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PETITIONER: LIFE INSURANCE CORPORATION OF INDIA

       Vs.

RESPONDENT: ESCORTS LTD. & ORS.

DATE OF JUDGMENT19/12/1985

BENCH: REDDY, O. CHINNAPPA (J) BENCH: REDDY, O. CHINNAPPA (J) VENKATARAMIAH, E.S. (J) ERADI, V. BALAKRISHNA (J) MISRA, R.B. (J) KHALID, V. (J)

CITATION:  1986 AIR 1370            1985 SCR  Supl. (3) 909  1986 SCC  (1) 264        1985 SCALE  (2)1289  CITATOR INFO :  R          1988 SC1737  (66)  E&F        1989 SC1642  (22,26,41)  D          1989 SC1713  (10)  RF         1990 SC 737  (27)  RF         1991 SC1191  (13)  R          1991 SC1420  (25,73)  RF         1992 SC   1  (45)

ACT:      A.  Foreign  Exchange  Regulation  Act,  1973,  section 29(1)(b) -  Whether the  Reserve Bank of India had the power or  authority  to  give  "ex-post  facto"  permission  under section 29(1)(b)  of the  Act for  the purchase of shares in India by a company not incorporated in India or whether such permission had necessarily to be previous permission - Words and Phrases "Permission" meaning of.      B. Corporate democracy, concept of, explained.      C. Company  Law -  Shares -  Nature of  the property in shares -  Law relating  to transfer  of property  in  shares under the  law and  the effect  of  the  provisions  of  the Foreign Exchange  Regulation Act  explained - Companies Act, 1956, sections 2(46), 82, 84, 87, 106, 108(1), 108 (1-A) (a) and (b),  108 to 108 H, 110, 111(1) & 3, 206, 207, 397, 398, 428, 439  and 475  read with  section 27  of the  Securities Contracts (Regulation)  Act, Sale  of Goods  Act, Sections 2 (7), 19, 20 to 24 and Transfer of Property Act, section 6.      D. Companies Act, 1956, sections 291-293 - Position and nature  of  discretionary  powers  of  the  Directors  in  a company.      E. Shares  of a  company,  transfer  of  -  Refusal  to transfer the  shares, extent  of -  Whether the  refusal  to transfer the shares by the company even after the permission was granted  by the  Reserve Bank  under the  FERA, proper - Companies Act, 1956 section 111(1) & (3).      F. Shares,  Purchase of  by  the  foreign  investor  of Indian nationality/origin  - On  the facts  of the  instance case, whether involved any contravention of Foreign Exchange Regulation of the Non-Residents’ Investment Scheme.      G. Doctrine of lifting the corporate veil - Investments by company  owned by  non-residents of Indian nationality in accordance with  the Foreign  Exchange Regulations, the Non-

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Residents 910 External  Account  Rules,  1970,  the  Portfolio  Investment Scheme, the  Exchange Control Manual, Stock Exchange Control (Regulation) Act,  1956 and  its bylaws  - Whether the Court could pierce the veil of the transactions.      H. Shareholders’  right to  call extraordinary  general meeting on  requisition either  to  alter  the  Articles  of Association of  removal/change of  directors - State and its instrumentalities being shareholders have the same rights of an ordinary  share-holder -  Companies Act,  1956,  sections 169, 172, 173(3), 284, - L.I.C. Act, Section 6.      I. Constitution  of India,  1950, Articles  14, 19, 32, 226 read  with order  XXXIX Rule  1 - Whether the Courts can interfere with  the shareholder’s  right to  call a  general body meeting  and grant  injunctions -  Judicial Review  and Article 14 explained.      J. Construct  of statutes enacted in national interest, explained.      K.  English   cases,  reference  to  as  external  aids permissibility - Forms, whether can control the Act.      L. Exchange Control Manual - Paras 24, 24 A-1 and 28 A- 1 Titled  "Introduction to  Foreign Investment  in  India  - Nature of - Whether statutory direction.      M.  Foreign   Exchange  Regulation,  1973  -  Grant  of permission by  the Reserve  Bank of  India under  the N.R.P. scheme -  Whether can  be questioned  by the  company  whose shares are  purchased by  N.R.I. in a petition under Article 226 of the Constitution.      N. Rule against retrospectivity, applicability of.      O.  Portfolio   Investment  Scheme   by  companies  and overseas   bodies   owned   by   non-residents   of   Indian nationality/origin in  accordance with circulars issued from time to  time by  the Reserve  Bank of  India under  section 73(3) of  FERA and clarifications thereof contained in Press Release dated  17.9.83 and the circular dated 19.9.83 (both) issued by  the Reserve  Bank of  India and  the letter dated 19.9.83 issued by the Government of India, whether valid.      P. Mala  fides, whether the Union of India, the Reserve Bank of India and the Life Insurance Corporation of India be said to 911 have acted  malafides, in  the matter of requisiting general meeting and  in the investment by purchase of shares made by the Caparo companies, respectively.

HEADNOTE:      Indian economy  which has to operate under the existing world economic system needs lots of foreign exchange to meet its developmental  activities. For  the purpose  of earning, conserving and  building up  a reservoir,  thereof,  and  to improve its  proper utilisation Parliament and the executive government including  the Reserve  Bank of  India have  been taking several  steps from  time to  time under  the Foreign Exchange Regulation  Act, 1973  and other  allied  Acts  and Rules made  thereunder. In  exercise of the powers conferred by section  79 of  the Foreign  Exchange Regulation Act, the Central  Government   made  Rules  called  the  Non-Resident External Account  Rules, 1970.  With a  view to earn foreign exchange by  attracting non-resident  individuals of  Indian nationality  or   origin  to  invest  in  shares  of  Indian companies,  the  Government  of  India  decided  to  provide incentives to  such individuals  and formulated a "Portfolio

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Investment  Scheme".   This  scheme  was  announced  by  the Government on  27.2.1982 was  incorporated in  Circular No.9 dated 14.4.1982  of the  Reserve Bank  of India issued under section  73(3)  of  the  Foreign  Exchange  Regulation  Act. Paragraph 4(a)  thereof 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  subject to provisos therein. This was followed by further circulars No. 10 dated 22.4.1982, No.15  dated  25.8.1982,  No.27  dated  10.12.82, No.12 dated 16.5.1983 and No.18 dt. 19.9.83.      The net  result of  all the  circulars  was  that  non- resident individuals of Indian nationality/origin as well as overseas companies, partnership firms, societies, trusts and other corporate  bodies which  were owned by or in which the beneficial interest  vested in  non-resident individuals  of Indian nationality/origin  to the extent of not less than 60 per cent  were entitled  to invest, on a repatriation basis, in the  shares of  Indian companies to the extent of one per cent of  the paid  up equity  capital of such Indian company provided that the aggregate of such portfolio investment did not exceed  the ceiling  of 5  per cent.  It was  immaterial whether the investment was made directly or indirectly. What was essential  was that  60 per cent of the ownership or the beneficial interest  should be  in the hands of non-resident individuals of Indian nationality/origin. Though a 912 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.      Desiring  to   take  advantage   of  the   Non-Resident Portfolio Investment  Scheme and  to invest in the shares of Escorts  Ltd.,   (an  Indian   company),  thirteen  overseas companies, twelve out of whose shares was owned 100% 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 broker  for the  purpose of  such  investment. Their designated  bankers M/s  Punjab National  Bank  E.C.E. Branch informed  the Reserve  Bank of  India  through  their letter dated  4.3.1983 that  according to  OAC &  RPC  forms received the  Caparo group of companies were incorporated in England and  that 61.6  per cent  of the  shares thereof are held by  the Swaraj  Paul Family Trust, one hundred per cent of whose  beneficiaries are  one Swaraj Paul and the members of his family, all non-resident individuals of Indian origin and requested  the Reserve Bank to accord their approval for opening Non-Resident  External Accounts  in the name of each of  thirteen   companies  for  the  purpose  of  "conducting investment operations  in India"  through the agency of Raja Ram Bhasin  and Co.  Stock Investment  Adviser and member of the Delhi  Stock &  Share Department Delhi. It was mentioned in the  letters  to  the  Reserve  Bank  that  the  proposed accounts would  be "effected"  by  remittances  from  abroad through normal banking channels and credits and debits would be allowed  only in  terms of  the scheme  contained in  the scheme for  investment by non-residents. Though a remittance of $1,30,000  equivalent to  Rs.19,63,000 made by Mr. Swaraj Paul to  the Punjab  National Bank, Parliament Street Branch on 28.1.1983 for the purpose of opening on N.R.E. account in the name  of Swaraj  Paul, his  bankers advised  the Reserve

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Bank that  only four  remittances  had  been  received  from Caparo Group  Ltd. the  holding company  on 9.3.83, 12.4.83, 13.4.83   and    23.3.83,   of    amounts   equivalent    to Rs.1,35,36,000,     Rs.2,36,59,000,     Rs.76,35,000     and Rs.1,31,38,681.13p.      Payments under  the Stock  Exchange Rules  may be  made within two  weeks after  the purchases  contracted for. M/s. Raja Ram  Bhasin &  Co. had,  therefore, purchased shares of Escorts Ltd.  worth Rs. 33,40,865 from Mangla & Co. prior to 9.3.83, the  date of  the first  remittance as  disclosed by Punjab National  Bank. However,  the statements of purchases of shares  made by  the  said  brokers  show  that  even  by 14.3.83, shares of Escorts Ltd. worth 913 Rs.3,85,920 had been purchased from Bharat Bhushan & Co. and shares worth  Rs.45,81,677 had  been purchased from Mangla & Co. The  brokers had advised the designated bank that out of 75000 shares  of Escorts Ltd. purchased upto 28.4.83, 35,560 shares purchased  by each  of the twelve companies and 35667 shares purchased  by the  thirteenth company  were lodged by them with  Escorts Co.  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. Under byelaw 242 of the Stock Exchange Regulations  which permit  the brokers to lodge the shares in  their own  names instead  of their principals, if they are  unable to  complete  the  formalities  before  the closing of  the books.  In the meanwhile, on 31.5.83, Punjab National Bank  wrote to Escorts Ltd. informing them that the thirteen 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- residents of  Indian nationality/origin  to an  extent of at least 60%  and that  the  thirteen  overseas  companies  had designated them  as their  banker and  M/s Raja Ram Bhasin & Co. as their brokers for the purpose of investment.      Escorts Ltd.,  sought detailed  information from Punjab National Bank  and the  brokers about the names of investors and also  whether the  Reserve Bank  of India  had  accorded permission to  them. As there was no response from either of them, Escorts  Ltd. constituted a committee to look into the question of  transfer of shares in their books and according to its  recommendations the  Board  of  Directors  passed  a resolution refusing to register the transfer of shares.      Escorts Ltd.,  although they  had  already  refused  to register  the  transfer  of  shares,  wrote  to  the  Punjab National Bank  for information  on several  points  as  they desired to  make a  representations to  the Reserve  Bank of India, intervene  and assist  in the inquiry being conducted by the  Reserve Bank  at the  behest of  the  Government  of India. They  also wrote  several letters to the Reserve Bank purporting   to    give   information    regarding   various irregularities committed  in the purchase of shares of their company by  the thirteen  foreign companies, suppressing the fact that  they have  refused to  register the  transfer  of shares in their favour.      In  accordance  with  the  clarificatory  letter  dated 17.9.83 from  the Government  of India, its Press Release of the same  date and  its circular  No. 18  dated 19.9.83, the Reserve Bank,  by a  telex message  conveyed to  the  Punjab National Bank their 914 permission to  release the  money remitted  by Caparo  Group Ltd. from  abroad for  making payment  against the shares of DCM and  Escorts Ltd.  Subsequent to the grant of permission by the  Reserve Bank  of India,  another attempt was made to

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have the  transfer of  shares registered.  The  request  was turned down  once again  by Escorts Ltd. who by their letter dated 13.10.83  stated  that  apart  from  the  question  of obtaining the  permission of  the Reserve Bank of India, the decision of  the Board  to refuse to register the shares was based  on   other  grounds  which  contained  to  be  valid. Respondent No.19,  therefore, preferred  an  appeal  to  the Central Government  under section  111(3) of  the  Companies Act.      Escorts Ltd. alleging undue pressure from the financial institutions like  ICICI, IFC,  LIC, IDBI  and UTI  for  the registration of  the transfer  of shares  and explaining the circumstances and instances commencing from the meeting held on 18.10.83  onwards  upto  29.12.83,  filed  Writ  Petition No.3068/83 on 29.12.83 under Article 226 of the Constitution challenging the validity of Circular No.18 dated 19.9.83 and the  Press  Release  of  the  same  date  as  arbitrary  and violative of  not only Articles 14, 19(1)(c) and 19(1)(g) of the  Constitution,   but  also  the  provisions  of  Foreign Exchange Regulations,  the provisions of Securities Contract Regulation Act etc.      Subsequent to  the filing of the Writ Petition the Life Insurance  Corporation   of  India   who  along  with  other financial institutions  held as  many as  52% of  the  total number of  shares in the company, issued a requisition dated 11.2.84 to  the company  to hold  an extra  ordinary general meeting for  the purpose  of removing  nine of the part-time Directors of  the company  and for nominating nine others in their place.  Alleging that the action of the Life Insurance Corporation of  India was  malafide and  part of a concerted action by  the Union of India, the Reserve Bank of India and the Caparo  Group Ltd. to coerce the company to register the transfer of  shares and  to withdraw  the Writ Petition, the Writ Petitioners  sought to suitably amend the Writ Petition and to  add prayers (ia), (ib), (ic) and (id) to declare the requisition to  hold the  meeting arbitrary,  illegal, ultra vires etc. The writ petition was amended. Paragraphs 149A(1) to (44)  were added  as also  prayers (ia),  (ib), (ic)  and (id).      The High  Court of Bombay allowed the writ petition and granted reliefs in the following manner:-      "Section 29(1)(b) of FERA is mandatory. No Non-Resident Indian Investor is authorised to purchase share in an Indian 915 Company without the prior permission of R.B.I. under section 29(1)(b) of  FERA; any purchase of shares without such prior permission is  illegal: Neither  the Union  of India  or the R.B.I. is  empowered to  order otherwise either by issuing a direction under  section 75  or under  section 73(3)  of the FERA; nor  are they  empowered to grant permission after the shares are purchased without obtaining prior permission. The Press Release  dt. 17.9.83 (Ex.A.), the circular dt. 19.9.83 (Ex.B) and  the letter  dt. 19.9.83  (Ex.C)  cannot  operate retrospectively so  as to  validate the  purchase of  shares made by  N.R.I. companies  which were ineligible on the date of purchase;  nor can  they  authorise  purchase  of  shares without obtaining  prior  permission  of  the  R.B.I.  under section 29(1)(b)  of the  FERA. In  so far  as the  impugned Press Release circular and letter permitting the respondent- companies to  hold the  shares purchased  without  obtaining prior permission  of the  R.B.I., they  are ultra  vires  of section 29(1)(b)  of FERA and the powers vested in the Union of India under section 75 and the R.B.I. under section 73(3) of the  FERA. To  that extent  they are void and inoperative both prospectively  and retrospectively.  The impugned Press

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Release and  the circular,  however, amount  to amending the Portfolio investment  Scheme with full repatriation benefits introduced under  Circular No. 9 dated 14th April, 1982, and such amendments  operates only  prospectively. The action of respondent No.18  in issuing the impugned requisition notice is  contrary  to  the  provisions  of  section  284  of  the Companies Act  and ultra  vires the  powers  vested  in  the L.I.C. under section 6 of the L.I.C. Act and contrary to the intendment of the provisions of the L.I.C. Act. The impugned requisition  notice   offends  the   principles  of  natural justice. The  action of  the L.I.C.  in issuing the impugned requisition notice  is an  arbitrary and  mala  fide  action taken for  collateral purpose; it is violative of Article 14 of the  Constitution of  India. The  Union of  India and the R.B.I., respondents  Nos. 1 and 2, are in no way responsible for the  action of the L.I.C. in this regard. The allegation of mala  fides made  against  them  and  the  Union  Finance Minister are unsubstantiated. The requisition notice and the resolutions passed  at the  meeting held in pursuance of the said notice are quashed". Aggrieved by the said judgment and decree the  Life Insurance  Corporation of India has come in appeal, and  cross-appeals have  been filed  by Escorts Ltd. and Mr. Nanda, the Managing Director of Escorts.      Allowing  CA   4598/84  filed  by  the  Life  Insurance Corporation of India, Union of India and the Reserve Bank of India and  dismissing the  cross appeals No.497-499/85 filed by Escorts Ltd. and Nanda, the Court 916 ^      HELD : 1.1 The action of the Life Insurance Corporation of India  in issuing the requisition notice dated 11.2.84 to hold an  extra  ordinary  general  meeting  of  the  Escorts Company Ltd.  for the  purpose of  removing nine of the part time Directors of the company and for nominating nine others in their  place is  neither contrary  to the  provisions  of section 284  of the  Companies Act, 1956 nor ultra vires the powers  vested  in  the  Life  Insurance  Corporation  under section 6  of the  Life Insurance  Corporation of India Act. The notice does not offend the principle of natural justice. The said action of the L.I.C. cannot be said to be arbitrary and malafide  and taken  for collateral purpose or violative of Article 14 of the Constitution of India. [1022 F]      1.2 A company is, in some respects, an institution like a  State   functioning  under   its   "basic   constitution" consisting of  the  Companies  Act  and  the  Memorandum  of Association.  "The  members  in  general  meeting"  and  the directorate  are   the  two  primary  organs  of  a  company comparable with  the legislative and the executive organs of a  Parliamentary  democracy  where  legislative  sovereignty rests with  Parliament, while  administration is left to the Executive government,  subject to  a measure  of control  by Parliament  through   its  power   to  force   a  change  of Government. Like  the  Government,  the  Directors  will  be answerable to  the Parliament  constituted  by  the  general meeting. But  in practice  (again like the government), they will exercise  as much  control over  the parliament as that exercises over  them. Although  it would be constitutionally possible for  the company in general meeting to exercise all the  powers   of  the  company,  it  clearly  would  not  be practicable (except in the case of one or two-man companies) for day  to day  administration to  be undertaken  by such a cumbersome piece  of machinery. So the modern practice is to confer on  the Directors  the  right  to  exercise  all  the company’s powers  except such  as the  general law expressly provides must  be exercised  in general  meeting. Of course,

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powers which  are strictly  legislative are  not affected by the conferment  of powers  on the Directors as section 31 of the Companies  Act provides that an alteration of an article would require a special resolution of the company in general meeting. Under the Company Act, in many ways the position of the Directorate  vis-a-vis the company is more powerful than that the  Government vis-a-vis  the 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. The only effective way the members in general 917 meeting can exercise their control over the Directorate in a democratic manner is to alter the Articles of Association so as to restrict the powers of the Directors for the future or to dismiss  the Directorate  and  appoint  others  in  their place. The  holders of  the  majority  of  the  stock  of  a Corporation  have   the  power   to  appoint,  by  election, Directors of  their choice and the power to regulate them by a resolution  for their  removal. This  is  the  essence  of corporate democracy. [1010 G-H; 1011 A-H]      In the  instant case,  the financial institutions which held 52%  of the  shares of  Escorts company  had a very big stake in  its working and future and were aggrieved that the management did  not even  choose to  consult them  or inform them that  a Writ  Petition was  proposed to  be filed which would launch  and  involve  the  company  in  difficult  and expensive litigation  against the Government and the Reserve Bank of India. The institutions were 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 a  removal of  the non-Executive  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 Therefore, the Life Insurance Corporation  of India cannot be said to have acted mala fide  in  seeking  to  remove  the  nine  non-Executive Directors and  to replace  them by  representatives  of  the financial institutions.  No aspersion  was cast  against the Directors proposed  to be  removed. It  was the  only way by which the  policy which  had been  adopted by  the Board  in launching  into  a  litigation  could  be  reconsidered  and reversed, if  necessary. It was a wholly democratic process. A minority  of shareholders in the saddle of power could not be allowed to pursue a policy of venturing into a litigation to which the majority of the shareholders were opposed. That is not how corporate democracy may function. [1010 A-G]      1.3 Every  shareholder of  a  company  has  the  right, subject to  statutorily prescribed  procedural and numerical requirements to  call an  extra ordinary  general meeting in accordance with  the provisions  of the Companies Act, 1956. He cannot be restrained from calling a meeting and he is not bound to disclose the 918 reasons for  the resolution  proposed to  be  moved  at  the

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meeting. Nor  are the reasons for the resolutions subject to judicial review. [1016 B-C]      1.4 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 treasures, if any, and  the manager  if any.  That 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 calling a meeting to disclose  the reasons  for  the  resolutions  which  they propose  to   move  at   the  meeting.  The  Life  Insurance Corporation of  India,  though  an  instrumentality  of  the State, as  a shareholder  of Escorts Ltd. has the same right as  every  shareholder  to  call  an  extraordinary  general meeting  of   the  company  for  the  purpose  of  moving  a resolution to  remove some  Directors and  appoint others in their place.  The Life Insurance Corporation of India cannot be restrained  from doing  so nor  is bound  to disclose its reasons for moving the resolutions. [1016 C-F]      1.5 When a requisition is made by a shareholder calling for a general meeting of the company under the provisions of the companies  Act validly  to remove a director and appoint another, an  injunction cannot  be granted  by the  Court to restrain the holding of a general meeting. [1011 G-H]      Shaw &  Sons (Salford)  Ltd. v.  Shaw [1935]  2 KB 113; Isle of  wight Railway  Company v.  Tabourdin (1883)  25 Ch. D.320; Inderwick v. Snell 42 Eng. Rep.83; Bentley-Stevens v. Jones [1974] 2 All E.R.653; Ebrabimi v. Westbourne Galleries Ltd. [1972] 2 All E.R. 492 referred to.      1.6 Every  action of the State or an instrumentality of the State  must be informed by reason. In appropriate cases, actions uninformed  by reason may be questioned as arbitrary in proceedings  under Article  226  or  Article  32  of  the Constitution. But  Article  14  cannot  be  construed  as  a charter for  judicial review  of state  action, to call upon the State  to  account  for  its  actions  in  its  manifold activities by  stating reasons  for  such  actions.  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 919 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  attracted  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. [1017 C-D; E- G]      When the  State or  an  instrumentality  of  the  State ventures into  the corporate world and purchases shares of a company  it  assumes  to  itself  the  ordinary  role  of  a shareholder and  dons the  robes of  a shareholder, with all the rights  available to  such a shareholder. Therefore, the State as  a shareholder  should not be expected to state its reasons  when  it  seeks  to  change  the  management  by  a resolution of the company, like any other shareholder. [1017 G-H; 1018 A-B]      O’Reilly v.  Mackman [1982]  3 All  E.R. 1124;  Devy v. Spelthonne [1983]  3 All  E.R. 278;  I Congress  Del Partido [1981]  2  All  E.R.  1064;  R.  v.  East  Berkshire  Health

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Authority [1984]  3 All E.R. 425; and Radha Krishna Aggarwal JUDGMENT:      2. It  cannot be  said that  the attitude  taken by the Life Insurance  Corporation of  India in  regard to  (i) the issue of  Equity linked  Debentures; (ii) Repayment of loans to Indian  Financial Institutions; and (iii) the proposal of the merger  of Goetze  with Escorts  were mala  fide and  an attempt on  its part  to exert  pressure on  Escorts Ltd. to register the shares of Caparo Group. The result of accepting the proposal for the issue of Equity linked Debentures would be that  the L.I.C.’s  holdings would be reduced from 30 per cent to  18.14 per  cent,  while  the  holding  of  all  the financial institutions  would be  reduced from 52% to 31.21% besides involving  great financial  loss  to  them.  Similar would be  the position  if the  proposals for  the merger of Goetze with Escorts was accepted. None holding a majority of the equity  capital of  a company  would allow himself to be hustled into  becoming a minority shareholder. The object of prepayment of  loans was to get rid of the directors who 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 at sufferance. [1018 D- E; 1019 A-B; 1021 C-D]      3.1  On  an  overall  view  of  the  several  statutory provisions and  judicial precedents,  it  is  clear  that  a shareholder has an 920 undoubted interest  in  a  company,  an  interest  which  is represented by  his share holding. Share is movable property with all  the attributes  of such  property. The rights of a share  holder  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;  and (vii)  to share  in the surplus on winding up. [995 G-H; 996 A]      3.2 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  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 registered in the  books of the company, the person whose name is found in the  register alone is entitled to receive the dividends, notwithstanding that he has already parted with his interest in the  shares. However,  on the  transfer  of  shares,  the transferee becomes  the owner  of  the  beneficial  interest though the  legal title  continues with  the transferor. The relationship of  trustee and ceatui que trust is established and the  transferor is  bound to  comply with all reasonable directions that  the transferee  may give. He also becomes a trustee of  the dividends as also of the rights to vote. The right of  the transferee  "to get  on the  register" must be exercised with  due diligence  and the  principle of  equity which makes  the transferor  a constructive trustee does not extend to a case where a transferee takes no active interest

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"to get on the register". [996 A-D]      3.3 Where the transfer is regulated by a statute, as in the case of transfer to a non-resident which is regulated by the Foreign Exchange Regulation Act, the permission, if any, prescribed by  the statute  must be obtained. In the absence of  the   permission,  the  transfer  will  not  clothe  the transferee with  the "right  to get  on the register" unless and until the requisite permission is obtained. A transferee who  has  the  right  to  get  on  the  register,  where  no permission  is   required  or   where  permission  has  been obtained, may  ask the  company to register the transfer and the company  who is  so asked  to register  the transfer  of shares may  not refuse  to register the transfer, except for bona 921 fide reasons,  neither arbitrarily,  nor for  any collateral purpose. The  paramount consideration is the interest of the company and  the general interest of the shareholder. On the other hand,  where, the  requisite permission  under FERA is not obtained,  it is  open to the company, and indeed, it is bound to  refuse to  register the  transfer of  shares of an Indian company if favour of a non-resident. [996 E-H]      But once  permission is  obtained,  whether  before  or after the  purchase  of  the  shares,  the  company  cannot, thereafter refuse to register the transfer of shares. Nor is it open  to the company or any other authority or individual to take  upon itself  or himself,  thereafter  the  task  of deciding whether  the permission  was  rigthtly  granted  by Reserve Bank  of India.  The FERA  makes  it  its  exclusive privileges and  function.  The  provisions  of  the  Foreign Exchange Regulation  Act are  so structured  and woven as to make it clear that it is for the Reserve Bank of India 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 secs. 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.  Under the scheme of the Act, 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  of India  and the  Reserve Bank of India alone that has  to decide  whether permission  may or  may not  be granted under section 29(1) of the Act. The Act makes it its exclusive privilege  and function.  No  other  authority  is vested with  any power nor may it assume to itself the power to decide  the question whether permission may or may not be granted or  whether it  ought or  ought  not  to  have  been granted. The  question may  not be  permitted to  be  raised either directly  or collaterally  before any Court. However, the  grant   of  permission  by  the  Reserve  Bank  may  be questioned by  an interested  party in  a  proceeding  under Article 226  of the  Constitution on  the ground that it was malafide or  that there  was no  application of  the mind or that it  was opposed to national interest as contemplated by the Act. [996 H; 997 A-G] 922      3.5 It  is certainly not open to a company whose shares have been  purchased by  a non-resident company to refuse to register the  shares even  after permission is obtained from

