TaxTMI 
TaxTMI 
1985 (12) TMI 289
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....essary 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-questions. Courts of justice are well-tuned to distress signals against arbitrary action. So, corporate giants do not hesitate to rush to us with cries for justice. The court room becomes their battle ground and corporate battles are fought under the attractive banners of justice, fair play and the public interest. We do not deny the right of corporate giants to seek our aid as well as any Lilliputian farm labourer or payement dweller though we certainly would prefer to devote more of our time and attention to the latter. We recognise that out of t....
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....ipal 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 excellant reasons for them for not choosing to appear before us, but their non-appearance and abstemious silence in court have certainly complicated the case and embarrassed the Government of India, the Reserve Bank of India and the Life Insurance Corporation of India to whose lot it fell to defend the case since it was their policies, decisions and actions that were assailed. We must, however, express our strong condemnation of the conduct and tactics employed by Swraj Paul and Raja Ram Bhasin which we consider deplorable. The Punjab National Bank,....
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....uthorised 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 performance of the trust or to revoke or vary, with or without the consent of any other person, the trust or any terms thereof, or to control the investment of the trust moneys." Section 3 provides for the establishment of a Directorate of Enforcement consisting of a Director of Enforcement and other officers. Section 6(1) enables the Reserve Bank on an application made to it, to authorise any person to deal in foreign exchange. Section 6(2) prescribes what may be authorised and section 6(4) and section 6(5) prescribe the duties of the authorised dealer....
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.... 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 resident outside India (whether a citizen of India or not) or a person who is not a citizen of India but is resident in India, or a company (other than a banking company) which is not incorporated under any law in force in India or in which the non-resident interest is more than forty per cent, or any branch of such company, shall not, except with the general or special permission of the Reserve Bank- (a)carry on in India, or establish in India a branch, office or other place of business for carrying on any activity of a trading, commercial or industrial nature, othe....
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....nt 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 contraventions of the provisions of the Act and the rules, and directions or orders made thereunder. Section 57 makes the failure to pay the penalty imposed by the adjudicating officer or the Appellate Board or the High Court or the failure to comply with any directions issued by those authorities, an offence punishable with imprisonment. Section 59 prescribes a presumption of mensrea in prosecutions under the Act and throws upon the accused the burden of proving that he had no culpable mental state with respect to the act charged in the prosecution. Section 61 provides for cogn....
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....rd 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 called "the Non-Resident (External) Account Rules, 1970" have been made. Rule 3 enables, subject to the provisions of the rules, any person resident outside India to open and maintain in India an account with an authorised dealer, to be called, a Non-Resident (External) Account. Rule 4(1) prescribes that no amount other than the amounts mentioned therein shall be credited to a Non-Resident (External) Account. One such is "any amount remitted by the account-holder from outside India through normal banking channels as an amount which may be credited to a Non-Resident (External) Account". Rule 4(4) pro....
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...., 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, 1973, are more or less automatically issued." Paragraph 24A.1 provides: "In terms of section 29(1)(b) of the Foreign Exchange Regulation Act, 1973, no person resident outside India whether an individual, firm or company (not being a banking company) incorporated outside India can acquire shares of any company carrying on trading, commercial, or industrial activity in India without prior permission of Reserve Bank. Also, under section 19(1)(b) and 19(1)( d) of the Act, the transfer and issue of any security (which includes shares) in favour of or to a person resident outside India require prior permission ....
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....ised 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 purchased through a stock exchange, (b) the purchase of shares in any one company by each non-resident investor does not exceed Rs. 1 lakh in face value or one per cent, of the paid up equity capital of the company, whichever is lower, and (c) payment for such investments is made either by fresh remittances from abroad or out of the funds held in the investor's Non-resident (External) Account/FCNR account with a bank in India. It further provides that the Reserve Bank will grant permission to designated banks authorised to deal in any foreign exchange for purchasing shares through a stock exchange on behalf of their non-resident custo....
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....es 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 repatriation basis on behalf of their overseas customers of Indian nationality/origin so that they are able to ensure that the purchase of shares in any one company by each non-resident investor does not exceed Rs. 1 lakh in face value or 1 per cent, of the paid-up equity capital of the company, whichever is lower." Circular No. 9 was followed by Circular No. 10, dated April 22, 1982, from the Reserve Bank to all authorised dealers in foreign exchange. The purpose of the circular was to ensure that the overseas companies, partnership firms, societies, other corporate bodies and overseas trusts to whom the benefits of the investment scheme formula....
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....bentures 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 to be made on behalf of the nonresident investor who has not submitted any application to the Reserve Bank earlier in the prescribed form, the initial application for such investments should be made in the appropriate form giving details of the equity shares/convertible debentures to be purchased. Paragraph 3 of Circular No. 12 prescribed the procedure for monitoring the ceiling of 5 per cent. Authorised dealers through their link offices were required to submit to the Reserve Bank a consolidated statement of the total purchases and sales (company wise) of equity shares/convertible debentures made by their designated branches. The daily statements were to be....
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....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 by each individual company of the same family (group) of companies. In the absence of any such restriction, any non-resident determined to destabilise an Indian company could do so by forming a combination of different individuals and companies each of whom could separately obtain permission to purchase one per cent, of the shares of an Indian company. The authority authorised to grant permission could not, for example, refuse to grant permission to B who has applied for permission in his own right on the mere ground that permission has been granted to his father; A. Similarly, permission could not be refused to company, C, in which D, a non-resident Indian, ....
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....ow 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 must be mentioned here that 61.6 per cent, of shares of Caparo Group Ltd. are held by the Swraj Paul Family Trust, one hundred per cent, of whose beneficiaries are one Swraj Paul and the members of his family, all non-resident individuals of Indian origin. Their designated banker, the Punjab National Bank, E.C.E. House Branch, by their letter dated March 4, 1983, but despatched on March 9, 1983, and by another letter dated March 12, 1983, addressed the Controller, Reserve Bank of India, Exchange Control Department, and requested the Reserve Bank to accord their approval for opening Non-resident External Accounts in the name of each of thirteen companies, thre....
