TaxTMI 
TaxTMI 
TaxTMI 
1985 (12) TMI 372
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.... 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 payment dweller though we certainly would prefer to devote more of our time and attention to the latter. We recognise that out of the dust of the battles of giants occasionally emerge some new principles, worth the while. That is how the law has....
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....rt 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, the designated bank of Mr. Swraj Paul's companies, did appear before us but their appearance was of no assi....
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.... time being authorised under section 6 to deal in foreign exchange. 7. "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." 8. Section 3 provides for the establishment of a Directorate of Enforcement consisting of a Director of Enforcement and other officers. 9. 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. 10. Section 8(1) provides that, except with ....
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....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." 14. 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, other than an activity, for....
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.... Reserve Bank of India for the doing of a thing. 19. 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 cognizance ....
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....to have regard 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. 25. Section 79 invests the Central Government with the power generally to make rules and in particular for various specified purposes. 26. 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 (Ex....
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....n Exchange Regulation Act, 1973, viz., section 19, governing issue and transfer of securities in favour of non-resident's, section 29 governing establishment of a place of business by non-residents 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 re....
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.... existing facilities had been liberalised 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 ....
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....ary for handling the investment procedures 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." 29. 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 tru....
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....erned, and (ii) 5 per cent, of the total paid-up value of each series of the convertible debentures 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 non-resident 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 shar....
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.... the paid-up equity capital of such Indian company provided that the aggregate of such portfolio investment 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 ....
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....origin in this case involved any contravention of the FERA or the Non-Residents' Investment Scheme. To appreciate how the questions arise, it is necessary to state here a few facts. 36. 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....
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...., Raja Ram Bhasin and Co., Share and Stock Investment Advisers, Member of Delhi Stock Exchange Association Ltd. The Reserve Bank was also advised that 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. 37. 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 £1,30,000 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 ....
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....g that in a matter concerning valuable foreign exchange, the Punjab National Bank, a nationalised bank and an authorised dealer under the Foreign Exchange Regulation 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 £1,30,000 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. 38. 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....
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....t did not give any indication that it would be objectionable to do so with out prior permission of the Reserve Bank. Thereafter, the Punjab National Bank wrote three letters to the Reserve Bank 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 l....
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....80,000 equity shares of Delhi Cloth and General Mills Co. Ltd. and 75,000 equity shares of Escorts Ltd. on behalf of each one of the thirteen overseas companies predominantly owned by non-residents of Indian origin. 40. 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 appeare....
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....RIOR SPECIFIC APPROVAL OF THE RBI. YOUR REPORT SHOULD REACH AS QUICKLY AS POSSIBLE IN ORDER TO ENABLE THE GOVERNMENT TO TAKE DECISION." The importance of May 2, 1983, so frequently mentioned in the 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. 41. 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 non-resident's 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 sha....
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....nk. They seem to have thought that they were with in their rights under the Stock Exchange Regulations in asking the shares to be transferred in their names. It was suggested by the learned counsel for Escorts 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 co....
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....the Board of Directors of Escorts Ltd. considered the committee's report and passed a resolution refusing to register the transfer of shares. The resolution was in the following terms : The Board considered the report of the Share Scrutiny 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 purchase....
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....names of the thirteen foreign non-resident companies, a similar report was submitted by the committee on September 29, 1983, and a similar resolution was passed by the board of directors on the same day. 44. Escorts Ltd., although they had already refused to register 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 non-resident companies indicated the maximum price at which the shares might be bought. The company further desired to know to whom the share scrips should b....
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.... the floor of the stock exchange, whether the delivery of shares was taken, whether the bank had a day-to-day record of the transactions and so on. The Reserve Bank was also requested to seize the scrips and the books of account in the possession of the stock exchange. 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 be....
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....id the Reserve Bank deign a reply or even the courtesy of an acknowledgment. Though the Reserve Bank did not choose to write or make any further enquiry from Escorts Ltd., there is no doubt that the Reserve Bank did enquire in its own way into the allegations made by Escorts 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. 47. 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&....
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....h 9, 1983, March 24, April 12, April 15, April 28, and April 28, 1983, remittances of Rs. 1,35,36,000, Rs. 1,31,38,681, Rs. 2,36,59,900, Rs. 76,35,000, Rs. 1,56,76,000 and Rs. 1,56,80,000 were received and transferred to the account of Raja Ram Bhasin and Co. from the account 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.....
