# LlFE INSURANCE CORPORATION OF lNDlA v. ESCORTS LTD, & ORS

- **Citation:** [1985] Supp. 3 S.C.R. 909
- **Court:** Supreme Court of India
- **Decided:** 1985-12-19
- **Case number:** Civil Writ No. 3063 of 1983
- **Bench:** Chinnappa Reddy, E.S. Venkataramiah, V. Balakrishna B Eradi, R.B. Misra, Khalid
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/llfe-insurance-corporation-of-lndla-v-escorts-ltd-ors-9228
- **Pages:** 116

## Headnote

A. Foreign Exchange Regulation Act, 1973, section 29(1) (b)
- Whether the Reserve Bank of lndia had the power or authority to
give "ex-post facto" permission under section 29(l)(b) of the Act
for the purchase of shares in lndia by a company not incorporated
C
in India or whether such permission had necessarily to ' be
previous permission - Words atui Phrases
11Permission
11 meaning of.
B. Corporate democracy, concept of, explained.
C. Company Law - Shares - Nature of the property in shares
D
- La" relating to transfer of property in shares under the law
and the effect of the provisions of the Foreign Exchange Regulation Act explained - Companies Act, 1956, sections 2(46), 82, 84,
87, 106, 108(1), 108 (1-A) (a) and (b), 108 to 108 H, 110, 111(1)
& 3, 206, 207, 397, 398, 428, 439 and 475 read '11th section 27 of
the Securities Contracts (Regulation) Act, Sale of Goods Act,
E
Sections 2 (7), 19, 20 to 24 and Transfer of Property Act,
section 6.
D, Companies Act, 1956, sections 291-293 -
Position and
nature of discretionary powers of the Directors in a company.
E. Shares of a company, transfer of - Refusal to transfer
F
the shares, extent of -
Whether the refusal to transfer the
shares by the company even after the permission was granted by
the Reserve Bank under the FERA, proper - Companies Act, 1956
section 111(1) & (3).
F. Shares, Purchase of by the foreign investor of lndian
G
nationality/origin - On the facts of the instance case, whether
involved any contravention of Foreign Exchange Regulation of the
Non-Residents' Investment Scheme.
G. Doctrine of lifting the corporate veil - Investments by
company owned by non-residents of Indian nationality in accordance '11th the Foreign Exchange Regulations, the Non-Residents
H
A
B
c
D
E
F
G
H
910
SUPREME COURT REPORTS
[1985] SUPP.3 s.c.R.
External Account Rules, 1970, the Portfolio Investment Scheme,
the Exchange Control Manual, Stock Exchange Control (Regulation)
Act, 1956 and its bylaws - Whether the Court could pierce the
veil of the transactions.
H. Shareholders' right to call extraordinary general meeting on requisition either to alter the Articles of Association of
removal/ change of directors -
State and its instrume~talities
being shareholders have the same rights of an ordinary shareholder - Companies Act, 1956, sections 169, 172, 173(3), 284, -
L.I.C. Act, Section 6.
I. Constitution of 'India, 1950, Articles 14, 19, 32, 226
read with order XXXIX Rule l - Whether the Courts can interfere
with the shareholder's right to call a general body meeting and
grant injunctions - Judicial Review and Article 14 explained.
J. Construct of statutes enacted in national interest,
explained.
K. English cases, reference to as external aids permissibility - Forms, whether can control the Act.
L. Exchange Control Manual - Paras 24, 24 A-1 and 28 A-1 -
Titled "Introduction to Foreign Investment in India - Nature of -
Whether statutory direction.
M. Foreign Exchange Regulation, 1973 - Grant of permission
by the Reserve Bank of India under the N.R.P. scheme - Whether
can be questioned by the company whose shares are purchased by
N.R.I. in a petition under Article 226 of the Constitution.
N. Rule against retrospectivity, applicability of.
o. Portfolio Investment Scheme by companies and overseas
bodies owned by non-residents of Indian nationality/origin in
accordance with circulars issued from time to time by the Reserve
Bank of India under section 73(3) of FEM and clarifications
thereof contained in Press Release dated 17.9.83 and the circular
dated 19.9.83 (both) issued by the Reserve Bank of India and the
letter dated 19. 9. 83 issued by the Government of India, whether
valid.
P. Mala fides, whether the Union of India, the Reserve Bank
of India and the Life Insurance Corporation of India be said to
L.r.c. v. ESCORTS
911
have acted malafides, in the matter of requisiting general meetA
ing and in the investment by purchase of shares made by the
Caparo companies, respectively.
Indian economy whi.ch

## Text

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909
LlFE INSURANCE CORPORATION OF lNDlA
A
v.
ESCORTS LTD, & ORS.
DECEMBER 19, 1985
[0, CHINNAPPA REDDY, E.S. VENKATARAMIAH, V. BALAKRISHNA
B
ERADI, R.B. MISRA AND V, KHALID, JJ,]
A. Foreign Exchange Regulation Act, 1973, section 29(1) (b)
- Whether the Reserve Bank of lndia had the power or authority to
give "ex-post facto" permission under section 29(l)(b) of the Act
for the purchase of shares in lndia by a company not incorporated
C
in India or whether such permission had necessarily to ' be
previous permission - Words atui Phrases
11Permission
11 meaning of.
