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TMI Blog1985 (12) TMI 372X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 been progressing until recently. But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id 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 assistance to the court. They had put themselve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 the previous general or special permission of the Reserve Bank, no person other than the authorised dealer shall deal in foreign exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the carrying on of which permission of the Reserve Bank has been obtained under section 28 ; or (b) acquire the whole or any part of any undertaking in India of any person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 of offences. Section 61(2)(ii) obliges the court not to take cognizance of any offence punishable under section 56 or 57 except upon a complaint made in writing by (a) the Director of Enforce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (External) Account . Rule 4(4) provides that amounts accruing by way of a dividend or interest on shares, securities or deposits held in India, shall not be credited to Non-Resident (External) Account unless certain conditions are fulfille ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 require prior permission of Reserve Bank. When permission has been granted for transfer or issue of shares to non-resident investor under section 19(1)(b) or section 19(1)(d), it is automatically deemed to be permission under section 29(1)(b) for purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on behalf of their non-resident customers of Indian nationality/origin, subject, inter alia, to the limits and conditions mentioned. Paragraph 5 deals with another significant relaxation in the existing policy and provides the entire gamut of the facilities of direct and portfol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestor, 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 trusts to whom the benefits of the investment scheme formulated by Circular No. 9 were extended are owned to the extent of at least 60 per cent, by non-residents of Indian nationality/origin or in which at least 60 per cent, of the beneficial interest (in the case of trusts) is irrevocably held by such per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shares/convertible debentures made by their designated branches. The daily statements were to be serially numbered and submitted to the Controller positively on the following working day. It was further provided all purchases and sale transactions for which a firm commitment has been made to acquire or transfer equity shares/convertible debentures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 his father; A. Similarly, permission could not be refused to company, C, in which D, a non-resident Indian, owns 20 per cent, of the shares and E, another non-resident Indian, owns 40 per cent, of the shares on the ground that company, L, in which D owns 60 per cent, of the shares has already been granted permission. Would it make any difference if D owns 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose 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 Bank to accord their approval for opening Non-resident External Accounts in the name of each of thirteen companies, three named in the first letter and ten named in the second letter, for the purpose of conducting investment operations in India through the agency of Raja Ram Bhasin and Co., Investment Advisor, Member of the Delhi Stock Share Department, Delhi. These letters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 Paul. The remittance was said to have been made pursuant to the discussion of Mr. Swraj Paul with the chairman of the Punjab National Bank. We have no information as to what those instructions were. We are told that the cable and the letter relating to the remittance were handed over to the judges across the bar when the writ petition was being argued in the High Court. We may further mention here that on January 26, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We may also notice here that the letter dated March 4, 1983, from the Punjab National Bank seeking permission for investment in shares by three of the Caparo Group of companies was actually despatched on 9th and received by the Reserve Bank on March 14, 1983 only, while the letter dated March 12, 1983, seeking permission on behalf of the remaining Caparo Group of companies was received by the Reserve Bank on March 18, 1983. The statements of purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. 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 later letters, asking for clarification as to how, without obtaining the Reserve Bank's permission for purchase of shares on behalf of thirteen overseas companies, the purchase consideration of the shares of Indian companies was paid to Indian sellers out of the Non-Resident (External) Account of the overseas purchasers. Information was once again sought regarding the exact percentage of share holding of (i) Mr. Swraj Paul, (ii) other non-resident individuals of Indian nation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paro 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 appeared to be of the view that the investment facilities under the scheme were intended to be extended to overseas companies, family trusts, etc., owned predominantly by non-residents of Indian nationality/origin at least to the extent of 60% and that it was not the intention to open these investment facilities to overseas companies which were not directly owned by non-residents individuals of Indian nationality/origin but owned by them indirectly via some other trust or company. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anwhile, 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 shares so purchased, 35,560 shares purchased by each of twelve the companies had been lodged by the brokers with Escorts Ltd. in the names of H.C. Bhasin and Mr. Bharat Bhushan for the purpose of transfer of the shares in the books of the company. 35,667 shares purchased for the 13th company were also lodged for the purpose of transfer in the name of Mr. H.C. Bhasin and Mr. Bharat Bhushan. Escorts Ltd. replied on June 1, 1983, and requested the Punjab National Bank to furnish information whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company in the names of H.C. Bhasin and Mr. Bharat Bhushan for the purposes of transfer of shares in the books of the company. We have also referred to the reply of Escorts Ltd. to Punjab National Bank on June 1, 1983. Punjab National Bank immediately wrote to Escorts Ltd. on June 2, 1983, that they had already informed the company that the purchase of shares for the thirteen companies had been handled by the designated brokers M/s. Raja Ram Bhasin Co. and wanted to know the purpose for which Es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her 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 purchases of the shares in question would qualify as ' portfolio investment' as envisaged under the RBI scheme. The board further considered whether it is in the interest of the company and its shareholders to approve of the proposed transfers and whether it is desirable in the aforesaid interests to accept the proposed transferees as shareholders. Upon full discussion of the share scrutiny and transfer committee's report, the board in acceptance thereof adopted the* same. Further, after a full examination of the issues, legal as wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances 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 be returned as they had decided to refuse registration of the transfer of shares. The Punjab National Bank, we may state here, refused to receive the share scrips and suggested to Escorts Ltd. that they should return the scrips to those who had lodged them with the company. 