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....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 Rs. 1,35,36,000, Rs. 2,36,59,000, Rs. 76,35,000 and Rs. 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 approval might be communicated to their client by cable. We would like to mention at this juncture that the letters dated March 4, March 12, and April 23, 1983, as well as all other subsequent letters written by the Punjab National Bank, E. C. E. House Branch, to the Reserve Bank are totally silent about a remittance of GBP1,30,000 equivalent to Rs. 19,63,000 made by Mr. Swraj Paul to the Punjab National Bank, Parliament Street Branch, on January 28, 1983, for the purpose of opening an NRE account in the name of Mr. Swraj Paul. The remittance was said to have been made pursuant to the discussion of Mr. Swraj Paul with the chairman of the Punjab National Bank. We have no inform....
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.... 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 GBP1,30,000 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 disclosed by the Punjab National Bank to the Reserve Bank, Raja Ram Bhasin & Co. had purchased shares of Escorts Ltd., worth Rs. 33,40,865, from Mangla & Co. We have already mentioned that according to the correspondence which passed between the Punjab National Bank and the Reserve Bank, the remittances were made on March 9, 1983, March 24, 1983, April 12, 1983, April 15, 1983, April 28, 1983, and April 28, 1984. In the correspondence, there is no mention of any remittance having been made prior to March 9, 1983. We may also notice here that the letter dated March 4, 1983, from the Punjab National Bank seeking permission for investment in shares by three of the Caparo Group of co....
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....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 pointed out that the necessary RPC and OAC forms had already been submitted. The request for expedition of approval was reiterated. The Reserve Bank of India was also informed that their non-resident clients had advised them that details of shares of Indian companies purchased by or on it heir behalf would be supplied as soon as the purchases were complete. On May 25, 1983, the Reserve Bank of India wrote to the Punjab National Bank, in answer to the letter dated April 23, 1983, and without reference to any of the later letters, asking for clarification as to how, without obtaining the Reserve Bank's permission for purchase of shares on behalf of thirteen overseas companies, the purchase consideration ....
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....nts 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 cent. Caparo Group Ltd. was owned to the extent of 61.6% by the family trust of Mr. Swraj Paul, the other members of the family trust being Mrs. Aruna Paul, Mr. Akash Paul, Mr. Amber Paul, Mr. Angad Paul and Miss Anjali Paul. The Reserve Bank pointed out that it was to be noticed that even the Caparo Group Ltd. was not directly owned by non-resident individuals of Indian origin but only indirectly to the extent of 61.6% through the family trust whose beneficiaries were persons of Indian origin. The Reserve Bank appeared to be of the view that the investment facilities under the scheme were intended to be extended to overseas companies, family trusts, etc., owned predominantly by non-residents of Indian national....
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....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 of the scheme for investment by overseas corporate bodies predominantly owned by nonresidents of Indian nationality/origin to an extent of at least 60 per cent, and that the thirteen overseas companies had designated them as their banker and M/s. Raja Ram Bhasin & Co. had been designated as the brokers for the purpose of investment. The brokers had advised the bank that up to April 28, 1983, 75,000 equity shares of Escorts Ltd. had been purchased by them for each of the thirteen overseas companies. Out of the shares so purchased, 35,560 shares purchased by each of twelve the companies had been lodged by the brokers with Escorts Ltd. in the names of H.C. Bhasin and Mr. Bharat Bhushan for the purpose of transfer of the....
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....s 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 and who directed him to deposit the shares in his own name ? He was not the stock broker designated to purchase shares on behalf of the overseas companies. If so, one wonders what authority he had to enter into transactions on behalf of overseas companies ! This is also a matter which may require investigation by the Reserve Bank. As already mentioned, the Punjab National Bank wrote to Escorts Ltd. on May 31, 1983, about purchase of shares by each of the thirteen companies and the lodging of the shares with the company in the names of H.C. Bhasin and Mr. Bharat Bhushan for the purposes of transfer of shares in the books of the company. We have also referred to the reply of Escorts Ltd. to Punjab National Bank on June ....
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....utiny 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 Securities Act and other regulations relating to the stock exchange and transfer of shares-requirements of law have been complied with. The board further considered the various statements reported in the press and made by the non-resident concerned, as also by his associates in Delhi which are contradictions to the policy of the Government underlying the liberalized scheme for ' portfolio investment' by eligible non-residents. The board further considered whether the purchases of the shares in question would qualify as ' portfolio investment' as envisaged under the RBI scheme. The board further considered whether it is in the interest of the company and its shareholders to approve of the proposed transfer....
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....gister 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 4,62,337 shares only had been lodged with them for transfer although it had been stated that 9.75 lakhs shares had been purchased by the thirteen non-resident companies. The company further wanted to know whether instructions to purchase the shares were given to the brokers by the Punjab National Bank and whether the nonresident companies indicated the maximum price at which the shares might be bought. The company further desired to know to whom the share scrips should be returned as they had decided to refuse registration of the transfer of shares. The Punjab National Bank, we may state here, refused to receive the share scrips and suggested to Escorts Ltd. that they should return the scrips to those who had lodged them with th....
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....nge. 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 Rs. 2.61 crores was remitted from overseas to the Punjab National Bank and was utilised to purchase shares in addition to the shares purchased in the names of thirteen companies. The provisions of the Foreign Exchange Regulation Act were violated and the ceilings of one per cent. and 5 per cent, imposed under the scheme were also circumvented. Rupee funds to the tune of Rs. 4 crores appeared to have been unauthorisedly diverted for the purchase of the shares for and on behalf of the thirteen non-resident companies in the two Indian companies, that is, Escorts Ltd. and Delhi Cloth and General Mills Ltd. Though the purchases made on behalf of the thirteen non-resident companies were said to have been purchased before April 28, 1983, ....
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....scorts 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 Exchange Regulation Act and the portfolio investment scheme. It was, therefore, to the Punjab National Bank that the Reserve Bank turned for elucidation in the matter. On June 11, 1983, the Reserve Bank wrote to the Punjab National Bank advising them that mere submission of an application under section 29(1)(b) of the Foreign Exchange Regulation Act was not sufficient to enable the non-resident Indian companies to purchase shares without the general or special permission of the Reserve Bank. The Reserve Bank's permission had to be obtained before buying any shares of Indian companies. The contention of the Punjab National Bank that submission of an application was sufficient to enable a non-resident company to purchase shares was not accepted as correct and the bank was ....
