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TMI Blog1995 (2) TMI 293X X X X Extracts X X X X X X X X Extracts X X X X ..... in the private sector, Alembic, which is producing the said drug. The total production of penicillin-G within the country is sufficient to meet only 45 per cent, of the country's total requirement. The remaining 55 per cent. is being imported. The price of the imported penicillin-G is hall the price at which the locally produced drug is sold. Penicillin-G produced through complex fermentation under controlled conditions of, strains of the fungus penicillim notatum and penicillium chrysogenum. It is stated that the companies all over the world have been trying to develop the strains to improve the quality and yield. HAL which has been producing the drug in this country for over two decades has also been trying to improve the strain as also the quality and yield of the said drug. From 1976 up to 1986, it was using the filamentous Toyo Jozo strains from Japan. Since the said technology became outdated, it switched over in 1986 to Pellety strains from Panlabs Inc., United States of America. Even so, the production could not exceed 55 per cent, of the installed capacity. For all these reasons, HAL has been trying to devise ways and means to improve the product ion, quality and yield. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant information to enable them to formulates specific offer. The mala fides on t he part of Sri Basu, it is alleged, are responsible for the impugned MoU whereunder the HAL had agreed to lease out its plant and all other facilities for an annual amount of Rs. 17 crores to the proposed joint venture company (JVC) to be formed by HAL and MGB, whereas the appellants were prepared to offer a lease amount far above the said figure. The mala fides on the part of Sri Basu are evident from the fact that though the board of directors had stipulated a minimum lease amount of Rs. 31.68 crores, he flouted the said stipulation and agreed to a low figure of Rs. 17 crores. It is submitted that HAL, being a Government owned corporation, is an authority within the meaning of article 12 and that it was bound to consider all the offers received in a fair and impartial manner giving an equal opportunity to all competitors to give their bids and select the most suitable among them. This fairness has not been observed by the HAL in arriving at the impugned MoU. Indeed, the submission is that the Government/HAL should have called for tenders or offers on a competitive basis and selected the most s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viz., MGB. The foreign collaborators of some of the appellants do not have technology comparable to GB and none of them have a sizeable share in the world market. According to the respondents, the position in 1993 is the following : Company Rating % share of world's production in 1993 Gist Brocades, Holland I 20.0 Biochemie, Austria II 11.5 Antibioticos, Spain III 11.0 Beecham, UK IV 8.5 Bristol Myers, UK V 7.5 Synpac, UK VI 6.0 Hoeschst, Germany VII 5.0 It is stated further by the respondents that while SPIC offered the technology of Cipan, Torrent and PBG offered the technology of Biotica of Slovakia. The technologies offered along with the facts relevant to each of these appellants was considered and their offers were rejected by the board of directors of HAL. In the circumstances, the appellants cannot complain that their offers were not fully and fairly considered. The real reason for the appellants approaching the court is that they are afraid of being driven out of the market if the proposed collaboration between MGB and HAL bears fruit. Because of their inferior technology, they will not be in a position to compete with the proposed JVC and this is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so gave a detailed account of the discussion he had with GB in Holland. He explained the salient features of the draft MoU proposed to be entered into with MGB. He stated that the technology to be obtained from GB would be the best in the world and that it is a lifetime opportunity for HAL to get this technology. He stated that with a little modification, the production of penicillin can be increased substantially. He placed before the board a profile of the increased production and profitability with the induction of the MGB technology. He also explained why the offer of Ranbaxy labs, who offered to bring in the technology of Hoescht, AG, Germany was not definite or acceptable. He pleaded for approval of the draft MoU between MGB and HAL. The chairman of the board, however, expressed his opinion that since approval of the proposed MoU would require the approval at the highest level in the Government, the company should formulate its proposal indicating the examination of available options including the possibility of direct tie-up for acquiring technology and participation. Accordingly, it was decided to explore the available options. The managing director was asked to obtain exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly employed by HAL. It was accordingly decided to reject the offer of SPIC. At this meeting the managing director informed the board that once HAL gets top grade technology, the units of the other licensees within the country would become uneconomic and that is why they were trying to stall HAL from getting the best technology. He also stressed the need for upgrading the present technology by HAL and stated that with GB technology the production of HAL will be doubled to 2000 MMU in two years' time without any need for further fermentors. The board then decided that all interested parties be informed to submit their proposals by December 20, 1993, and that no further time shall be granted. The date, December 20, 1993, was later extended to December 31, 1993, at the