Narendra
Kumar Maheshwari Vs. Union of India & Ors [1989] INSC 175
(3 May 1989)
Mukharji,
Sabyasachi (J) Mukharji, Sabyasachi (J) Rangnathan, S.
CITATION:
1989 AIR 2138 1989 SCR (3) 43 1990 SCC Supl. 440 JT 1989 (2) 338 1989 SCALE
(1)1353
ACT:
Capital
Issues (Control) Act, 1947/Capital Issues (Exemption) Order, 1969: Sections 2,
3 and 12--Controller of Capital Issues--Scope of power and exercise of function
in according sanction--Extent of.
Companies
Act, 1956: Section 81(5)--'Compulsorily convertible debentures'--Floating
charge--Debt equity ratio--What are--Whether a Company can deal with its
property without the permission of debenture holders.
Practice
and Procedure: Grant of Interim Orders--Regard to be had to principles of
comity of courts administering same laws throughout the country.
HEAD NOTE:
Reliance
Industries Ltd. (RIL) and Reliance Petrochemicals Industries Ltd. (RPL) are
inter-connected and represented Companies in the large industrial house known
as Reliance Group. RIL had promoted RPL. RPL was incorporated on 11.1.1988 and
has been a cent percent subsidiary of RIL.
It was
claimed that RPL would set up the largest petrochemical complex in India with foreign collaboration. RPL
proposed to issue convertible debentures for raising capital for the project.
The
Controller of Capital Issues (CCI), who functions under the Capital Issues
(Control) Act, 1947 had, on 15th September, 1984 by way of press release issued certain non statutory guidelines for
approval of issue of secured convertible and non-convertible debentures. These
guidelines were subsequently amended on 8.3.1985. Guidelines were also given by
the CCI for issue of convertible cumulative preference shares, and for employees
stock option scheme.
RPL
had, on 4.5.1988, made an application to CCI for issue of debentures of the
face value of Rs.200 crores fully convertible into equity shares on the
following terms:
A sum
of Rs. 10 being 5% of the face value of each debentures by 44 way of first
conversion immediately into one equity share at par on allotment;
(ii) A
sum of Rs.40 being the 20% of the face value of each debenture by way of second
conversion after three years but before four years from the date of allotment
at a premium to be fixed by the Controller of Capital Issues;
(iii)
The balance of Rs. 150 representing 75% of the face value of each debenture as
third conversion after five years but not later than seven years from the date
of allotment at a premium to be fixed by the Controller of Capital Issues.
The
CCI accorded his sanction for the issue of debentures on 4.7.1988. However, the
sanction was amended on 19th
July, 1988. The
amendment put a non-transferability condition on the preferential share-holders
of RPL. It was limited to the corporate shareholders of RIL and relaxed for
individual share-holders of RIL. The amendment also stipulated that the Company
should obtain prior approval of the Reserve Bank of India, Exchange Control Department, for
the allotment of debentures to the non-residents as required under the Foreign
Exchange Regulation Act, 1973. On 26th July 1988, there was another amendment which
restricted the transfer of shares allotted to the employees of RPL and RIL.
The
consent orders issued by the CCI were challenged in various High Courts, by way
of writ petitions and a suit.
Some
High Courts issued injunctions restraining the issue of the debentures.
This
Court, on 19th August,
1988, restrained the
aforesaid issuance of injunctions by the High Courts, and issued directions for
the issue of debentures. The cases pending in various High Courts were
transferred to this Court.
In
these transferred cases the consent orders of the CCI were challenged mainly on
the grounds that:
Despite
the fact that RPL did not fulfil the requirements of a proper application and
the necessary consent and approval, RPL's application was. entertained and
processed by the CCI with undue expedition and without application of mind;
The
guidelines issued by the CCI himself were deviated from;
45 The
CCI had processed the application of RPL in a hurry, within two months;
The
CCI did not take into account the fact that RIL had earlier issued debentures
for manufacture of identical products;
The
CCI failed to note that RPL did not have the necessary licences, consents and
approvals, from the relevant departments of the Government of India;
The
CCI failed to consider the financial soundness and feasibility of the project
of RPL;
The
CCI did not take adequate care to examine the terms of the issue and had
blindly accepted the terms as proposed by RPL;
RPL in
its brochures has misled the public by describing the debentures as fully
secured convertible debentures;
The
security for the debentures was inadequate;
RPL
has been permitted to create securities which would have priority over the
securities available to the present debenture holders and without their
consent;
RPL
has misled the public in that in its prospectus it had stated that security
would be provided to the satisfaction of the trustees;
The
CCI had failed to examine whether RIL had misused the funds raised on its
debentures;
There
has been a discrimination in favour of RIL in that RIL would be entitled to
allotment of shares of the face value of Rs.57.50 crores, whereas only 5% of
the investment of the debenture-holders could be converted;
Whereas
RIL's loan of Rs.50 crores would be converted into shares at par, the debenture
holders would have to pay premium to be fixed by the CCI at the time of second
conversion of 20% of the debentures; and In the application filed by RPL, no
shares were earmarked for the employees of RIL and RPL, but ultimately it was
done.
46 On
behalf of the petitioners, it was contended inter alia that the issue of the
debentures in question was detrimental to public interest, and that public
interest had been ignored.
On
behalf of Respondents it was argued that the sanction issued by the CCI had
been genuine and valid, and that no irregularity had been committed. It was
submitted that it was a misconception that the CCI had not followed his own
guidelines relating to sanction of the issue of the debentures, and it was
incorrect to say that there had not been proper security.
Dismissing
the writ petitions and the suit, this Court,
HELD:
1.1.
The CCI functions under the Capital Issues (Control) Act, 1947, an Act to
provide for control over the issue of capital. The purpose of the Act must be
found from the language used. The scheme and the language used, strictly
speaking, do not indicate any positive role for the CCI in discharging his functions
in respect of grant of sanction. But it has to be borne in mind that he is a
part of State instrumentalities committed to the endeavours of the
constitutional aspiration to secure justice--social and economic--and also
under Article 39(b) & {c) of the Constitution to ensure that the ownership
and control of the material resources of the community are so distributed as to
best subserve the common good and that the operation of the economic system
does not result in concentration of wealth and means of production to the
common detriment. Yet, every instrumentality and functionary of the State must fulfil
its own role and should not trespass or encroach/entrench upon the field of
others. Progress is ensured and development helped if each performs his role in
the common endeavour. [90B; 124F-H; 125A]
1.2.
In the changed socio-economic conditions of the country one who is charged to
ensure capital-investment has to perform a social role in capital formation and
to protect the interest of the capital market, and to oversee the growth of industrialisation
and investment in such a manner as to ensure employment and demand in the
national economy, to prevent wasteful investment and to promote sound methods
of corporate finance. In recent years, there has been a vast increase in the
number of members of public who have surplus money to invest. The size of the
issues has assumed macro proportions and the type of investments are also more
sophisticated. Entrepreneurs with expert legal assistance could easily trap unwary
investors and the development of a public interest lobby that can scrutinise
issues carefully and advise prospective investors may be desirable. [125A, B,
F, G] 47
1.3.
The guidelines are only a guide and nothing more.
The
application of mind by the CCI before sanction must be in the perspective for
which he is enjoined by the Act. He must endeavour to secure a balanced
investment of the country's resources in industry, agriculture and social
services. The Controller should perform the role of social control and fulfil
the social purpose in conjunction with other authorities and functionaries. It
is necessary for him in the discharge of his functions to ensure that there is
not too much concentration of particular industries in particular areas, and
that there is a scientific development and proper investment in key and core
projects. [125C-D]
1.4.
The duties of the CCI have to be construed in the context of the above,
particularly when there is no clear cut delineation of their scope in the
enactment. This is also reinforced by the expanding scope of the guidelines
issued under the Act from time to time and the increasing range of financial
instruments that enter the market. The responsilbilities of the CCI in this
direction should not be widened beyond the range of expeditious implementation
of the scheme of the Act and should, atleast be restricted and limited to
ensuring that the issue to which he is granting consent is not, patently and to
his knowledge, so manifestly impracticable or financially risky as to amount to
a fraud on the public. While it is true that some procedure may have to be
evolved to ensure that the CCI gets the benefit of the comments, suggestions
and objections from the public before arriving at his decision whether to grant
consent or not, and if so, on what terms and conditions, it will be too
cumbersome to have a provision that the details of every proposed application
for consent should be publicised to the maximum extent by the CCI, that
objections and comments from the public should be called for, that there should
be public hearing by the CCI and that he should pass a reasoned order granting
or withholding consent. That would delay the whole process of approvals which
should be as expeditious as possible. [93C-E; 125G-H; 126A-B]
1.5.
The CCI has also a role to play in ensuring that public interest does not
suffer as a consequence of the consent granted by him. To go beyond this and
require that the CCI should probe in depth into the technical feasibilities and
financial soundness of the proposed projects or the sufficiency or otherwise of
the security offered and such other details may be to burden him with duties
for the discharge of which he is as yet ill-equipped. [93D-F]
1.6.
Being non-statutory in character, the guidelines are not judicially
enforceable. A policy is not law. A statement of policy is not a 48
prescription of binding criterion. The competent authority might depart from
these guidelines where the proper exercise of his discretion so warrants. In
the instant case, the statute provided that rules can be made by the Central
Government only. And according to s. 6(2) of the Act, the competent authority
has the power and jurisdiction to condone any deviation from even the statutory
requirements prescribed, under sections 3 and 4 of the Act. The CCI applied his
mind to the facts of this case and the factors in general. The CCI did not act malafide
or on extraneous consideration. [122D-F; 124B-D] Fernandez v. State of Mysore, [1967] 3 SCR 636; R. Abdullah Rowther
v. State of Tansport, etc., AIR 1959 SC 896; Dy. Asst. Iron & Steel
Controller v. Manekchand Proprietor, [1972] 3 SCR 1; Andhra Industrial Work v.
CCI & E, [1975] 1 SCR 321; K.M. Shanmugham v. S.R.V.S. Pvt. Ltd., [1964] 1
SCR 809; Sagnata Investments Ltd. v. Norwich Corpn., [1971] 2 QB 614; British
Oxygen Co. v. Board of Trade, [1971] AC 610, relied on.
Ramanna
Dayaram Shetty v. International Airport Authority, [1979] 3 SCR 1014; Motilal Padampat Sugar Mills
v. Uttar Pradesh, [1979] 2 SCR 641; Ex P. Khan, [1981] 1 All. E.R. 40; IRC v.
National Federation, [1982] AC 617; Reqina v.
Preston
Supplementary, [1975] 1 WLR 624; Council of Civil Service Unions & Others
v. Minister for the Civil Service, [1985] AC 407, referred to.
Foulkes'
Administrative Law, 6th Edn. pp 181 to 184, referred to.
2. As
regards the contention that the sanction of the CCI was accorded with undue
haste and favouritism, in the first place, an application of this type is
intended to be disposed of with great expedition. In a project of the type
proposed to be launched by the petitioner, passage of time may prejudicially
affect the applicant and it is not only desirable but also necessary that the
application should be disposed of within as short a time as possible. It is,
therefore, difficult to say that the period of two months taken in granting
consent in the present case is so short that an inference of haste must follow.
Secondly, on behalf of the Union of India, a list of various applications
received and disposed of by the office of the CCI between September, 1987 and
September, 1988 has been produced to show that, generally speaking, these
applications are disposed of within a month or two. It is true that none of
these issues is of the same colossal magnitude as the present issue. Nevertheless,
the CCI could hardly keep the application pending merely because the amount
involved is heavy. It is not possible therefore to say merely from the 49 short
span of time that there was a hasty grant of consent in the present case.
[73G-H;74A-C]
3.1.
The consent of the CCI was not accorded in ignorance of the facts pertaining to
the G series of RIL debentures. The application for consent makes it clear that
the petitioner company is a new company promoted by RIL and that RIL was
promoting this company to manufacture High Density Polyethylene (HDPE), Poly
Vinyl Chloride PVC and Mono Ethylene Glycol (MEG). The application refers to
the fact that the total cost of the project was expected to be Rs.650 crores
and that this cost had been approved earlier in 1985.
Considering
that RPL had come into existence only on 11.1.1988, this was a clear indication
that the projects for which the debenture issue was being proposed were
projects which had been mooted even by the RIL as early as 1985.
Again
in the detailed application form submitted by the RPL it has been mentioned
that the RIL had already obtained approval of the Central Government for
implementation of the aforesaid projects under the MRTP Act. In part C of the
application form it has been mentioned that the promoter company had made
necessary applications for endorsement in favour of the company of the Letter
of Intent/Industrial Licences already issued by the Central Government under
the Industries (Development & Regulation) Act, 1951, in the name of the
holding company, viz., RIL. It is, therefore, extremely difficult to agree that
the fact of issue of the earlier series of debentures by the RIL or the
purposes thereof could have escaped the notice of the CCI, particularly, when
it is remembered that the issue of G series of debentures by the RIL was quite
recent and had also attracted a lot of publicity. [74D-H; 75C-D]
3.2.
The CCI was not performing the role of a social mentor taking into account the
purpose of RIL. If RIL has misutilised any of its funds or the funds had not
been utilised for G-series, then RIL would be responsible to its shareholders
or to authorities in accordance with the relevant provisions of the Companies
Act, 1956. This aspect does not enter into sanctioning the capital issue for
the new project in accordance with the guidelines. Even if RIL and RPL have to
be treated as one for this purpose and the grant of consent for earlier
debenture issues in favour of RIL are to be taken into account in judging the
necessity of the issues, there is no illegality or irregularity in the grant of
consent to RPL. RIL had not been able to utilise any part of the 'G' series of
debentures on the MEG project as there had been a cost overrun and it was
decided to have a wholly-owned subsidiary. Hence the projects are those of the
RIL to be implemented by RPL. The additional finances were needed for the
extension, expansion and diversification of 50 the projects originally
envisaged. This is one of the objects for which a debenture issue is permissible
under the guidelines. [101F-H; 102A, B]
4.1.
So far as HDPE is concerned, it appears that there was a valid licence; and it
may be mentioned that on 24th August, 1985 pursuant to an application made by
RIL under section 22(3)(a) of the MRTP Act, the Govt. granted approval for the
establishment of a new undertaking for manufacture of HDPE. [77F]
4.2.
Regarding foreign collaboration, an application was made by RIL in 1984 for
approval of foreign collaboration with M/s Du Pont Inc. Canada, for manufacture of HDPE. The
approval was given and the validity was extended and the foreign collaboration
approval was endorsed in favour of RPL on 12th October, 1988. Similar other
consents were there.
Finally,
capital goods clearance was endorsed in favour of RPL for the PVC project on
12th August, 1988. Capital goods clearance was also endorsed in favour of RPL
for HDPE project on 23rd August, 1988. Thus, it will be seen that all the basic
groundwork had already been done by the RIL. [77G, H; 78A]
4.3.
On 16th June, 1987 by a Press Note issued by the Deptt.
of Industrial Development in the Ministry of Industry of the Govt. of India
declared that where a transferee Company is a fully owned subsidiary of the
Company holding the Letter of Intent or licence, the change of the Company
implementing the project would be approved. It is in the light of this that the
Board of RIL on 30th
December, 1987 passed
a resolution to incorporate a 100% subsidiary Company whose main objects were
to implement the licences/Letters of Intent received by RIL and to carry on the
activities relating to production and distribution. The resolution approved the
name of the Company as RPL. On 11th January, 1988 the RPL was incorporated and the Certificate of Incorporation was
issued. Thereafter, on 12th
January, 1988 letters
were written by RIL for endorsement of licences/Letters of Intent in favour of
RPL. The certificate of commencement of business was thereafter issued. [78B-E]
4.4.
The Press Note is clear that the transfers from one company to an allied
company were considered unexceptionable except where trafficking in licences is
intended. In this situation the change of name from RIL to RPL, of the licences,
letter of intent and other approvals was only a matter of course and much importance
cannot be attached to the fact that CCI did not insist upon these endorsements
being obtained even before the letter of consent is granted.
In any
event the letter of 51 consent is very clear. Clause (h) of the conditions
attached to the consent letter makes it clear that the consent should not be
construed as exempting the company from the operation of the provisions of the
Monopolies & Restrictive Trade Practices Act, 1969, as amended. Clause (c)
makes it clear that it is a condition of this consent that the company will be
subject to any measures of control, licensing, or acquisition that may be
brought into operation either by the Central or any State Government or any
authority therein.
Under
clause (t) the approval granted is without prejudice to any other
approval/permission that may be required to be obtained under any other
Acts/laws in force. Having regard to the above and also to the terms and
conditions of the consent letter, the grant of consent itself being conditioned
on RPL obtaining the necessary approvals, consents and permissions before
embarking on the project, there was no impropriety in the CCI granting the
consent without waiting for the formal endorsement of the various licences,
letters and approvals in favour of RPL. Moreover, CCI is aware of the progress
of the various applications made by the company. The Controller is also aware
that the ICICI had looked into the financial soundness and feasibility of the
project and there is material to show that the comments of the ICICI were made
available to him. When a project is being appraised by the institution like the
ICICI and when the CCI is also aware, by reason of the participation of his
representatives at the meetings of the Department of Industry and the
Department of Company Affairs about the stage or outcome of the proposals made
under the IDR and MRTP Acts, it is clear that the CCI did not overlook any
crucial aspect and that his grant of consent in anticipation of the necessary
transfers to the RPL was based on a practical appraisal of the situation and
fully in order. [78F-H; 79A, B; 80B-D]
5.
There has been sufficient compliance with the guidelines on the quantum of
issue, debt-equity ratio, interest rate and the period of redemption. There was
sufficient security for the debentures in the facts and circumstances of this
case. The preference in favour of shareholders of RIL was justified and based
on intelligible differentia.
Indeed,
if one considers the role of the CCI, he is primarily concerned to ensure a
balanced investment policy and not to guarantee the solvency or sufficiency of
the security.
Most
of the criticisms directed against deviation from guidelines were misplaced. [94G,
H; 95A, B] 6.1. The discrimination alleged is on two grounds. The first is that
RIL is entitled straightaway to the allotment of shares of the face value of
Rs.57.50 crores whereas only 5% of the investment by the debenture holders can
be converted into shares at par simultaneously 52 with the issue. The second is
that a loan of Rs.50 crores advanced by RIL to RPL will be converted into
shares at par at the end of 3 years whereas the debenture holders will have to
pay a premium even for converting 20% of their debentures into shares by that
time. These allegations do not bear scrutiny. So far as the first ground is
concerned, there is no justification for a comparison between these two
categories of investors. RIL is the promoter company which has conceived the
projects, got them sanctioned, invested huge amounts of time and money and transferred
the projects for implementation to RPL. It is, therefore, in a class by itself
and there is nothing wrong if it is allotted certain shares in the company,
quite independently of the debenture issue, in lieu of its investments. So far
as the second ground is concerned, it overlooks certain disadvantages attached
to RIL in regard to the loan of Rs.50 crores advanced by RIL as compared with
the investor in the debentures. Firstly, RIL's advance is interest free for 3
years whereas the debenture holders got interest at the rate of 12.5% during
the period. Secondly, the debenture loan is secured while the RIL's are not.
Thus the debenture holders have certain benefits which RIL does not have and,
if the debenture holders have the disadvantage of having to pay a premium, that
cannot constitute basis for a ground of discrimination. [103E-H; 104 A, B]
6.2.
RPL is a company--not the State or a State instrumentality-that is issuing the
shares and debentures. It is entirely for the company to issue the shares and
debentures on such terms as they may consider practicable from their point of
view. There is no reason why they should not so structure the issue that it
confers certain great advantages and benefits on the existing share holders or
promoters than on the new subscribers. It is not permissible for the CCI to
withhold consent only for this reason or to stipulate that consent can be given
only if the share holders and promoters as well as prospective debenture
holders are all treated alike. The subscribers to the debenture are only
lenders to the company who have an option to convert their debt into equity on
certain terms. It is perfectly open to the subscribers to balance the pros and
cons of the issue and to desist from taking the debentures if they feel that
the dice are loaded unfavourably in favour of the "proprietors" of
the company. [104B-E]
7.1.
In the present case, a legal mortgage has been created by RPL in favour of the
trustees in respect of its immovable and movable assets, except book debts, in
respect of which financial institutions will hold a first charge on account of
foreign loan. RPL does not have any existing loans. Therefore, the charge in favour
of the debenture holders 53 iS presently the first charge. No further borrowing
is contemplated at this stage except the foreign currency loan to the extent of
Rs.84 crores. Even if the value of the foreign currency which has been
sanctioned in principle by the three financial institutions is taken into
account, the assets coverage goes down at each stage and does not make any
critical difference to the value of the security of the debenture holders under
the Trust Deed. The purposes of borrowings, namely, term-loan borrowings,
deferred payment credits/guarantees and borrowing for financing new projects do
not, on analysis, raise any difficulty. There are sufficient in-built checks
and controls. The company, being an MRTP company would have to obtain both MRTP
permission for creating any security irrespective of its value and fresh CCI
consent under the CCI Act, except in case of exempted securities. [119G, H;
120A-C]
7.2.
With the escalation in the value of the fixed assets due to passage of time on
the one hand and the redemption of a good portion of the debentures by the end
of three years on the other, the security provided is complete and, in any
event, more than adequate to safeguard the interests of the debenture holders.
[96G, H]
8.
Clauses 5 and 6 are only enabling clauses and in the nature of permitting the
Company, despite the mortgage in favour of the debenture holders, to carry on
his business normally. What is referred to therein as residual charge is really
a floating charge. The Company's normal business activities would necessarily
involve alienation of some of its assets from time to time such as goods
manufactured by it as well as procurement and discharge of loan and
accommodation facilities from banks, financial institutions and others. The
entire progress of the company would come to a standstill in the absence of
such enabling provisions. They are not only usual but essential because the
basic idea is that the finances raised by the debentures should be employed for
running the project profitably and thereby generate more and more funds and
assets which will also be available to the debentures holders. Further what the
clauses provide is only that the consent and concurrence of the debenture
holders need not be obtained by the company before creating securities that may
have priority over the present issue of debentures. But the trustees for the
debenture holders have to concur before the company can raise any future
borrowings and create, therefor, the security which will have priority over the
security available to the present debenture holders. The ICICI is not only a
financial institution in the public sector but also one of the institutions
financing the project and thus has a stake in its success and so can be trusted
to safeguard the interests of the debenture holders. The debenture trust 54
deed also contains a provision by which at the time of creation of any future
charge the terms and ranking have to be agreed upon between RPL and ICICI.