45. More important still is the fact that Escorts Ltd., having already rejected the registration of the transfer of shares, wrote to the Reserve Bank on June 14, 1983, June 20, 1983, and July 23, 1983, purporting to give information regarding various illegalities committed in the matter of purchase of shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance 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 behalf of the thirteen non-resident companies in the two Indian companies, that is, Escorts Ltd. and Delhi Cloth and General Mills Ltd. Though the purchases made on behalf of the thirteen non-resident companies were said to have been purchased before April 28, 1983, only 4,62,337 shares were lodged with the company for registration of transfer, leaving a shortfall of 5,12,663 shares. The non-lodgment of these shares raised a doubt whether those shares had been purchased in accordance with the scheme. It was pointed out that the share transfer deeds lodged with Escorts Ltd. bore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign 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's permission had to be obtained before buying any shares of Indian companies. The contention of the Punjab National Bank that submission of an application was sufficient to enable a non-resident company to purchase shares was not accepted as correct and the bank was told that they had committed a serious irregularity in purchasing shares. The Punjab National Bank was also asked to explain as to how they had allowed the non-resident external account of Caparo Group Ltd. to be debited in contravention of the provisions of paragraph 28B.9 of the Exchange Control Manual. The Pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. to the Punjab National Bank confirming that they had appointed M/s. Raja Ram Bhasin and Co. as. their designated brokers and that the bank was authorised to act upon the instructions of the, aforesaid brokers, entirely at the risk and responsibility of Caparo Group Ltd. On June 24,1983, the Punjab National Bank again wrote to the Reserve Bank in reply to their letter of June 11,1983, wherein they stated that they were under the impression that the clause .........RBI will grant permission to designated banks.............. meant that permission would automatically be granted on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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 India and the concern should be the purpose of investments rather than legal entity of the non-resident investor of Indian origin; (b) it was to be ensured that the benefits of the scheme should not be available to non-resident persons or overseas bodies other than those of Indian nationality/origin; and (c) the investment of funds under the scheme should not lead to take over of existing companies through operations in the stock market. It was in the context of the first two considerations that it was insisted that the overseas companies, etc., should be owned by non-residents of Indian nationality/origin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 that the Government, having regard to the objectives of the scheme for investment by non-residents of Indian nationality/origin had clarified that their original intention was that the facilities of direct and portfolio investments in shares/debentures of Indian companies and deposits with public limited companies should be available to the overseas companies, partnership firms, trusts, societies and other bodies in which the ownership/beneficial interest was indirectly but ultimately held to the extent of at least 60 per cent by non-resident individuals of Indian nationality or origin. It was further stated in the press release ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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) Account to be opened with the banker. Purchases of equity shares with repatriation benefits could be purchased up to one per cent of the total paid-up equity capital of the company, subject to the overall ceiling of 5 per cent. Another condition was that the shares acquired under the permission should be retained by the non-resident investor company for a minimum period of one year from the date of their registration with the Indian company. The permission was to be valid for a period of three years from the date of the letter. 52. In the meanwhile, Escorts Ltd. wrote several frantic letters to the Reserve Bank of India and the Government of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 purchased and, consequently, the brokers had to take delivery from the seller broker and monies had to be paid to them. Otherwise the brokers would be declared as defaulters for non-payment. In the premises, the brokers had to take deliveries and arrange payments. Reserve Bank's permission was not necessary for this purpose. 54. Thereafter, the Punjab National Bank wrote to the Reserve Bank answering the queries raised by them and reiterating that they had acted in accordance with the instructions and guidelines contained in the Reserve Bank's letter dated September 19,1983. All the other points raised by Escorts Ltd. and DCM Ltd. required answers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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 111 of the Companies Act before the Company Law Board and the same is still pending. Respondents Nos. 20 and 21, the stock-brokers, continue to insist upon reconsideration of the decision taken by the board of directors in regard to registration of the shares. D. N. Davar, on behalf of the financial institutions, has put in a written note on January 6, 1984, signed by him demanding the board of directors to reconsider its decision. Further, the petitioner-company has to pay dividend on these shares accruing from time to time to the holders of these shares. The dividend on these shares amounting to Rs. 7,50,000 per annum is obviously payable to those in whose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced 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 issue and have pressed the same before this court. The question whether prior permission is necessary or not is thus not concluded by the rejection of transfer of the shares purchased by respondents Nos. 4 to 16. It would arise from time to time as and when such purchases are made in future. The petitioner company itself would have to consider the same whenever such shares are presented for registration. Even the solicitors of respondent No. 18 in their letter dated February 27, 1984, addressed to the petitioners' solicitors stated: ...the controversy regarding transfer of shares has been raging throughout the length and breadth of the country and various forums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uto 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 to agree with this contention ; firstly, because if under section 29 prior permission was required for a valid purchase, any such statement made in the letter on behalf of the petitioner-company cannot validate such transfer so as to entitle the purchaser to claim registration of shares. Any registration of transfer by the petitioner-company would still be in contravention of section 19 read with section 29 of the FERA; secondly, the letter cannot be interpreted to mean that the stand taken by the company and its board of directors unanimously that the purchase is invalid for not obtaining prior permission was given up. Further, even if exhibit B and exhibit C are construed as a grant of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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 register the transfer of shares, the only ground which it is necessary for us to consider is whether the permission granted by the Reserve Bank was in order. 