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the Reserve  Bank of  India on  the ground  that  permission ought  not   to  have  been  granted  under  the  FERA.  The permission contemplated  under section  29(1) of the Foreign Exchange Regulation  Act is  neither intended to nor does it impinge in  any manner  or any legal right of the company or any of  its shareholders. Conversely neither the company nor any of its shareholders is clothed with any special right to question any such permission. [997 G-H; 998 A]      3.6 Where  the  articles  permitted  the  Directors  to decline to register the transfer of shares without assigning reasons,  the  Court  would  not  necessarily  draw  adverse inference against  the Directors  but will  assume that they acted reasonably  and bonafide.  Where  the  Directors  gave reasons the  Court would  consider whether  the reasons were legitimate and whether the Directors proceeded on a right or a wrong  principle. If  the articles permitted the Directors not to  disclose the reasons, they could be interrogated and asked to  disclose the  reasons. If  they failed to disclose that reason  adverse inference  could be drawn against them. [995 C-F]      Manekji Pestonji Bharucha and Anr. v. Wadilal Sherabhai and Co.  52 I.A.  92; Bank of India v. Jamshetji A.R. Chinoy A.I.R. 1950  Pc 90;  In Re  Fry [1946] 2 All E.R. 106; Swiss Bank Corporation  v.  Lioyds  Bank  Ltd.  [1982]  A.C.  584; Charanjit Lal  Chaudhury v.  Union of India A.I.R. 1951 S.C. 41; Mathalone and Ors. v. Bombay Life Assurance Company Ltd. A.I.R. 1953  S.C. 385; Vasudev Ramachandra Shelat v. Pranlal Jayanand Thakkar [1975] 1 S.C.R. 534; A.K. Ramiah v. Reserve Bank (1970) 1 M.L.J. PI referred to.      4. The  purchase of  shares made by and or on behalf of the Caparo  Group Ltd.  cannot be said to be in violation of the Portfolio  Scheme in  as much  as: (i) the permission of the Reserve  Bank contemplated  by section  29(1)(b) of  the Foreign Exchange Regulation Act, 1973 need not be "prior" or "previous" but  the permission  should be  obtained at  some stage for the purchase of shares. It could be ex post facto, subsequent and  conditional; (ii)  Payments under  the Stock Exchange Rules  may be made within two weeks after the first purchase and  there would  have been no difficulty in making payments out of foreign remittances; (iii) the provisions of sections 19(4),  29(1)(b), 47,  48, 50,  56 and  63  of  the Foreign Exchange  Regulation Act  do not  stipulate that the purchase of shares without obtaining the permission of the 923 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, damage  or otherwise,  unless and  until requisite permission  is  obtained.  If  permission  may  be granted ex  post facto,  the transaction cannot be a nullity and without  effect whatsoever; (iv) under section 27 of the Securities Contracts  (Regulation) Act,  it shall  be lawful for the  holder of  the company issuing the said security to receive and  retain any  dividend declared by the company in respect thereof  for  any  year,  notwithstanding  that  the security  has   already  been   transferred   by   him   for consideration, unless the transferee who claims the dividend from the  transferor has  lodged the  security and all other documents relating  to the transfer which may be required by the company  with the  company for  being registered  in his name within  fifteen days  of the date on which the dividend became due;  (v) Even  under the  Bye-law 242  of the  Stock Exchange Regulations  the brokers are permitted to lodge the shares purchased  on behalf of their principals in their own names, if they are unable to complete the formalities before

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the closing  of the  books; and  (vi) under  the scheme, any foreign company  whose shares  were owned  to the  extent of more than  60% by  persons of  Indian nationality  or origin could avail the facility given by the scheme irrespective of the fact  whether the  same group of shareholders figured in the different  companies. Where  any of  the purchases  were made subsequent  to 2.5.83, they were subject to the ceiling of 5%  in the aggregate. Merely because more than 60% of the shares of the several foreign companies who have applied for permission are  held by a Trust of which Mr. Swaraj Paul and the members  of his  family are beneficiaries, the companies cannot be  denied the  facilities  of  investing  in  Indian companies. In  fact, if such of the six beneficiaries of the Trust had  separately applied  for  permission  to  purchase shares of  Indian companies, they could not have been denied such permission. Therefore, merely on this account it cannot be said  that there  has been any violation of the Portfolio Investment Scheme or that the permission granted is illegal. [1022 B-C; 988 F-H; 989 A-B; 1004 A-H; 1005 A-B]      5. Generally  and broadly  speaking, the corporate veil may be  lifted where  a statute  itself contemplates lifting the veil,  or fraud  or improper  conduct is  intended to be prevented or  a taxing  statute or  a beneficent  statute is sought to  be  evaded  or  where  associated  companies  are inextricably connected  as to  be in  reality, part  of  one concern. It  is neither necessary nor desirable to enumerate the classes  of cases  where lifting  the corporate  veil is permissible, since that must necessarily depend 924 on the  relevant statutory  or other  provisions the  object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, and the effect on the parties who  may  be  affected  etc.  In  the  instant  case "lifting the  veil" is  neither  necessary  nor  permissible beyond the  essential requirement  of the  Foreign  Exchange Regulation Act  and the  Portfolio  Investment  Scheme.  The object of  the Act  is to  conserve and regulate the flow of foreign exchange  and the object of the scheme is to attract non-resident investors  of Indian  nationality or  origin to invest in  shares  of  Indian  companies.  In  the  case  of individuals, there can be no difficulty in identifying their nationality or  origin. In  the case  of companies and other legal personalities, there can be no question of nationality or ethnicity  of such  company or  legal personality. Who of such non-resident  companies or legal personalities may then be permitted  to invest  in shares  of Indian companies. The answer is  furnished by the scheme itself which provides for "lifting the  corporate veil" to find out if at least 60 per cent of  the shares  are held  by  non-residents  of  Indian nationality or  origin. Lifting  the veil  is  necessary  to discover the  nationality or  origin of the shareholders and not to  find out  the individual  identity of  each  of  the shareholders. The  corporate veil  may  be  lifted  to  that extent only  and no  more. Further  it would  be beyond  the scope of  the writ  petition in  the High  Court. [1006 F-H; 1007 A-D]      Wallersteiner v.  Moir, [1974]  3 All  E.R.  217;  Tata Engineering and  Locomotive Company  Ltd. v. State of Bihar, [1964] 6  S.C.R. 885;  The Commissioner  of  Income  Tax  v. Meenakshi Mills, A.I.R. 1967 S.C. 819; Workmen v. Associated Rubber Ltd., [1985] 2 Scale 321; and Salomon v. A. Saloman & Co. Ltd., [1897] A.C. 22 referred to.      6.1 The  permission of the Reserve Bank contemplated by the Foreign  Exchange  Regulation  Act,  1973  need  not  be "prior"  or  "previous"  and  it  could  be  ex  post  facto

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subsequent and conditional. [1021 H]      6.2 The expression used in section 29(1) of the Foreign Exchange Act,  1973 is "general or special permission of the Reserve Bank  of India".  It is  not qualified  by the  word "prior" or  "previous". While the word "prior" or "previous" may be implied if the contextual situation or the object and design of  the legislation  demands if,  there  is  no  such compelling  circumstances   justifying  reading   any   such implication into  section 29(1).  Though the  Parliament has not been  unmindful of  the  need  to  clearly  express  its intention by using the expression 925 "previous  permission".   Whenever   if   thought   previous permission was  necessary, as  for example,  sections  8(1), 8(2), 27(1),  30 and  31 of the Act, it deliberately avoided the qualifying  word "previous"  in section  29(1) so  as to invest the  Reserve Bank  of India  with a certain degree of elasticity in  the matter  of granting  permission  to  non- resident companies  to purchase  shares in Indian companies. Therefore, the  word permission  must be interpreted to mean "permission  previous  or  subsequent"  -  and  that  it  is necessary that  the permission  of the Reserve Bank of India should be  obtained at some stage for the purchase of shares by non-resident companies. [979 F-H; 980 A-C]      6.3 The  scheme of  the Foreign Exchange Regulation Act does not  make previous  permission imperative under section 29(1)(b), though  failure to  obtain  prior  permission  may expose  the   foreign  investor   to  prosecution   penalty, conviction,  confiscation,   if  permission   is  ultimately refused. Even  if permission  is granted,  it  may  be  made conditional. The  expression "special  permission"  is  wide enough  to   take  with   in  its   stride  a   "conditional permission", the  condition being relevant to the purpose of the statute,  in this  case, the conservation and regulation of foreign exchange. [981 F-H]      6.4 Nor  is the  Reserve Bank of India bound to give ex post facto permission whenever it is found that business has been started  or shares  have  been  purchased  without  its previous permission.  In such  cases, wherever  the  Reserve Bank of  India suspects  an oblique motive, it will not only refuse permission  but will  further resort  to action under section 50,  61 and 63 not merely to punish the offender but also confiscate the property involved. [981 E-F]      6.5 Parliament  did not  intend 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) and the acquisition of an undertaking or shares in India of the  character mentioned in clause (b). Hence, Parliament left to  the Reserve  Bank of India as the saftest authority to grant  permission previous  or ex post facto, conditional or unconditional.  And the Reserve Bank could be expected to use the  discretion wisely  and in the best interests of the country and  in furtherance  of declared  Government  fiscal policy in the matter of foreign exchange. 1982 F; G-H] 926      6.6 Reading  together sections 13 and 67 of the Foreign Exchange Regulation  Act and  section 11 of the Customs Act, it is seen that an order under section 13 FERA operates as a prohibition and  there, can therefore, be no question of the Reserve Bank  of India  granting  subsequent  permission  to validate the  importation of  the prohibited goods and avoid the consequences  prescribed by  the Customs  Act. To accept the analogy  of section  13 to interpret sections 19 and 29,

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therefore, is not possible. [983 D-E]      6.7 It  is true  that the consequences of not obtaining the permission  of the  Reserve Bank  or not  to follow  the procedure 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. [983 G-H; 984 A]      6.8 If it was the intention of Parliament to comprehend both  previous   and   subsequent   permission,   the   word "confirmation" as  in section  19(5) would  not do  at  all. While  it   may  be   permissible  to   construe  the   word "permission" widely,  the word "confirmation" could never be used to  convey the  meaning "previous permission". The word "confirmation" is totally misplaced in section 29. [984 E-F]      6.9 The rule against retrospectivity cannot be imported into  the   situation  presented   here.  The  rule  against retrospectivity  is   a  rule  of  interpretation  aimed  at preventing  with   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 the rule. [984 G-H; 985 A-B]      6.10 Paragraph  24A.1 of the Exchange Control Manual is neither  a   statutory  direction  nor  is  it  a  mandatory instruction  issued  under  section  73(3)  of  the  Foreign Exchange Regulation  Act, but  is in the nature of a comment on  section   29(1)(b).  The  paragraph  is  an  explanatory statement of  guideline for  the benefit  of the  authorised dealers. It  reads as  if it is in the nature of and, indeed it is,  advice given  to the  authorised dealers  that  they should obtain prior permission of the Reserve Bank of India, so that there may be no later complications. It is a helpful suggestion rather  than a  mandate. The  Manual itself  is a sort of  guide book  for authorised dealers, money changers, etc. and is a compendium or collection of various statutory 927 directions, administrative  instructions, advisory opinions, comments,  notes,   explanations,   suggestions   etc.   The expression "prior  permission" used  in paragraph 24.A(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. [986 B-E]      6.11 The forms cannot control the Act, the Rules or the directions. None of the prescribed forms, no doubt, provided for the  application and grant of subsequent permission, but that is so because ordinarily one would expect permission to be sought and given before the act. [986 E-F]      6.12 The  Portfolio investment  Scheme does not talk of any prior  or previous permission. Further a power possessed by the Reserve Bank under a Parliamentary legislation cannot be so cut down as to prevent its exercise altogether. It may be open  to subordinate legislating body to make appropriate rules and  regulations to  regulate the  exercise of a power which the Parliament has vested in it so as to carry out the purposes of  the legislation, but it cannot divest itself of the power.  Therefore, the Reserve Bank, if it has the power under the  FERA to  grant ex  post facto  permission  cannot divest itself of that power under the scheme. [987 A-D]      Shakir Hussain v. Candoo Lal & Ors., AIR 1931 All. 567, Vasudev  Ramachandra  Shelat  v.  Pranlal  Jayanand  Thakur, [1975] 1 S.C.R. 534 referred to.

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    7.1 When  construing statutes  enacted in  the national interest, the Courts must necessarily take the broad factual situations  contemplated   by  the  Act  and  interpret  its provisions so as to advance and not to thwart the particular national interest  whose  advancement  is  proposed  by  the legislation. Traditional  norms of  statutory interpretation must yield to broader notions of the national interest. [980 G-H; 981 A]      The object  of the  Foreign Exchange Regulation Act, is to earn,  conserve, regulate and store foreign exchange. The entire scheme and design of the Act is directed towards that end. Section  76 emphasises that every permission or licence granted by  the Central  Government or  the Reserve  Bank of India should be animated by a desire to conserve the foreign exchange  resources  of  a  country.  The  Foreign  Exchange Regulation Act,  is therefore,  clearly a statute enacted in the national interest. [980 C-G] 928      7.2 The proper way to interpret statutes is to give due weight to  the use  as well  as  the  omission  to  use  the qualifying words  in different  provisions of  the Act.  The significance of  the use  of  the  qualifying  word  in  one provision and  its non-use  in another  provision may not be disregarded. [980 B-C]      7.3 Every  word has  different shades  of  meaning  and different words  may have  the same  meaning. It all depends upon the context in which the word is used. [984 E]      8. The Press Release (Ex.A) dated 17.9.83, the circular (Ex.B) dated 19.9.83 and the letter (Ex.C) dated 19.9.83 are all valid. [1022 A]      9. The  Reserve Bank  of India  was not  guilty of  any malafides in  granting permission  to the  Caparo  Group  of companies. Nor  was it  guilty of  non-application of  mind. Every  question   involving  investments   by   non-resident companies and  foreign exchange  is bound  to have different facets which  present themselves  in different  lights  when viewed from  different angles. If after full discussion with those in  higher rungs  of the  Government who are concerned with policy-making,  the Reserve  Bank of  India changed its former negative  attitude to a more positive attitude in the interests of the economy of the country, its decision cannot be said  to be the result of any pressure or non-application of the  mind. And  merely because, the Reserve Bank of India did not  choose  to  send  a  reply  to  the  communications received from the company it did not follow that the Reserve Bank of India was not acting bonafide. [999 E; G-H; 1000 B]      10. No  malafides could  be attributed  to the Union of India either. [1022 D]      11. There was a total and signal failure on the part of Punjab National  Bank in  the discharge  of their  duties as authorised dealers under the Foreign Exchange Regulation Act and the  Portfolio Investment  Scheme with  the result there was no  monitoring of the purchases of shares made on behalf of the Caparo Group of companies. [1022 D-E]      12. The  question that  would involve  the adduction of evidence or  as in  the instant case a probe into individual purchases of  shares -  Whether  they  were  purchased  with foreign exchange  or locally available funds would be beyond the scope  of the  writ petition  in the  High  Court  under Article 226 of the Constitution. [1004 G] 929

&

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    CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4598 of 1984.      From the  Judgment and  Order dated  9.11.1984  of  the Bombay High Court in Civil Writ No. 3063 of 1983.      K.  Parasaran,   Attorney   General,   M.K.   Banerjee, Additional Solicitor  General, V.C.  Kotwal,  F.S.  Nariman, K.K. Venugopal, Soli J. Sorabjee, A.B. Divan, O.P. Malhotra, T.R.  Andhyarujina,   Mahendra  H.  Shah,  S.C.  Maheshwari, Shardul S.  Shroff, Mrs. Pallavi S. Shroff, Cyril S. Shroff, Amit Desai,  Sasi Prabhu,  Ms. Prema Baxi, Suresh A. Shroff, M/s. J.B.  Dadachanji, B.H.  Antia,  Aspi  Chonay,  Ravinder Narain, O.C. Mathur, Rajive Sawhney, R.F. Nariman, Mrs. A.K. Verma,  Joel   Peres,  Miss   Ratna  Kapoor,   D.N.   Misra, Talyarkhan, A.K.  Ganguli, H.S.  Parihar, A. Subba Rao, A.K. Chakravarty,  R.N.   Poddar  and   R.D.  Aggarwala  for  the appearing parties.      The Judgment of the Court was delivered by      CHINNAPPA REDDY,  J. Problems of high finance and broad fiscal policy which truly are not and cannot be the province of the  court for  the very  simple reason  that we lack the necessary expertise and, which, in any case, are none of our business  are   sought  to  be  transformed  into  questions involving broad  legal principles  in order to make them the concern of  the court.  Similarly what  may  be  called  the ’political’ processes of ’corporate democracy’ are sought to be subject  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  pavement  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 not so now. Public interest litigation and  public assisted  litigation are today taking over many  unexplored fields  and the dumb are finding their voice. 930      In the  case before us, as if to befit the might of the financial giants  involved, innumerable documents were filed in the  High Court,  a truly mountainous record was built up running to  several thousand  pages and more have been added in this court. Indeed, and there was no way out, we also had the advantage  of listening  to learned  and long drawn-out, intelligent and  often  ingenious  arguments,  advanced  and dutifully heard  by us.  In the name of justice, we paid due homage to  the causes  of the  high and  mighty by  devoting precious time  to them, reduced, as we were, at times to the position of  helpless spectators.  Such is the nature of our judicial process  that we  do this  with the  knowledge that more worthy  causes of lesser men who have been long waiting in  the  queue  have  blocked  thereby  and  the  queue  has consequently  lengthened.  Perhaps  the  time  is  ripe  for imposing a time-limit on the length of submissions and page- limit on  the length of judgments. The time is probably ripe

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for insistence  on brief written submissions backed by short and time-bound  oral submissions. The time is certainly ripe for brief  and  modest  arguments  and  concise  and  chaste judgments. In  this very case we heard arguments for 28 days and our  judgment runs to 181 pages and both could have been much shortened.  We hope that we are not hoping in vain that the vicious circle will soon break and that this will be the last of  such mammoth  cases.  We  are  doing  our  best  to disentangle the  system from  a situation  into which it has been forced over the years by the existing procedures. There is now  a public  realisation of  the growing  weight of the judicial  burden.   The  cooperation   of  the  bar  too  is forthcoming though  in slow  measure. Drastic  solutions are necessary. We  will find  them and  we do  hope  to  achieve results sooner  than expected.  So  much  for  sanctimonious sermonising and now back to our case.      We do  not for a moment doubt that this is a case which require our scrutiny, more particularly so because of a most singular and  remarkable feature  of  the  case  namely  the absence of the principle dramatics personnae from the stage. Mr. Swraj Paul, the hero of the drama, did not appear before the High  Court and  did not  appear before  us; nor did 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  excellent reasons for them for not choosing to  appear before  us, but their non-appearance and abstemious 931 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 themselves in  such a  hapless situation. It was apparent to us from  the beginning  that if  there was  much  front-line battle strategy,  there was  considerably  more  back  stage ’diplomatic’ manouvering,  as may be expected when financial giants clash, though we are afraid neither giant was greatly concerned for  justice or  the public  interest. For both of them the  court room  was just  another arena for their war, except that  one of the giants carefully kept himself at the back behind  a screen  as it  were. One  was reminded of the Mahabharta War  where Arjuna  kept Shikhandi in front of him while fighting  Bhishma, not that neither of the warriors in this case can be compared with Bhishma or Arjuna nor can the Government of  India and Reserve Bank of India be downgraded as Sikhandies.  But the case does raise some questions which do concern  the public interest and we are greatly concerned for the public interest and administration of administrative justice in  the public interest. It is from that angle alone that we  propose to examine the several questions arising in the case.      The present state of India economy which has to operate under the  existing World Economic System is such that India

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needs foreign  exchange and, lots of it, to meet the demands of its  developmental activities. It has become necessary to earn, conserve and build-up a reservoir of foreign exchange. So the  Parliament and  the Executive  Government have  been taking steps,  from time  to time,  to regulate, to conserve and improve  the foreign  exchange resources  of the country and the  proper utilisation  thereof in the interests of the economic development  of the  country. The  Foreign Exchange Regulation Act, 1973 was enacted for that purpose.      ’Foreign Exchange’  is defined  by sec. 2(h) of the Act to mean foreign currency and includes -           "(i) all deposits, credits and balances payable in           any foreign  currency and  any drafts, traveller’s           cheques, letters  of credit and bills of exchange,           expressed or  drawn in Indian currency but payable           in any foreign currency; 932           (ii) any  instrument payable, at the option of the           drawee  or  holder  thereof  or  any  other  party           thereto, either  in Indian  currency or in foreign           currency or  partly  in  one  and  partly  in  the           other."      ’Authorised dealer’ is defined to mean a person for the time being  authorised under  sec. 6  to deal  with  foreign exchange.      ’Owner’ is  defined by  sec. 2(c),  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 money."      Section  3   provides  for   the  establishment   of  a Directorate of  Enforcement  consisting  of  a  Director  of Enforcement and other officers.      Section 6(1) enables the Reserve Bank on an application made to  it, to  authorise any  person to  deal  in  foreign exchange. Sec.  6(2) prescribes  what may  be authorised and sec.  6(4)  and  sec.  6(5)  prescribe  the  duties  of  the authorised dealer.      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 exchange. Sec.8(2)  provides that  except with  the previous general or special permission of the Reserve Bank, no person shall enter  into any  transaction which  provides  for  the conversion of  Indian  currency  into  foreign  currency  or foreign currency  into Indian  currency at rates of exchange other than those authorised by the Reserve Bank.      Section 13(1) prescribes that subject to such exemption as may  be specified,  no  person  shall,  except  with  the general or 933 special permission  of the  Reserve Bank, bring or send into India any  gold or  silver or  any foreign  exchange or  any Indian currency.  Sec. 13(2)  provides that no person shall, except with the general or special permission of the Reserve

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Bank or  with the  written permission of a person authorised by the  Reserve Bank  take or  send out  of India  any gold, jewellery or  precious stones  or Indian currency or foreign exchange other than foreign exchange obtained by him from an authorised dealer or from a money-changer.      Section 19(1)(b)  provides that no person shall, except with the  general or  special permission of the Reserve Bank of India,  transfer any  security or  credit or transfer any interest in  the security  to  or  in  favour  of  a  person resident outside India.      Section 19(4)  and  (5)  which  are  relevant  for  our purpose are as follows :-           "(4) Notwithstanding  anything  contained  in  any           other  law,  no  person  shall,  except  with  the           permission of the Reserve Bank-           (a)  enter  any  transfer  of  securities  in  any           register  or   book  in   which   securities   are           registered or  inscribed if  he has any ground for           suspecting  that   the   transfer   involves   any           contravention of  the provisions  of this section,           or           (b) enter in any such register or book, in respect           of any  security, whether  in connection  with the           issue or transfer of the security or otherwise, an           address   outside   India   except   by   way   of           substitution for  any such  address  in  the  same           country or  for the purpose of any transaction for           which  permission  has  been  granted  under  this           section with  knowledge that  it involves entry of           the said address, or           (c) transfer  any share  from a  register  outside           India to a register in India.           (5)  Notwithstanding  anything  contained  in  any           other law,  no transfer  of any share of a company           registered in  India made  by  a  person  resident           outside India  or by a national of a foreign State           to another  person whether  resident in  India  or           outside India shall be 934           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."      Section 29(1)  which is  also relevant for the purposes of this case is as follows:           "29(1) Without prejudice to the provisions of s.28           and s.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 sec. 28; or           (b)  acquire   the  whole   or  any  part  of  any           undertaking in  India or  any  person  or  company

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         carrying on  any trade,  commerce or  industry  or           purchase the shares in India in any such company." Section 29(2) makes provision for applying for permission to continue after  the commencement  of the Act any activity of the nature  mentioned in  clause (a) of sec. 29(1) which was being carried  on at the commencement of the Act, while sec. 29(4) makes similar provision for applying for permission to continue to hold after the commencement of the Act shares of a company referred to in sec. 29(1) (b) which were held by a person at the commencement of the Act.      Section 30  prescribes that  no national  of a  foreign State shall,  without the previous permission of the Reserve Bank-           (i) take up any employment in India, or 935           (ii) practise  any  profession  or  carry  on  any           occupation, trade or business in India.      Section 31  prohibits any  person, who is not a citizen of India  or a company not incorporated in India or in which the non-resident  interest is  more than  40 per  cent, from acquiring or  holding or  transferring or  disposing  of  by sale, mortgage,  lease, gift,  settlement or  otherwise  any immovable  property   situate  in  India,  except  with  the previous general or special permission of the Reserve Bank.      Section 47  deals with contracts in evasion of the Act. Sec.  47(1)  prohibits  any  person  from  entering  into  a contract or  agreement which  would directly  or  indirectly evade or  avoid in any way the operation of any provision of the Act  or of any rule, direction or order made thereunder. Section  47(2)  provides  that  any  provision  of  the  Act requiring that  a  thing  shall  not  be  done  without  the permission of  the Central  Government or  Reserve  Bank  of India, shall  not render  invalid any  agreement to  do that thing if it is a term of the agreement that  thing shall not be done  unless permission  is granted. Where such a term is not explicit, it is to be implied in every contract. Section 47(3) further  provides that,  subject to  certain specified conditions, legal  proceedings may  be instituted to recover any sum  which would  be due,  apart from  and  despite  the provisions of  the Act or any term of the contract requiring the permission of the Central Government or the Reserve Bank of India for the doing of a thing.      Section 50  prescribes the  levy of  a penalty  if  any person contravenes  any of  the provisions of the Act except certain enumerated  provisions, 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  the enquiry and the power to adjudicate. Section 52 provides for an appeal  to the  Appellate Board and sec. 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, 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  mens-rea in  prosecutions under  the Act and throws upon the accused the burden of proving that he had no culpable mental 936 state with  respect to  the act  charged in the prosecution. Section 61  provides for  cognizance  of  offences.  Section 61(1)(ii) obliges  the court  not to  take cognizance of any

