# • N. PARTHASARATHY ETC v. CONTROLLER OF CAPITAL ISSUES AND ANOTHER ETC

- **Citation:** [1991] 2 S.C.R. 329
- **Court:** Supreme Court of India
- **Decided:** 1991-04-16
- **Bench:** B.C. Ray, N.M. Kasliwal
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/n-parthasarathy-etc-v-controller-of-capital-issues-and-another-etc-11169
- **Pages:** 60

## Headnote

Constitution of India, 1950: Articles 14, 39(b) and (c) and 298---
Shares of public company held by State Instrumentalities-Sale ofPublic interest-Chance of creating business monopoly in private
hands-Due consideration to ensure public interest-Need for.
A
B
Articles 32 and 226---Public Interest Litigation-Petition against C
grant of consent by Controller of Capital Issues-Alleged violation of
Articles 14, 39(b) and ( c )-Maintainability of.
Capital Issues (Control) Act, 1947: Section 3-Issue of debentures-Consent of Controller of Capital issues-Whether given after due
D
consideration and application of mind-Variation in consent-Whether
permissible-Decision as to utilisation of the amount received from
public or approving a different consent order-Whether Courts have the
power/jurisdiction-Preferential issue reserved for shareholders of
inter-connected company-Validity of-Public interest-Constitutional
directive under Article 39(b) and (c)-To be ensured by Controller of E
Capital Issues while granting consent for public issue.
Companies Act, 1956: Sections 55, 61, 62, 63, 72(l)(a), 81(1-A},
108, 110 and I I I-Special Resolution at general meeting-Consent for
public issue-Granted by the Control/er of Capital Issues, after considering the Special Resolution-Third party acting on it and acquiring F
rights by purchase of debentures-Change of consent order in respect of
amount and purpose of utilisation-Whether could be effected contrary
to the Special Resolution adopted in a general meeting-Preferential
allotment to shareholders of interconnected Group CompaniesValidity of-Transfer of shares-Done surreptitiously and with malafide intention-Effect of-Whether opposed to public policy and hence G
illegal.
Monopolies and Restrictive Trade Practices Act, 1969: Sections
2(g), 21 and 22-"Interconnected undertakings"-Meaning ofClearance for capital issue-Approval given to Group CompanyWhether valid in respect of the inter-conneCted company.
H
329
330
SUPREME COURT REPORTS
[ 1991] 2 S.C.R.
A
Out of the Equity Shares of M/s Larsen & Toubro Ltd. held by
public financial institutions viz., UTI, LIC and GIC, 39 lakb shares
were sold to BOB Fiscal Services, a subsidiary of Bank of Baroda.
These shares were purchased by BOB Fiscal Services for Rs.30 crores
.._ -
which was given by four satellite companies of Reliance Group.
Immediately after the purchase, the shares were transferred and
B
registered in the name of Trishna Investing and Leasing Ltd. which was
also a satellite of the Reliance Group. It had only a capital of Rs.44,000
at that point of time. It was claimed that funds for the purchase of the
shares was provided by Reliance Group from out of the amount
received by way of debentures issued to public. Two Directors of the
'
Reliance Group were coopted as Director of Larsen and Toubro Ltd.
,-
c
even though the said shares were not registered in their names or in the
name of Reliance Group. Even the nominee Director of the financial
institutions did not question the induction of the two Directors. One
more Director from the Reliance Group was later coopted as Director,
which paved the way for the Chairman, Reliance Group to become the
Chairman of Larsen and Toubro Ltd. also.
D
Thereafter the Board of Directors of Larsen and Toubro Ltd. at its
meeting approved a proposal to raise funds by issue of convertible
.--
debentures for Rs.920 crores. In the said meeting it was also resolved to
issue a notice for convening an extraordinary General Meeting to consider a special resolution for the proposed issue of convertible debeuE
lures. Applications were made to the Controller of Capital Issues seeking
sanction to the rights issue of debentures of Rs.200 crores and for public
issue of debentures to the extent of Rs.620 crores. It was also stated in
the application that it was proposed to reserve/preferentially allot
-~
Rs.310 crores out of the public issue, to Larsen and Toubro's Group
Companies viz., Reliance Industries Ltd. and Reliance Petro

## Text

_Characters 0–39,974 of 158,417. This is a partial read: ask again with offset=39974 for what follows._

•
N. PARTHASARATHY ETC.
v.
CONTROLLER OF CAPITAL ISSUES AND ANOTHER ETC.
APRIL 16, 1991
[B.C. RAY AND N.M. KASLIWAL, J.)
Constitution of India, 1950: Articles 14, 39(b) and (c) and 298---
Shares of public company held by State Instrumentalities-Sale ofPublic interest-Chance of creating business monopoly in private
hands-Due consideration to ensure public interest-Need for.
A
B
Articles 32 and 226---Public Interest Litigation-Petition against C
grant of consent by Controller of Capital Issues-Alleged violation of
Articles 14, 39(b) and ( c )-Maintainability of.
Capital Issues (Control) Act, 1947: Section 3-Issue of debentures-Consent of Controller of Capital issues-Whether given after due
D
consideration and application of mind-Variation in consent-Whether
permissible-Decision as to utilisation of the amount received from
public or approving a different consent order-Whether Courts have the
power/jurisdiction-Preferential issue reserved for shareholders of
inter-connected company-Validity of-Public interest-Constitutional
directive under Article 39(b) and (c)-To be ensured by Controller of E
Capital Issues while granting consent for public issue.