58. Escorts Ltd. having refused permission to register the transfer of shares, one would have thought that it was thereafter up to the purchasers or the sellers of the shares, if they were so minded to proceed to take further appropriate action in the matter to have the transfer of shares registered. However, it was not they that moved it, but it was the Escorts Ltd. that filed the writ petition out of which the present appeals arise. They explain that the pressure of circumstances was such that they had no option except to go to court under article 226 of the Constitution. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 most upset at the refusal of Escorts Ltd. to register the transfer of shares. Thereafter, in the first week of December, the Unit Trust of India wrote a letter to Escorts Ltd. to induct their Dy. General Manager as a nominee director on the board of directors of Escorts Ltd. On December 13, 1983, there was a meeting between Mr. Nanda and the representatives of financial institutions when once again there was renewed insistence that the transfer of shares Should be registered. On December 20, 1983, Mr. Nanda telephoned and had a discussion with Mr. Punja who, it was said, informed him that the question of clearance of the proposal of Escorts Ltd. for merger, for pre-payment of loans and issue of debentures were interlinked with the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard 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 writ petition that very day. 60. Writ Petition No. 3063 of 1983, thus filed in the High Court of Bombay was perhaps both a protective and a pre-emptive strike. The writ petition is at once remarkable for its length and the number of prayers. The writ petition runs to as many as 172 pages and innumerable documents running into several volumes are now placed before us. There were originally thirteen prayers (a) to (m). To these prayers four more prayers were added subsequently. Prayers (a), (b) and (c ) seek declarations that Circular No. 18, dated September 19, 1983, is illegal and void as contrary to the provisions of the Foreign Exchange Regulation Act, as arbitrary and issued for collateral purposes, as constituting an abuse of statutory authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 objection and concluded: As stated earlier, I think what is sought for in prayer (d ) must be regarded as ordinarily beyond the function of the writ court but this should not be taken to imply that there is no warrant in the various complaints made by Escorts and petitioner No. 2 in connection with this aspect of the matter. Indeed it would be clear that what had been stated by petitioner No. 2 in his letter dated September 19, 1983, was substantial and serious but these allegations have not been gone into either by the Government of India or the Reserve Bank of India. Exhibit B, we may mention, is the Circular dated September 19, 1983, and exhibit C is the permission granted by the Reserve Bank. 61. Subsequent to the filing of the writ petition, the Life ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, dated April 14, 1982 (exhibit 'G') , and such amendment operates only prospectively. A writ of mandamus shall issue restraining respondents Nos. 1 and 2 from issuing any directions (a) to register transfer of shares purchased by the respondent-companies (which form the subject-matter of this writ petition) pursuant to the letter dated September 19, 1983 (exhibit 'C'); and (b) to further forbear from implementing the said Circular dated September 19, 1983 (exhibit 'B'), and the said letter dated September 19, 1983 (exhibit 'C'), with respect to the shares purchased by the respondent- companies which form the subject-matter of this writ petition. There shall be a declaration that the action of respondent No. 18 in issuing the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been unmindful of the need to clearly express its intention by using the expression previous permission whenever it was thought that previous permission was necessary. In sections 27(1) and 30, we find that the expression permission is qualified by the word previous and in sections 8(1), 8(2) and 31, the expression general or special permission is qualified by the word previous , whereas in sections 13(2), 19(1), 19(4), 20, 21(3), 24, 25, 28(1) and 29, the expressions permission and general or special permission remain unqualified. The distinction made by Parliament between permission simpliciter and previous permission in the several provisions of the same Act cannot be ignored or strained to be explained away by us. That is not the way to interpret statutes. The proper way is to give due weight to the use as well as the omission to use the qualifying words in different p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that we do, we find no difficulty in interpreting permission to mean permission , previous or subsequent, and we find no justification whatsoever for limiting the expression permission to previous permission only. In our view, what is necessary is that the permission of the Reserve Bank should be obtained at some stage for the purchase of shares by non-resident companies. 66. An argument which was strenuously pressed before us by Shri F.S. Nariman, learned Senior Advocate for the company, was that the very scheme of the Act shows that the permission contemplated by section 29(1) could only be previous permission, notwithstanding the circumstance that the word previous does not qualify the expression general or special permission in section 29(1) though it does in several other provisions. According to Sri Nariman, the Act was designed not merely to attract but also to regulate the inflow of foreign exchange. That was why, he said, the provisions were very stringent. We have no hesitation in agreeing with Mr. Nariman that while the inflow of foreign exchange is welcomed by the Act, the inflow is also subject to stringent checks as otherwise in no time the economy of the country will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Reserve Bank, were clearly indicative of the imperative nature of the need for previous permission. It was submitted that whatever argument was possible in regard to the acquisition of shares, it was clear that no activity of the nature mentioned in section 29(1)(a) could