Clause 16 of the trust deed authorises the trustees to intervene and crystallise
the charge in certain circumstances and stultify an attempt by the company to
create higher ranking charges. There are also restraints on the company under
the Companies Act and the MRTP Act involving the consent of public financial
institutions, Commercial Banks, the term lenders, share holders, the MRTP Commission,
the Central Govt. and the CCI before the creation of such securities. [98B-H;
99A, E, F]
9. In
certain brochures and pamphlets issued by RPL, the debentures were described as
"fully secured convertible debentures". The company admitted that
there was such a description but explained that this was due to an oversight;
the
words "fully secured convertible debentures" were printed in some
brochures instead of the words "secured fully convertible debentures"
without meaning or intending any change. It was stated that the company's
representation was that the debentures were "secured fully
convertible" ones.
This
is also what had been set out in the application for consent. Though the
company did claim that the debentures were also fully secured, the emphasis in
the issue was that the debentures were fully convertible and secured. This
explanation is plausible. No importance or significance need be attached to the
different description in some places. particularly. in the context of the
nature of security actually provided for the debentures. [95F-H; 96A]
10.
Prospectus issued by RPL is not misleading because it stated that security will
be provided to the satisfaction of the trustees and the CCI accepted that
statement in the application for consent. The debenture trustees are well known
financial institutions and it is not possible for the CCI to ensure more than
the usual practice which was followed in the present case. [100D, E]
11.
The CCI modified paragraph 5 of the consent by his letter of the 19th July, 1988 to say that allotment to the
employees shall not exceed 50 debentures per individual. It does not appear
that the restriction of the allotments to the employees was at the instance of
the Company; nor does it seem that any discrimination was intended in respect
of the allotments to the employees. Nor has attention been invited to any legal
requirements or guidelines prescribing any fixed or minimum quota of allotment
to the employees of the Company. Under the circumstances, the question of discrimination
does not arise. [107C, D] 55
12.
The consent order of the CCI clearly indicated that the consent conveyed in the
letter shall lapse on the expiry of 12 months from the date thereof. The
consent order categorically stated that the approval was without prejudice to
any other aPproval/permission that may be required to be obtained under any
other Acts and laws in force. It necessarily follows that the obligation to
obtain other permissions continued. There was no legal conditions that other
approvals should be examined by the CCI before grant of its own consent. 1112E,
F]
13.1.
As defined in the Companies Act, a debenture need not be secured. Therefore,
guideline 10 means that security should be provided as is customarily adopted
in corporate practice. In the present case, the debentures are compulsorlly
convertible and so no repayment is really involved.
The
debenture is essentially an acknowledgement of debt with a commitments to repay
the principal with interest. The question of security becomes relevant for the
purpose of payment of interest only in the unlikely event of winding up. The
guidelines did not provide for the quantum and the nature of the security. A
debenture may, therefore, be secured or unsecured. An ordinary debenture has to
be distinguished from a mortgage debenture which necessarily creates mortgage
on the assets of a Company. A compulsorily convertible debenture does not
postulate any repayment of the principal and so does not constitute a debenture
in the classic sense. Even a debenture which is only convertible at option has
been recognised as a hybrid debenture. The guidelines for the protection of
debenture holders issued on 14.1.1987 recognise the basic distinction between
convertible and non-convertible debenture. Compulsorily convertible debentures
in corporate practice were adopted in India sometime after 1984. Wherever the concept of compulsorily convertible
debenture is involved, various guidelines issued by the Government of India
treat them as equity and not as loan or debt. Even a non-convertible debenture
need not always be secured. In fact, modern tendency is to raise loan by
unsecured stock which does not create any charge on the assets of a Company.
Whenever a security is created, it is invariably in the form of a floating
charge. In addition they are frequently secured by a trust deed as in the
present case where specific property/land etc. has been mortgaged to the
trustees. [116E, F; 117B-G]
13.2.
In the instant case, if the permission of the debenture holders were required
or is insisted upon to create future security, 2.5 million debenture holders
have to be informed and invited for the meeting. The extravagant effects of
this course would be collosal especially when a shareholders meeting is also
additionally called for the same 56 body of persons. It is, therefore,
incorrect to say that a floating charge creates an illusory charge because
future securities can be created ranking in priority over it.
[118D-E]
The British India Steam Navigation Co: v. The Commissioner of Inland Revenue,
[1881] 7 QBD 165; Re. Colonial Dusts Corporation, [1879] 15 Ch. 465; Speyar Brothers v. The Commissioner of Inland
Revenue, [1907] 1 KB 246; Lemon v. Austin Friars Investment Trust Ltd., [1926]
1 Ch. 15; Florence Land & Public
Works Co., [1878] 10 Ch. 530; Re. Panama, New Zealand, and Australian Royal Mail Co., [1870] L.R. 5 Ch. 318; Re. Standard Manufacturing Co., [1891] 1 Ch. 627; Re. Borak Foster v. Borax Co., [1901] 1 Ch. 326; Creatnor Maritime Co. Ltd. v. Irish Marine Management
Ltd., [1978] 1 WLR 966. referred to.
Palmer's
Company Law, 24th Edn. pp. 672, 675, 676, 706;
The Encyclopaedia
of Forms and Precedents, 4th Edn., Vol. 6 p. 1094, 1095, 1097, 1098, referred
to.
14.
The Court, would be reluctant to interfere simply because one or more of the
guidelines have not been adhered to even where there are substantial deviations
unless the deviations are by nature and extent such as to prejudice the
interests of the public which it is their avowed object to protect. Per Contra,
the Court would be inclined to overlook or ignore such deviations, if the
object of the statute and public interest warrant, justify or necessitate such
deviations in a particular case. Judicial control takes over only where the
deviation either involves arbitrariness or discrimination or is so fundamental
as to undermine a basic public purpose which the guidelines and the statute
under which they are issued are intended to achieve. In the instant case, there
is no such infraction of the norms required to be followed in granting the
sanction. [123F-H; 124A, B]
15.
Before the Courts grant any injunction they should have regard to the
principles of comity of courts in a federal structure and have regard to
self-restraint and circumspection. It may be impossible to lay down hard and
fast rules of general application because of the diverse situations which give
rise to problems of this nature. Each case has its own special facts and
complications and it will be a disadvantage, rather than an advantage, to attempt
and apply any stereo-typed formula to all cases. Perhaps in this sphere, the
High Courts themselves might be able to introduce a certain amount of
discipline having regard to the principles of comity of courts administering
the same general 57 laws applicable all over the country in respect of granting
interim orders which will have repercussion or effect beyond the jurisdiction
of the particular courts. Such an exercise will be a useful contribution in
evolving good conventions in the federal judicial system. [126F, G; 127A]
[Having considered the facts and circumstances of the present cases, this Court
directed refund of the sum of Rs.one lakh deposited RPL as ordered by the Court
on 9.9.1988. The deposit amount was meant for payment to the petitioners in
case they were to spend unduly.]
ORIGINAL
JURISDICTION: Transfer Case Nos. 161-165 of 1988.
S. Ganesh,
Arun Jaitely, Miss Bina Gupta, Miss Madhu Khatri, A.N. Haksar, Praveen Anand, Anip
Sachthey, B.L. Pagaria, P.K. Jain, Udai Holla and T. Sridharan for the
petitioners.
G. Ramaswamy,
Soli, J. Sorabjee, M.H. Baig, F.S. Nariman, H.N. Salve, R. Sasiprabhu, S.S. Shroff,
Mrs. P.S. Shroff and S.A. Shroff for the Respondents.
The
Judgment of the Court was delivered by SABYASACHI MUKHARJI, J. In these transferred
writ petitions and one suit, we are concerned with the powers, functions and
the role of the Controller of Capital Issues. By an order dated 9th September, 1988 this Court had directed that the
four writ petitions and one civil suit i.e., W.P. No. 1791/88 pending before
the Delhi High court, W.P. No. 2708/88
pending before the Jaipur Bench of the Rajasthan High Court, W.P. No. 12176/88
pending before the Karnataka High court, W.P. No. 4388/88 pending before the
High Court of Bombay and Civil Suit No. 1172/88 pending before the Civil Judge,
Junior Division Bench, Baroda, Gujarat, be transferred to this Court for
disposal. It would be appropriate to deal with the facts of one of these, i.e.,
W.P. No. 1791/88, which was filed in Delhi High Court in T.C. No. 161/88. The
other writ petitions and the suit raise more or less identical problems and
issues on more or less same facts.
The
petitioner in that writ petition is one Narendra Kumar Maheshwari and the
respondents are the Union of India, the Controller of Capital Issues, and
Reliance Petro-chemicals Ltd. (RPL). The case of the petitioner is that he is
an individual who is a public spirited 58 person and is an existing shareholder
of the Company known as Reliance Industries Ltd. (RIL), which was the promoter
of Reliance Petrochemicals Limited, being the respondent No. 3.
The
petitioner held at all relevant times 144 shares of RIL and 100 debentures of
different categories. The respondent No. 3, being RPL, was a newly set up
public limited company for the purpose of carrying on the business of
manufacture of petrochemicals. These petitions were filed in different courts
challenging the consent of the Controller of Capital Issues granted for the
issue of shares (Rs. 50 crores) and debentures (Rs.516 crores) by the RPL. It
was contended in the petition that the respondents Nos. 1 & 2, being the
Union of India and the Controller of Capital Issues, ought not to have granted
consent to respondent No. 3, namely, RPL to issue share and debenture capital
at an aggregate value of approx. Rs.600 crores. It may be mentioned that after
these writ petitions and suit were filed, attempts were made to obtain
injunction restraining the issue of share-capital and debentures as advertised.
By an order dated 19th
August, 1988 passed by
this Court, this Court had restrained the issue of such injunctions and
directed that the shares and debentures would be issued irrespective of any
order of injunction passed by any court or authority in India. Different cases, as mentioned hereinbefore,
were thereafter transferred to this Court.
On the
basis of the said consent, it was stated that the respondent No. 3 had issued
prospectus and at the relevant time had intended to open the issue from 22nd August, 1988, of about 3 crores debentures of
the face value of Rs.200 each which was the largest convertible debentures
issue in India. It was alleged that the
respondents had adopted very sharp methods to collect money from the public and
ultimately to defraud them. It was stated that under the terms of the
prospectus, each debenture of the face value of Rs.200 would be fully
convertible: Respondent No. 3 would issue one share of Rs. 10 at par on the
date of allotment. There would, thus, be an equity capital of about Rs.30 crores
in all on allotment. Further, it was stated that the Company would convert
Rs.40 of each convertible debentures into share after 3 years and the balance
of Rs. 150 into share at any time between five and seven years. It was
mentioned by the Company that it would convert at the second stage of
conversion at such premium to be allowed by the Controller of Capital Issues.
The petitioner alleged that it was not clear as to whether the investors would
get 2 shares or 3 shares or 4 shares for each debenture, at the second conversion
of Rs.40. Similarly, it was alleged that the last portion of Rs. 150 would be
converted into shares any time between five and seven years at which time again
the Controller, would fix the premium for conversion. The 59 petitioner further
stated that it was thus not clear what the equity capital of the Company would
be, whether it would be Rs. 150 crores or Rs.600 crores or whether the residual
amount would go into reserve account or whether a separate account would be
opened in respect of the premium. It was alleged that the respondent No. 3
being RPL had been promoted by RIL and the past history of RIL showed that the
share prices of RIL had fluctuated widely leaving lot of scope for
manipulations. It was alleged in the petition that there was no explanation
from the company or anybody from the share market as to why the share prices
fluctuated so widely and it was obvious that there were market operators who
prop up or bring down the prices depending on how it suited their convenience.
The share value of RIL, the promoter company, was subjected to wide
fluctuations on account of the purchase and sale operations of certain
interested quarters close to the management of the respondent No. 3 Company, it
was alleged. On more than one occasion during the past six months, the sale of
the share in the stock market was banned in some Stock-Exchanges due to fall in
price. It was alleged that it indicated the cooperation and support from the
authorities for maintaining the fictitious value of the share in the market;
and thus on an equity capital of Rs. 152 crores an amount of Rs.800 crores in
the premium account has been obtained, but there would be no amount in General
Reserve account because the Company had not earned anything worthwhile to put
in General Reserve. It was further alleged that the lack of bona fide of the
Reliance group was wellknown; and that RIL had issued debentures of 'G' Series
and had assured to pay interest up to 5th February, 1988. It was alleged that the Company
did not keep up this assurance, but converted the debentures into equity shares
in the month of August, 1987 thereby avoiding payment of interest. In this
manner, it was alleged, the Company saved interest of Rs.30 crores whereas in
fact it incurred a loss. The case of the petitioner was that the Company was
obviously trying to repeat the same game through the new Company by maintaining
the share price only on an equity capital converted on each debenture. The
paramount duty of respondents Nos. 1 & 2 before according permission was,
it was asserted, to ensure that the requirement of the Company in raising such
capital was bona .fide. It was observed that no public interest was intended to
be served by respondent No. 1, as it had chosen to allow respondent No. 3 to
collect such huge amounts in excess of the requirement.
It is
further the case of the petitioner that the operations' of RIL (Promoter)
subsequent to the raising of past issues made by it were subjected to severe
criticisms both in the press and in the public. It was 60 pointed out that
though the issue proposed was of shares of Rs.50 crores and debentures of
Rs.516 crores, the company was allowed to retain over-subscription to the tune
of 15% amounting to Rs.77.40 crores. It was alleged that the respondent No. 3
was a new Company and it should not be allowed 15% retention; and if it wanted
to raise Rs.600 crores, it should have come out with an issue of that amount.
It was further alleged that the respondent No. 2, without considering the
propriety of the situation, allowed the respondent No. 3 to make issue of the
capital for the interest of a few people. Hence, the sanction of the issue of
convertible debentures of respondent No. 3 calls for judicial review. It was
also alleged that the sanction was approved at exorbitant terms: 5% of the face
value (equal to nothing) according to the petitioner, would be converted at par
on allotment, another 20% {Rs.40) at a premium to be decided by the Controller
of Capital Issues after 3 years but before 4 years of allotment and the balance
of Rs. 150 at such premium as might be permitted by the Controller of Capital
Issues after 5 years but before the end of 7 years from the date of allotment.
It was stated that the investors would be completely left thrown at the mercy
of respondents Nos. 3 & 4; and that till date no convertible debenture had
been issued on such vague terms. In those circumstances, it was submitted, the
consent of the Controller of Capital Issues was bad, illegal on the ground
hereinafter alleged:
The
consent order was hit by arbitrary and capricious exercise of jurisdiction by
respondent No. 1. It was further alleged that the respondent No. 3's promoters
i.e. RIL had been obtaining from respondent No. 1/2 such Consent Orders on the
ground that it was in a position to raise such huge moneys from the public for
the purpose of implementation of its projects without recourse to the Financial
Institutions.
According
to the petitioner, for the first time, in the corporate history of India, RIL (Promoter) was allowed to raise
Rs. 100 crores by way of issuance of 'F' Series debentures. On account of the
campaigning through Brokers for attractive returns, the public was misled and
RIL wooed the public and collected Rs. 406 crores. RIL had not made any
allotment on a proper basis but made allotments on some basis of 'Private
Placement'. It was further alleged that the management of RIL through its
associate companies obtained huge borrowals from nationalised banks; and
several bank employees got into trouble due to advancing of loans for the
purpose of subscription in the 'F' Series debentures through the associated
companies of respondent No. 3/RIL which had popularly come to be known as
'Reliance Loan Mela'. It was alleged that the Controller of Capital Issues and
Union of India acted mala fide in issuing the consent order 61 which was
designed to benefit respondent No. 3 and prejudice the interests of the
investing public. It was further alleged that in giving the consent order the
respondent No. 1 blatantly overlooked the magnitude of the sum of Rs.600 crores,
proposed to be raised from the public through the new issue of debentures.
It was
alleged that the act of respondent No. 1/2 was vitiated as in issuing the
consent order respondent No. 2 was influenced by extraneous considerations not
germane to the public interest. The Capital Market in India has undergone turbulent changes in
the recent years. Small investors such as employees, workers and small business
community were coming forward, according to the petitioner, for the purpose of
investment in corporate sector. It was further stated that the small investors
had no means of verifying the correctness or otherwise of the statements and
the soundness/financial viability of any company. It was further alleged that
the respondents Nos. 1/2 had acted wrongly and illegally in allowing the
respondent No. 3 to raise share capital on premium for financing new projects.
It was contended in the petition of the petitioner that the consent order was a
fraud.
In
those circumstances it was prayed that the court should exercise its
jurisdiction under Art. 226 and set aside the consent order which was for the
public issue on 22nd
August, 1988.
The
facts and the circumstances leading to this consent order have been stated in
the affidavit on behalf of respondent No. 3 to the writ application. After
disputing the locus of the petitioner, who challenged the consent order for
making the public issue of 12.5 Secured Convertible Debentures by 3rd
respondent, the respondent No. 3 stated that the petition suffers from laches
and delays. On behalf of respondent No. 3 it was asserted that the public
issues made by the 3rd respondent had been promoted by RIL. The RIL and RPL are
inter connected and represented companies in the large industrial house known
as 'Reliance Group'. According to respondent No. 3, they represented India's fastest growing private sector
companies and comprised the world's second largest investor family of over 30 lakhs
investors.
It was
further asserted that the 3rd respondent would have India's largest private sector
Petrochemical Complex for the manufacture of critically scarce raw-materials.
It was stated that the 3rd respondent would manufacture versatile raw-material
which was behind the plastic revolution, particulars whereof have been
mentioned in the Annexure. It was further stated that the petrochemical complex
of the 3rd respondent would come up at Hazira, District Surat in the 62 State
of Gujarat and the production was planned to
start in a phased manner between the next 18-24 months. The 3rd respondent
would be setting up a state-of-art world class plant in collaboration with the
world leaders in the respective fields, i.e.
(a) Du Pont, Canada for HDPE
(b)
B.F. Goodrich & Co. for PVC, and
(c)
Scientific Design Co. for MEG.
The
terms of the issue of debentures of the face value of Rs.200 being fully
converted into equity shares were the following:
"(i)
A sum of Rs. I0 being 5% of the face value of each debentures by way of first
conversion immediately into one equity share at par on allotment;
(ii) A
sum of Rs.40 being the 20% of the face value of each debenture by way of second
conversion after three years but before four years from the date of allotment
at a premium to be fixed by the Controller of Capital issues;
(iii)
The balance of Rs. 150 representing 75% of the face value of each debenture as
third conversion after five years but not later than seven years from the date
of allotment at a premium to be fixed by the Controller ofapital Issues."
The
premium, it was stated on behalf of respondent No. 3, that would be charged at
the time of conversion into equity shares would be as fixed and decided by the
prescribed statutory authority, namely, the Controller of Capital issues, and
the 3rd respondent and its Board of Directors would not have any say in the
matter or be entitled to fix the same on their own. It was further stated that,
subject to the necessary approvals being obtained in that behalf, the
shareholders and the convertible debenture holders of the respondent No. 3, promoter
company, would be entitled to participate in all the future issues of the 3rd
respondent. The fully convertible debentures of the 3rd respondent would thus
be a growth instrument with different rights, viz., earning a fixed rate of
interest from the first day till it was converted into equity and thereafter
entitled to dividend that might be declared after conversion into Equity. It is
to that extent different from a purely equity share on which investor would
earn dividend only when profits are declared. Thus, the instrument proposed by
the 3rd respondent, according to it, has the best features of share as well as
debenture. Apart from the above, in accordance with the application for listing
made by the 3rd respondent to the Bombay Stock Exchange and 63 Ahmedabad Stock
Exchange, the 3rd respondent has proposed that all the three components or
parts of the instrument, namely, Part 'A' representing an equity share on first
conversion, Part 'B' being 20% of the face value of the debenture and Part 'C'
being the balance 75% of the face value of the debentures, would all be listed
separately and independently so that after allotment, an investor can sell if
he so desires the convertible portion of the debentures being Part 'B' and 'C',
and just retain the equity share being Part 'A'. It was intended to ensure both
liquidity and appreciation in the hands of the investor.
The
products which were intended to be manufactured by the 3rd respondent were
many, namely, (a) High Density Polyethylene (HDPE) and Poly Vinyl Chloride
(PVC) which are raw-materials behind plastic revolution; (b) Mono Ethylne
Glycol (MEG) is a critical polyester raw-material; HDPE and PVC being vital
thermo plastic play an important role in the core sector and are used for
manufacture of everything from films to pipes, auto parts to cable coatings,
and containers to furnishings. It is not necessary for the issues involved in
these applications to set out in detail the very many particulars given by the
respondent No. 3 in support of the contention that a petrochemical complex
proposed to be set up by the new Company--respondent No. 3--would be beneficial
socially and economically for the country as well as for the investors.
The
advantages of convertible debentures proposed to be issued at that time by the
respondent No. 3 were also highlighted. It is stated that debentures are
treated as equity.
The
3rd respondent's borrowing capacity remains unutilised and this would help it
in implementing the future projects expeditiously. The first phase of the
project is financed by the proposed issue of debentures and not by large
capital borrowings from the public financial institutions (except to the extent
of foreign currency loans of Rs.85 crores from them). The interest which would,
therefore, have been payable to the financial institutions will be paid to the
debenture holders ensuring them a return and simultaneously the convertible
clause which would have been applicable to term-loans obtained from the
financial institutions would be available to the investors thereby ensuring
them growth in equity value. It was further stated that since the preferential
allotment of 50% of the total issue was made to RIL shareholders, the
shareholding pattern of the 3rd respondent will be the most widely held
people's shareholding in the country and it was pleaded that there will be at
least 20 lacs shareholders of the 3rd respondent which would be a world market
record.