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....count of Caparo Group Ltd. A balance of Rs. 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 National Bank also stated that the broker had confirmed by their letter dated June 22, 1983, a copy of which was enclosed, that apart from the shares mentioned, they had not purchased any other shares for the thirteen companies. Along with their letter, the Punjab National Bank also sent to the Reserve Bank, copies of the certificates of incorporation, the memoranda of articles of association and the balance-sheets of the thirteen companies. One of the letters enclosed with the letter of the Punjab National Bank was a letter from the Caparo Group Ltd. to the Punjab National Bank confirming that they had appointed M/s. Raja Ram Bhasin and Co. as. their designated brokers and that the bank was authorised to act upon the instructions of the, aforesaid brokers, entirely at the risk and responsibility of Caparo Group Ltd.....
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....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 portfolio investment scheme by companies and overseas bodies owned by nonresidents of Indian nationality/origin was introduced as part of a package of measures to facilitate remittances and investments by non-residents of Indian nationality/origin in India in the overall context of the difficulties of our balance of payments. It was pointed out that in formulating the scheme, there were three paramount considerations: (a)as much flexibility as possible should be available to non-residents for bringing foreign exchange into India and the concern should be the purpose of investments rather than legal entity of the non-resident investor of Indian origin; (b)it was to be ensured that the benefits of the scheme should not be available to non-resident persons or overseas bodies other than those of Indian nationality/....
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.... 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 out consequential action. I have discussed with FS, FM and Principal Secretary to PM the issue of a press note regarding clarification by the Government regarding the NRI scheme. It has been agreed that the press note will be issued at 6.30 p.m. by RBI in Delhi itself." We are told that the letters FS stand for Finance Secretary, FM for Finance Minister and CCPA for Cabinet Committee on Political Affairs. As mentioned in the note of Dr. Manmohan Singh, a press release was issued by the Reserve Bank the same day to the effect that the Government, having regard to the objectives of the scheme for investment by non-residents of Indian nationality/origin had clarified that their original intention was that the facilities of direct and portfolio investments in shares/debentures of Indian companies and deposits with publ....
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....e 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 number and face value of the shares purchased up to May 2, 1983, as also details of shares, if any, purchased after May 2, 1983. Permission was also accorded for purchase of shares/debentures of other Indian companies on behalf of the 13 non-resident companies, through stock exchanges in India at the ruling market price subject to the condition that the shares/debentures would be purchased out of fresh remittances received from abroad and/or out of the funds held in the applicant companies' Non-Resident (External) Account to be opened with the banker. Purchases of equity shares with repatriation benefits could be purchased up to one per cent of the total paid-up equity capital of the company, subject to the overall ceiling of 5 per cent. Another condition was that the shares acquired under the permission should be r....
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....f 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 were purchased in benami names. The queries for which answers were now sought, were already before the Reserve Bank of India and considered by them before permission was granted. Raja Ram Bhasin & Co. wrote a further letter on December 27, 1983, with regard to the query whether shares were purchased from rupee loan raised in India from the Reserve Bank. It was stated that the remittance of about Rs. 1.07 crores was withheld by the Punjab National Bank without disclosing any reason. Shares had already been purchased and, consequently, the brokers had to take delivery from the seller broker and monies had to be paid to them. Otherwise the brokers would be declared as defaulters for non-payment. In the premises, the brokers had to take deliveries and arrange payments. Reserve Bank's permission was not necessary for thi....
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....hould 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 and whether the petitioners have locus standi cannot be viewed in isolation or in the abstract, divorced from the facts and circumstances of the case. In our view, in raising this contention, certain relevant factors are being overlooked. The Union of India, the RBI and the PNB and the other respondents dispute the correctness of the decision taken by the petitioners not to register the transfer of shares purchased by respondents Nos. 4 to 17. Respondent No. 19 has preferred an appeal under section 111 of the Companies Act before the Company Law Board and the same is still pending. Respondents Nos. 20 and 21, the stock-brokers, continue to insist upon reconsideration of the decision taken by the board of directors in regard to registration of the shares. D. N. Davar, on behalf of the financial institutions, has put in a written note....
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....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 before the court; nor is the court entitled to require them to disclose it. It must be recorded that the petitioners' learned counsel, Mr. Nariman, fairly conceded that it was an error on the part of the petitioners to have referred in petitioner No. 2's affidavit to the legal advice tendered to the respondents and requested that it may be treated as withdrawn. It was not pressed at the hearing of the writ petition. Be that as it may, the fact remains that the respondents held a different view on this legal issue and have pressed the same before this court. The question whether prior permission is necessary or not is thus not concluded by the rejection of transfer of the shares purchased by respondents Nos. 4 to 16. It would arise from time to time as and when such purchases are made in future. The petitioner company itself would have to ....
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....e 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 Court in Bajaj Auto Ltd. v. N. K. Firodia [1971] 41 Comp. Cas. 1 (SC), the learned counsel, Mr. Nariman, conceded that the other grounds for not registering the shares were not being pressed in support of the refusal of registration. It was, therefore, argued for the respondents that this letter would indicate that even the petitioners at that stage accepted that the permission granted under exhibit "B" and exhibit "C" validated the purchase and no longer stood in the way of registration of the shares. We are unable to agree with this contention ; firstly, because if under section 29 prior permission was required for a valid purchase, any such statement made in the letter on behalf of the petitioner-company cannot validate such transfer so as to entitle the purchaser to claim registration of shares. Any registration of transfer by the petitioner-c....
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....istration 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, holds 52% shares, is mala fide and is calculated to secure the registration of the shares which were purchased in contravention of the FERA. In the circumstances referred to above, it cannot be said that the company and its managing director had no cause of action to file this writ petition or that there was no longer any live issue to be adjudicated. " (pp. 408-412) In view of the rejoinder and the concession made before the High Court, in regard to the refusal of the company to register the transfer of shares, the only ground which it is necessary for us to consider is whether the permission granted by the Reserve Bank was in order. Escorts Ltd. having refused permission to register the transfer of shares, one would have thought that it was thereafter up to the purchasers or the sellers of the shares, if they were so minded to proceed to take....