be commenced without the previous permission of the Reserve Bank. Since the word general or special permission of the Reserve Bank occurring in section 29(1) qualified both clauses (a) and (b), the expression had to be given the same meaning with reference to clause (b) as it had to be given with reference to clause (a) and that was that previous permission was necessary. The argument is attractive and not altogether without substance but it proceeds on the assumption, for which there is no basis, that permission required for carrying on business under section 29(1)(a) must necessarily be previous permission. We do not think that Parliament intended to lay down in absolute terms that the permission contemplated by section 29(1) had necessarily to be previous permission. The principal object of section 29 is to regulate and not altogether to ban the carrying on in India of the activity contemplated by clause (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the consequences that follow the failure to obtain the permission of the Reserve Bank, and the circumstance that even the burden of proof that requisite permission had been obtained, was on the person prosecuted or proceeded against for contravening a provision of the Act or rule or direction or order made under the Act, thus ruling out mensrea as an essential ingredient of an offence. It is true that the consequences of not obtaining the requisite permission where permission is prescribed are serious and even severe. It is also true that the burden of proof is on the person proceeded against and that mensrea may consequently be interpreted as ruled out. But that cannot lead to the inevitable conclusion that the permission contemplated by section 29 is necessarily previous permission. Action under section 50 or under section 56 is not obligatory and in the case of a prosecution under section 56, the delinquent is further protected by the requirement that the complaint has to be made by one or other of the officers specified by section 61(2)(ii) only and even then only after giving an opportunity to the person accused of the offence of showing that he had the necessary permission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presented here. The rule against retrospectivity is a rule of interpretation aimed at preventing interference with vested rights unless expressly provided or necessarily implied. To invoke the rule against retrospectivity in a situation where no vested rights are involved is to give statutory status to a rule of interpretation forgetting the reason for a rule. One of the submissions very strenously urged before us was that the very authority which was primarily entrusted with the task of administering the Foreign Exchange Regulation Act, namely, the Reserve Bank, was, itself, of the view that the permission contemplated by section 29(1)(b) of the Foreign Exchange Regulation Act was prior permission . Our attention was invited to paragraph 24A.1 of the Exchange Control Manual where the first three sentences read as follows: In terms of section 29(1)(b) of 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)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory direction nor is it a mandatory instruction. It reads as if it is in the nature of and, indeed it is, advice given to authorised dealers that they should obtain prior permission of the Reserve Bank so that there may be no later complications. It is a helpful suggestion, rather than a mandate. The expression prior permission used in paragraph 24A.1 is not meant to restrict the range of the expression general and special permission found in sections 29(1)(b ) and 19(1)(b). It is meant to indicate the ordinary procedure which may be followed. Shri Nariman argued that none of the prescribed forms provided for the application and grant of subsequent permission. That may be so for the obvious reason that ordinarily one would expect permission to be sought and given before the act. Surely, the form cannot control the Act, the Rules or the directions. As one learned judge of the Madras High Court was fond of saying it is the dog that wags the tail and not the tail that wags the dog. We may add what this court had occasion to say in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 1 SCR 534. The subservience of substance of a transaction to some rigidly prescribed form req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company shall be movable property, transferable in the manner provided by the articles of the company. Section 84 makes a certificate, under the common seal of the company, specifying any shares held by any member, prima facie evidence of the title of the member to such shares. Section 87 gives every member of a company holding any equity share capital therein a right to vote, in respect of such capital, on every resolution placed before the company, his voting right to be in proportion to his share of the paid-up equity capital of the company. Section 106 makes provision for ' alteration of rights of holders of special classes of shares' under certain circumstances. Section 108(1) prohibits a company from registering a transfer of shares in a company unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee has been delivered to the company along with the certificate relating to the shares. Section 108(1A)(a) provides for the presentation of the instrument of transfer, in the prescribed form, to the prescribed authority for the purpose of having duly stamped on it the date of such presentation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applies to stocks and shares. Section 2(7) of the Sale of Goods Act defines goods as meaning every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. 77. Section 19 prescribes that where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Intention may be ascertained having regard to the terms of the contract, the conduct of the parties and the circumstances of the case. Unless a different intention appears, the rules contained in sections 20 to 24 are to determine the intention as to the time at which the property in the goods is to pass to the buyer. Section 20 deals with specific goods in a deliverable state. Section 21 deals with specific goods to be put in a deliverable state. Section 22 deals with specific goods in a deliverable state when the seller has to do anything thereto in order to ascertain the price. Section 23 deals with sale of unascertained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, do not appear to stipulate that the purchase of shares without obtaining the permission of the Reserve Bank shall be void. On the other hand, legal proceedings arising out of such transactions are contemplated subject to the condition that no sum may be recovered as debt, damages or otherwise, unless and until requisite permission is obtained. We have already held that the permission may be ex post facto. If permission may be granted ex post facto, quite obviously the transaction cannot be a nullity and without any effect whatsoever. 