Companies Act, 1956: Sections 55, 61, 62, 63, 72(l)(a), 81(1-A},
108, 110 and I I I-Special Resolution at general meeting-Consent for
public issue-Granted by the Control/er of Capital Issues, after considering the Special Resolution-Third party acting on it and acquiring F
rights by purchase of debentures-Change of consent order in respect of
amount and purpose of utilisation-Whether could be effected contrary
to the Special Resolution adopted in a general meeting-Preferential
allotment to shareholders of interconnected Group CompaniesValidity of-Transfer of shares-Done surreptitiously and with malafide intention-Effect of-Whether opposed to public policy and hence G
illegal.
Monopolies and Restrictive Trade Practices Act, 1969: Sections
2(g), 21 and 22-"Interconnected undertakings"-Meaning ofClearance for capital issue-Approval given to Group CompanyWhether valid in respect of the inter-conneCted company.
H
329
330
SUPREME COURT REPORTS
[ 1991] 2 S.C.R.
A
Out of the Equity Shares of M/s Larsen & Toubro Ltd. held by
public financial institutions viz., UTI, LIC and GIC, 39 lakb shares
were sold to BOB Fiscal Services, a subsidiary of Bank of Baroda.
These shares were purchased by BOB Fiscal Services for Rs.30 crores
.._ -
which was given by four satellite companies of Reliance Group.
Immediately after the purchase, the shares were transferred and
B
registered in the name of Trishna Investing and Leasing Ltd. which was
also a satellite of the Reliance Group. It had only a capital of Rs.44,000
at that point of time. It was claimed that funds for the purchase of the
shares was provided by Reliance Group from out of the amount
received by way of debentures issued to public. Two Directors of the
'
Reliance Group were coopted as Director of Larsen and Toubro Ltd.
,-
c
even though the said shares were not registered in their names or in the
name of Reliance Group. Even the nominee Director of the financial
institutions did not question the induction of the two Directors. One
more Director from the Reliance Group was later coopted as Director,
which paved the way for the Chairman, Reliance Group to become the
Chairman of Larsen and Toubro Ltd. also.
D
Thereafter the Board of Directors of Larsen and Toubro Ltd. at its
meeting approved a proposal to raise funds by issue of convertible
.--
debentures for Rs.920 crores. In the said meeting it was also resolved to
issue a notice for convening an extraordinary General Meeting to consider a special resolution for the proposed issue of convertible debeuE
lures. Applications were made to the Controller of Capital Issues seeking
sanction to the rights issue of debentures of Rs.200 crores and for public
issue of debentures to the extent of Rs.620 crores. It was also stated in
the application that it was proposed to reserve/preferentially allot
-~
Rs.310 crores out of the public issue, to Larsen and Toubro's Group
Companies viz., Reliance Industries Ltd. and Reliance Petro Chemicals
F
Ltd.
In its extraordinary General Meeting, the shareholders of Larsen
and Toubro passed a resolution authorising the Board of Directors of
the company to issue 12.5 per cent fully secured convertible debentures
of the total value of Rs.820 crores. Accordingly, the Controller of CapiG
tal Issues conveyed the Central Government's consent under the Capi-
)'
tal Issues (Control) Act, 1947, to the proposed issue of debentures by
Larsen and Toubro Ltd.
A Writ Petition was filed in the High Court pleading that the
divestment by the financial institutions of the controlling shares in
H
Larsen and Toubro to the Reliance Group was a secret and circuitous
N. PARTHASARTHY v. CONTROLLER
331
arrangement and hence such a divestment was arbitrary, illegal, ma/a
A
fide and a fraud on the statutory powers of the financial institutions.
>
}
The High Court, however, dismissed the Writ Petition. Aggrieved by
the dismissal of their Writ Petition, the petitioners preferred Letters
Patent Appeal before the Division Bench of the High Court. The
Respondents in those Writ Petitions filed Transfer Petitions in this
Court praying for transfer of the Letters Patent Appeal as also the
B
various Writ Petitions filed in the different High Courts, to this Court.
This Court allowed the Transfer Petitions .
._.
In all these matters, the consent granted by the Controller of
_,
Capital Issues was assailed mainly on the ground that the sanction was
issued without application of mind and without considering the after c
effect of it, viz., the Reliance Group acquiring debentures of the value
of Rs.310 crores earmarked for preferential allotment to the shareholders of Reliance Industries Ltd. and Reliance Petro Chemicals Ltd.
which amounted to allowing the Reliance Group to have control of
Larsen and Toubro. It was also contended that the consent was given
within 24 hours of the making of the application and the hurry with D
·-;.
which the sanction was granted showed that it was done with mala fide
intentions and with a motive to help the Reliance Group.
