R.D. Goyal
& Anr Vs. Reliance Industries Ltd [2002] Insc 477 (20 November 2002)
Cji.,
H.K. Sema & S.B. Sinha. S.B. Sinha, J :
WITH CIVIL
APPEAL NOS 2071-2100 OF 1987
The
core question in this batch of appeals is as to whether shares or convertible
debentures even before they are allotted can be considered to be
"goods" within the meaning of Section 2(e) of the Monopolies and
Restrictive Trade Practices Act, 1969 (the 'M.R.T.P. Act').
The
appellants herein pursuant to or in furtherance of an invitation to offer
debentures linked with equity shares for public issue applied therefor. The
respondents are public limited companies. They had offered capital for
subscription but had linked the equity shares with the accrued redeemable
non-convertible debentures.
A
complaint was made to the effect (which is the subject-matter of Civil Appeal
Nos. 2071-2100 of 1987) that the issue of equity shares tied up with debentures
is a restrictive trade practice within the meaning of Sections 2(o)(ii),
33(1)(b) and 33(1)(g) of the M.R.T.P. Act. In Civil Appeal No.2490 of 1995, the
subject-matter of complaint was that the public issue of debentures offered by
the respondent therein upon certain terms and conditions amounted to unfair
trade practice as the respondent- company in their prospectus for raising
capital through the issue of debentures made false and misleading claims.
The
said complaints were inquired into by the Director General, who upon finding a
prima facie case, recommended for issuance of notice; whereafter a proceeding
was initiated by the Commission.
The
respondents herein raised preliminary objection questioning the jurisdiction of
the Commission to deal with the subject-matter of such complaints. The
Commission on the said preliminary objection, raised the following issues:
1.(a)
Whether having regard to true legal nature and characteristics of debentures,
the same could be considered as "goods" within the meaning of Section
2(e) of the M.R.T.P. Act, 1969 even before they are allotted to the
debenture-holder?
(b)
Whether it makes any difference to the answer to the foregoing question, if the
debentures offered by the company are compulsorily or optionally convertible
into an equity share?
2.
Assuming that debentures are even prior to their allotment "goods", whether
any trade practice is involved where the company simply invites applications
for allotment of debenture for the purpose of raising capital for its trade or
business?
3.
Whether the company provides or makes available any service to the prospective investors
where it simply issues debentures and invites application therefor within the
meaning of Section 2(r) of the M.R.T.P. Act? The said preliminary issues were
determined by the Commission in favour of the respondents herein and against
the appellants.
Ms. Indira
Jaising and Mr. Anup G. Choudhary, learned senior counsel appearing on behalf
of the appellants, inter alia, would submit that the Commission committed a
manifest error of law in passing the impugned judgment insofar as it failed to
properly construe the definition of 'goods' contained in the Sale of Goods Act,
1930 vis--vis its definition contained in Section 2(e) of the M.R.T.P.
Amendment Act, 1991, as also the definition of service as contained in Section
2(r) thereof.
According
to the learned counsel the action on the part of the respondents herein
involved unfair trade practice. The learned counsel would urge that as the
'stocks' and 'shares' come within the purview of definition of 'goods', it
cannot be said that only because they had not been allotted to the respective
applicants, they would not become so. In any event, it was submitted, notice
inviting offer for purchase of shares in lieu of convertible debentures would
amount to 'rendition of service' by the Respondent. It was submitted that the
expression 'goods and service' must be interpreted in a broad manner.
Ms. Indira
Jaising further urged that it may be that the definition of expression 'goods'
had been amended in the year 1991 so as to bring within its purview the shares
and stocks including issue of shares before allotment but such amendment being
merely clarificatory in nature, the Commission must be held to have misdirected
itself in holding that shares and debentures before they are issued do not come
within the purview of expression 'goods'. It was argued that a public limited
company offers shares from time to time and thus an act of raising capital by
allotment of shares would be an act of 'trade' and consequently the same would
amount of 'rendition of service' within the meaning of Section 2 (r) of the
Act. Reliance in this connection has been placed in the case of Lucknow
Development Authority v. M.K.Gupta [(1994) 1 SCC 243].
It was
further submitted that the decision of this Court in Morgan Stanley Mutual Fund
etc. v. Kartick Das etc. {(1994) 4 SCC 225}, whereupon the Commission has
placed reliance is not applicable to the fact of the present case as the same
was rendered while considering a matter interpreting the provisions of the
Consumers Protection Act, 1986.