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offence punishable  under section  56  or  57  except  on  a complaint  made   in  writing  by  -  (a)  the  Director  of Enforcement; or  (b) any  officer authorised  in writing  in this behalf  by the  Director of  Enforcement or the Central Government;  or   (c)  any   officer  of  the  Reserve  Bank authorised by  the Reserve  Bank by  a  general  or  special order.  The  proviso  to  this  provision  enjoins  that  no complaint shall  be made for the contravention of any of the provisions  of  the  Act,  rule,  direction  or  order  made thereunder which  prohibits the  doing of  the  Act  without permission, unless  the person  accused of  the offence  has been given  an opportunity  of  showing  that  he  had  such permission. Section  63  empowers  the  adjudicating  office adjudging any  contravention under  sec. 51  and  any  court trying a contravention under sec. 56, if he or it thinks fit to direct  the confiscation of any currency, security or any other  money   or  property   in  respect   of   which   the contravention has taken place.      Section 67 treats the restrictions imposed by secs. 13, 18(1)(a) and  19(1)(a) as  restrictions under  s.11  of  the Customs Act  and makes all the provisions of the Customs Act applicable accordingly.      Section 71(1)  lays the  burden of  proving that he had the requisite  permission on  the  prosecuted  or  proceeded against for  contraventing any  of the provisions of the Act or  rule   or  direction  or  order  made  thereunder  which prohibits him from being an Act without permission.      Section 73(3)  enables the  Reserve Bank  of  India  to "give directions in regard to the making of payments and the doing of  other acts  by bankers  authorised dealers, money- changers, stock  brokers, persons referred to in sub-sec.(1) of sec.  32 or  other persons,  who are  authorised  by  the Reserve Bank  to do anything in pursuance of this Act in the course of their business, as appear to it to be necessary or expedient for  the purpose  of securing  compliance with the provisions of  this Act  and of  any  rules,  directions  or orders made thereunder."      Section 75  enables the  Central Government to give and the  Reserve   Bank  to   comply  with  general  or  special directions as the former may think fit. 937      Section 76  requires  the  Central  Government  or  the Reserve Bank,  while giving  or granting  any permission  or licence under  the Act,  to have regard to all or any of the following factors, namely,           (i) conservation of the foreign exchange resources           of the country;           (ii) all  foreign exchange accruing to the country           is properly accounted for;           (iii)  the   foreign  exchange  resources  of  the           country are  utilised as  best subserve the common           good; and           (iv)  such   other   relevant   factors   as   the           circumstances of the case may require.      Section 79  invests the  Central  Government  with  the power generally  to make rules and in particular for various specified purposes.      In exercise  of the  powers conferred by sec. 79 of the FERA, rules  called  ’the  Non-Resident  (External)  Account Rules, 1970’s 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

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(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 on Non-Resident  External Account  unless certain conditions are fulfilled.  One of  the conditions  is that the account- holder is  the registered  holder of such shares, securities or deposits.  Another condition  is that  the account-holder has deposited  the certificates  relating to the shares with an authorised dealer along with an undertaking in writing to the effect  that he  will not  dispose of  any of the shares except with  the previous approval of the Reserve Bank. Rule 5 further  prescribes that  no such amount as is referred to in rule  4(1) shall be credited to a Non-Resident (External) Account  unless  the  Reserve  Bank  having  regard  to  the desirability of permitting remittance of funds held in India by Non-Residents, either by general or special order, gives 938 permission in  this behalf.  Rule 6  provides that  a person resident outside  India  who  wishes  to  open  Non-Resident (External) Account, shall make an application in this behalf to an authorised dealer. The authorised dealer, unless there is a  general or  special  order  of  the  Reserve  Bank  so directing, shall refer every such application to the Reserve Bank together with the particulars.      The Exchange  Control Manual  published by  the Reserve Bank   of   India   incorporates   various   statutory   and administrative instructions,  advisory  opinions,  comments, notes, explanations etc. issued from time to time. Paragraph 24.1(i) states,           "Investment in  India by  non-residents of  Indian           nationality or  origin is  subject to  a different           set  of   rules  in   order  to  give  them  wider           investment opportunities. Ordinarily investment is           allowed freely  if the  investment proposed  to be           made is  not of an undesirable nature, but subject           to the  condition that  no repatriation of capital           invested  and   income  earned   thereon  will  be           allowed.  The   non-resident  investor   is   also           required to  give an undertaking agreeing to forgo           the  benefits  of  repatriation.  Investment  with           repatriation   benefits   is   allowed   only   in           restricted fields  subject to  certain conditions.           The  schemes  under  which  such  investments  are           permitted are explained in this Chapter". Paragraph 24.1(ii), however, states           "Foreign investment  in India  is also  subject to           regulation through  the various  provisions in the           Foreign Exchange  Regulation Act,  1973, viz. Sec.           19 governing  issue and  transfer of securities in           favour  of   non-residents,  sec.   29   governing           establishment of  a  place  of  business  by  non-           residents for  carrying on  trading, commercial or           industrial  activities   or  acquiring   such   an           undertaking or  shares in  such companies in India           and sec.  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 Foreign Exchange Regulation Act, 1973, are more           or less automatically issued." 939

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         "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 sec. 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  sec. 19(1)(b) or sec. 19(1)(d), it           is automatically  deemed to  be  permission  under           sec. 29(1)(b)  for purchase of shares by him. Non-           resident Indians  are however  permitted to invest           freely  in   securities  of   Central  and   State           Governments, Units  of Unit  Trust  of  India  and           National Savings/Plan  Certificates of  Government           of  India   (see  paragraph   24B.2).  All   other           investments  requires   specific   permission   of           Reserve Bank." Paragraph 28A.4 states,           "Authorised dealers may freely open a Non-Resident           (External) Account  in the names of individuals of           Indian nationality  or origin, resident of outside           India,  provided   funds  for   the  purpose   are           transferred to  India in  an approved  manner from           country of  residents of  the prospective account-           holder or  in other foreign country if the foreign           country of residence of the account holder and the           country from which remittance is received are both           in external group." Paragraph  28A.4(iii)   however,  prescribes   that   firms, companies and other corporate bodies as well as institutions and organisations  resident abroad  are not eligible to open Non-Resident  (External)   Accounts  in   India.   Paragraph 28.A8(ii) states  that under  sec. 29(1)(b)  of the  Foreign Exchange Regulation  Act,  1973,  persons  resident  outside India require  prior permission of Reserve Bank for purchase of shares  in Indian  companies. Investment  of Non-Resident (External) Account  funds in  shares of  Indian companies is not  therefore  permitted  without  prior  approval  of  the Reserve Bank. 940      With a view to earn foreign exchange by attracting non- resident individuals  of Indian  nationality  or  origin  to invest in  shares of  Indian companies,  the  Government  of India decided  to provide incentives to such individuals and formulated a ’portfolio investment scheme’ for investment by non-residents of  Indian nationality or origin. This scheme, announced by  the  Government  on  February  27,  1982,  was incorporated in  circular No.9  dated April  14, 1982 of the Reserve Bank  of India issued under sec.73(3) of the Foreign Exchange  Regulation   Act.  Paragraph  2  of  the  Circular explains that  in order  to provide  further incentives  and facilitate investment by non-residents of Indian nationality or origin  in shares of Indian companies existing facilities had been  liberalised and  procedural formalities  had  been simplified as  explained in the subsequent paragraphs of the circular.  Paragraph   3  deals   with  investment   without repatriation  benefits   while  paragraph   4   deals   with investment  with  repatriation  benefits.  Paragraph  4  (a) provides that under the liberalised policy, non-residence of

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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 be each non-resident investor does not exceed Rs. one 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 with 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 portfolio investments  as outlined  in paragraphs  3  and  4 above  will   now  be   extended  to   overseas   companies, partnership firms,  trusts, societies  and  other  corporate bodies owned  predominantly by  non-residents individuals of Indian nationality/origin.  The  criterion  for  determining such predominant  ownership is  that at  least  60%  of  the ownership of  these entities should be with non-residents of Indian nationality/origin.  It would  be necessary  for such entities to  submit a  certificate in  this  regard  in  the prescribed  form   OAC   from   Overseas   Auditor/Chartered Accountant/Certified Public  Accountant,  along  with  their applications for  investment in  shares, to the Reserve Bank of India  either through  the designated banks authorised to deal in  foreign exchange  or the  Indian companies offering new issues, as the case may be." 941 Applications  from   those  entities   for   permission   to designated  banks for investments with repatriation benefits are required  to submit form RPC to the Controller, Exchange Control Department,  Reserve Bank  of India,  Central Office (Foreign Investment  Division), Bombay. Paragraph 7 stresses the importance  of encouraging  investments in India by non- residents  of   Indian   nationality/origin   and   overseas companies, etc.  predominantly owned  by them  and  required authorised dealers to render prompt and efficient service by centralising their work in a few selected branches in places where  stock  exchange  facilities  are  readily  available. Paragraph  8   enables  non-resident  investors  to  appoint residents in India (other than the authorised dealers) to be their agents  with appropriate  power of attorney to arrange purchase/sale  of   shares/securities.  Such   agents  would include recognised  stock exchange  brokers. It  is  however made clear  that ’permission  for Investment  in  shares  on behalf of  such investors  will, however  be granted  to the designated banks  authorised to  deal  in  foreign  exchange since these  banks would  be responsible for compliance with the   relevant   exchange   control   requirements.   Proper coordination and  understanding between  the designated bank and the  investor’s agents  would be  necessary for handling the  investment   procedures  efficiently’.   Paragraph   11 prescribes amount  other matters,  the  duty  of  designated banks           "to maintain  separately a  proper record  of  the           investments  made   in  shares  with  repatriation           benefits  and  without  repatriation  benefits  on           account of  each investor,  showing  the  relevant

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         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 80 that they are able to ensure           that the  purchase of shares in any one company by           each non-resident  Investor toes  not exceed Rs. 1           lakh in face value or 1 per cent of the paid up           equity capital of the company, whichever 18 lower.      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 h 942 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  persons. ’In order to ensure  that   the  ownership   interest  in   the  overseas company/firm/society or  the irrevocable beneficial interest in the trust held by persons of Indian nationality/origin is not less  than 60  per cent, authorised dealers are required to  obtain,   along  with   the  account   opening  form,  a certificate    from     an    overseas     Auditor/Chartered Accountant/Certified Public Accountant in Form SOAC enclosed with A.D. (M.A.Series) Circular No. 9 of 1982.’ ’The account holder is  further required  to submit such a certificate to the authorised  dealer on  an annual  basis so  as to ensure that the  ownership/beneficial interest of the above persons continues to be at or above the level of 60 per cent.’      By Circular  No. 15  dated August 28, 1982, the Reserve Bank partially  relaxed Circular  No. 9 dated April 14, 1982 by removing  the monetary limit of Rs. One lakh on portfolio investment in  shares on  repatriation basis.  However,  the limit of  one per cent of the paid-up capital of the company was retained.      By Circular  No. 27  dated December  10, 1982,  it  was prescribed,            "Where  permission is granted by the Reserve Bank           for purchase/sale  of shares/debentures  on  stock           exchange  in  India  by  non-residents  of  Indian           nationality/origin,  the  transactions  should  be           effected at  the ruling  market price  as  may  be           determined on  the floor  of the stock exchange by           normal bid and offer method only.      On May 16, 1983 the Reserve Bank clarified and modified the ’Non-residents  of Indian  nationality/origin  Portfolio Investment Scheme’  in the  following manner:  Referring  to Circular No.  9 which  extended portfolio scheme to overseas companies, partner ship firms, societies and other corporate bodies which  were owned  to the  extent of  at least 60 per cent by  non-residents of  Indian nationality/origin  and to overseas trusts  in which  at  least  60  per  cent  of  the beneficial interest  was irrevocably  held by  such persons, Circular No.  12 dated  May  16,  1983  imposed  an  overall ceiling of  (i) 5  per cent  of the total paid-up capital of the 943 company concerned  and (ii)  5 per cent of the total paid-up

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value of each series of the convertible debentures issue, as the  case  may  be.  For  the  purpose  of  determining  and monitoring the  5 per  cent ceiling  the  cut-off  date  was prescribed as  May 2, 1983, the date on which the policy was announced in  Parliament. It was made clear that purchase of equity 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 is 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 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 in the form of the broker’s contract notes issued by recognised stock exchange  brokers should  be  included  in  the  daily statement irrespective of whether the actual deliveries have been effected  or not.  It was  further provided that with a view to  effectively monitor  the 5  per cent  ceiling,  the Reserve Bank  would, as  soon as  the aggregate  reached the limit of  4 per cent, notify the fact to the link offices of the  authorised  dealers  in  Bombay.  Thereafter  the  link offices were  required to give the total number and value of equity  shares/convertible   debentures   proposed   to   be purchased through  the stock  exchange during  the  next  15 days.    Clearance    for    the    purchase    of    equity shares/convertible  debentures   would  be  granted  by  the Reserve  Bank   after  taking  into  account  the  purchases proposed to be made under the Portfolio Investment Scheme by all the  authorised dealers  from whom intimations have been received.      On September 19, 1983, another circular (18) was issued by the Reserve Bank of India advising all authorised dealers in foreign  exchange that  the facilities  made available to the overseas  companies, etc.  by Circular  No.9 dated April 14, 1982 were also available where such overseas bodies were owned even  indirectly to the extent of at least 60 per cent by such 944 non-residents  of   Indian  nationality/origin.   What   was necessary, A  was that  the ultimate ownership of beneficial interest in the overseas bodies to the extent of at least 60 per cent  must be  in the  hands of one or more non-resident individuals of Indian nationality/origin.      The net  result of  all the  circulars  was  that  non- resident individuals of Indian nationality/origin as well as overseas companies, partnership firms, societies, trusts and other corporate  bodies which  were owned by or in which the beneficial interest  vested in  non-resident individuals  of Indian nationality/origin  to the extent of not less than 60 per cent  were entitled  to invest, on a repatriation basis, in the  shares of  Indian companies to the extent of one per cent of  the paid-up  equity capital  of such Indian company

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provided that the aggregate of such portfolio investment did not exceed  the ceiling  of 5  per cent.  It was  immaterial whether the investment was made directly or indirectly. What was essential  was that  60 per cent of the ownership or the beneficial interest  should be  in the hands of non-resident individuals 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  establish  an Indian Company  could do  90 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  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 in  which a  non-resident Indian owns 20 per cent of the share  and another  non-resident Indian owns 40 per cent of the  Shares on the ground that Company L in which owns 60 per cent  of the shares has already been granted permission. Would it  make any  difference if  owns 60  per cent  of the shares in both Companies and L ? One can well imagine half a dozen overseas  companies in  which  a  dozen  non  resident individuals  of   Indian  origin   hold  shares  in  varying proportions but  holding in  the aggregate  more than 60 per cent of  the shares  of the  overseas companies applying for permission to  purchase shares  in an  Indian Company. Could permission be  refused to  them ?  Is the  Reserve  Bank  to concern 945 itself with  the individual identity of the share holders of the A overseas companies or the nationality or origin of the shareholders? Is  the Reserve  Bank to  concern itself  only with the  colour of  the skin,  as it were, and not with the personality of the share holder of overseas company? We will revert to  this question  later. Obviously, the one per cent rule was  introduced to  prevent large-scale  acquisition of shares  of  Indian  companies  by  non-residents  and  their possible destabilisation.  Also, obviously  the rule  was  a futile exercise  as it was incapable of yielding the desired result. Quite  obviously therefore  a better solution had to be found  and lt  was found by the ’aggregate of 5 per cent’ rule. This  would  automatically  limit  the  total  outside holdings and effectively prevent destabilisation- Of course, it would  still be  necessary to satisfy the requirements of the Foreign  exchange Regulation  Act, more particularly the requirement of  sec. 29 of the Act providing for the general of special  permission of  the Reserve  Bank to purchase the shares  in   India  of  the  company.  Though  the  ultimate authority under the scheme is the Reserve Bank, an important feature of  the scheme  is L  that  the  monitoring  of  the remittances and  the investments  has  to  be  done  by  the designated Bank, which is the authorised dealer.      Two of  the principal  questions argued  before us were whether the  permission contemplated  by sec.29 was previous permission or  whether the  permission could  be granted ex- post-facto and  whether the  purchase of  the shares  by the foreign investor  of Indian  nationality/origin in this case involved any contravention of the FERA or the Non-Residents’ Investment Scheme.  To appreciate how the questions arise it

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is necessary to state here a few facts.      Desiring  to   take  advantage   of  the   Non-resident Portfolio Investment  Scheme and  to invest in the shares of Escorts  Limited,   an  Indian  company,  thirteen  overseas companies, twelve out of whose shares was owned 100 per cent and the thirteenth out of whose shares was owned 98 per cent by Caparo Group Limited, 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  Limited 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 4th  1 March,  1983, but despatched on 9th March, 1983 and by  another letter  dated 12th  March, 83, addressed the Controller,  Reserve   Bank  of   India,  Exchange   Control Department and requested 946 the Reserve  Bank to  accord their  approval for opening Non resident External  accounts in  the name  of  each  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 & Co., Stock Investment Adviser, Member of Delhi Stock & Share Department,  Delhi.  These  letters  were  received  by  the addressee on  14th and  18th March.  It was mentioned in the letters that  the proposed  accounts would  be ’effected’ by remittances from  abroad through normal banking channels and debits and  credits would  be allowed  only in  terms of the scheme contained  in  the  scheme  for  investment  by  non- residents. The first letter was in respect of (1) Caparo Tea Company Limited,  UK, (2)  Empire Plantation  and Investment Limited, UR  and (3)  Assam Frontier  Tea Holding  PLC,  UK, while  the  second  letter  was  in  regard  to  (1)  Caparo Investments Limited,  (2)  Caparo  Properties  Limited,  (3) Steel Sales  Limited, (4)  Atlantic Merchants  Limited,  (5) Buchanan Limited,  (6) Scymour  Shipping Limited, (7) Caparo Group Limited,  (8) Natural  Gas Tube  Limited,  (9)  Single Holdings Limited  and (10)  Deborne  Hotel  Torkey  Limited. Forms RPC  signed by  each of  the companies  and forms  OAC signed by  the auditors of the companies accompanied the two letters. Each  form  RPC  mentioned  that  the  company  was incorporated in  England and  that 61.6%  of the company was owned by non-residents of Indian nationality/origin. In each form OAC  the  auditor  certified  that  the  percentage  of holding   of    the   company    by   persons    of   Indian nationality/and/or origin was 61.6% and that the name of the share-holder was  ’Swraj Paul  Family  Trust  through  their interest in  the holding  company.’ The  auditors  certified that the  ownership interest  of persons of Indian origin in the company  was 61,6% of the total ownership of interest as on the  date of  certificate and  that the entire beneficial interest in the family trust was held irrevocably by persons of Indian  origin. On  23rd April,  83, Punjab National Bank addressed the  Controller, Reserve  Bank of  India, Exchange Control Department, inviting their attention to their former letters  dated   4th  and   12th  March,  1983,  which  were accompanied by  the RPC  and OAC  forms relating  to the  13 companies and  advising the Reserve Bank that the investment operations were being conducted through the company Raja Ram Bhasin &  Co., Share  & Stock Investment Advisers, Member of Delhi Stock  Exchange Association  Ltd. The Reserve Bank was also advised  that four  remittances had  been received from

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Caparo Group Limited, the holding Company on 9.3.83,12.4.83, 13.4.83 and 23.3.83 of amounts equivalent to Rs.1,35,36,000, Rs.2,36,59,000, Rs.76,35,000  and Rs.1,31,38,681.  13p.  The Punjab National Bank also mentioned in the letter that 947 although all necessary formalities prescribed by the Reserve A Bank’s  Circular  dt.  22.4.82  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.      We would  like to  mention at  this juncture  that  the letters dated  4th March, 12th March and 23rd April, 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 L 1,30,000 equivalent to Rs.  19,63,000 made  by Mr.  Swraj  Paul  to  the  Punjab National Bank, Parliament Street Branch on 28.1.1983 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 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 26th January, 83,  three of  the Caparo  Companies, namely, Assam Frontier Tea  Holding Public  Limited  Company,  Caparo  Tea Company  Limited   and  Empire  Plantations  and  Investment Limited addressed three identical letters to Raja Ram Bhasin & Co.  instructing the  broker to  purchase equity shares of Delhi Cloth  Mills Limited  at the  best market  price on  a repatriation basis.  Each letter  mentioned  that  a  letter addressed to  the Punjab  National Bank,  Parliament  Street authorising  payment  of  an  advance  of  Rs.20  lakhs  was enclosed. Delivery of shares could be given as and when they were received  from the  market. It was also, mentioned that the Bank  would pay  the full  purchase value  of the shares delivered and  the advance  of Rs.20 lakhs would be adjusted on the final delivery of the shares. Curiously enough, these letters  were  tendered  by  the  company  Escorts  Limited. Letters to  the Punjab  National Bank  said to accompany the letters were  not placed  before us  and the counsel for the Punjab National  Bank denies  that any  such letter was ever received by  the Punjab National Bank. Be that as it may, we have the  circumstance that  a remittance  of L 1,30,000 was undoubtedly made  to the  Parliament Street  Branch  of  the Punjab National  Bank, unbeknown  or at  any rate said to be unknown to  the ECL  House Branch  of  the  Punjab  National Branch. The record produced before us does not indicate what was done  with the amount of L 1,30,000 nor does it indicate that the  Reserve Bank  of India  was ever  informed of this remittance by the Punjab National Bank. The money appears to have come  in and  disappeared like  a will-o’-the-wisp. The learned counsel for the Punjab H 948 National Bank frankly confessed before us that the EOE House Branch of  the Punjab National Bank which was monitoring NRE accounts and  the purchase  of shares by the Caparo Group of Companies was  not aware  of the remittances received by the Parliament Street Branch. In other words, the right hand did not know what the left hand was doing. It is surprising that in a  matter concerning valuable foreign exchange the Punjab National Bank,  a nationalised bank and an authorised dealer under the Foreign Exchange Regulation Act, should have acted in such  an irresponsible  manner. Whatever  else requires a

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probe by the Reserve Bank of India, the disappearance or the expending of  the amount of L 1,20,000 without the knowledge of the  Reserve Bank  is a  matter which  requires  thorough investigation. No  one should  be allowed  to break  the law with impunity,  if he  has so  done, and get away with it in this bizarre way.      The statements filed by Raja Ram Bhasin & Co. show that prior to  9.3.1983, the  date of  the  first  remittance  as disclosed by  Punjab National Bank to the Reserve Bank, Raja Ram Bhasin  & Co.  had purchased  shares of  Escorts Limited worth Rs.33,40,865.00  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 9.3.83, 24.3.83, 12.4.83, 15.4.83, 28.4.83 and  28.4.84. In  the correspondence,  there  is  no mention of  any remittance having been made prior to 9.3.83. We may  also notice  here that  the letter dated 4.3.83 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 14.3.83  only, while  the letter  dated  12.3.83  seeking permission on  behalf  of  the  remaining  Caparo  Group  of Company was  received by  the Reserve  Bank on  18.3.83. The statements of  purchases of shares made by Raja Ram Bhasin & Co. show  that even  by 14.3.83,  shares of  Escorts Limited worth Rs. 3,85,920.00 had been purchased from Bharat Bhushan & Co.  and shares  worth Rs.45,81,677.00  had been purchased from Mangla  & Co.  Based on  the circumstances  that shares appeared to have been purchased even before remittances were received a  seemingly serious  complaint has  been made that Rupee funds  must have  been freely  used to purchase shares for the  Caparo  Group  under  the  Non-Resident  Investment Scheme. We  do not think that there is any genuine basis for the complaint.  Payments under  the Stock Exchange Rules may be made within two weeks after the purchases contracted for. In the  present case  the remittances  from  abroad  started coming in  less than  two weeks after the first purchase and there would  have been  no difficulty in making payments out of foreign remittances. 949      The Reserve  Bank of India having been approached for A permission to  purchase shares  on behalf  of  the  thirteen Caparc Group  of companies  by the  letters of  4th and 12th March, 1983,  wrote to  the Punjab  National Bank on 29.4.83 seeking  information   regarding  the  exact  percentage  of holding  of  (i)  Mr.  Swraj  Paul  and  other  Non-resident individuals of  Indian origin  (ii) Family  Trusts and (iii) others  separately  in  respect  of  each  of  the  thirteen companies. Information  was also  sought as  to whether  any shares of  Indian Companies had already been purchased by or on behalf  of their  Indian clients. It is not clear why the Reserve Bank  wanted information  as to the exact percentage of holdings  etc. since the relevant information had already been furnished  in the RPC and OAC forms sent along with the letters dated  4.3.83 and  12.3.83. The letter dated 29.4.83 is also  important for  the reason  that  the  Reserve  Bank merely wanted to know whether any shares of Indian Companies had already  been purchased  but did not give any indication that it  would be  objectionable  to  do  so  without  prior permission  of  the  Reserve  Bank.  Thereafter  the  Punjab National Bank  wrote three  letters to the L Reserve Bank on 6.5.83, 19.5.83  and 25.5.83,  the purport of which was that the Swraj  Paul Family Trust held 61.6% of the share capital of Caparo  Group Limited  which in turn held 100 per cent of the Share  Capital of eleven of the Companies and 98% of the

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share capital  of the  twelfth Company.  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 their behalf would be supplied as soon as the purchases were complete. On 25.5.83 the  Reserve Bank  of  India  wrote  to  the  Punjab National Bank,  in answer  to the  letter dated  23.4.83 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 nationality/origin (if any),  and (iii)  Family Trust of such persons in Caparo Group Limited  in U.K.  separately. On  28.5.83, the  Punjab National Bank sent a telegram to the Reserve Bank and 950 followed it  up with  a letter  dated 30.5.83  to the effect that the  beneficial interest  of Mr.  Swraj  Paul  and  his family trust  in Caparo  Group Limited  was 61.6% as already clearly  mentioned   in  forms   RPC  and  certificates  OAC delivered to  the Reserve  Bank in  February, 83.  The other non-residents of  Indian origin  who  were  members  of  the Family Trust were Mrs. Aruna Paul, Mr. Akash Paul, Mr. Ambar Paul, Mr.  Angad Paul  and Miss  Anjali Paul, all members of Mr. Swraj  Paul’s family.  It was further pointed out in the letter that  as required  by the scheme which mentioned that the  Reserve   Bank  of   India  will  grant  permission  on application  being   made  in  the  prescribed  manner,  the thirteen  companies   had  submit   ted  their  applications complying with  all the  formalities. The  letter of 23.4.83 was  also   referred  to  and  it  was  mentioned  that  all particulars were  given therein.  The Punjab  National  Bank further expressed its view that they were not required under the provisions  of the  scheme to await the clearance of the Reserve Bank  before purchasing  shares of Indian companies, once proper  applications had  been submitted.  The  Reserve Bank was  informed that  the remittances  from Caparo  Group Limited were  made in  favour of  Raja Ram  Bhasin and  Co., their designated  brokers and  power of Attorney holders. So the operations were executed by Punjab National Bank through NRE account  on various  date upto  23.4.83 and  thereafter. Payments were made according to the bye laws and regulations of Delhi  Stock Exchange. On 31.5.83, a further telegram was sent by  the  Punjab  National  Bank  to  the  Reserve  Bank informing them  that they  had been  advised  by  the  agent brokers that  up till  28.4.83  they  had  purchased  80,000 equity shares of Delhi Cloth and General Company Limited and 75,000 equity  shares of  Escorts Limited  on behalf of each one of  the thirteen  overseas companies predominantly owned by non residents of Indian origin.      On 1.6.83,  the Assistant  Controller, Reserve  Bank of India, wrote to the Government of India informing them about the receipt of applications from the Punjab National Bank on behalf of  thirteen overseas companies, eleven of which were wholly owned  by Caparo Group Limited which in turn owned by Family Trust  of Mr.  Swraj Paul  to the extent of 61.6%. In

