt. Ltd., M/s KAL Radio. Whereas Ministry of Home Affairs has denied security clearance to M/s Digital Radio (Mumbai) Broadcasting Ltd for the following reasons: M/s Digital Radio(Mumbai) Broadcasting Ltd. .....

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of laundering and an amount of ₹ 5.5 billion in the Aircel-Maxis matter. iii. The CBI has charged Shri Dayanidhi Maran for setting up 300 illegal telephone lines at the residence of Shri Kalanithi Maran to facilitate Sun TV services, thereby gaining an illegal pecuniary advantage of ₹ 443 cr. MHA has stated that the aforementioned economic offences are of serious nature adversely impinging upon economic integrity of the country. 2. In view of the denial of Security Clearance, the app .....

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.0003615PBG005467 dt. 20.03.2015 issued by Citi Union Bank Ltd., Mandaveli, Chennai is returned herewith in original. Encl: As above. Yours faithfully, Sd/- Ygendra Trihan Deputy Director (FM) 3. Before we set out the submissions of the parties in respect of the impugned letter dated 15.07.2015, we need to mention certain background facts. In the year 2000, the respondent had called for bids in respect of FM channels. The Mumbai company (as also to the Delhi company) submitted bids which were ac .....

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Phase-II license was extended by the respondent for a further period of six (6) months (with effect from 01.04.2015) or till migration to FM Phase - III (whichever was earlier). 4. Earlier, on 25.07.2011, the respondent had notified the Policy Guidelines on Expansion of FM Radio Broadcasting Services through Private Agencies (Phase-III) . Paragraph 2 of the said Policy Guidelines prescribed the eligibility criteria, which, to the extent relevant, is as under:- 2. Eligibility Criteria: 2.1 Only .....

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ing declared insolvent; xxxx xxxx xxxx xxxx Paragraph 2.7 (under the heading Managerial Competence ) of the said Policy Guidelines is also relevant: 2.7 The company as well as all Directors on the Board shall be security cleared. The company shall take prior permission of the Government before effecting any change in the Board of Directors. 5. On 21.01.2015 the respondent had issued the Information Memorandum [hereinafter referred to as the IM ] in respect of E-Auction of First Batch of Private .....

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elow:- III Eligibility Criteria 3.1 Eligibility 3.1.1 Only Companies registered in India under the Companies Act, 2013 or under the previous Companies Act, 1965 shall be eligible for bidding and obtaining permission for FM Radio channels as per the provisions mentioned hereunder. 3.2 Disqualifications 3.2.1 The following types of companies shall not be eligible to apply:- a) Companies not incorporated in India. b) Any company controlled by a person convicted of an offence involving moral turpitu .....

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The company shall take prior permission of the Government before effecting any change in the Board of Directors. 6. On 25.03.2015, the Mumbai company submitted its application for pre-qualification for the said e-auction and submitted the requisite details and documents for security clearance in terms of Annexure 10.8 of the NIA (as required under clause 3.8). A similar application was submitted by the Delhi company. Both the applications were rejected by the impugned identical letters dated 15 .....

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d Shri Kalanithi Maran in the Aircel-Maxis case by CBI; (ii) Charge levelled by the Enforcement Directorate (ED) against the said two individuals under the Prevention of Money Laundering Act (PMLA) in the Aircel-Maxis case; and (iii) Charge levelled by CBI against Shri Dayanidhi Maran for allegedly setting up 300 illegal telephone lines at the residence of Shri Kalanithi Maran to allegedly facilitate Sun TV services and thereby allegedly gaining pecuniary advantage of ₹ 443 cr. In this bac .....

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he Marans, nobody has been convicted as yet. In fact, the charges have not been framed by any court in any of the said three cases. And, it is only in the CBI case in the Aircel-Maxis matter that a charge-sheet has been filed. The other two cases are still under investigation. So, the question of disqualification under clause 3.2.1(b) does not arise. Insofar as clause 3.8 is concerned, it was submitted by Mr Sibal that it only speaks of the company and its directors , which expressions do not co .....

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ed that Shri Kalanithi Maran had an indirect interest in the Mumbai company to the extent of 21.6% but that, in any event, was not the controlling interest which was with the Rao-Reddy group (approx. 51%). He further submitted that there was no allegation whatsoever against the Rao- Reddy group which held the controlling interest in the Mumbai company. He submitted that in the context of article 19(2) of the Constitution of India, restrictions on the ground of national security could be imposed .....

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, senior advocate, appearing for the Delhi company supplemented Mr Sibal s arguments. He submitted that the word control is not there in clause 3.8. But, the very next clause (i.e., 3.9) deals with management control and stipulates that the largest Indian shareholder as defined in clause 3.6 exercises management control over the applicant company. He submitted that the shareholding and control is also specifically dealt with in clause 3.6. The point that Dr Singhvi was making was that in the sam .....