79. In the course of the submissions, we were referred to Manekji Pestonji Bharucha v. Wadilal Sarabhai and Co. [1925] 52 IA 92; AIR 1926 PC 38, Bank of India v. Jamsetji A. H. Chinoy, AIR 1950 PC 90, In re Fry: Chase National Executor and Trustees Corporation Ltd. v. Fry [1946] 2 All. ER 106 (Ch D); [1946] Ch 812, Swiss Bank Corporation v. Lloyds Bank Ltd. [1981] 2WLR893; [1981]2 All. ER 449 ; [1982] AC 584 (HL), Charanajit Lal Chowdhury v. Union of India, AIR 1951 SC 41, R. Mathalone v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp. Cas. 1 (SC) and Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 45 Comp. Cas. 43 (SC), A. R. Ramiah v. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the circumstance that till the name of the transferee was brought on the register of shareholders in order to bring about a fair dealing between the transferor and the transferee, equity clothed the transferor with the status of a constructive trustee and this obliged him to transfer all the benefits of property rights annexed to the sold shares of the cestuique trust. The principle of equity could not be extended to cases where the transferee had not taken active steps to get his name registered as a member on the register of the company with due diligence and in the meantime, certain other privileges or oppprtunities arose for purchase of new shares in consequence of the ownership of the shares already acquired. The benefit obtained by a transferor as a constructive trustee in respect of the share sold by him cannot be retained by him and must go to the beneficiary, but that cannot compel him to make himself liable for the obligations attaching to the new issues of shares and to make an application for the new issue by making the necessary payments, unless specially instructed to do so by the beneficiary. 82. In Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f shares made by a donor does not render the gift imperfect , and the passage in Palmer's Company Law, 21st edition, p. 334: A transfer is incomplete until registered. Pending registration, the transferee has only an equitable right to the shares transferred to him. He does not become the legal owner until his name is entered on the register in respect of these shares. The two statements of law were reconciled by the court and it was stated, the transferee, under a gift of shares, cannot function as a shareholder recognised by company law until his name is formally brought upon the register of a company and he obtains a share certificate as already indicated above. Indeed, there may be restrictions on transfers of shares either by gift or by sale in the articles of association . It was pointed out that, a transfer of ' property ' rights in shares, recognised by the Transfer of Property Act, may be antecedent to the actual vesting of all or the full rights of ownership of shares and exercise of the rights of shareholders in accordance with the provisions of the company law , and that while transfer of property in general was not the subject-matter of the Companies Act, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e treated as having been made in contravention of section 16(2), which, as I have already mentioned, is conceded ; but an act done in contravention of a statute is not necessarily a nullity. Whether it is so or not must depend upon the terms and effect of the statute, and may depend upon the policy of the statute and the nature of the act itself. By section 34 of the 1947 Act, effect is given to the provisions of Schedule 5 to the Act for the purposes of the enforcement of the Act. Paragraph 1(1) of Part II of Schedule 5 provides that any person in or resident in the United Kingdom who contravenes any restriction or requirement imposed by or under the Act shall be guilty of an offence punishable under that part of that Schedule. The subsequent provisions of that part of the Schedule impose maximum penalties by way of imprisonment or fine for such offences. In my judgment offences under the Act are clearly mala prohibita, not mala in se; they are not acts the validity of which the law refuses to countenance for any purpose. As such they are not devoid of any effect; they merely expose the culprits to the penalties prescribed by the Act none of which, so far as I am aware, has been e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a company, an interest which is represented by his shareholding. Share is movable property, with all the attributes of such property. The rights of a shareholder are (i) to elect directors and thus to participate in the management through them ; (ii) to vote on resolutions at meetings of the company ; (iii) to enjoy the profits of the company in the shape of dividends ; (iv) to apply to the court for relief in the case of oppression; (v) to apply to the court for relief in the case of mismanagement ; (vi) to apply to the court for winding up of the company ; (vii) to share in the surplus on winding up. A share is transferable but while a transfer may be effective between transferor and transferee from the date of transfer, the transfer is truly complete and the transferee becomes a shareholder in the true and full sense of the term, with all the rights of a shareholder, only when the transfer is registered in the company's register. A transfer effective between the transferor and the transferee is not effective as against the company and persons without notice of the transfer until the transfer is registered in the company's register. Indeed, until the transfer is regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctured and woven as to make it clear that it is for the Reserve Bank alone to consider whether the requirements of the provisions of the Foreign Exchange Regulation Act and the various rules, directions and orders issued from time to time have been fulfilled and whether permission should be granted or not. The consequences of non-compliance with the provisions of the Act and the rules, orders and directions issued under the Act are mentioned in sections 48, 50, 56 and 63 of the Act. There is no provision of the Act which enables an individual or authority functioning outside the Act to determine for his own or its own purpose whether the Reserve Bank was right or wrong in granting permission under section 29(1) of the Act. As we said earlier, under the scheme of the Act, it is the Reserve Bank that is constituted and entrusted with the task of regulating and conserving foreign exchange. If one may use such an expression, it is the custodian-general of foreign exchange. The task of enforcement is left to the Directorate of Enforcement, but it is the Reserve Bank and the Reserve Bank alone that has to decide whether permission may or may not be granted under section 29(1) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy and anxious to issue press releases for his own ends either because he had an inkling or made a guess of what course of action the Government or the Reserve Bank was likely to pursue or because he, like every interested party, was interested in making statements which may find some receptive ears somewhere. These is nothing whatever to indicate that Shri Swraj Paul had any access to anyone who was in a position to take a decision in the matter or influence a decision in the matter. We do not think we can attach any importance to the vainglorious and grandiloquent press statements and releases made by Shri Swraj Paul. They deserve to be ignored as the overrated statements of a person, who rated himself very high. The most important circumstance on which reliance was placed on behalf of the company in support of the argument relating to mala fides was the 'turn-about' of the attitude of the Reserve Bank in the matter. It was said that in the beginning, the Reserve Bank of India had serious reservations on the question whether indirect purchase of shares by non-residents of Indian nationality/origin was permissible under the original scheme. Later, after the Governor of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible to hold that it was done under pressure. Every question of this nature is bound to have different facets which present themselves in different lights when viewed from different angles. If after full discussion with those in the higher rungs of the Government who are concerned with policy-making, the Reserve Bank changed its former negative attitude to a more positive attitude in the interests of the economy of the country, one fails to see how its decision can be said to be the result of any pressure. 