Oppressive share allotments without notice can be set aside, while later foreign-investment regularisation may still validate earlier transfers.

Prior Reserve Bank permission was not treated as essential to sustain an earlier allotment and transfer of shares to non-residents, because ex post facto regularisation was recognised and the company could not retrospectively nullify the transaction after a long delay. By contrast, a later issue of shares to the managing director, carried out without notice to the majority shareholders and with the effect of transferring control and reducing them to a minority, was held to lack probity and bona fide corporate purpose. Such allotments were treated as oppressive and set aside, with rectification directed to restore the ownership structure to its pre-oppression position.

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Issues: (i) Whether the earlier allotment and transfer of shares in favour of non-residents could be invalidated and the register of members rectified for want of prior Reserve Bank permission. (ii) Whether the subsequent allotment of shares to the managing director, without notice to the majority shareholders and in a manner reducing them to minority, amounted to oppression and warranted setting aside of the allotments.

Issue (i): Whether the earlier allotment and transfer of shares in favour of non-residents could be invalidated and the register of members rectified for want of prior Reserve Bank permission.

Analysis: The allotment and transfer had been made with the knowledge and at the instance of the company management, and the objection based on lack of prior permission was raised after a long lapse of time. The governing principle recognised by the Court was that Reserve Bank permission under the foreign exchange regime need not be restricted to prior permission alone, and ex post facto regularisation is legally permissible. In the circumstances, the company could not use the absence of prior permission to nullify the allotment retrospectively.

Conclusion: The challenge to the earlier allotment and transfer failed and rectification on that basis was not warranted.

Issue (ii): Whether the subsequent allotment of shares to the managing director, without notice to the majority shareholders and in a manner reducing them to minority, amounted to oppression and warranted setting aside of the allotments.

Analysis: The Court found that further shares were issued without notice to the then majority shareholders, that the increase in capital and allotments were engineered through meetings from which they were effectively excluded, and that the issue of shares had the effect of transferring control to the managing director. It applied the settled principle that directors' powers to issue shares must be exercised bona fide in the interests of the company and not to entrench control or defeat existing shareholder rights. The Court held that the allotments were made in a manner lacking probity and fair dealing and therefore constituted oppression. The remedial order of the Company Law Board, which had left the impugned allotments in place and substituted a buy-out at par with interest, was held to be unsustainable because it would reward the wrongdoer rather than undo the oppressive act.

Conclusion: The allotments made in the later board meetings were set aside and the register was directed to be rectified.

Final Conclusion: The non-resident shareholders retained their earlier allotment, while the later share issues made behind their back were invalidated for oppression and the company's ownership structure was directed to be restored to its pre-oppression position.

Ratio Decidendi: Share allotments that are made without notice to existing majority shareholders, with the object and effect of transferring control to management, are liable to be set aside as oppressive unless justified as a bona fide and necessary measure for the company's existence; absence of prior foreign-exchange permission does not by itself retrospectively invalidate an allotment where ex post facto regularisation is legally permissible.

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