B. Corporate democracy, concept of, explained.
C. Company Law - Shares - Nature of the property in shares
D
- La" relating to transfer of property in shares under the law
and the effect of the provisions of the Foreign Exchange Regulation Act explained - Companies Act, 1956, sections 2(46), 82, 84,
87, 106, 108(1), 108 (1-A) (a) and (b), 108 to 108 H, 110, 111(1)
& 3, 206, 207, 397, 398, 428, 439 and 475 read '11th section 27 of
the Securities Contracts (Regulation) Act, Sale of Goods Act,
E
Sections 2 (7), 19, 20 to 24 and Transfer of Property Act,
section 6.
D, Companies Act, 1956, sections 291-293 -
Position and
nature of discretionary powers of the Directors in a company.
E. Shares of a company, transfer of - Refusal to transfer
F
the shares, extent of -
Whether the refusal to transfer the
shares by the company even after the permission was granted by
the Reserve Bank under the FERA, proper - Companies Act, 1956
section 111(1) & (3).
F. Shares, Purchase of by the foreign investor of lndian
G
nationality/origin - On the facts of the instance case, whether
involved any contravention of Foreign Exchange Regulation of the
Non-Residents' Investment Scheme.
G. Doctrine of lifting the corporate veil - Investments by
company owned by non-residents of Indian nationality in accordance '11th the Foreign Exchange Regulations, the Non-Residents
H
A
B
c
D
E
F
G
H
910
SUPREME COURT REPORTS
[1985] SUPP.3 s.c.R.
External Account Rules, 1970, the Portfolio Investment Scheme,
the Exchange Control Manual, Stock Exchange Control (Regulation)
Act, 1956 and its bylaws - Whether the Court could pierce the
veil of the transactions.
H. Shareholders' right to call extraordinary general meeting on requisition either to alter the Articles of Association of
removal/ change of directors -
State and its instrume~talities
being shareholders have the same rights of an ordinary shareholder - Companies Act, 1956, sections 169, 172, 173(3), 284, -
L.I.C. Act, Section 6.
I. Constitution of 'India, 1950, Articles 14, 19, 32, 226
read with order XXXIX Rule l - Whether the Courts can interfere
with the shareholder's right to call a general body meeting and
grant injunctions - Judicial Review and Article 14 explained.
J. Construct of statutes enacted in national interest,
explained.
K. English cases, reference to as external aids permissibility - Forms, whether can control the Act.
L. Exchange Control Manual - Paras 24, 24 A-1 and 28 A-1 -
Titled "Introduction to Foreign Investment in India - Nature of -
Whether statutory direction.
M. Foreign Exchange Regulation, 1973 - Grant of permission
by the Reserve Bank of India under the N.R.P. scheme - Whether
can be questioned by the company whose shares are purchased by
N.R.I. in a petition under Article 226 of the Constitution.
N. Rule against retrospectivity, applicability of.
o. Portfolio Investment Scheme by companies and overseas
bodies owned by non-residents of Indian nationality/origin in
accordance with circulars issued from time to time by the Reserve
Bank of India under section 73(3) of FEM and clarifications
thereof contained in Press Release dated 17.9.83 and the circular
dated 19.9.83 (both) issued by the Reserve Bank of India and the
letter dated 19. 9. 83 issued by the Government of India, whether
valid.
P. Mala fides, whether the Union of India, the Reserve Bank
of India and the Life Insurance Corporation of India be said to
L.r.c. v. ESCORTS
911
have acted malafides, in the matter of requisiting general meetA
ing and in the investment by purchase of shares made by the
Caparo companies, respectively.
Indian economy whi.ch has to operate under the existing
world economic system needs lots of foreign exchange to meet its
'
developmental activities. For the purpose of earning, conserving
B
and building up a reservoir, thereof, and to improve its proper
utilisation Parliament and the Executive government including the
Reserve Bank of India have been taking several steps from time to
time under the· Foreign Exchange Regulation Act, 1973 and other
allied Acts and Rules made thereunder. In exercise of the powers
conferred by section 79 of the Foreign Exchange Regulation Act,
c
the Central Government made Rules called the Non-Resident
External Account
Rules, 1970. With a view to earn foreign
exchange
by attracting non-resident
individuals
of
Indian
nationality or origin to invest in shares of Indian companies,
the C.overnment of India decided to provide incentives to such
individuals and formulated a "Portfolio Inveatment Scheme". This
D
scheme
was
announced
by
the Government
on 27.2.1982 was
incorporated in Circular No.9 dated 14.4.1982 of the Reserve Bank
of India issued under section 73(3) of the Foreign Exchange
Regulation Act. Paragraph 4{a) thereof provides that under the
liberalised policy non-residents of Indian nationality or origin
will be permitted to make portfolio investment in shares quoted
E
on stock exchanges in India with full benefits of repartriation
of capital invested and income earned subject to provisos
therein. This was followed by further circulars No. 10 dated
22.4,1982, No.15 dated 25.8.1982, No.27 dated 10.12.82, No.12
dated 16.5.1983 and No.18 dt. 19.9.83.