88. It was argued that, from time to time, the company had addressed several communications to the Reserve Bank drawing the latter's attention to several irregularities and illegalities, which it claimed, had been committed by Mr. Swraj Paul and the Caparo Group of companies, but to no avail, as the Reserve Bank failed to respond and make any enquiry into the matter. It was said that the Reserve Bank was guilty of total non-application of the mind and, therefore, mala fides in law could be attributed to it. We are unable to agree with this submission. Merely because the Reserve Bank did not choose to send a reply to the communications received from the company, it did not fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfession to hear from the Punjab National Bank that their ECE House Branch which was monitoring the NRE Accounts and the purchase of shares by the Caparo Group of companies was not aware of the remittance received by the Parliament Street branch. We are now told that this amount of 1,30,000 was also utilised for purchasing shares for the Caparo Group of companies. If that was so, the ECE House Branch should have known about it. Otherwise, one wonders what was the monitoring that was done by the ECE House Branch, if it was not even aware that a large remittance of 1,30,000 received by their Parliament Street branch had been utilised for purchase of shares for the Caparo Group of companies ! If the amount was not utilised for the purchase of shares for the Caparo Group of companies, it must necessarily follow that locally available funds and not foreign remittances must have been utilised for purchasing some of the shares. The fact that this large sum had been remitted by Shri Swraj Paul and received by the Punjab National Bank was never brought to the notice of the Reserve Bank of India which was apparently kept in the dark about it. We consider this a serious matter which requires ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a consolidated statement of the total purchases and sales of equity shares made by the designated branches in the prescribed form. The daily statements were to be submitted to the Controller positively on the succeeding day. We may straightaway say that the Punjab National Bank, apart from receiving the remittances from the Caparo Group Ltd. and passing on the amount to the stock brokers, Raja Ram Bhasin Co., did nothing whatsoever to discharge their prescribed duties as authorised dealers. It is now admitted that they did not give any instructions to Raja Ram Bhasin Co. regarding the purchase of shares, that they never maintained any systematic, up-to-date and proper record of the investments made in shares and that they did not submit daily statements of purchases and sales of shares to the Controller. Of course, in the beginning, they submitted the applications of the Caparo Group of companies to the Reserve Bank for permission to purchase shares in Indian companies. That was on the 4th and the 12th of March, 1983. Thereafter, they wrote to the Reserve Bank on April 23, 1983, reminding the latter about the applications of their customers for permission and informing them about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the brokers had confirmed that no other purchases had been made besides these shares. This letter again discloses how casual they were in the discharge of their duties as authorised dealers. Not only did they not maintain up-to-date and proper record of the purchases made on behalf of each of the companies, not only did they not submit daily statements to the Controller, they were not even aware of the transactions which had taken place but were solely dependent on the information supplied to them once in a way by Raja Ram Bhasin Co. Though the Reserve Bank did make some enquiries from the Punjab National Bank, the Reserve Bank did not pursue the matter as vigorously as they might have done but, apparently, preferred to rely upon the Punjab National Bank probably for the reason that they were authorised dealers under the Foreign Exchange Regulation Act and could be expected to have been doing everything properly and in a manner authorised and contemplated by the Act and the Scheme. It has to be remembered that Escorts Ltd. also had made no complaint regarding the Punjab National Bank. It is only now it has come to light that the Punjab National Bank acted no better than a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adequate or not and we do not have the necessary material to say on the record now before us. The question will involve a probe into individual purchases and the adducing of evidence. That would be beyond the scope of the writ petition in the High Court. It is to be remembered that the High Court refused to issue a rule nisi in regard to prayer (d), obviously as it was thought that the court exercising jurisdiction under article 226 of the Constitution should not explore the evidence to determine the dates of the various transactions of purchase of shares and whether they were purchased with foreign exchange or locally available funds. We consider that it is really a matter for the consideration of the final monitoring authority, namely, the Reserve Bank. We will later indicate what we propose to do about this aspect of the matter. 92. It was submitted that the thirteen Caparo companies were thirteen companies in name only; they were but one and that one was an individual, Mr. Swraj Paul. One had only to pierce the corporate veil to discover Mr. Swraj Paul lurking behind. It was submitted that thirteen applications were made on behalf of the thirteen companies in order to circumven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Company Law (Twenty-third Edition), the present position in England is stated and the occasions when the corporate veil may be lifted have been enumerated and classified into fourteen categories. Similarly, in Gower's Company Law (Fourth Edition), a chapter is devoted to lifting the veil and the various occasions when that may be done are discussed. In Tata Engineering and Locomotive Co. Ltd. [1964] 34 Comp. Cas. 458 (SC), the company wanted the corporate veil to be lifted so as to sustain the maintainability of the petition filed by the company under article 32 of the Constitution by treating it as one filed by the shareholders of the company. The request of the company was turned down on the ground that it was not possible to treat the company as a citizen