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....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, therefore, Mr. Punja should await the outcome of the investigation. On November 10, 1983, Mr. Sen Gupta, the Controller of Capital Issues, telephoned to Mr. Nanda and insisted that Escorts Ltd. should at least register some shares purchased by the Caparo Group immediately. ,On November 12, 1983, Mr. Punja once more insisted that some shares at least should be registered immediately. On November 16,1983, Mr. Nanda met Mr. Nadkarni, the chairman of ICICI who informed him that Mr. Punja was most upset at the refusal of Escorts Ltd. to register the transfer of shares. Thereafter, in the first week of December, the Unit Trust of India wrote a letter to Escorts Ltd. to induct their Dy. General Manager as a nominee director on the board of directors of Escorts Ltd. On December 13, 1983, there was a meeting between Mr. Nanda and the representatives of financial instit....
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....erves 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 a representative of the UTI on the board of Escorts and was further informed that the proposal for merger of Goetze Ltd. may not be acceptable as it would reduce the holding of the financial institutions from 52 per cent, to 49 per cent, but that the matter was still under consideration. What is remarkable and what may even be considered dubious conduct on the part of Mr. Nanda is his failure to inform the representatives of the financial institutions about the filing of the writ petition that very day. Writ Petition No. 3063 of 1983, thus filed in the High Court of Bombay was perhaps both a protective and a pre-emptive strike. The writ petition is at once remarkable for its length and the number of prayers. The writ petition runs to as many as 172 pages and innumerable documents running into several volumes are now placed before us. There were originally....
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...., 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 jurisdiction under article 226 of the Constitution. This becomes clear from what the learned judge has himself stated. He has referred to the objection to prayer (d) in the following words: "It was also submitted that prayer (d) should not be entertained and if the petitioners wanted to urge the contentions beyond those restricted to exhibits ' B ' and ' C ', they should be relegated to an ordinary action or to urge these contentions in the pending appeal before the Company Law Board." He has dealt with the objection and concluded: "As stated earlier, I think what is sought for in prayer (d ) must be regarded as ordinarily beyond the function of the writ court but this should not be taken to imply that there is no warrant in the various complaints made by Escorts and petitioner No. 2 in connection with this aspect of the matter. Indeed it would be clear that what had been stated by petiti....
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....o 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 impugned press release, circular and the letter permit the respondent-companies to hold the shares purchased without obtaining prior permission of the RBI, they are ultra vires section 29(1) (b) of the FERA and the powers vested in the Union of India under section 75 and the RBI under section 73(3) of the FERA. To that extent, they are void and inoperative both prospectively and retrospectively. The impugned press release and the Circular, however, amount to amending the portfolio investment scheme with full repatriation benefits introduced under Circular No. 9, dated April 14, 1982 (exhibit 'G') , and such amendment operates only prospectively. A writ of mandamus shall issue restraining respondents Nos. 1 and 2 from issuing any directions- (a)to register transfer of shares purchased by the respondent-companies (which form the subject-matter of this writ petition) pursuant to the letter dated September 19, 1983 (exhibit 'C'....
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....ned. 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 of India" and that the expression is not qualified by the word "previous" or "prior". While we are conscious that the word "prior" or "previous" may be implied if the contextual situation or the object and design of the legislation demands it, we find no such compelling circumstances justifying reading any such implication into section 29(1). On the other hand, the indications are all to the contrary. We find, on a perusal of the several different sections of the very Act, that Parliament has not been unmindful of the need to clearly express its intention by using the expression " previous permission" whenever it was thought that "previous permission" was necessary. In sections 27(1) and 30, we find that the expression "permission" is qualified by the word "previous" and in sections 8(1), 8(2) and 31, the expression "general or special permission" is qualified by the word "previous ", whereas in sections 13(2), 19(1), 19(4), 20, 21(3), 24, 25, 28(1) and 29, the e....
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....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 is proposed by the legislation. Traditional norms of statutory interpretation must yield to broader notions of the national interest. If the legislation is viewed and construed from that perspective, as indeed it is imperative that we do, we find no difficulty in interpreting "permission" to mean "permission", previous or subsequent, and we find no justification whatsoever for limiting the expression "permission" to "previous permission" only. In our view, what is necessary is that the permission of the Reserve Bank should be obtained at some stage for the purchase of shares by non-resident companies. An argument which was strenuously pressed before us by Shri F.S. Nariman, learned Senior Advocate for the company, was that the very scheme of the Act shows that the permission contemplated by section 29(1) could only be previous permission, notwithstanding the circumstance that the word "previous" does not qualify the expression "general or special permission" in se....
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.... 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 permission of the Reserve Bank of India. It was suggested that the very absence of any prescribed form for the grant of permission for an activity started or shares acquired subsequent to the commencement of the Act without previous permission of the Reserve Bank, were clearly indicative of the imperative nature of the need for previous permission. It was submitted that whatever argument was possible in regard to the acquisition of shares, it was clear that no activity of the nature mentioned in section 29(1)(a) could be commenced without the previous permission of the Reserve Bank. Since the word "general or special permission" of the Reserve Bank occurring in section 29(1) qualified both clauses (a) and (b), the expression had to be given the same meaning with reference to clause (b) as it had to be given with reference to clause (a) and that was that previous permission was necessary. The argument is attractive and not altogether without substance but it proceeds on the....
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....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 to validate the importation of the prohibited goods and avoid the consequences prescribed by the Customs Act. It is, therefore, not possible to accept the analogy of section 13 to interpret sections 19 and 29. Our attention was drawn to the very serious nature of the consequences that follow the failure to obtain the permission of the Reserve Bank, and the circumstance that even the burden of proof that requisite permission had been obtained, was on the person prosecuted or proceeded against for contravening a provision of the Act or rule or direction or order made under the Act, thus ruling out mensrea as an essential ingredient of an offence. It is true that the consequences of not obtaining the requisite permission where permission is prescribed are serious and even severe. It is also true that the burden of proof is on the person proceeded against and that mensrea may consequently be interpreted as ruled out. But that cannot lead to the inevitable conclusion that the permission c....
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....g "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 post facto permission, it would really amount to giving retrospective operation to the permission. The Reserve Bank, it was said, was not competent to grant permission with retrospective effect. In our view, the rule against retrospectivity cannot be imported into the situation presented here. The rule against retrospectivity is a rule of interpretation aimed at preventing interference with vested rights unless expressly provided or necessarily implied. To invoke the rule against retrospectivity in a situation where no vested rights are involved is to give statutory status to a rule of interpretation forgetting the reason for a rule. One of the submissions very strenously urged before us was that the very authority which was primarily entrusted with the task of administering the Foreign Exchange Regulation Act, namely, the Reserve Bank, was, itself, of the view that the "permission" contemplated by section 29(1)(b) of the Foreign Exchange Regulation Act was "prior permission". Our at....