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the twelfth company, Caparo Properties Limited, Caparo Group Limited had  a holding  of 98 per cent. Caparo Group Limited 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. Ambar Paul, Mr. Angad Paul and Miss  Anjali Paul.  The Reserve Bank pointed out that it was to be noticed that even the Caparo Group Limited was not directly owned  by non-resident individuals of Indian origin but only indirectly to the extent of 61.6% through 951 the family  trust whose beneficiaries were persons of Indian A 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  non-residents  of  Indian  Nationality/origin atleast to  the extent  of 61.6%  and that  it was  not  the intention to  open these  investment facilities  to overseas companies which  were not  directly  owned  by  non-resident individuals of  Indian nationality/origin  but owned by them indirectly via  some other trust or company. It was observed that  if  investment  facilities  were  to  be  extended  to overseas companies  indirectly  owned  by  non-residents  of Indian nationality/origin,  it would  be very  difficult  to enforce the  scheme and  the conditions of FERA. The Reserve Bank  also   informed  the   Government  that   their  Legal Department supported  their view  that none  of the thirteen overseas companies  were eligible  to invest  in  shares  of Indian companies  and the  existing policy. They, therefore, proposed to  reject the  applications of  all  the  thirteen overseas companies.  They requested  the Government of India to confirm  by telex.  To this  L the  Government  of  India replied by telex on 8.6.83 in these words:           "REFERENCE D.O.NO.  EC.CO. FID  (II) 294/344-82/83           DATED NIL  JUNE 1983  REGARDING  APPLICATION  FROM           THIRTEEN OVERSEAS  COMPANIES FOR PURCHASING SHARES           ON OF  INDIAN COMPANIES THROUGH THE STOCK EXCHANGE           WITH  REPATRIATION   RIGHTS  UNDER  THE  PORTFOLIO           INVESTMENT SCHEME  (.) IT  IS REPORTED  THAT  SOME           PURCHASES HAVE  ALREADY BEEN  MADE IN TERMS OF THE           ABOVE PROPOSAL  BY  THE  PUNJAB  NATIONAL  BANK(.)           ALTHOUGH IT  DOES APPEAR  THAT PRIOR TO SECOND MAY           1983  UNDER   THE  PORTFOLIO   INVESTMENT   SCHEME           AUTHORISED  DEALERS   COULD  WITHOUT  RBI’S  PRIOR           APPROVAL PURCHASE SHARES THROUGH STOCK EXCHANGE ON           BEHALF  OF   THEIR  NON   RESIDENT  CLIENTS,   THE           CIRCUMSTANCES IN  WHICH SOME  SUCH PURCHASES  WERE           ALREADY MADE  BEFORE THE  CONCERNED COMPANIES  GOT           THE NECESSARY APPROVAL FROM THE R.B.I. DO NOT SEEN           TO BE  CLEAR (.)  THE RBI  IS REQUESTED TO ENQUIRE           FURTHER INTO  THE MATTER  AND  SUBMIT  A  DETAILED           REPORT TO  THE GOVERNMENT  COVERING ALL ASPECTS OF           THE  MATTER   INCLUDING  THE   DETAILS   OF   SUCH           PURCHASES, THE FINANCIAL STATUS AND THE ACTIVITIES           OF THE  APPLICANT COMPANIES  AND  THEIR  DATES  OF           INCORPORATION AND  ALSO THE GENERAL LEGAL ISSUE AS           TO WHETHER SUCH PURCHASES ON THE STOCK 952           A  EXCHANGE   BY  OVERSEAS   NON  RESIDENT  INDIAN           COMPANIES ETC.  PRIOR TO SECOND MAY 1983 ARE VALID           WITHOUT THE  PRIOR SPECIFIC APPROVAL OF THE RBI(.)           YOUR REPORT SHOULD REACH US QUICKLY AS POSSIBLE IN           ORDER   TO   ENABLE   THE   GOVERNMENT   TO   TAKE           DECISION(.)" The importance  of 2nd  May, 1983 so frequently mentioned in the telex  message is  apparently because  2nd May, 1983 was

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fixed as  the cut-off  date  for  the  introduction  of  the ceiling of  5 per  cent in  shares of  Indian  companies  by foreign investors  of Indian  origin by  the Circular No. 12 dated May 16, 1983 issued by the Reserve Bank of India.      In the  meanwhile, on  31.5.83,  Punjab  National  Bank wrote to  Escorts Limited  informing them  that the thirteen overseas companies  had been making investments in shares of Escorts Limited  in terms  of the  scheme for  investment by overseas  corporate   bodies  predominantly  owned  by  non- residents of  Indian  nationality/origin  to  an  extent  to atleast 60  per cent  and that  the  thirteen  overseas  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 upto 28th April, 83,  75,000 equity shares of Escorts Limited had been purchased  by   them  for  each  of  the  thirteen  overseas companies. Out  of the  shares 80  purchased  35,560  shares purchased by  each of  companies  had  been  lodged  by  the brokers with Escorts Limited 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 Limited replied  on June 16th, 1983 and requested the Punjab National Bank  to  furnish  informations  whether  the  non- resident companies had executed and handed over applications to be  filed with Reserve Bank of India for prior permission to purchase  the shares  of the  company through them as the designated bank  and whether any permission had been granted by the  Reserve Bank  of India  to Punjab  National Bank  to purchase  shares   on  behalf   of  the  thirteen  companies mentioned in  the letter.  Escorts Limited  did not refer in this letter  to the circumstance that H.C. Bhasin and Bharat Bhushan had  lodged the  shares with  them for  transfer  in their own  names instead of the names of any of the overseas companies.  Escorts  Limited  obviously  did  not  think  in strange that  the brokers  lodged the  shares in  their  own names instead  of their  principals, for  the simple  reason that Bye-law  242 of  the Stock  Exchange Regulations permit the brokers  to do  80 if  they are  unable to  complete the formalities before the closing 953 of the  books. They  now seek to make a point of it. It is A obviously without  substance. In  fact in  their  letter  to Punjab National  Bank, Escorts Limited did not even think it worthwhile mentioning that when they wrote to the brokers on 27.5.83  requesting   information  whether   they  were  the beneficial owners  of the  shares and whether the shares had been purchased  on behalf  of non-residents of Indian origin with the  requisite permission  of the Reserve Bank of India they had  been curtly  refused the  information by  Mr. H.C. Bhasin and  Mr. Bharat Bhushan who had also questioned their authority to  ask for  such information, and even threatened legal action  of the  transfer was  not registered.  We  are unable to  fathom the  reason behind  the  attitude  of  the brokers. We  can but make a guess. It was probably they were still awaiting  the permission of the Reserve Bank of India. That they  had purchased  the shares  for overseas investors was no  secret since they had already so informed the Punjab National Bank.  They seem  to have,  thought that  they were within their  rights under the Stock Exchange Regulations in asking the  shares to  be transferred in their names. It was suggested by  the learned  counsel for  Escorts Limited that the brokers  were loath  to  disclose  the  names  of  their principals as  they had  utilised rupee  funds and wanted to

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cover up that fact. The suggestion appears to be far fetched as the  funds remitted  till then from abroad were more than ample to cover the purchase of the shares until 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  Limited on  31.5.83 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 purpose of transfer of shares in the books of the company. We have also referred to  the reply of Escorts Limited to Punjab National Bank on  1.6.83. Punjab  National Bank  immediately wrote to Escorts Limited on 2.6.83 that they had already informed the company  that  the  purchase  of  shares  for  the  thirteen companies had  been handled  by designated brokers M/s. Raja Ram Bhasin  & Co.  and wanted  to know the purpose for which Escorts Limited  was seeking  information  from  them.  They however, stated that they 954 were designated  as bankers  of the  thirteen companies  and that they  had acted  in terms of the procedure laid down by the scheme.  Without much  further  ado,  that  is,  without making any  further enquiry either from M/s. Raja Ram Bhasin or from  the Punjab  National Bank  or without  seeking  any information of  guidance from  the Reserve  Bank  of  India, Escorts  Limited  proceeded  to  consider  the  question  of registering  the   transfer  of   shares.  A  Committee  was constituted by Escorts Limited to scrutinize the transfer of the shares. After taking expert legal opinion, the Committee submitted a  report to  the Board  of Directors  of  Escorts Limited  recommending   against  the   registration  of  the transfer  of   shares.  The  primary  ground  on  which  the recommendation was based and with which we are now concerned is ground No.5 which stated,           "that the  company is prohibited by the provisions           of section 19 of FERA from registering transfer of           shares in its books when it has reasons to suspect           that there  has been a violation of the provisions           of section 19 of FERA." The Committee  reported that  it had  reasonable  ground  to believe that the requisite permission of the Reserve Bank of India has  not been  obtained for the purchase of the shares in question.  It was  also mentioned  in the  report of  the Committee that they took serious notice of ’attempts made to intimidate and coerce the company to register the shares and to pre-empt  the free  and proper  exercise of  the  Board’s discretion in accordance with the Articles of Association of the Company  and the provisions of Law.’ However, the report did not  mention what  the attempts  were that were made ’to intimidate and coerce the company to register the shares and to pre-empt  the free  and proper  exercise on  the  Board’s discretion.      On 9.6.83,  the Board  of  Directors  of  Escorts  Ltd. considered the  Committee’s Report  and passed  a resolution refusing to  register the transfer of shares. m e resolution was in the following terms: " me Board considered the report of the  Share Scrutiny  and Transfer Committee of Directors. The Board further considered exhaustively all aspects of the

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matter, all  the materials  which were  gathered and  placed before the  Board and  legal opinions  and records  of legal advice which  had been  secured by the Company on the points in issue.  The Board  further considered  whether  -  having regard to the provisions of FERA and FERA 955           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 - requirement 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  liberalised scheme  for ’Portfolio           Investment’  by  eligible  residents.  m  e  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 L  in  acceptance           thereof adopted  the same.  Further after  a  full           examination of the issues legal as well as factual           and the  circumstances and  further on  account of           the reasons  contained in  the Share  Scrutiny and           Transfer Committee’s  Report and  in the  light of           the said  Committee’s recommendations  and further           on account  of the  view of the Board of Directors           that it  would not  be  in  the  interest  of  the           company or  the General  Body of  shareholders  to           register the  transfer of  the shares  in question           and on  account of  the  Board’s  view  that-  the           transferees in  question could not be approved for           purposes of  admitting them  as members in view of           the facts  and circumstances  taken note of by the           Board of  Directors, the  Board decided  to refuse           registration of the shares under consideration           Accordingly it was-           Resolved that  the  transfer  of  2,88,390  Equity           Shares in  Rs.10 each  fully paid-up lodged by Mr.           Harish  Chander   Bhasin  and  Rs.1,73,947  Equity           Shares of  Rs.10 each  fully paid-up lodged by Mr.           Bharat Bhushan  as per  distinctive Nos. appearing           in the  lists marked  Annexure A  and respectively           placed before  the Directors and initialled by the           Chairman for  the h  purpose of  identification be           and is hereby refused. 956           Further resolved  that Mr.  Charanjit Singh,  Vice           President and  Secretary of  the Company be and is           hereby authorised  to give and send notices of the           refusal to the transferors under sec.111(2) of the           Companies Act,  1956 and  take such other steps as           may be  necessary and appropriate in the matter of           the above resolution.           The  resolution   was  passed   with  all  the  13           Directors  (out  of  total  15  Directors  of  the           Company) present  and voting  for  the  resolution           excepting Mr. D.N. Davar, who did not take part of

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         the discussion and voting on the resolution. There           was no dissenting vote." In respect  of another  block of  shares lodged with Escorts Ltd. On  19th and  22nd August, 1983 for registration in the name of  the  thirteen  foreign  non-resident  companies,  a similar report was submitted by the committee on 29.9.83 and a similar resolution was passed by the Board of Directors on the same day.      Escorts Limited,  although they  had already refused to register the  transfer of  shares, nonetheless, wrote to the Punjab National  Bank for  information on  various points as they desired to make a representation to the Reserve Bank of India in  the enquiry  being conducted  by the  Reserve Bank under the  directions of  the Government. The Company wanted to know  whether the  remittances were  received  from  M/s. Caparo Group  Limited only and from none of the other twelve foreign companies.  me  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  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 scripts 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 scripts and suggested to Escorts Limited that they should return the scripts to those that had lodged them with the Company.      More important  still is the fact that Escorts Limited, having already  rejected the registration of the transfer of Shares, wrote  to the  Reserve Bank  of India  on 14th June, 1983, 20th June, 1983 and 23rd July, 1983 purporting to give information regarding  various illegalities committed in the matter of 957 purchase of  shares of their company by the thirteen foreign companies, Caparo Group Limited, etc. It was stated that the information was  being furnished to the Reserve Bank because it was  understood that  the Reserve  Bank  was  holding  an enquiry in  the matter  of the  purchase of shares in Indian companies by  the Caparo  Group  Companies.  One  remarkable feature about the letters is that for some reason best known to themselves,  Escorts Limited  did  not  disclose  to  the Reserve Bank  the circumstance that they had already refused to register  the transfer of shares. In the first letter, it was stated that their information revealed that Caparo Group Limited was  the holding  company and  the remaining  twelve companies were  its subsidiaries and that a majority of them were  in   no  financial   position  to   make  such   large investments. The  Reserve Bank was particularly requested to consider whether  it was  ever  intended  that  an  overseas company could  circumvent the  stipulated ceiling of one per cent by channelling investment through a dozen subsidiaries. It was  pointed out  that a colourable device of that nature would defeat  the very  purpose of  the ceiling. The Reserve Bank was  also requested  to take serious notice of the fact that while  the scheme  permitted repatriation  benefits  to investments upto  the maximum  of one  per cent in an Indian company, shares  to the  tune of  over 7  per cent  had been acquired in  the names  of thirteen  companies though  funds were remitted  only by  one company.  It was  also mentioned that the stock-brokers and not the bank purchased the shares and  that   the  stock  brokers  unauthorisedly  lodged  for

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registration their own names, the shares purchased on behalf of non-residents.  The Reserve  Bank as requested to enquire into the  dates and  rates of  the purchases  of the shares, whether the  shares were purchased on the floor of the stock exchange, whether  the delivery of shares was taken, whether the bank  had a  day-today record of the transactions and 80 on. The  Reserve Bank was also requested to seize the scrips and the  books of  account in  the possession  of the  stock exchange.  The  next  letter  dated  20th  June,  1983  drew attention to  the circumstances  that though 9,75,000 shares were purported  to have  been purchased  before 28th  April, 1983, only 4,62,337 shares had been lodged by 13th May, 1983 and therefore,  it appeared that there were forward transac- tions and  the purchases  were not  in accordance  with  the scheme. In their third letter dated 23rd July, 1983, Escorts Limited asserted that a large amount of money to the tune of about Rs.  2.61 crores  were 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 FERA were violated and the ceilings of one per 958 cent and  5 per  cent imposed  under the  scheme  were  also circumvented. Rupee  funds to  the  tune  of  Rs.4.0  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 Limited  and Delhi  Cloth and General Mills Limited. Though the  purchases made  on behalf  of the  thirteen non- resident companies  were said  to have been purchased before 28th April,  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 Limited bore the date 28th April, 1983 and disclosed consideration of Rs.65 per share although the highest  rate at  which sales  of  Escorts  shares  were transacted at  the Stock  Exchange upto 28th April, 1983 was Rs.55  only  per  share.  This  fact  demonstrated  that  an incorrect statement  had been  made that the shares had been purchased prior  to 28th  April,  1983.  Further  the  share transfer deeds  lodged with  the companies  in regard to the 9,75,000 shares  of Escorts  Limited and 10,30,000 shares of Delhi Cloth  Mills Limited  said to  have been  purchased on behalf of  non-resident Indian companies showed that a total amount of Rs.6,33,75,000 of non-resident funds was spent for purchasing the  shares of  Escorts  Limited  and  a  sum  of R8.9,88,69,020 of non-resident funds was spent of purchasing shares of  Delhi Cloth Mills Limited making a grand total of Rs.16,22,44,020. As  against this a sum of Rs.13 crores only had been  remitted from  abroad for  the purchase of shares. Out of  the Rs.13  crores, a sum of Rupee One crore had been frozen by the Reserve Bank of India making only a balance of Rs.12 crores of non-resident funds available for purchase of shares. There  was thus a short-fall of Rs.2.61 crores which was unaccounted.  It was  also brought  to the notice of the Reserve Bank  that the  brokers had  lodged the  shares  for registration of  the transfers in their names of the foreign companies. When  asked by  the company to disclose the names of the  principals, the  brokers had  refused to  do so. The company therefore,  suggested various  steps that  should be taken by the Reserve Bank to detect the several illegalities committed and  to prevent  the circumvention  of the one per cent limit  imposed by  the scheme for acquisition of shares

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by any single non-resident individual or company.      To none  of these letters did the Reserve Bank of India deign a  reply or  even the  courtesy of an acknowledgement. Though the  Reserve Bank did not choose to write or make any further enquiry from Escorts Limited, there is no doubt that the Reserve Bank did 959 enquire in  its own way into the allegations made by Escorts A Limited  against the Caparo Group of Companies. It was not as if  the Reserve Bank want only refused to worry itself in regard to  the  allegations  against  the  Caparo  Group  of Companies. The  Punjab National Bank was the designated bank of the  Caparo Group  of Companies  and it was an authorised dealer under the FERA, owing a serious responsibility to the Reserve Bank  under the  FERA and  the Portfolio  Investment Scheme. It  was, therefore, to the Punjab National Bank that the Reserve Bank turned for elucidation in the matter.      On 11th  June, 1983, the Reserve Bank of India wrote to the Punjab  National Bank advising them that mere submission of an  application under  sec. 29  (1) (b)  of FERA  was not sufficient to  enable the  non-resident  Indian  company  to purchase shares without the general or special permission of the Reserve Bank. Reserve Bank permission had to be obtained before buying any shares of Indian companies. The contention of Punjab  National Bank  that submission  of an application was sufficient  to enable a non-resident company to purchase shares was  non 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 Limited  to be  debited in contravention of the provisions  of paragraph  28B.9 of  the Exchange Control Manual. The  Punjab National  Bank  was  informed  that  the applications of all the companies for approval of opening of Non-Resident Accounts  were pending with them and that until specific permission  for purchase  of shares was granted, no payment should  be made  out of  the accounts for purchasing shares on  behalf of  any of  the thirteen companies. On the same date, another letter was written by the Reserve Bank of India to  the Punjab National Bank asking for particulars of the thirteen  companies purchased  by them  and the dates of remittances 80  far received from the thirteen companies. On 17th June,  1983 and  23rd June,  1983, the  Punjab National Bank sent  their reply  to the  Reserve Bank by telex and by letter. They  stated in the telex message that consequent on the letter of the Reserve Bank, they had withheld payment of a sum  of Rs.107,22,610  in favour  of the  brokers and that they had  advised the remitter about the same. It was stated that the  brokers had  written to  them asking  for  payment stating that it would amount to default if payment pertained to  shares  purchase  prior  to  2nd  May,  1983  under  the portfolio investment  scheme. By  their  letter  dated  23rd June,  1983,  they  informed  the  Reserve  Bank  that  upto December 1982 and h from 1st January. 1983 to 28th February, 1983 no shares on behalf 960 of  the  thirteen  non-resident  companies  were  purchased. Between A  1st March,  1983 and 2nd May, 1983, 80,000 shares of Delhi  Cloth and General Mills Company Limited and 75,000 shares of  Escorts Limited  were purchased  for each  of the thirteen  companies.  After  2nd  May,  1983  no  share  was purchased.  All  remittances  were  received  through  their London Branch  for the credit of M/s. Raja Ram Bhasin & Co., for purchase  of shares on behalf of the thirteen companies. On 9th March, 1983, 24th March, 12th April, 15th April, 28th

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April and  28th April,  1983 remittances  of  Ks.1,35,36,000 Rs.1,31,38,681,     Rs.      2,36,59,900,      Rs.76,35,000, Rs.1,56,76,000  and   Rs.1,56,80,000   were   received   and transferred to the account of Raja Ram Bhasin & Company from the account  of Caparo Group Limited. A balance of Rs.38,682 in the NRE account of Caparo Group Limited was allocated pro rata to  the thirteen accounts on 2nd June, 1983 in terms of the letter  of their  broker M/s. Raja Ram Bhasin & Company. The broker  derived his authority in terms of the investors’ letters which  were annexed  to the  letter of the bank. The Punjab  National  Bank  also  stated  that  the  broker  had confirmed by  their letter  dated 22nd June, 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 associations 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 Limited  to the Punjab National Bank   confirming that they had appointed M/s. Raja Ram Bhasin  & Company  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 Limited.  On 24th  June, 1983,  the  Punjab National Bank  again wrote  to the  Reserve Bank in reply to their letter  of 11th June, 1983, they stated that they were under the impression that the clause "....... RBI will grant permission to  designated bank...... " meant that permission would  automatically   be  granted   on  the  submission  of applications in  the prescribed  form by  the NRE Investors, accompanied by auditors’ certificates of the eligibility. As a matter  of abundant  caution they  had intimated  the  NRE investors and their brokers that the transactions were being put through  entirely  at  their  risk  and  responsibility. Details of  the remittances  received and transferred to the account of  Raja Ram  Bhasin & Company were once again given and the request for permission      On 6th  July, 1983,  the Controller  Foreign  Exchange, Reserve Bank  of India,  wrote to  the Government  of  India informing them  that the  relevant documents had been called for and examined and 961 the report which was desired by the Government’s telex dated 8th June, 1983 was being submitted along with the letter. It was stated that they had taken the legal opinion ’an eminent jurist and  senior counsel’  Mr. H.M.  Seervai, which was to the  effect   that  the   circular  did  not  grant  general permission to  non-residents or  their designated  banks and that oversees  bodies where  they were not directly owned by non-resident individuals  were not  eligible to invest under the liberalised  scheme. It was, therefore, stated that none of the thirteen overseas companies was eligible to invest in shares of Indian companies under the scheme. The question of further action  in the  matter  of  failure  of  the  Punjab National  Bank  to  follow  the  relevant  Exchange  Control Regulations would  be taken  up  separately  after  a  final decision  was  taken  on  the  applications,  that  is,  the applications of  the overseas  companies for  permission  to purchase shares.  The report  of the  Reserve Bank  of India which was  sent along  with their  letter was  not  produced before the High Court, nor has it been placed before us. The Government of  India, on  11th  August,  1983,  replied  the Reserve Bank’s letter of 6th July, 1983 communicating to the latter the  opinion given  by the Attorney General and asked

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the Reserve  Bank to dispose of the applications made by the Punjab National  Bank in  the light  of the  opinion of  the Attorney General.  The Government  of India  also  mentioned that they  agreed with  the opinion  of the Attorney General who had given primary importance of the intention behind the Government policy  which was  spelt out in the report of the working group. By another letter dated 17th September, 1983, the Government  of India  clarified the  position and it was pointed  out   that  the   portfolio  investment  scheme  by companies and  overseas bodies  owned by  non-residents  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  bring  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 962           (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 to the extent of  at least  60% and  it was  In the  context of the third consideration  that a  ceiling of one per cent of paid up capital  for each  investor was  imposed. Further  to the same considerations,  in May,  1983, a ceiling of 5 per cent on aggregate  investment was also imposed. The Government of India pointed  out that  the question  of direct or indirect ownership should  be considered  in  the  context  of  these considerations. It was pointed out:           "In many  countries there  is no bar on the number           of companies  an individual can pre dominantly own           directly or  indirectly. A person of Indian origin           could, if  he wished, set up a number of companies           directly owned  by him and investment through each           of these  companies upto  one per cent of the paid           up capital  of  a  company  in  India  within  the           framework of our portfolio Investment Scheme. This           situation  is   not  different   in  its  economic           implications than if the same amount of investment           was made  by the same person in the same companies           in India  by the  same number  of companies, which           were indirectly  (and not  directly) owned by him.           As such  having regard  to the  objectives of  the           scheme and  the intention  of the  Government, the           fact whether  a company  is predominantly directly           owned or  predominantly indirectly  owned is not a           material consideration.           Taking the  above consideration  into account, and           in  order   to  remove  any  doubt  regarding  the           eligibility of  companies, it  is  clarified  that           overseas  bodies,   whether  owned   directly   or           indirectly,  are  eligible  to  invest  under  the           scheme so  long as  it is  clear that the ultimate           ownership to the extent of at least 60 per cent is

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         in  the   hands   of   non-residents   of   Indian           nationality/origin. Each such applicant company is           eligible  to   make  investment   subject  to  the           existing ceiling  of one  per cent irrespective of           whether the  ultimate ownership is in the hands of           one or more individuals. 963           Since  this   clarification  merely  reflects  the           original     intention  of   the  Government,  the           investments made by the applicants before 2nd May,           1983  but  pending  for  approval  should  not  be           subject  to   five  per   cent  ceiling.   Pending           applications may be disposed of accordingly.      This letter  was apparently delivered personally to Dr. Man Mohan  Singh, Governor  of the Reserve Bank of India and he made the following endorsement on the letter :           "I have  discussed this  case with FS and FM. This           matter has  been approved  by  CCPA.  As  such  we           should faithfully  carry out consequential action.           I  have   discussed  with  FS,  FM  and  Principal           Secretary to  PM the issue of 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 PM 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.      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 that  the Government  had also  clarified that  each overseas body  was eligible  to invest up to one per cent of the equity  capital under  the portfolio  investment  scheme irrespective of  whether the  ultimate  ownership/beneficial interest in such body was in the hands of one or more 964 non-resident  individuals   of   Indian   nationality/origin subject to  an overall  ceiling of  5 per  cent of the total paid up  equity capital if the investment was made after 2nd May, 1983.  The overseas  bodies desiring to make investment under the  scheme were required to submit their applications to the  Controller, Reserve  Bank of India, Exchange Control Department, Bombay.  The overseas  bodies were  required  to maintain accounts  with banks  authorised to deal in foreign exchange in  India under the Non-resident (External) Account Scheme.      On 19.9.1983, the Reserve Bank also issued Circular No. 18 under sec. 73(3) of FERA. We have already referred to the Circular earlier.  On the  same day (19.9.1983), the Reserve Bank by  a telex  message, conveyed  to the  Punjab National Bank their  permission to  release the money remitted by the Caparo Group  of companies  from abroad  for making  payment against shares  of DCM  and  Escorts  Limited  purchased  on behalf of  the 13  Caparo Group  of Companies  provided  the shares in question were purchased up to and inclusive to 2nd