for the purposes of article 19. In CIT v. Sree Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC), the corporate veil was lifted and evasion of income-tax prevented by paying regard to the economic realities behind the legal facade. In Workmen v. Associated Rubber Industry [1986] 59 Comp. Cas. 134 resort was had to the principle of lifting the veil to prevent devices to avoid welfare legislation. It was emphasised that regard mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to take over the Indian companies. We have already explained the futility of the imposition of the one per cent, ceiling since that would not effectively prevent a group of foreign investors of Indian origin from investing in shares of Indian companies by each of them purchasing one per cent, of the shares. We also pointed out that different foreign companies in which several different groups of resident Indians with one individual common to all together held more than 60 per cent, of the shares could not be denied the facility of investing in shares of Indian companies merely because the foreign companies were dominated by the single common non-resident individual. That would be unfair to the other non-resident Indian shareholders of the foreign companies who would otherwise be entitled to the benefit of investment in Indian companies, via the foreign companies in which they hold shares. Clearly, it was the realisation of the futility of the one per cent, limit that led to the imposition of the five per cent, aggregate limit. The five per cent, aggregate limit would effectively prevent any single foreign investor or a combination of foreign investors from attempting to destab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e withdrawn as it had been filed without consulting the financial institutions and that the matter should be placed before the board for careful consideration of all aspects of the case and that the cheques sent in part payment of certain institutional loans should be recalled as the question was still under consideration. The resolutions proposed by Mr. Davar were rejected. On January 9, 1984, Mr. Nanda wrote to Mr. Punja informing him about the events that took place at the board meeting on January 6, 1984, and pointing out that in the last 20 years, there had not been a single occasion on which the financial institutions had even a single word to say against any decision taken or proposed by the management. Complete confidence was reposed in each other in the past by the management of Escorts Ltd. and the financial institutions. Mr. Nanda explained the position of the management of Escorts Ltd. in regard to pre-payment of loans of financial institutions and the filing of the writ petition. Mr. Nanda pointed out that though the Reserve Bank had granted permission to the Caparo Group of companies to purchase shares, it had not condoned any of the illegalities that had already been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve Bank. The financial institutions must have been struck by the duplicity of Mr. Nanda, who was holding discussions with them, while he was simultaneously launching the company, of which they were the majority shareholders, into a possibly trouble-some litigation without even informing them. The financial institutions were instrumentalities of the State and so was the Reserve Bank and it must have been thought unwise to launch such a litigation. The institutions were, therefore, anxious to withdraw the writ petition and discuss the matter further. As the management was not agreeable to this course, the Life Insurance Corporation thought that it had no option but to seek removal of the nonexecutive directors so as to enable the new board to consider the question whether to reverse the decision to pursue the litigation. Evidently, the financial institutions wanted to avoid a confrontation with the Government and the Reserve Bank and adopt a more conciliatory approach. At the same time, the resolution of the Life Insurance Corporation did not seek removal of the executive directors, obviously because they did not intend to disturb the management of the company. It is, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act itself make9 it clear that in many ways the position of the directorate vis-a-vis the company is more powerful than that of the Government vis-a-vis Parliament. The strict theory of parliamentary sovereignty would not apply by analogy to a company since under the Companies Act, there are many powers exercisable by the directors with which the members in general meeting cannot interfere. The most they can do is to dismiss the directorate and appoint others in their place, or alter the articles so as to restrict the powers of the directors for the future. Gower himself recognises that the analogy of the Legislature and the executive in relation to the members in general meeting and the directors of a company is an oversimplification and states to some extent a more exact analogy would be the division of powers between the Federal and the State Legislature under a Federal Constitution . As already noticed, the only effective way the members in general meeting can exercise their control over the directorate in a democratic manner is to alter the articles so as to restrict the powers of the directors for the future or to dismiss the directorate and appoint others in their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meeting is the only way in which they can interfere, if the majority of them think that the course taken by the directors, in a matter which is intra vires of the directors, is not for the benefit of the company. 100. In Inderwick v. Snell (42 English Reports 83, 85), the deed of settlement of a company provided for the removal of any director for negligence, misconduct in office or any other reasonable cause . Some directors were removed and others were appointed. The directors who were removed sued for an injunction to prevent the new directors from acting on the ground that there was no reasonable cause for their removal. The court negatived the claim for judicial review of the reasons for removal and made the following interesting observations : The argument for the plaintiffs rested on the allegation that the general cause of removal referred to in the clause being expressed to be reasonable prevents the power referred to from being a power to remove at pleasure arbitrarily or capriciously, and made it requisite that the proceeding for exercising the power should be in its nature judicial, and that the reasonable cause should be such as a court of justice would consider good a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of error or injustice thereby occasioned can rarely, if ever, be appreciated. This court might inquire whether the meeting was regularly held, and in cases of fraud clearly proved, might perhaps interfere with the acts done; but supposing the meeting to be regularly convened and held, the shareholders assembled at such meeting may exercise the powers given to them by the deed. The effect of speeches and representations cannot be estimated, and for those who think themselves aggrieved by such representations, or think the conclusion unreasonable, it would seem that the only remedy is present defence by stating the truth and demanding time for investigation and proof, or the calling of another meeting, at which the whole matter may be reconsidered. The plaintiffs, objecting to this meeting and considering it illegal, protested against it, but abstained from attending, and, therefore, made no answer or defence to, and required no proof of, the charges made against them. The adoption of this course was unfortunate, but does not afford any grounds for the interference of this court. 