1985 (12) TMI 372 - SC - FEMA

RBI's Discretion Upheld: SC Validates FERA Permissions and LIC's EGM Notice; Directs PNB Oversight Probe.

Life Insurance Corpn. of India Versus Escorts Ltd. And Ors.

The SC allowed appeals by the Union of India, RBI, and LIC, dismissing Escorts Ltd.'s appeal. It upheld RBI's discretion to grant ex post facto permission ... - Issues Involved:1. Whether the permission under Section 29(1)(b) of the Foreign Exchange Regulation Act (FERA) could be granted ex post facto.2. The validity of the press release, circular, and letter issued by the Reserve Bank of India (RBI) regarding the investment scheme.3. The legality of investments by foreign companies owned by non-residents of Indian origin.4. Allegations of mala fides against the RBI and the Union of India.5. The conduct of the Punjab National Bank as an authorized dealer under FERA.6. Allegations of mala fides against the Life Insurance Corporation (LIC) of India.7. The validity of LIC's requisition notice for an extraordinary general meeting of Escorts Ltd.Issue-wise Detailed Analysis:1. Ex Post Facto Permission under Section 29(1)(b) of FERA:- The court examined whether the permission contemplated by Section 29(1)(b) of FERA could be granted after the purchase of shares by foreign companies. The judgment highlighted that the expression 'general or special permission' in Section 29(1) was not qualified by the word 'previous' or 'prior.' The court noted that Parliament had used the term 'previous permission' in other sections of the Act, indicating a deliberate choice not to include it in Section 29(1). The court concluded that the permission could be granted ex post facto, emphasizing that the Reserve Bank of India (RBI) had the discretion to grant permission at any stage, provided it was in the national interest.2. Validity of the Press Release, Circular, and Letter Issued by RBI:- The court upheld the validity of the press release dated September 17, 1983, the circular dated September 19, 1983, and the letter dated September 19, 1983, issued by the RBI. These documents clarified the eligibility of overseas companies predominantly owned by non-residents of Indian origin to invest in Indian companies. The court found that these measures were consistent with the objectives of the investment scheme and did not operate retrospectively to validate prior purchases without permission.3. Legality of Investments by Foreign Companies Owned by Non-residents of Indian Origin:- The court addressed the issue of whether foreign companies owned by non-residents of Indian origin could invest in Indian companies under the scheme. It was held that any foreign company whose shares were owned to the extent of more than 60% by persons of Indian nationality or origin could avail of the facility provided by the scheme. The court emphasized that the scheme's purpose was to attract foreign exchange while preventing destabilization of Indian companies through large-scale foreign investments.4. Allegations of Mala Fides Against RBI and Union of India:- The court rejected the allegations of mala fides against the RBI and the Union of India. It found no evidence to suggest that the RBI acted under pressure from the government or that there was any non-application of mind in granting permission to the Caparo Group of companies. The court noted that the RBI had acted in consultation with the government due to the significant foreign exchange involved and the policy implications.5. Conduct of Punjab National Bank as Authorized Dealer:- The judgment criticized the Punjab National Bank for its failure to monitor the purchase of shares by the Caparo Group of companies. The bank was found to have neglected its duties as an authorized dealer under FERA, leading to a lack of proper oversight. The court directed the RBI to conduct a detailed inquiry into the bank's conduct and take necessary action, including the possible cancellation of its authorization under Section 6 of FERA.6. Allegations of Mala Fides Against LIC:- The court dismissed the allegations of mala fides against the LIC, finding that the requisition notice for an extraordinary general meeting was a legitimate exercise of shareholder rights. The LIC, as a shareholder, had the right to call a meeting to remove directors and appoint new ones. The court emphasized that such actions were part of corporate democracy and not subject to judicial review unless there was evidence of fraud or improper conduct.7. Validity of LIC's Requisition Notice:- The court upheld the validity of the LIC's requisition notice for an extraordinary general meeting of Escorts Ltd. It was held that the LIC, as a shareholder, was entitled to call a meeting to propose resolutions for the removal and appointment of directors. The court found no basis to question the notice on the grounds alleged in the writ petition.Conclusion:The appeals filed by the Union of India, the RBI, and the LIC were allowed, and the appeal by Escorts Ltd. was dismissed. The court directed the RBI to conduct a full inquiry into the purchase of shares by the Caparo Group of companies and reconsider the permission granted. The court also directed the RBI to investigate the conduct of the Punjab National Bank and take appropriate action. Costs were imposed on Har Prasad Nanda, Swraj Paul, and the Punjab National Bank for their roles in the litigation.