In any
event, as therein various questions raised in these appeals had not been
considered, the matter may be referred to a larger Bench for an authoritative
pronouncement by this Court. Mr. Choudhary further submitted that linking
shares with debentures being 'unfair trade practice', the question as to
whether the shares or stocks would amount to 'goods' or not lose significance
particularly when having regard to the various provisions of the Companies Act,
allotment of shares is not a matter of much importance.
Before
adverting to the issues involved in these appeals, relevant statutory
provisions may be looked into.
'Goods'
have been defined in the Sale of Goods Act, 1930 to mean :
"every
kind of moveable property other than actionable claims and money; and includes
stock and shares, growing crops, grass, and things attached to or forming part
of the land which are agreed to be severed before sale or under the contract of
sale;" The expression 'goods' was defined in Section 2(e) of the M.R.T.P.
Act to mean :
"goods"
includes goods produced in India, and, in
relation to any goods, supplied, distributed or controlled in India, also includes goods imported into India." The aforesaid definition
underwent an amendment in 1984 and again in 1991. Now it reads thus :
"goods"
means goods as defined in the Sale of Goods Act, 1930 (3 of 1930), and
includes, -
(i) products
manufactured, processed or mined in India;
(ii) shares
and stocks including issue of shares before allotment;
(iii) in
relation to goods supplied, distributed or controlled in India, goods imported into India;" Section 2 (r) defines
"Service" to mean :
"service
which is made available to potential users and includes the provisions of
facilities in connection with banking, financing, insurance, chit fund, real
estate, transport processing supply of electrical or other energy, board or
lodging or both, entertainment, amusement or the purveying of news or other
information, but does not include the rendering of any service free of charge
or under a contract of personal service;" Section 2(s) defines the term
'trade' to mean "any trade, business, industry, profession or occupation
relating to the production supply distribution, or control of goods and
includes the provision of any services;" Section 2(u) defines the
expression "trade practice" as under :
"any
practice relating to the carrying on of any trade, and includes (i) anything
done by any person which controls or affects the price charged by, or the
method of trading of, any trader or any class of traders, (ii) a single or
isolated action of any person in relation to any trade;" The expression
'debenture' however, is not defined in the Act.
The
question therefore, which arises for consideration is as to whether convertible
debentures would be 'goods' within the meaning of provisions of the MRTP Act.
Debentures,
as ordinarily understood, in our considered view, would not come within the
purview of definition of goods as it is simply an instrument of acknowledgement
of debt by the company whereby it undertakes to pay the amount covered by it
and till then it undertakes further to pay interest thereon to the
debenture-holders.
It has
been observed by the Company Law Committee in its report quoted by Ramaiya at
page 26 of his commentary :
"A
debenture means a document which either creates or acknowledges a debt.
Ordinarily a debenture constitutes a charge on the undertaking of the company
or some part of its property, but there may be debentures without any such
charge and under the law, it is not necessary that the debentures should create
a charge. We have, therefore, brought the definition of debentures, in line
with that contained in English Companies Act, 1948, which defines 'debentures'
as including 'debenture stock' bonds and other securities of a company, whether
constituting a charge on the assets of the company or not." Palmer on
Company Law has made similar observations in paragraph 44.02, 24th Edn. He said
that in modern commercial usage, a debenture denotes an instrument issued by
the company normally but not necessarily called on the face of it a debenture,
and providing for the payment of a specified sum at a fixed rate with interest
thereon.
Debentures
having regard to the definition of 'actionable claim' as defined in Section 3
of the Transfer of Property Act would constitute actionable claims except where
they are secured by mortgage of immovable property or hypothecation or pledge
of immovable property.
It is
true that when there exists a statutory definition in respect of an expression,
the dictionary meaning thereof cannot be applied. It is also true that when a
statutory definition uses the word 'includes', it provides an extended meaning
thereto but it is equally well-settled that the words are required to be
construed in terms of the legislative intent.
It is
furthermore a well-settled principle of law that if the words are general and
not precise, their interpretations are to be restricted to the fitness of
matter.
The
Commission in the instant case was dealing with the question as to whether the respondents
herein had resorted to unfair trade practice or not? In the event they were
found to be doing so, it inter alia, could direct that such practice be
discontinued. In a given case, the Commission may grant temporary injunction or
award compensation as provided under Section 12A and 12B thereof. As by reason
of the provision of the said Act, the right of the traders can be controlled or
restricted, the provisions thereof must receive a strict construction.
Furthermore,
the expressions 'debentures' and 'shares' convey distinct and separate meaning
although they belong to the same genesis.