The net result of all the circulsrs was that non-resident
individuals of Indian nationality/origin as well as overseas
companies,
partnership
finmi,
societies,
trusts
and
other
corporate bodies which were owned by or in which the beneficial
interest vested
in
non-resident
individuals
of
Indian
nationality/origin to the extent of not less than 60 per cent
were entitled to invest, on a repatriation basis, in the shares
of Indian companies to the extent of one per cent of the paid up
equity capital of such Indian company provided that the aggregate
vf such portfolio investment did not exceed the ceiling of 5 per
cent. It was imnaterial whether the investment was made directly
or indirectly. What was essential was that 60 per cent ol' the
ownership or the beneficial interest should be in the hands of
non-resident individuals of Indian national! ty I origin. Though a
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SUPREME COURT REPORTS
(1985] SUPP.3 s.c.R.
limit of one per cent was imposed on the acquisition of shares by
each investor there was no restriction on the acquisition of
shares to the extent of one per cent separately by each
individual member of the same family or by each individual
company of the same family (group) of companies.
Desiring to take advantage of the Non-Resident Portfolio
Investment Scheme and to invest in the shares of Escorts Ltd.,
(an Indian company), thirteen overseas companies, twel¥e out of
whose shares was owned 100% and the thirteenth out of whose
shares was owned 98 per cent by Caparo Group Ltd., designated the
Punjab National Bank as their banker (authorised dealer) and M/s.
· Raja Ram Bhasin & Co. as their broker for the purpose of such
investment. Their designated bankers M/ s Punjab National Bank
E.C.E. Branch informed the Reserve Bank of India through their
letter dated 4.3.1983 that according to OAC & RPe forms received
the Caparo group of companies were incorporated in England and
that 61.6 per cent of the sharea thereof are held by the Swsraj
Paul Family Trust, one hundred per cent of whose beneficiaries
are one Swsraj Paul and the members of his family, all non-resident individuals of Indian origin and requested the Reserve Bank
to accord their approval for opening Non-Resident External
Accounts in the name of each of thirteen companies for the
purpose of "conducting investment operations in India" through
the agency of Raja Ram Bhasin and Co. Stock Investment Adviser
and member of the Delhi Stock & Share Department Delhi. It was
mentioned in the letters to the Reserve Bank that the proposed
accounts would be "effected" by remittances from abroad through
noxmal banking chancels and credits and debits would be allowed
only interms of the scheme contained in the scheme for investment
by non-residents. Though a remittance of $1,30,000 equivalent to
Rs.19,63,000 made by Mr. Swaraj Paul to the Punjab National Bank,
Parliament Street Branch on 28.1.1983 for the purpose of opening
on N.R.E. account in the name of Swsraj Paul, his bankers advised
the Reserve Bank that only four remittances had been received
from Caparo Group Ltd. the holding company on 9.3.83, 12.4.83,
13.4.83 and 23.3.83, of amounts equivalent to Rs.l,35,36,000,
Rs.2,36,59,000, Rs.76,35,000 and Rs.l,31,38,681.lJp.
Payments under the Stock Exchange Rules may be made within
two weeks after the purchases contracted for. M/s. Raja Ram
Bhasin & Co. had, therefore, purchased shares of Escorts Ltd.
worth Rs. 33,40,865 from Mangla & Co. prior to 9.3.83, the date
of the first remittance as disclosed by Punjab National Bank.
However, the statements of purchases of sha.res made by the said
brokers show that even by 14.3.83, shares of Escorts Ltd. worth
L.r.c. v. ESCORTS
913
Rs.3,85,920 had been purchased from Bharat Bhushan &
Co.
and
shares worth Rs.45,81;677 had been purchased from Mangla & Co.
A
The brokers had advised the designated bank that out of 75000
shares of Escorts Ltd. purchased upto 28.4.83, 35,560 shares
purchased by each of the twelve companies and 35667 shares
purchased by the thirteenth company were lodged by them with
B
Escorts Co. Ltd. in the uames of H.c. BJ:iasin and Mr. Bharat
Bhushan for the purpose of transfer of the shares in the books of
the company. Under byelaw 242 of the Stock Exchange Regulations
which permit the brokers to lodge the shares in their own names
instead& of their principals, if they are unable to complete the
fonualities before the closing of the books. In the meanwhile, on
C
31.5.83, Punjab National Bank wrote to Escorts Ltd. informing
them that the thirteen companies liad been making investments in
shares of Escorts Ltd. in terms of the scheme for Investment by
overseas cor\>orate bodies predominantly owned by non-residents of
Indian nationality/origin to an extent of at least 60% and that
the thirteen overseas companies had designated them as their
L
banker and M/s Raja Ram Bhasin & Co. as their brokers for the
purpose of investment.
Escorts Ltd., sought detailed information from Punjab
National Bank and the brokers about the names of investors and
also whether the Reserve Bank of India had accorded permission to
E
them. As there """ no response from either of them, Escorts Ltd.
constituted a cOlllllittee to look into the question of transfer of
shares in their books and according to its rec011111endations the
Board of Di rec tors passed a resolution refusing to register the
transfer of shares.