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....vernment of India, on August 11, 1983, replied to the Reserve Bank's letter of July 6, 1983, communicating to the latter the opinion given by the Attorney General and asked the Reserve Bank to dispose of the applications made by the Punjab National Bank in the light of the opinion of the 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 Ind....
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....ne per cent irrespective of whether the ultimate ownership is in the hands of one or more individuals. Since this clarification merely reflects the original intention of the Government, the investments made by the applicants before May 2, 1983, but pending for approval should not be subject to five per cent ceiling. Pending applications may be disposed of accordingly." 49. 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. 50. As mentioned in the note of Dr. Manmohan Singh, a press release was issued by the Reserve Bank the same day to the effect ....
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....otes. The letter granting permission for purchase of shares was stated to follow. A letter did follow on the same day by which the 13 group of companies were given the approval of the Reserve Bank "to make investments in and hold shares of Delhi Cloth and General Mills Ltd. and Escorts Ltd. to the 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) ....
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....uld be made and accepted pursuant to the contracts earlier entered into. It was not essential that the transfer deeds must bear the date stamp of the Registrar of Companies as the date of the contract. Deliveries could be taken even after April 28, 1983. The dates stated in the transfer deeds were the dates of 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. 53. 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 purchase....
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.... of registration of shares, and, as such, failure to obtain prior permission under section 29 of the FERA remained the sole ground for rejection. The respondents urge that since the other grounds of refusal to register the shares are not now pressed and are not required to be adjudicated in this writ petition, the court should 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. Para 215: 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. Para 216: 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....
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....e issue even on December 17,1983, and was not decided even by the time the writ petition was filed. None of the respondents has taken back the shares lodged with the petitioner-company for registration of transfer. Upon the sale of the shares and lodging of applications for their transfer with the petitioner-company, it had to take 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 iss....
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....hares be reviewed. In reply, the petitioner-company conveyed through its letter dated October 13, 1983, that notwithstanding the impugned Circular and the letter of the RBI, the refusal to register continued to hold good for various other reasons. In that letter, the petitioner-company also disputed the claim that the 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....
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..... It is also the allegation of the petitioners that the financial institutions, finding that notwithstanding the unanimous request made on their behalf by D. N. Davar at the meeting of the board of directors, the company and its managing director were refusing to withdraw the writ petition and effect the transfer of shares, with the ulterior purpose of obtaining registration 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) 57. In view of the rejoinder and the concession made before the High Court, in regard to the refusal of the company to....
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....or merger of Goetze India Ltd. with Escorts Ltd. and the proposal for prepayment of the outstanding loans of Escorts Ltd. to the financial institutions at the inter-institutional meeting to be held on the afternoon of 9th. Mr. Nanda was later informed by Mr. Davar that the proposals of Escorts Ltd. had been discussed and accepted but the formal clearance would have to await 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 mo....
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....t position held by the financial institutions in the equity shares of some large private companies and added, "I have a very effective instrument under my command to end the uncertainty." According to Escorts Ltd., it was in this factual background, that they were compelled to file the writ petition in the High Court of Bombay. One remarkable tactic of Mr. Nanda of Escorts deserves 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 w....
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....ansfer of shares. The prayers relating to Circular No. 18, dated September 19, 1983, and the letter dated September 19, 1983, were only in aid of prayer (d) which, as we see it, was the main prayer in the writ petition. But we do not propose to dispose of the case on any such preliminary ground. Apparently, when the learned single judge refused to issue a rule nisi in regard to prayer (d), 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 objec....
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....ant permission after the shares are purchased so as to validate such purchases or to permit holding of the shares purchased without obtaining prior permission. The press release dated September 17, 1983 (exhibit 'A'), the Circular dated September 19, 1983 (exhibit 'B'), and the letter dated September 19, 1983 (exhibit 'C'), cannot operate retrospectively so as to 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,....
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....", whether the word is comprehensive enough to include subsequent permission. We will only refer to what Sir Shah Sulaiman, Actg. C.J., said in Shakir Husain v. Chandoo Lal, AIR 1931 All. 567 (headnote): "Ordinarily, the difference between the approval and permission is that in the first, the act holds good until disapproved, while in the other case, it does not become effective until permission is obtained. But permission subsequently obtained may all the same validate the previous act." 65. 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....
