1985 (12) TMI 289 - SC - Companies Law

Company Incorporation of Membership of Shares Allotment of Shares warrants and entries in register of members Shares warrants and entries in register of members Transfer to shares Power to refuse registration and appeal against refusal Share capital - Further issue of Meetings and proceedings - Annual General Meeting Extra Ordinary General Meeting Removal of Director Oppression and mismanagement Principles for interpretation of statutes Regulation of export and transfer of securities Restrictions on establishment of place of business in India Supplemental provisions

Issues Involved:
1. Whether the permission of the Reserve Bank of India (RBI) under section 29 of the Foreign Exchange Regulation Act (FERA) could be ex post facto and conditional.
2. Validity of the press release, circular, and letter issued by the RBI.
3. Eligibility of foreign companies with more than 60% shares owned by persons of Indian nationality/origin to avail the portfolio investment scheme.
4. Compliance with the 5% ceiling on aggregate investment by foreign investors.
5. Allegations of mala fides and non-application of mind by the RBI.
6. Allegations of mala fides against the Union of India.
7. Failure of Punjab National Bank (PNB) in monitoring purchases of shares.
8. Allegations of mala fides against the Life Insurance Corporation of India (LIC).
9. Validity of the requisition notice issued by LIC for an extraordinary general meeting.

Detailed Analysis:

1. Ex Post Facto and Conditional Permission by RBI under FERA:
The court held that the permission of the RBI under section 29 of FERA could indeed be ex post facto and conditional. The expression "general or special permission" in section 29(1) is not qualified by the word "previous" or "prior," unlike other sections of the Act. The court emphasized that the object of the Act is to regulate and conserve foreign exchange, and interpreting "permission" to include both previous and subsequent permissions aligns with this objective. The court rejected the argument that the scheme of the Act necessitated previous permission, stating that the RBI has the discretion to grant permission either before or after the purchase of shares.

2. Validity of RBI's Press Release, Circular, and Letter:
The court upheld the validity of the press release dated September 17, 1983, the circular dated September 19, 1983, and the letter dated September 19, 1983, issued by the RBI. These documents were found to be in accordance with the FERA and the portfolio investment scheme. The court noted that the scheme did not restrict the RBI's power to grant ex post facto permission and that the documents were consistent with the objective of attracting foreign investment while regulating the flow of foreign exchange.

3. Eligibility of Foreign Companies under the Portfolio Investment Scheme:
The court held that any foreign company whose shares were owned to the extent of more than 60% by persons of Indian nationality or origin could avail the facility given by the scheme, irrespective of whether the same group of shareholders figured in different companies. The court emphasized that the scheme aimed to attract investment from non-residents of Indian origin and that the 60% ownership criterion was the key factor, not the individual identity of the shareholders.

4. Compliance with the 5% Ceiling on Aggregate Investment:
The court found that any purchases made subsequent to May 2, 1983, were subject to the 5% ceiling in the aggregate. The court directed the RBI to conduct a detailed enquiry to ensure compliance with this ceiling and to take appropriate action if any violations were found.

5. Allegations of Mala Fides and Non-Application of Mind by RBI:
The court rejected the allegations of mala fides and non-application of mind by the RBI. It found that the RBI had acted bona fide and had applied its mind to the relevant facts and circumstances. The court noted that the RBI had sought information from the PNB, an authorized dealer under the FERA, and had relied on the information provided by PNB. While the court acknowledged that the reliance on PNB was misplaced due to PNB's failure to discharge its duties, it did not attribute mala fides to the RBI.

6. Allegations of Mala Fides against the Union of India:
The court found no basis for the allegations of mala fides against the Union of India. It noted that the decision to grant permission to the Caparo Group of companies was made after high-level discussions involving the Finance Secretary, Finance Minister, and the Governor of the RBI. The court held that the decision was made in the interests of the economy and was not influenced by any improper motives.

7. Failure of Punjab National Bank in Monitoring Purchases:
The court found that the PNB had failed to discharge its duties as an authorized dealer under the FERA and the portfolio investment scheme. PNB did not maintain proper records, did not submit daily statements to the RBI, and was not aware of the transactions that had taken place. The court directed the RBI to conduct a thorough enquiry into the conduct of PNB and to take appropriate action, including the possible cancellation of PNB's authorization under section 6 of the FERA.

8. Allegations of Mala Fides against the Life Insurance Corporation of India:
The court rejected the allegations of mala fides against the LIC. It found that the LIC, as a shareholder holding a significant percentage of shares in Escorts Ltd., had the right to call an extraordinary general meeting to remove directors and appoint new ones. The court held that the LIC's actions were motivated by a desire to protect its investment and were not influenced by any improper motives.

9. Validity of the Requisition Notice Issued by LIC:
The court upheld the validity of the requisition notice issued by the LIC for an extraordinary general meeting. It held that the LIC, as a shareholder, had the right to call a meeting and propose resolutions for the removal and appointment of directors. The court found that the requisition notice was not liable to be questioned on any of the grounds raised in the writ petition.

Conclusion:
The appeals filed by the Union of India, the RBI, and the LIC were allowed, and the appeal filed by Escorts Ltd. was dismissed. The court directed the RBI to conduct a detailed enquiry into the purchase of shares by the Caparo Group of companies and to reconsider the permission granted. The court also directed the RBI to enquire into the conduct of PNB and take appropriate action. Costs were awarded against Mr. Nanda, Mr. Swraj Paul, and PNB.

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