board meeting held on December 20, 1993. At this meeting (December 20, 1993) the board rejected the offer of PBG on the ground that the technology of Biotica of Slovakia offered by it was not superior to the technology presently employed by HAL. At the board meeting held on February 4, 1994, the board was informed that the proposal of MGB has been received. The board directed that these proposals be sent for evaluatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantial profits by itself without any tie-up with the foreign company. It also commented upon the failure of HAL, which is the pioneer and the largest manufacturer in the country, in not approaching the leading penicillin manufacturers in the world directly for acquisition of technology and instead waiting for the Indian companies to enter into agreements with foreign technology sources and then entering into discussion with these Indian firms for collaboration. The sub-committee stated : "59. As result of the evaluation of the HAL's production efficiencies, the sub-committee is firmly of the view that there is tremendous scope for improvements and higher level of efficiency and cost reduction in the penicillin production operations of HAL even with the existing technology. It came as surprise to the sub-committee that HAL which is the largest penicillin producer in the country, what to talk of comparing internationally, does not compare favourably with IDPL penicillin production operation in so far as raw material and utility costs are concerned. A draft on the latest cost price study report for the year 1994-95 on penicillin first crystals production as prepared by BICP a copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows : "205.10.11. After detailed discussion on the report of the sub-committee the board agreed that the company should go in for higher levels of production beyond, 1100 MMU which can be achieved with the present technology and for which the costs could be reduced to the levels suggested by the sub-committee. It was decided that the company should acquire technology for reaching a production level of 1800-2000 MMU without addition of more fermentors (except the two which are yet to be installed). It was also decided by the board that the only available option of acquisition of the technology offered through the route of JVC as proposed by Max-GB with HAL having 50 per cent, equity each in the JVC be accepted but the lease rental payable by the JVC to HAL should be computed taking into account the profit of Rs. 31.68 crores at the level of production of 1100 MMU. To this, MD stated that this may not be acceptable to Max-GB and he felt that at best Max-GB may agree to the increase in the lease rental offer of Rs. 13 crores by Rs. 1 or 2 crores. He stated that the lease rental of Rs. 13 crores had been found to be fully justified by the evaluation presented before the sub-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also a fellow of the Indian Academy of Sciences. The judgment of the High Court refers to the substance of the opinion tendered by Prof. Sharma. Prof. Sharma is stated to have opined that the best technology for penicillin-G in the world was with GB and that it was in the interest of HAL as well as in the interest of the country to acquire that technology. He also opined that such first grade technologies in the frontier areas were just not available irrespective of their cost. He also approved the proposal of JVC and was of the opinion that it was in the commercial interest of HAL besides the national interest. It is after receiving this report that a "directive" under article 117 of the articles of association was issued. The "directive" is contained in the letter dated June 20, 1994, addressed to Sri A. K. Basu, managing director, HAL. It directs HAL to enter into a MoU at the earliest with the MGB for establishing a JVC. The letter reads as follows : "Sir, I am directed to refer to your letter No. MD/IV/4010, dated 3rd May, 1994, on the subject cited above and to say that the matter relating to the proposed collaboration between Hindustan Antibiotics Limited (HAL) and Max-G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directors at its meeting held on September 6, 1994. The board merely "noted" the fact. We are told that the Government of India has not yet approved the MoU. The respondents' counsel explained that this was because of the pendency of the writ petition in the High Court and these matters in this court. It would be noticed that there is no reference to Torrent Gujarat Biotech Limited in any of the board resolutions or in the sub-committee report. According to Torrent, they have obtained technology from Biotica of Slovakia and have set up a plant which according to them was to go into production by the end of 1994. Torrent says that it addressed a letter on April 12, 1994, to the Government of India expressing their interest in upgrading the technology of HAL and in improving the production by investing Rs. 40-50 crores. It is stated that their offer was rejected by HAL on May 21, 1994, and that thereafter its representatives met the Minister of State on June 3, 1994, and represented their case. On June 15, 1994, it is stated, the Minister of State asked the managing director of HAL to consider Torrent's proposal. Its grievance is that without considering its case, the managing dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns were held and the MoU signed between HAL and MGB. It does not appear that the board of directors of HAL was having any part in the negotiations of in the matter of entering into the MoU with MGB. The MoU was signed by Sri Basu on behalf of the HAL. The alacrity with which MoU was signed on the very day on which the Government directive was issued also shows the deep interest the managing director had in collaboration