1989 (5) TMI 313 - SC - Companies Law

Whether the CCI has acted in the manner he should act in the present atmosphere of socio-economic development in view of our constitutional commitments? Held that - The scheme and the language used, strictly speaking, do not indicate any positive role for the CCI in discharging his functions in respect of grant of sanction. But it has to be borne in mind that he is a part of a State instrumentalities committed to the endeavours of the constitutional aspiration to secure justice, inter alia, social and economic, and also under Article 39(b) & (c) of the Constitution to ensure that the ownership and control of the material resources of the community are so distributed as to best subserve the common good and that the operation of the economic system does not result in concentration of wealth and means of production to the common detriment. Yet, every instrumentality and functionary of the State must fulfil its own role and should not trespass or encroach/entrench upon the field of others. Progress is ensured and development helped if each performs his role in the common endeavour. Having regard to the facts and the circumstances of the case in view of the various facts mentioned hereinbefore, we are of the opinion that there was no undue haste. There was proper application of mind that the sanction was for a new project. Sufficient security for the debentures as was enjoined to be ensured before sanction has been ensured in the facts and the circumstances of this case and guidance provided by means of guidelines has been substantially complied with. There has been no infraction as such of the norms required to be followed in granting the sanction. The challenge to the sanction, therefore, must fail. Appeal dismissed.

Issues Involved:
1. Powers, functions, and role of the Controller of Capital Issues.
2. Validity of the consent granted by the Controller of Capital Issues for the issue of shares and debentures by Reliance Petrochemicals Ltd. (RPL).
3. Allegations of fraud and sharp practices in the issue of debentures.
4. Compliance with guidelines and statutory requirements by the Controller of Capital Issues.
5. Adequacy and nature of the security for the debentures.
6. Allegations of undue haste, favoritism, and lack of application of mind by the Controller of Capital Issues.
7. Discrimination between the promoter company (Reliance Industries Ltd. - RIL) and the general public in the allotment of shares and debentures.
8. Role of the Controller of Capital Issues in the socio-economic context and its alignment with the Directive Principles of State Policy.

Detailed Analysis:

1. Powers, Functions, and Role of the Controller of Capital Issues:
The judgment examines the statutory role of the Controller of Capital Issues (CCI) under the Capital Issues (Control) Act, 1947, emphasizing that the CCI's primary function is to ensure a balanced investment of the country's resources in industry, agriculture, and social services. The CCI's role is not to guarantee the financial soundness of any scheme but to prevent wasteful investments and promote sound methods of corporate finance. The judgment highlights that the CCI must act in conjunction with other authorities to ensure that investments are made in priority sectors to encourage employment and demand in the national economy.

2. Validity of the Consent Granted by the Controller of Capital Issues:
The consent granted by the CCI for the issue of shares and debentures by RPL was challenged on the grounds of alleged fraud, sharp practices, and non-compliance with statutory guidelines. The judgment notes that the CCI had applied its mind to the relevant facts and circumstances, including the financial soundness of the project, the adequacy of security for the debentures, and the compliance with statutory guidelines. The CCI's decision was found to be within its statutory powers and not arbitrary or capricious.

3. Allegations of Fraud and Sharp Practices in the Issue of Debentures:
The petitioners alleged that RPL had adopted sharp methods to collect money from the public and ultimately defraud them. The judgment examines these allegations in detail, noting that the terms of the issue, including the conversion of debentures into equity shares, were clearly stated in the prospectus. The court found no evidence of fraud or sharp practices and held that the investors were adequately informed about the terms and conditions of the issue.

4. Compliance with Guidelines and Statutory Requirements by the Controller of Capital Issues:
The judgment addresses the petitioners' contention that the CCI had not followed its own guidelines while granting consent for the issue. It was argued that the guidelines were mandatory and any deviation from them was arbitrary and illegal. The court held that the guidelines were not statutory in character and were intended to serve as a guide for the CCI. The CCI had substantially complied with the guidelines, and any deviations were justified in the interest of the capital market and public interest.

5. Adequacy and Nature of the Security for the Debentures:
The petitioners contended that the security offered for the debentures was inadequate and illusory. The judgment examines the nature of the security, including the creation of a floating charge on the assets of the company and the role of the debenture trustees. The court found that the security provided was adequate and customary in corporate practice. The debenture trustees, being public financial institutions, were entrusted with the responsibility of ensuring the security of the debenture holders.

6. Allegations of Undue Haste, Favoritism, and Lack of Application of Mind by the Controller of Capital Issues:
The petitioners alleged that the CCI had acted with undue haste and favoritism in granting consent for the issue. The judgment notes that the application for consent was processed within the normal time frame and that the CCI had applied its mind to the relevant facts and circumstances. The court found no evidence of undue haste, favoritism, or lack of application of mind by the CCI.

7. Discrimination Between the Promoter Company (RIL) and the General Public in the Allotment of Shares and Debentures:
The petitioners argued that the scheme of allotment was discriminatory, favoring RIL over the general investing public. The judgment examines the rationale for treating RIL differently, noting that RIL, as the promoter company, had invested significant time and money in the project. The court held that the differential treatment was justified and based on intelligible criteria. The discrimination alleged by the petitioners was found to be without merit.

8. Role of the Controller of Capital Issues in the Socio-Economic Context and Its Alignment with the Directive Principles of State Policy:
The judgment discusses the broader role of the CCI in the socio-economic context, emphasizing the need for the CCI to ensure that investments are made in priority sectors to promote balanced industrial growth and prevent concentration of wealth. The court acknowledged the importance of the CCI's role in protecting the interests of small investors and ensuring that capital issues serve the common good. However, it also noted the practical limitations of the CCI's powers and resources, suggesting that any expansion of the CCI's role should be carefully considered.

Conclusion:
The court dismissed the writ petitions and the civil suit, holding that the CCI had acted within its statutory powers and had substantially complied with the guidelines. The allegations of fraud, sharp practices, undue haste, favoritism, and discrimination were found to be without merit. The judgment underscores the importance of the CCI's role in ensuring a balanced investment of the country's resources while also recognizing the practical limitations of its powers and resources.

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