101. Again in Bemtley-Stevens v. Jones [1974] 1 WLR 638 ; [1974] 2 All ER 653 (HL), it was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirements, to call an extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. It is true that under section 173(2) of the Companies Act, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business to be transacted at the meeting including, in particular, the nature of the concern or the interest, if any, therein, of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any. This is a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meeting. The Life Insurance Corporation of India, as a shareholder of Escorts Ltd., has th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment of the English law. While we do not for a moment doubt that every action of the State or an instrumentality of the State must be informed by reason and that, in appropriate cases, actions uninformed by reason may be questioned as arbitrary in proceedings under article 226 or article 32 of the Constitution, we do not construe article 14 as a charter for judicial review of State actions and to call upon the State to account for its actions in its manifold activities by stating reasons for such actions. 104. For example, if the action of the State is political or sovereign in character, the court will keep away from it. The court will not debate academic matters or concern itself with the intricacies of trade and commerce. If the action of the State is related to contractual obligations or obligations arising out of tort, the court may not ordinarily examine it unless the action has some public law character attached to it. Broadly speaking, the court will examine actions of State if they pertain to the public law domain and refrain from examining them if they pertain to the private law field. The difficulty will lie in demarcating the frontier between the public law domain a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proposal for the issue of equity-linked-debentures was conceived to meet the cost of the new project. According to the Life Insurance Corporation, the issue was solely motivated by an anxiety to reduce the percentage of the holdings of the Life Insurance Corporation and other financial institutions in the equity capital of the company. The barest scrutiny of the proposal, as it finally emerged from Escorts Ltd., is sufficient to expose the game of Escorts Ltd. The proposal, as it finally emerged from Escorts Ltd., was to issue 17,50,000 secured redeemable debentures of Rs. 100 each and equity shares of the value of Rs. 17.50 crores divided into 87,50,000 equity shares of Rs. 10 each for cash at a premium of Rs. 10 per share. It was proposed that 20 per cent, of the new issue would be offered on preferential basis to existing resident equity shareholders of Escorts Ltd. and Goetze Ltd. (in accordance with the amalgamation proposal) subject to maximum allotment of 100 debentures and 500 equity shares to any single shareholder. The promoters, directors and their friends and relatives, business associates and employees were to be offered 15 per cent, of the new issue on a preferentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the company, subject to the approval of financial institutions. At that stage, no details of the proposals were placed before the board and even then there was the reservation that it was subject to the approval of the financial institutions. We think that it was too much for Mr. Nanda and his associates to expect the financial institutions or for that matter any other shareholder having large holdings in the company to agree to the proposal as it finally emerged. We reach the limit when we hear the complaint of Mr. Nanda and his associates that the refusal of the financial institutions to accept their proposal was fide. It is a clear case of an attempt on the part of Mr. Nanda and his associates to overreach themselves. We do not think it is necessary for us to go into any further details in regard to the equity-linked-debenture issue. 108. The proposal to merge Goetze with Escorts Ltd. was also agreed to in principle in the first instance. However, the share exchange ratio had apparently not been agreed to by the financial institutions even at that time. This is evident from the letter dated December 30, 1983, of Mr. Nanda to Mr. Nadharna of ICICI in which he stated: The pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny to pay interest at a higher rate than that payable to Indian financial institutions. Obviously, the object of pre-payment was to get rid of the directors whom the financial institutions had a right to nominate. True, Escorts offered to appoint Mr. Davar as a director even if the financial institutions had no right to nominate him. But it is one thing to have the right to nominate a director and quite another thing to be a director on sufferance. 110. We do not think that it is necessary to discuss these proposals at greater length than we have done. The correspondence which passed between the parties and which has been read to us shows that Mr. Nanda was certainly trying to hustle the financial institutions into accepting the proposals. 111. We have discussed the submissions made to us in broad perspective. We have not referred to the myriad minutiae which were presented to us, as we consider it unnecessary to do so and we do not wish to further lengthen an already long judgment. This does not mean that we have not taken into account all the little submissions and trifling details which were brought to our notice. 112. We may now state our conclusions as follows: (1) The permiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve Bank of India to make a full and detailed enquiry into the purchase of shares of Escorts Ltd. by the Caparo Group of companies and consider afresh the question whether permission ought or ought not to have been granted. If the Reserve Bank of India is satisfied that permission ought not to have been granted, it may cancel the permission already granted and take such further action as may be necessary under the FERA if it considers that there has been any infraction of the FERA or the scheme; if the Reserve Bank of India is of the view that the permission may be granted subject to restrictions, it may impose such restrictions and conditions as it may think fit, in addition to the condition that either the capital or the profits or both cannot be repatriated. We further direct respondents Nos. 3 to 17, 20 and 21 (in the writ petition), that is the Punjab National Bank, the thirteen Caparo Group of companies, Mr. Swraj Paul, M/s. Raja Ram Bhasin and Co. and M/s. Bharat Bhusan and Co., to make available to the Reserve Bank of India each and every document in their possession pertaining to the remittances made for the purchase of shares on behalf of thirteen Caparo Group of comp ..... 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