Escorts Ltd., although they had already refused to register
F
the transfer of shares, wrote to the Punjab National Bank for
information on several points as they desired to make
a
representations to the Reserve Bank of India, intervene and
aesis t in the inquiry being conducted by the Reserve Bank at the
behest of the Government of India. They also wrote several
letters to the Reserve Bank purporting to give information
G
regarding various irregularides committed in the purchase of
shares of their company by the thirteen foreign compsnies,
suppressing the fact that they have refused to register the
transfer of shares in their favour.
In accordance with the clarificatory letter dated 17 .9.83
from the Government of India, its Press Release of the same date
h
and its circular No. 18 dated 19,9.83, the Reserve Bank, by a
telex message conveyed to the Punjab National
Bank their
914
SUPREME COURT REPORTS
[1985] SUPP.3 s.c.R.
A
permission to release the money remitted by Caparo Group Ltd.
frou abroad for making payment againat ·the shares of DCM and
Escorts Ltd. Subsequent to the grant of permission by the Reserve
Bank of India, . another attempt was made to have the tranafer of
shares registered. The request. was turned down once again by
iscorts Ltd. who by their letter dated 13.10.83 stated that apart
B
from the que•tion of obtaining the permission of the Reserve Bank
of India, the decision of the Board to refuse to register the
shares was bas.A on other grounds which contained to be valid.
Respondent No.19, therefore, preferred an appeal to the Central
Government under section 111(3) of the Companies Act.
Escorts Ltd. alleging undue pressure from the financial
C
inatitutiona like ICICI,
IFC,
LIC,
IDBI
and
UTI
for
the
registeration of the transfer of sl-.ares and explaining the
circ1DDStances and instances c0111Dencing from the meeting held on
18.10.83 onwards upto 29.12.83, filed Writ Petition No.3068/83 on
29.12.83 under Article 226 of the Constitution challenging the
validity of Circular No.18 dated 19.9.83 and the fress Release of
the same date as 2.rbitrary and violative of not only Articles 14,
D
19(l)(c)
and
19(l)(g) of the Constitution,
but also the
provisions of Foreign Exchange Regulations, the provisions of
Securities Contract Regulation Act etc.
Subsequent to the filing of the Writ Petition the Life
Insurance Corporation of India who along with other financial
E
institutions held as many as 52% of the total nwnber of shares in
the company, issued a requisition dated 11.2.84 to the company to
hold an extra ordinary general meeting for the purpose of
removing nine of the part-time Directors of the company and for
nominating nine others in their place. Alleging that the action
of the Life Insurance Corporation of India was malaf ide and part
F
of a concerted action by the Union of India, the Reserve Bank of
India and the Caparo Group Ltd. to coerce the company to register
the tranafer of shares and to withdraw the Writ Petition, the
Writ Petitioners sought to suitably amend the Writ Petition and
to add prayers (ia), (ib), (ic) and (id) to declare the
requisition to hold the meeting arbitrary, illegal, ultra vires
G
etc. The writ petition was amended.
Paragraphs 149A(l) to (44)
were added as also prayers (ia), (ib), (ic) and (id).
The High Court of Bombay allowed the writ petition and
granted reliefs in the following manner:-
Ii
"Section 29(l)(b) of FERA is mandatory.
No Non-Resident
Indian Investor is authorised to purchase share in an Indian
L.I.C. v. ESCORTS
915
Company without the prior permission of R.B.I. under section
29(l)(b) of FERA; any purchase of shares without such prior
permission is illegal: Neither the Union of India or the R.B.I.
is empowered to order otherwise either by issuing a direction
under section 75 or under section 73(3) of the FERA; nor are they
empowered to grant permission after the shares are purchased
without obtaining prior permission.
The Press Release dt.
17.9.83 (Ex.A.), the circular dt. 19.9.83 (Ex.B) and the letter
dt. 19.9.83 (Ex.C) cannot operate retrospectively so as to
validate the purchase of shares made by N.R.I. companies which
were ineligible on the date of purchase; nor can they authorise
purchase of shares without obtaining prior permission of the
R.B.I. under section 29(l)(b) of .the FERA.
In so far as the
impugned
Press Release circular and letter permitting the
respondent-companies
to
hold
the
shares
purchased without
obtaining prior permission of the R.B.I., they are ultra vires of
section 29(l)(b) of FERA and the powers vested in the Union of
India under section 75 and the R.B.I. under section 73(3) of the
FERA.
To
that extent they are void and inoperative both
prospectively and retrospectively.
The impugned Press Release
and the circular, however, amount to amending the Portfolio
investment Scheme with full repatriation benefits introduced
under Circular No. 9 dated 14th April, 1982, and such amendments
operates only prospectively.
The action of respondent No.18 in
issuing the impugned requisition notice is contrary to the
provisions of section 284 of the Companies Act and ultra vires
the powers vested in the L.I.C. under section 6 of the L.I.c. Act
and contrary to the intendment of the provisions of the L.I.C.
Act.