On behalf of the Respondents, it was contended that the shares
were sold in the interest of their constituents and for recycling the fund
for investing in the business by purchasing shares of other companies in
E.
public interest and also in the interest of money market; that there was
nothing hanky and panky in it nor was it effected with the motive of
..,...
diluting shares held by public financial institutions in order to facilitate
the increase in the holding of Reliance group, a private monopoly
'•
house, to get into the management of Larsen & Tubro. It has been
further contended that the transfer of 39 lakh shares of Larsen &
F
Toubro was not made in favour of satellite companies of that Group,
but through BOB Fiscal Services Ltd. which is a wholly owned subsidiary of Bank of Baroda; that it was not made surreptitiously or
discreetly on the basis of any design or secret arrangement. It was also
-.../
contended that in transferring the equity shares the financial institutions acted purely on business principles and to earn profit by these G
transactions and in the case of LI C and UTI in the interest of the policy
holders and the unit holders as the case may be. Further, it was contended that the acceptance Of the requests made by the subsidiary of
Bank of Baroda i.e. BOB Fiscal Services for selling the shares of L & T
to them at the highest market price through the broker was in public
interest in as much as if all those 39 lakh shares had been put in the H
A
•
332
SUPREME COURT REPORTS
[ 1991] 2 S.C.R.
stock market !'or sale it would have created as adverse effect on the
company and would have adversely affected the interest of Larsen and
Toubro Ltd., and that it was not possible to know the actual purchasers
of these shares from BOB Fiscal Services Ltd.
Dismissing the matters, this Court,
B
HELD:
c
D
E
(Per Ray, J).
1. The application for consent was submitted on 26. 7 .89 for sanction. On August 21, 1989 at the extraordinary general meeting of shareholders of L & T, a resolution was passed, with only one shareholder
dissenting, for the issue of debentures of Rs.820 crores. The company
sent a copy of this resolution to the Controller of Capital Issues who
after duly considering the same accorded the consent on August 29,
1989. It cannot be said that there has been complete non-application of
mind by the Controller of Capital Issues in according the consent for
the issue. Moreover, the Controller of Capital issues sent a letter dated
15th September, 1989 to M/s Larsen and Toubro asking it to note
amendment of the condition of the consent order to the effect that fund
utilisation shall be monitered by Industrial Development Bank of India.
This will further go to show that the consent was given after due consideration in accordance with the provisions of Section 3 of the Capital
Issues (Control) Act, 1947. [355C-E]
2. In view of Sections 55, 61, 62, 63 and 72 of The Companies Act
the terms of contract mentioned in the prospectus or the statements in
lien of the prospectus cannot be varied except with the approval of and
on the authority given by the Company in the general meeting. Therefore, the consent that was given by the Central Government, may by the
F
Controller of Capital Issues, on a consideration of the special resolution
adopted in the extraordinary general meeting of the shareholders of the
company on August 28, 1989 cannot be varied, changed or modified
both as regards the reduction of the amount of debentures as well as the
purposes for which the fund will be utilised contrary to what has been
embodied in the prospectus and approved by the Controller of Capital
G
Issues on the basis of the special resolution adopted at the general
meeting of the shareholders of the company. [363A-C]
3. On a plain reading of section 3(6) of the Capital Issues (Control) Act, 1947, it cannot be inferred that consent order given by the
Central Government after consideration of the special resolution passed
H
at the general meeting of the company on taking the no objection certifi-
""·-·
N. PARTHASARTHY v. CONTROLLER
333
cation from the I.D.B.I. can be changed or varied in any manner whatA
soever by the Central Government. The Central Government can
)
merely vary all or any of the conditions subject to the consent being
given. [363F]
4. There has been no general meeting of the company nor any
special resolution was taken for variation or reduction of the amount of
B
debentures to be issued as, required under Section 81 read with clause
IA of the Companies Act. It is also evident that no steps have been taken
to have the consent already granted by Controller of Capital Issues,
...>
varied or modified as required under the Capital Issues (Control) Act,
-1
..
1947. Merely because clause (v) of the consent order provides for
monitoring of the funds by I.D.B.I., .it does not mean nor it can be c
inferred automatically that the suggestion of the I.D.B.J. as regards the
funds requirement can be automatically given effect to without complying with the statutory requirements as provided in the provisions in the
Companies Act as well as in the Capital Issues (Control) Act. The
consent order is one and indivisible and as such the same cannot be
varied or vivisected without taking recourse to the provisions of the D
___,
statute. It is also well settled that the contract to purchase shares or
debentures is concluded by allotment of shares issued under the
prospectus and Section 72 of the Companies Act makes it clear that
allotment can only be made after the prospectus is issued. The Company is bound by the special resolution, the prospectus and the consent
of the Controller of Capital Issues. The power to pass a consent order is E
a statutory power vested in a statutory authority under the Capital
Issues Act and the Court has no power or jurisdiction to step into the
,..
shoes of the statutory authority and pass or approve a consent order
different from the statutory consent order given by the statutory
.,
authority. Moreover, the consent order cannot be varied by the Central
Government or Controller of Capital issues after the said order has F
been made public and third parties have acted on it and acquired rights
thereon. [363G-H; 364A-E]
State of Madhya Pradesh and Ors. v. Nandlal Jaiswal and Ors.,
..,,
[1986] 4 SCC 566 and Aaron's v. Twiss, [1896] A.C. 273, r<forred to .
G
Palmer's Company Law, 24th Edition by C.M. Schmitthoff,
pp. 332-333, referred to.
