1984 (11) TMI 358 - HC - FEMA

Summary

Issues Involved:
1. Requirement of prior permission under Section 29(1)(b) of the Foreign Exchange Regulation Act (FERA) for purchasing shares by Non-Resident Indian (NRI) investors.
2. Validity and retrospective effect of the press release, circular, and letter issued by the Reserve Bank of India (RBI).
3. Legality and propriety of the requisition notice issued by the Life Insurance Corporation (LIC) for an Extraordinary General Meeting (EGM) to remove directors.
4. Allegations of mala fides and arbitrariness against the LIC and other financial institutions.
5. Jurisdiction and propriety of granting declaratory relief under Article 226 of the Constitution.
6. Costs and consequences of the writ petition.

Detailed Analysis:

1. Requirement of Prior Permission under Section 29(1)(b) of FERA:
- The court held that Section 29(1)(b) of FERA is mandatory and no NRI investor may purchase shares in an Indian company under the portfolio investment scheme without obtaining prior permission of the RBI. Any purchases made without such prior permission would expose the investor to action under Sections 50 and 57 and prosecution under Section 56 of FERA. Such purchases would be illegal. The shares in question were all purchased by the respondent-companies prior to September 19, 1983, before any permission was granted. These purchases contravene Section 29 of FERA and Regulation 24.1 issued by the RBI as also the conditions stipulated by Circular No. 9 dated April 14, 1982.

2. Validity and Retrospective Effect of the Press Release, Circular, and Letter Issued by RBI:
- The press release dated September 17, 1983, the Circular dated September 19, 1983, and the letter dated September 19, 1983, cannot operate retrospectively so as to validate the purchase of shares made by NRI companies which were ineligible on the date of purchase. The clarifications under Exhs."A", "B" and "C" would amount to amending the portfolio investment scheme with full repatriation benefits introduced under Exh."G" prospectively, that is, on and from September 19, 1983, which is the date of its issue and they are valid from that date and validly operate prospectively. They, however, cannot operate retrospectively so as to validate the purchase of shares made by legal entities which were ineligible on the date of purchase or authorize the purchase of shares without obtaining prior permission of the RBI under Section 29(1)(b) of FERA.

3. Legality and Propriety of the Requisition Notice Issued by LIC for an EGM to Remove Directors:
- The requisition notice issued by the LIC for an EGM to remove nine out of fifteen directors of the petitioner-company and replace them with nine whole-time employees of public financial institutions was found to be arbitrary and not in conformity with Section 284 of the Companies Act. The court held that the requisition notice does not conform to the provisions of Section 284 of the Companies Act, inasmuch as it does not disclose any reasons or grounds for moving a resolution to remove the directors. The notice offends the principle of natural justice. The action of the LIC in issuing the impugned requisition notice is an arbitrary and mala fide exercise of power for a collateral purpose; it is violative of Article 14 of the Constitution.

4. Allegations of Mala Fides and Arbitrariness Against LIC and Other Financial Institutions:
- The court found that the LIC and other financial institutions linked up the proposals of the petitioner-company to accept prepayment of loans and to agree to the merger of Goetze-Escorts Ltd. with the issue of registration of transfer of shares in favor of the Caparo group of companies. This linking up amounted to exercising illegal and unauthorized pressure on the petitioner-company and its management and constituted commercial duress and abuse of their dominant position. The court, however, found that the allegations of mala fides against respondents Nos. 1 and 2 (Union of India and RBI) were unsubstantiated.

5. Jurisdiction and Propriety of Granting Declaratory Relief under Article 226 of the Constitution:
- The court held that it is empowered and justified in granting a declaratory relief simpliciter under Article 226 of the Constitution. In certain circumstances, the declaratory relief itself may constitute substantive relief and having regard to the declaration granted, the respondents may also be restrained from taking any action contrary to the said declaration. The court granted declaratory relief and issued a writ of mandamus restraining the respondents from implementing the impugned circular and letter with respect to the shares purchased by the respondent-companies.

6. Costs and Consequences of the Writ Petition:
- The court directed that the costs of the writ petition should come out of the funds of the petitioner-company irrespective of the ultimate result of the writ petition or any appeal that may be filed against this judgment. The petitioners were entitled to costs, which were fixed at Rs. 25,000 from respondents Nos. 1, 2, and 3. The court also held that the subsequent events, such as the resolutions adopted at the EGM, must stand nullified if the requisition which is the foundation for this meeting itself is declared illegal.

Conclusion:
The court allowed the writ petition and made the rule absolute, granting declaratory relief and issuing a writ of mandamus restraining the respondents from implementing the impugned circular and letter and from taking any steps or action in pursuance of the impugned requisition notice and/or the resolutions passed at the EGM held pursuant to the said notice. The costs of the writ petition were directed to be borne by the petitioner-company.