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cannot be denied to the petitioners only on the basis of some tenuous implication. He also submitted that the expression the company used in clause 3.8 has reference to the independent and distinct personality of the petitioner company and not to the holder of an indirect interest in the company. In this connection Dr Singhvi submitted that it is true that in certain situations the corporate veil can be pierced to reveal its true identity but, that is permissible when the corporate entity itsel .....

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ed under the Companies Act is a distinct legal entity other than the legal entity or entities that hold its shares. xxxx xxxxxx xxxxxx xxxxx 17. In Rustom Cavasjee Cooper v. Union of India [(1970) 1 SCC 248] it was held: (SCC p. 273, para 11) 11. A company registered under the Companies Act is a legal person, separate and distinct from its individual members. Property of the Company is not the property of the shareholders. A shareholder has merely an interest in the Company arising under its Art .....

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cing the corporate veil stands as an exception to the principle that a company is a legal entity separate and distinct from its shareholders with its own legal rights and obligations. It seeks to disregard the separate personality of the company and attribute the acts of the company to those who are allegedly in direct control of its operation. The starting point of this doctrine was discussed in the celebrated case of Salomon v. Salomon & Co. Ltd. [1897 AC 22 : (1895-99) All ER Rep 33 (HL)] .....

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ompany was a sham or a façade . However, there was yet to be any clarity on applicability of the said doctrine. 71. In recent times, the law has been crystallised around the six principles formulated by Munby, J. in Ben Hashem v. Ali Shayif [Ben Hashem v. Ali Shayif, 2008 EWHC 2380 (Fam)] . The six principles, as found at paras 159-64 of the case are as follows: (i) Ownership and control of a company were not enough to justify piercing the corporate veil; (ii) The court cannot pierce the .....

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by them as a device or facade to conceal their wrongdoing; and (vi) The company may be a façade even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions. The court would, however, pierce the corporate veil only so far as it was necessary in order to provide a remedy for the particular wrong which those controlling the company had done. xxxx xxxx xxxx xxxx 73. The position .....

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s sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected, etc. 74. Thus, on relying upon .....

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iability. The intent of piercing the veil must be such that would seek to remedy a wrong done by the persons controlling the company. The application would thus depend upon the peculiar facts and circumstances of each case. 11. It was also submitted by Dr Singhvi that clause 3.8 has high penal consequences not limited to the subject auction. Denial of security clearance has the effect of the company being damned. Consequently the interpretation to be placed on clause 3.8 must also be strict and .....

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hat might possibly have been intended as with what has been actually said in and by the language employed. Dr Singhvi submitted that if the terms of clause 3.8 of the NIA were unclear then an interpretation against the respondent would, in any event, have to be adopted. Reliance was placed on the principle of verba chartarum forties accipiuntur contra proferentem on the strength of the decision in Assistant General Manager, State Bank of India & Others v. Radhey Shyam Pandey: 2015 (3) SCALE .....

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everal clauses and the words of each clause should be interpreted so as to bring them into harmony with the other provisions if that interpretation does no violence to the meaning of which they are naturally susceptible. (North Eastern Railway Co. v. Lord Hastings14) 32. The fundamental position is that it is the banks who were responsible for formulation of the terms in the contractual Scheme that the optees of voluntary retirement under that Scheme will be eligible to pension under the Pension .....

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right to prescribe conditions for the auction. He further submitted that the government has the right to deal with bidders/participants fulfilling certain criteria. Moreover, clause 3.8 is based upon the Policy Guidelines and that courts have always been restrained in interfering with issues touching upon policies of the government. In any event, he submitted, the condition of security clearance stipulated in clause 3.8 of the NIA is neither irrational nor arbitrary. 13. It was further submitted .....

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t challenge clause 3.8 of the NIA. 14. Mr Mehta submitted that e-auction pertained to an extremely important public asset - airwaves. Radio waves which include the FM bands need to be closely watched and regulated by the government to ensure that there is no threat to the security and integrity of the nation. In this backdrop when the government has decided that a particular person or company should not be given access to airwaves because of security concerns, the court ought not to interfere wi .....

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Shri Dayanidhi Maran and Shri Kalanithi Maran in the Aircel-Maxis case; that the ED has levelled charges under the PMLA against the said two individuals; and that the CBI is investigating the case against them with respect to the alleged 300 illegal telephone lines. In these circumstances and the connection between the petitioner companies and the said two individuals, the government has, in keeping with the Policy Guidelines and the conditions stipulated in the NIA, taken a decision to deny se .....