5. In the prospectus of Larsen & Toubro Ltd. it has been
mentioned that Larsen and Toubro Ltd. is part of Reliance Group. This
is in accordance with Section 2(g) of the Monopolies and Restrictive H
A
B
c
0
E
F
G
334
SUPREME COURT REPORTS
[1991] 2 S.C.R.
Trade Practices Act, 1969 which defines "interconnected undertakings", which is quite In accordance with this provision of Section 81(1A)
of the Companies Act, 1956. In the extraordinary general meeting of L
& T a special resolution was made providing for preferential allotment
of debentures to the equity shareholders of R.I.L. and R.P .L. So the
reservation of debentures of the value of Rs.310 crores of Public issue
for allotment to shareholders of R.I.L. and R.P.L. cannot be questioned.
In the prospectus of L & T Ltd, under Business Plants it has been
mentioned "that the requirement of funds of tbe company for the period
from 1st October 1989 to 31st March, 1992 including in respect of
Suppliers credit to be extended to customers under turnkey projects/
quasi-turnkey projects and for incurring capital expenditure on new
plant and equipment, normal capital expenditure on modernisation and
renovation, meeting additional working capital requirements and for
repayment of existing loan Hability, is estimated to be in the region of
Rs.1425 crores. The suppliers' credits Included Rs.510 crores to be
extended to RIL in respect of its Cracker Project. The funds requirement was intended to be met out of the present issue of Debentures to
the extent of Rs.820 crores and the balance would be met from internal
accruals by way of short term borrowings, and out of the proceeds cf
the previous Debenture Issue (Ill Series). It is seen from the letter dated
2.12.1988 issued by Government of India to M/s Reliance Industries
Ltd. endorsing a copy of Central Government's Order dated 25. U.1988
passed under Section 22(3)(e) of the Monopolies and Restrictive Trade
Practices Act, 1969 that it gave approval for the proposal of M/s
Reliance Industries Ltd. for setting up a cracker complex. The approval
of Central Government was made under Section 22(3)(d) of the
M.R. T .P. Act and communicated to M/s Reliance Petrochemicals Ltd.
by letter dated 30.5.1989. Consent was also given by the Central
Government under Section 22(3)(a) of the M.R.T.P. Act for the
establishment of a new undertaking for the manufacture of Acrylic
Fibre. Thus the consent given by Controller of Capital Issues cannot be
challenged on the ground that no M.R. T .P. clearance for the issue of
Capital under Section 21 or under Section 22 of the M.R.T.P. Act was
not given. [3560-H; 357A-B]
Narendra Kumar Maheshwari v. Union of India & Ors., J.T.
[1989] 2 S.C. 338, referred to.
6.1. The public financial institutions should be very prudent and
cautious in transferring the equity shares held by them not only being
guided by the sole consideration of earning more profit by selling them
H
but by taking into account also the factors of controlling the f"mances in
-
[
•
'
N. PARTHASARTHY v. CONTROLLER
335
the market in public interest. The public financial institutions while
transferring or selling bulk number of shares must consider whether
such a transfer will lead to acquisition of a large proportion of the
shares of a public company and thereby creating a monopoly in favour
of a particular group to have a controlling voice in the company if the
same is not in public interest and not congenial to the promotion of
business. [351F-G]
6.2. Considering the entire sequence of events and the manner in
which the financial institutions sold those 39 lakh equity shares of L & T
A
B
to BOB Fiscal Service which immediately after purchase of those shares
with the 30 crores of rupees given by 4 satellites of the Reliance Group
transferred those shares to Trishna Investment and Leasing Ltd., a satellite of Ambani Group though it had a capital of only Rs.44,000 and
C
money required for purchase was at least Rs.39 crores, leads to the
conclusion that such transfers had been made to help the Amhanis to
acquire the shares of L & T Company in a circuitous way. In the instant
case, all the circumstances taken together clearly spell some doubt
whether the transfer of such a huge number of 39 lakh shares by the
D
Public Financial Institutions was for public interest and was made
on purely business principles. However, since the financial institutions have already bought back all the 39 lakh shares from Trishna
Investment and Leasing Ltd. with the accretions thereon, nothing turns
on it. [350F-H; 351A-F]
L.l. C. of India v. Escorts Ltd., A.I.R. 1986 SC 1370, distinguished.
E
~
7. The Writ Petitions filed as Public Interest Litigation challenging the consent issued by the Controller of Capital Issues, are
maintainable.
S.P. Gupta & Ors. v. Union of India & Ors., [1982] 2 SCR 365;
Bandhua Mukti Morcha v. Union of India & Ors., [1984] 2 SCR 67 and
LIC of India v. Escorts Ltd., [1986] 1 SCC 264, relied on.
(Per Kasliwa/, J., Concurring)
F
G
1. So far as the relief of a writ of mandamus directing the respondents to recover 39 lakh shares of L & T and pay back the amounts
received therefor, does not survive in view of the shares having been
already bought back by the fmancial institutions from Trishna Investments. However, for future guidance it may be worthwhile to note that
public financial institutions while making a deal in respect of a very
H
336
SUPREME COURT REPORTS
[1991] 2 S.C.R.
A large number or bulk of shares worth several crores of rupees must also
make some inquiry as to who was the purchaser of such shares. Such
transactions should he made with circumspection and care to see that
the deal may not be to camouflage some illegal contrivance or in built
'
conspiracy of a privjlte monopoly house in order to usurp the management of a public company and which may not be in public interest. [371E-G]
B
State of Maharashtra v. Ramdas Shriniwas Nayak & Anr., [1983]
l SCR 8, referred to.