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....nd bullion, for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country." We have already referred to section 76 which emphasises that every permission or licence granted by the Central Government or the Reserve Bank of India should be animated by a desire to conserve the foreign exchange resources of the country. The Foreign Exchange Regulation Act is, therefore, clearly a statute enacted in the national economic interest. When construing statutes enacted in 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 limitin....
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....the person purchasing the shares will not be entitled to repatriation benefits. 67. Shri Nariman then suggested that even if we look at the provisions of section 29 by themselves, it would be clear that the permission contemplated by section 29 could only be "previous". He pointed out to us that while sections 29(2) and 29(4) made due provision for applying for permission to continue to carry on any activity of the nature mentioned in section 29(1)(a) and continue to hold shares of a company of the character mentioned in section 29(1)(b) if such activity was carried on and such shares were held on the date of the commencement of the Act, no such provision was 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 na....
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....urged, both in section 13 and sections 19 and 29, the expression should be construed to exclude subsequent permission. There is no force in this submission. Section 67 of the Foreign Exchange Regulation Act provides that the restriction imposed by or under section 13 is to be deemed to have been imposed under section 11 of the Customs Act and further makes the provisions of the Customs Act applicable accordingly. Section 11 of the Customs Act empowers the Central Government to prohibit absolutely or, subject to conditions, the, import or export of goods of any specified description. Reading together sections 13 and 67 of the Foreign Exchange Regulation Act and section 11 of the Customs Act, 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. 69. Our attention was drawn to the very serious nature of the consequences that follow the....
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....r the commencement of the Act, if it was so minded, but, since, it did not do so, but chose the word "permission", it must follow that section 29 contemplates previous permission only. We see no true foundation for this submission. A reference to any dictionary or any book of synonyms will show that every word has different shades of meaning and different words may have the same meaning. It all depends upon the context in which the word is used. If it was the intention of Parliament to comprehend both previous and subsequent permission, the word "confirmation" would not do at all. While it may be permissible to construe the word "permission" widely, the word "confirmation" could never be used to convey the meaning "previous permission". The word "confirmation" would be totally misplaced in section 29. 70. 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,....
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.... directions have been issued under section 73(3) of the Foreign Exchange Regulation Act, 1973, which empowers the Reserve Bank to issue directions necessary or expedient for the administration of exchange control. Authorised dealers should hereafter be guided by the provisions contained in this Manual." There is no force whatever in this part of the submission. A perusal of the Manual shows that it is a sort of guide-book for authorised dealers, money changers, etc., and is a compendium or collection of various statutory directions, administrative instructions, advisory opinions, comments, notes, explanations, suggestions, etc. For example, paragraph 24A.1 is styled as "Introduction to Foreign Investment in India". There is nothing in the whole of the paragraph which even remotely is suggestive of a direction 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....
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....ate the exercise of a power which Parliament has vested in it so as to carry out the purposes of the legislation but it cannot divest itself of the power. We are, therefore, unable to appreciate how the Reserve Bank, if it has the power under the Foreign Exchange Regulation Act to grant ex post facto permission, can divest itself of that power under the scheme. The argument was advanced with particular reference to the forms prescribed under the scheme. We have already pointed out that the forms under the scheme cannot abridge the legislation itself. 73. Before proceeding further, it is just as well to have a clear picture of the nature of the property in shares, the law relating to transfer of property in shares under the law and the effect of the provisions of the Foreign Exchange Regulation Act. For that purpose, it is desirable 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. 74. Section 2(46) of the Companies Act defines "share" as meaning "share in the share capital of a comp....
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....imum of one hundred members of the company or one-tenth of the total number of members, has the right to apply to the court under section 397 for relief in case of oppression and under section 398 for relief in case of mismanagement. Section 428 defines "contributory" and it includes the holder of any shares which are fully paid-up. The shareholder, as a contributory, has also the right to apply for winding-up of the company under section 439. On winding-up, section 475 enables the court to adjust the rights of the contributories amongst themselves and to distribute the surplus among the persons entitled thereto. 75. We have also to notice here section 27 of the Securities Contracts (Regulation) Act, 1956, which provides that it shall be lawful for the holder of any security, whose name appears on the books of the company issuing the said security to receive and retain 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 whic....