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....rection 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 under section 73(3), we notice, are separately issued as circulars on various dates. No circular has been placed before us which corresponds to any part of paragraph 24A.1. We do not have the slightest doubt that paragraph 24A.I is an explanatory statement of guideline for the benefit of the authorised dealers. It is neither a statutory direction nor is it a mandatory instruction. It reads as if it is in the nature of and, indeed it is, advice given to authorised dealers that they should obtain prior permission of the Reserve Bank so that there may be no later complications. It is a helpful suggestion, rather than a mandate. The expression "prior permission" used in paragraph 24A.1 is not meant to restrict the range of the expression "general and special permission" found in sections 29(1)(b ) and 19(1)(b). It is meant to indicate the ordinary procedure which may be followed. Shri Nariman argued that none of the prescribed forms provided for the application and grant of subsequent permission. That may be so for the....
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.... that we read together all the relevant statutory provisions relating to the acquisition, transfer and registration of shares. Besides referring to the relevant statutory provisions, we will also refer to the leading cases on the topic. Section 2(46) of the Companies Act defines "share" as meaning "share in the share capital of a company, and includes stock except where a distinction between stock and shares is expressed or implied." Section 82 of the Companies Act states : "the shares or other interests of any member in a company shall be movable property, transferable in the manner provided by the articles of the company." Section 84 makes a certificate, under the common seal of the company, specifying any shares held by any member, prima facie evidence of the title of the member to such shares. Section 87 gives every member of a company holding any equity share capital therein a right to vote, in respect of such capital, on every resolution placed before the company, his voting right to be in proportion to his share of the paid-up equity capital of the company. Section 106 makes provision for ' alteration of rights of holders of special classes of shares' under certai....
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....tain any dividend declared by the company in respect thereof for any year, notwithstanding that the said security has already been transferred by him for consideration, unless the transferee who claims the dividend from the transferor has lodged the security and all other documents relating to the transfer which may be required by the company with the company for being registered in his name within fifteen days of the date on which the dividend became due. We have to notice further here that the Sale of Goods Act, 1930, also applies to stocks and shares. Section 2(7) of the Sale of Goods Act defines "goods" as meaning "every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale." Section 19 prescribes that where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Intention may be ascertained having regard to the terms of the contract, the conduct of the part....
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....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 suspecting that the transfer involves any contravention of the provisions of section 19. Sections 48, 50, 56 and 63 prescribe the consequences of non-compliance with the provisions of the Act and the rules, orders and directions issued under the Act and provide for penalties and prosecutions. The provisions of the Foreign Exchange Regulation Act, to which we have just now referred, do not appear to stipulate that the purchase of shares without obtaining the permission of the Reserve Bank shall be void. On the other hand, legal proceedings arising out of such transactions are contemplated subject to the condition that no sum may be recovered as debt, damages or otherwise, unless and until requisite permission is obtained. We have already held that the permission may be ex post facto. If permission may be granted ex post facto, quite obviously the transaction cannot be a nullity and without any effect whatsoever. In the course of the submissions, we were referred to Manekji Pestonji Bharucha v. Wadilal Sarabhai and Co. [1925] 52....
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....ed in connection with the right of the transferee to the "right shares" issued by the company. On the transfer of shares, transferee became the owner of the beneficial interest though the legal title was with the transferor, the relationship of trustee and "cestuique trust" was established and the transferor was bound to comply with all the reasonable directions that the transferee might give and that he became a trustee of dividends as also a trustee of the right to vote. The relationship of trustee and cestuique trust arose by reason of the circumstance that till the name of the transferee was brought on the register of shareholders in order to bring about a fair dealing between the transferor and the transferee, equity clothed the transferor with the status of a constructive trustee and this obliged him to transfer all the benefits of property rights annexed to the sold shares of the cestuique trust. The principle of equity could not be extended to cases where the transferee had not taken active steps to get his name registered as a member on the register of the company with due diligence and in the meantime, certain other privileges or oppprtunities arose for purchase of new sh....
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.... the mode of transfer of shares, it was observed by the court that there was nothing either in the regulation or elsewhere to indicate that without strict compliance with some rigidly prescribed form, the transaction must fail to achieve its purpose. It was said, "the subservience of substance of a transaction to some rigidly prescribed form required to be meticulously observed savours of archaic and outmoded jurisprudence". The court referred to the passage in Buckley on the Companies Acts, 13th edition, p. 813: "Non-registration of a transfer of shares made by a donor does not render the gift imperfect", and the passage in Palmer's Company Law, 21st edition, p. 334: "A transfer is incomplete until registered. Pending registration, the transferee has only an equitable right to the shares transferred to him. He does not become the legal owner until his name is entered on the register in respect of these shares." The two statements of law were reconciled by the court and it was stated, "the transferee, under a gift of shares, cannot function as a shareholder recognised by company law until his name is formally brought upon the register of a company and he obtains a share certifi....
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.... WLR 893; [1981] 2 All ER 449 ; [1982] AC 584 (HL) the question was about the consequence of an authorised depository under section 16(2) of the Exchange Control Act, 1947, parting with a certificate relating to a foreign currency security without the permission of the treasury contrary to Bank of England Exchange Control Notice E.C. 7. In the Court of Appeal, Buckley L. J. observed (at p. 431 of [1980] 2 All ER): "..........the Bank of England, we must assume for sufficient reasons, declined to validate the transfer of custody. It must consequently be treated as having been made in contravention of section 16(2), which, as I have already mentioned, is conceded ; but an act done in contravention of a statute is not necessarily a nullity. Whether it is so or not must depend upon the terms and effect of the statute, and may depend upon the policy of the statute and the nature of the act itself. By section 34 of the 1947 Act, effect is given to the provisions of Schedule 5 to the Act for the purposes of the enforcement of the Act. Paragraph 1(1) of Part II of Schedule 5 provides that any person in or resident in the United Kingdom who contravenes any restriction or requirement impo....