2. It cannot be said that there was nothing wrong or illegal even if
~
the action of Reliance Group was to corner or purchase all the shares of
,-
c
L & T, and even if done through intermediaries or surreptitiously, cannot
become illegal.
Babula/ Chaukhani v. Western India Theatres, AIR 1957 Cal.
709, disapproved.
D
3.1. No doubt any person or company is lawfully entitled to
purchase shares of another company in open market, but if the transaction is done surreptitiously with a ma/a fide intention by making use of
.-
some public financial institutions as a conduit in a clandestine manner,
such.deaJortransaction would be contrary to public policy and illegal. [372R]
E
3.2. In the instant case, all the circumstances taken together
clearly spell some doubt whether the transfer of such a huge number of
39 lakh shares by the public financial institutions was for public interest l
and was made on purely business principles. [372H; 373A]
_..,.,
4. As regards the preferential issue of Rs.3 JO crores in favour of
F
shareholders of the Reliance Group of companies is concerned, L & T
and Reliance Group of companies were interconnected within the meaning of Section 2(g) of the MRTP Act and it is permissible according to
law. The size of the issue was so large that it was considered necessary
to reserve a substantial portion of it in favour of the shareholders of
Reliance group of companies, in order to ensure the successful absorpG
tion of the entire issue. It may also be noted that the shareholders of the
....
Reliance Group of companies are numbering about 35 lakhs and they
represent the investor base of the entire shareholding community of the
country. Preferential issue per se is not a novel idea. The Controller of
Capital Issues has been permitting reservations for various categories
out of public issue based on the request made by companies after pasH
sing a special resolution in the general body meeting and there is no
. ...._,
N. PARTHASARTHY v. CONTROLLER
337
restriction on the shareholders of a company to offer shares of their
company to anybody after passing a special resolution as required
under Section 81(1-A)(a) of the Companies Act. The question of
bifurcating or vivisecting the consent order given hy CCI does not
sur.vive. The legal controversy thus raised that the consent given hy CCI
under the Capital Issues (Control) Act can he held valid or invalid as a
whole but not some part of it as valid and the rest invalid, does not
require to be decided in this case and the same is left open. [385A-F]
State of Madhya Pradesh v. Nandlal Jaiswal & Ors., [1987] 1 SCR
54; Life Insurance Corporation of India v. Escorts Ltd & Ors., (1985]
Suppl. 3 SCR 909; Jai Narain v. Surajmu!l, AIR 1949 F.C. 211 and
Anisminic Ltd. v. The Foreign Compensation Commission, (1969] 2
A.C. 147, referred to.
De Smith's Judicial Review of Administrative Action, 4th Edition,
p. 285, referred to.
A
B
c
5. It is the bounden duty of the CCJ before giving an order of D
consent for the issuance of any mega issue to keep in mind and to carry
out the Directive Principles of State Policy as enshrined in Article 39(h)
and (c) of the Constitution. It is no doubt correct that the CCI is not
required to probe indeptb into the technical feasibilities and financial
soundness of the proposed project• or the sufficiency or otherwise of the
security offered, but at the same time it has to see that the capital E
available for investment at •my given time has to be sized and allocated
according to the national priorities, a!ld in the changed 'ocio-economic
conditions of the colll!try to SOC!ml a balllnced investment of the 001mtry's
resources in industry, agrici!ltw:e and socifil services. [386D-H; 387A-B]
Narendra Kumar Maheshwari v. Union of India, JT 1989 2 SC F
238, explained.
6. It would not be in the interest of general investor public to
cancel the entire mega issue. Many transactions must have already
taken place on the floor of the stock exchange regarding the sale and
purchase of the debentures during this intervening period. Under the G
order of this Court dated 9.11.89, no restrictions were placed on L & T
in the matter of utilisation offunds. According to L & T against Rs.410
crores due on application and allotme11t, the L & T bas so far received
Rs.396 crores out of which approximately Rs.300 crores have been
utilised tow3rds issu• expenses, capital expenditure, repayment of loans
abd working capital in terms of the objects of the issue. The balance H
338
- SUPREME COURT REPORTS
(1991) 2 S.C.R.
A
available with the company is approximately Rs.96 crores only. There
is already a safegnard provided in the order of the CCI dated -15.9.89
that the fllnd ntillsation shall be with the approval or the IDBI. In any
case, the consent order given by CCI cannot be held invalid on any of - ~
the grounds of challenge raised by the jietitioners. In these proceed·
ings this Court is neither called upon nor is entitled to decide as to
B
how and in what manner the amount mopped up from the public by
this mega issue could be utilised or spent. Thus, the consent given
by CCI is valid. [JSSCD)
c
CIVIL.APPELLA1E JURISDICITON: Transferred Case No.
61of1989 etc. etc._
,-
(Under Article 139-A of the Constitution ofJndia).
Soli J.Sorabjee, Attorney General, Ashok Desai, Solicitor General,
N. Santosh Hegde, Addi. Solicitor General, B.R.L. Iyengar, F.S.
Nariman, T.R. Andhiyarujina, I. Chagla, Dr. Y.S. Chitale, Dr. L.M.