64 It
was further stated that RIL, who are the promoters of the project, have one of
the best track records for setting up of the Projects such as Polyester Staple Fibre
(PSF), Polyester Filament Yarn (PFY), Linear Alkyl Benzene (LAB) and Purified Terphthalic
Acid (PTA) plants at Patalganga in record time. Business records of Reliance's
'Vimal' and 'Recorn' were also emphasised. It is, however, not necessary for
the purpose of the issues involved in these applications either to dilate upon
these or to consider the correctness or otherwise of these assertions.
Reliance's plant at Patalganga complex in the State of Maharashtra and its beneficial effects to the
community and the State, as asserted on behalf of respondent No. 3, are also
not relevant. It was stated that Reliance is privy to the technology of the
world leaders, such as Du Pont of U.S.A. and Imperial Chemical Industries of UK. Mr. Pageria, learned counsel
appearing for one of the petitioners, Radhey Shyam Goyal tried to impress upon
us that among the world leaders of technology, Du Pont of USA and Imperial Chemical Industries of UK cannot claim
such high position. Neither is it necessary nor is it possible for us to
consider these assertions and denials.
The
industrial licences have been applied for and it was stated that pending the
formation and incorporation of RPL on 4.1. 1988 under the Companies Act, 1956,
RIL had undertaken and performed various acts and deeds, particulars whereof
have been mentioned in the Statement of Facts. In the Statement of facts filed
on behalf of respondent No. 3, a list of consents and approvals obtained by the
3rd respondent, has also been indicated.
It was
further stated that pursuant to the order of this Court, dated 19th August, 1988 the public issue was made under the
prospectus dated 27th
July, 1988 which
opened on 22nd August,
1988 and closed on 31st August, 1988. There had been an overwhelming
response to the issue from all categories of investors including nonresidents,
RIL shareholders/employees and the issue was heavily oversubscribed. On behalf
of the RPL, it was stated that the time frame of 10 weeks commencing from 1st September, 1988 and ending on th November, 1988 had
to be strictly adhered to.
The
provisions of Section 73 and other applicable provisions of the Companies Act,
1956, the provisions of the Securities (Contract and Regulation) Act, 1956 and
the listing requirements of the Stock Exchanges were also complied with.
It was
stated on behalf of the 3rd respondent that for the purpose 65 of finalising
the means of finance of HDPE, PVC and MEG Projects, RIL as the promoters of the
3rd respondent had engaged the services of the Merchant Banking Division of
ICICI which is a public financial institution and one of the foremost
consultants in the field. During the discussions which were initiated in the
second half of 1987 with ICICI, the idea of implementing these projects through
a new independent Company instead of RIL had taken shape duly taking into
account the financial aspects, management aspects, issues related to management
and operation control of setting up the projects within the existing company vis-a-vis
the setting up of the projects in the new company, namely the 3rd respondent
company, was taken up. The 3rd respondent company and ICICI also considered
various alternative means of financing project keeping in view the following
criteria:
(a)
That the project should be financially beneficial to the company.
(b)
That it should be financially attractive to the investor.
(c)
That it should be operationally easy for the company and the investor.
(d)
That it should meet the institutional/stock exchange/Ministry of Finance norms
and guidelines as regards financing of projects.
(e)
That it should be sustainable and attractive enough in terms of the
profitability/servicing capability of the project.
(f)
That it should reduce the dependence of the company on institutional finance.
(g)
That it should encourage the capital market activity in India.
The
various alternative means of issue of security such as equity share and/or
convertible cumulative preference shares (CCP) and/or partially convertible
debentures and/or non-convertible debentures and/or equity linked debenture
issue and/or fully convertible debentures were all examined by the management
and ICICI at length from various aspects including the aforesaid aspect, it was
asserted on behalf of respondent No. 3.
It was
reiterated that the Controller of Capital Issues had applied his mind and
considered all relevant, pertinent and proximate matters and the Controller
bona fide bestowed painstaking consideration by examining the entire gamut of
means of finance, the volume of finance needed and types of securities,
marketability of securities, conditions of the capital market and other
relevant considerations as are normally and properly to be evaluated by him as
an expert authority. A specialised expert statutory authority or agency under a
valid and legal enactment has been set up for the purpose of examining on what
basis securities such as share and/or convertible debenture should be issued 66
and the merits of his conclusions are not open to judicial review.
It has
to be borne in mind that the writ petitioners were only potential investors in
the shares and debentures proposed to be issued at the time when a large part
of the averments had been made. It was open to them, if they felt that the
scheme was not attractive not to subscribe to the issues. It was, however, not
possible for them, contend the respondents, to prohibit the issue. or prevent
the taking of other steps in pursuance thereof. Respondents 3 and 4 have set
out various reasons why an interim injunction should not be granted. These are
unnecessary to be dealt with now when the matter is being finally disposed of.
Two
other affidavits are necessary to be referred to.
One is
the rejoinder affidavit on behalf of the petitioner in writ petition No. 1791
of 1988 before the Delhi High Court, and the other is on behalf of the
Government. So far as the petition of Narendra Kumar Maheshwari is concerned,
it is necessary to note that he has stated that the capital market had
undergone changes in raising issues and the investors had no means of verifying
the correctness and soundness of the financial viability of the scheme. It was
stated that the Central Govt. did not take the responsibility for financial soundness
of the scheme. It was asserted that a new share of a new company could not be
raised at a premium but the Govt. had improperly permitted the issue of shares
of a new company at a premium in the instant case. It was stated that the
consent order of the Controller of Capital Issues stated that premium would be
payable on the shares to be allotted on conversion which, according to the
deponent, amounted to fraud on the investing public and the subterfuge to boost
up the market value of shares of RIL.
It was
reiterated that the RPL had been promoted by RIL whose shares had fluctuated in
the share market so widely for which no explanation came forth from the
company. These fluctuations in the share market were, according to the
petitioner, on account of purchases/ sales made by certain interested quarters
close to the management. On many occasions the sale of the share of RIL in the
stock market was banned in some stock exchanges due to fall in prices which,
according to the deponent, was a clear indication of cooperation and support
from the authorities.
It was
further alleged that there was discrimination in respect of time period of
conversion of loan/investment into equity between the shareholders of RIL and
the investing public. Immediately on allot67 ment the conversion of percentage
of investment of the rights holders is 53.49% whereas that of the investing
public is only 5%. At the end of 3 years from the debenture allotment date,
percentage debenture conversion of investment of the rights holders is 46.51%
and that of the investing public is nil. Hence, after the end of 3 years time
the percentage of conversion in investment of rights holders is 100% whereas
that of the investment of right holders at the end of 3 years in figures is
approx Rs. 107.50 crores and the investing public is only 29.67 crores. Between
3 and 4 years of debenture allotment the percentage of conversion of allotment
of rights holders is nil and that of the investing public is 20%. Between 5 and
7 years of the debenture allotment date the percentage of conversion of
investment of the rights holders was nil and that of the investing public is
75%. Thus the conversion of the debenture allotment between 3 and 7 years of
rights holders is nil and that of the investing public is 95%, which in figures
comes to about Rs.563.73 crores.
In a
democratic set up in the country, it was asserted on behalf of the petitioners,
the sanction of the issue amounted to concentration of wealth in one hand which
brought danger to the national economy and was against the Directive Principles
of State policy enshrined in the Constitution. It was submitted that the
validity of the consent order had to be decided on the merits of the case in
the background of the aforesaid. The petitioner had every right to question the
validity of the consent order, it was stated.
One
consolidated reply to all these writ petitions on behalf of the Union of India
through the Secretariat, Ministry of Finance, Deptt. of Economic Affairs and
Controller of Capital Issues was filed by means of an affidavit affirmed by Mr.
Prabhat Chandra Rastogi who. at the relevant time, was the Under-Secretary in
the Ministry of Finance, and Deputy Controller of Capital Issues in the office
of Controller of Capital Issues. He has mentioned that the consent of Capital
Issues was granted on 4th
July, 1988 and the
same was amended to a certain extent on 19th & 26th July, 1988.
He has
explained in his affidavit the background of the circumstances leading to the
consent order.
In
relation to the 3 projects, namely,
(i) for
manufacture of 1,00,000 tonnes per annum Polyvinyl Chloride (PVC),
(ii)
60,000 tonnes per annum of MEG (Mono Ethylene Glycol); and
(iii)
50,000 tonnes per annum. of HDPE (High Density Polyethylene), RPL submitted an
application for issue of capital on or about 4th May, 1988 in 68 the prescribed
form. RPL proposed raising of capital by various instruments, like, equity
shares, cumulative convertible preference shares (CCP'), partly convertible
debentures, intended to be issued to the public, to the shareholders of RIL,
debenture-holders and deposit holders of RIL. The original proposal for
approval related to the following instruments:
Instrument
Amount in Rs. (Crores) Equity Reliance Industries Ltd.
47.00
Shareholders, debentureholders 4.00 and deposit holders of Reliance Industries
Ltd.
Public
6.00 Cumulative convertible Preference Shares (CCPS) Non-resident
Indians/Foreign Collaborators/Indian Resident Public 81.00 Convertible
Debentures Sharesholders, debentureholders and 214 deposit holders of Reliance
Industries Ltd.
Public
241 The instrument of convertible cumulative preference shares was proposed to
be converted at a price to be fixed by the 2nd respondent at premium not
exceeding Rs.40 per share between the third and fifth year from the date of
allotment. The debentures proposed were to be of the face value of Rs.500 each
and the conversion was to be of Rs.200 into 10 shares as follows:
"6%
of the face value (Rs.30) would be compulsorily converted into equity at par at
1 year from allotment.
16% of
the face value (Rs.80) would be compulsorily converted at 2 years from
allotment into equity at a premium to be decided at the time of conversion but
not greater than Rs.20 per share.
69 18%
of the face value (Rs.90) would be compulsorily converted into equity at 3
years from allotment at a premium decided at the time of conversion but not
greater than Rs.30 per share.
60% of
the face value (Rs.300) would be redeemed between 8th and th years from
allotment by draw of lots." It appears that the Industrial Credit and
Investment Corpn. of India Ltd. (for short ICICI), was the lead financial
institution and lead manager for the issue of capital of RPL, and its merchant
banking department, having the necessary expertise, was interacting between the
2nd respondent, namely, the Controller of Capital Issues and RPL.
Discussions
were held with ICICI to evaluate whether the company could proceed with the
proposal by respondent No. 3 (RPL) by removing the instrument of cumulative
preference shares as also the nonconvertible portion of the debentures.
This
would have been necessitated by the sluggishness in the capital market, the
market reactions to non-convertible debentures and the discount at which such
instruments were traded after they came into existence, the complexity of
cumulative convertible preference shares and the general reaction anticipated
from the public for investment. It was stated that it was necessary to
encourage investments and draw out savings from the home saving sector so that
investments into productive and industrial sectors are promoted.
The
need to encourage growth of the Capital Market and to provide impetus for
investment in a depressed market condition through several liberalisation
steps, were factors in the consideration of the Controller of Capital Issues so
that on balance investment in the industrial sector in high priority industries
could be encouraged. RPL revised its proposal under which it proposed to raise
equity shares of Rs.50 crores from RIL--its promoter. The fully convertible
debenture issue of Rs.5 16 crores from public was sought to be subscribed to in
a manner that 50% on preferential share basis to be allotted to shareholders,
debenture-holders and fixed deposit holders of RIL. RPL made a suggestion for
issue of debentures' of the face value of Rs.200 each with the following terms
and conditions:
(i) 5%
of the face value of the debentures at par on allotment;
(ii)
20% of the face value (inclusive of premium) at a premium as may be decided in
consultation with the Controller of Capital Issues at the end of the fourth
year from the date of allotment.
70
(iii) the residual portion (inclusive of premium) at a premium as may be
decided in consultation with the Controller of Capital Issues at the end of the
seventh year from the date of allotment.
In
view of the revised project cost it was felt that the promoter's contribution
of Rs.50 crores was less and RIL as promoters were told, as asserted in the
affidavit, to increase the promoter's contribution to 15% of the total project
cost of Rs.700 crores. RIL in view of this requirement, agreed to bring in Rs.
107.50 crores as its contribution to RPL, out of which a sum of Rs.50 crores
was directed to be kept as interest-free unsecured loan at the time of
allotment which would be converted into equity at par at the expiry of 36
months from the date of allotment of convertible debentures.
As a
practice, it is asserted, respondent No. 2 being the CCI, observed that
debenture holders/fixed deposit holders of RIL were not eligible for
preferential reservation in the capital issue of RPL, and thus RPL was not
permitted to issue capital to these categories on preferential basis and only
the shareholders of RIL were permitted preferential entitlement in accordance
with the practice.
By a
Press Release dated 15th September, 1984 the 2nd respondent had issued certain
non-statutory guidelines for approval of issue of secured convertible and
non-convertible debentures. These guidelines had been subsequently amended by
Press Release dated 8.3. 1985. Guidelines were also issued by Press Release on
19.8.1985 for issue of convertible cumulative preference shares. There are
guidelines issued by Press Release dated 1.8.1985 for employees stock option
scheme. In accordance with the guidelines of 15.9.1984, as amended on 8.3.
1985, the consent for capital issue for secured fully convertible debentures
was issued as the projects originally to be established in RIL were permitted
by the Deptt. of Company Affairs to be transferred to RPL. The application for
industrial licences and endorsements thereof from RIL to RPL had already been
filed including, inter alia, the endorsement of the letters of intent for the
MEG Project. The scheme of finance for setting up of 3 projects, namely, PVC,
HDPE and MEG had already been approved by the Deptt. of Economic Affairs in favour
of RIL, promoter of respondent No. 3 and the Deptt. of Company Affairs also
approved the transfer of project to RPL, and a revised scheme of finance was to
be submitted by RPL. It was asserted that it was on the basis of appraisal by
the ICICI, a public financial institution which had evaluated the project cost
for the 3 71 projects for the purpose of implementation of RPL. ICICI had
evaluated the estimated project cost at Rs.700 crores for setting up 3
undertakings of RPL--post transfer from RIL, to RPL for implementation.
Applications for the endorsement of industrial licences and the Letter of
Intent had been filed with the Deptt. of Industrial Development, Secretariat
for industrial Approvals and these were pending consideration.
The
object of the issue was setting up of a new project and was within the scope of
the guide lines.
The
proposal contemplated was within the debt-equity norms and ratio in accordance
with para 4 of the non-statutory guidelines as the debt in the proposal
aggregated to Rs.47 1 crores. This is because debentures are considered as debt
only when they are unredeemed beyond the period of 5 years as per Explanation
to Section 5(ii) of the Capital Issues (Exemption) Order, 1969. In the present
case, 25% of the face value of the debenture would stand redeemed by the 3rd
and 4th year and before the 5th year, and it would therefore not be considered
as debt for evaluating debtequity-ratio as per the guidelines. Similarly, the
promoter's contribution of Rs. 100 crores plus 25% converted debentures at the
end of 5 years would be categorised as equity representing share-capital and
free-reserves converted from the total investment of Rs.516 crores proposed by
RPL. It was assumed to aggregate to Rs.229 crores and debtequity-ratio thus
came to 2.05:1-which approximates the ratio of 2: 1.
It was
further asserted that these guidelines being non-statutory and not rigid, a
relaxation in the norm of debt-equity-ratio of 2:1 is considered favourably for
capital intensive projects like petrochemicals which require large investments
as would appear from the Note annexed to the guidelines. The guidelines
postulate that these debentures should be secured. The proposal itself
contemplated that the security would be in such form and manner as required by
the trustees for the debenture holders for convertible debentures. It was
asserted that it was not a requirement of the guidelines that the debenture
issue be compulsorily under-written. The guidelines themselves contemplated
that the 2nd respondent could satisfy himself that the issue need not be
underwritten. An application to this effect had been made by RPL and was
granted by the 2nd respondent after carefully examining this issue. The
guidelines contemplated simultaneous listing of shares and debentures. In the
present case, upon allotment, there was simultaneous compulsory conversion of
5% of the face value of the convertible debentures. It was stated that it was
not an equity linked debenture as was asserted on behalf of the petitioner.
72
However, it was further stated that, in view of the size of the issues, there
was a modification dated 19th July, 1988 of the consent order which restricted
and put a nontransferability condition on the preferential entitlement of the
shareholders of RPL. It was limited to the corporate shareholders of RIL and
relaxed for individual shareholders of RIL. The restrictive condition on their
right to sell.
transfer
and hypothecate their shareholding was thought necessary in order to ensure
that they do not disinvest soon after the issue and thus dilute their stake in
the Company.
On
behalf of the Controller it was asserted that the guidelines should not be
construed in a manner which would fetter, constrict or inhibit statutory
discretion vested in the 2nd respondent for taking decisions in the interest of
the Capital-market and for national purpose of furthering the growth of industrialisation
and investment in priority sectors so as to encourage employment and demand in
the national economy. The objectives of the control, according to the deponent,
contemplated under the Capital Issues (Control) Act was to prevent wasteful
investments and to promote sound methods of corporate finance. It was asserted
that the administrative guidelines were only enabling in nature and could not
and ought not to be construed as preventing the statutory authority from
adopting or modifying varying norms in operational area of implementing the purposes
of the Act especially when there were no fetters under the Statute.
The
Controller of Capital Issues had issued, it was stated, guidelines as a result
of the war-time needs and controls, since the year 1947 and flow from the
experience gained under the Defence of India Rules 1939. Hence, according to
the deponent, these controls have been progressively reduced and the Capital
Issue (Exemption) Order, 1969 was brought into force so as to reduce the rigours
of the Act.
In the
absence of any control for capital issues for securities, according to the
deponent, there would be no fetter or restriction on the part of the Company to
borrow or raise capital from the market. It is to check raising of wasteful
capital and to avoid investment being made in nonproductive, non-priority
sectors and non-commensurate with the needs that the Act in question was
brought into force. This is being implemented with the aid of competent bodies.
It is further stated that the stipulation for fixation of premium at the time of
conversion is not a new practice and had been applied in the year 1986 in the
case of Standard Medical Leasing as also in ATV Projects Ltd. and the
Industrial Credit & Investment Corpn. of India Ltd. As regards Convertible
Debenture Issue, it was asserted that there is no violation of the provi73 sions
of Section 81(5) of the Companies Act, 1956 as the section contemplates only an
optional conversion of Government loan into equities. In the instant case,there
is a compulsory conversion of publicly held debentures of the convertible type.
In the premises, Sec. 81(5) of the said Act has absolutely, according to the
deponent, no application to the facts and circumstances of the case.
All
these petitions challenge only the grant of sanction by the Controller of
Capital Issues, though different aspects have been highlighted in the different
petitions and we have heard different learned counsel. We have, therefore, to
examine what is the scope of the powers and functions of the Controller of
Capital Issues while discharging his statutory functions in according sanctions
to capital issues. It is further necessary to examine if that role has in
anyway, changed or altered due to the present economic and social conditions
prevailing in the country. It has also to be considered whether the guidelines
or the provisions of law under which the Controller has functioned or has
purported to function in this case, were proper or there had been deviations
from these guidelines. If so, were such deviations possible or permissible? It
is further necessary to examine whether the Controller has acted bonafide in
law. These are the broad questions which have to be viewed in respect of the
challenge to the consent order. It is, therefore, necessary to examine the
broad features as have emerged.
Counsel
for the petitioners contended that the RPL's application had been entertained
even without the company fulfilling the requirements of a proper application
and furnishing the necessary consents and approvals, processed with undue expedition
within a very short time and sanctioned without any application of mind to the
crucial terms of the issue which were detrimental to public interest. This
contention, when analysed, turns on a number of aspects which can be dealt with
separately.
(a) It
is submitted that the application was made on 4.5.88 and sanctioned on
4.7.88--within hardly a period of two months; this reflects undue haste and favouritism,
particularly if one has regard to the magnitude of the public issue proposed to
be made and the various financial and other intricacies involved. We are unable
to accept this contention. In the first place, an application of this type is
intended to be disposed of with great expedition. In particular, in a project
of the type proposed to be launched by the petitioner, passage of time may
prejudicially affect the applicant and it is not only desirable but also 74
necessary that the application should be disposed of within as short a time as
possible. It is, therefore, difficult to say that the period of two months
taken in granting consent in the present case is so short that an inference of
haste must follow. Secondly, on behalf of the Union of India a list of various
applications received and disposed of by the office of the CCI between September
1987 and September 1988 has been placed before us to show that, generally
speaking.
these
applications are disposed of within a month or two. It is true that none of
these issues is of the same colossal magnitude as the. present issue.
Nevertheless, the Controller of Capital Issues could hardly keep the
application pending merely because the amount involved is heavy. It is not
possible therefore to say merely from the short span of time that there was a
hasty grant of consent in the present case.
(b)
Secondly, it has been submitted that the RPL was a company which was
incorporated only on 11.1.88. RIL had issued a 'G' series of debentures as
recently as 1986 for the same projects. In granting consent to the present
issue the Controller of Capital Issues has completely over-looked the fact that
in respect of the same projects the RIL had been permitted to raise debentures
on earlier occasions. We do not think that the petitioners are correct in
saying that the Controller of Capital Issues has over-looked or was not aware
of the debenture issues by the RIL or the purposes for which these debenture
issues had been sanctioned. The application for consent makes it clear that the
petitioner company is a new company promoted by RIL and that RIL was promoting
this company to manufacture HDPE, PVC and MEG at Hazira.
The
application refers to the fact that the total cost of the project was expected
to be Rs.650 crores and that this cost had been approved earlier in 1985.