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....onably and bona fide. Where the directors gave reasons, the court would consider whether the reasons were legitimate and whether the directors proceeded on a right or wrong principle. If the articles permitted the directors not to disclose the reasons, they could be interrogated and asked to disclose the reasons. If they failed to disclose that reason, adverse presumption could be drawn against them. On an overall view of the several statutory provisions and judicial precedents to which we have referred, we find that a shareholder has an undoubted interest in a company, an interest which is represented by his shareholding. Share is movable property, with all the attributes of such property. The rights of a shareholder are (i) to elect directors and thus to participate in the management through them ; (ii) to vote on resolutions at meetings of the company ; (iii) to enjoy the profits of the company in the shape of dividends ; (iv) to apply to the court for relief in the case of oppression; (v) to apply to the court for relief in the case of mismanagement ; (vi) to apply to the court for winding up of the company ; (vii) to share in the surplus on winding up. A share is transferab....
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....ned, it is open to the company and, indeed, it is bound to refuse to register the transfer of shares of an Indian company in favour of a non-resident. But once permission is obtained, whether before or after the purchase of the shares, the company cannot, thereafter, refuse to register the transfer of shares. Nor is it open to the company or any other authority or individual to take upon itself or himself, thereafter, the task of deciding whether the permission was rightly granted by the Reserve Bank. The provisions of the Foreign Exchange Regulation Act are so structured and woven as to make it clear that it is for the Reserve Bank alone to consider whether the requirements of the provisions of the Foreign Exchange Regulation Act and the various rules, directions and orders issued from time to time have been fulfilled and whether permission should be granted or not. The consequences of non-compliance with the provisions of the Act and the rules, orders and directions issued under the Act are mentioned in sections 48, 50, 56 and 63 of the Act. There is no provision of the Act which enables an individual or authority functioning outside the Act to determine for his own or its own pu....
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.... Shri Nariman, learned counsel for the company, now and then, in the course of his argument mentioned that Shri Swraj Paul had been issuing press statements which were generally followed up, according to him, by some action or the other by the Government or the Reserve Bank, he properly refrained from reading to us the press statement said to have been made by Shri Swraj Paul. However, the gist of some of the press statements and press releases of Shri Swraj Paul has been included in the pleadings which were read out to us. It may be that Shri Swraj Paul was ever ready and anxious to issue press releases for his own ends either because he had an inkling or made a guess of what course of action the Government or the Reserve Bank was likely to pursue or because he, like every interested party, was interested in making statements which may find some receptive ears somewhere. These is nothing whatever to indicate that Shri Swraj Paul had any access to anyone who was in a position to take a decision in the matter or influence a decision in the matter. We do not think we can attach any importance to the vainglorious and grandiloquent press statements and releases made by Shri Swraj Paul.....
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....exchange vital to the economy of the country was involved. Though the Reserve Bank appeared to have taken, in the beginning, a certain position in the matter, it thought it necessary to consult and seek the advice of the Government of India in the matter. There were high level discussions obviously because of the amount of foreign exchange and the question of policy involved and the matter had also attracted considerable attention from the press and the public. If, after high level discussions, the Reserve Bank changed its views, it would be unreasonable and impermissible to hold that it was done under pressure. Every question of this nature is bound to have different facets which present themselves in different lights when viewed from different angles. If after full discussion with those in the higher rungs of the Government who are concerned with policy-making, the Reserve Bank changed its former negative attitude to a more positive attitude in the interests of the economy of the country, one fails to see how its decision can be said to be the result of any pressure. It was argued that, from time to time, the company had addressed several communications to the Reserve Bank dra....
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....ecause it placed reliance upon the Punjab National Bank and the information supplied by it although with the aid of some of the material now brought out during the hearing, we perceive that the Reserve Bank could have acted with greater wisdom than to rely on the Punjab National Bank. But that would really be speaking with "hindsight". Earlier we had referred to the failure of the Punjab National Bank to inform the Reserve Bank, as it was bound to do, about the remittance of GBP1,30,000 received from Mr. Swraj Paul by their Parliament Street branch. It was a sorry confession to hear from the Punjab National Bank that their ECE House Branch which was monitoring the NRE Accounts and the purchase of shares by the Caparo Group of companies was not aware of the remittance received by the Parliament Street branch. We are now told that this amount of GBP1,30,000 was also utilised for purchasing shares for the Caparo Group of companies. If that was so, the ECE House Branch should have known about it. Otherwise, one wonders what was the monitoring that was done by the ECE House Branch, if it was not even aware that a large remittance of GBP 1,30,000 received by their Parliament Street br....
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....he total paid-up equity capital of the company was imposed, it was prescribed, for the purpose of monitoring the ceiling of 5 per cent., that authorised-dealers who were permitted to purchase shares under the portfolio investment scheme on behalf of the eligible non-resident investors should nominate a link office in Bombay for the purpose of co-ordinating the purchases and sales of equity shares made by their designated branches on a daily basis and notify the same to the Controller, Exchange Control Department, Reserve Bank of India. The link offices were required to submit a consolidated statement of the total purchases and sales of equity shares made by the designated branches in the prescribed form. The daily statements were to be submitted to the Controller positively on the succeeding day. We may straightaway say that the Punjab National Bank, apart from receiving the remittances from the Caparo Group Ltd. and passing on the amount to the stock brokers, Raja Ram Bhasin & Co., did nothing whatsoever to discharge their prescribed duties as authorised dealers. It is now admitted that they did not give any instructions to Raja Ram Bhasin & Co. regarding the purchase of shares, t....
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....) up to December, 1982 ; (ii) from January 1, 1983, to February 28, 1983 ; (iii) from March 1, 1983, to May 2, 1983 ; and (iv) after May 2, 1983. Details of purchases including the total number and face value of the shares were required to be given. The Punjab National Bank replied on June 23, 1983, to the effect that their brokers had informed them by their letter dated June 22, 1983, that 75,000 shares of Escorts Ltd. had been purchased for each of the thirteen companies during the period from March 1, 1983, to May 2, 1983, but none were purchased before or after. It was also stated that the brokers had confirmed that no other purchases had been made besides these shares. This letter again discloses how casual they were in the discharge of their duties as authorised dealers. Not only did they not maintain up-to-date and proper record of the purchases made on behalf of each of the companies, not only did they not submit daily statements to the Controller, they were not even aware of the transactions which had taken place but were solely dependent on the information supplied to them once in a way by Raja Ram Bhasin & Co. Though the Reserve Bank did make some enquiries from the Punj....