Singhvl, Tapas Ray, G. Ramaswamy, S.S. Ray, Ashok Sen, R.K.
D _ Garg, K. Parasaran, Ram Jethmalani, M.S. Ganesh, G.V. Shantaraju,
LR. Singh, Aspi Chinoy, Mahesh Jethmalani, Rajesh Kumar,
R. Karanjawala, Mrs. M. Karanjawala, Ram Dashandhi, N.P. Midha,
F.H.J. Talayarkhan, Gopal ,Subramaniam, R.F. Nariman, V.B.
Trivedi, S.C. Sharma, Bharat Sangal, Miss A. Subhashini, Rajan
Mahapatra, S.S. Shroof, S.A. Shroff, N. Roy, Mrs. Pallavi S. Shroff,
E
A.K. Ghose, A.M. Singhvi, Sandeep Junarkar, Shahid Rizvi, D.K.
Singh, Dalveer Bhandiiri, A.K. Sangal, K. Swami, N.D.B. Raju,
Vineet Kumar, H. Salve, Ms. Bina Gupta and Ms. Monika Mohil for
the appearing parties.
Onkar Seth appeared in person for the Intervenor.
F
The Judgment of the Court was delivered by
RAY, J. One Mr. Haresh Jagtiani, a practising advocate of the
High Court of Bombay and a policy-holder under the Life Insurance
Corporation of India and also holder of units issued by the Unit Trust
of India and Mr. Shamit Majumdar, a holder of shares and debentures
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of Larsen & Toubro Ltd. filed a writ petition being No. 2595 of 1989 in
the High Court of Judicature at Bombay against the Union of India
and others including the financial institutions questioning the legality
and validity of the consent given by the Controller of Capital Issues for
the proj:>osed issue of convertible secured debentures aggregating
Rs.820 crores by Larsen & Toubro Limited insofar as the~ said issue
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seeks to offer such convertible debentures to persons other than the
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N. PARTHASARTHY v. CONTROLLER [RAY, J.]
339
existing shareholders and members and the employees of Larsen &
Toubro Limited and praying for quashing the same as well as for a
declaration that the transfer of 39 lakh shares of Larsen & Toubro Ltd.
A
+
held by Unit Trust of India, Life Insurance Corporation of India,
General Insurance Company and its subsidiaries to Trishna Investment & Leasing Ltd. through the instrumentality of BOB Fiscal
Services Ltd. is arbitrary, illegal, ma/a fide and a fraud on the statutory
B
powers of the respondents and is clearly ultra vires of Article 14 and
39(b) and (C) of the Constitution on the allegations that in or around
the middle of the year 1988 the respondents entered into a secret
agreement by which a large chunk of the equity shares of Larsen &
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Toubro Ltd., the largest engineering company in India, would stand
surreptitiously divested by the respondents in favour of the Ambani .
Group, the third largest monopoly house in India. This divestment was C
achieved not directly but, indirectly and with a motive to conceal the
real nature of the deal by interpolating BOB Fiscal Services Ltd. (a
wholly owned subsidiary of Bank of Baroda) as the conduit for the
transfer of shares from the public financial institutions to the satellite
companies of the Ambani Group.
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The petitioners also alleged in the petition that pursuant to this
secret agreement, the following events took place in quick succession:
In or around August 1988, four satellite companies of Reliance
Group, namely Skyiab Detergents Limited, Oskar Chemicals Private
E
Limited, Maxwell Dyes and Chemicals Private Limited and Pro-lab
Synthetics Private Limited, gave a total deposit of Rs.30 crores to an
yinvestment company associated with Ambanis who, in turn, deposited
this amount with BOB Fiscal Services Ltd., a wholly owned subsidiary
of Bank of Baroda, a nationalised bank.
BOB Fiscal Services Ltd., which had been formed only three
months earlier acquired either immediately before the above deposit,
or immediately subsequent thereto, 33 lakh equity shares of Larsen &
Toubro from UTI, LIC, GIC and its subsidiaries. Later, in January,
1989 it acquired a further 6 Jakh shares from the LIC.
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Within weeks after the deposit by the four companies mentioned
above, Trishna Investments and Leasing Limited, another satellite
company of the Ambani Group, paid the requisite amounts for the
acquisition of the said 33 lakh shares in Larsen & Toubro from BOB
Fiscal Services Ltd. to the latter through a stock broking firm and
immediately thereafter the money advanced by the above four comH
340
SUPREME COURT REPORTS
[1991] 2 S.C.R.
A parries was returned by BOB Fiscal Services Ltd. through the investment company associated with Ambanis, which was earlier used as a
conduit for making the deposit from the four satellite companies of
Reliance Group.
The deposit by the four companies was made immediately after
B the divestment of the shares by the respondents was okayed by the
highest level in the Government and the deposit was returned
immediately after the Ambani Group was able to divert moneys taken
by them in the name of Reliance Petrochemicals Ltd. by the issue of
convertible debentures of the order of Rs.594 crores.
c
D
The said 33 lakh shares were registered in the name of BOB
Fiscal Services Ltd. in the Register of Members of Larsen & Toubro
Ltd. on 11.10.1988 and later, on 6.1.1989, a further 6 lakh shares were
registered in the name of the BOB Fiscal Services Ltd. on any valuation based on market values of Larsen & Toubro Ltd. shares at the
relevant time, the value of 39 lakh shares would cost not less than
Rs.45 crores.