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May, 1983. It was also mentioned that the purchase of shares shall be  deemed to  have taken place up to and inclusive of 2nd May,  1983 if  firm purchase commitments as evidenced by brokers’ contract notes had been entered into and the shares had been/would  be taken  delivery of  pursuant to such firm commitments at  the price mentioned in the relative brokers’ contract notes.  m e letter granting permission for purchase of shares  was stated  to follow. A letter did follow on the same day  by which  the 13 group of companies were given The approval of  the Reserve  Bank ’to  make investments  in and hold shares  of Delhi  Cloth and  General Mills  Limited and Escorts Limited to the extent of one per cent of the paid up capital of  the  respective  companies  subject,  where  the purchase had  been made  after 2nd  May, 1983  subject to an overall ceiling  of 5  per cent of paid up equity capital of each of  the investee  companies.’ Purchases  made up to and inclusive of  2nd May,  1983 were  not subject  to the 5 per cent ceiling.  Information was requested as to the number of face value  of the  shares purchased  up to 2nd May, 1983 as also details  of shares,  if any,  purchased after  2nd May, 1983.  Permission   was  also   accorded  for   purchase  of shares/debentures of  other Indian companies on behalf of 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 965 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.      In the meanwhile, Escorts Limited wrote several frantic letters to  the Reserve  Bank of India and the Government of India  on   23.7.83,  5.9.1983,   16.9.1983  and   17.9.1983 reiterating the  allegations in  regard to  the purchase  of shares  by  the  13  non-resident  companies.  Although  the Reserve Bank  granted the  requisite permission  to the non- resident companies on 19.9.83, the Reserve Bank of India, on 22.10.1983, perhaps  in view  of the  persistence with which Escorts Limited  continued making  allegations  against  the non-resident companies  and perhaps  with a  view to further satisfy itself,  wrote to  the Punjab  National Bank  asking them for  a report  on the  issues raised  in the letters of Escorts Limited  dated 5th  and 17th September’83, the DCM’s letters dated  11th and  24th August  ’83 and the letters of their advocates. Copies of the letters were forwarded to the Punjab National  Bank who in turn asked the brokers Raja Ram Bhasin &  co. to  submit a  report to them about the various issues raised  in the Reserve Bank’s letter. Raja Ram Bhasin & Co.  replied on  12.12.1983 and  expressed their  surprise that these  questions were  being raised  after the  Reserve Bank had  granted its permission on 19.9.1983. However, they explained that  no illegality  had been committed by them or their clients  the Caparo  Group of Companies with regard to the purchase  of shares  before 2.5.1983. The queries raised by the  companies did not dispute the date of purchases made by them  up to  28.4.1983. The  queries were  misleading and were merely  an attempt  to create  a confusion. The Reserve

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Bank had  satisfied itself  and declared  the eligibility of the companies  to invest.  All contracts  for  the  sale  or purchase of  shares were made subject to the rules, bye-laws and regulations  of the stock exchange and delivery could be made and  accepted pursuant to the contracts earlier entered into. It was not essential that the transfer deeds must bear the date  of stamp of the Registrar of Companies as the date of the  contract.  Deliveries  could  be  taken  even  after 28.4.1983 .  The dates stated in the transfer deeds were the dates  of   execution  of  the  deeds  of  transfer  by  the transferee and had no relevance to the date of 966 purchase of  the date  of delivery.  The sale  consideration shown  in   the  transfer   deed  was  for  the  purpose  of computation of  the stamp  duty had  to be  paid at the rate prevalent on  the dates stated on the transfer deeds and not as on  the actual date or purchase. No shares were purchased in the  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.      Raja Ram  Bhasin  &  Co.  wrote  a  further  letter  on 27.12.1983 with  regard to  the query  whether  shares  were purchased from  rupee loan  raised in India from the Reserve Bank of  India. It  was stated  that a  remittance of  about Rs.107 crores  was with-held  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.      Thereafter, the  Punjab  National  Bank  wrote  to  the Reserve Bank  of India  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  19.9.1983. All  the other points raised by the Escorts Limited  and DCM  Limited required  answers from the brokers. So  they wrote  to the  brokers and the brokers had replied  to   them  stating  that  no  illegality  had  been committed. The  comments of  the brokers were summarised and it was  then added that a sum of Rs.1,05,30,000 was released to the  brokers in accordance with the directions of the RBI as  conveyed   by  their  telex  message  and  letter  dated 19.9.1983.      Subsequent to  the grant  of permission  by the Reserve Bank of  India another attempt was made to have the transfer of shares registered. The request was turned down once again by the Escorts Ltd. who by their letter 13.10.83 stated that apart from  the question  of obtaining the permission of the Reserve Bank of India the decision of the Board of Directors to refuse  to register  the transfer  of shares was based on other grounds  also which  continued to  be  valid.  We  may mention here  that before  the High  Court,  all  the  other grounds mentioned  by the  Board of Directors were abandoned except the  ground relating  to want  of permission  of  the Reserve Bank  of India.  Before the High Court, a resolution passed by  the Directors by Circulation was filet and it was to this effect:- 967           "Resolved that  it is not the Board’s intention to           get  adjudicated  in  some  other  proceeding  the           grounds of  rejection contained  in para  7 of the           Share Scrutiny ant Transfer Committee of Directors           Report dated 8th June, 1983 or in paras 6, 7 and 8

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         of the Report dated 29th August 1983 and the Board           hereby resolve  not to rely on the said grounds in           any proceeding."      The High  Court also  recorded the  concession  in  the following words :           "Para 214  : In  the rejoinder  affidavit filed by           petitioner No.2  it was  specifically pleaded that           the petitioners  do not  want adjudication  of the           other  grounds   of  refusal  of  registration  of           shares,  and  as  such  failure  to  obtain  prior           permission under  section 29  of the FERA retained           the sole  ground for  rejection.  The  respondents           urged that  since  other  grounds  of  refusal  to           register the  shares are  not now  pressed and are           not  required  to  be  adjudicated  in  this  Writ           Petition, the  Court should refuse to go into this           question.  That   would   amount   to   piece-meal           adjudication on  the validity  of the purchase and           refusal to register, which is not permissible even           in the  case of a suit, which principle, according           to the  learned Attorney-General,  also applies to           Writ Petition mutatis mutandis.           Para 215  : Whether  there is  a  live  issue  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  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 968           111 of  the Companies  Act before  the Company Law           Board and  the same  is still  pending. Respondent           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, put in written note           on 6.1.1984  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 names the shares stand           registered in  the books  of the  company. If  the           dividend is  not paid  within the stipulated time,           the petitioner-company  and its Directors would be           exposed to  penalties under the Companies Act. The           question of  payment of  dividend would recur year           after year. In fact, on the question of payment of           interim  dividend  arose,  while  the  respondent-           companies claim  to be  entitled to the payment of           the  dividend  because  they  have  purchased  the           shares, the  petitioners object to payment because           the registration  of transfer  of shares purchased           without prior permission could not be effected and           the dividend  cannot  be  paid  to  persons  whose           shares are  not registered.  When petitioner  No.2           addressed a letter dated 2nd December 1983 to D.N.

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         Davar,  Executive  Director,  IFCI,  inviting  his           comments on  the decision  to withhold the interim           dividend with  respect to  shares purchased by the           respondent-companies,  he   replied  through   his           letter dated  17th December,  1983 inter  alia  as           follows:           "Since the  payment of  dividend in  question,  as           referred to in your letter under reply pertains to           interim dividend  as  resolved  by  the  Board  of           Directors on  the 20th  July 1983  there does  not           appear to  be legal  bar in  withholding the  same           according to  the second  opinion. However in view           of the conflicting legal opinions on the issue, we           are referring  the matter  to the Ministry of Law,           Department   of    Company   Affairs   for   their           clarification. On  hearing  from  them,  we  shall           revert to you on the subject". 969           Thus  the   matter  was  under  reference  to  the           Government  of  India  and  the  question  whether           registration  of  transfer  of  shares  should  be           effected or  not and  who  would  be  entitled  to           receive dividend  on these shares was a live issue           even on  17th December  1983 and  was not  decided           even by the time the writ petition was filed. None           of the  respondents  has  taken  back  the  shares           lodged    with    the    petitioner-company    for           registration of  transfer. Upon  the sale  of  the           shares  and   lodging  of  application  for  their           transfer with  the petitioner-company,  it had  to           take a  decision. The  Company  has  rejected  the           request  for   registration  on   grounds   which,           according to  the well considered opinion of their           legal advisers,  are valid  and justified. The RBI           as well  as the  other respondents and their legal           advisers seem to hold a different view. Of course,           as discussed  above, that  legal opinion  has  not           been placed  before the  court; nor  is the  Court           entitled to  require them  to disclose it. It must           be recorded that petitioners’ learned counsel, Kr.           Nariman, fairly  conceded that  it was an error on           the part  of the  petitioners to  have referred in           the  petitioner  No.2’s  affidavit  to  the  legal           advice tendered  to the  respondent and  requested           that lt  may be  treated as  withdrawn. It was not           pressed at  the bearing  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 E 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 27th  February  1984           addressed to the Petitioners’ Solicitors stated :           "......  the  controversy  regarding  transfer  of           shares has  been raging  throughout the length and           breadth of 970           the  country  and  various  forums  including  the           shareholders associations,  chambers  of  commerce

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         and  other   public  bodies   have   been   making           observations and suggestions on such issues.."           They also  specifically said  in that  letter that           they would  refer to that letter at the hearing of           the writ  petition. This  legal issue  would arise           for  decision   whenever   the   action   of   the           petitioners  not   to  register   the  shares   is           questioned  by   any   of   the   transferors   or           transferees of  the  shares.  If  the  respondents           could still  insist upon  the registration  of the           shares and  claim that  permission granted  to the           respondent  companies   by  the   respondent  No.2           subsequent to  the purchase  of  shares  is  valid           which claim  is strongly  supported by  the  stand           taken by respondents Nos. 1 and 2, the petitioners           are certainly  entitled to  seek a  declaration in           this behalf.  Whether such a declaratory relief in           this behalf  could  be  granted  or  not  will  be           considered in  due course, but certainly it cannot           be said  that the  petitioners have  no  cause  of           action for  seeking a declaration. Notwithstanding           the decision  taken by the Board of Directors, the           company continues to be under pressure to transfer           the shares.  If the stand taken by the petitioners           is incorrect,  then they  would be bound under the           statute as  well as  under the  directions of  the           RBI, to  register the  transfer of  shares in  the           books of  the Company  even now.  While forwarding           the copy  of the  letter dated 27th September 1983           addressed by  the PNB  to  the  respondent  No.  4           Company, Haresh  Bhasin (respondent  No.20) by his           letter dated  8th October  1983 addressed  to  the           petitioner-company and  sent  by  Registered  Post           A.D., had requested that the decision of the Board           of Directors  dated 29th  August 1983  refusing to           register the  shares be  reviewed.  In  reply  the           petitioner company  conveyed  through  its  letter           dated 13th  October 1983  that notwithstanding the           impugned Circular  and the  letter of the RBI, the           refusal to  register continued  to hold  good  for           various  other   reasons.  In   that  letter   the           petitioners-company also  disputed the  claim that           the thirteen  non-resident companies hat purchased           the shares  prior to 2nd May 1984. The petitioner-           company  thus   maintained  that   the  permission           granted subsequently  is not  valid and  that  the           refusal to register the shares for other reasons 971           still holds good. Of course, at the hearing of the           writ petition,  having regard  to the  decision of           the Supreme  Court in  Bajaj  Auto  Ltd.  v.  N.K.           Firodia A.I.R.  1971 S.C.  321 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 Exh. "B" and Ext. "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 sec. 29 prior           permission was  require for  a valid purchase, any           such statement made in the letter on behalf of the           petitioner-company cannot  validate such  transfer

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         so  as   to  entitled   the  purchase   to   claim           registration of  the shares.  Any registration  of           transfer by  the petitioner-company would steel 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           Exh.’B’ and  Exh.’C’ are  construed as  a grant of           permission, lt would amount to granting permission           subsequent to the purchase. When the letter of the           petitioner-company    expressly     states    that           "notwithstanding grant  of the  permission by  the           RBI as refer by you", it could only mean the grant           of permission subsequent to the purchase could not           hold good  and that  they  were  not  prepared  to           transfer  the   shares  on   the  basis   of  that           permission. The  fact that they actually proceeded           to challenge the very permission granted by way of           Writ Petition  fully establishes  that the company           repudiated its liability to transfer the shares on           the strength  of the impugned Circular and letter.           While 80,  it is  the case of the petitioners that           D.N. Davar  one of  the Directors,  armed with the           authority  to   speak  for   all   the   Financial           Institutions including the LIC continued to insist           that the  writ petition  be withdrawn.  Apart from           the other  pressures  exerted  on  the  petitioner           company  and   its  Managing   Director,   already           discussed above,  at the  meeting of  the Board of           Directors of  the petitioner  company held  on 6th           January 1984, D.N. Davar tabled four pages of 972           signed note inter alia insisting upon the Board of           Director to  recall the  cheques lodged  with  the           institutions towards  repayment of  loans  and  to           withdraw the  writ petition filed in the court and           not to  take note  of the correspondence exchanged           between  the   financial  institutions   and   the           management. The  Board of  Director, however,  did           not concur  with his proposal; on the contrary, it           ratified the  filing of  the writ  petition. Apart           from  petitioner  No.2  each  of  the  other  nine           Directors  filed   an  affidavit   in  this  court           supporting the  filing of the writ petition. It is           also  the   allegation  of  the  petitioners  that           financial     institutions,      finding      that           notwithstanding  the  unanimous  request  made  on           their behalf  by D.N.  Davar at the meeting of the           Board of  Directors, the  Company and its Managing           Director  were   refusing  to  withdraw  the  Writ           Petition and  effect the  transfer of shares, with           the ulterior  purpose of obtaining registration of           shares, requisitioned  an EGM  of the  petitioner-           company so  that they  may  secure  a  controlling           majority  in   the   Board   of   Directors.   The           petitioners allege  that the  action  of  the  LIC           (respondent no.  18) which  by itself holds 30% of           the shares  and along  with this  other  financial           institutions, collectively  represented by  Davar,           holds 52%  shares, is  mala fide and is calculated           to secure  the registration  of the  shares  which           were purchased  in contravention  of FERA.  In the           circumstances referred to above, it cannot be said

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         that the  company and its Managing Director had no           cause of  action to  file this  Writ Petition hold           that there  was no  longer any  live issue  to  be           adjudicated.    The     petitioner-company    thus           maintained    that    the    permission    granted           subsequently is  not  valid  and  the  refusal  to           register the  shares for  other reasons still hold           good. Of  course,  at  the  hearing  of  the  Writ           Petition, having  regard to  the decision  of  the           Supreme Court  in Bajaj Auto Ltd. v. N.K. Firodia,           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.      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 973 us to  consider is  whether the  permission granted  by  the Reserve Bank of India was in order.      Escorts Limited  having refused  permission to register the transfer  of shares,  one would have thought that lt was thereafter upto the purchasers or the sellers of the shares, if  they   were  no   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 but it was the  Escorts Limited 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 Art.226 of the Constitution. It appears that  on 18.10.83,  Escorts  Limited  met  with  the representatives of  the Financial  Institutions, the  ICICI, the IFC,  the IDBI  and the UTI. It has to be mentioned here that 30  per cent  of the shares of Escorts Limited are held by the  Life Insurance  Corporation, 16 per cent by the Unit Trust of  India and  6 per  cent by  the  General  Insurance Corporation  and  its  subsidiaries.  According  to  Escorts Limited, at  this meeting  L their representatives gave full particulars of  the various  illegalities committed  by  the Caparo Group  of Companies  in the  purchase  of  shares  of Escorts Limited  but they  were repeatedly  pressed  by  the representatives of  the institutions  to get  their Board of Directors to  reconsider their  earlier refusal  to register the transfer  of shares.  It was  said that  Mr.  Patel  the Chairman of  the Unit  Trust of  India even  said  that  the Financial Institutions  who owned  52 per cent of the shares were in  a position  to remove the management at will. There were other  meetings also  with the  representatives of  the Financial Institutions.  Mr. Nanda,  the Chairman of Escorts Limited was  requested to  meet with  Mr. Punja, Chairman of IDBI, and  a Director  of Life Insurance Corporation who had just returned  from abroad.  At this  meeting also,  it  was said,  Mr.  Punja  insisted  that  the  transfer  of  shares purchased  by   the  thirteen  Caparo  Companies  should  be registered. Again on 1.11.83 there was a meeting between the lawyers of  Escorts and  the legal advisers of the Financial Institutions. There  was a  further meeting  between . Nanda and Mr.  Punja on  9.11.83 when Mr. Nanda of Escorts Limited requested Mr.  Punja to  expedite the proposal for merger of goetze India  Limited with  Escorts Limited and the proposal for pre-payment  of the outstanding loans of Escorts Limited to the  Financial Institutions  at  the  inter-institutional meeting to  be held  on the  after¯ on of 9th. Mr. Nanda was later informed  by Mr.  Davar that  the proposals of Escorts

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Limited had been discussed 974 and accepted  but the  formal clearance  would have to await Mr. Punja’s  discussion with  Mr. Nanda.  Thereafter, it was said, Mr.  Nanda was  informed by  Mr.  Punja  that  Escorts Limited must  register some  shares purchased  by the Caparo Group of  Companies. In  answer Mr. Nanda informed Mr. Punja that the  RBI itself  was enquiring  into  the  purchase  of shares by  Caparo Group of Companies and therefore Mr. Punja should await  the outcome  of the investigation. On 10.11.83 Mr. Sen  Gupta, the  Controller of capital issues telephoned to Mr.  Nanda  and  insisted  that  Escorts  Limited  should atleast register  some shares  purchased by the Caparo Group immediately. On  12.11.83 Mr.  Punja once more insisted that some shares  atleast should  be registered  immediately.  On 16.11.83 Mr.  Nanda met  Mr. Nadkarni, the Chairman of ICICI who informed  him that  Mr. Punja  was  most  upset  at  the refusal of  Escorts Limited  to  register  the  transfer  of shares. Thereafter  in the  first week of December, the Unit Trust of  India wrote  a letter to Escorts Limited to induct their Dy. General Manager as a nominee Director on the Board of Directors  of Escorts Limited. On 13th December, 83 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 20.12.83  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 Limited for merger, for pre-payment of loans and issue of debentures were inter- linked with  the question  of register of transfer of shares purchased by the Caparo Group of Companies. According to Mr. Nanda this  conversation was  contemporaneously recorded  by him in a letter addressed by him to Mr. Punja that very day.      While so  the ’Telegraph’  and the  ’Financial Express’ published a  statement by  Mr. Swraj Paul that the fight was now between  the Government  and the  management of  Escorts Limited and  that he  would consider himself defeated if the Government cleared  the proposal of Escorts for the issue of debentures without first settling the matter of registration of transfer  of the  shares purchased by him. Mr. Swraj Paul was also  reported to  have said  that the  Governor of  the Reserve Bank  (Dr. Man Mohan Singh, a highly respected Civil Servant of  our country)  was applying  double standards and was feeding wrong information to the Union Finance Minister. (If  the   reported  statement   is  correct,  we  can  only characterise it  as saucy,  rude and  impudent coming  as it does from  a foreign  national seeking the permission of the Reserve Bank  to  invest  in  shares  of  Indian  Companies. Perhaps those  are the  ways of  the  markets  in  which  he operates. People 975 afflicted  with  double  vision  are  ready  to  see  double standards in  others. We  appreciate neither his conduct nor his statements.  Dr. Man  Mohan Singh, we presume, could not and did not think it proper to go to the press as readily as Mr.  Swraj   Paul  and   involve  himself  in  an  unsavoury controversy). On 24.12.83, there was a report of a speech of the Union  Finance Minister  (Mr. Pranab  Mukherjee), at the Platinum Jubilee  Celebration of the Calcutta Stock Exchange in which  he referred  to the  dominant position held by the Financial Institutions  in the  equity shares  of some large private  companies  and  added,  I  have  a  very  effective instrument  under   my  command   to  end  the  uncertainty. According  to   Escorts  Limited  it  was  in  this  factual background, that  they  were  compelled  to  file  the  writ

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petition in  the High Court of Bombay. One remarkable tactic of Mr.  Nanda of  Escorts deserves special mention here. The Writ  Petition  was  filed  on  29.12.83  and  some  interim directions were  also sought  on the  same day. On that very day Mr. Nanda also had a meeting with the representatives of the Financial  Institutions at  the Office  of Mr.  Punja at which-. Mr.  Nanda was asked to arrange for the induction of a representative  of the  U.T.I. on the Board of Escorts and was further  informed that the proposal for merger of Goetze Limited may not be acceptable as it would reduce the holding of the financial institutions from 52 per cent to 49 percent 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.      Writ Petition  No.3063 of  83 thus  filed in  the  High Court of Bombay was perhaps both protective and a preemptive 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. Prayer (a), (b) and (c)  seek declarations that Circular No.18 dated 19.9.83 are illegal  and void  as contrary  to the provisions of the Foreign Exchange  Regulation Act as arbitrary and issued for collateral purposes,  as constituting  in abuse of statutory authority and  as violative  or Articles  14,  19(1)(c)  and 19(1)(g)  of   the  Constitution.   Prayer  (d)   is  for  a declaration that  the purchases  of shares made by and/or on behalf of the Caparo Group 976 Limited are  illegal and  violative of  the Foreign Exchange Regulation Act,  the circulars  of the Reserve Bank of India issued  from   time  to  time  and  the  provisions  of  the Securities Contracts  Regulation Act and the bye-laws of the Stock Exchange.  Prayers (e),(f),(g),(h),(i) again relate to Circular No.  18 dated 19.9.83 and the letter dated 19.9.83. Prayer  (j)   is  directed  towards  securing  the  relevant documents. Prayer  (k) is  to restrain  the first respondent (Union of India) from pressuring the company to register the transfer of  shares. Prayer (1) is for ad-interim reliefs in terms of prayers (j) and (k). Prayer (m) is for costs of the Petition. It  will be of interest to notice at this juncture that the  learned single judge before whom the writ petition came up  for preliminary  hearing thought fit not to issue a rule nisi  in regard  to prayer(d). The learned judge made a speaking order  refusing to  issue a  rule nisi in regard to prayer (d).  There was  no  appeal  against  that  order  by Escorts Limited  and  the  order  became  final  so  far  as prayer(d) was  concerned. The  entire cause of action of the petitioner centres  round the purchase of shares made by and on behalf of Caparo Group Limited and if those purchases are left unquestioned,  one is  left wondering  what survives in the writ petition, particularly in view of the fact that the Board of  Directors of the Company had already refused their permission to  register the  transfer of shares. The prayers relating to  Circular No.  18 dated  19.9.83 and  the letter dated 19.9.83  were only  in aid  of prayer (d) which, as we see it,  was the main prayer in the writ petition. But we do not propose  to dispose  of the case on any such preliminary ground. Apparently, when the learned single judge refused to issue a  rule nisi  in regard to prayer(d) what he meant was that transactions of purchase of shares would not be allowed

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to be  separately and  individually questioned as that would involve adduction  of evidence  in regard  to  each  of  the transactions and would be ordinarily outside the province of a court  exercising jurisdiction  under Article  226 of  the Constitution. This becomes clear from what the learned 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           Exhibit ’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 : 977           "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  19th           September 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." Ex.B we  may mention  in the Circular dated 19.9.83 and Ex-C in the permission granted by the Reserve Bank of India.      Subsequent to  the filing of the Writ Petition the Life Insurance Corporation  of India  (who later was impleaded as the 18th  respondent in  the Writ  Petition) who  along with other financial  institutions held as many as 52 per cent of the  total  number  of  shares  in  the  Company,  issued  a requisition  dated   11.2.84  to  the  company  to  held  an extraordinary general  meeting for  the purpose  of removing nine of  the part-time  Directors of  the  Company  and  for nominating nine  others in  their place.  Alleging that  the action of  the  Life  Insurance  Corporation  of  India  was malafide and  part of  a concerted  action by  the Union  of India, the  Reserve Bank  of  India  and  the  Caparo  Group Limited to  coerce the  company to  register the transfer of shares  and   to  withdraw   the  Writ  Petition,  the  Writ Petitioners sought  to suitably  amend the Writ Petition and to add  prayers (ia),  (ib), (ic)  and (id)  to declare  the requisition to  hold the  meeting arbitrary,  illegal, ultra vires etc. The writ petition was amended. Paragraphs 149A(l) to (44)  were added  as also  prayers (ia),  (ib), (ic)  and (id).      The High  Court after  an elaborate  enquiry summarised their conclusions  and  granted  reliefs  in  the  following manner:           "Rule nisi  is made  absolute as  under :  Section           29(1)(b) of  FERA is mandatory. No NRI Investor is           authorised to purchase shares in an Indian company           without prior  permission of the RBI under section           29(1)(b) of  FERA; any  purchase of shares without           such 978           prior permission  is illegal. Neither the Union of           India nor  the RBI is empowered to order otherwise           either by  issuing directions  under section 75 or           under section  73(3) of  the FERA;  nor  are  they           empowered to grant permission after the shares are           purchased so  as to  validate such purchases or to