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....ere lodged with the company on May 14, 1983, for registering the transfers. 3,68,463 shares were lodged on August 19, 1983, that is, 3½ months, after May 2, 1983, which was the cut-off date fixed for the imposition of the ceiling of 5 per cent. 1,44,200 shares were not lodged at all with the company. The failure to lodge the shares within a reasonable period after April 28, 1983, which was supposed to be the date by which all the purchases had been made indicated that the purchases must have been made long afterwards. Every one of these circumstances is capable of some explanation, adequate or not and we do not have the necessary material to say on the record now before us. The question will involve a probe into individual purchases and the adducing of evidence. That would be beyond the scope of the writ petition in the High Court. It is to be remembered that the High Court refused to issue a rule nisi in regard to prayer (d), obviously as it was thought that the court exercising jurisdiction under article 226 of the Constitution should not explore the evidence to determine the dates of the various transactions of purchase of shares and whether they were purchased with forei....
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.... book. The reader who wishes to pursue the subject is referred to the many standard text books on corporation tax, income tax, capital gains tax and capital transfer tax. The other inroads on the principle of separate corporate personality have been made by two sections of the Companies Act, 1948, by judicial disregard of the principle where the protection of public interests is of paramount importance, or where the company has been formed to evade obligations imposed by the law, and by the courts implying in certain cases that a company is an agent or trustee for its members." In Palmer's Company Law (Twenty-third Edition), the present position in England is stated and the occasions when the corporate veil may be lifted have been enumerated and classified into fourteen categories. Similarly, in Gower's Company Law (Fourth Edition), a chapter is devoted to "lifting the veil" and the various occasions when that may be done are discussed. In Tata Engineering and Locomotive Co. Ltd. [1964] 34 Comp. Cas. 458 (SC), the company wanted the corporate veil to be lifted so as to sustain the maintainability of the petition filed by the company under article 32 of the Constitutio....
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....veil is necessary to discover the nationality or origin of the shareholders and not to find out the individual identity of each of the shareholders. The corporate veil may be lifted to that extent only and no more. The particulars of the scheme have already been extracted by us. First, a ceiling of one per cent, of the equity capital of the Indian company was imposed on the purchase of its shares by any single foreign investor. The obvious object of the imposition of the ceiling was the prevention of destablisation of Indian companies by foreign investors purchasing large blocks of shares and attempting to take over the Indian companies. We have already explained the futility of the imposition of the one per cent, ceiling since that would not effectively prevent a group of foreign investors of Indian origin from investing in shares of Indian companies by each of them purchasing one per cent, of the shares. We also pointed out that different foreign companies in which several different groups of resident Indians with one individual common to all together held more than 60 per cent, of the shares could not be denied the facility of investing in shares of Indian companies merely be....
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....ew days before the filing of the writ petition, there was the report of a speech of the Finance Minister, to which we have earlier made a reference, to the effect that he has in his possession an effective weapon to end the uncertainty. After the writ petition was filed and before it was admitted, there was a meeting of the board of directors of Escorts Ltd. on January 6,1984, at which Mr. D.N. Davar, claiming to speak for the financial institutions holding 52 per cent, of the shares of Escorts Ltd., circulated three notes and moved resolutions, the purport of which was that the writ petition should be withdrawn as it had been filed without consulting the financial institutions and that the matter should be placed before the board for careful consideration of all aspects of the case and that the cheques sent in part payment of certain institutional loans should be recalled as the question was still under consideration. The resolutions proposed by Mr. Davar were rejected. On January 9, 1984, Mr. Nanda wrote to Mr. Punja informing him about the events that took place at the board meeting on January 6, 1984, and pointing out that in the last 20 years, there had not been a single occas....
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....rance Corporation. It was thereafter that the Life Insurance Corporation served a requisition on Escorts Ltd. to call an extraordinary general meeting of the company. What does the sequence of events go to show ? It shows that the financial institutions which held 52% of the shares of the company and, therefore, had a very big stake in its working and future were aggrieved that the management did not even choose to consult them or inform them that a writ petition was proposed to be filed which would launch and involve the company in difficult and expensive litigation against the Government and the Reserve Bank. The financial institutions must have been struck by the duplicity of Mr. Nanda, who was holding discussions with them, while he was simultaneously launching the company, of which they were the majority shareholders, into a possibly trouble-some litigation without even informing them. The financial institutions were instrumentalities of the State and so was the Reserve Bank and it must have been thought unwise to launch such a litigation. The institutions were, therefore, anxious to withdraw the writ petition and discuss the matter further. As the management was not agreea....
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....ay administration to be undertaken by such a cumbersome piece of machinery. So, the modern practice is to confer on the directors the right to exercise all the company's powers except such as the general law expressly provides must be exercised in general meeting (Gower's Principles of Modern Company Law). Of course, powers which are strictly legislative are not affected by the conferment of powers on the directors as section 31 of the Companies Act provides that an alteration of an article would require a special resolution of the company in general meeting. But a perusal of the provisions of the Companies Act itself make9 it clear that in many ways the position of the directorate vis-a-vis the company is more powerful than that of the Government vis-a-vis Parliament. The strict theory of parliamentary sovereignty would not apply by analogy to a company since under the Companies Act, there are many powers exercisable by the directors with which the members in general meeting cannot interfere. The most they can do is to dismiss the directorate and appoint others in their place, or alter the articles so as to restrict the powers of the directors for the future. Gower himself....
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....m of requisition would have been embarrassing, because it is obvious that the meeting might think it fit to remove a director or allow him to remain, according to his behaviour and demeanour at the meeting with regard to the proposals made at it." In the same case, considering the question whether an injunction should be granted to restrain the holding of a general meeting, one of the purposes of the meeting being the appointment of a committee to reorganise the management of the company, Cotton L.J. said (at p. 329): "It is a very strong thing indeed to prevent shareholders from holding a meeting of the company, when such a meeting is the only way in which they can interfere, if the majority of them think that the course taken by the directors, in a matter which is intra vires of the directors, is not for the benefit of the company." In Inderwick v. Snell (42 English Reports 83, 85), the deed of settlement of a company provided for the removal of any director "for negligence, misconduct in office or any other reasonable cause". Some directors were removed and others were appointed. The directors who were removed sued for an injunction to prevent the new directors from act....