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.... provisions of section 29 are stated to the without prejudice to the provisions of section 47 which while prohibiting any person from entering into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of the Act or rule or direction or order made there under also provides that the provisions of the Act requiring that anything for which the permission of the Central Government or the Reserve Bank is necessary shall not prevent legal proceedings being brought in India to recover any sum which apart from the said provisions would be due as debt, damages or otherwise, subject to the condition that no step shall be taken for the purpose of enforcing any judgment or order for the payment of any sum, unless the Central Government or the Reserve Bank, as the case may be, may permit the sum to be paid. We have also referred earlier to section 19(4) which 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 prescr....
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....part, though indirectly, in the management of the company's affairs. If the majority of shareholders sides with him, he can have a resolution passed which would be binding on the company and, lastly, he can institute proceedings for the winding up of the company which may result in a distribution of the net assets among the shareholders. It is interesting to notice that Mukherjea J., in the course of his opinion, expressed the view that a corporation, which is engaged in the production of a commodity vitally essential to the community has a social character of its own and it must not be regarded as the concern primarily or only of those who invest their money in it. 81. In Mathalone and Ors. v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp. Cas. 1 (SC), the question of relationship between the transferor and transferee of shares before registration of the transfer in the books of the company came to be considered 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 &qu....
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....erty Act also justified such a splitting up of a right constituting "property" in shares just as it was well recognised that rights of ownership of a property might be split up into a right to the " corpus ' and another to the "usufruct" of the property and then separately dealt with. On the delivery of the registered deed of gift together with the share certificate to the donee, the donation of the right to get the share certificate transferred in the name of the donee became irrevocable by registration as well as by delivery. Either was sufficient. The actual transfer in the registers of the companies constituted a mere enforcement of this right to enable the donee to exercise the rights of the shareholder. The mere fact that such transfers had to be recorded in accordance with the company law did not detract from the completeness of what was donated. Referring to regulation 18 of the First Schedule to the Indian Companies Act of 1913, which prescribed 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, th....
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....ssion from the treasury, the company wrote to F that certain forms had to be completed by him and the transferee and that a licence had to be obtained from the treasury. Before F could apply and obtain the permission of the treasury, he died. The question arose whether F's son was entitled to require F's personal representatives to obtain for him legal and beneficial possession of the shares. It was held that the permission of the treasury not having been obtained, the company could not register the transfer and, therefore, the son acquired no legal title to the shares in question. Nor was there a complete gift of the equitable interest in the shares to the son because F had not obtained the consent of the treasury and had, therefore, not done all that was necessary to divest himself of his equitable interest in favour of his son. The son was, therefore, not entitled to sue the father's personal representatives to obtain for him legal and beneficial possession of the shares. 84. In Swiss Bank Corporation v. Lloyds Bank Ltd. [1981] 2 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) o....
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....hares has been explained by this court in Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp. Cas. 1, 6, 7 (SC). It was said that even if the articles of the company provided that the directors might at their absolute and uncontrolled discretion decline to register any transfer of shares, such discretion does not mean a bare affirmation or negation of a proposal. Discretion implies just and proper consideration of the proposal, in the facts and circumstances of the case. In the exercise of that discretion, the directors will act for the paramount interest of the company and for the general interest of the shareholders because the directors are in a fiduciary position both towards the company and towards every shareholder. The directors are, therefore, required to act bona fide and not arbitrarily and not for any collateral motive. " Where the articles permitted the directors to decline to register the transfer of shares without assigning reasons, the court would not necessarily draw adverse inference against the directors but will assume that they acted reasonably and bona fide. Where the directors gave reasons, the court would consider whether the reasons were legitimate and whet....
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....a constructive trustee does not extend to a case where a transferee takes no active interest "to get on the register". Where the transfer is regulated by a statute, as in the case of a transfer to a non-resident which is regulated by the Foreign Exchange Regulation Act, the permission, if any, prescribed by the statute must be obtained. In the absence of the permission, the transfer will not clothe the transferee with the right "to get on the register" unless and until the requisite permission is obtained. A transferee who has the right to get on the register, where no permission is required or where permission has been obtained, may ask the company to register the transfer and the company who is so asked to register the transfer of shares may not refuse to register the transfer except for a bona fide reason, neither arbitrarily nor for any collateral purpose. The paramount consideration is the interest of the company and the general interest of the shareholders. On the other hand, where, for instance, the requisite permission under the Foreign Exchange Regulation Act is not obtained, it is open to the company and, indeed, it is bound to refuse to register the t....