On the very day of the registration of the shares in the name of
BOB Fiscal Services Ltd., namely, I 1.10.1988, two nominees of the
Ambani Group, Mr. Mukesh Ambani and Mr. M. Bhakta, a solicitor
of Reliance Industries, joined the Board of Larsen & Toubro Ltd. and
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were co-opted as additional directors.
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Subsequently, on 30th December, 1988, Mr. Anil Ambani
another nominee of the Ambani Group was also co-opted on the
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Board of Larsen and Toubro Ltd., as an additional director.
On 6th January, 1989, the entire 39 lakh equity shares of Larsen
and Toubro Ltd. registered in the name of BOB Fiscal Services
Limited (of which 6 lakh shares tansferred to BOB Fiscal Services Ltd.
by UC was registered in the name of BOB Fiscal Services Ltd. only
on 6.1.89). were transferred to Trishna Investments and Leasing Ltd.,
which is a satellite company of the house of Ambanis.
Thus, BOB Fiscal Services merely acted as a conduit for funneling shares from the public financial institutions to the Amhani group
and this interpolation of BOB Fiscal Services was necessitated to get
over the legal impediments in the way of selling any part of the controlling shares held by public financial institutions to private parties by
private deals except to those already in management and at a price
N. PARTHASARTHY v. CONTROLLER [RAY, J:J
341
equal to two times the market price.
The Chairman of Bank of Baroda, Mr. Premjit Singh, is closely
linked to the house of Ambanis through the business of his son Harinder Singh. BOB Fisc~I Services Ltd. is the wholly owned subsidiary of
Bank of Baroda and it was incorporated only two months preceding
A
the acquisition of Larsen & Toubro Ltd. shares by BOB Fiscal Services B
Ltd. ln fact, the acquisition of L & T shares for the Ambani Group for
which it had acted as a conduit is the first business of BOB Fiscal
Services Ltd.
Subsequently, on 28th April, 1989, Mr. Dhirubhai Ambani, the
Chairman of Reliance Group, became the Chairman of Larsen &
Toubro Ltd., thus completing the process of take-over of the manageC
ment of Larsen & Toubro by the Ambani Group.
By this process, the public financial institutions which had virtual
ownership and control of Larsen & Toubro Ltd. holding about 40%
shares of the company (with no other individual shareholder holding D
more than 2% ), voluntarily diluted their holdings to 33% and parted
with approximately 7% to the house of Ambanis and made them the
single largest private sharesholder. This was done, in the submission of
the petitioners, deliberately and by a design to legitimise the eventual
take-over of Larsen & Toubro by the Ambanis. While the petitioners
challenge the divestment of 7% ownership rights in Larsen & Toubro E
Ltd. and the management of the company to the Ambani Group, the
immediate and proximate provocation for this writ petition is the proposed issue of convertible debentures by Larsen & Toubro Ltd. now
under the management of the house ofAmbanis to raise Rs.820 crores
from stock market.
The proposed issue has the effect of aggravating and perpetuating, and irretrievably divesting and transferring the ownership, of
Larsen & Toubrq in favour of the Ambani Groui). rfhe concealed and
covert intent which is manifest in the direct effect of the proposed Issue
F
is to make Larsen & Toubro Ltd. a complete family owned and a·
decisively family controlled Industrial Corporation-whereas the G
openly declared policy of the Government is to force the reverse viz.
professionalise the existing family controlled companies. By the proposed issue, the house of Ambanis and the shareholders, debentureholders and employees of Reliance Industries and Reliance Petrochemical Industries Ltd. would collectively hold 35.5% of the ownership rights in Larsen and Toubro and will be single largest block or
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SUPREME COURT REPORTS
[ 1991] 2 S.C.R.
A group in the company. This preferred group which is not in law
entitled to any issue of shares from Larsen & Toubro Ltd., has been
chosen to be the preferential .beneficiaries of the scheme under which
they would get shares in Larsen & Toubro Ltd. at Rs.60 per share
when the share holders of Larsen & Toubro Ltd. themselves (who, by
law, are entitled to further issue of shares from Larsen & Toubro Ltd.)