In
"All About Debentures" by Mr. T.M. Sen and Mr. C. Chandrasekhar, the
distinction between the 'shares' and 'debentures' has been stated thus:
"Debentures
distinguished from:
(a)
Shares Although shares and debentures belong to the same genesis yet they have
distinct and different characteristics. The Companies Act, 1956 deals with the
issue of debentures in the same manner as it deals with the issue of shares,
but the similarity ends with the mode and manner of issue, their allotment,
their transferability and in the applicability of forfeiture provisions. The
corpus of the two issues forms two different segments of capital - shares
representing the share capital and the debentures representing the loan
capital.
Shareholders
are the owners of the company till the company is folded up fully while
debenture- holders are only creditors of the company sometimes secured and
sometimes unsecured and that too for a defined period. The rights of the
shareholders and debenture-holders are different as also their remedies. To the
extent the comparison could bear between the two, the procedures are by and
large the same for both in the matter of issue, allotment and transfers and forfeiture.
Shares, therefore, are distinct from debentures, although in the usual parlance
they both are grouped together in many legislations and referred to some times
by the generic term of 'scrip'. It is on account of their free transferability
and marketability, they are referred together. The stamp duty on the share
certificates and debenture certificates and on their transfers is totally
different and bears no comparison. The incidents of debenture certificates as
seen from our discussion about above are different from the incidents of shares
certificates and hence bear no comparison.
Therefore,
there is no equation between shares and debentures except as referred to
above." 'Share' has been defined in Section 2(46) of the Companies Act to
mean a share in the share capital of a company which in turn would mean that it
would represent contribution of the share-holder towards the share capital of
the company. On the other hand, a debenture is an instrument of debt executed
by the company acknowledging its receipt to repay the same at a specified rate
and also carrying an interest. It is in sum and substance a certificate of loan
or a bond evidencing the fact that the company is liable to pay a specified
amount with interest and although the money raised by the debentures becomes a
part of the company's capital structure yet it does not become a share capital.
In any event, a debenture would not come within the purview of definition of
goods, in as much as, although the shares and stocks are included in the
definition of goods but debentures are not.
We may
also note that having regard to the provisions contained in Section 36A of the
M.R.T.P. Act, there cannot be any doubt whatsoever that an inquiry proceeding
can be initiated when an element of unfair trade practice arises in the matter
of promoting sale, or use of any goods. Shares before their allotment, in our
opinion, are not goods.
In Sri
Gopal Jalan & Co. v. Calcutta Stock Exchange
Association Ltd. [AIR 1964 SC 250], it has been held that in Company law
"allotment" means the appropriation out of the previously unappropriated
capital of a company, of a certain number of shares to a person. Till allotment
is made, shares do not exist as such. It is only on allotment in this sense
that the shares come into existence. Therefore, till the shares are actually
issued, the question of the company having issued debentures as transferable
property would not arise and thus there cannot be any doubt whatsoever that the
shares before their allotment would not come into existence and they cannot be
regarded as goods. Debentures would also not come within the purview of
definition of stock. In Sellar v. Charles Bright & Co. Ltd. reported in
(1904), King's Bench Division at page 447, the law is stated in the following terms
:
"The
Judgments Act, 1838 (1 & 2 Vict. C. 110) s.14, speaks of "any stock or
shares of or in any public company in England." Debentures are neither "stock" nor "shares".
A distinction is drawn between "debenture stock" and "shares or
stock" of a company by the Companies Clauses Act, 1863 (26 & 27 Vict. C.118)
s. 23. The meaning of "stock" in the section is indicated by its
collocation with "shares" as being something ejusdem generis
therewith. If debenture stock would not be within the section, a fortiori
debentures are not: see Palmer's Company Precedents, 8th ed. Part III. P. 5.
Debentures are clearly not shares.
They
are simply specially debts due from the company, which may nor may not be
secured by a charge on the company's assets. A debenture-holder as such is not
a member, but a creditor of the company. He has no share in the capital of the
company, and his right to payment is not dependent on its profits. He has not,
as a shareholder has, a voice in the management of the company's affairs. In the
case of In re Bodman (1) it was held by Chitty J. that a bequest of all the
testator's shares in a gas company would not pass debenture stock of that
company. He said in giving judgment "Debenture stock therefore stands in a
materially different position from that occupied by proprietary or capital
stock of the company: in other words, debenture stock is borrowed money
capitalized for purposes of convenience. The words used by this testator aptly
and correctly describe his shares in this gas company, and I should be
improperly extending the meaning of the word 'shares', if I were to hold that
it included debenture stock, which, as I have already explained, is property of
a different kind altogether from the ordinary or proprietary stock of a
company." The matter may be considered from another angle. Under Sections
44(2) and 56 of the Companies Act, 1956, in the prospectus to be filed with the
Registrar, a statement has to be made as regards amount payable on application
of allotment of each share. One of the particulars required to be mentioned in
the prospectus is the price to be paid for shares or debentures subscribed for
under the options or right.