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         ’permit holding  of the  shares purchased  without           obtaining  prior  permission.  The  press  release           dated  17th   September,  1983   (Exh.  ’A’),  the           Circular dated 19th September, 1983 (Exh. ’B’) and           the letter  dated 19th  September, 1983 (Exh. ’C’)           cannot operate  retrospectively so  as to validate           the purchase of shares made by NRI Companies which           were ineligible  on the  date of purchase; nor Can           they  authorise   purchase   of   shares   without           obtaining  prior   permission  of  the  RBI  under           section 29(1)(b)  of the  FERA. In  so far  as the           impugned press  release, circular  and the  letter           permit the respondent companies to hold the shares           purchase without obtaining prior permission of the           RBI, they  are ultra  vires of section 29(1)(b) of           the FERA  and the  powers vested  in the  union of           India under  section 75  and the  RBI  under  sec.           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           14th April,  1982  (Exh.’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 19th September, 1983 (Exh.’C’); and           (b) to  further forbear from implementing the said           t Circular dated 19th September 1983 (Exh.’B’) and           the  said   letter  dated   19th  September   1983           (Exh.’C’) with  respect to the shares purchased by           the respondent  companies which  form the subject-           matter of this writ petition. 979           There shall  be a  declaration that  the action of           respondent   No.18   in   issuing   the   impugned           requisition notice  is contrary  to the provisions           of sec.284  of the  Companies Act  and ultra vires           the powers  vested in  the LIC  under section 6 of           the LIC  Act and contrary to the internment of the           provisions  of   the   LIC   Act.   The   impugned           requisition  notice   offends  the  principles  of           natural justice.  The action of the LIC in issuing           the impugned  requisition notice  is an  arbitrary           and mala fide action taken for collateral purpose;           it is  violative of Article 14 of the Constitution           of  India.   The  Union  of  India  and  the  RBI,           respondents Nos.1 and 2, are in no way responsible           for the  action of  the LIC  in this  regard.  The           allegation of  this mala  fides made  against them           and    the     Union    Finance    Minister    are           unsubstantiated. The  requisition notice  and  the           resolutions  passed   at  the   meeting  held   in           pursuance of  the said  notice are quashed. A writ           of   mandamus    shall   issue   restraining   the           respondents from  taking any  steps or  action  in           pursuance of  the resolutions  passed any  meeting           held pursuant to that notice any step or action on           or  under   or  in  furtherance  of  the  impugned           requisition notice."      From what has been narrated above, one of the principle

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questions to be considered is seen to be whether the Reserve Bank of  India had  the power  or authority  to give ex-post facto permission  under sec.29(1)(b) of the Foreign Exchange Regulation Act  for‘ the  purchase of  shares in  India by a company ¯ t incorporated in India or whether such permission had necessarily to be previous permission.      We do  not propose  to refer  to any dictionary to find out the  meaning of  the word ’permission’, whether the word is comprehensive enough to include subsequent permission. We will only  refer to  what Sir  Shah Sulaiman,  CJ.  said  in Shakir Hussain  v. Chandoo  Lal &  Ors., A.I.R.  1931 Allah, 567.           "Ordinarily the  difference between  approval  and           permission is that in the first the act holds good           until disapproved,  while in  the other  case,  it           does not  become  effective  until  permission  is           obtained. But permission subsequently obtained may           all the same validate the previous act. 980      We have  already extracted sec.29(1) and we notice that the expression used is "general or special permission of the Reserve Bank  of India"  and  that  the  expression  is  not qualified by  the word  "previous" or  "prior". While we are conscious that the word ’prior" or "previous" may be implied if the  contextual situation or the object and design of the legislation  demands   it,  we   find  no   such  compelling circumstances justifying  reading any  such implication into sec.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  the Parliament has no 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 Secs.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’   ant   ’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  provisions of  the Act.  The significance of  the use  of the qualifying in one provision and its non-use in another provision may not be disregarded. In  our   view,  the  Parliament  deliberately  avoided  the qualifying word ’previous ’ in sec.29(1) so as to invest the Reserve Bank of India with a certain degree of elasticity in the matter  of granting permission to non-resident companies to purchase  shares in  Indian companies.  The object of the Foreign Exchange Regulation Act, as already explained by us, undoubtedly, is  to  earn,  conserve,  regulate  and  stored foreign exchange. The entire scheme and design of the Act is directed towards  that end.  Originally the Foreign Exchange Regulation Act, 1947 was enacted as a temporary measure, but it was  placed  permanently  on  the  Statute  Book  by  the Amendment Act  of 1957. The Statement of Objects and Reasons of the  1957 Amendment  Act expressly  stated, "India  still continues  to  be  short  of  foreign  exchange  and  it  is necessary to  ensure that our foreign exchange resources are conserved in  the national  interest." In  1973, the old Act was repealed and replaced by the Foreign Exchange Regulation

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Act, 1973,  the long  title of  which reads  :  "An  Act  to consolidate and  amend the  law regulating certain payments, dealings in foreign exchange ant securities, tran- 981 sactions  indirectly  affecting  foreign  exchange  and  the import  and   export  of   currency  and  bullion,  for  the conservation of  foreign exchange  resources of  the country and the  proper utilisation  thereof in  the interest of the economic  development  of  the  country."  We  have  already referred to  sec. 76  which emphasises that every permission or licence  granted by the Central Government or the Reserve Bank of India should be animated by a desire to conserve the foreign exchange  resources  of  the  country.  The  Foreign Exchange Regulation  Act is,  therefore, clearly  a  statute enacted in  the national  economic interest. When construing statutes  enacted   in  the   national  interest,   we  have necessarily   to   take   the   broad   factual   situations contemplated by  the Act  and interpret its provisions so as to  advance  and  not  to  thwart  the  particular  national interest whose  advancement is  proposed by the legislation. Traditional norms  of statutory interpretation must yield to broader notions of the national interest. If the legislation is viewed  and construed from that perspective, as indeed it is  imperative   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 of India should be obtained at some  stage for  the purchase  of shares  by non-resident companies.      An argument  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   Sec.  29(1)   could  only   be   previous permission, notwithstanding  the circumstance  that the word ’previous’ does  not  qualify  the  expression  ’general  or special permission’  in sec. 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 be  swamped with  Foreign money  and taken over by  giant multinationals.  But  that  really  does  not affect the  interpretation of the expression ’permission’ in Sec. 29(1).  The Reserve  Bank of India is not bound to give ex-post-facto permission  whenever it is found that business has been started or 982 shares have  been purchased without its previous permission. In such  cases, wherever  the Reserve Bank of India suspects an oblique motive, we presume that the Reserve Bank of India will not  only refuse  permission but will further resort to action under  sections 50,  61 and 63, not merely punish the offender but  also confiscate  the property  involved. We do not  think  that  the  scheme  of  the  Act  makes  previous permission imperative under sec. 29(1) though the failure to obtain prior  permission may  expose the foreign investor to prosecution,  penalty,   conviction  and   confiscation   if permission is  ultimately refused.  Even  if  permission  is granted, it may be made conditional. The expression ’special permission is  wide enough  to  take  within  its  stride  a

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’conditional permission’,  the condition  being relevant  to the purpose  of the  statute, in this case, the conservation and regulation  of foreign  exchange. For  example, ex-post- facto permission  may be  granted subject  to the  condition that the  person purchasing  the shares will not be entitled to repatriation benefits.      Shri Nariman then suggested that even if we look st the provisions of  s. 29  by themselves  it would clear that the permission contemplated  by s.  29 could only be ’previous’. He pointed  out to  us that while secs. 29(2) and 29(4) made due provision  for applying  for permission  to continue  to carry on any activity of the nature mentioned in s. 29(1)(a) and continue  to hold  shares of  a company of the character mentioned in s. 29(1)(b) if such activity was carried on and such shares were held on the date of the commencement of the act, no  such provision  was found  for the  application for permission to  carry on such activity or to hold such shares if such  activity was  commenced  or  if  such  shares  were acquired after  the commencement  of the Act but without the previous permission  of the  Reserve Bank  of India.  It was suggested that  the very  absence of any prescribed form for the grant  of permission  for an  activity started or shares acquired subsequent  to the  commencement of the Act without previous permission  of the  Reserve  Bank  of  India,  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  sec. 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  sec.  29(1) qualified both 983 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 A  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 sec. 29(1)(a) must necessarily be previous permission. We do not think that the Parliament intended  to lay  down in absolute terms that the permission contemplated  by sec. 29(1) had necessarily to be previous permission.  The principal  object of sec. 29 is to regulate and  not altogether to ban the carrying on in India of  the   activity  contemplated   by  clause  (a)  and  the acquisition of  an undertaking  or shares  in India  of  the character mentioned in clause (b). The ultimate object is to attract and  regulate the  flow  of  Foreign  Exchange  into India. If  that much is obvious, it becomes evident that the Parliament did  not intend to adopt too rigid an attitude in the matter  and it  was, therefore, left to the Reserve Bank of India,  than whom  there could  be no  safer authority in whom the  power may be vested, to grant permission, previous or ex-post-facto,  conditional or unconditional. The Reserve Bank could  be expected  to use the discretion wisely and in the best  interests of  the country  and in  furtherance  of declared Governmental fiscal policy in the matter of Foreign Exchange.      It was contended on behalf of Escorts Limited that sec. 13 of  the Foreign  Exchange Regulation Act which enable the Central Government,  by a  notification in  the gazette,  to order that  no person  shall  except  with  the  general  or special permission  of the  Reserve Bank  bring or send into India any  gold or  silver or any Foreign Exchange or Indian

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currency, would  be rendered  ineffective if  the expression ’general or special permission’ accruing in sec. 13 could be construed to  include  subsequent  permission.  So,  it  was urged, both  in s.  13 and  secs. 19  and 29  the expression should be  construed to exclude subsequent permission. There is no  force in  this submission.  Section 67 of the Foreign Exchange  Regulation   Act  provides  that  the  restriction imposed by  or under  sec. 13  is to  be deemed to have been imposed under  sec. 11  of the  Customs Act,  and,  further, makes  the   provisions  of   the  Customs   Act  applicable accordingly. Section  11 of  the Customs  Act  empowers  the Central Government  to prohibit  absolutely  or  subject  to conditions the  import or  export of  goods of any specified description. Reading together sections 13 and 67 984 of the Foreign Exchange Regulation Act and Section 11 of the Customs Act,  it is  seen that an order under sec. 13 of the Foreign Exchange  Regulation Act  operates as  a prohibition and there,  can, therefore,  be no  question of  the Reserve Bank  granting   subsequent  permission   to  validate   the importation  of   the  prohibited   goods  and   avoid   the consequences  prescribed   by  the   Customs  Act.   It  is, therefore, not  possible to accept the analogy of section 13 to interpret sections 19 and 29.      Our attention  was drawn  to the very serious nature 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. We presume that when called upon  to show  that he  had the necessary permission, the person  accused of the offence could satisfy the officer concerned that  he had  applied for permission as that there was a  reasonable prospect  of his obtaining the permission. We may  further add here that ordinary prudence would warn a foreign national  who is  man of  the world, particularly of the commercial  world, to  seek and obtain permission before venturing to invest his money in shares of Indian Companies. If not  he would  chance a  refusal of  permission and  risk other consequences.  The chance  and the  risk,  of  course, would  not  be  there  if  everything  was  clean.  Even  if permission is granted, it may be subject to a condition such as withholding  of repatriation  benefits, which  may not be platable to  him. That  is another chance that he takes when he seeks ex-post-facto permission. One 985 of the  submissions of  Shri Nariman was that the Parliament took care  to use  the word  ’confirmation’ as distinguished from  the   word  ’permission’   where   lt   thought   such

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confirmation  was   sufficient,  as   in  sec.   19(5).  The Parliament, according  to Shri Nariman, could well have made a  provision   for  confirming   transactions  coming   into existence after  the commencement  of the  Act, if lt was 80 minded, but  since, it  did not  do 60,  but chose  the word permission’,  it  must  follow  that  sec.  25  contemplates previous permission only. We see no true foundation for this submission. reference  to any  dictionary  or  any  book  of synonyms will  show that  every word has different shades of meaning and  different words  may have  the same meaning. It all depends  upon the  context in which the word is used. If it was  the  intention  of  Parliament  to  comprehend  both previous and  subsequent permission, the word ’confirmation’ would not do at all. While it may be permissible to construe the word  ’permission’ widely  the word ’confirmation’ could never be  used to  convey the meaning ’previous permission’. The word confirmation would be totally misplaced in sec. 29.      It was  also submitted on behalf of the company that if the word ’permission’ was construed to include ex-post-facto permission, it  would really  amount to giving retrospective operation to  the permission.  The Reserve Bank, it was said was  not  competent  to  grant  permission  with  retrospect effect. In our view, the rule against retrospectivity cannot be imported  into the  situation 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 submission very strenuously 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  of  India  was itself, of  the view  that the  ’permission’ contemplated by sec. 29(1)(b)  of the  Foreign Exchange  Regulation Act  was ’prior permission.  Our attention  was invited  to paragraph 24-A.1 of  the Exchange Control Manual where the first three sentences read as follows :-           In terms of sec. 29(1)(b) of Foreign Exchange 986           Regulation Act  1973, no  person resident  outside           India whether  an individual, firm or company (nor           being  a  banking  company)  incorporated  outside           India can  acquire shares  of any company carrying           on trading,  commerce or  industrial  activity  in           India without  prior permission  of Reserve  Bank.           Also under  sec. 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 any  person           outside India  require  prior  permission  of  the           Reserve Bank  of India.  When permission  has been           granted for  transfer or  issue of  shares to ¯ n-           resident investors under sec. 19(1)(b) or 19(1)(d)           it is  automatically deemed to be permission under           sec. 29(1)(b) for purchase of shares by him. The submission  of Shri  Nariman was two-fold. He urged that paragraph 24-A.1 was a statutory direction issued under sec. 73(3) of the Foreign Exchange Regulation Act and, therefore, had the  force of law and required to be obeyed. Alternately he  urged   that  it   was  the  official  and  contemporary interpretation  of   the  provision  of  the  Act  ant  was, therefore, entitled  to our  acceptance. The  basis for  the first part  of the  submission  was  the  statement  in  the preface to the Exchange Control Manual to the effect:

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         "The present  edition of  the Manual  incorporates           all the  directions of a standing nature issued to           authorised dealers  in the  form of circulars upto           31st May,  1978. The  directions have  been issued           under  sec.   73(3)  of   the   Foreign   Exchange           Regulation Act  which empowers the Reserve Bank of           India to  issue directions  necessary or expedient           for  the   administration  of   exchange  control.           Authorised dealers  should hereafter  be guided by           the provisions contained in this Manual." There is no force whatever in this part of the submission. A perusal of  the Manual shows that it is a sort of guide book for  authorised  dealers,  money  changers  etc.  and  is  a compendium or  collection of  various statutory  directions, administrative instructions,  advisory  opinions,  comments, notes, explanations suggestions, etc. For example, paragraph 24-A.1 is  styled as  Introduction to  Foreign Investment in India. There is nothing in 987 the whole of the paragraph which even remotely is suggestive of a  direction under  sec. 73(3).  Paragraph 24-A.1  itself appears to  be in  the nature of a comment on sec. 29(1)(b), rather than  a direction  under sec. 73(3). Directions under sec. 73(3), we notice, are separately issued as circulars on various dates.  No Circular  has been placed before us which corresponds to  any part of paragraph 24-A.1. We do not have the slightest  doubt that paragraph 24-A.1 is an explanatory Statement of  guideline for  the benefit  of the  authorised dealers. It  is neither  a statutory  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 of India, so  that there may be no later complications. It is a helpful suggestion,  rather than  a mandate.  The expression ’prior permission’  used in paragraph 24-A.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  tall that wags the dog.’ We may add  what   this  Court  had  occasion  to  say  in  Vasudev Ramchandra Shelat  v. Pranlal  Jayanand  Thakkar,  [1975]  1 S.C.R. 534:           "The subservience of substance of a transaction to           some  rigidly   prescribed  form  required  to  be           meticulously  observed,  savours  of  archaic  and           outmoded jurisprudence."      According to  Shri Nariman  even if as found by us, the permission to purchase shares of an Indian company by a non- resident Investor  of Indian  origin  or  nationality  under section 29(1)(b)  of the  FERA could  be obtained  after the purchase, the  Reserve Bank  ceased to have such power after the formulation  of the Portfolio Investment Scheme since it did not reserve to itself any such power under the Portfolio Investment Scheme  promulgated in  exercise  of  its  powers under sec.  73(3) of the Foreign Exchange Regulation Act. We do not  see any  foundation for  this argument in the scheme itself. The  scheme does  not talk  of any prior or previous permission, nor are we able to

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988 understand how a power possessed by the Reserve Bank under a Parliamentary legislation  can be  so cut down as to prevent its exercise  altogether. It  may be  open to  a subordinate legislating body  to make  appropriate rules and regulations to regulate the exercise of a power which the Parliament has vested in  it, so  as to  carry  out  the  purposes  of  the legislation, but  it cannot  divest itself  of the power. We are, therefore,  unable to  appreciate how the Reserve Bank, if it  has the  power under  the FERA to grant ex-post-facto permission, can  divest  itself  of  that  power  under  the scheme. The  argument was advanced with particular reference to the  forms prescribed  under the  scheme. We have already pointed out  that the  forms under the scheme cannot abridge the legislation itself.      Before proceeding further, it is just as well to have a clear picture  of the  nature of the property in shares, the law relating to transfer of property in shares under the law and the  effect of  the provisions  of the  FERA.  For  that purpose, it  is desirable  that we  read  together  all  the relevant statutory  provisions relating  to the acquisition, transfer and  registration of  shares. Besides  referring to the relevant statutory provisions, we will also refer to the leading cases on the topic.      Section 2(46)  of the  Companies Act  defines shares as meaning share  in  the  share  capital  of  a  company,  and includes stock except where a distinction between stocks and shares is  express or  implied. Section  82 of the Companies Act states  the shares or other interests of any member in a company shall be movable property transferable in the manner prescribed 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 the  company holding  any  equity share capital  there-in 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 transfer or and by or on behalf of the transferee 989 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. Section 108(1A)(b)  provides for  the delivery  of the  duly stamped instrument  to  the  company  generally  within  two months from the date of such presentation. Sections 108-A to 108-H impose  certain restrictions  on transfer of shares in the company  with which we are not concerned for the purpose of this  case. Section  110  provides  for  application  for transfer of  shares. Section  111 (1) preserves the power of the company  under its  articles to  refuse to  register the transfer of  any shares  of the  company,  and  sec.  111(3) provides for  an appeal  to the  Central Government  against such refusal  to register. Section 206 obliges a company not to pay  the dividend  in respect  of any share except to the registered holder  of such  share or  to his order or to his bankers or  where a share warrant has been issued in respect

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of the share to the bearer of such warrant or to his banker. Default in payment of dividend is also made punishable under sec. 207. A share-holder along with others, making a minimum of one  hundred members  of the  company or one-tenth of the total number  of members has the right to apply to the court under sec.  397 for  relief in  case of oppression and under sec. 398  for relief  in case  of mismanagement. Section 428 defines ’contributory’  and it  includes the  holder of  any shares which  are fully  paid-up.  The  share-holder,  as  a contributory, has  also the right to apply for winding up of the company  under sec. 439. On winding up, sec. 475 enables the court to adjust the rights of the contributories amongst themselves and  to distribute  the surplus among the persons entitled thereto.      We have  also no  notice here sec. 27 of the Securities Contracts (Regulation)  Act which  provides that it shall be lawful for the holder of any security, whose name appears on the books  of the  company  issuing  the  said  security  to receive and  retain any  dividend declared by the company in respect thereof  for any year, notwithstanding that the said security  has   already  been   transferred   by   him   for consideration,  unless   the  transferee,   who  claims  the dividend from the transferer has lodged the security and all other documents  relating  to  the  transfer  which  may  be required  by   the  company   with  the  company  for  being registered in  his name  within fifteen  days of the date on which the dividend became due. 990      We have  to further  notice here that the sale of Goods Act also  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 sold before sale or under the contract of sale."      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 section  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 into 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 goods and appropriation and  section  24  deals  with  goods  sent  on approval or "on sale or return".      We have  referred at  the outset  and  indeed  we  have extracted some  of the  important provisions  of the Foreign Exchange Regulation  Act which  have relevance  to the  case before us.  We have seen that while sec. 19(1)(b) prescribes that no  person shall,  except with  the general  or special provision of  the Reserve  Bank, transfer  any  security  or create or  transfer any  interest in  a security,  to or  in favour of  a person  resident outside  India, sec.  29(1)(b) provides that  no person  resident outside  India (whether a citizen of  India or  not) or  a company is not incorporated under any law in force in India or in which the non-resident interest is  more than  40 per  cent, shall  except with the general or  special permission  of the Reserve Bank purchase

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the shares  in India  or any  company carrying on any trade, commerce or  industry. The  provisions of sec. 29 are stated to be  without prejudice  to the provisions of sec. 47 which while prohibition any person from entering into any contract or agreement  which would  directly or  indirectly evade  or avoid in  any way  the operation of any provision of the Act or rule or direction or order made thereunder 991 also provides  that the provisions of the Act requiring that anything for  which the permission of the Central government or the  Reserve Bank  is necessary  shall not  prevent legal proceedings being brought in India to recover any sum which, apart from the said provisions would be due as debt, damages or otherwise, subject to the condition that no step shall be taken for the purpose of enforcing any judgment or order for the payment of any sum, unless the Central Government or the Reserve Bank as the case may be, may permit the sum to paid. We have also referred earlier to sec. 19(4) which stipulates that no  person shall,  except with  the permission  of  the Reserve Bank,  enter  the  transfer  of  securities  in  any register if  he has  any  ground  for  suspecting  that  the transfer involves  any contravention  of the  provisions  of sec.  19.   Sections  48,   50,  56  and  63  prescribe  the consequences of  non-compliance with  the provisions  of the Act and  the rules,  orders and  directions issued under the Act  and   provide  for   penalties  and  prosecutions.  The provisions of  the Foreign Exchange Regulation Act, to which we have  just now  referred, 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.      In the  course of  the submissions  we were referred to Manekji   Pestonji Bharucha and Anr. v. Wadilal Sarabhai and Company 52 I.A. 92, Bank of India v. Jamshetji  A.H. Chinoy, A.I.R. 1950  P.C.90, In  Re Fry, 1946 (2) All E.R. 106 Swiss Bank  Corporation   v.  Liodys  Bank  Ltd.  1982  A.C.  584, Charanjit Lal Choudhury v. Union of India A.I.R 1951 S.C 41, Mathalone and  Ors. v. Bombay Life Assurance Company Limited A.I.R. 1953  S.C. 385  and  Vasudev  Ramachandra  Shelat  v. Pranlal Jayanand  Thakkar, (supra)  A.K. Ramiah  v.  Reserve Bank of India 1970 (1) M.L.J. 1 and Baliv Chopra I.A.R. 1971 (2) Delhi  637. We  have read all of them and we think it is enough if we refer to some of them.      In Charanjit  Lal Choudhary  v. Union of India (supra), Mukherjee, J.  summarised the  rights of  a shareholder in a company in the following manner :           "The petitioner  as a  shareholder has undoubtedly           an  interest  in  the  company.  His  interest  is           represented by the share he holds and the share is           a movable 992           property according  to the  Indian companies  Act,           with all  the incidence  of such property attached           to it.  Ordinarily, he  is entitled  to enjoy  the           income arising  from the  shares in  the shape  of           dividends; the  share like  any  other  marketable           commodity can  be sold  or transferred  by way  of           mortgage or  pledge. The  holding of  the share in           his name  gives him  the  right  to  vote  at  the

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         election of  Directors and  thereby take  a  part,           though  indirectly   in  the   management  of  the           company’s  affairs.  If  the  majority  of  share-           holders sides  with him,  he can have a resolution           passed which  would be  binding on the Company and           lastly, he  can institute  proceedings for winding           up  of   the  Company   which  may   result  in  a           distribution of  the net  assets among  the  share           holders. It is interesting to notice that Mukherjee, J. in the course of his opinion, expressed the view that a Corporation, which is  engaged   in  the  production  of  a  commodity  vitally essential to the community has a social character of its own and it must not be regarded as the concern primarily or only of these who invest their money in it.      In Mathalone  and Ors. v. Bombay Life Assurance Company Ltd. (supra),  the  question  of  relationship  between  the transferor and  transferee of  shares before registration of the transfer  in  the  books  of  the  company  came  to  be considered in connection with the right of the transferee to the ’right-shares’ issued by the company. On the transfer of shares  transferee   became  the  owner  of  the  beneficial interest though  the legal title was with the transferor the relationship  of   trustee  and   ’cestui  que   trust’  was established and  the transferor was bound to comply with all the reasonable directions that the transferee might give and that he  became a  trustee of dividends as also a trustee of the right  to vote.  The relationship  of trustee and cestui que trust  arose by reason 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 cestui que 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  opportunities  arose  for  purchase  of  new  shares  in consequences of 993 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.      In  Vasudev  Ramachandra  Shelat  v-  Pranlal  Jayanand Thakkar (supra),  the question  arose this  way,  The  donor gifted certain  shares in  companies to  the appellant  by a registered deed.  She also  signed  several  blank  transfer forms to  enable the  donee to  obtain transfer of shares in the register  of companies.  However, she  died  before  the shares could be transferred to the appellant in the books of the companies.  The respondent, a nephew of the donor, filed the suit,  claiming the  shares on  the ground that the gift was incomplete  for failure  to comply  with the formalities prescribed by  the Indian Companies Act 1913 for transfer of shares. Noticing that in 53 Indian Appeals, 92 a distinction was made  between the  title to  go on  the register and the full property in the shares in a company the court expressed the view  that sec.  6 of  the Transfer of Property Act also

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justified such  a  splitting  up  of  a  right  constituting property on  shares just  as it  was  well  recognised  that rights of  ownership of  property might  be split  up into a right to  the Corpus  and another  to the  "usufruct" of the property and  then separately dealt with. On the delivery of the  registered   deed  of  gift  together  with  the  share certificate to  the donee,  the donation of the right to get the share  certificate transferred  in  the  name  of  donee became irrevocable  by registration  as well as by delivery. Either was  sufficient. The actual transfer in the registers of the  companies constituted more enforcement of this right to  enable   the  donee   to  exercise  the  rights  of  the shareholder. The  more fact  that such  transfers had  to be recorded in  accordance with the Company Law did not detract from the  completeness of  what was  donated.  Referring  to Regulation 18  of the first schedule to the Companies Act of 1913 which prescribed the mode of transfer of shares, it was observed by  the court  that there was nothing either in the Regulation or  elsewhere to  indicate  that  without  strict compliance  with   some   rigidly   prescribed   form,   the transaction must  fail to  achieve its purpose. It was said, the subservience  of substances  of a  transaction  to  some rigidly  prescribed   from  required   to  be   meticulously observed, savours of archaic and outmoded jurisprudence. The Court referred  to the  passage in  Buckley on the Companies Acts XXXI Edn. Page 813 : 994 "Non-registration of  a transfer  of shares  made by a donor does not  render the  gift-imperfect", and  the  passage  in Palmar’s Common  Law :  21st Edn.  page 334  : A transfer is incomplete  until   registered.  Pending  registration,  the transferor  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  its 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 obtain 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,  it  deals  with  transfers  of  shares  only because they  give certain  rights to the legally recognised share holders  and imposes  some obligations  upon them with regard to  the companies  in which they hold shares. A share certificate not  merely entitles  the shareholder whose name is found  on it  to interest  on the  share hold but also to participate in  certain proceedings  relating to the company concerned.      In Re  Fry, (supra), F, a resident of the United States of America  desiring to  make a  gift to  his son of certain shares of  an English  company, executed  a deed of transfer and sent  it to the company for registration. As the Defence (Finance)  Regulations   prohibited  any   transfer  of  any securities or  any interest  in securities  held by  a  non- resident without  permission from  the Treasury, the company wrote to  that certain  forms had to be completed by him and the transferee  and that  a licence  had to be obtained from

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the Treasury.  Before could  apply and obtain the permission of the Treasury, he died. The question arose whether F’s son was entitled  to require  F’s  personal  representatives  to obtain for  him legal and beneficial position of the shares. It was  held that  the permission of the Treasury not having been obtained,  the company  could not register the transfer and, therefore,  the son  acquired no  legal  title  to  the shares in  question. Nor  was there  a complete  gift of the equitable interest in the shares to the son because had not 995 obtained the consent of the Treasury and had, therefore, not done all  that  was  necessary  to  divest  himself  of  his equitable interest  in favour  of  his  son.  The  son  was, therefore,  not   entitled  to  sue  the  father’s  personal representatives to  obtain  for  him  legal  and  beneficial position of the shares.      In Swiss  Bank Corporation  v. Lioyds Bank Ltd. & Ors., (supra), the  question  was  about  the  consequence  of  an authorised depository under s. 16(2) of the Exchange Control Act, parting  with  a  certificate  relating  to  a  foreign currency security  without the  permission of  the  Treasury contrary to  Bank of  England Exchange Control Notice E.C.7. In the court of appeal, Buckley L.J. Observed :           "....the Bank  of  England,  we  must  assume  for           sufficient  reasons,   declined  to  validate  the           transfer  of  custody.  It  must  consequently  be           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 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  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 that Schedule 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  the part  of that  Schedule. The           subsequent provisions of that part of the Schedule           impose maximum penalties by way of imprisonment or           find for such offence -           "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           exacted  or   sought  to   be  exacted   in   this           case................................   ...........           If  the  legislature  had  intended  that  such  a           security, if  transferred from  the custody of the           one  authorised   depository  to  the  custody  of           another 996           without compliance  with all the conditions of any           relevant permission,  should  not  be  treated  as           being in the custody of the latter depository, one           would.  I   think,  expect   to  find  an  express           provision  to   that  effect,  for  otherwise  the           consequences of  an irregular  transfer of custody           is left in doubt.