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iduals at the level of prosecution and not of conviction for serious offences like corruption, money laundering, financial frauds etc., because of clear threats to national security emanating therefrom. This is embedded in clause 3.8 of the NIA which is distinct from the disqualification criteria specified in clause 3.2.1(b) which requires a conviction. So, while a company may not be disqualified under clause 3.2.1(b), it may still not qualify for the e-auction on account of the fact that it doe .....

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e inputs but also the minutes of the meetings of the FIPB. We affirm the findings of the learned Single Judge that neither any case for mala fides or victimization is pleaded or made out, nor is any found to be borne out from the files. The FIPB itself has evaluated the various inputs received from the Security Agencies and has on the basis thereof objectively reached a conclusion that the clearance earlier given to the appellants needs to be revoked. Once the Agencies of the Government having e .....

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v. Ramesh Narang: 2011 (113) BOMLR 2335 in which it was observed as under: 31. We cannot transgress the limits of writ jurisdiction by sitting in judgment over the actions of Intelligence Agencies. These agencies manned by experts, who are in the best are position to judge the security interests. Ultimately, sensitive and vital installations have to be safeguarded and protected from entry of persons who are considered to be undesirable and a security risk. Precisely, such are the inputs in the .....

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of the vital installations as they are in-charge of laying down standards and norms for protecting and safeguarding them. They act in public interest and when no malafides are alleged, their actions ought not to be interfered. 17. On the aspect of interpretation of clause 3.8 of the NIA, Mr Mehta submitted that it cannot be given a narrow or restrictive meaning. A narrow interpretation of the word Company as used in Clause 3.8 would run foul to the object sought to be achieved. According to Mr M .....

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thority v. Skipper Construction Company: (1996)4 SCC 622 wherein it was held :- 28. The concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do .....

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100% (b) The shareholding of Optimum Media Services Pvt. Ltd is as under: Metro Digital Network (Hyderabad) Pvt. Ltd 70.10% South Asia FM Ltd 28.56% Ms Usha Reddy 0.67% AV Telecast Services 0.67% (c.1) The shareholding of Metro Digital Network (Hyderabad) Pvt. Ltd is as under: Donakanti Arjun Rao 5% Nookla Usha Reddy 66% South Asia FM Ltd 29% (c.2) The shareholding of South Asia FM Ltd is as under: South Asia Multimedia 20% Sun TV Network Ltd 59% Others 21% (d) The shareholding of Sun TV Network .....

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security clearance to the petitioner companies. 19. Let us clear some ground with regard to the scope of challenge and the amplitude of our consideration in these writ petitions. We are not adjudicating on the validity of clause 3.8. Although prayers have been made seeking the quashing of clause 3.8, the main thrust of the arguments of Mr Sibal and Dr Singhvi was on the interpretation of clause 3.8 and whether the same has been applied correctly or not. In any event, since the petitioners have .....

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pon to comment upon, nor have we, as to whether the allegations/charges against the said two individuals and Sun TV are well founded or unfounded. Those would be decided in criminal proceedings. 21. So, the limited extent of judicial review is whether the security assessment in respect of Shri Dayanidhi Maran and Shri Kalanithi Maran is germane to the requirements of security clearance prescribed in clause 3.8 of the NIA. Clause 3.8 stipulates the requirement of a security clearance of the compa .....

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en it would amount to ascribing a very narrow meaning to clause 3.8 of the NIA which would defeat the very purpose of having a security clearance particularly in this very sensitive field of radio waves. We are afraid, we cannot agree with this submission. Dr Singhvi was right in submitting that the clause has serious ramifications extending far beyond the present e-auction. If security clearance were to be denied to a company, as has happened in the two cases before us, that would a blot on tha .....

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s. 23. Wherever the respondent wanted to bring in a shareholder or refer to the concept of control over the company it has done so specifically as would be evident from clauses 3.2.1(b), 3.6 and 3.9 as pointed out earlier in this judgment. It therefore follows that there is no explicit reference to shareholders of the company in clause 3.8 of the NIA. But, this does not mean that the respondent is prevented from looking behind the corporate identity of the applicant company. 24. That would take .....

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liability upon the persons exercising real control over the said company. But, the Supreme Court cautioned that this principle has been and should be applied in a restrictive manner, that is, only in scenarios wherein it is evident that the company was a mere camouflage or sham deliberately created by the persons exercising control over the said company for the purpose of avoiding liability. It was also held that the intent of piercing the veil must be such that would seek to remedy a wrong done .....

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operating their licenses under Phases I and II since 2002/2003. Even when the cases against the Marans were registered in 2011, the petitioner companies have continued to operate their respective radio channels without any objection concerning security issues. As pointed out by Mr Sibal, both these companies got extensions of their licenses by six months as recently as on 31.03.2015. Even then, no security concerns were raised in respect of the two companies. 26. The Supreme Court, in Saluja (s .....

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