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.... being in contravention of the provisions of the Act and the rules, orders and directions issued under the Act. Once permission is granted by the Reserve Bank, ordinarily it is not open to anyone to go behind the permission and seek to question it. It is certainly not open to a company whose shares have been purchased by a non-resident company to refuse to register the shares even after permission is obtained from the Reserve Bank on the ground that permission ought not to have been granted under the Foreign Exchange Regulation Act. It is necessary to remind ourselves that the permission contemplated by section 29(1) of the Foreign Exchange Regulation Act is neither intended to nor does it impinge in any manner on any legal right of the company or any of its shareholders. Conversely neither the company nor any of its shareholders is clothed with any special right to question any such permission. 87. Much was said before us about the mala fides of the Government of India and the Reserve Bank of India and the non-application of mind by the Reserve Bank of India which was said to amount to legal mala fides. Though Shri Nariman, learned counsel for the company, now and then, in the co....
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....rnment of India to the Reserve Bank of India, and (iii) the endorsement made on the letter dated September 17, 1983, by the Governor of the Reserve Bank. We have already referred to the contents of (i) and (ii), the two letters in the preceding paragraphs. We have also extracted the endorsement of Dr. Manmohan Singh in full. The inference sought to be drawn from (i), (ii) and (iii ) is that though the Reserve Bank had expressed itself strongly in (i), it was under the pressure of the Finance Secretary, Finance Minister and the Personal Secretary to the Prime Minister that the Governor of the Reserve Bank finally agreed to adopt the line suggested by the Government in its letter dated September 17, 1983, and that the decision of the Reserve Bank was not that of a free agent. The circular issued by the Reserve Bank of India and the permission granted by it, it was suggested, were so issued and granted under the pressure of the Government of India. We do not think that we will be justified in drawing any such inference. It would be wholly unfair and uncharitable to Dr. Manmohan Singh. An enormous amount of foreign exchange vital to the economy of the country was involved. Though the R....
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....Reserve Bank with full and accurate information. At that stage, there was nothing to doubt the bona fides and the ineptitude of the Punjab National Bank. The company also in its several communications to the Reserve Bank did not make any allegations against the Punjab National Bank. In those circumstances, if the Reserve Bank thought it fit to seek information from the Punjab National Bank and proceeded to act on the information obtained from the Punjab National Bank, the Reserve Bank cannot be accused of non-application of mind. The Reserve Bank was entitled to rely on the Punjab National Bank and the information supplied by that bank as the bank held a statutory position under the Foreign Exchange Regulation Act. It may be that the Punjab National Bank did not act with that degree of competence and diligence as should be expected from it, but at that stage, there was nothing to provoke any suspicion in the mind of the Reserve Bank. We will revert to the part played by the Punjab National Bank presently, but there is no reason to charge the Reserve Bank with want of bona fides and non-application of mind merely because it placed reliance upon the Punjab National Bank and the infor....
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....reign investors for permission to invest in shares of Indian companies were in fact to be made through the designated banks. By paragraph 11 of Circular No. 9, dated April 14, 1982, the designated banks were required to maintain separately a proper record of the investment made in shares, with and without repatriation benefits, on account of the investor, showing all relevant particulars including the numbers of share certificates and distinctive numbers of shares. They were required to keep a systematic and up-to-date record of the shares purchased by them for each investor through stock exchange so that they would be able to ensure that the purchase of shares in any one company by a single investor would not exceed Rs. 1 lakh in face value of the company. Again by Circular No. 10 of April 22, 1982, the authorised dealer (designated bank) was required to obtain from the investing overseas companies a certificate from an auditor/chartered accountant/certified public accountant in form OAC. The certificate was to be obtained by the authorised dealer every year. When by Circular No. 12 of May 16, 1983, an overall ceiling of 5 per cent of the total paid-up equity capital of the compan....
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....cept Caparo Properties in which the holding was 98 percent. In this letter, it was expressly stated "as regards details of shares of Indian companies purchased by or on behalf of the said non-resident clients, they have advised us that the same would be supplied when the purchases were complete." This statement appears to us to be in complete breach of the duties of an authorised dealer under the portfolio investment scheme. The letter shows that not only the sales were not put through by the authorised dealers, the authorised dealers were not even aware of the transactions that had taken place till then, though we are now told that all the shares had been purchased by April 28, 1983. It was only on May 31, 1983, that the Punjab National Bank sent a telegram to the Reserve Bank of India that they had been advised by the brokers that up to April 28, 1983, 75,000 equity shares of the Escorts Ltd. had been purchased on behalf of and for the benefit of each of the thirteen overseas companies. The Reserve Bank sought information by their letters dated June 11, 1983, of the purchases of shares made for the benefit of the overseas companies, (i) up to December, 1982 ; (ii) from ....