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    Earlier we  mentioned that  S. 111 of the Companies Act preserves the  power of  the company  under its  articles to refuse to  register  the  transfer  of  any  shares  of  the company. The  nature and  extent of the power of the company to refuse  to register  the  transfer  of  shares  has  been explained by  this court  in  Bajaj  Auto  Limited  v.  N.K. Ferodia and Anr. 41 Company Cases 1 = [1971] 2 S.C.R. 4C. It was said  that even  if the  article of the company provided that the  directors might at their absolute and uncontrolled discretion decline  to register any transfer of shares, such discretion does not mean a bare affirmation or negation of a proposal. Discretion  implies just  and proper consideration of the  proposal in the facts and circumstances of the case. In the  exercise of  that discretion, the Directors will act for the  general interest  of the  shareholders because  the Directors are  in a  fiduciary  position  both  towards  the company and  towards every  shareholder. The Directors, are, therefore, required to act bona fide and not arbitrarily and not for  any collateral motives Where the articles permitted the Directors  to decline to register the transfer of shares without assigning  reasons, the  court would not necessarily draw adverse inference against the Directors but will assume that the acted reasonably and bona fide. Where the Directors gave reasons  the court  would consider  whether the reasons were legitimate  and whether  the Directors  proceeded on  a right or  wrong principle.  If the  articles  permitted  the Directors  not  to  disclose  the  reasons,  they  could  be interrogated and  asked to  disclose the  reasons.  If  they failed to disclose that reason, adverse presumption could be drawn against them.      On a  overall view  of the several statutory provisions and judicial  precedents to  which we  have referred we find that a  shareholder has  an undoubted interest in a Company, an interest which is represented by his share-holding. Share is  movable  property,  with  all  the  attributes  of  such property. The  rights of  a shareholders  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 997 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  register in the books of the company the person  whose name  is found  in the  register alone  is entitled to  receive the  dividends, notwithstanding that he has already parted with his interest in the shares. However, on the  transfer of shares, the transferee becomes the owner of the  beneficial interest though the legal title continues with the transferor. The relationship of trustee and ’cestui que trust’  is established  and the  transferor is  bound to comply  with   all  the   reasonable  directions   that  the transferee may  give. he  also  becomes  a  trustee  of  the dividends as  also of  the right  to vote.  The right of the

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transferee ’to  get on  the register’ must be exercised with due diligence  and the  principle of  equity which makes the transferor a  constructive trustee does not extend to a case where a  transferee takes  no active interest ’to get on the register’. Where  the transfer is regulated by a statute, as in the  case of  a  transfer  to  a  non-resident  which  is regulated  by  the  Foreign  Exchange  Regulation  Act,  the permission, if  any,  prescribed  by  the  statute  must  be obtained. In  the absence  of the  permission, the  transfer will not clothe the transferee with the right to ’get on the register’ unless  and  until  the  requisite  permission  is obtained. A  transferee who  has the  right to  get  on  the register,  where   no  permission   is  required   or  where permission  has  been  obtained,  may  ash  the  company  to register the  transfer and  the company  who is  so asked to register the  transfer of  shares may not refuse to register the  transfer   except  for  a  bona  fide  reason,  neither arbitrarily nor  for any  collateral purpose.  The paramount consideration is the interest of the company and the general interest of  the shareholder.  On the other hand, where, for instance, the  requisite permission  under the  FERA is  not obtained, it is open to the company and, indeed, it is bound to refuse  to register  the transfer  of shares of an Indian company in  favour of a non-resident. But once permission is obtained, whether  before  or  after  the  purchase  of  the shares, the  company cannot,  thereafter, refuse to register the transfer of shares. 998 Nor is  it open  to the  company or  any other  authority or individual to  take upon  itself or himself, thereafter, the task of  deciding whether the permission was rightly granted by the  Reserve Bank of India. The provisions of the Foreign Exchange Regulation  Act are  so structured  and woven as to make it clear that it is for the Reserve Bank of India alone to consider  whether the  requirements of  the provisions of the Foreign  Exchange Regulation  Act and the various rules, directions and  orders from time to time have been fulfilled and  whether  permission  should  be  granted  or  not.  The consequences of noncompliance with the provisions of the Act and the  rules, orders  and directions  issued under the Act are mentioned  in secs.  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 sec. 29(1) of the Act. As we said  earlier, under  the scheme  of the  Act, it  is the Reserve Bank of India 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  of India  and the  Reserve Bank of India alone that has  to decide  whether permission  may or  may not  be granted under  sec. 29(1)  of the  Act. The Act makes it its exclusive privilege  and function.  No  other  authority  is vested with  any power nor may it assume to itself the power to decide  the question whether permission may or may not be granted or  whether it  ought or  ought  not  to  have  been granted. The  question may  not be  permitted to  be  raised either directly  or collaterally.  We do  not, however, rule out the limited class of cases where the grant of permission by the  Reserve Bank  of India  may  be  questioned,  by  an interested party  in a  proceeding under  Art.  226  of  the Constitution, on  the ground  that it  was mala fide or that there was  no application of the mind or that it was opposed

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to the  national interest  as contemplated by the Act, being in contravention of the provisions of the Act and the rules, orders and  directions issued under the Act. Once permission is granted  by the  Reserve Bank  of India, ordinarily it is not open  to anyone  to go behind the permission and seek to question it.  It is  certainly not  open to  a company whose shares have  been purchased  by a  non-resident  company  to refuse to  register the  shares  even  after  permission  is obtained from  the Reserve  Bank of India on the ground that permission ought not to have been granted under the FERA. It is  necessary   to  remind  ourselves  that  the  permission contemplated  by   sec.  29(1)   of  the   Foreign  Exchange Regulation Act is neither intended to nor does 999 it impinge  in any  manner or any legal right of the company or any  of its  shareholders. Conversely neither the company nor any  of its  shareholders is  clothed with  any  special right to question any such permission.      Much was  said before  us about  the mala  fides of the Government of  India and  the Reserve  Bank of India and the non-application of  mind by  the Reserve Bank of India which was said  to amount to legal Mala fides. Though Shri Nariman learned counsel for the company, now and then, in the course of his  argument mentioned  that Shri  Swraj Paul  had  been issuing press  statements which  were generally followed up, according to  him, by  some  action  or  the  other  by  the Government or  the Reserve  Bank, he properly refrained from reading to us the press statements said to have been made by Shri Swraj  Paul. however,  the gist  of some  of the  press statements and releases of Shri Swraj Paul has been included in the  pleadings which  were read out to us. It may be that Shri Swraj  Paul was  ever ready  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  respective ears  some where.  There 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 over-rated 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 of India 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  Reserve  Bank  had  discussions  with  the Finance  Secretary,   Finance  Minister   and  the  Personal Secretary to  the Prime  Minister the  Reserve Bank of India changed its  attitude and  issued the  impugned circular and the permission.  Our attention  was particularly  invited to the letter dated June 1, 1983 from the Reserve Bank of India to the  Government  of  India  in  which  the  Reserve  Bank appeared  to   take  the   view  that  the  scheme  did  not contemplate indirect 1000 investment by non-resident individuals of Indian nationality origin and  proposed to reject the application of all the 13 overseas companies,  but  sought  the  confirmation  of  the

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Government of India, (ii) the reply dated September 17, 1983 of the  Government of India to the Reserve Bank of India and (iii) the  endorsement made  on the  letter dated 17.9.83 by the Governor  or the  Reserve Bank of India. We have already referred to the contents of (i) and (ii), the two letters in the  proceeding  paragraphs.  We  have  also  extracted  the endorsement of  Dr. Man  Mohan Singh  in full. The inference sought to  be drawn  from (i), (ii) and (iii) is that though the Reserve  Bank of  India had expressed itself strongly in (i), it  was under  the pressure  of the  Finance Secretary, Finance Minister  and the  Personal Secretary  to the  Prime Minister that  the Governor  of the  Reserve Bank  of  India finally agreed to adopt the line suggested by the Government in its  letter dated  17.9.83 and  that the  decision of the Reserve Bank  of India  was not  that of  a free  agent. The Circular issued  by  the  Reserve  Bank  of  India  and  the permission granted  by it,  it was suggested, were so issued and granted  under the  pressure of the Government of India. We do  not think  that we  will be  justified in drawing any such inference.  It would  be wholly unfair and uncharitable to Dr.  Man Mohan  Singh.  An  enormous  amount  of  foreign exchange vital  to the  economy of the country was involved. Though the  Reserve Bank of India appeared to have taken, in the beginning,  a certain position in the matter, it thought it  necessary   to  consult  and  seek  the  advice  of  the Government of  India in  the matter.  mere were  high  level discussions obviously  because  of  the  amount  of  foreign exchange and  the question of policy involved and the matter had also  attracted considerable attention from the Press as the public. If after high level discussions the Reserve Bank of India  changed its  views, it  would be  unreasonable and impermissible 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 of India changed its former negative attitude  to  a  Â¯  re         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.      It was  argued that, from time to time, the company had addressed several  communications to  the  Reserve  Bank  of India   drawing    the   latter’s   attention   to   several irregularities and  illegalities, which it claimed, had been committed by Mr. Swraj 1001 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 of India 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 of  India did  not  choose  to  send  a  reply  to  the communications received  from the company, it did not follow that the  Reserve Bank  of India  was not  acting  bonafide. While we  may say that the Reserve Bank would have done well to acknowledge  the communications received from the company and to  reply to  them, we are unable to infer malafide from their failure  to do  so. It  was not as if the Reserve Bank ignored the complaints of the company. They did enquire into the matter  in their  own way.  As already  mentioned by  us during the  course of  the narration  of events, the Reserve Bank pursued  its enquiry  by seeking  information from  the Punjab National Bank, who was an authorised dealer appointed

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under the  provisions of the Foreign Exchange Regulation Act and who,  therefore, could be expected to supply the Reserve Bank with  full and  accurate information.  At  that  stage, there was nothing to doubt the bona fides and the ineptitude of the Punjab National Bank. The company also in its several communications  to   the  Reserve  Bank  did  not  make  any allegations against  the  Punjab  National  Bank.  In  those circumstances, if  the Reserve  Bank  thought  fit  to  seek information from  the Punjab  National Bank and proceeded to act on  the information  obtained from  the Punjab  National Bank, the  Reserve Bank cannot be accused to non-application of mind. The Reserve Bank was entitled to rely on the Punjab National Bank  and the  information supplied by that bank as the  bank  held  a  statutory  position  under  the  Foreign Exchange Regulation  Act. It may be that the Punjab National Bank  did  not  act  with  that  degree  of  competence  and diligence as  should be expected from it, but at that stage, there was  nothing to  provoke any  suspicion in the mind of the Reserve  Bank. We  will revert to the part played by the Punjab National  Bank presently,  but there  is no reason to change the  Reserve Bank  with want  of bona  fides and non- application of  mind merely  because it placed reliance upon the Punjab  National Bank and the information supplied by it although with  the aid  of some  of the material now brought out during  the hearing,  we perceive  that the Reserve Bank could have  acted with  greater wisdom  than to  rely on the Punjab National Bank. But that would really be speaking with ’hind-sight’.      Earlier we  referred  to  the  failure  of  the  Punjab National Bank to inform the Reserve Bank, as it was bound to do, about  the remittance  of L  1,30,000 received  from Mr. Swraj Paul by their 1002 Parliament Street  Branch. It was a sorry confession 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  L 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   L  1,30,000  received  by  their Parliament House  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 who was apparently kept in the dark about it. We consider this a serious matter which requires  further probe  by the  Reserve Bank. We find that the  entire conduct of the Punjab National Bank in this affair has  been most irresponsible. They had been appointed as authorised  dealers under the Foreign Exchange Regulation Act and  by virtue  of such appointment great confidence had been reposed  in them for the purpose of regulating the flow and conserving  the  foreign  exchange  and  protecting  the national interest.  The Portfolio Investment Scheme provided that the  banks which  were designated as authorised dealers could  purchase  shares  on  behalf  of  their  non-resident customers  of  Indian  nationality/origin  through  a  stock

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exchange. The  applications of  the  foreign  investors  for permission to  invest in  shares of Indian companies were in fact to  be made  through the designated banks. By paragraph 11 of  Circular No.  9 dated  April 14,  1982 the designated banks were  required to  maintain separately a proper record of  the   investment  made   in  shares,  with  and  without repatriation benefits,  on account  of the investor, showing all relevant  particulars including  the  numbers  of  share certificates and  distinctive numbers  of shares.  They were required to  keep a  systematic and  uptodate record  of the shares purchased by them for each investor through the stock exchange so  that they  would be  able to  ensure  that  the purchase of  shares in  any one company by a single investor would not  exceed Rs. One lakh in face value of the company. Again by  circular No.  10 of April 22, 1982, the authorised dealer (designated  bank) was  required to  obtain from  the investing  overseas   companies  a   certificate   from   an auditor/chartered accountant/certified public 1003 accountant in  form OAC.  The certificate was to be obtained by the authorised dealer every year. When by circular No. 12 of May  16, 1983,  an overall  ceiling of  5 per cent of the total paid-up  equity capital of the company was imposed, it was prescribed, for the purpose of monitoring the ceiling of 5 per  cent, that  authorised dealers  who were permitted to purchase shares  under the  Portfolio Investment  Scheme  on behalf  of   the  eligible   non-resident  investors  should nominate  a  link  office  in  Bombay  for  the  purpose  of coordinating the  purchases and  sales of equity shares made by their designated branches on a daily basis and notify the same to the Controller, Control Exchange Department, Reserve Bank of  India. The  link officers were required to submit a consolidated statement  of the  total purchases and sales of equity  shares  Lade  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 straight away  say that the Punjab National Bank, apart from receiving the  remittances from the Caparo Group Limited and passing on  the amounts to the stock brokers, Rajaram 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  Rajaram  Bhasin  &  Co. regarding the purchase of shares, that they never maintained any  systematic,   uptodate  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, 19&3 reminding the latter  about the  applications of  their customers  for permission end  informing them  about the  receipt  of  four remittances on 9.3.1983, 12.4.1983, 13.4.1983 and 23.3.1983. They also  mentioned that  investment operations  were being conducted through  Raja Ram  Bhasin &  Co. What  shares, how many, and for what amount, these details were not mentioned, not even the total number of shares purchased and the amount expended till  then. Therefore,  in answer  to a letter from the Reserve  Bank, they  wrote on  May 6, 1983 that they had been advised  that Mr.  Swraj Paul  and family  members hold 61.6 per  cent of  share capital of Caparo Group Limited and that Caparo  Group hold 100 per cent of share capital of the remaining companies  except Caparo  Properties in  which the holding was  98 per  cent. In  this letter, it was expressly

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stated "As  regards details  of shares  of Indian  Companies purchased by or on behalf of said non-resident clients, they have advised  us that  the same  would be  supplied when the purchases were complete." This statement appears to us 1004 to be  in complete  breach of  the duties  of the authorised dealer under  the Portfolio  Investment Scheme.  The  letter shows that  not only  the sales  were not put through by the authorised dealers,  the authorised  dealers were  not  even aware of  the transactions  that had  taken place till then, though we  are  now  told  that  all  the  shares  had  been purchased by  April 28,  1983. It was only on 31.5.1983 that the Punjab National Bank sent a telegram to the Reserve Bank of India  that they  had been advised by the brokers that up to 28.4.83, 75,000 equity shares of Escorts Limited had been purchased on  behalf of  and for  the benefit of each of the thirteen  overseas   companies.  The   Reserve  Bank  sought information by their letter dated 11.6.1983 of the purchases of shares  made for  the benefit  of the overseas companies, (i) upto  December, 1982; (ii) from 1.1.83 to 28.2.83; (iii) from 1.3.83  to 2.5.83;  and (iv)  after 2.5.83.  Details of purchases including  the total  number and face value of the shares were  required to  be given. The Punjab National Bank replied on  23.6.83 to  the effect  that their  brokers  had informed them  by their  letter dated  22.6.83  that  75,000 shares of Escorts Limited had been purchased for each of the thirteen companies  during the period from 1.3.83 to 2.5.83, but none  were purchased before or after. It was also stated 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 upto 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 dependant 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 Limited 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 mere dumb, dummy and signally failed to discharge the functions entrusted to them under the Act and the scheme. 1005      The result  of the  dereliction of  duty on the part of the Punjab  National Bank  is that  there had been no proper monitoring of  the purchase of shares by the thirteen Caparo Group of  Companies. While  we are  unable to  hold that the Reserve Bank  of India  did not  act bona  fide or apply its mind to  the relevant  facts and  circumstances  which  were required to  be considered by it before granting permission, because, it  did  bona  fide  apply  its  mind  to  whatever material was  then available to it and supplied to it by the Punjab National  Bank, we  must hold  on  the  material  now available to  US that  their implicit reliance on the Punjab National bank  was entirely  misplaced. That  further action must be taken on that finding is a question which we have to

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consider. We  will do so later after considerating the other questions argued before us.      Shri  Nariman   contended  that   there  were   several circumstances in  the record  which established that a large number of  shares were  purchased with funds which were made available locally  and not  funds remitted  from abroad  and also that  the shares  were purchased  subsequent to 2.5.83. The  circumstances   were  :  (i)  the  purchase  of  shares commenced before  the remittances started; (ii) the price at which the  shares were  available in  the market showed that funds in excess of what was remitted must have been utilised for purchasing the shares and this could only have been with rupee funds;  (iii) the  company  was  able  to  obtain  two brokers’ notes from two of the sellers’ brokers which showed that the  sales were made long subsequent to 2.5.83 and (iv) out of the total number of shares purchased on behalf of the thirteen companies,  4,62,000 shares  only were  lodged with the  company  on  14.5.83  for  registering  the  transfers. 3,68,463 shares were lodged on 19.8.83, that is 3-1/2 months after 2.5.83,  which was  the cut-off  date  fixed  for  the imposition of  the ceiling  of 5  per cent.  1,44,200 shares were not  lodged at  all with  the company.  The failure  to lodge the shares within a reasonable period at 28.4.83 which was supposed  to be  the date by which all the purchases had been made  indicated that  the purchases must have been made long afterwards.  Everyone of these circumstances is capable of some  explanation, adequate  or not,  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 adduction 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 1006 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  of India. We  will later  indicate what  we propose to do about this aspect of the matter.      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 thirteen companies in order to circumvent the scheme  which prescribed  a ceiling  of one  per cent on behalf of  each non-resident of Indian nationality or origin of each  company 60  per cent  of whose shares were owned by non-residents of  Indian nationality/origin.  Our  attention was drawn  to the  picturesque pronouncement of Lord Denning M.R. in  Wallersteiner v.  Moir 1974 3 All E.R. 217, and the decisions of  this court  in Tata Engineering and Locomotive Company Ltd.  v. State  of  Bihar  1964  6  S.C.R.  885,  me Commissioner of  Income Tax  v. Meenakshi  Mills A.I.R. 1967 S.C. 819, and Workmen v. Associated Rubber Ltd. 1985 2 Scale 321. While  it is  firmly established  ever since Salomon v. A. Saloman  & Co.  Limited 1897  A.C. 22, was decided that a company has  an independent  and legal  personality distinct from the  individuals who are its members, it has since been held that  the corporate  veil may  be lifted, the corporate personality  may  be  ignored  and  the  individual  members

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recognised  for   who  they   are  in   certain  exceptional circumstances.  Pennington   in  his   Company  Law  (Fourth Edition) states :           "Four inroads  have been  made by  the law  on the           principle of  the separate  legal  personality  of           companies. By  far the most extensive of these has           been made  by legislation  imposing taxation.  The           Government, naturally  enough, does  not willingly           suffer schemes for the avoidance of taxation which           depend for  their success on the employment of the           principle of  separate legal  personality, and  in           fact legislation  has gone  so far that in certain           circumstances taxation can be heavier if companies           are employed  by the  tax-payer in  an attempt  to           minimise his  tax liability  than if he uses other           means to  give effect  to his  wishes. Taxation of           Companies is a complex subject, and is outside the           scope of this book. The reader who wishes 1007           to pursue  the subject  is referred  to  the  many           standard text  books on  Corporation  Tax,  Income           Tax, Capital Gains Tax and Capital Transfer Tax.           "The other  inroads on  the principle  of separate           corporate  personality   have  been  made  by  two           section of  the Companies  Act, 1948,  by judicial           disregard of the principle where the protection of           public interests  is of  paramount importance,  or           where  the   company  has  been  formed  to  evade           obligations imposed  by the law, and by the courts           implying in  certain cases  that a  company is  an           agent or trustee for its members." In Palmer’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 Locomotives Co. Ltd.  (supra), the  company wanted the corporate veil to be lifted  80 as  to  sustain  the  maintainability  of  the petition,  filed  by  the  company  under  Art.  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 Art. 19. In Commissioner of  Income Tax  v. Meenakshi Mills (supra), 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. Association Rubber Industry (supra), resort was had to the principle of lifting the veil to prevent  devices to  avoid welfare  legislation.  It  was emphasised that  regard must be had to substance and not the form of  a transaction.  Generally and  broadly speaking, we may say  that the  corporate veil  may  be  lifted  where  a statute itself  contemplates lifting  the veil,  or fraud or improper conduct  is intended  to be  prevented, or a taxing statute or  a beneficent  statute is  sought to be evaded or where associated  companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable  to  enumerate  the  classes  of  cases  where lifting the veil is permissible, since that must necessarily depend on  the relevant  statutory or  other provisions, the object sought  to be  achieved, the  impugned  conduct,  the involvement of  the element  of  the  public  interest,  the effect on parties who may be affected etc.