Considering that RPL had come into existence only on 11.1.1988, this was clear
indication that the projects for which the debenture issue was being proposed
were projects which had been mooted even by the RIL as early as 1985. Again in
the detailed application form submitted by the RPL it has been mentioned that
the RIL had already obtained approval of the Central Government for
implementation of the aforesaid projects under the MRTP Act. In part C of the
application form it has been mentioned that the promoter company had made
necessary applications for endorsement in favour of the company of the Letter
of Intent/Industrial Licences already issued by the Central Government under
the Industries (Development & Regulation) Act, 195 1, in the name of the
holding company, the RIL. In the context of these statements it is extremely
difficult to agree that the fact of issue of the earlier series of debentures
by the RIL or the purposes thereof could have escaped the 75 notice of the CCI,
particularly, when it is remembered that the issue of G series of debentures by
the RIL was quite recent and had also attracted a lot of publicity. We have
elsewhere discussed the contention raised on behalf of the petitioners that the
consent given has contravened the guidelines because finances were being raised
for no new project but for the same old projects for which RIL had collected
funds. We have there pointed out that, MEG project, for all practical purposes,
was a new project that was to be implemented by the RPL and the funds raised by
the RIL had been insufficient for even the PAT and LAB projects launched by it.
The learned Addl. Solicitor General states that there was earlier
correspondence between the RIL and the CCI regarding the cost over-run of the
PTA and LAB projects. We have not gone into the details of this correspondence
as it is not our purpose to enquire into the details of the matter. We are
referring to it only for indicating that the CCI was fully aware of the earlier
series of debentures, of the stage of the various projects proposed therein, of
the actual implementation of the projects, of the cost over-run, of the
proposal to transfer to some of those from RIL to RPL and the exact
requirements of the present issue. It is not possible to accept the contention
that the consent of the CCI was accorded in ignorance of the facts pertaining
to the G series of debentures.
(c)
Thirdly, it is submitted that having regard to the requirements of the pro
forma prescribed under the rules, the application for consent could not have at
all been considered by the CCI until the RPL produced the industrial licence in
its favour, the collaboration agreements, the approvals of the financial
institutions and the approvals under the MRTP Act. It is submitted that the
application of the petitioner was cleared hurriedly without insisting upon
these clearances and this was done specially to oblige the company. We must
first of all point out that the pro forma relied on indicates a general
procedure and should not be understood as a rigid requirement. It is, of
course, the duty of the CCI to be satisfied that before the debentures are
actually issued the applicant company has all the necessary licences, consents,
orders, approvals, etc. in its favour. We are satisfied that in the present
case there is no reason to doubt that he had been so satisfied if one remembers
that those projects had been initiated by the RIL which had gone through the
necessary exercises and all that remained to be done was a formal approval of
their transfer for implementation to the RPL.
We
shall first refer to the steps taken by the RIL in this regard.
76 On
10th October, 1983 as RIL proposed to engage in manufacture of MEG, it filed an
application for grant of an Industrial Licence under the Industries
(Development & Regulation) Act, 195 1. On 16th August, 1984 RIL received a Letter of Intent No. 653(84) Regn. No.
1323(83)-IL/SCS issued by the Govt. of India for the manufacture of 40,000 TPA
of MEG. Thereafter, from time to time on the applications made by the RIL, the
Govt. of India by various letters extended the validity of the period ending up
to 30th June, 1989. The last of such extensions was
made by a letter dated 2nd
September, 1988. On 11th May, 1988 pursuant to an application made,
the Govt. of India permitted expansion of capacity for manufacture of MEG from
40,000 TPA to 60,000 TPA. From 12th January, 1988 to 22nd July, 1988
applications were made by RIL for change of Company from RIL to RPL for the MEG
Project. It appears that on 11th August, 1988
approval/sanction was granted by the Govt. of India for change in the
implementing agency from RIL to RPL. On or about 19th January, 1985 a letter
from the Govt. of Maharashtra was issued, stating that there was no objection
to the Company's proposal for change of location for the MEG Project from Maharashtra
to Gujarat. It also appears from the various documents which are mentioned in
Vol. IV of the present Paper Books at different pages (from 22 to 44) that by
various orders under the MRTP Act, sanctions and modifications were approved,
the latest sanction being dated 11th October, 1988 whereby the Govt. approved
the proposal of RPL for modified scheme of Finance. It is also significant to
mention that on 25th
January, 1988 an
application was made under Sec. 22(3)(d) of the MRTP Act with the proposal to
implement the MEG Project along with other projects of RPL.
It may
be mentioned that by a letter dated 6th June, 1988 RIL had informed that they had
originally planned to utilise a sum of Rs.85 crores from 'G' Series debentures
for this project. But, however, they were not able t9 utilise this money as the
entire 'G' Series amount had been utilised for PTA and Lab projects including
the working capital on account of overrun in the cost of LAB and PTA projects.
Hence, it applied for permitting a new scheme of finance. By an order dated 2 Ist
July, 1988 the Govt. accorded approval to the proposal of RIL for modified
scheme of finance to be implemented by RIL. Thereafter, RPL made an application
for modification of the scheme of finance and the same was approved by the Govt's
order dated 11th
October, 1988.
It
appears that on 9th
October, 1984 pursuant
to an application made by RIL for foreign collaboration with M/s Union Carbide
Corporation, USA, the Govt. of India by its order of
that date accorded approval to the terms of the foreign collaboration for a 77
period of six months for this project. It further appears that on 14th March, 1986 pursuant to an application made by
RIL, the Govt. accorded approval for foreign collaboration with M/s Scientific
Design Company. It may, however, be mentioned that there was a letter dated
30.4. 1986 whereby approval was granted by the Reserve Bank of India in respect of foreign collaboration
agreement with M/s Scientific Design Co. USA.
The
next aspect of the matter which has to be borne in mind in view of the
contentions urged was regarding the licences. It appears that there was an
application on 25th
March, 1987, for licence.
On 9th August, 1988 the Industrial Licence dated 25.3.
1984 granted to RIL for manufacture of PVC was endorsed to RIL. This is
important because one of the contentions that Shri Pagaria during the course of
his long submissions made was that there was no valid licence.
It
also appears that so far as the MRTP Act is concerned, an application was made
by RIL on or about 12th
October, 1984 under
Sec. 22(3)(a) for manufacture of PVC.
Several
other steps were taken and on 29th June, 1988
there was an order of the Govt. of India under Sec. 22(3)(d) of the Act,
according approval to the proposal for modified scheme of finance.
There
was a further proposal for modification and further orders. Last of such order
was dated 11th October,
1988. Similarly,
regarding the foreign collaboration, there were approval letters and the last
one was dated 12th
August, 1988 for
endorsement of foreign collaboration approval in favour of RPL. So far as HDPE
is concerned, it appears that there was a valid licence; and it may be
mentioned that on 24th August, 1985 pursuant to an application made by RIL
under section 22(3)(a) of the MRTP Act, the Govt. granted approval for the
establishment of a new undertaking for manufacture of HDPE.
Regarding
foreign collaboration, an application was made by RIL in 1984 for approval of
foreign collaboration with M/s Du Pont Inc. Canada, for manufacture of HDPE. Such approval was given and the validity was
extended and the foreign collaboration approval was endorsed in favour of RPL
on 12th October, 1988. Similar other consents were there.
Mention
may be made of letters dated 28th April, 11th March, 6th December, 1986, 2nd
January, 1987, 15th July, 25th, 26th July, 19th August, 1988 which appear at
various pages of Vol. IV of the papers. Finally, capital-goods clearance was
endorsed in favour 78 of RPL for the PVC project on 12th August, 1988. Capital goods clearance was also endorsed in favour of RPL
for HDPE project on 23rd
August, 1988. Thus, it
will be seen that all the basic groundwork had already been done by the RIL.
It is
in above perspective that one has to examine the events that have happened. The
question that has to be considered is whether the CCI could take it for granted
that these approvals, consents, etc. would stand automatically transferred to
the RPL. On 16th June,
1987 by a Press Note
issued by the Deptt. of Industrial Development in the Ministry of Industry, the
Govt. of India declared that where a transferee Company is a fully owned
subsidiary of the Company holding the Letter of Intent or licence, the change
of the Company implementing the project would be approved. It is in the light
of this that the Board of RIL on 30th December, 1987 passed a resolution to
incorporate a 100% subsidiary Company whose main objects were, inter alia, to
implement the licences/Letters of Intent received by RIL and the objects of
undertaking, processing, converting, manufacturing, formulating, using, buying,
dealing, acquiring, storing, packing, selling, transporting, distributing and
importing etc. and approved the name of the Company as RPL. On 11th January, 1988 the RPL was incorporated and the
Certificate of Incorporation was issued. Thereafter, on 12th January, 1988 letters were written by RIL for
endorsement of licences/Letters of Intent in favour of RPL. The certificate of
commencement of business was thereafter issued.
The
Press note earlier referred to makes it clear that the transfers from one
company to an allied company were considered unexceptionable except where
trafficking in licences is intended. In this situation the change of name from
RIL to RPL, of the licences, letters of intent and other approvals was only a
matter of course and much importance cannot be attached to the fact that CCI
did not insist upon these endorsements being obtained even before the letter of
consent is granted. In any event the letter of consent is very clear. Clause
(h) of the conditions attached to the consent letter makes it clear that the
consent should not be construed as exempting the company from the operation of
the provisions of the Monopolies & Restrictive Trade Practices Act, 1969, as
amended. Clause (e) makes it clear that it is a condition of this consent that
the company will be subject to any measures of control, licensing, or
acquisition that may be brought into operation either by the Central or any
State Government or any authority therein.
Under
clause (t) the approval granted is without prejudice to any other
approval/permission that may be required to be 79 obtained under any other
Acts/laws in force. Having regard to the above history as well as having regard
to the terms and conditions of the consent letter, the grant of consent itself
being conditioned on the RPL obtaining the necessary approvals, consents and
permissions before embarking on the project, we do not think that there was any
impropriety in the CCI granting the consent without waiting for the formal
endorsement of the various licences, letters and approvals in favour of the
RPL.
(d) It
is next submitted that under para 3 of the guidelines issued the Government,
the amount of issue of debentures for project financing and other objects will
be considered on the basis of the approvals of the scheme of finance by the
financial institutions/banks/ Government under the provisions of the MRTP Act,
etc. The criticism in this respect is that since no approvals of the scheme of
finance by the financial institutions/banks/Government under the provisions of
the MRTP Act etc. had been produced before the Controller of Capital Issues he
could not have been satisfied that the amount of issue of debentures was
necessary and adequate on the basis of such approvals. This argument proceeds
on a misconception of the Government set up for dealing with these matters. The
learned Additional Solicitor General points out that the Controller of Capital
Issues does not function in isolation, sitting at his desk and awaiting the
various types of clearances and consents that are necessary to be obtained from
various quarters before granting consent to an issue. He points out that the
CCI functions in close coordination with all the concerned departments of the
Government. He is in close touch with the progress of various projects. On
references from the Department of Company Affairs, the CCI (MRTP) Section
furnishes comments on the scheme of finance relating to the proposals of
industrial undertakings covered under the MRTP Act for effecting substantial
expansion for setting up of new undertakings, merger/amalgamations; and
acquisition/takeover of other undertakings. The comments are furnished to the
Department of Company Affairs with reference to the norms relating to equity
debt ratio promoter's contribution, dilution of foreign equity, listing
requirements for shares on Stock Exchanges and on analysis of balance sheets
for cash generation etc. An officer attends regular meetings of the Advisory Committee
meetings held in the Department of Company Affairs in terms of the MRTP Act,
hearing held in Department of Company Affairs under section 29 of the MRTP Act,
interdepartmental meetings held in the Department of Company Affairs to
consider specific issues relating to applications received under the MRTP Act,
Licensing-cum-MRTP Committee meetings 80 held in the Department of Industrial
Development, screening committee meetings held in the Administrative Ministries
to consider applications from MRTP companies and statutory public hearings held
in the MRTP Commission. The submission of the learned Solicitor General in
short is that, in dealing with application for consent to an issue of capital,
the CCI does not act in isolation but the entire Central Government functions
with various Departments closely monitoring and coordinating the scrutiny of
applications. He, therefore, submits that the Controller of Capital Issues is
aware of the progress of the various applications made by the company. The
Controller is also aware that the ICICI had looked into the financial soundness
and feasibility of the project and there is material to show that the comments
of the ICICI were made available to him. When a project is being appraised by
the institution like the ICICI and when the CCI is also aware, by reason of the
participation of his representatives at the meetings of the Department of
Industry and the Department of Company Affairs about the stage or outcome of
the proposals made under the IDR and MRTP Acts, it is clear that the CCI did
not overlook any crucial aspect and that his grant of consent in anticipation
of the necessary transfers to the RPL was based on a practical appraisal of the
situation and fully in order.
The assumptions
behind the petitioners' arguments that the terms of the issue as proposed by
the RPL were approved in toto by the CCI-without examination is also unfounded.
The
record before us indicates that there were frequent discussions leading to
alterations in the original proposals from time to time as well as changes in
the conditions of consent both before and even after the letter of consent
dated 4.7.1988. Some aspects of these have been referred to elsewhere and some
are referred to below and these will show that consent was not granted as a
matter of course. The allegation that consent was accorded without any
application of mind is, on the materials before us, clearly untenable.
It is
stated in the affidavit that in March/April, 1988 discussions centered around
the concept of cumulative convertible preference shares (CCP) which was mooted
as an instrument for the means of finance. The instrument offered would have
been equity shares to the extent of Rs.57 crores, cumulative convertible
preference shares to the extent of Rs.81 crores and convertible debentures to
the extent of Rs.478 crores with four conversions. In this connection,
reference may be made to Annexure 1 at page 39 of the reply affidavit filed in
these proceedings by RPL. Thereafter, on 4th May, 1988 RPL made an 81 application to the
Controller of Capital Issues seeking permission to make an Issue of Capital on
certain conditions. Specific details thereof are not necessary to be set out
here. It also made a proposal for issue of 81 lakhs 10% cumulative convertible
preference shares of Rs. 100 each for cash at par through prospectus to
non--resident Indians/resident Indian public--81 crores. It is stated that in
accordance with the present guidelines issued by the Govt. of India, the
Company intended to retain excess subscription amount to the extent of 15% of
Rs.566 crores, i.e., a right to retain an additional amount.
It was
further stated that in accordance with the Guidelines issued by the Government
of India, the Company had intended to retain excess subscription amount to the
extent of 15% of Rs.566 crores, i.e., a right to retain an additional amount of
Rs.85 crores. The idea was that the company would in the event of
over-subscription request the CCI for allotment of such additional amount of
Rs.85 crores. It was further proposed to issue a part of the cumulative
convertible preference shares to NRIS and a part to the foreign collaborators.
Terms
of the proposed convertible debentures were:
(a)
Convertible debentures upto 12.5% (interest) taxable: Each convertible debentures
of Rs.500 would be converted into 10 equity shares of Rs. 10 each as per scheme
envisaged. The residual portion of each Convertible Debenture would be
redeemable at the end of th year from the date of allotment with an option to
the company to repay these amounts in one or more instalments by drawing lots
at any time after the end of 5th year from the date of allotment.
(b)
Cumulative Convertible Preference Shares 10% (dividend) taxable. Each CCP would
be fully converted into equity share of Rs. 10 each at such a premium not
exceeding Rs.40 per share as might be approved by the CCI at any time between
the 3rd and/or 5th year from the date of allotment to be decided by the
company, by draw of lots, if necessary.
Then
there are other conditions regarding securities, underwriting, allotment of
equity shares to RIL shareholders. In May, 1988, several NRIS also evinced
interest in equity participation in RPL. It was stated that though the CCP
shares appeared to be most appropriate instrument, the computation of
reserved/preferential entitle82 ment resulted in very low entitlement to the
existing shareholders of RIL. It was then contemplated to increase the
preferential entitlement of RIL investors on partially convertible debentures
and the ratio of convertible debentures was altered so as give equal share
between RIL investors and the members of public. A three stage conversion was
contemplated. Thereafter, in June 1988, a revised proposal to the CCI was made
by RPL. It is not necessary to set out in detail the said revised proposal.
After several discussion, on or about 1st June, 1988, between the company, RPL,
the Merchant Bankers, ICICI and the Office of CCI, it was asserted on behalf of
the respondent No. 3 that serious reservations were expressed that the
marketability of CCP shares and the investors resistance was likely to be
there.
It was
in this context and also after considering the reservations that might be there
on the part of the foreign collaborators and NRIs, that the CCI required the
issue of fully convertible debentures. The institutional proposal of the
project cost emerged at Rs.700 crores instead of Rs.650 crores and it was then
felt that RIL should increase its own contribution to the project by way of a promotors'
contribution at Rs. 100 crores, thereby increasing its stake to 14% at the
suggestion of CCI. It was stated that this was also a requirement of the CCI
guidelines and MRTP conditions. At the end of June, 1988, there was an
amendment of the Order by the Department of Company Affairs in favour of RPL
for PVC. Similarly, on 21st
July, 1988, the order
for MEG passed for RIL was amended permitting RPL to undertake the new projects
for implementation of the MEG Project. It is not necessary to set out in detail
these proposals. On 4th
July, 1988, CCI
granted the consent under the Capital Issues (Control) Act, 1947 to the public
issue. There were variations between the proposal and the Order of consent of
the CCI.
It may
be necessary at this stage to refer to the Order dated 4th July, 1988, which is as follows:
"With
reference to your letter No. BOK/DKG/505(c) dated 8.6.1988, I am directed to
say that the Central Govt. in exercise of the powers conferred by the Capital
Issues (Control) Act, 1947, do hereby give their consent to an issue by M/s
Reliance Petrochemicals Ltd., a company incorporated in the State of Maharashtra,
of capital of the value of Rs.650.90 crores (inclusive of retainable excess
subscription to the extent of Rs.84.90 crores).
(A) 5,75,00,000
Equity shares of Rs. 10 each for cash at par' to M/s Reliance Industries Ltd.
(inclusive of retainable excess 83 subscription to the extent of Rs.7.50 crores).
(B) 2,96,70,000
12.5% secured, redeemable, convertible debentures of Rs.200 each for cash at
par to public by a prospectus (inclusive of retainable excess subscription of
77.40 crores).
2. Out
of (B) above, reservations for preferential allotment will be made as follows:
(i)
Shareholders of M/s Reliance Industries Ltd.
50%.
(ii)
Employees (including Indian working Directors)/ workers of the company and of
M/s RIL. 5% Unsubscribed portion, if any, of the reservations will be added to
the public offer.
The
Convertible debentures will carry interest 12.5% p.a. (taxable). The Debentures
will be fully and compulsorily convertible in the following manner:
(a) 5%
of the face value at par on allotment of the debentures.
(b)
20% of the face value at a premium if any, as may be decided by this office
after three years but before four years from the date of allotment of debentures.
(c)
The balance at such a premium if any, as may be decided by this office after 5
years but before the end of 7 years from the date of allotment.
3. The
consent given as aforesaid is qualified by the conditions mentioned in the
Annexure and the company shall comply with the terms of the conditions so
imposed.
4. I
am to make it quite clear that the grant of consent to the issue of capital
represents no commitment of any kind on the part of the Central Govt. to render
assistance in the matters. of priorities or licences for supplies of raw
materials, machinery, steel, etc., of transport facilities or any other
governmental assistance, including the provision for foreign exchange.
84
5.
This order also conveys the approval of the Central Govt. under proviso to Rule
19(2)(b) of the Securities Contracts (Regulation) Rules, 1957 subject to the
condition that the allotment to the employees shall not exceed 200 shares per
individual.
6.
This letter is issued in the name and under the authority of the President of
India." There was Annexure to the said Order. In that Annexure, certain
conditions were laid down and condition (a) stipulated that in any prospectus
or other document referred to in section 4 of the Capital Issues (Control) Act,
1947, relating to this issue, the statement required by that section must be
worded as follows:
"Consent
of the Central Government has been obtained to this issue by an order of which
a complete copy is open to public inspection at the Head Office of the Company.
It must be distinctly understood that in giving this consent the Central Govt.
do not take any responsibility for the financial soundness of any scheme or for
the correctness of any of the statements made or opinions expressed with regard
to them." It further imposed the condition (b) that the consent to lapse
on the expiry of twelve months from the date of consent. Order also stipulated
that the consent should not be construed as exempting the company from the
operation of the provisions of the Monopolies & Restrictive Trade Practices
Act, 1969, as amended. The consent also indicated that the company would be
subject to any measures of control, licensing, or acquisition that might be
brought into operation either by the Central or any State Govts. or any
authority therein. It also enjoined the company to ensure that the prospectus
for the issue of securities consented to should be printed subject to certain
conditions. It also enjoined, inter alia, that the convertible debentures
should be allotted to the employees of the company and of M/s RIL and the
shareholders of M/s RIL. On conversion the equity shares so converted should
not be transferred/sold/hypothecated for a minimum period of three years from
the date of allotment of convertible debentures. The other special conditions
contained the following:
"(v)
The equity shares to be allotted to the promoters of the company shall not be
sold/hypothecated/transferred for 85 at least three years from the date of
allotment.
(w) It
is a condition of this consent order that the proceeds from the issue of
debentures should be invested in fixed duration deposits/instruments with the
cooperative/ nationalised banks, UTI, Financial Institutions, Public Sector
Undertakings (other than public sector bonds) and be used strictly for the
requirements of the projects mentioned in the application and not for any other
purpose.
(x)
M/s Reliance Industries Limited will bring in additional amount of Rs.50 crores
as interest free unsecured loans, at the time of allotment of the above convertible
debentures as additional promoters contribution which will be converted into
equity at par on the expiry of 36 months from the date of allotment of
convertible debentures.
(y) (i)
The company shall scrupulously adhere to the time limit of 10 weeks from the
date of closure of the subscription list for allotment of all securities and despatch
of allotment letters/certificates and refund orders.
(ii)
The company shall, at the time of filing its application for listing to the
regional Stock Exchange, furnish an undertaking for compliance of the above
condition, along with a scheme incorporating the necessary details of the
arrangements for such compliance. This undertaking shall be signed by the Chief
Executive or a person authorised by the Board of the company.