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.... must hold on the material now available to us that their implicit reliance on the Punjab National Bank was entirely misplaced. What further action must be taken on that finding is a question which we have to consider. We will do so later after considering the other questions argued before us. 91. Shri Nariman contended that there were several circumstances in the record which established that a large number of shares were purchased with funds which were made available locally and not funds remitted from abroad and also that the shares were purchased subsequent to May 2, 1983. The circumstances were: (i) the purchase of shares commenced before the remittances started; (ii) the price at which the shares were available in the market showed that funds in excess of what was remitted must have been utilised for purchasing the shares and this could only have been with rupee funds; (iii) the company was able to obtain two brokers' notes from two of the sellers' brokers which showed that the sales were made long subsequent to May 2, 1983 ; and (iv) out of the total number of shares purchased on behalf of the thirteen companies, 4,62,000 shares only were lodged with the company on ....
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.... 196. While it is firmly established ever since Salomon v. A. Salomon and Co. Ltd. [1897] AC 22 (HL) was decided that a company has an independent and legal personality distinct from the individuals who are its members, it has since been held that the corporate veil may be lifted, the corporate personality may be ignored and the individual members recognised for who they are in certain exceptional circumstances. Pennington in his Company Law (Fourth Edition) states : Four inroads have been made by the law on the principle of the separate legal personality of companies. By far the most extensive of these has been made by legislation imposing taxation. The Government, naturally enough, does not willingly suffer schemes for the avoidance of taxation which depend for their success on the employment of the principle of separate legal personality, and in fact legislation has gone so far that in certain circumstances taxation can be heavier if companies are employed by the taxpayer in an attempt to minimise his tax liability than if he uses other means to give effect to his wishes. Taxation of companies is a complex subject, and is outside the scope of this book. The reader who wishes t....
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....s, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected, etc. 93. In the present case, we do not think "lifting the veil" is necessary or permissible beyond the essential requirement of the Foreign Exchange Regulation Act and the portfolio investment scheme. We have noticed that the object of the Act is to conserve and regulate the flow of foreign exchange and the object of the scheme is to attract non-resident investors of Indian nationality or origin to invest in shares of Indian companies. In the case of individuals, there can be no difficulty in identifying their nationality or origin. In the case of companies and other legal personalities, there can be no question of nationality or ethnicity of such company or legal personality. Which of such non-resident companies or legal personalities may then be permitted to invest in shares of Indian companies ? The answer is furnished by the scheme itself which provides for "lifting the corporate veil" to find out if at least 60 per cent, of the shares are held by non-residents of Indian nationality or origin. Lifting ....
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....members of his family are the beneficiaries, the companies can be denied the facility of investing in Indian companies. In fact, if each of the six beneficiaries of the trust had separately applied for permission to purchase shares of Indian companies, they could not have been denied such permission. It cannot, therefore, be said that there has been any violation of the portfolio investment scheme merely on that account or that the permission granted is illegal. 95. We now turn to the case of Escorts Ltd. against the Life Insurance Corporation of India. While narrating the sequence of events, we referred to the impleading of the Life Insurance Corporation of India as a respondent to the writ petition a few months after it was originally filed. The primary allegation which led to the impleading of the Life Insurance Corporation of India was that there was confabulation between the Government of India, Reserve Bank and the Life Insurance Corporation to pressurise Escorts Ltd. to register the transfer of shares in favour of the Caparo group of companies. The inference of collusion and conspiracy was sought to be drawn from the sequence of certain events which we will mention immediat....
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....nst the company because of external pressures brought upon the institutions as a result of the non-registration of the shares purchased by Mr. Swraj Paul's companies. There was no reply to this letter by Mr. Punja. But on January 13, 1984, Mr. Punja informed Escorts Ltd. that the financial institutions had decided to accept the proposal of Escorts Ltd. for pre-payment of the outstanding loan. At this stage, that is, on January 7, 1984, a meeting of the board of the Life Insurance Corporation was held and it was resolved that a requisition should be served on Escorts Ltd. to convene an extraordinary general meeting to pass resolutions for the removal of the nine non-executive directors and for the appointment as new directors, officers and nominees of the financial institutions, in their place. This subject was not one of the matters listed in the agenda for the meeting of the board of the Life Insurance Corporation. The resolution was considered after all the officers of the Corporation, except one, left the meeting. The minutes of the meeting did not record any discussion. But the minutes do show that Mr. Punja of the I.D.B.I, was present in his capacity as a director of the L....