with MGB. But it is not possible to say beyond this. It is quite likely that Sri Basu was actuated by the best of intentions, that he was of the bona fide belief that entering into a technological agreement with MGB (which really meant technical collaboration with GB of Holland) was a lifetime opportunity for HAL which it should not forgo. It could also be that he was genuinely satisfied that since GB is the world leader and has the best technology, it can deliver the goods far better than any other foreign company. It is also possible that Sri Basu was for collaboration with MGB for all the wrong reasons. We are not able to say one way or the other. The presumption is that being the managing director of HAL. he was acting in its best interests. This presumption is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est possible technology. In such matters, sights have to be set far into the future and a reasonable prognosis arrived at keeping in mind the best interests of the company. Floating of tenders may not have been a proper method to adopt in these circumstances. In any event, among the available technologies, not only has GB the best technology, it was the only source available, the other having being rejected as already stated. Probably it is for this reason that the Government of India gave the directive on June 20, 1994. In the above circumstances and, on the present material, we cannot say that Sri Basu was either actuated by mala fides or that he was acting out of extraneous reasons. The next question; is whether there was no fair consideration of the offers made by the appellants. So far as SPIC is concerned, even when it was putting forward its proposals, it was in the process of setting up a plant of its own for manufacture of penicillin-G. For that reason, it was perceived more as a competitor rather than as a probable partner. Secondly, its technology was as yet unproven at the commercial production level, which meant that there was an element 6f risk involved in adopting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gopal and Sri F.S. Nariman that the terms stipulated by MGB should have been put to the appellants and their response ascertained before finalizing the deal, is beside the point in the circumstances aforestated. We may also point out that one other Indian company, Ranbaxy, (not an appellant before us) offered in the first instance to bring in the technology of Hoescht-one of the seven leaders in the field-but it did not pursue its offer. It did not submit its proposals within the time prescribed. In the circumstances, the only grievance of the appellants is about the lower rental of Rs. 17 crores being accepted in the MoU as against the minimum Rs. 31.68 crores stipulated by the board of directors of HAL. firstly, once the appellant's offers/proposals are found to have been rejected rightly, they cannot be heard to complain of the amount of lease agreed Between HAL and MGB. Secondly, it appears that the Government of India was satisfied with Sri Basu's presentation and agreed with him that the stipulation of Rs. 31.68 crores rental was not feasible in the circumstances and that is why it gave the directive to him to enter into a MoU with MGB "at the earliest" for establishing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gree for a lease amount of less than Rs. 31.68 crores and to report back to the board the lease amount which MGB is prepared to pay, the managing director should have reported back to the board instead of entering into a MoU for a lesser amount. It is submitted that the managing director was bound to and ought to have carried out the instructions of the board. The managing director was trying to over reach the board, of directors by several means, one of which was his letter dated May 3, 1994, it is submitted. In reply to this, it is pointed out by learned counsel for the respondents that Sri Basu did write to MGB on May 10, 1994, as directed by the board but MGB did not agree to the figure stipulated by the board (vide MGB letter dated May 17, 1994) and that both these letters were placed before the board. Be that as it may, once the Government directive was issued, all this controversy lost its relevance. It is then argued that the power to give directives is vested by article 117 in the President alone and that no such directive can be given by the Government of India. It is submitted that the Rules of Business framed by the President of India under article 77 are relevant only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice to SPIC and PBG whose offers were already rejected by the board once and again after re-evaluation directed by the Government. Lastly, it is argued that in the case of Torrent, the Minister of State had asked the HAL to evaluate its proposal on June 15, 1994, and that, without any reference to the said order, the MoU was entered into on June 20, 1994. It is, however, explained by the respondents that the said order of the Minister of State was revised by the Minister for Chemicals and Fertilizers even before the issuance of the directive. Moreover, Torrent having entered the picture very late cannot complain of lack of fuller consideration. It is equally evident that since it was already in the process of setting up its own plant and also because its technology too was that of Biotica of Slovakia, which was already rejected in the case of PBG, no useful purpose would be served even by asking a reconsideration of its proposals. Before parting with this matter, we must say that the MoU entered into with MGB is subject to the final approval of the Government of India, as expressly provided in the directive dated June 20, 1994. We are sure that the Government would examine all t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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