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....cause which they thought reasonable, without its being incumbent upon them to prove to this or any other court of justice that the charge was true and the decision just, or that the case was substantiated after a due consideration of the evidence and charge. We cannot take upon ourselves to say that in the case of a trading partnership like this, this court has upon such a clause in the deed of partnership jurisdiction or authority to determine whether, by the unfounded speech of any supporter of the charge, the shareholders present may not have been misled or unduly influenced. All such meetings are liable to be misled by false or erroneous statements, and the amount of error or injustice thereby occasioned can rarely, if ever, be appreciated. This court might inquire whether the meeting was regularly held, and in cases of fraud clearly proved, might perhaps interfere with the acts done; but supposing the meeting to be regularly convened and held, the shareholders assembled at such meeting may exercise the powers given to them by the deed. The effect of speeches and representations cannot be estimated, and for those who think themselves aggrieved by such representations, or thi....
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....lf no longer a director, through removal, or non-re-election: this situtation he must normally accept, unless he undertakes the burden of proving fraud or mala fides. The just and equitable provision nevertheless comes to his assistance if he can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that if broken, the conclusion must be that the association must be dissolved." Thus, we see that every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. It is true that under section 173(2) of the Companies Act, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business to be trans....
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.... Ex parte Walsh [1984] 3 WLR 818 ; [1984] 3 All ER 425 (CA) and Radha Krishna Agarwal v. State of Bihar [1977] 3 SCR 249; AIR 1977 SC 1496. While we do find considerable force in the contention of the learned Attorney-General, it may not be necessary for us to enter into any lengthy discussion of the topic, as we shall presently see. We also desire to warn ourselves against readily referring to English cases on questions of constitutional law, administrative law and public law as the law in India in these branches has forged ahead of the law in England, guided as we are by our Constitution and uninhibited as we are by the technical rules which have hampered the development of the English law. While we do not for a moment doubt that every action of the State or an instrumentality of the State must be informed by reason and that, in appropriate cases, actions uninformed by reason may be questioned as arbitrary in proceedings under article 226 or article 32 of the Constitution, we do not construe article 14 as a charter for judicial review of State actions and to call upon the State to account for its actions in its manifold activities by stating reasons for such actions. For examp....
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....de taken by the Life Insurance Corporation in regard to (i) the issue of equity-linked-debentures; (ii) repayment of loans to Indian financial institutions ; and (iii) the proposal for the merger of Goetze with Escorts. It was argued that the facts clearly disclosed an attempt on the part of the Life Insurance Corporation to exert pressure on Escorts Ltd. It is impossible to agree with the submission. In regard to the proposal for the issue of equity-linked-debentures, the facts are as follows: Escorts obtained the approval of the Government , under the MRTP Act to establish a new undertaking to manufacture motor cycles/scooters. According to Escorts, the proposal for the issue of equity-linked-debentures was conceived to meet the cost of the new project. According to the Life Insurance Corporation, the issue was solely motivated by an anxiety to reduce the percentage of the holdings of the Life Insurance Corporation and other financial institutions in the equity capital of the company. The barest scrutiny of the proposal, as it finally emerged from Escorts Ltd., is sufficient to expose the game of Escorts Ltd. The proposal, as it finally emerged from Escorts Ltd., was to issue ....
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....ade the proposal. That was evidently the reason why at all the initial stages, the details of the proposal were never put to the financial institutions or before the board of directors. It was urged by Shri Nariman that Mr. Davar, who represented the financial institutions in the board of directors also voted in favour of the proposal at earlier stages, and, therefore, it must be inferred that the later change of attitude on the part of the financial institutions was not bona fide. We are afraid we cannot agree with Mr. Nariman. The resolution of the board of directors merely accepted in principle the issue of convertible debentures to raise finances required by the company, subject to the approval of financial institutions. At that stage, no details of the proposals were placed before the board and even then there was the reservation that it was subject to the approval of the financial institutions. We think that it was too much for Mr. Nanda and his associates to expect the financial institutions or for that matter any other shareholder having large holdings in the company to agree to the proposal as it finally emerged. We reach the limit when we hear the complaint of Mr. Nanda a....
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....uld allow himself to be hustled into becoming a minority shareholder. The proposal for pre-payment of institutional loans, though finally agreed to by the institutions, was not quite as straight as claimed by Escorts. In the first place, Escorts asked for pre-payment of loans by Indian financial institutions, but not the foreign currency loan. In the second place, the cost of pre-payment of institutional loans was to be met by part of the debenture issue which would entail payment of interest at the rate of 14 per cent, whereas the institutional loans carried interest at the rate of 10% only. It certainly could not be said to be in the interests of the company to pay interest at a higher rate than that payable to Indian financial institutions. Obviously, the object of pre-payment was to get rid of the directors whom the financial institutions had a right to nominate. True, Escorts offered to appoint Mr. Davar as a director even if the financial institutions had no right to nominate him. But it is one thing to have the right to nominate a director and quite another thing to be a director on sufferance. We do not think that it is necessary to discuss these proposals at greater ....
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....serve Bank was not actuated by malice and was not guilty of non-application of mind, the reliance placed by the Reserve Bank on the Punjab National Bank was misplaced in the event, the Punjab National Bank having totally abandoned its duties as authorised dealer, it follows that the permission granted by the Reserve Bank must be reconsidered by the Reserve Bank in the light of the failure of the Punjab National Bank to discharge its duties. Therefore, while allowing the appeals of the Union of India, the Reserve Bank of India and the Life Insurance Corporation of India and dismissing the appeal of Escorts Ltd. and setting aside the judgment of the High Court, we direct the Reserve Bank of India to make a full and detailed enquiry into the purchase of shares of Escorts Ltd. by the Caparo Group of companies and consider afresh the question whether permission ought or ought not to have been granted. If the Reserve Bank of India is satisfied that permission ought not to have been granted, it may cancel the permission already granted and take such further action as may be necessary under the FERA if it considers that there has been any infraction of the FERA or the scheme; if the Reserv....