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....tion to which the majority of the shareholders were opposed. That is not how a corporate democracy may function. 97. A company is, in some respects, an institution like a State functioning under its "basic constitution" consisting of the Companies Act and the memorandum of association. Carrying the analogy of constitutional law a little further, Gower describes "the members in general meeting" and the directorate as the two primary organs of a company and compares them with the legislative and the executive organs of a Parliamentary democracy where legislative sovereignty rests with Parliament, while administration is left to the Executive Government, subject to a measure of control by Parliament through its power to force a change of Government. Like the Government, the directors will be answerable to "Parliament" constituted by the general meeting. But in practice (again like the Government), they will exercise as much control over Parliament as that exercises over them. Although it would be constitutionally possible for the company in general meeting to exercise all the powers of the company, it clearly would not be practicable (except in the case ....
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....he directors is by altering the articles or, if opportunity arises under the articles, by refusing to re-elect the directors of whose action they disapproved." 99. In Isle of Wight Railway Co. v. Tahourdin [1884] 25 Ch 320 (Ch D) Cotton L. J. said (at p. 332): "Then there is a second object, 'To remove (if deemed necessary or expedient) any of the present directors, and to elect directors to fill any vacancy in the board.' The learned judge below thought that too indefinite, but in my opinion a notice to remove 'any of the present directors' would justify a resolution for removing all who are directors at the present time; 'any' would involve 'all.' I think that a notice in that form is quite sufficient for all practical purposes." Fry L.J. said (at p. 335): "The second objection was, that a requisition to call a meeting 'to remove (if deemed necessary or expedient) any of the present directors' is too vague. I think that it is not. It appears to me that there is a reasonably sufficient particularity in that statement. It is said that each director does not know whether he is attacked or not. The answer is, all the d....
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....evidence. But the deed is silent as to these matters and the question is whether any such power of control in the courts of justice is to be inferred from the words 'reasonable cause' contained in the 27th clause; whether the expression 'reasonable cause' contained In such a deed of a trading partnership can be held to be such a cause, as upon investigation in a court of justice must be held to be bona fide founded on sufficient evidence and just; or whether it ought not to be held to mean such cause as in the opinion of the shareholders duly assembled shall be deemed reasonable. We think the latter is the true construction and effect of the deed. In a moral point of view, no doubt every charge of a cause of removal ought to be made bona fide, substantiated by sufficient evidence, and determined on a due consideration of the charge and evidence ; and those who act on other principles may be guilty of a moral offence : they may be very unjust, and those who (being misled by the statements made to them), have no doubt a just right to complain that they have been led to concur in an unjust act. But the question is, whether by this deed the shareholders duly assembled at a ge....
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....ER 492 (HL), was explained as a case where a winding-up order was sought. In the case of Ebrahimi v. West-bourne Galleries Ltd. [1972] 2 WLR 1289 ; [1972] 2 All ER 492 (HL), the absolute right of the general meeting to remove the directors was recognised and it was pointed out that it would be open to the director sought to be removed to ask the company court for an order for winding-up on the ground that it would the "just and equitable" to do so. The House of Lords said (at p. 500 of [1972] 2 All ER): "My Lords, this is an expulsion case, and I must briefly justify the application in such cases of the just and equitable clause...The law of companies recognises the right, in many ways, to remove a director from the board. Section 184 of the Companies Act, 1948, confers this right on the company in general meeting whatever the articles may say. Some articles may prescribe other methods, for example, a governing director may have the power to remove (of In re Wondoflex Textiles P. Ltd. [1951] VLR 458). And quite apart from removal powers, there are normally provisions for retirement of directors by rotation so that their re-election can be opposed and defeated by a ....