"Subscription"
is an amount of money subscribed for acquiring any periodical or even to
acquire right of membership in a company or in a club. When a subscriber of any
periodical receives the periodical it is nothing short of purchasing it for a
price.
'Price'
has been defined in Section 2(l) of the M.R.T.P. Act in the following terms :
"Price",
in relation to the sale of any goods or to the performance of any services,
includes every valuable consideration, whether direct or indirect, and includes
any consideration which in effect relates to the sale of any goods or to the
performance of any services although ostensibly relating to any other matter or
thing;" The act of inviting offer shares of any company does not get
translated into a kind of service qua the allottee subscriber. Subscription,
therefore, is not in the nature of valuable consideration for any service.
Reliance
on Lucknow Development Authority's case (supra) by Ms. Jaising is misplaced. In
that case, the National Consumers' Disputes Redressal Commission was concerned
with the question of interpretation of the term "consumer" within the
meaning of the Consumer Protection Act, 1986. It was held that :
"The
right thus to approach the Commission or the Forum vests in consumer for unfair
trade practice or defect in supply of goods or deficiency in service. The word
'consumer' is a comprehensive expression. It extends from a person who buys any
commodity to consume either as eatable or otherwise from a shop, business
house, corporation, store, fair price shop to use of private or public
services. In Oxford Dictionary a consumer is defined as, "a purchaser of
goods or services". In Black's Law Dictionary it is explained to mean,
"one who consumes. Individuals who purchase, use, maintain, and dispose of
products and services. A member of that broad class of people who are affected
by pricing policies, financing practices, quality of goods and services, credit
reporting, debt collection, and other trade practices for which state and
federal consumer protection laws are enacted.." In the instant case, the
action on the part of the company, in our opinion, does not involve any sale of
goods or rendition of any service.
The
pointed issue is squarely covered by a decision of this Court in Morgan Stanley
Mutual Fund (supra). Therein this Court was considering a question as to
whether share for allotment of which only an application has been made was
goods as defined under Section 2(1)(i) of the Consumer Protection Act, 1986.
The said section reads as under :
"
'goods' means goods as defined in the Sale of Goods Act, 1930." The
definition of 'goods' as contained in the aforementioned provision is in pari-materia
with the provisions of the said Act. It was held that :
"As
to the scope of this clause, reference may be made to Maneckji Pestonji Bharucha
v. Wadilal Sarabhai & Co.. It was observed thus:
"The
Company is entitled to deal with the shareholder who is on the register, and
only a person who is on the register is in the full sense of the word owner of
the share. But the title to get on the register consists in the possession of a
certificate together with a transfer signed by the registered holder. This is
what Bharucha had. He had the certificates and blank transfers, signed by the
registered holders. It would be an upset of all Stock Exchange transactions if
it were suggested that a broker who sold shares by general description did not
implement his bargain by supplying the buyer with the certificates and blank
transfers, signed by the registered holders of the shares described. Bharucha
sold what he had got. He could sell no more. He sold what in England would have been choses in action,
and he delivered choses in action. But in India, by the terms of the Contract Act, these choses in action are goods. By
the definition of goods as every kind of moveable property it is clear that not
only registered shares, but also this class of choses in action, are goods. Hence
equitable considerations not applicable to goods do not apply to share in India." 29. Again in Madholal Sindhu
of Bombay v. Official Assignee of Bombay it
was held thus :
"A
sale according to the Sale of Goods Act (and in India goods include shares of joint stock companies) takes place
when the property passes from the seller to the buyer." Therefore, at the
stage of application it will not be goods. After allotment different
considerations may prevail.
30. A
fortiori, an application for allotment of shares cannot constitute goods. In
other words, before allotment of shares whether the applicant for such shares
could be called a consumer? In CIT v. Standard Vacuum Oil Co. while defining
shares, this Court observed :
"A
share is not a sum of money; it represents an interest measured by a sum of
money and made up of diverse rights contained in the contract evidenced by the
articles of association of the Company."
31.