(iii)
The company shall file, with the Executive Director or Secretary of the
regional Stock Exchange, within five working days of the expiry of the
stipulated period as above, a statement signed by the Chief Executive or a
person authorised by the Board, certifying that the allotment
letters/securities and the refund orders have been despatched within the
prescribed time limit as per the condition above. A copy of the statement shall
be endorsed to the office of the CCI quoting this consent order and date.
(iv)
Non-compliance of conditions above shall be;
86
punishable by the Stock Exchange, in addition to the action that may be taken
by other competent authorities." The other conditions mentioned therein
are not very relevant. These only enjoin certain procedural safeguards.
The
said consent order was amended on the 19th July, 1988, which clarified that the
intention for imposing condition (w) as set out above, was not to block all the
funds raised out should be invested in terms of the conditions laid down
aforesaid. The amendment enjoined that the approval of the Central Government
should be subject to the condition that allotment to the employees should not
exceed 50 debentures per individual. It was further added that the company should
obtain prior approval of the Reserve Bank of India, Exchange Control Department, for the allotment of
debentures to the non-residents as required under the Foreign Exchange
Regulation Act, 1973. There was a further amendment of the Consent Order on the 26th July, 1988 which added condition (s) to the
following effect:
"(s)
The convertible debentures to be allotted to the employees of M/s RPL and M/s
RIL and the corporate shareholders of M/s RIL (other than individual
shareholders of M/s RIL) shall not be sold/transferred/hypothecated till the
end of 3 years from the date of allotment of debentures. On conversion the
equity shares so converted shall not be transferred/sold/hypothecated for a
minimum period of 3 years from the date of allotment of convertible
debentures." It was stated that between 4th January, 1988 to 24th July,
1988, news about the formation of RPL and to set up the projects at Hazira,
Gujarat and the consent granted by CCI for convertible debentures for RPL--all
these were widely reported in various newspapers and magazines including
national dailies such as Times of India, Indian Express, Financial Express,
Gujarat Samachar, Hindustan Times, Bombay Samachar, Business Standards and
other magazines and news items. Thereafter, till mid August, 1988, there were
detailed advertisements about the company and nearly 1600 insertions in nearly
200 newspapers and dailies were made advising the opening of the issue. There
were from mid July, 1988 onwards till August, 1988, advertisement campaigns in
television and radio to attract investments in Petrochemicals advising the
public about the issue of Rs.593.40 crores of convertible debentures of RPL. It
is asserted on behalf of the respondents that the public issue of these shares
was made known 87 since mid July, 1988. As mentioned hereinbefore since the
words "till conversion" were capable of wide interpretation and might
have rendered the shares/convertible debentures non-transferable for upto 7
years, the CCI modified the consent and limited this restriction to a period of
3 years.
On July 27, 1988, the prospectus of RPL was filed
with the Registrar of Companies, Gujarat and the Stock Exchanges at Bombay and Ahmedabad. On August 22, 1988,
the issue of RPL opened for subscription. A letter was addressed to the CCI on August 23, 1988, requesting for the lifting of
embargo for non-transferability for three years for the corporate shareholders
of RIL also. It is asserted that by August 31, 1988, the issue of RPL was fully/over
subscribed and closed.
By October 25, 1988, the basis of allotment was
approved by Ahmedabad Stock Exchange. A resolution of the Board of Directors of
RPL was passed on October
27, 1988 to allot the
debentures/shares. On November
4, 1988, lease deed
for land at Hazira between RPL and GIDC was executed. There was no objection
certificate obtained from GIDC. It is asserted that the Debenture Trust Deed
between RPL and ICICI was executed at Surat and was lodged for registration on November, 7, 1988. Certificate of Mortgage under
Section 132 of the Companies Act, 1956 was issued by the Registrar of
Companies, Gujarat regarding the creation of charge
for the Debentures on November
11, 1988 itself.
In
this context, on behalf of the respondents, Mr. Baig drew our attention to
certain dates indicating that the writ petitioners were aware of this and it
was stated that on July 20, 1988, Mr. Radheyshyam Goyal, the Writ Petitioner in
Rajasthan High Court, wrote a letter to the Editor of the Financial Express
that the premia for the issue of shares upon the second and third conversion
had not been fixed and the terms and conditions were vague. Shri Goyal also
made certain other allegations. Though, of course, no complaint was ever made
to RIL or RPL on this aspect, on August 16, 1988, one Mr. J.P. Sharma filed a
complaint of Unfair Trade Practices under the MRTP Act before the MRTP
Commission seeking injunction against the issue opening on 22nd August, 1988
and alleging the same breaches as claimed by the petitioners in the Transfer
cases.
On
being moved, this Court, on August 19, 1988, passed an order in Transfer
Petition,; No. 192-193 of 1988 staying the three pending Writ Petitions in the
three High Courts, namely, Bangalore, Delhi and Jaipur and further stayed the
proceedings in the suit being Civil Suit No. 1172 of 1988 filed in Baroda. It
was directed that the issue of debentures would proceed without hindrance
notwithstanding any 88 proceedings instituted or orders passed and that any
order or direction or injunction already passed or which might be passed would
remain suspended till further orders of this Court. It was mentioned that on August 29, 1988, the complaint filed by Shri Sharma
before the MRTP Commission was dismissed. On August 31, 1988, one Shri Arvind Kumar Sanganeria issued notice through his
Advocate advising that a Writ Petition was being preferred in the Bombay High
Court.
On September 1, 1988, this Court granted an ex-parte
stay of the proceedings in Writ Petition No. 4388 of 1988 pending before the
Bombay High Court. As mentioned hereinbefore, on September 9, 1988, this Court had transferred the four Writ Petitions in the
four High Courts and civil suit to this Court. It appears that there was a
further writ petition filed by Shri Suni1 Ambani in the High Court of Allabahad
on the basis of two articles published in the Indian Express.
Shri Ganesh
made submissions in Transfer Case No. 164 of 1988. Shri Haksar made his
submissions in T.C. No. 161 of 1988. Shri Pagaria argued T.C. 162 of 1988. Shri
Udai Holla who was the counsel for the petitioner in Karnataka matters,
appeared in T.C. 163 of 1988 and made his submissions. We heard Mr. G. Ramaswamy,
Additional Solicitor General. Shri Soli J. Sorabjee, Shri Baig and Shri Salve
argued on behalf of respondents 1 and 2 and Shri F.S. Nariman for respondent
No. 3 in T.C. No. 162 of 1988.
Inasmuch
as the charge is the non-evaluation by the CCI in enforcing and applying the
principles of guidelines properly, it would be appropriate at this stage to
refer to the said guidelines. It appears that from time to time, in exercise of
the powers conferred by section 12 of the Capital Issues (Control) Act, 1947,
the Central Government had issued rules and guidelines. On or about April 17, 1982, guidelines were issued by the
Government of India under the said Act for the "Issue of Debentures by
public Limited Companies". It is not necessary to set out in detail these
guidelines, but it may be necessary to refer to clauses (4) and (6) of the said
guidelines. Clause (4) reads as follows:
"4.
Debt-equity.' The debt-equity ratio shall not normally exceed 2: 1. For this
purpose:
"Debt"
will mean all term loans, debentures and bonds with an initial maturity period
of five years or more, including interest accrued thereon. It also includes all
deferred payment liabilities but it does not include short89 term bank
borrowings and advances, unsecured deposits or loans from the public,
shareholders and employees, and unsecured loans or deposits from others. It
should also include the proposed debenture issue.
"Equity"
will mean paid-up share capital including preference capital and free reserves.
Notes:
(1) The computations under guidelines 3 and 4 mentioned above will be based on
the latest available audited balance-sheet of the company.
(2) A
relaxation in the norm of debt-equity ratio of 2:1 will be considered favourably
for capital-intensive projects such as fertilizers, petro-chemicals, cement,
paper, shipping etc." Clause (6) of the said guidelines deals with the
period of redemption and is as follows:
"6.
Period of Redemption.' Debentures shall not normally be redeemable before the
expiry of the period of seven years except in the following cases:
(i) A
company will have the option of redeeming the debentures from the 5th to the
9th year from the date of issue in such a way that the average period of
redemption continues to be seven years. While exercising such option the small
investors having debentures of the face value not exceeding Rs.5,000 will have
to be paid in one instalment only.
(ii)
In case of non-convertible debentures or nonconvertible portion of convertible
debentures a company may have the option of getting the debentures converted
into equity fully with the approval of and at such. price as may be determined
by the Controller of Capital Issues. The debenture holders will, however, be
free not to exercise this right." Clause (8) provides for the denomination
of debentures.
Clause
(9) enjoins the listing of debentures on the Stock Exchange. Clause (10)
stipulates that only secured debentures would be permitted for issue to 90 the
public. Clause,(11) enjoins the underwriting of the debentures and clause (12)
also provides for listing of the shares of the company proposing debenture
issue. Clause (13) permits linked issue of shares and debentures. There were
certain amendments to these guidelines which would be noted at the relevant
time.
While
considering the question of the application or non-application of mind or
infringement of guidelines, it is necessary to bear in mind the role of the CCI
in this respect. The CCI functions under the Capital Issues (Control) Act,
1947. This is an Act to provide for control over the issue of capital. Section
2(e) of the said Act defines "securities" and states that the
"securities" means any of the following instruments issued or to be issued,
or created or to be created, by or for the benefit of a company, namely:
(i)
shares, stocks and bonds;
(ii) debentures;
(iii) mortgage
deeds, etc.; and
(iv)
instruments acknowledging loan or indebtedness.
Section
3(1) of the said Act enjoins that no company incorporated in the States shall,
except with the consent of the Central Government, make an issue of capital
outside the States. The other sub-sections of Section 3 deal with the
modalities of such consent.
It may
be mentioned that the Statement of Objects and Reasons of the Act states that
the object of this measure is to keep in existence .... the control over
capital issue which was imposed by Rule 94-A of the Defence of India Rules in
May, 1943 and continued in force after the expiry of the Defence of India Act
by Ordinance No. XX of 1946. The Statement further states that although there
has been an appreciable change in the general conditions which constituted the
principal reason for the introduction of the control during war-time, it was
thought in the light of experience gained that the control was still necessary
to secure a balanced investment of the country's resources in industry,
agriculture and the social services. (See Gazette of India, 1947, Part V, p.
264).
In
this connection, Shri G. Ramaswamy, learned Additional I Solicitor General for
the Union of India drew our attention to the 91 Debates of the Lok Sabha and
the Rajya Sabha in FebruaryMarch, 1956 when the question of continuance of the
control of the capital issues came up for consideration. The Minister of
Finance, Shri C.D. Deshmukh stated that the control of capital issues was first
introduced in May, 1943 under the Defence of India Rules. It was continued
after the termination of the war by an Ordinance, thereafter in 1947 by an Act
for a term of three years and it was again successively extended in 1950 and
1952. The Act as it stood expired on the 31st March, 1956. The main purpose which the
Minister explained was to prevent the diversion of investible resources to
none-essential projects (emphasis supplied), the control had also been used for
many other purposes and the most important of these purposes which might be
called ancillary purposes were the regulation of the issue of bonus shares,
regulation of capital reorganisation plans of companies including mergers, and
amalgamations which involved the use or re-issue of capital and the regulation
of the capital structure. Shri Ashok Mehta, then a Member of Parliament,
suggested that the purpose of the Act might be used for evolving a national
investment policy. The Minister of Finance further observed that many things
might have been done to give a proper form and shape to the national investment
policy (emphasis supplied), but the Minister expressed his surprise how these
could have been secured through a negative piece of control (emphasis supplied)
like the Capital Issue Control Act. He observed that there were other
provisions like the Industries (Development & Regulation) Act, under which licences
were given to new industries. But this, according to the Minister, was not the
purpose of the negative control of the capital issue. Various suggestions were
made by the members of the Parliament about the role of the Act, for instance,
to encourage public companies, not too much concentration of particular
industries at particular areas, etc. The Minister referred to the various other
Acts which control the industry and the Minister also referred that there
should not be undue delay.
Similar
statements were made by Mr. M.C. Shah in Rajya Sabha, who was then the Minister
for Revenue and Civil Expenditure. One Member in Rajya Sabha made it
particularly clear that the consent of the Government had been misleading to
some investors and thought that by a regulation, it was essential that in the
prospectus it should be clearly stated that the sanction by the Government did
not mean any guarantee about the suitability or the successful running of the
industry. Therefore, this sanction of the Government should be stated more
clearly and the public should be clearly warned that a sanction of the
Government did not imply any sort of guarantee by the Government.
92 We
have referred to the debates only to highlight that the purpose of the Bill was
to secure a balanced investment of the country's resources in the industry and
not to ensure so much the soundness of the investment or give any guarantee to
the investors. The section of the Act in question in express terms does not
enjoin the CCI to discharge such obligations nor does the background of the Act
so encompass.
There
was considerable discussion before us as to the scope of the powers and
responsibilities of the CCI while granting his consent to an issue of shares
and debentures proposed by a company. As stated above, the learned Additional
Solicitor General submitted that the restrictions on issue of capital were
introduced as part of the control measures found necessary during the period of
the first world war and that, after the war ended, the control was continued as
it was thought "in the light of experience gained that control is still
necessary to secure a balanced investment of the country's resources in
industry, agriculture and the social services" (vide, the statement of
Objects and Reasons of the Act in 1947). He urged, relying also upon the speech
of the concerned Minister at the time of moving the amendment bill of 1956 in
Parliament, (which placed the measure on a permanent footing) that all that the
CCI is concerned with is to ensure that the investible resources of the country
are properly utilised for priority purposes and are not invested in
non-essential projects or in a manner which runs counter to the accepted
investment policies of the Government. The CCI, he submitted, has neither the
duty, nor the staff, the facilities or the expertise to enquire about. or
investigate into, the financial soundness or acceptability of the issue
proposed to be made. He pointed out that one of the conditions on which all
consent is granted is that the Central Government does not take any
responsibility for the financial soundness of any scheme or the correctness of
any statement made or opinions expressed in the prospectus and the condition is
also explicitly set out in the prospectus.
We are
unable to agree fully with this somewhat narrow aspect of the CCI's role. In
the very speech in Parliament to which the learned Additional Solicitor General
referred, the Minister also stated:
"Apart
from this main object of the Bill which is thus to prevent the diversion of investible
resources of non-essential projects, the control has also been used for man),
other purposes. The more important of these purposes which may be called
ancillary purposes are the regulation of the 93 issue of bonus shares, regulation
of capital reorganisation plans of companies including mergers and
amalgamations which involved the issue or re-issue of capital, the regulation
of the capital structure of companies with a view to discouraging undesirable
practices, namely, issue of shares with disproportionate voting rights and
encouraging the adoption of sound methods and techniques in company flotation,
regulation of the terms and conditions of additional issues of capital
etc." (emphasis added) That apart, whatever may have been the position at
the time the Act was passed, the present duties of the CCI have to be construed
in the context of the current situation in the country, particularly, when
there is no clear cut delineation of their scope in the enactment. This line of
thought is also reinforced by the expanding scope of the guidelines issued
under the Act from time to time and the increasing range of financial
instruments that enter the market. Looking to all this, we think that the CCI
has also a role to play in ensuring that public interest does not suffer as a
consequence of the consent granted by him. But, as we have explained later, the
responsibilities of the CCI in this direction should not be widened beyond the
range of expeditious implementation of the scheme of the Act and should, at
least for the present, be restricted and limited to ensuring that the issue to
which he is granting consent is not, patently and to his knowledge, so
manifestly impracticable or financially risky as to amount to a fraud on the
public.
To go
beyond this and require that the CCI should probe in depth into the technical
feasibilities and financial soundness of the proposed projects or the
sufficiency or otherwise of the security offered and such other details may be
to burden him with duties for the discharge of which he is as yet iII-equipped.
Shri Ganesh
submitted that the CCI is duty bound to act in accordance with the guidelines
which lay down the principles regulating the sanction of capital issues. This
is especially so because the guidelines had been published. It was submitted
that the investing public is, therefore, entitled to proceed on the basis that
the CCI would act in conformity with the guidelines and would enforce them
while sanctioning a particular capital issue. It was submitted that it is not
permissible to deviate from the guidelines.
In
this connection, reliance was placed by him as well as by Shri Haksar,
appearing for the petitioner in T.C. No. 161/88, upon the observations of this
Court in Ramanna Dayaram Shetty v. International Airport Authority, [1979] 3 94
SCR 10 14, where this Court observed that it must be taken to be the law that
where the Government is dealing with the public, whether by way of giving jobs
or entering into contracts or issuing quotas or licence or granting other forms
of largess, the government could not act arbitrarily at its sweet will and,
like a private individual, deal with any persons it please, but its action must
be in conformity with standard or norm which is not arbitrary, irrational or irrelevant.
We accept the position that the power of discretion of the government in the
matter of grant of largess including award of jobs, contracts, quotas, licences
etc.
must
be confirmed and structured by rational, relevant and nondiscriminatory standard
or norm and if the government departed from such standard or norm in any
particular case or cases, the action of the government would be liable to be
struck down, unless it could not be shown by the government that the departure
was not arbitrary but was based on some valid principle which in itself was not
irrational, irrelevant, unreasonable or discriminatory. Mr. Haksar drew our
attention to the observations of this Court in the case of Motilal Padampat
Sugar Mills v. Uttar Pradesh, [1979] 2 SCR 641, where this Court reiterated
that claim of change of policy would not be sufficient to exonerate the
government from the liability; the government would have to show what precisely
was the changed policy and also its reason and justification so that the Court
could judge for itself which way the public interest lay and what the equity of
the case demanded. It was contended by Shri Haksar that there were departures
from the guidelines and there was no indication as to why such departures had
been made.
We are
unable, however, to accept the criticism that there has been derivations from
the guidelines which are substantial. We have referred to the guidelines. We do
not find that there has been any requirement of such guidelines which could be
considered to be mandatory which have not been complied with. We have
considered this carefully and found that there have been no deviations from paras
3, 5, 12, 13 and 14 of the guidelines. Nor has there been, as pointed out by
the respondents, any infraction of guidelines nos. 2 and 4. The fact that
debentures of the face value of Rs.200 have been approved as against the normal
face value of Rs. 100 envisaged under para 8 or that the requirements of the
service of underwriters have been dispensed with in exercise of the discretion
conferred by para 11 do not constitute arbitrary, substantial or unjustified
deviations from those guidelines. There has been sufficient compliance with the
guidelines on the quantum of issue, debt-equity ratio, interest rate and the
period of redemption and also guideline No. 10 about the security of the
debenture and there was sufficient security for the debentures in the 95 facts
and circumstances of this case. The preference in favour of shareholders of RIL
was justified and based on intelligible differentia. Indeed, if we consider the
role of the CCI, it is primarily concerned to ensure a balanced investment
policy and not to guarantee the solvency or sufficiency of the security. In our
opinion, most of the criticism directed against deviation from guidelines were
misplaced.
It was
submitted by Shri Ganesh that there was an obligation cast on the CCI to ensure
that the guideline regarding security for the debentures was fulfilled. Shri Ganesh
took us through the documents filed before the CCI including, in particular,
the draft prospectus which, according to him, clearly showed that there was in
reality no security for the debentures. We are unable to accept this
contention.
Perhaps
the most important of the arguments addressed on behalf of the petitioners was
that the scrutiny by the CCI of the prospectus was so cursory that the most
glaring travesty of truth contained therein has passed unnoticed by him. Sri Ganesh
points out that the guidelines were clear that a company can issue only secured
debentures and draws attention to the fact that the company proclaimed the
issue to be of "fully secured convertible debentures". Yet, the
prospectus, on its very face, disclosed that the debentures were unsecured. Shri
Ganesh urges that, if only the CCI had perused carefully the figures and
statements made in the prospectus he could never have accepted, at face value,
the assertion of RPL that the debentures were "secured" ones within
the meaning of the guidelines or accorded his consent to the issue. This
argument is in three parts and may be dealt with accordingly.
(i)
The first criticism of the petitioners is that, in certain brochures and
pamphlets issued by RPL, the debentures are described as "fully secured
convertible debentures" which they are not. The description but explained
that this was due to an oversight;
the
words "fully secured convertible debentures" were printed in some
brochures instead of the words "secured fully convertible debentures"
without meaning or intending any change. It is submitted that the company's
representation was that the debentures were "secured fully
convertible" ones. This is also what had been set out in the application
for consent. Though the company does claim that the debentures were also fully
secured, it is submitted that the emphasis in the issue was that the debentures
were fully convertible and secured. We think this explanation is plausible and
do not think that any importance or significance need be attached 96 to the
different description in some places, particularly, in view of our discussion
below as to the extent and nature of the security actually provided for the
debentures.
(ii)
The second contention is that the security offered, on the face of it, falls
far short of the face value of the debentures. Sri Ganesh analysed before us
some statements indicating the inadequacy of the security. It was submitted by
him that as per page 6 of the prospectus issuing the debentures, after
implementation of the projects only the following assets would be available
with the company:
Rs. in
Crores Land and site development 11 Buildings 26 Plant and Machinery 305
-------------Total 342 The assets of Rs.51.25 crores, mentioned in the balance
sheet as at 31.5.88 as per the Auditor's report, are also included in the above
because the above figures are of the total assets which would come in existence
after implementation of the project. This, according to Shri Ganesh, clearly
showed the inadequacy of the security.
On
behalf of RPL, it is submitted that there is no justification to exclude, from
the figures of assets shown on p. 6 of the prospectus, items such as technical
know-how fees, expatriation fees and engineering fees amounting to Rs.79 crores
and preliminary and pre-operative expenses amounting to Rs. 138 crores as these
are capitalised in the accounts and result in accretion to the value of the
company's capital assets. The calculation also ignores miscellaneous fixed
assets of the value of Rs.70 crores shown on the page. If these are added, the
value of the investment in assets would work out to Rs.629 crores which far
exceeds the value of the debentures after the first conversion which comes to
Rs.563.73 crores. This figure of Rs.629 crores takes into account only the
investment in assets made out of the borrowed funds and not the future profits
and assets acquired therefrom. But, even taking this as the basis, it is clear
that, with the escalation in the value of the fixed assets with the passage of
time on the one hand and the redemption of a good portion of the debentures by
the end of three years on the other, the security provided is complete and, in
any event, more than adequate to safeguard the interests of the debenture
holders. There is substance in this contention.