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....ance Corporation was an instrumentality of the State and was, therefore, debarred by article 14 from acting arbitrarily. It was, therefore, under an obligation to state to the court its reasons for the resolution once a rule nisi was issued to it. If it failed to disclose its reasons to the court, the court would presume that it had no valid reasons to give and its action was, therefore, arbitrary. The learned counsel relied on the decisions of this court in Sukhdev Singh v. Bhagatram Sardar Singh Raghu-vanshi [1975] 45 Comp. Cas. 285; AIR 1975 SC 1331; Maneka Gandhi v. Union of India AIR 1978 SC 597, Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628, and Ajai Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487. The learned Attorney-General, on the other hand, contended that actions of the State or an instrumentality of the State which do not properly belong to the field of public law but belong to the field of private law are not liable to be subjected to judicial review. He relied on O'Reilly v. Mackman [1982] 3 WLR 1096 ; [1982] 3 All ER 1124 (HL), Davy v. Spelthorne Borough Council [1983] 3 WLR 742 ; [1983] 3 All ER 278 ; [1984] AC 262 (HL), ....
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.... instrumentality of the State ventures into corporate world and purchases the shares of a company, it assumes to itself the ordinary role of a shareholder, and dons the robes of a shareholder, with all the rights available to such shareholder. There is no reason why the State as a shareholder should be expected to state its reasons when it seeks to change the management, by a resolution of the company, like any other shareholder. 105. In the instant case, the reason for the resolution stares one in the face. The financial institutions who held the majority of the stock were not only not told by the management about the filing of the writ petition in the High Court but were deliberately kept in the dark about it. The matter was not even discussed at a meeting of the directors before the writ petition was filed. It was filed in a furtive manner even as Mr. Nanda was purporting to hold discussions with Mr. Punja and others. And that was not all. Mr. Nanda was also unduly exerting himself in certain matters to the detriment of the majority shareholders. We will immediately refer to these matters. 106. One of the circumstances relied upon to establish the mala fides of the Life Insura....
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....rts Ltd., would be entitled to a meagre 500 shares in the new issue. The result would be that its holdings would be reduced from 30 per cent, to 18.14 per cent. The holding of all the financial institutions would be reduced from 51.62 to 31.21 per cent. Not merely would it result in the reduction of the percentage of the holding of the financial institutions in the capital stock of the company, but it would also result in great financial loss to the institutions in the following manner : if the existing shareholders were to be given preferential allotment in the new issue on the basis of their existing holdings without any ceiling, the Life Insurance Corporation and other financial institutions would be entitled not to the meagre 500 shares each, but to some tens of thousands of shares in the new issue. Taking the market value of the shares into account at Rs. 50 per share, the loss to the financial institutions would be in the neighbourhood of about Rs. 10 crores. We do not think that any financial institution with the slightest business acumen could possibly accept the proposal as it finally emerged from Escorts Ltd. No man of ordinary prudence would have accepted the proposal. T....
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....r including the permission of the High Court followed by the extraordinary shareholders meeting of both the companies may proceed. Yesterday's meeting with the chairman and senior executives of the Financial Institutions, I was informed, for the first time, that the financial institutions were still examining our request for approval they were primarily concerned about the 53% (52%) holding of all the investing financial institutions (LIC, GIC, UTI) post-merger coming down close to 49 per cent. It is seen from the letter that Mr. Nanda was not proceeding on the basis that the financial institutions had already agreed to the proposal for merger, but was in fact awaiting their approval. When he learnt the reason for the hesitation of the financial institutions to agree to the proposal, he wrote a letter on December 30, 1983, explaining his views and requesting the financial institutions to expedite the approval of the proposal. It is, therefore, futile for Mr. Nanda to contend that the proposal for merger of Goetze with Escorts Ltd. was a lever which the financial institutions were using to exert pressure on him to agree to register the transfer of shares in favour of the Caparo....
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....per cent by persons of Indian nationality or origin could avail of the facility given by the scheme irrespective of the fact whether the same group of shareholders figured in the different companies. (4) Where any of the purchases were made subsequent to May 2, 1983, they were subject to the 5 per cent ceiling in the aggregate. (5) The Reserve Bank was not guilty of any mala fides in granting per mission to the Caparo Group of companies. Nor was it guilty of non- application of mind. (6) No mala fides could be attributed to the Union of India either. (7) There was a total and signal failure on the part of the Punjab National Bank in the discharge of their duties as authorised dealers under the FERA and the scheme with the result that there was no monitoring of the purchases of shares made on behalf of the Caparo Group of companies. (8) The allegation of mala fides against the Life Insurance Corporation of India was baseless. (9) The notice requisitioning a meeting of the company by the Life Insurance Corporation was not liable to be questioned on any of the grounds on which it was sought to be questioned in the writ petition. 113. On our finding that there was no monit....