The impugned requisition notice offends the principles of
natural justice.
The action of the L.I.C. in issuing the
impugned requisition notice is an arbitrary and mala fide action
taken for collateral purpose; it is violative of Article 14 of
the Constitution of India.
The Union of India and the R.B.I.,
respondents Nos. l and 2, are in no way responsible for the
action of the L.I.C. in this regard.
The allegation of mala
fides made against them and the Union Finance Minister are
unsubstantiated.
The requisition notice and the resolutions
passed at the meeting held in pursuance of the said notice are
quashed". Aggrieved by the said judgment and decree the Life
Insurance
Corporation
of
India has
come
in appeal,
and
cross-appeals have been filed by Escorts Ltd. and Mr. Nanda, the
Managing Director of Escorts.
Allowing CA 4598/84 filed by the Life Insurance Corporation
of India, Union of India and the Reserve Bank of India and
dismissing the cross appeals No.497-499/85 filed by Escorts Ltd.
and Nanda, the Court
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[1985] SUPP.3 s.c.R.
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llKLD : 1.1 The action of the Life Insurance Corporation of
India in issuing the requisition notice dated 11.2.84 to bold an
extra ordinary general meeting of the Escorts Collpany Ltd. for
the purpose of removing nine of the part time Directors of tbe
company and for nominating nine others in their place is neither
contrary to the provisiona of section 284 of the eo.p.niea Act,
B
1956 nor ultra vires the powers vested in the Life Insurance
Corporation under section 6 of the Life Insurance Corporation of
India Act.
The notice does not offend the principle of natural
justice.
The said action of the L.I.c. cannot be said to be
arbitrary and malafide and taken for collateral purpoae or
violative of Article 14 of the Constitution of India. [1022 F]
C
1.2 A company is, in some respects, an inatitution like a
State functioning under its "basic constitution" consistillg of the
Compsul es Act and the Memorandum of Association.
"The members in
general meeting" and the directorate are the two primary organs
of a company comparable with the legialative and the executive
organs of a Parliamentary democracy where legislative sovereignty
rests with Parliament, while administration is left to the
D
Executive government, subject to a measure of control by Parliament thrwgh its power to force a change of Government. Like the
Gover.-nt, the Directors will be answerable to the Parliament
constituted by the general meeting.
But in practice (again like
the gover.-nt), they will exercise as much control over the
parliament as that exercises over them.
Although it would be
E
constitutionally possible for the company in general meeting to
exercise all the powers of the company, it clearly would not be
practicable (except in the case of one or two-man compsniu) for
day to day administration to be undertaken by such a clllberscne
piece of machinery.
So the modern practice is to confer on the
Directors the right to exercise all the company 1 s powers except
F
such as the general law expressly provides must be exercised in
general meeting.
Of course, powers which are strictly legislative are not affected by the conferment of powers on the
Directors as section 31 of the CoBpaul es Act provides that an
alteration of an article would require a special reaolution of
the company in general meeting.
Under the Company Act, in many
G
ways the position of the Directorate vis-a-vis the company ii
more powerful than that the Government via-a-vis the Parl.iaent.
The strict theory of Parliamentary sovereignty 1IOUld not apply by
analogy to a company since under the Companies Ac;, there are
many powers exercisable by the Directors with which the members
in general meeting cannot interfere. The most they can do is to
H
dismiss the directorate and appoint others in their place or
alter the articles so as to restrict the powers of the Directors
for the future.
The only effective way the members in general
L.I.c. v. ESCORTS
917
meeting can exercise their control over the Directorate in a
democratic manner is to alter the Articles of Association so as
to restrict the pm.-ers of the Directors for the future or to
dismiss the Directorate and appoint others in their place.
The
holders of the majority of the stock of a Corporation have the
power to appoint, by election, Directors of their choice and the
power to regulate them by a resolution for their removal.
'11lis
is the essence of corporate democracy. (1010 G-11; 1011 A-HJ
In the instant case, the finaocial institutions which held
52% of the shares of Escorts company had a very big stake in its
working and future and were aggrieved that the management did not
even choose to consult them or inform them that a Writ Petition
was proposed to be filed which lillU1d launch and involve the
company in difficult and expensive litigation against the
Govermnent and the Reserve llaDk of India. The institutions were
anxious to withdraw the writ petition and discuss the matter
further. As the Management was not agreeable to this course, the
Life Insurance Corporation thought that it had no option but to
seek a removal of the non-Executive Directors so as to enable the
new Board to consider the question whether to reverse the
decision to pursue the litigation. Evidently the finaocial
institutions wanted to avoid a confrontation with the Govermnent
and tile Reserve Bank and adopt a more conciliatory approach. At
the same time, the resolution of the Life Insurance Corporation
did not seek removal of the Executive Directors, obviously
because they did not iI\tend to disturb the management of the
company
Therefore, the Life Insurance Corporation of India
cannot be said to have acted mala fide in seeking to remove the
niI\e
non-Executive
Directors
and
to
replace
them
by
representatives of the financial institutions. No aspersion was
cast against the Directors proposed to be removed. It was the
only way by which the policy which had been adopted by the Board
in launching into a litigation could be reconsidered and
reversed, if necessary. It was a wholly democratic process.