97
(iii) The third loophole, according to the petitioners, is the insecurity
created by the terms of clauses 5 and 6 of the prospectus dealing with
'security' and 'borrowings'. Sri Ganesh submits that clauses 5 and 6 severely
qualify the rights of the debenture holders under the present issue in several
respects.
(a)
There is, in their favour, only a residual charge on all or any of the assets
of the company at Hazira and other places which shall "rank expressly
subject to subservient and subordinate" to all existing and future
mortgages, charges and securities as may be hereafter created by the company in
any manner whatsoever;
(b)
The company need not obtain the consent or concurrence of the debenture holders
for creating any such mortgages etc. which will have priority over the present debenture
issue or for disposing of any of the assets of the company;
(c)
Not only is the residential complex of the company excluded from the purview of
the security, it is also open to the company and the trustees of the debenture
holders to agree to the exclusion of any of the assets of the company from the
purview of the security.
(d)
The current assets or the bankers' goods such as stocks, inventories, book
debts, receivables, work in progress, finished and semi-finished goods etc.
stand excluded from the security.
(e)
Clause 6 again emphasises that the company shall be at liberty to raise any
further loans and secure the same in priority to the present security and/or on
such terms as to security, ranking or otherwise as may be mutually acceptable to
the. company and the trustees of the debenture holders without being required
to obtain any further sanction from the debenture holders.
If
these clauses are closely perused, Sri Ganesh urges, it will be seen
(a)
that the charge in favour of the debenture holders has a very poor priority as
it can rank subservient to any securities that may be created by the company in
future in respect of further borrowings,
(b) that
the company and debenture trustees, by mutual agreement, can take any of the
assets of the company outside the purview of the present security and
(c) that
the company can create such future securities as have a priority over the
present issue or exclude assets from the purview of the security without the
consent or concurrence of the present debenture holders.
98 We
think, as has been urged on behalf of the company, that these arguments proceed
on a mis-apprehension of the true nature and scope of clauses 5 and 6 above as
well as of the nature and legal effect of a floating charge--what has been
described in this prospectus as a 'residual charge'--that is created at the
time of issue of such debentures. In the first place, these clauses are only
enabling in nature so as to permit the company, despite the mortgage in favour
of debenture holders, to carry on its business normally. It will be appreciated
that the company's normal business activities would necessarily involve, inter alia,
alienation of some of the assets of the company from time to time (such as, for
example, the sale of the goods manufactured by the company) as well the
procurement and discharge of loans and accommodation facilities from banks,
financial institutions and others (such as, for example, entering into
agreements for hire purchase of plant and machinery and making payments of instalments
towards their price). The entire progress of the company would come to a
standstill in the absence of such an enabling provision. Such a provision is
not only usual but also essential because the basic idea is that the finances
raised by the debentures should be employed for running the project profitably
and thereby generating more and more funds and assets which will also be
available to the debenture holders. Secondly, we think--and indeed RPL also
conceded both in arguments as well in an affidavit filed on its behalf by Sri
Mohan Ramachandran dated th January. 1989--that what the two clauses provide is
only that the consent and concurrence of the debenture holders need not be
obtained by the company before creating securities that may have priority over
the present issue and that, under clauses 5 and 6 read harmoniously together,
the trustees for the debenture holders have to concur before the company can
raise any future borrowings and create therefor a security which will have priority
over the security available to the present debenture holders. The Trustees here
are not stooges of the company. The ICICI is not only a financial institution
in the public sector but is also one of the institutions financing the project
and thus having a stake in the success of the project. It can be trusted to
adequately look after the interests of the debenture holders.
Thirdly,
as has been pointed out by the company, the misapprehensions of the petitioners
are more imaginary than real.
The
company, in its affidavit, has pointed out that the Debenture Trust Deed dated
7.11.1988, which has since been executed in the present case, contains a
provision by which.
at the
time of creation of any future charge, the terms and conditions as to ranking
have to be agreed upon between the RPL and ICICI. Also clause 16 of the
Debenture Trust Deed authorises the debenture trustees to intervene 99 and crystallise
the charge in their favour, inter alia, in the following circumstances:
"If
the Company sells the Mortgaged Premises or any part thereof not in the
ordinary course of business except a sale, transfer or disposition allowed
under the terms of these presents to be made with the consent of the
Trustees." (Sub-clause (f)) "If the Company (except as hereinafter
expressly provided) creates or attempts or purports to create any charge or
mortgage of the Mortgaged Premises or any part of parts thereof prejudicial to
the interests of the Debenture holders." (Sub-Clause (i)) "If, in the
opinion of the Trustees, the security of the Debenture holders is in
jeopardy." (Sub-clause (k)) Thus if at any time the company proposes to
create such higher ranking charges, the trustees for debenture holders can
stultify the same by taking immediate action. Fourthly, the impression sought
to be created by the petitioners that the company may go on creating
encumbrances, left and right, to the detriment and prejudice of the present
debenture holders overlooks several restraints imposed on the company in this
respect under the Companies Act, the CCI` Act, the MRTP Act and involving the
consent of public financial institutions, commercial banks, the term lenders,
the shareholders, the MRTP Commission, the Central Government and the CCI
before the creation of such securities. Lastly, the contention of the
petitioners completely overlooks the basic principles underlying the commercial
law concept of debentures secured by a floating charge as evolved in British
Jurisprudence over the past two hundred years. Clauses like clauses 5 and 6 are
usually inserted in debenture issues and the company has drawn our attention to
two like instances in certain issues approved in December 1988 and January,
1989.
It has
also been argued for the company that a fully convertible debenture is not a
debenture at all in the true sense of the term and is more akin to an issue of
equity and -that, therefore, there is no need that it should be covered by
adequate security at all. These aspects of the matter are dealt with by us at
some length later; it is sufficient here to say that we are unable to accept
the contention that the security in favour of the debenture holders is illu100 sory
and inadequate because of the wide language of clauses (5) and (6) of the
prospectus. Both these clauses have to be read together and so read, we have no
doubt, do not permit the creation of any charge ranking in priority to the
charge created under these debentures save with the consent of the trustees of
debenture holders.
The
further argument of Sri Ganesh is that the company law in its application as
well as the prospectus, carefully skirted round the issue by merely stating
that security will be provided to the satisfaction of the trustees and that
this is not very helpful as the debenture holders come into the picture only
after the funds have been raised. This argument is untenable. We have already
pointed out, there was sufficient security as was warranted by the issue. This
was an issue of 12.5% fully secured convertible debentures of Rs.200 each. We
have examined the share capital, the present issue and the scheme of
conversion. In the premises, it is not possible to accept the submission of Shri
Ganesh that the Controller satisfied himself (as stated by him in his
affidavit) with the bare statement of the applicant company (RPL) that security
would be created as per the requirements of the debenture trustees. There was
this statement that the debenture trustees were well known financial instutitions
and they had been entrusted with this obligation. Learned Additional Solicitor
General drew our attention to similar debentures and submitted and, in our
opinion, rightly that this was the usual practice. It is not possible for the
CCI to ensure more than that. The prospectus was not misleading to that extent.
It, therefore, cannot be accepted that the CCI failed to apply its mind to the
documents before him. Reliance was placed on the fact that the RIL had proposed
the issue of shares for G-series for more or less identical project. It was
contended that if capital issues had once been sanctioned for a project and the
issue had been converted for that purpose and then a fresh capital issue could
not be applied for or granted for the same purpose. It was urged by Shri Ganesh
that the project under those circumstances could not be considered to be a 'new
project' within the meaning oflll para 2(i) of the Guidelines for Issue of
Debentures by Public Limited Companies. Secondly, it was urged by Shri Ganesh
that the basic object of the Capital Issues (Control) Act was to ensure .sufficient
and fruitful utilisation of capital would be completely defeated if more than
one capital issue is permitted for the same project. In this connection, Shri Ganesh
referred to the affidavit of the CC1 which, according to him, clearly indicated
that CCI was specifically aware of the fact that the scheme of finance for
setting up the very same project had been approved in favour of RIL. Our
attention was drawn to the affidavit filed on behalf of the CCI, 101 where he
had stated at p. 203 of the Paper Book of T.C. No.
164 of
1988, that by a Press Release dated 15th September, 1984, certain guidelines which the said
deponent described as "non-statutory guidelines" for approval of
issue of secured convertible and nonconvertible debentures. These guidelines
had been subsequently amended by a Press Release dated 8th March, 1985 and these were released on 19th August, 1985 for issue of convertible cumulative
preference shares and also there are guidelines issued by Press Release dated 1st August, 1985 for employees stock option scheme.
In accordance with .these guidelines, according to the deponent on behalf of
the CCI, the consent of the CCI for capital issue for secured fully convertible
debentures was issued as the projects originally to be established in RIL were
permitted by the Department of Company Affairs to be transferred to RPL and
endorsements thereof from RIL to RPL had already been filed including, inter alia,
for endorsement of the letter of intent for the MEG Project. The scheme: of
finance for setting up of three projects namely PVC, HDPE and MEG had already
been approved by the Department of Economic Affairs in favour of RIL. In that
context, in our opinion, to contend that there was violation of the guidelines
because the RPL's project was not a new project was too narrow and legalistic
view. Shri Ganesh tried to urge that the CCI ought to have been aware of the
fact that he had sanctioned a capital issue of Rs.400 crores (subsequently
enhanced to Rs.500 crores) to RIL for the same project and that the said issue
had been implemented and capital of Rs.500 crores had been mopped up from the
public by RIL. The CCI ought to have withheld permission for a fresh capital
issue in the name of RPL for the very same project. However, the CC1 did not
appear to have applied his mind, according to Shri Ganesh. Consent Order,
therefore, according to Shri Ganesh, was bad. We are, however, unable to accept
this submission. The CCI was not performing the role of a social mentor taking
into account the purpose of RIL. If RlL has misutilised any of its funds or the
funds had not been utilised for G-series, then RIL would be responsible to its
shareholders or to authorities in accordance with the relevant provisions of
the Companies Act, 1956. This aspect does not enter into sanctioning the
capital issue for the new project in accordance with the guidelines enumerated
hereinbefore. That apart, even if RIL and RPL have to be treated as one for
this purpose and the grant of consent for earlier debenture issues in favour of
RIL are to be taken into account in judging the necessity of the issues, there
is no illegality or irregularity in the impugned grant of consent to RPL. As
referred to elsewhere, RIL had not been able to utilise any part of the 'G'
series of debentures on the MEG project as there had been a cost overrun in 102
the PTA & LAB projects. Eventually, for reasons adverted to earlier, it was
decided to have the MEG, PVC and HDPE projects undertaken by floating RPL, a
wholly-owned subsidiary. In the result, even if we look at the projects not as
new ones but only as those of the RIL to be implemented by RPL, the additional
finances were needed for the extention, expansion and diversification of the
projects originally envisaged. This is one of the objects for which a debenture
issue is permissible under the guidelines.
Shri Ganesh
then submitted that Guideline No. 3 for the Issue of Debentures by Public
Limited Companies laid down that the CCI would consider an application for
capital-issue only after the approval of the financial institutions, banks and
Government are received. The statutory application form prescribed by the
Capital Issues (Application for Consent) Rules, 1966 requires, according to Shri
Ganesh, that the consent and clearances of the various authorities and
institutions should be annexed to the application. Shri Ganesh submitted that
in the present case, many of the relevant applications had not even been filed
by RIL and RPL as on 4th July, 1988 when the CCI passed the Consent Order. It
was submitted by Shri Ganesh, also by Shri Haksar and especially by Shri Pagaria,
that RPL's application had been processed in unseemly haste and without due and
proper application of mind. It is true that things moved speedily in the case.
This
has caused us certain amount of anxiety. Speed is good; haste is bad, and it is
always desirable to bear in mind that one should hasten slowly. However,
whether in a particular case, there was haste or speed depends upon the
objective situation or on overall appraisement of the situation. Here, as
discussed earlier, the material shows that the details of the proposals have
been examined and discussed and that an examination of the merits has not been
a casualty due to the speed with which the application was processed; and especially
in view of the fact that no injury has been caused to the investors and no
substantial loss to their securities have been occasioned, we are of the
opinion that much cannot be made of this criticism. Learned Additional
Solicitor General placed before us other instances where applications had been
sanctioned within shorter times.
Shri Ganesh
tried to urge that RIL had declared itself as a promoter of RPL and the
prospectus stated that no benefit was being provided to RIL as promotor. But,
the entire amount spent by RIL was being reimbursed to it by RPL. In these
circumstances, RIL could not be treated differently from the general public in
the matter of 103 allotments of the shares of RPL. However, the scheme of
allotment was such that gross discrimination resulted against the general
investing public and in favour of RIL.
The
long-term implications, it was urged by Shri Ganesh, of the said discrimination
were highly anomalous and unjust for the investing public who had subscribed to
the debentures of RPL. However, there had been no application of mind by the
CCI, according to Shri Ganesh, to the matter of quantification of the extent of
benefits conferred on RIL and consideration of whether the same are justified
or not. The CCI, however, had merely mentioned in his affidavit that RIL was a promotor
and had given an interest free advance of Rs.50 crores to RPL for a period of
three years. In our opinion, these factors were sufficient to justify the
treatment of RIL differently from other investing public and thus the treatment
does not amount to any discriminatory benefit to RIL in respect of the
debentures of RPL. As a matter of fact, this was a known fact and the
shareholders or the subscribing debenture holders would be aware of the same.
Shri Ganesh
sought to urge that the CCI had not made any attempt to appreciate or quantify
the extent of the said benefits and advantages and go into the question whether
the same are fair, reasonable and just. Consequently, for this reason also,
there had not been, according to Shri Ganesh, due application of mind by the
CCI before the Consent Order was issued. We are unable to accept this
criticism.
The
discrimination alleged is on two grounds. The first is that RIL is entitled
straightaway to the allotment of shares of the face value of Rs.57.50 crores
whereas only 5% of the investment by the debenture-holders can be converted
into shares at par simultaneously with the issue. The second is that a loan of
Rs.50 crores advanced by RIL to RPL will be converted into shares at par at the
end of 3 years whereas the debenture~holders will have to pay a premium even
for converting 20% of their debentures into shares by that time.
These
allegations do not bear scrutiny. So far as the first ground is concerned,
there is no justification for a comparison between these two categories of
investors. RIL is the promoter company which has conceived the projects, got
them sanctioned, invested huge amounts of time and money and transferred the
projects for implementation to RPL. It is, therefore, in a class by itself and
there is nothing wrong if it is allotted certain shares in the company, quite
independently of the debenture issue, in lieu of its investments. So far as the
second ground is concerned, it overlooks certain disadvantages attached to RIL
in regard to the loan of Rs.50 crores advanced by RIL as compared with the
investor in the debentures. Firstly, RIL's advance is interest free 104 for 3
years whereas the debenture holders get interest at the rate of 12.5% during the
period. Secondly, the debenture loan is secured while the RIL's are not. Thus
the debenture-holders have certain benefits which RIL does not have and, if the
debenture-holders have the disadvantage of having to pay a premium, that cannot
constitute basis for a ground of discrimination.
These
considerations apart, we would like to observe that we are unable to appreciate
how any question of discrimination is at all relevant in the present context.
It is a company--not the State or a State instrumentality--that is issuing the
shares and debentures. It is entirely for the company to issue the shares and
debentures on such terms as they may consider practicable from their point of
view.
There
is no reason why they should not so structure the issue that it confers certain
greater advantages and benefits on the existing shareholders or promoters than
on the new subscribers to the debentures. We do not think that it is
permissible for the CCI to withhold consent only for this reason or to
stipulate that consent can be given only if the shareholders and promoters as
well as prospective debenture holders are all treated alike. The subscribers to
the debentures are only lenders to the company who have an option to convert
their debt into equity on certain terms. It is perfectly open to the
subscribers to balance the pros and cons of the issue anti to desist from
taking the debentures if they feel that the dice are loaded unfavourably in favour
of the "proprietors" of the company.
Shri Pagaria,
who appeared in T.C. No. 162/88 in the matter of Shri Radheyshyam Goyal v.
Union of India & Ors., where the petitioner was a Chartered Accountant,
prefaced his submission by submitting that ours is a sovereign, socialist,
secular democratic republic governed by the Constitution of India. Shri Pagaria
drew our attention to Article 19(1)(g) of the Constitution. He submitted that
the Capital Issues (Control) Act, 1947 is a pre-constitutional law and the Act
was enacted as being expedient to provide for control of issue of capital.
Under Article 14 read with Article 38, it was obligatory to ensure that there
was no disproportionate wealth. He drew our attention to MRTP Act and other
Acts and also to a large number of decisions to highlight that the directive
principles should be imported for ensuring that the CCI performs his functions
for the welfare of the community and to bring about an egalitarian society.
That
was his first submission and he further submitted that the petitioner was
really in a position to come under the Public Interest Litigation propounding
the cause of the public. Secondly, he submitted that the concept of com105 pany
being the property of the Board of Directors had undergone a radical change. He
submitted that company in a new socio-economic set-up is a social institution
having duties and responsibilities towards community for which it functions.
According to him, maximisation of social welfare should be the legitimate goal
of the companies and the shareholders. He, therefore, stated that the CCI
should take upon himself a social role and ensure that Capital issues are
satisfactorily implemented.
One
may perhaps concede that, with the vast expansion in recent years of the
corporate sector and its constant tendency to have recourse to public funds for
securing finances for its projects (either by way of share capital or borrowed
capital), the scope of the responsibilities of the CCI can no longer be as
limited as before. It may no longer be restricted merely to the task of
preventing an imbalance of investment in various sectors or the diversion of
investment to non-essential projects. The petitioners may perhaps have a point
in suggesting that the CCI should be burdened with a duty also to safeguard the
interests of the public who are invited to participate in such financing on
large scale and at least to satisfy himself that the project for which funds
are needed is not in the nature of a "South-sea bubble" and that the
volume, terms and conditions of the issue proposed by the company are not such as
to constitute a fraud on the public. But we think that the time is not yet ripe
for placing on the office of the CCI, as at present constituted, more than a skelital
outline of responsibility in this direction; his shoulders are, as yet, not
strong enough to bear such burden. He does not have the time, the staff, the
powers of enquiry, the benefit of public hearing, the requisite background, or
the economic commercial or financial skill or expertise to so assess the
technical, commercial and financial aspects of the projects as to be able to
give the public investor a guarantee that he is not being led up the garden
path. All that one can say at present is that th parameters of his action have
to be found within the four corners of the Act and the guidelines. May be, he
can legitimately withhold his consent to a project that is ex facie
impracticable (for instance, as was put to the parties in the course of
hearing, a project to convert base metal into gold) or a project, which in the
present state of finances and scientific knowledge and progress of our country,
is an impossibility--(for example, to have a transport service to the moon).
May be, he also can in a proper case, refuse his consent to a scheme of finance
if, ex facie, and without any detailed investigation, he is satisfied, that it
is too big for the applicant company to handle, or too risky and onerous to be
permitted in public interest. But this is a decision which he will have to 106 venture
upon, on his own responsibility, in patent cases where the nature of the
project or the scheme of financing is, on its face, startlingly non-feasible,
impracticable or risky. He cannot, however, be compelled to withhold consent.
or
found fault with for having granted consent, in a case such as this, where the
proposed project is in a core industrial sector. where there is considerable
scope for foreign currency savings and the scheme of financing proposed has
been developed in consultation with and scrutinised and approved by a leading
public sector financial institution (which has also agreed to be the trustee
for the Debenture holders). It is too much to suggest that the CCI should be
held to have failed in his duty by accepting the opinion of such institutions
and not investigating for himself from various angles and in particular, the
adequacy of the security offered to the debenture holders under the scheme.
While
we do appreciate that in the changed atmosphere, the corporate sector, when
seeking to attract public moneys while raising new capital must perform both
responsible and responsive roles, it is difficult to enjoin that the CCI while
considering the question of consent/sanction of the capital issues can fulfil
any role beyond the policies prescribed under which, as noticed before, it was
enjoined to function. There are other various Acts like the IncomeTax Act,
Companies Act, MRTP Act to subserve other social objectives which are conducive
or ancillary to the directive principles. Nelson, it is reported to have said
before the battle of Waterloo. that England expected every man to do his duty.
It is well to remember that every authority in a vast developmental society
must perform his role keeping in view the part he is expected to play in the
background of the whole perspective anti should not encroah upon others taking
the onus upon himself to do everything. That would lead to chaos and confusion.
Shri Pagaria
drew our attention to Section 237 of the Companies Act. 1956. If there was any
violation of some of the rights of the parties, they are at liberty to proceed
in accordance with law. It was contended that it was an admitted position that
RPL is a newly established company though initially financed by RIL. No ceiling
had been put on the allotment of the shares to the business associates of
Directors whereas at item 5 page 2 of the Consent Order dated 4th July, 1988,
the limit of the shares for the employees of the RPL had been reduced from 200
to only 50, thereby, according to Shri Pagaria, depriving the employees having
large shareholding in the company which discriminated them vis-a-vis the
business associates, for whom no such ceiling had been kept.
107 We
find the factual position to be this. The application for consent to the issue
had not specifically earmarked any portion of the issue to the employees of RPL
and RIL. In the course of the discussion with the CCI, it was suggested that 12,90,000
debentures should be offered by way of preferential allotment to the employees
of the RIL and RPL. Para 5 of the consent order by the CCl
conveyed the approval by the Central Government under proviso to rule 19(2)(6)
of the Securities Contracts (Regulation) Rules, 1957 "subject to the
condition that the allotment to the employees shall not exceed 200 shares per
individual". The Company by its letter of 7th July pointed out that
"shares" in the above para was a mistake for "debentures"
and also suggested that a maximum of 200 debentures--which on first conversion
would become 200 shares--be allotted to each of the employees of RPL as well as
RIL. The CCI, however, modified Para
5 by his letter of the
19th July, 1988 to say
that allotment to the employees shall not exceed 50 debentures per individual.