Therefore, it is after allotment, rights may arise as per the contract (Article
of Association of Company). But certainly not before allotment. At that stage,
he is only a prospective investor (sic in) future goods." Furthermore, as
noticed hereinbefore, the expression 'goods', underwent an amendment in the
year 1991. The relevant notes on clauses as contained in the Statement of
Objects and Reasons of the Monopolies and Restrictive Trade Practices
(Amendment) Bill, 1991 (Bill No.198 of 1991) speaks thus :- "Clause 2
seeks to enlarge the definition of 'goods' by including issue of shares before
allotment. The scope of the definition of 'service' is also being enlarged by
including chit-fund. An explanation has also been added that any deals in real
estate shall be deemed to be included in 'service'" It is, therefore,
evident that the said amendment is not explanatory or clarificatory in nature.
By reason thereof, the definition of goods was sought to be enlarged which will
have prospective operation. The very fact that the Parliament in its wisdom sought
to enlarge the definition of goods by including the issue of shares by
allotment as also the service is a clear pointer to the fact that thereby the
mischief which was existing in the said provision was sought to be remedied.
It is,
therefore, axiomatic that before the said definition of 'goods' was amended,
the matter relating to issue of shares before allotment was not included
therein.
In Shree
Gopal Paper Mills Ltd. v. Commissioner of Income-tax, Central, Calcutta [(1967)
37 Comp.Cas 240], the question which fell for consideration before a Bench of
the Calcutta High Court was the meaning and scope of the words
"share", "issue of share" vis--vis "bonus share"
issued to them. The Calcutta High Court noticed the decision of this Court in
Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. [(1963)
33 Comp.Cas.862] wherein it was held that allotment of share means
appropriation of unissued shares to a specified number of persons. It was
further held that issue of shares is something distinct from allotment and is
subsequent act whereby the title of the allottee becomes complete.
The
matter thence came up before this Court in Shree Gopal Paper Mills Ltd. v.
Commissioner of Income-tax, Central, Calcutta [(1970) 77 I.T.R.543]. It was
held by the High Court that a share cannot be held to have been issued unless a
share certificate is given to the concerned person. This Court, however,
disagreed with the view of the High Court only to the aforementioned extent.
It was
noticed:
"The
words "allot" and "distribute" found in clause (b) of the
resolution do not carry the matter further.
Their
meaning should be gathered from the context in which they were used. Clauses
(b) and (c) of the resolution must be read harmoniously with clause (a).
The
word "allotment" has not been defined in the Companies Act. The
meaning of the word "allot" or "allotment" will have to be
gathered from the context in which those words are used. This court considered
the meaning of the word "allotment" in Sri Gopal Jalan and Co. v.
Calcutta Stock Exchange Association Ltd.
Therein,
it referred to a large number of English decisions which have considered the
meaning of that word. In that decision this Court referred to the observations
of Chitty J. in In re Florence Land and Public Works Co.:
"To
my mind there is no magic whatever in the term 'allotment' as used in these
circumstances. It is said that the allotment is an appropriation of a specific
number of shares. It is an appropriation, not of specific shares, but of a
certain number of shares." In Sri Gopal Jalan's case Sarkar J (as he then
was) quoted with approval the following passage from Farwell L.J. in Mosley v. Koffyfontain
Mines Ltd.:
"As
regards the construction of these particular articles, it is plain that the
words 'creation', 'issue' and 'allotment' are used with three different
meanings familiar to business people as well as to lawyers.
There
are three steps with regard to new capital; first, it is created; till it is
created the capital does not exist at all. When it is created it may remain unissued
for years, as indeed it was here; the market did not allow of a favourable
opportunity of placing it. When it is issued it may be issued on such terms as
appear for the moment expedient. Next comes allotment. To take the words of
Sterling J. in Spitzel v. Chinese Corporation, he says: 'What is an allotment
of shares.
Broadly
speaking, it is an appropriation by the directors or the managing body of the
company of shares to a particular person'" After examining the various decisions,
Sarkar J. observed :
"It
is beyond doubt from the authorities to which we have earlier referred, and
there are many more which could be cited to show the same position, that in
company law 'allotment' means the appropriation out of the previously unappropriated
capital of a company, of a certain number of shares to a person. Till such
allotment the shares do not exist as such. It is on allotment in this sense
that the shares come into existence" In view of the aforementioned
authoritative pronouncement of this Court it must be held that shares pending
allotment in view of the provisions of law as thence existed could not be said
to be goods.
For
the aforementioned reasons, it is not necessary to go into the other questions
raised at the Bar.
For
the views, we have taken, the judgment of the Commission cannot be found fault
with.
These
appeals are dismissed accordingly. No costs.
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