A
minority of shareholders in the saddle of power could not be
allowed to pursue a policy of venturing into a litigation to
which the majority of the shareholders were opposed. That is not
how corporate democracy may function. (1010 A-G]
1.3 Every shareholder of a company has the right, subject
to statutorily prescribed procedural and numerical requirements
to call an extra ordinary general meeting in accordance with the
provisions of the Companies Act, 1956. He cannot be restrained
from calling a meeting and he is not bound to disclose the
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[1985] SUPP.3 s.c.R.
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reasons for the resolution proposed to be moved at the meeting.
Nor are the reasons for the resolutions subject to judicial
review. [1016 B-C]
1.4 It is true that under section 173(2) of the Companies
Act, there shall be annexed to the ncitice of the meeting a stateB
ment setting out all material facts concerning each iten of
business to be transacted at the meeting, including in particular, the nature of the concern or the interest, if any therein,
of every director, the managing agent, if any, the secretaries
and treasures, if any, and the manager if any.
That is a duty
cast on the management to disclose, in an explanatory note, all
material facts relating to the resolution coming up before the
c
general meeting to enable the shareholders calling a meeting to
disclose the reasons for the resolutions which they propose to
move at the meeting.
The Ufe Insurance Corporation of India,
though an instrumentality of the State, as a shareholder of
Escorts Ltd. bas the same right as every shareholder to call an
extraordinary general meeting of the company for the purpose of
moving a resolution to remove some Directors and appoint others
D
in their place.
The Ufe Insurance Corporation of India cannot
be restrained from doing so nor is boUDd to disclose its reasons
for moving the resolutions. (1016 C-F]
'
1.5 When a requisition is made by s shareholder calling for
a general meeting of the company under the provisions of tbe
E
companies Act validly to remove a director and appoint another,
an injunction cannot be granted by the Court to restrain the
holding of a general meeting. (1011 G-H]
Slllllr & Sonil (Salford) Ltd. v. Slllllr [1935] 2 KB 113; Iale of
Wight llaibmy Cmpany v. Tahourdin (1883) 25 Ch. D.320; Illllenriclt
F
v. Saell 42 Eng. Rep.83; lleDtley-Stevens v. Joaa (1974] 2 All
E.R.653; Ebrahimi v. Westbouroe Galleries Ltd. (1972] 2 All E.R,
492 referred to.
1.6 Every action of the State or an instrumentality of the
State must be informed by reason. In appropriate cases, actions
G
uninformed by reason may be questioned as arbitrary in proceedings under Article 226 or Article 32 of the Constitution. But
Article 14 cannot be construed as a charter for judicial review
of state action, to call upon the State to account for its
actions in its manifold activities by stating reasons for such
actions. If the action of the State is political or sovereign in
H
character, the Court will keep away from it. The Court will not
debate academic matters or concern itself with the intricacies of
'
L,l.C. v. ESCORTS
919
trade and commerce.
If the action of the State is related to
contractual obligations or obligations arising out of tort, the
Court may not ordinarily examine it unless the action has soma
public law character attracted to it. Broadly speaking the Court
will examine actions of State if they pertain to the public law
domain and refrain from examining them if they pertain to the
private law field. [1017 C-D; E-G]
When the State or an inatrumantality of the State ventures
into the corporate world and purchases shares of a company it
assumes to itself the ordinary role of a shareholder and dons the
robes of a shareholder, with all the rights available to such a
shareholder. Therefore, the State as a shareholder should not be
expected
to state its
reasons
when it seeks
to
change
the managemant by a resolution of the company, like any other
shareholder. [1017 G-H; 1018 A-B]
O'Reilly
V• Hackman [1982] 3All
E.R.
1124;
Devy
V•
Speltbolllll! [1983] 3 All E.R. 278; I Coagress Del~ [1981] 2
All E.R. 1064; R. v. East Berkshire Health Authority [1984) 3 All
E,R, 425; and ladba Xrislms .Aggarwal & Ors. V• State of llihllr
[1977] 3 S.C.R, 249 referred to.
2, It cannot be said that the attitude taken by the Life
Insurance Corporation of India in regard to (i) the issue of
Equity linked Debentures; (ii) Repaymant of loans to Indian
Financial Institutions; and (iii) .the proposal of the marger of
Goetze with Escorts were mals fide and an attempt on its part to
exert pressure on Escorts Ltd. to register the shares of Caparo
Group. The result of accepting the proposal for the issue of
Equity linked Debentures would be that the L.1.c. 's holdings
would be reduced from 30 per cent to 18.14 per cent, while the
holding of all the financial institutions would be reduced from
52% to 31.21% besides involving great financial loss to them.