In this context, it does not appear that the restriction of the allotment to
the employees was at the instance of the company nor does it seem that any
discrimination was intended in respect of the allotments to the employees. Nor
has our attention been invited to any legal requirement or guidelines
prescribing any fixed or minimum quota of allotment to the employees of the
company. We are, therefore, unable to see any discrimination. In any case, the
petitioner in this case has no cause for grievance on that score.
It was
submitted that the Consent Order suffered from arbitrariness, mala fides, unprecedented
hurry and with extraneous considerations. We are unable to see any such
discrimination. It was submitted that the Consent Order had been passed
without, satisfying that the pre-requisite condition of the various clearances
and no objection certificates and licences under MRTP Act, FERA Act and
Petroleum Act and the Essential Commodities Act, Securities Contract
(Regulation) Act, Companies Act, and other allied laws had been fulfilled. The
CCI has given consent for 12.5% secured redeemable convertible debentures of Rs.200
each for cash at par to the public. This nomenclautre has not been changed, but
in the prospectus, fully convertible debentures have been shown. According to Shri
Pagaria, the most important is the concentration of wealth in the hands of Ambani
family and this aspect has not been considered in granting the consent, which
according to him, resulted in violation of Article 39(b) & (c) of the
Constitution of India and section 22(3) of the MRTP Act. It was submitted that
the consent could not be given in favour of any applicant or company, who had
no valid industrial licence nor it pos108 sessed the letter of intent under the
provisions of Industries (Development and Regulation) Act, 1951. It was
submitted that the CCI did not give judicial consideration to the application
as in this connection reliance was placed on the decision of the Gujarat High
Court in Navjivan Mills Co. Ltd. Kalol, v. In re. Kohinoor Mills Co. Ltd. Bombay, [1972] 42 Co. Cases 265.
Some
passages of Halsbury's Statutes of England, 4th edn., vol. 8, were referred. It
was submitted that the Directors who had received money without disclosing full
facts were bound to refund the same and were constructive trustees of the
company. This proposition, in our opinion, is irrelevant in the present
context. Shri Pagaria sought to urge that RIL management had passed an ultra vires
resolution in transferring the industrial licence and letter of intent to RPL
and for that act, the office bearers were personally liable and he referred to
certain decisions. Shri Pagaria also submitted that by advertisement on
Television, radio and print media under the caption "Your Family Khazana",
without first creating a solid and viable security for the fully paid
convertible debentures under the impugned invalid consent order, the
application money had been raised to the tune of more than Rs. 1,200 crores.
According to him, the advertisement given was not only violative of section 58A
of the Companies Act but also contrary to provisions of Security Contract
(Regulation) Act, 1956 and Rules made there under. Shri Pagaria then submitted
that in view of what he described as improper or insufficient security, no
consent could have been granted and even if the issue was over-subscribed, the
money was repayable to the persons who had subscribed to the issue on the basis
of the promises and they were entitled not only to the refund of the money but
to all benefits by way of interest, etc. He drew our attention to certain
decisions, which in our opinion, are irrelevant. He submitted that the people
have a right to know and this right had been violated by not telling the people
the full facts. It was submitted that RPL did not place any material before the
Central Government to justify the consent. We are unable to accept this submission.
It was next submitted that the guidelines were mandatory. It was next contended
by Shri Pagaria that there was nondisclosure of true and correct facts not only
in respect of the interest of Directors of RIL in the RPL properties but also
the security and with regard to the approval of the financial scheme under MRTP
Act, the licence under the Petroleum Act, Explosive Act, etc., Shri Pagaria has
referred to the requirements under a large number of enactments and contended
that, until requisite consents, approvals, licences etc. are obtained under the
said enactments, the Company cannot be permitted to raise public finances for
the projects on hand.
In
this context, he referred, in addition to the provisions of the Companies Act,
the 109 MRTP Act, CCI Act, rules and guidelines, and the Industries
(Development & Regulation) Act which have been considered by us, to certain
provisions of the Petroleum Act, 1934 (and rules and orders made thereunder);
Explosives Act (and rules made thereunder); Essential Commodities Act, Atomic
Energy Act; Insecticide Act; Air (Prevention and Control of) Pollution Act,
1981; Indian Standards Institution Certification (Marks) Act, 1952 (and rules
and regulations thereunder);
Foreign
Exchange Regulation Act, 1973; Interest Act, 1978;
Securities
Regulation Act and Dowry Prohibition Act, 1961.
We
have gone through these provisions. They relate to various types of controls
and regulations which have to be observed in the actual running of various
types of business.
We are
satisfied that neither these statutes nor those regulating the grant of consent
to the issue of shares and debentures intend that clearances there under should
all be obtained before filing an application for consent. In our considered
view, such requirement is neither practical nor feasible and is not envisaged
by the statutes referred to.
Some
of the contentions of Sri Pagaria alleging misleading statements made by the
Company to attract investments, such as the one based on the Dowry Prohibition
Act and the description of the issue as the "Family Khazana", are
farfetched and unrealistic besides being irrelevant to the issue to be
considered at the stage of consent for the issue by the CCI.
Sri Pagaria
then submitted that the grant of consent was without lawful authority and on
extraneous considerations.
He
referred to certain decisions in support of that broad proposition. If the
basis of his submission was correct, undoubtedly, the consent was bad but we do
not find any merit in the submission. The next submission by Shri Pagaria was
that the issue had been made public subject to the injunctive relief granted by
this Court on 19th August, 1988 without entering into the merits of the case
and it was submitted that RPL did not possess any industrial licence or letter
of indent and whatever licence it had, had expired.
This
position is not factually correct as noted before. It was submitted that there
had been violation of several laws.
No
particular violation had been indicated. Furthermore, it was submitted that the
Industries (Development & Regulation) Act, 1951, Companies Act, 1956,
Capital Issues (Control) Act, 1947, MRTP Act, 1969, FERA, 1973 have to be read
in conjunction and as such the corporate sector should not be permitted to
accumulate wealth on account of favour from the Government. The factual
position being as indicated before, it is not possible to entertain these bald
submissions.
On
behalf of the CCI, it was submitted that the contention that 110 the CCI had
not followed his own guidelines relating to the sanction of the issue is
misconceived. It was further submitted that the security for debentures had
been properly there. It was submitted that the following facts would establish
that there had been no breach of duty or obligation cast on the CCI either
under the Act or under the Guidelines or under Capital Issues (Application for
Consent) Rules. The relevant guidelines for consideration of this question are
as follows:
(a)
Guidelines for Issue of Debentures by Public Limited Companies--Press Release
1984.
4.
DEBT-EQUITY RATIO: The debt-equity ratio shall not normally exceed 2:1. For
this purpose 'debt' will mean all term loans, debentures and bonds with an
initial maturity period of five years or more including interest accrued thereon.
It also includes all deferred payment liabilities but it does not include
short-term bank borrowings and advances, unsecured deposit or loans for the
public, shareholders and employees, and unsecured loans or deposits from
others. 'Equity' would mean paid up share capital including preference capital
and free reserves.
Guideline
No. 11 is also instructive. The Press Release also was referred to. The
trustees to the debenture holders were enjoined to supervise the implementation
of the conditions regarding creation of the security of the debentures.
It
was, therefore, submitted that the trustees of the debenture issue who were to
supervise the implementation of the conditions regarding the creation of
security, were vested with the requisite powers for protecting the interest of
debenture holders. Before formulating the guidelines for protection of the
interest of debenture holders considerable deliberations took place between the
concerned departments in the Ministry and between the Public financial institutions,
investment institutions, Department of Banking and CCI and Reserve Bank of
India as a large quantum of debentures were coming to the period of maturity in
1989 onwards and redemption and a need was felt to protect the interest of
debenture holders so that no defaults endanger their interests. Consequently,/he
question of debenture redemption reserve and the security creation was examined
by the financial institutions and the scheme with debenture trustees was
formulated with sufficient degree of precision and urgency.
The
debenture trustees are normally public financial institutions and nationalised
banks. Public 111 financial institutions have the necessary expertise and
infrastructure to examine the aspects of security creation and the quality of
the security offered for protecting the interest of debenture holders. The
original guidelines of 14th January, 1987 were continuously being monitored by
the CCI and on 25th June, 1987, a further clarificatory guideline was published
on the concept of security to be offered for the debentures. In the present
case, the application dated 4th May, 1988 as filed by the RPL with the CCI
categorically mentioned that "the security will be in such form and manner
as required by the trustees for debenture holders". These requirements are
contained in Part V(E): Particulars of Issues--Particulars of Preference Shares
and Debentures--(e) indicate the security to be offered in the case of
debentures. It is in these circumstances that it was not necessary for the CCI
to evaluate the security or the adequacy thereof at the stage of grant of
consent. The CCI did examine the proposal with reference to the debenture
residual value beyond the fifth year of its allotment and in relation to the
asset creation and take on record prior to grant of consent the project
estimations and cash flows statements of the ICICI for the years 1989 to 1996
which had looked into the projects and also examined the question of creation
of security and asset creation for RPL in relation to the issue for three
projects. It was further submitted that as per this statement, the debt service
coverage ratio was 1.89 in 1991 and going upto 2.55 in 1995. It was therefore
inaccurate to say that the CCI had not satisfied himself on the matter of
security or had failed to apply his mind to documents before him. It is further
stated on behalf of the CCI that the CCI consented to the proposal of RIL for
'G' series for projects including PTA, LAB, MEG and HDPE and also for working
capital requirement in November, 1986 and not merely for MEG and HDPE as
alleged by the petitioner.
During
the implementation of projects, there was cost overrun for PTA and LAB which
was taken due note of by ICICI in December, 1987 and CCI was informed of this
cost overrun in 1987 itself by ICICI. Major part of 'G' Series was utilised for
PTA and LAB, CCI was also aware of this cost overrun through the proposal of
the company to MRTP Commission much prior to granting consent to RPL as CCI is
represented in the process of approval for MRTP. CCI's office was informed by
ICICI of likely deployment of 'G' Series funds for projects other than MEG and
HDPE much prior to the grant of consent to RPL. It was submitted that RIL had
received approval to its modified scheme on 17th May, 1988 for its LAB project
and on 13th July, 1988 for its PTA Project.
However,
these formal communications were preceded by the awareness of the CCI in regard
to cost overruns in PTA and LAB projects and consequently the
non-implementation of MEG and HDPE.
112
Learned Additional Solicitor General, therefore, submitted that it was
incorrect to state that the CCI granted consent for issue of debentures for
financing the projects of RPL which were already given financing facilities
earlier against the 'G' Series debentures. It was submitted that since the
projects of MEG and HDPE were not implemented in RIL and were now being
implemented in RPL for the first time these were 'new projects' within the
meaning of paragraph 2(a) of the guidelines dated 15th September, 1984.
Therefore, it is incorrect to say that more than one capital issue was
permitted by the CCI to finance the same project.
It is
clear, according to learned Additional Solicitor General, that CCI satisfied
himself before granting the consent on 4th July, 1988 to RPL, that the capital
raised by RIL was not used for HDPE and MEG and the scheme of finance for the
G-Series of RIL, as modified, and for the present issue of RPL were different.
It was denied that the CCI ought to have withheld permission for a fresh issue
of capital in RPL for HDPE and MEG, especially since these two projects were
not permitted. It was submitted on behalf of the CCI that there was no bar for
receiving finance for either a cost overrun, or for an unimplemented portion of
a project. It is a fact that the MEG and HDPE projects had not been implemented
in RIL and they were now being implemented only in RPL. It is further submitted
on behalf of the CCI that the public financial institution, namely, ICICI
looked into the project and reported to the CCI, in their letter dated 15th
June. 1988 that the estimated cost of projects for which the consent was being
sought was Rs.650 crores.
The
consent order of the CCI clearly indicated that the consent conveyed in the
letter shall lapse on the expiry of 12 months from the date thereof. The
consent order further categorically stated that the approval was without
prejudice to any other approval/permission that might be required to be
obtained under any other Acts and laws in force. It necessarily therefore
followed that the obligation to obtain other permissions continued. There was
no legal condition that other approvals should be examined by the CCI before
grant of its own consent. This was submitted on behalf of the CCI and there is
substance in the submission. In the application form prescribed in Schedule A
of the Capital Issues (Applications for Consent) Rules, 1956--other than the
Bonus shares, the indications are only directory and not mandatory
requirements. The words used are "normally insisted". Therefore, it
does not preclude the CCI from granting its consent before the grant of other
approvals. Through a chart, it was highlighted before us that there was no
undue haste and it is the normal time taken in respect of others also. It is
further stated that the statutory information clearly indicated that no amount
had been paid or given to the companies promoters or 113 officers or offered to
them. The prospectus and the terms and conditions were not approved by the CCI
at the time of granting of consent. No discrimination had been practised
against the existing shareholders of RIL, while according consent to RPL. The
proposal of the 8th June, 1988, as submitted by RPL to the CCI, sought approval
for equity participation to the extent of Rs.50 crores only. This Rs.50 crores
was by way of unsecured interest-free deposit to be converted at the end of the
36 months into equity shares at par. This substantial addition to the
promoter's contribution was to ensure an enhanced participation in the project
and to ensure its stake. The Petrochemical Industry has a long gestation period
for yielding high profits. The convertible debentures have a fixed return as
contrasted to equity participation which might earn a flexible dividend.
In the
initial period, no dividend ,'night be earned. The CCI therefore applied its
mind while evaluating this aspect since a sum of Rs.50 crores was to be
non-interest bearing and unsecured whilst computing the position on the debtequity-ratio.
The enhanced contribution sought from the promoter was a condition imposed on
them. The long term implications and the balance capital structure of the
company were placed for consideration of the CCI through the cash flow analysis
of ICICI and the CCI applied its mind to the scheme of financing and correctly
granted the consent order on relevant considerations. So far as the grievance
of alleged discrimination is concerned, it arises from the petitioner's
assumption of the possible capital appreciation of equity shares of RIL at the
second conversion which might be at a premium, if any, at the time of such
conversion. It was submitted on behalf of the CCI that CCI had imposed a
condition that any conversion would be at a premium, if any, as might be
decided by the CCI's office, at the time of such conversion. It was further
submitted that the computation of premium depends on several factors, such as
the net worth of the company, the performance of the company, the profit
earning capacity value of the company, etc. Since RPL was in the Petrochemical
sector, which had ordinarily the gestation period, at the time of grant of the
consent, it was not possible for the CCI to forecast or estimate the rate of
conversion on the second and the third stage and advisedly the CCI reserved to
itself the right to determine this premium on factual data available at the
time of conversion.
Therefore,
this cannot be said to be bad. The convertible debentures would receive
interest @ 12.5% on the sum of Rs.190 (31.5% interest would accrue on this
amount). It was, therefore, not necessary for the CCI to quantify the extent of
benefits and advantages before grant of consent and had to enter into
computation for evaluating this. Naturally, the RIL, as a promoter, stood on a
different footing and there were rational intelligible critera distinguishing
general 114 members of the public from a promoter proposing the capital issue
and the establishment of new projects. It was further relevant to notice, it
was submitted, that RPL was a 100 per cent subsidiary company of RIL at the
time of its conversion and even presently a proposal for a capital issue would
have sought that the entire issue of capital be allotted to itself. The CCI had
the option to grant the consent in terms of the application or to impose such conditions
as were necessary for the balanced capital structure of the company.
The
consent, it was submitted, could not be evaluated in hindsight, after the issue
was closed and subscribed.
It was
asserted that today RIL is the third largest industrial house in India. It was stated that the present
portfolio of RIL spreads over 2.5 million sharesholders/debenture
holders/deposit holders. Till date, it has made 7 debentures issues besides
making three equity share capital issues (rights) and 2 bonus shares issue. All
the debentures issues were at a premium and over-subscribed.
E-Series
partly-convertible debentures of Rs.80 crores were issued in 1984-85. F-series
non-convertible debentures of Rs.270 crores were issued in 1985-86. G-Series
fully-convertible debentures for Rs.500 crores were issued in 1986
87.
According to the respondent, the investment in RIL, during this period has
proved to be consistently and remarkably profitable to investors. The RIL
commenced business in the year 1966 for the manufacture of synthetic cloth made
from synthetic yarn and fibre. Their factory was commenced and installed in the
vicinity of Ahmedabad at Naroda. In order to manufacture synthetic fabric, the
company was importing polyester filament yarn and polyester staple fibre and
re-exporting fabrics produced from the same. It was one of the recognised
export houses doing business in textiles.
In the
year 1977, Reliance Textile Industries merged with a company, Minylon Ltd. and,
after the merger, changed its name back to Reliance Textile Industries Ltd. Its
traditional line of business was manufacturing of synthetic fabrics.
However
since 1977, through several capital issues, (both of debentures and of equity)
it has diversified and backwardintegrated. In the first instance, the company
decided to install a plant for the manufacture of polyester staple fibre and
polyester staple yarn which item it was previously importing for manufacturing
synthetic fabrics. These plants were established at Patalganga in the State of Maharashtra.
Thereafter,
the company decided to further backward integrate and to manufacture PTA
(Purified Teriphthalic Acid) which is one of the raw materials used in the
manufacture of polyester filament yarn/polyester staple fibre. Simultaneously,
it also diversified horizontally into the manufacture of Linear Aklyl Benzene
(LAB) 115 used in the manufacture of detergents, as this product could also be
manufactured from the petrochemical downstream products in which the company
was engaged.
RIL's
3rd stage of backward-integration involved, it was asserted, in the manufacture
of Mono Ethylene Glycol (MEG), used in the manufacture of polyester staple fibre
and polyester staple yarn. It also decided to diversify into the manufacture of
critically scarce plastic raw materials like High Density' Polyethylene (HDPE),
Poly Vinyl Chloride (PVC) and Mono Ethylene Glycol (MEG) a polyester raw
material used in the manufacture of polyester fibre, etc. The company had also
applied for Gas Cracker Project, which is said to have been cleared recently,
whereby (natural) gas oil would be cracked to produce ethylene and other
petrochemicals. Thus right from the Naphtha stage to the yarn fibre and fabric
stage, the company has attempted the complete range of products necessary for the
manufacture of fabrics from the raw material namely, natural gas.
Hazira
has been selected with special reference to the availability of natural gas oil
from South Sea Basin and it is country's first ethylene handling port and has
economies of transportation and terminal facility at Hazira etc. It is not
necessary to set out however how the company developed in different stages. The
application for consent was filed on 4th May, 1988 as mentioned hereinbefore.
The licence and letter of intent were endorsed in favour of the RIL and the
scheme for finance in favour of the RPL.
Both Shri
Baig and Shri Salve, appearing for the respondents 3 and 4, gave us the factual
background of the business of the RPL. It is not necessary to set out these in
greater detail than what has been mentioned hereinbefore. It is further
submitted by both that the CCI had examined the nature and quantum of security
in cases of the debentures.
It was
submitted that the submission of Shri Ganesh that the security was inadequate
was wrong. It was submitted that clauses (5) and (6) of the Prospectus read
together indicate how the power has been exercised. These clauses visualise the
creation of a residual or floating charge on all or any of the movable or
immovable assets and properties of RPL at Hazira and/or at any other location.
These further postulate future charge, superior in priority, might be created
by RPL. Future charges might be created without the consent or concurrence of
the debenture holders. Nor was their consent required for purposes of dealing
with the assets and properties of the company. It was submitted that the
following properties are excluded from charge, namely, 116 (a) Residential complex
at Hazira or at any other location.
(b)
Current assets or Banker's goods.
(c)
Any other property that might be specifically excluded by agreement with the
trustees.
Future
charges might be created on such terms regarding ranking, etc. as might be
agreed to by the trustees. It was submitted that whereas clause (5) essentially
visualised creation of a floating charge in favour of debenture-holders without
any restrictions or limitation, clause (6) incorporated a limitation and a
safeguard that controls the normal characteristics of floating charge.
It has
to be borne in mind that convertible debenture is a new type of instrument
introduced in this case and these appear to have caught the imagination of the
investors. It has been asserted before us that subsequent to RPL issue, others
have also gone for this type of project. Our attention was drawn to rule 2(b)(x)
of the Companies (Acceptance of deposits) Rules, 1975 which provided clearly
that a convertible debenture was not to be included in the definition of
debenture. it was further asserted that the security visualised in clauses (5)
and (6) of the Prospectus was one which was prevalent and customary in
corporate practice and was regarded as valid and adequate. Nothing contrary to
this was indicated before us.
Our
attention was drawn to Sec. 2(12) of the Companies Act under which a debenture
need not be secured at all. In that light the guidelines should be interpreted.
Therefore, it was submitted, Guideline 10, reasonably interpreted, means that
such security should be provided as is customarily adopted in corporate practice
in the matter of issuing debentures. It has to be borne in mind that the
debentures issued in the present case are compulsorily convertible.
Therefore,
no repayment of principal is really involved. The question of security becomes
relevant for the purpose of payment of interest on these debentures and the
payment of principal only in the unlikely, event of winding up. The debentures
need not necessarily be secured. Guidelines do not provide for quantum and
nature of the security. A debenture has been defined to mean essentially as an
acknowledgement of debt, with a commitment to repay the principal with interest
(Palmer's Company Law; p. 672; 24th Edition).
Reference,
in this connection, may be made to The British India Steam Navigation Co. v. The
Commissioner of Inland Revenue. [1881] 7 QBD 165; at pages 172 117 and 173. A
debenture may contain charge only on a part of the assets of the company Re.