B would be issued Larsen & Toubro shares under the convertible
debentures issued in April 1989 only at Rs.65 per share. Thus, as
against 35.5% holding of Ambani-Reliance Group, the public
finance bodies, which held 40% shares before they diluted their holdings in favour of the Ambani group, would have had their holding
further diluted to only 22.9% as a result of the present issue. In other
C words, by approving the terms of the proposed issue the public financial institutions have agreed to a further dilution of their holdings from
32.8% to 22.9% without any consideration whatsoever for agreeing to
such reduction and to pass on their vested rights u/s 81 of the Companies Act to pre-emptive allotment of shares in Larsen & Toubro to
the members, debentureholders and employees of Reliance Industries
D Ltd. and Reliance Petrochemicals Ltd. It is in this background significant that the preferential allotment to the shareholders, debentureholders and employees of the house of Ambanis who have no statutory
right, offers to them shares in Larsen & Toubro Ltd. at a premium of
only Rs.50 per share, while in the fully convertible debentures issue
made by Larsen & Toubro Ltd. in April/May, 1989 the existing shareE holders of Larsen & Toubro were given conversion rights at a premium
of Rs.50 per share in the first conversion and Rs.55 per share in the
second conversion i.e. Rs.5 more than what the Reliance Group is
called upon to pay. It means that while the existing shareholders of
Larsen & Toubro were paying for their own shares a premium of Rs.50
or Rs.55 per share, new group of shareholders, debentureholders and
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employees of the house of Ambanis would be getting Larsen & Toubro
shares at a premium of only Rs.50. It means that, by making extraordinay favour to a totally different group which is not entitled to
Larsen & Toubro shares, the Ambani group is creating a favoured
lobby of their own, almost a ciao, who are already their shareholders,
debeotureholders and employees to act as a group to own and control
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Larsen & Toubro Ltd. This is a device to perpetuate and aggravate
their own decisive control over Larsen & Toubro, to which the public
financial institutions are willing and enthusiastic parties inside the
Board room and in the general meeting of Larsen & Toubro Ltd.
In the facts and circumstances the petitioners pleaded that they
H are entitled to a declaration that the divestment by the respondents of
N. PARTHASARTHY v. CONTROLLER [RAY, J.]
343
the controlling shares in Larsen & Toubro to the house of Ambanis in
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a secret and circuitous arrangement is arbitrary, illegal, ma/a fide and a
4
fruad on the statutory powers of the respondents. It was further
pleaded that pursuant to this secret arrangement the financial institulions such as the UT!, LIC, GIC and its subsidiaries divested themselves of 7% shares of Larsen & Toubro Ltd. in favour of Ambani
Group in an illegal and arbitrary manner as a result of which the
B
Ambani Group became the single largest private shareholder. This
paved the way for the said private monopoly group and the Government to rationalise the take-over of the management of Larsen &
_,
Toubro Ltd. by the Ambani Group with the active connivance and
support of the Central Government.
The modus operandi adopted for the transfer was as under:
c
(a) In the month of May 1988, Bank of Baroda of which Mr.
Premjit Singh is the Chairman, forms a subsidiary for merchant
banking under the name and style of BOB Fiscal Services P. Ltd.
This Company became a public company u/s 43A of the ComD
panies Act 1956, in June, 1988. Mr. Harjit Singh, son of Premjit
. ...._.
Singh, owned a company 'Krystal Poly Fab. Ltd.' whose only
business is texturising of partially oriented yam from Reliance
Industries Ltd. and the supply of texturised yam back to
Reliance Industries Ltd. or its nominees.
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(b) On 5th August, 1988, four satellite companies of the House
of Ambanis, viz. SKYLAB Detergents Ltd., OSCAR Chemicals
...
Pvt. Ltd., MAXWELL Dyes & Chemicals Pvt. Ltd. and PREI
LAS Synthetics Pvt. Ltd. gave a total deposit of Rs.30 crores to
~
an investment company, associated with Reliance who, in tum,
deposited the same amount with BOB Fiscal Services.
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( c) Either immediately preceding this deposit or immediately
thereafter, BOB Fiscal Services acquired 33 lakh equity shares in
Larsen & Toubro Ltd. from the UT!, LIC and GIC and its sub-
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sidiaries. Later, it acquired a further 6 lakh shares in Larsen &
Toubro Ltd. from the LIC. The manner in which the transfer had G
been effected by the public financial institutions and the bulk
sale amounting to about 7% of the then share capital of Larsen &
Toubro Ltd. left no one in doubt about what the financial institulions intended to do, viz. they intended to shed a vital seven per
cent of the ownership rights held by them in Larsen & Toubro
Ltd.
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SUPREME COURT REPORTS
(1991] 2 S.C.R.
(d) In July, 1988 Reliance Petrochemicals Ltd. of the Ambani
Group had issued convertible debentures for Rs.594 crores to
public and others and had raised a vast sum of monies as subscription. The petitioners understand that as soon as the above
funds became available to the Ambani group for employment, a
part of it was diverted for acquisition of Larsen & Toubro Ltd.
shares not directly in the name of Reliance Industries Ltd. or
Reliance Petrochemicals Ltd. but in the name of faceless,
benami concerns of the Ambani group with virtually no financial
standing of their own.
(e) Thereafter on October 11, 1988 the 33 lakh equity shares of
Larsen & Toubro Ltd. acquired by BOB Fiscal Services Ltd.
were registered in the register of members of Larsen & Toubro
Ltd. in Folio No. B 69567 at pages 1851 to 1858. These shares
had been transferred by LIC, UTI, GIC and its subsidiaries to
BOB Fiscal Services Ltd.
(f) On the same day two nominees of the A~bani Group Mr.
Mukesh Ambani and Mr. M.L. Bhakta, a Solicitor of Reliance
Industires Ltd., who are also directors of Reliance Industries
Ltd. and Reliance Petrochemicals Ltd., were co-opted on the
Board of Larsen & Toubro Ltd.
(g) It is evident from the above events that the sate to BOB
Fiscal Services Ltd. by the financial institutions was accepted by
all parties concerned to be a sale to the Ambani Group itself.
Otherwise there is no provocation or justification for the financial
institutions to propose or to support appointment of Mr. Mukesh
Ambani and Mr. M.