Similar would be the position if the proposals for the marger of
Goetze with Escorts was accepted. None holding a majority of the
equity capital of a company would allow himself to be hustled
into becoming a minority shareholder. The object of prepaymant of
loans was to get rid of the directors who the financial institutions had a right to nominate. True Escorts offered to appoint
Mr. Davar as a Director even if the financial institutions had no
right to nominate him. But it is one thing to have the right to
nominate a director and quite another thing to be a director at
sufference. [1018 D-E; 1019 A-B; 1021 C-ll]
3.1 On an overall view of the several statutory provisions
and judicial precedents, it is clear thst a shareholder hss an
A
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920
SUPREME COURT REPORTS
[1985] SUPP.3 s.c.R.
undoubted interest in a company, an interest which is represented
by his share holding. Share is movable property with all the
attributes of such property. The rights of a share holder are (i)
tQ elect directors and thus to participate in the management
through them; (ii) to vote on resolutions at meetings of the
company; (iii) to enjoy the profits of the company in the shape
of dividends; (iv) to apply to the court for relief in the case
of oppression; (v) to apply to the court for relief in the caae
of mismanagement; (vi) to apply to the court for winding up of
the company; and (vii) to share in the surplus on winding up.
(995 G-11; 996 A]
3. 2 A share is transferable but while a transfer may be
• effective between transferor and transferee from the date of
transfer, the transfer is truly complete and the transferee
becomes a ehareholder in the true and full sense of the term,
with all the rights of a shareholder, only when the transfer is
registered in the comp.ny's register. A transfer effective
between transferor and the transferee is not effective as against
the company and persons without notice of the transfer until the
transfer is registered in the company's register. Indeed until
the transfer is registered in the books of the company, the
person whose name is found in the register alone is entitled to
receive the dividends, notwithstanding that he has already parted
with his intere•t in the shares.
However, on the transfer of
shares, the transferee becomes the owner of the beneficial
interest though the legal title continues with the transferor.
The relationship of trustee and ceatui que trust is established
and the transferor is bound to comply with all reasonable
directions that the transferee may give.
He also becomes a
trus<ee of the dividends as also of the rights to vote.
The
right of the transferee "to get on the register" llllSt be
exercised with due diligence and the principle of equity which
makes the transferor a constructive trustee does not extend to a
case where a transferee takes no active interest "to get on the
register". (996 A-ll]
3.3 Where the transfer is regulated by a statute, as in the
case of transfer to a non-resident which is regulated by the
Foreign Exchange Regulation Act, the permission, if any, prescribeil by the statute must be obtained.
In the absence of the
permission, the transfer will not clothe the transferee with the
"right to get on the register" unless and until the requisite
permission i5 obtained. A transferee who has the right to get on
the register, where no permission is required or where permission
has bean obtained, may ask the company to register the transfer
and the company who is so asked to register the transfer of
shares may not refuse to register the transfer, except for bona
';
L,I,C, v. ESCORTS
921
fide reasons,
neither arbitrarily, nor for any collateral
purpose,
The paramunt consideration is the interest of the
company and the general interest of the shareholder.
On the
other hand, where, the requisite permission under FERA is not
obtained, it is open to the company, and indeed, it is bound to
refuse to register the transfer of shares of an Indian company if
favour of a non-resident. [996 E-i!]
But once permission is obtained, whether before or after
the purchase of the shares, the company cannot, thereafter
refuse to register the transfer of shares.
Nor is it open to
the company or any other authority or individual to take upon
itself or himself, thereafter the task of decid_ing whether the
permission was rightly granted by Reserve Bank of India.
The
FERA makes it its exclusive privileges and function.
The
provisions of the Foreign Exchange Regulation Act are so
structured and woven as to make it clear that it is for the
Reserve Bank of India alone to consider whether the requirements
of the provisions of the Foreign Exchange Regulation Act and the
various rules, directions and orders issued from time to time
have been fulfilled and whether permission should be granted or
not.
The consequences of. non-compliance with the provisions of
the Act and the rules, orders and directions issued under the Act
are mentioned in secs. 48, 50, 56 and 63 of the Act. There is no
provision of the Act which enables an individual or authority
functioning outside the Act to determine for his own or its own
purpose whether the Reserve Bank was right or wrong in granting
permission under section 29(1) of the Act.
Under the scheme of
the Act, it is the "custodian-general" of foreign exchange.
The
task of enforcement is left to the Directorate of Enforcement,
but it is the Reserve Bank of India and the Reserve Bank of India
alone that has to decide whether permission may or may not be
granted under section 29(1) of the Act.
The Act makes it its
exclusive privilege and function.
No other authority is vested
with any power nor may it assume to itself the power to decide
the question whether permission may or may not be granted or
whether it ought or ought not to have been granted. The ques.tion
may not be permitted to be raised either directly or collaterally
before any Court.
However, the grant of permission by the
Reserve Bank may
be questioned by an interested party in a
proceeding under Article 226 of the Constitution on the ground
that it was malafide or that there was no application of the mind
or that it was opposed to national interest as contemplated by
the Act. [996 H; 997 A-G]
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922
SUPREME COURT REPORTS
[1985] SUPP.3 s.c.R.
3•5 It is certainly not open to a company whose shares have
been purchased by a non-resident company to refuse to register
the shares even after permission is obtained from the Reserve
Bank of India on the ground that permission ought not to have
been granted under the FERA.
The permission contemplated under
section 29(1) of the Foreign Exchange Regulation Act is neither
intended to nor does it impinge in any manner or any legal right
of the company or any of its shareholders.