Colonial Trusts Corporation, [1879] (15) Ch. 465 or it may not contain any
charge on any of its assets (See Speyer Brothers v. The Commissioner of Inland
Revenue, [1907] 1 KB 246 and Lemon v. Austin Friars Investment Trust Ltd.,
[1926] (1) Ch. 15. A debenture may, therefore, be secured or unsecured
(Palmer's Company Law; p. 675; 24th Edition). An ordinary debenture has to be
distinguished from a 'mortgage debenture' which necessarily creates a mortgage
on the assets of a company (See Palmer's Company Law p, 706). A compulsorily
convertible debenture does not postulate any repayment of the principal.
Therefore, it does not constitute a 'debenture' in its classic sense. Even a
debenture, which is only convertible at option has been regarded a 'hybrid'
debenture by Palmer's Company Law (Para 44.07 at page 676). In this connection,
reference may be made to the guidelines for the '"Protection of Debenture
Holders" issued on the 14th January, 1987 which have recognised the basic
distinction between a convertible and a nonconvertible debenture. It is
apparent that these were issued for the purpose of ensuring the serviceability
and repayment of debentures on time. It has been asserted before us that the
compulsorily convertible debentures in corporate practice was adopted in India
some time after the year 1984.
Wherever
the concept of compulsorily convertible debentures is involved, the guidelines
treat these as "equity". This is clear from Guideline IV(i) read with
IV (iii) of the Guidelines for Issue of Cumulative Convertible Preference
Shares and Guidelines No. 8 and 11 of the Employees Stock Option Guidelines,
These two sets of Guidelines clearly indicate that any instrument which is
compulsorily convertible into shares, is regarded as an "equity" and
not as a loan or debt. Even a non-convertible debenture need not be always
secured. In fact, modern tendency is to raise loan by unsecured stock, which
does not create any charge on the assets of the Company (The Encyclopaedia of
Forms and Precedents;
4th Edn.
Vol. 6 para 17 at pages 1094, 1095 and para 22 at pages 1097-98). Whenever,
however, a security is created, it is invariably in the form of a floating
charge (See' The Encyclopaedia of Forms and Precedents, 4th Edn., Vol. 6 Para
25 at page 1099). It follows, therefore, that the secured debenture almost
invariably contains a floating charge. In addition to the floating charge,
debentures are frequently secured by trust deed also as had happened in the
present case where specific property, land, etc. has been mortgaged to
trustees.
Shri Ganesh
made a submission that under clause (5) of the Prospectus, the company could deal
with its assets and properties with118 out the permission of debenture-holders
or debenture trustees and that it could create future charges which would rank
superior in priority. The concept of floating charge was, invented by the
Victorian Lawyers only because of its special advantages inasmuch as it leaves
a company free to deal with its assets in the ordinary course of business and
does not require the permission of debenture-holders or debenture trustees for
dealing with them or creating further charges. It has been pointed out that the
business of a corporation would be paralysed if it could not deal with its
assets and create future charges, ranking superior in priority, and if it would
have to obtain the permission of the debenture holders for doing so. (See the
discussion in Palmer's Company Law; page 709 and 682) (See also the
observations in Re. Florence Land & Public Works Co., [1878] 10 Ch. 530; Re. Colonial Trust Corporation, (supra). In
fact, in Re. Florence Land's case (supra), the Court observed
that if the companies were not allowed to resort to floating charge, they would
have to call the meeting of existing charge holders/debenture holders each time
they intend to create future charge. The decision in Re. Panama, New Zealand, and Australian Royal Mail Co., as indicated in Palmer's
Company Law at page 708 is a landmark because it established the validity and
the utility of a floating charge. In the instant case, if the permission of the
debenture holders were required or is insisted upon to create future security,
2.5
million debenture holders would have to be informed and invited for meeting.
The extravagant effects of this course would be colossal especially when a
shareholders' meeting is also additionally called for the same body of persons.
It is, therefore, incorrect to say that a floating charge creates an illusory
charge because future securities can be created ranking in priority over it.
The legal position is that a floating charge creates a present equitable right
in favour of the debenture holders/trustees. It creates a present charge.in the
property/undertaking of a company even before the time of payment of the
debenture arrives. The fact is that a company can deal with its property
without the permission of debenture holders/trustees, before crystallisation by
resorting to a floating charge on the undertaking (See the observations in this
connection in Re.
Florence
Land's case (supra); Re. Standard Manufacturing Co., [1891] 1 Ch. 627; Re.
Borax Foster v. Borax Co., [1901] 1 Ch. 326 and Creatnor Maritime Co. Ltd. v.
Irish Marine Management Ltd., [1978] 1 WLR 966. This however does not mean that
the company can keep on creating future charges with superior ranking without
any let or hindrance because the debenture holders/trustees can any time move
to crystallise the floating security if they felt that the security is in
jeopardy.
119 In
the present case, there is no case to suggest or believe that ICICI (which is
one of the most important national Government financial institutions), will not
act effectively and promptly to ensure that the security in favour of the
debenture-holders is not rendered illusory.
Even
Guidelines dated 14th January, 1987 has cast the responsibility of supervising,
creating, monitoring and implementation of security in favour of
debenture-trustees. The company cannot normally create a general floating
charge ranking in priority to or pari passu with a prior floating charge unless
the prior floating charge itself permits such a course. In this connection,
reference may be made to the observations in The Encyclopaedia of Forms and
Precedents, 4th Edn., Vol. 6 para 27 at pages 1102-1103.
It,
therefore, follows that:
(i) A
debenture is usually secured by floating charge only.
(ii) A
company which creates floating charge has a right to create future security
which may rank superior in ranking.
(iii)
However, this right of the company may be restricted by agreement.
(iv)
Where no restriction is provided, any future specific charge will rank superior
to the earlier floating charge (Section 123 of the Companies Act)
(v)
Again, where no specific provision is made in the earlier floating charge with
respect to the ranking of future floating charge then any future floating
charge will be inferior to the earlier floating charge. In this connection,
reference may be made to sec.
48 of
the Transfer of Property Act. The risk of floating charges can be controlled by
creating legal mortgage in favour of debenture trustees as has been explained
in "All About Debentures" by Sen & Chandrashekhar (pp. 6667).
In the
present case, a legal mortgage has been created by RPL in favour of the
trustees in respect of its immovable and movable assets, except book debts, in
respect of which financial institutions will hold a first charge on account of
foreign loan. In the present case, RPL does not have any existing loans.
Therefore, the charge in favour of the debenture holders is presently the first
charge. No future borrowing is contemplated at this stage except the foreign
currency loan to the 120 extent of Rs. 84 crores. Therefore, the submission
that the security is illusory cannot be accepted and the CCI is right that the
apprehension is based on factually unsound and unfounded grounds. Even if the
value of the foreign currency which has been sanctioned in principle by the
three financial institutions, is taken into account, the assets coverage goes
down at each stage and does not make any critical difference to the value of
the security of the debentureholders under the Trust Deed. The purposes of
borrowings, namely, term-loan borrowings, deferred payment credits/guarantees
and borrowing for financing new projects do not, on analysis, raise any
difficulty. There are sufficient in-built checks and controls. The company,
being an MRTP company would have to obtain both MRTP permission for creating
any security irrespective of its value and fresh CCI consent under the CCI Act.
except in case of exempted securities. Therefore, in our opinion, this
submission is really in the nature of. red-herring. It was submitted that we
should at least direct that the future security should not rank superior to the
floating charge in favour of the existing debentures holders.
Having
regard to the factors which the investors should have taken into consideration,
we are of the opinion that all relevant factors were borne in mind by the CCI.
There is no substance also in the ground of discrimination. It is reiterated
that Article 14 of the Constitution does not forbid reasonable classification.
RIL is a promoter company.
It had
conceived the projects, got them sanctioned and invested huge amounts of time
and money in the process. It was open to RIL to undertake these projects on its
own and not to make any public issue at all. The ground that there was
non-application of mind be. cause the CCI did not take into consideration the
issue of G-Series is also without substance. Under Guideline 2(a) of the
Guidelines of 1984, capital could be raised only for setting up of new project.
MEG,
it was submitted, was not a new project for capital had been raised for it by
RIL under G-Series. It was further submitted that the Controller did not ask
RPL to get the bankers prior clearance certificate under Guideline II(v) of the
Guidelines of January
14, 1987. Finally, the
CCI did not take note of the fact that the application under Schedule I of Rule
III of the Capital Issues (Application for Consent) Rules did not contain the
relevant information. The position of cost over-run has been explained. So
there was no substance in the submission that it was not a new project.
Secondly,
it cannot be accepted that the CCI did not insist the bankers prior clearance
certificate. These guidelines apply to "non-convertible debentures"
or "partly convertible debentures". These do not apply to
"compulsorily convertible debentures".
121
Even assuming that these are applied to "compulsorily convertible
debentures", there was no need for the CCI to ask for the bankers prior
clearance certificate because RPL was not issuing any new set of debentures.
All requisite information had been furnished.
Shri Ganesh
as well as Shri Pagaria tried to submit that in order to protect the investors,
a function, which they submitted, the CCI, in changed circumstances, should
determine whether the project is profitable. Where a project has been appraised
by an institution like ICICI, the Controller can safely assume that it is
profitable and he need not engage in separate independent exercise of his own
in this regard. The scope and nature of the Controller's powers and
jurisdiction have to be determined in the light of the specific provisions of
the CCI Act, its history, the debates, to which we have referred, the capital
structure of the national economy and its over all direction, in higher priorities,
are decided by the Government and the Planning Commission by formulating Five
Year Plans. However, the capital structure and the direction of a particular
industry is decided in terms of the provisions of IDR Act. That a particular
industrial house may become a monopoly or otherwise have a restrictive and
detrimental effect on the economy of the country, is the concern of MRTP Act.
Therefore, the scope of the CCI under the Act is of a limited nature and must
be kept in its proper perspective. It is true that he cannot, as was contended
on behalf of the petitioner, be oblivious of the fact that small scale
investors are coming into operation and there is a social obligation of the
State to provide safe guidelines. Yet, each authority must circumscribe its. work
in the proper light. Unless, therefore, CCI acts perversely, irrationally or
with procedural impropriety, his decisions cannot and should not be faulted on
the ground that other consequences might follow. Of course, no other
consequences have been indicated before us.
As a
matter of fact, there was no allegation that the CCI acted mala fide or on
extraneous considerations. The CCI applied its mind to the facts of this case
and the factors in general. There was no undue haste. A statement was produced
indicating that the application for grant of consent had been disposed after
some time, but within the time frame in which such applications are normally
disposed of.
It
may, however, be stated that being not statutory in character, these guidelines
are not enforceable. See the observations of this Court in Fernandez v. State
of Mysore, [1967] 3 SCR 636: Also see R. Abdullah Rowther v. State Transport,
etc., AIR 1959 SC 896; Dy.
122
Asst. Iron & Steel Controller v. Manekchand Proprietor, [1972] 3 SCR 1;
Andhra Industrial Work v. CCI & E, [1975] 1 SCR 321; K.M. Shanmugham v.
S.R.V.S. Pvt. Ltd., [1964] 1 SCR 809). A policy is not law. A statement of
policy is not a prescription of binding criterion. In this connection,
reference may be made to the observations of Sagnata investments Ltd. v.
Norwich Corpn., [1971] 2 QB 614 and p. 626.
Also
the observations in British Oxygen Co. v. Board of Trade, [1971] AC 6 10. See
also Foulkes' Administrative Law, 6th Ed. at page 18 1-184. In Ex. P. Khan,
[1981] 1 All E.R. page 40, the court held that a circular or self made rule can
become enforceable on the application of persons if it was shown that it had
created legitimate expectation in their minds that the authority would abide by
such a policy/guideline. However, the doctrine of legitimate expectation
applies only when a person had been given reason to believe that the State will
abide by the certain policy or guideline on the basis of which such applicant
might have been led to take certain actions. This doctrine is akin to the
doctrine of promissory estoppel. See also the observations of Lord Wilberforce
in IRC v. National Federation, [1982] AC 617). However, it has to be borne in
mind that the guidelines on which the petitioners have relied are not statutory
in character. These guidelines are not judicially enforceable. The competent
authority might depart from these guidelines where the proper exercise of his
discretion so warrants. In the present case, the statute provided that rules
can be made by the Central Government only. Furthermore, according to Section
6(2) of the Act, the competent authority has the power and jurisdiction to
condone any deviation from even the statutory requirements prescribed under
Sections 3 and 4 of the Act. In Regina v. Preston Supplementary, [1975] 1 WLR p. 624 at p. 631, it had been
held that the Act should be administered with as little technicality as
possible. Judicial review of these matters, though can always be made where
there was arbitrariness and mala fide and where the purpose of an authority in
exercising its statutory power and that of legislature in conferring the powers
are demonstrably at variance, should be exercised cautiously and soberly.
We
would also like to refer to one more aspect of the enforceability of the guidelines
by persons in the position of the petitioners in these cases. Guidelines are
issued by Governments and statutory authorities in various types of situations.
Where such guidelines are intended to clarify or implement the conditions and
requirements precedent to the exercise of certain rights conferred in favour of
citizens or persons and a deviation therefrom directly affects the rights so
vested the persons whose rights are affected have a clear right to 123 approach
the court for relief. Sometimes guidelines control the choice of persons
competing with one another for the grant of benefits largesses or favours and,
if the guidelines are departed from without rhyme or reason, an arbitrary
discrimination may result which may call for judicial review. In some other
instances (as in the Ramanna Shetty, case), the guidelines may prescribe
certain standards or norms for the grant of certain benefits and a relaxation
of, or departure from, the norms may affect persons, not directly but
indirectly, in the sense that though they did not seek the benefit or privilege
as they were not eligible for it on the basis of the announced norms, they
might also have entered the fray had the relaxed guidelines been made known.
In
other words, they would have been potential competitors in case any relaxation
or departure were to be made. In a case of the present type, however, the
guidelines operate in a totally different field. The guidelines do not affect
or regulate the right of any person other than the company applying for
consent. The manner of application of these guidelines, whether strict or lax,
does not either directly or indirectly, affect the rights or potential rights
of any others or deprive them, directly or indirectly, of any advantages or
benefits to which they were or would have been entitled. In this context, there
is only a very limited scope for judicial review on the ground that the
guidelines have not been followed or have been deviated from. Any member of the
public can perhaps claim that such of the guidelines as impose controls
intended to safeguard the interests of members of the public investing in such
public issues should be strictly enforced and not departed from departure therefrom
will take away the protection provided to them. The scope for such challenge
will necessarily be very narrow and restricted and will depend to a
considerable extent on the nature and extent of the deviation. For instance, if
debentures were issued which provide no security at all or if the debt-equity
ratio is 6000:1 (as alleged) as against the permissible 2:1 (or thereabouts) a
Court may be persuaded to interfere. A Court, however, would be reluctant to interfere simply because one or more of
the guidelines have not been adhered to even where there are substantial
deviations, unless such deviations are, by nature and extent such as to
prejudice the interests of the public which it is their avowed object to
protect. Per contra, the Court would be inclined to perhaps overlook or ignore
such deviations, if the object of the statute or public interest warrant,
justify or necessitate such deviations in a particular case.
This
is because guidelines, by their very nature, do not fall into the category of
legislation, direct, subordinate or ancillary. They have only an advisory role
.to play and non-adherence to or deviation from them is necessarily and
implicitly permissible if the circumstances of any particular fact or law 124 situation
warrants the same. Judicial control takes over only where the deviation either
involves arbitrariness or discrimination or is so fundamental as to undermine a
basic public purpose which the guidelines and the statute under which they are
issued are intended to achieve.
But in
the instant case, in the view we have taken, it' is not necessary to base our
decision on this aspect. We find that the CCI has, in fact, acted in
substantial compliance with the principles of these guidelines. He has acted
objectively and bona fide. He has not acted in undue haste.
No
substantial prejudice or injury to the petitioners have been demonstrated. In
the aforesaid view of the matter, we are, therefore, unable to interfere. In
this connection, furthermore, a common sense view has to be adopted--See the
observations in Council of Civil Service Unions & Others v.
Minister
for the Civil Service, [1985] AC at 407. Public interest in this case does not
require that we should interfere. In this case, there is no illegality in the
decision of the Controller of Capital Issues. He has not exercised a power
which he does not possess. There is also no irrationality. He has not acted in
any manner that no reasonable authority would have acted in the decision. There
is no procedural impropriety in his decision. He has not failed in his duty to
act fairly insofar as fairness was warranted by the justice of the situation.
In the
aforesaid view of the matter, we are of the opinion that there was no substance
in the writ petitions and also in the civil suits covered by these transfer
applications.
The
main question, as mentioned hereinbefore, canvassed in these transfer petitions
is whether the CCI has acted in the manner he should act in the present
atmosphere of socio-economic development in view of our constitutional
commitments. The purpose of the Act must be found from the language used. The
scheme and the language used, strictly speaking, do not indicate any positive
role for the CCI in discharging his functions in respect of grant of sanction.
But it
has to be borne in mind that he is a part of a State instrumentalities
committed to the endeavours of the constitutional aspiration to secure justice,
inter alia, social and economic, and also under Article 39(b) & (c) of the
Constitution to ensure that the ownership and control of the material resources
of the community are so distributed as to best subserve the common good and
that the operation of the economic system does not result in concentration of
wealth and means of production to the common detriment. Yet, every
instrumentality and functionary of the State must fulfil its own role and
should not trespass or encroach/ 125 entrench upon the field' of others.
Progress is ensured and development helped if each performs his role in the
common endeavour.
In
that light it is true that as was contended by learned counsel appearing 'on
behalf of the petitioners that in the changed socioeconomic conditions of the
country one who is charged to ensure capital-investment has to perform the
social role in capital formation and to protect the interest of the capital
market, and to oversee the growth of industrialisation and investment in such a
manner as to ensure employment and demand in the national economy to prevent
wasteful investment and to promote sound methods of corporate finance. The
guidelines are only a guide and nothing more. The application of mind by the
CCI before sanction must be in the perspective for which he is enjoined by the
Act. He must endeavour to secure a balanced investment of the country's
resources in industry, agriculture and social services. The Controller should
perform the role of social control and fulfil the social purpose in conjunction
with other authorities and functionaries. It is necessary for him in discharge
of his functions to ensure that there is not too much concentration of
particular industries in particular areas, and that there is a scientific
development and proper investment in key and core projects.
The
present petitions have perhaps brought to the fore for the first time a public
interest aspect of the issue of shares and debentures. In the past decades,
investors in shares and equities constituted a very limited section of the
public and consisted of two extreme types --either persons who could shrewdly
appraise the merits of each issue and take a considered decision or persons who
just wanted to invest and get a return for their moneys but were indifferent to
the terms and conditions of such investment. The position has changed in recent
years. There has been a vast increase in the number of members of the public
who have surplus money to invest; the size of the issues has assumed
macro-proportions; and the types of instruments are also becoming more and more
sophisticated. Entrepreneurs, with legal and expert assistance at their
command, could easily trap unwary investors and the development of a public
interest lobby that can scrutinise issues carefully and advise prospective
investors on their comparative merits and demerits may not be entirely
undesirable. It is also perhaps necessary that the CCI, in considering the
grant of consent to such issues, should have these aspects brought to his
notice. We think that it may be too cumbersome to have a provision that the
details of every proposed application for consent should be publicised to the
maximum extent by the CCI, that objections and comments from the public 126
should be called for, that there should be a public hearing before the CCI
before grant of consent and that the CCI should pass a reasoned order granting
or withholding consent. That would also delay the whole process of approvals
which should be as expeditious as possible. But we have no hesitation in saying
that some procedure has to be evolved to ensure that the CCI gets the benefit
of the comments, suggestions and objections from the public before arriving at
his decision whether to grant consent or not and, if so, on what terms and
conditions. Perhaps, evolution of certain rules in this respect could be
examined at this juncture of industrial growth in our country. But having
regard to the facts and the circumstances of the case in view of the various
facts mentioned hereinbefore, we are of the opinion that there was no undue
haste. There was proper application of mind that the sanction was for a new
project. Sufficient security for the debentures as was enjoined to be ensured
before sanction has been ensured in the facts and the circumstances of this
case and guidance provided by means of guidelines has been substantially
complied with. There has been no infraction as such of the norms required to be
followed in granting the sanction. The challenge to the sanction, therefore,
must fail.
Before
we conclude, we must note that good deal of argument was adduced that these
applications in different High Courts in civil suits were not genuine and
properly motivated, but were mala fide. Even though these might not have been
to feed fat an innocent object, it was apparent that it was to feed fat a
grudge in respect of a competitive project by a competitor. Anyway, in the view
we have taken, it is not necessary to decide the bona fides or mala fides of
the applicants. Shri Nariman, when he moved the application initially, had
suggested that we should lay down certain norms as to how the courts in
different parts of the country should grant injunction or entertain
applications affecting an all-India issue or having remifications all over the
country. Except that before the courts grant any injunction, they should have
regard to the principles of comity of courts in a federal structure and have
regard to self restraint and circumspection, we do not at this stage lay down
any more definite norms. We may also perhaps add that it may be impossible to
lay down hard and fast rules of general application because of the diverse
situations which give rise to problems of this nature. Each case has its own
special facts and complications and it will be a disadvantage, rather than an
advantage, to attempt and apply any stereo-typed formula to all cases. Perhaps
in this sphere, the High Courts themselves might be able to introduce a certain
amount of discipline having regard to the principles of comity of courts 127
administering the same general laws applicable all over the country in respect
of granting interim orders which will have repercussion or effect beyond the
jurisdiction of the particular courts. Such an exercise will be useful
contribution in evolving good conventions in the federal judicial system.
On the 9th September, 1988, when we transferred these matters,
we directed respondent no. 3 to deposit a sum of Rs. 1 lac to be held if the
petitioners were made to spend unduly. Having considered the facts and
circumstances of the case, we do not think that we would be justified in
ordering disbursement of this sum to the petitioners whose cases have been
transferred or the plaintiffs whose cases have been transferred. The sum
should, therefore, be refunded to the respondent no. 3.
All
the writ petitions and the suit fail, and are dismissed. In the facts and the
circumstances of the case, there will be no order as to costs.
G.N.
Petitions dismissed.
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