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1008      In the present case, we do not think ’lifting the veil’ is necessary or permissible beyond the essential requirement of the  Foreign Exchange  Regulation Act  and the  Portfolio Investment Scheme.  We have  noticed that  the object of the Act is to conserve and regulate the flow of foreign exchange and the  object of  the scheme  is to  attract  non-resident investors of  Indian nationality  or  origin  to  invest  in shares of  Indian companies.  In the  case  of  individuals, there can  be no difficulty in identifying their nationality or  origin.  In  the  case  of  companies  and  other  legal personalities, there  can be  no question  of nationality or ethnicity of  such company or legal personality. Who of such non-resident companies  or legal  personalities may  then be permitted to  invest in  shares  of  Indian  companies?  The answer is  furnished by the scheme itself which provides for ’lifting the  corporate veil’ to find out if at least 60 per cent of  the shares  are held  by  non-residents  of  Indian nationality or  origin. Lifting  the veil  is  necessary  to discover the  nationality or  origin of the shareholders and not to  find out  the individual  identity of  each  of  the shareholders. The  corporate veil  may  be  lifted  to  that extent only and no more.      The  particulars   of  the  scheme  have  already  been extracted by  us. First,  a ceiling  of one  per cent of the equity capital  of the  Indian company  was imposed  on  the purchase of  its shares  by any single foreign investor. The obvious object  of the  imposition of  the ceiling  was  the prevention of  destabilisation  of  the  Indian  company  by foreign investors  purchasing large  blocks  of  shares  and attempting to  take over the Indian company. 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 the  Indian company  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  held 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 1009 investor  or   a  combination   of  foreign  investors  from attempting to  destabilise Indian  companies  by  purchasing large blocks  of shares. If this is borne in mind it will be clear that  the lifting  of the  corporate veil is necessary and permissible  in the  present case,  only to find out the nationality or  origin of  the shareholders  of the  Foreign companies seeking  to invest  in shares  of Indian companies and  not   to  explore   the  individual   identity  of  the shareholders. We  do not think that merely because more than 60 per  cent of  the shares of the several Foreign companies who have applied for permission are held by a trust of which Mr. Swraj  Paul and  the  members  of  his  family  are  the beneficiaries, the  companies can  be denied the facility of investing in  Indian companies.  In fact, if each of the six

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beneficiaries  of  the  trust  had  separately  applied  for permission to  purchase shares  of  Indian  companies,  they could not  have been  denied  such  permission.  It  cannot, therefore, be  said that there has been any violation of the Portfolio Investment  Scheme merely  on that account or that the permission granted is illegal.      We now  turn to the case of Escorts Limited against the Life Insurance  Corporation of  India. While  narrating  the sequence of  events, we  referred to  the impleading  of the Life Insurance  Corporation of  India as a respondent to the Writ Petition  a few  months after  it was originally filed. The primary  allegation which  led to  the impleading of the Life Insurance  Corporation of  India  was  that  there  was confabulation between  the Government of India, Reserve Bank of India  and the  Life Insurance  Corporation to pressurise the Escorts  Limited to  register the  transfer of shares in favour of  the Caparo  Group of  Companies. The inference of collusion and  conspiracy was  sought to  be drawn  from the sequence  of   certain  events   which   we   will   mention immediately. A  few days  before  the  filing  of  the  writ petition there  was the  report of  a speech  of the Finance Minister, to  which we have earlier made a reference, to the effect that  he has in his possession an effective weapon to end the  uncertainty. After  the writ petition was filed and before it  was admitted, there was a meeting of the Board of Directors of  Escorts Limited  on 6th January, 1984 at which Mr.  D.N.   Davar,  claiming  to  speak  for  the  financial institutions holding  52 per  cent of  the shares of Escorts Limited, circulated  three notes  and moved  resolutions the purport of  which was  that  the  writ  petition  should  be 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 institutions loans should be recalled as the 1010 question was  still  under  consideration.  The  resolutions proposed by  Mr. Davar  were rejected.  On 9th January, 1984 Mr. Nanda  wrote to Mr. Punja informing him about the events that took  place  at  the  Board  meeting  on  6.1.1984  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 Limited and the Financial Institutions. Mr. Nanda explained the position of the  Management of  Escorts Limited  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 committed  and  it  was strange that  the financial  institutions should continue to press the company to register the shares. It was also stated by Mr.  Nanda that  he had repeatedly drawn the attention of Mr. Punja and others to the fact that funds far in excess of those remitted  by the  Caparo Group  of Companies  had been invested  in   the  purchase   of  shares   and,  therefore, repatriation benefits  in  foreign  exchange  could  not  be allowed to  such shares  by registering  their transfer. Mr. Nanda complained  that he  was forced  to believe  that  the institutions were adopting this attitude against the company because of  external pressures brought upon the institutions as a  result of the non-registration of the shares purchased by Mr.  Swraj Paul’s  companies. There  was no reply to this

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letter by  Mr. Punja.  But on  13.1.1984, Mr. Punja informed Escorts that  the  financial  institutions  had  decided  to accept the  proposal of  Escorts Limited  for pre-payment of the outstanding  loan. At this stage, that is on 7.1.19&4, a meeting of  the Board  of the Life Insurance Corporation was held and it was resolved that a requisition should be served on Escorts  Limited  to  convene  an  extraordinary  general meeting to pass resolutions for the removal of the nine non- Executive  Directors   and  for   the  appointment   as  new Directors,  officers   and   nominees   of   the   financial institutions, in  their place.  This subject  was not one of the matters  listed in  the agenda  for the  meeting of  the Board of  Life Insurance  Corporation.  The  resolution  was considered after all the officers of the Corporation, except one, left  the meeting.  The minutes  of the meeting did not record any  discussion. But  the minutes  do show  that  Mr. Punja of  the I.D.B.I.  was present  in his  capacity  as  a Director  of   the  Life   Insurance  Corporation.   It  was thereafter that  the Life  Insurance  Corporation  served  a requisition on  Escorts Limited  to  call  an  extraordinary general meeting of the company. 1011      What does  the sequence  of events go to show? It shows that the financial institutions which held 52% of the shares of the  company and,  therefore, had a very big stake in its working and  future were  aggrieved that  the management did not even  choose to  consult them or inform them that a writ petition was  proposed to  be filed  which would  launch and involve the  company in  difficult and  expensive litigation against the  Government  and  Reserve  Bank  of  India.  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  into  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  a removal  of the non-Executive 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  reconciliatory 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,  difficult to  accuse  the  Life Insurance Corporation  of India of having acted mala fide in seeking to  remove the  nine non-Executive Directors and to, replace   them   by   representatives   of   the   financial institutions. No  aspersion was  cast against  the Directors proposed to  be removed.  It was  the only  way by which the policy which had been adopted by the Board in launching into a  litigation   could  be   reconsidered  and  reversed,  if necessary. It was a wholly democratic process. A minority of shareholders in  the saddle of power could not be allowed to pursue a  policy of venturing into a litigation to which the majority of  the share-holders were opposed. That is not how corporate democracy may function.      A Company  is, in some respects, an institution like as State functioning  under its ’basis Constitution’ consisting

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of the  Companies Act  and the  memorandum  of  Association. Carrying the analogy of constitutional law a little further, Gower describes  "the members  in general  meeting" and  the directorate as  the two  primary organs  of  a  company  and compares them with the legis- 1012 lative and the executive organs of a Parliamentary democracy where legislative  sovereignty rests  with Parliament, while administration is  left to the Executive Government, subject to a  measure of  control by Parliament through its power to force a  change of  Government.  Like  the  Government,  the Directors will be answerable to the ’Parliament’ constituted by the  general meeting.  But in  practice (again  like  the Government), they  will exercise  as much  control over  the Parliament as that exercises over them. Although it would be constitutionally possible for the company in general meeting to exercise  all the powers of the company, it clearly would not be practicable (except in the case of one or two - man - companies) for day-to-day administration to be undertaken by such a cumbersome piece of machinery. So the modern practice is to  confer on the Directors the right to exercise all the company’s  powers  except  such  as  general  law  expressly provides must  be  exercised  in  general  meeting.  Gower’s Principles of  Modern Company  Law. Of  course, powers which are strictly  legislative are not affected by the conferment of powers  on the  Directors as  section 31 of the Companies Act provides  that an alteration of an article would require a special  resolution of the company in general meeting. But a perusal  of the  provisions of  the Companies  Act  itself makes 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  the  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 over-simplification  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 place. The holders of the majority of the stock of a corporation have the power to appoint,  by election,  Directors of their choice and the power to  regulate them  by a  resolution for their removal. And, an injunction cannot be granted to restrain the holding of a  general meeting  to  remove  a  director  and  appoint another. 1013 In Shaw  & Sons  (Salford) Ltd.  v. Shaw  1935 2  K.B.  113, Greer, L.J. expressed :           "The only  way in  which the  general body  of the           shareholders can  control-the exercise  of  powers           vested by  the articles  in the  Directors  is  by           altering the  articles or,  if opportunity  arises           under the  articles, by  refusing to  re-elect the           Directors on whose action they disapproved."

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    In Isle of Wight Railway Company v. Tahourdin (1883) 25 Chancery Division 320, Cotton L.J. said :           "Then there  is a  second object,  "To remove  (if           deemed necessary  or expedient) any of the present           directors, and  to elect  directors  to  fill  any           vacancy in  the board."  The learned  Judge  below           thought that  too indefinite,  but in my opinion a           notice to  remove "any  of the  present directors"           would justify  a resolution  for removing  all who           are directors  at the  present  time;  any"  would           involve "all".  I think that a notice in that form           is quite sufficient for all practical purpose." Fry, L.J. said.           "The second  objection was,  that a requisition to           call a  meeting "To remove (if deemed necessary or           expedient) any  of the  present directors"  is too           vague. I  think that  it is  not. It appears to me           that   there    is   a    reasonably    sufficient           particularity in  that statement.  It is said that           each director does not know whether he is attacked           or not. The answer is, all the directors know that           they are  laid open  to attack.  I think  that any           other  form   of  requisition   would  have   been           embarrassing,  because  it  is  obvious  that  the           meeting might  think fit  to remove  a director or           allow him  to remain,  according to  his behaviour           and demeanour  at the  meeting with  regard to the           proposals made at it. In  the  same  case  considering  the  question  whether  an injunction should  be granted  to restrain  the  holding  of general meeting,  one of  the purposes  of the meeting being the appointment  of a committee to reorganise the management of the company, Cotton L.J. Said : 1014           "It is  a very  strong  thing  indeed  to  prevent           shareholders  from   holding  a   meeting  of  the           company, when  such a  meeting is  the only way in           which they  can interfere  if the majority of them           think that  the course taken by the Director, in a           matter intra  vires of  the Directors,  is not for           the benefit of the company.      In Inderwick  v. Snell. 42 English Reports 83, 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 the 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  and sufficient.  If  this  argument           could  be   sustained,  all  proceedings  at  such           meetings would  be subject  to the  review of  the           Courts of  Justice, which  would have  to  inquire           whether the cause of removal which was charged was

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         in their reasonable, whether the charges were bona           fide   brought    forward,   whether   they   were           substantiated by  such evidence  as the  nature of           the case  required, and whether the conclusion was           come to upon a due consideration of the charge and           evidence. But  the deed  is  silent  as  to  these           matters, and  the question  is  whether  any  such           power of control in the Courts of Justice is to be           inferred  from   the  words   "reasonable   cause"           contained  in   the  27th   clause;  whether   the           expression "reasonable clause" contained in such a           deed of  a trading  partnership can  be held to be           such a  cause, as upon investigation in a Court of           Justice must  be held  to be  bona fide founded on           sufficient evidence  and just; or whether it ought           not to  be held  to mean  such  cause  as  in  the           opinion of the 1015           share-holders  duly   assembled  shall  be  deemed           reasonable.  We  think  the  latter  is  the  true           construction and effect of the deed.           In a moral point of view, no doubt every charge of           a cause  of removal  ought to  be made  bona  fide           substantiated   by    sufficient   evidence,   and           determined on  a due  consideration of  the charge           and  evidence;   and  those   who  act   on  other           principles may  be guilty of a moral offence; they           may be very unjust, and those who (being misled by           the statements  made to them, have no doubt a just           right to  complain that  they  have  been  led  to           concur in  an unjust  act. But  the  question  is,           whether by  this  deed  the  shares  holders  duly           assembled at  a general  meeting might not, or had           not a  right to,  remove a  director for  a  cause           which they  thought reasonable,  without its being           incumbent upon  them to prove to this or any other           Court of  justice that the charge was true and the           decision just,  or that the case was substantiated           after a  due consideration  of  the  evidence  and           charge. We  cannot take upon ourselves to say that           in the  case of  a trading  partnership like this,           this Court  has upon  such a clause in the deed of           partnership jurisdiction or authority to determine           whether, by  the unfounded speech of any supporter           of the  charge, the  shareholders present  may not           have been misled or unduly influenced.           All such meetings are liable to be misled by false           or erroneous  statements, and  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  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  re-considered.  The           Plaintiff, objecting to this

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1016           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  toes   not  afford   any  grounds   for   the           interference of this Court."      Again in  Bentley-Stevens v.  Jones, 1971  (2) All E.R. 653, it  was held  that a share holder had a statutory right to move a resolution to remove a Director and that the court was not entitled to grant an injunction restraining him from calling a  meeting to  consider such  a resolution. A proper remedy of  the Director  was to apply for a winding-up order on the ground that it was ’just and equitable’ for the court to make  such an  order. The  case of Ebrahimi v. Westbourne Galleries Ltd.,  1972 (2)  All E.R.  492, was explained as a case where  a winding-up of order was sought. In the case of Ebrahimi v.  Westbourne Galleries Ltd. (supra), the absolute right of  the general  meeting to  remove the  directors was recognised and  it was  pointed out that it would be open to the Director  sought to  be removed to ask the Company Court for an  order for  winding-up on the ground that it would be ’just and equitable’ to do so. The House of Lords said,           "My Lords,  this is  an expulsion case, and I must           briefly justify  the application  in such  case of           the just  and equitable clause....................           The law of companies recognises the right, in many           way, to  remove a director from the board. Section           184 of  the Companies  Act 1948 confers this right           on the  company in  general meeting  whatever  the           articles may  say. Some  articles  may  prescribed           other methods,  for example,  a governing director           may have  the power  to remove  (of  Re  Wondoflex           Textiles Pvt.  Ltd.). And quite apart from removal           powers,  there   are   normally   provisions   for           retirement of  directors by rotation so that their           re-election can  be  opposed  and  defeated  by  a           majority, or  even by a casting vote. In all these           days a particular director-member may find himself           no longer  a director, through removal, or non-re-           election: this  situation he must normally accept,           unless he undertakes the burden of providing fraud           or mala  fides. The  just and  equitable provision           nevertheless comes  to his  assistance if  he  can           point  to,  and  prove,  some  special  underlying           obligation of  his fellow member(s) in good faith,           or  confidence,  that  so  long  as  the  business           continues  he  shall  be  entitled  to  management           participation, an obligation so 1017           basic that  if broken, the conclusion must be that           the association must be dissolved.      Thus, we  see that  every shareholder  of a company has the right,  subject to statutorily prescribed procedural and numerical 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. hor are the reasons for the resolutions  subject to judicial review. It is true that under s. 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

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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 Limited, has the same right as every shareholder to  call an extraordinary general meeting of the company for  the purpose  of moving  a resolution  to remove some Directors  and appoint  others in their place. The Life Insurance Corporation  of India  cannot be  restrained  from doing so nor is it bound to disclose its reasons its reasons for moving the resolutions.      It was,  however, urged  by the learned counsel for the company  that   the  Life   Insurance  Corporation   was  an instrumentality of the State and was, therefore, debarred by Art. 14 from acting arbitrarily. It was, therefore, under an obligation to  state  to  the  court  its  reasons  for  the resolution once  a rule  nisi was issued to it. If it failed to disclose  its reasons  to  the  court,  the  court  would presume that  it had no valid reasons to give and its action was, therefore, arbitrary. The learned counsel relied on the decisions of  this court  in Sukhdev  Singh, Maneka  Gandhi, International Airport  Authority and Ajay Hasia. The learned Attorney General,  on the other hand, contended that actions of the State or an instrumentality of the State which do not properly belong to the field of public law but belong to the field of  private law  are not  liable to  be  subjected  to judicial review.  He relied  on O’Reilly v. Mackman [1982] 3 All E.R. 1124, 1018 Davy v.  Spelthonne [1983]  3 All  E.R. 278,  I Congress del Partido 1981  2 All  E.R. 1064,  R. v. East Berkshire Health Authority [1984]  3 All E.R. 425, and Radha Krishna Aggarwal and Ors.  v. State of Bihar [1977] 3 S.C.R. 249. While we do find considerable  force in  the contention  of the  learned Attorney General  it may  not be  necessary for  us to enter into any  lengthy discussion  of  the  topic,  as  we  shall presently see.  We also  desire to  warn  ourselves  against readily  referring   to  English   cases  on   questions  of Constitutional law, Administrative Law and Public Law as the law in  India in  these branches has forged ahead of the law in England,  guided  as  we  are  by  our  Constitution  and uninhibited as  we are  by the  technical rules  which  have hampered the development 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 Art. 226 or Art. 32 of the Constitution, we do not construe Art. 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.      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  the tort,  the  court  may  not ordinarily examine  it unless the action has some public law character attached  to it.  Broadly speaking, the court will

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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 and the private  law field.  It is  impossible to  draw the line with precision  and we  do  not  want  to  attempt  it.  The question must  be decided in each case with reference to the particular action,  the activity  in which  the State or the instrumentality of  the State is engaged when performing the action, the  public law  or private  law  character  of  the action and  a host of other relevant circumstances. When the State or  an instrumentality  of the State ventures into the corporate world  and purchases  the shares  of a company, it assumes to  itself the  ordinary role  of a shareholder, and dons the  robes  of  a  shareholder,  with  all  the  rights available to  such a shareholder. There is no reason why the State as  a shareholder  should be  expected  to  state  its reasons when  it  seeks  to  change  the  management,  by  a resolution of the Company like any other shareholder. 1019      In the  instant case  the  reason  for  the  resolution stares one  in the face. The financial institutions who held the majority  of the  stock were  not only  not told  by the management about the filing of the Writ Petition in the High Court but  were deliberately  kept in the dark about it. The matter was  not even discussed at a meeting of the directors before the  Writ Petition  was filed.  It  was  filed  in  a furtive manner  even as  Mr. Nanda  was purporting  to  hold discussions with Mr. Punja and others. And that was not all. Mr. Nanda  was  also  unduly  exerting  himself  in  certain matters to  the detriment  of the  majority shareholders. We will immediately refer to those matters.      One of  the circumstances  relied upon to establish the mala fides  of the  Life Insurance  Corporation of  India, a consideration of  which leads  us to the conclusion that the boot was  on the  other leg,  was the  attitude taken by the Life Insurance  Corporation of  India in  regard to  (i) the issue of  Equity-Linked-Debentures; (ii)  Repayment of loans to Indian Financial Institutions; and (iii) the proposal for the merger  of Goetze  with Escorts.  It was argued that the facts clearly  disclosed an  attempt on the part of the Life Insurance Corporation  of India to exert pressure on Escorts Limited. It is impossible to agree with the submission.      In regard  to the  proposal for  the issue  of  Equity- Linked-Debentures,  the  facts  are  as  follows  :  Escorts obtained the  approval of  the Government under the M.R.T.P. Act to  establish a  new undertaking  to  manufacture  motor cycles/scooters. According  to Escorts, the 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 Limited is sufficient to expose the  game of  Escorts Limited.  The proposal,  as  it finally  emerged   from  Escorts   Limited,  was   to  issue debentures  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 share holders of Escorts  Limited and  Goetze Limited  (in accordance with amalgamation proposal)  subject to  maximum allotment of 100

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debentures and  500 equity shares to any single shareholder. The Promoters,  Directors and  their friends  and relatives. business associates and employees were to be 1020 offered 15  per cent  of the  new issue  on  a  preferential basis, but  in their  case there was to be no ceiling on the number of shares which might be allotted to any one cf them. 30 per  cent of  the new  issue was  to be  offered  to  the public. having  regard to the ceiling of 500 shares proposed to be  imposed in  the case  of allotment to existing equity shareholders,    the     Life     Insurance     Corporation, notwithstanding the  fact that  it owned  30 per cent Of the shares of  Escorts Limited would be entitled to a meagre 500 shares in  the new  issue. The  result  would  be  that  its holding would be reduced from 30 per cent to 18.14 per cent. The holding  of all  the  financial  institutions  would  be reduced from  51.62 to  31.21 per  cent. Not merely would it result in  the reduction of the percentage of the holding of the financial  institutions in  the  capital  stock  of  the company, but it would also result in great financial loss to the institutions  in the  following manner:  if the existing shareholders were  to be given preferential allotment in the new issue  on the  basis of their existing holdings, without any  ceiling,  the  Life  Insurance  Corporation  and  other financial institutions  would be  entitled not to the meagre 500 shares  each, but to some tons of thousands of shares in the new  issue. Taking  the market  value of the shares into account at  Rs. 50  per share,  the loss  to  the  financial institutions would  be in  the neighbourhood of about Rs. 10 crores. We  do not think that any financial institution with the slightest  business acumen  could  possibly  accept  the proposal as  it finally emerged from Escorts Limited. No man of ordinary  prudence would  have accepted  the proposal. To expect the  financial institutions to agree to the proposal, we must  say, was  sheer audacity  on the part of these that made the  proposal. That was evidently the reason why at all the initial  stages, the  details of the proposal were never put to  the financial  institutions or  before the  Board of Directors. It  was urged by Shri Nariman that Mr. Davar, who represented the  financial  institutions  in  the  Board  of Directors also  voted in  favour of  the proposal at earlier stages, and,  therefore, it  must be inferred that the later change of attitude on the part of the financial institutions was not  bonafide. We  are afraid  we cannot  agree with Mr. Nariman. The  resolution of  the Board  of Directors  merely accepted in principle the issue of convertible debentures to raise finances  required by  the  company,  subject  to  the approval of financial institutions. At that stage no details of the  proposal 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 1021 Mr. Nanda  and  his  associates  that  the  refusal  of  the financial institutions  to accept  their proposal  was  mala fide. It  is a   clear case of an attempt on the part of Mr. Nanda and  his associates  to over  reach themselves. we do, not think  it is  necessary for  us to  go into  any further details in regard to the Equity-Lined-Debenture issue.      The proposal  to merge  Goetze with Escorts Limited was also agreed  to in principle in the first instance. However,

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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 3.12.1983 of Mr. Nanda to Mr. Nadharna ICICI in which he stated :           "The proposals  together with  the report  of  the           Chartered Accountants  and the  Resolution of  the           Board of  Directors are with ICICI and IFCI and we           understand that  the matter  has been discussed in           the Inter-Institutional  meeting of  the Financial           Institutions. We  have been  eagerly  waiting  and           have made  several requests  to all  the financial           institutions to  expedite their  approval so  that           the other  processes of  the merger  including the           permission of  the  High  Court  followed  by  the           Extraordinary Shareholders  meeting  of  both  the           Companies may  proceed. Yesterday’s  meeting  with           the Chairman and Senior Executive of the Financial           Institutions, I  was informed, for the first time,           that  the   financial  Institutions   were   still           examining  our  request  for  approval  they  were           primarily concerned  about the  53% holding of all           the investing  financial institutions  (LIC,  GIC,           UTI) post  merger coming  down  close  to  49  per           cent." It is seen from the letter that Mr. Nanda was not proceeding on the  basis that  the financial  institutions had  already agreed to  the proposal for merger, but was in fact awaiting their approval. When he learnt the reason for the hesitation of the  financial institution  to agree  to the proposal, he wrote a  letter  on  30.12.1983  explaining  his  views  and requesting  the   financial  institutions  to  expedite  the approval of  the proposal.  It is, therefore, futile for Mr. Nanda to centend that the proposal for merger of Goetze with Escorts Limited was a lever which the Financial Institutions were using to exert pressure on him to agree to register the transfer  of  shares  in  favour  of  the  Caparo  Group  of Companies. It  is difficult to understand why anyone holding a majority of the equity capital of a company should h allow himself to be hustled into becoming a minority shareholder. 1022      The proposal  for pre-payment  of institutional  loans, though finally  agreed to by the institutions, was not quite as straight  as claimed  by Escorts.  In  the  first  place, Escorts asked  for pre-payment  of loans by Indian financial institutions, but  not the  foreign currency  loan.  In  the second place, the Cost of pre-payment of institutional loans was to  be met  by part  of the  debenture issue which would entail payment  of interest  at the  rate  of  14  per  cent whereas the institutional loans carried interest at the rate of 10 per cent only. It certainly could not be said to be in the interests  of the  company 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 who  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 the director on sufferance.      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.

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    We have  discussed the  submission 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.      We may now state our conclusions as follows :      1. The  permission of  the Reserve Bank contemplated by the FERA could be ex-post-facto and conditional.      2. The press release (Ex.A) dated 17.9.83, the circular (Ex.B) dated 19.9.83 and the letter (Ex.C) dated 19.9.83 are all valid.      3. Under  the scheme,  any foreign company whose shares were owned to the extent of more than 63 per cent by persons of Indian  nationality or  origin could  avail the  facility given by  the scheme  irrespective of  the fact  whether the same  group  of  share  holders  figured  in  the  different companies. 1023      4. Where  any of  the purchases were made subsequent to 2.5.83, they  were subject  to the 5 per cent ceiling in the aggregate.      5. The Reserve Bank of India was not guilty of any mala fides  in   granting  permission  to  the  Caparo  Group  of Companies. Nor was it guilty of non-application of mind.      6. No  mala fides  could be  attributed to the Union of India either.      7. There  was a total and signal failure on the part of the Punjab National bank in the discharge of their duties as authorised dealers  under the  FERA and  the scheme with the result that  there was  no monitoring  of the  purchases  of shares made on behalf of the Caparo Group of Companies.      8. The  allegation  of  mala  fides  against  the  Life Insurance Corporation of India was baseless.      9. The  notice requisitioning  a meeting of the Company the Life Insurance Corporation of India was not liable to be questioned of  any of  the grounds on which it was sought to be questioned in the writ petition.      On our  finding that there was no monitoring whatsoever of the purchase of shares made on behalf of the Caparo Group of Companies  by the Punjab National Bank and on our further finding that  though the  Reserve  Bank  of  India  was  not actuated by  malice and was not guilty of non-application of mind, the  reliance placed  by the  Reserve Bank of India on the Punjab  National Bank  was misplaced  in the  event, the Punjab National  Bank having totally abandoned its duties as authorised dealer, it follows that the permission granted by the Reserve Bank must be reconsidered by the Reserve Bank in the light  of the  failure of  the Punjab  National Bank  to discharge its  duties. Therefore, while allowing the appeals of the  Union of  India, the  Reserve Bank  of India and the Life Insurance  Corporation  of  India  and  dismissing  the appeal of  Escorts Limited and setting aside the judgment of the High  Court, we direct the Reserve Bank of India to make a full  and detailed  enquiry into the purchase of shares of Escorts  Limited  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 1024 of the  FERA or  the scheme: if the Reserve Bank of India is

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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 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 Bhushan 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  Companies and the purchase of shares made on their behalf. They  are also  directed to  produce every  document which the Reserve Bank of India may require them to produce. The enquiry  by the  Reserve Bank should be concluded within three months from today.      We also  direct the  Reserve Bank  of India  to enquire into the  conduct of  Punjab National  Bank  and  take  such action as  may be  necessary including  cancellation of  the authorisation granted  under sec.  6 of the Foreign Exchange Regulation Act.  In regard to costs, the Union of India, the Reserve Bank  of India and the Life Insurance Corporation of India are  certainly entitled  to their costs. We do not see any reason why the company Escorts Limited should be mulcted with costs.  The litigation was launched by Mr. Nanda and he should be  personally made  liable for  the costs.  We  also think that the litigation has been unnecessarily complicated by the  failure of  Mr. Swraj Paul and Raja Ram Bhasin & Co. to cooperate  by appearing  before the  court. We think that they should  also be  liable for  a portion of the costs. So also the  Punjab National  Bank. The  appeals filed  by  the Union of  India, the Life Insurance Corporation of India and the Reserve  Bank of India are allowed with costs payable as follows :  Three-fifths of the taxed costs in each case will be payable  by Har Prasad Nanda, one-fifth by Swraj Paul and one-fifth by  the Punjab  National Bank.  The  cross  appeal filed by  Escorts Limited  and Nanda  is dismissed  with the costs of  the Union  of India, the RESERVE Bank of India and the Life Insurance Corporation of India. The Union of India, the Reserve Bank of India and the Life Insurance Corporation of India  are entitled  to their  costs in  the High  Court, three-fifths payable  by Nanda,  one-fifth by Swraj Paul and one-fifth by  Punjab National  Bank. In  modification of our order dt.  4.4.85 in C.M.P No. 12832/85, we direct Shri H.P. Nanda and  Rajan Nanda  to continue  as  Managing  Directors until the Board of Directors takes a decision in the matter. 1025