Conversely neither
the company nor any of its shareholders is clothed with any
special right to question any such permission. (997 G-i!; 998 A]
3.6 Where the articles permitted the Directors to decline
to register the transfer of shares without assigning reasons, the
Court would not necessarily draw adverse inference against the
Directors but will assume that they acted reasonably and bonafide.
Where the Directors gave reasons the Court would consider
whether the reasons were legitimate and whether the Directors
proceeded on a right or a wrong principle. If the articles
permitted the Directors not to disclose the reasons, they could
be interrogated and asked
to disclose the reasons.
If they
failed to disclose that reason adverse inference could be drawn
against them. [995 C-F]
llanekji Pestonji Bbarucba and Anr. v, Wadilal Sberabhai and
Co. 52 I.A. 92; Bank of India v. Jamsbetji A.R. Qrlnoy A.I.R.
1950 Pc 90; In Re Fry [1946] 2 All E.R.
106; Sw:las Bank
Corporation V• Lloyds Bank Ltd. (1982] A.c.
584; Dlaranjit Lsl
C1111ncllp1ry v. IJnioD of India A.I.R. 1951 s.c. 41; Kat:balooe and
Ora. V• Bombay Life Assurani:e Calpaoy Ltd. A.I.R. 1953 s.c. 385;
Vasudev llamachandra Shelat v. Pnmlal Jayanaud l'baklrar [1975] l
s.c.R. 534; A.x:. llm:iah v. Beserve Bank (1970) l M.L.J. PI
referred to.
F
4. The
purchase of shares made by and or on behalf of the
Caparo Group Ltd. cannot be said to be in violation of the Portfolio Scheme in as much as: (i) the permission of the Reserve
Bank contemplated by section 29(l)(b) of the Foreign Exchange
Regulation Act, 1973 need not be "prior" or "previous" but the
permission should be obtained at some stage for the purchase of
G
shares. It could be ex post facto, subsequent and conditional;
(ii) Payments under the Stock Exchange Rules may be made within
two weeks after the first purchase and there would have been no
difficulty in making payments out of foreign remittances; (iii)
the provisions of sections 19(4), 29(l)(b), 47, 48, 50, 56 and 63.
of the Foreign Exchange Regulation Act do not stipulate that the
H
purchase of shares without obtaining the permission of the
' '
-'
L.I.C. v. ESCORTS
923
Reserve Bank shall be void. On the other hsnd, legal proceedings
A
arising out of such transactions are contemplated subject to the
condition thst no sum may be recovered as debt, damage or otherwise, unless and until requisite permission is obtained.
If
permission may be granted ex post facto, the transaction cannot
be a nullity and without effect whatsoever; (iv) under section 27
of the Securities Contracts (Regulation) Act, it shsll be lawful
B
for the holder of the company issuing the said security to
receive and retain any dividend declared by the company in
respect thereof for any year, notwithstanding thst the security
has already been transferred by him for consideration, unless the
transferee who claims the dividend from the transferor hss lodged
the security and all other documents relating to the transfer
C ·
which may be required by the company with the company for being
registered in his name within fifteen days of the date on which
the dividend became due; ( v) Even under the Bye-law 242 of the
Stock Exchange l!egulations the brokers are permitted to lodge the
shares purchased on behalf of their principals in their own
names, if they are unable to complete the formalities before the
t
closing of the books; and (vi) under the scheme, any foreign
company whose shares were owned to the extent of more than 60% by
persons of Indian nationslity or origin could avail the facility
given by the scheme irrespective of the fact whether the same
group of shareholders figured in the different companies. Where
any of the purchases were made subsequent to 2.5.83, they were
E
subject to the ceiling of 5% in the aggregate. Merely because
more than 60% of the shares of the several foreign companies who
have applied for permission are held by a Trust of which Mr.
swaraj Paul and the members of his family are beneficiaries, the
companies cannot be denied the facilities of investing in Indian
companies. In fact, if such of the six beneficiaries of the Trust
had separately applied for permission to purchase shares of
F
Indian
companies,
they
could
not
have
been
denied
such
permission. Therefore, merely on this account it cannot be said
that there has been any violation of the Portfolio Investment
Scheme or that th~ permission granted is illegal. [ 1022
B-C;
988 F-H; 989 A-B; 1004 A-H; 1005 A-BJ
G
5.
Generally and broadly speaking, the corporate veil may
be lifted where a statute itself contemplates lifting the veil,
or fraud or improper conduct is intended to be prevented or a
taxing statute or a beneficient statute is sought to be evaded or
where associated companies are inextricably connected as to be in
reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the
R
corporate veil is permissible, since that must necessarily depend
924
SUPREME COURT REPORTS
(1985] SUPP.3 s.c.R.
A
on the relevant statutory or other provisions the object sought
to be achieved, the impugned conduct, the involvement of the
element of the public interest, and the effect on the parties who
may be affected etc. In the instant csse "lifting the veil" is
neither necessary nor permissible beyond the essential requirement of the Foreign Exchange Regulstion Act and the Portfolio
B
Investment Scheme.