# NARENDRA KUMAR MAHESHWARI v. UNION OF INDIA & ORS

- **Citation:** [1989] 3 S.C.R. 43
- **Court:** Supreme Court of India
- **Decided:** 1989-05-03
- **Bench:** Sabyasachi Mukharji Ands. Ranganathan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/narendra-kumar-maheshwari-v-union-of-india-ors-10452
- **Pages:** 85

## Headnote

Capital Issues (Control) Act, I947/Capital Issues (Exemption)
Order, 1969: Sections 2, 3 and 12-Controller of Capital Issues-Scope
of power and exercise of function in according sanction-Extent of.
Companies Act, 1956: Section 8;](5)-'Compulsorily convertible
debentures'-Floating charge-Debt equity ratio-What are-Whether
a Company can deal with its property without the permission of
debenture holders.
Practice and Procedure: Grant of Interim Orders-Regard to be
A
B
c
had to principles of comity of courts administering same laws throughD
out the country.
Reliance Industries Ltd. (RIL) and Reliance Petrochemicals
Industries Ltd. (RPL) are inter-connected and represented Companies
in the large industrial house known as Reliance Group. RIL had promoted RPL. RPL was incorporated on 11.1.1988 and has been a cent
E
percent subsidiary of RIL. It was claimed that RPL would set up the
largest petrochemical complex in India with foreign collaboration. RPL
proposed to issue convertible debentures for raising capital for the
project.
The Controller of Capital Issues (CCI), who functions under the
F
Capital Issues (Control) Act, 1947 had, on 15th September, 1984 by
way of press release issued certain non-statutory guidelines for
approval of issue of secured convertible and non-convertible debentures. These guidelines were subsequently amended on 8.3.1985.
Guidelines were also given by the CCI for issue of convertible cumulative preference shares, and for employees stock option scheme.
G
RPL had, on 4.5.1988, made an application to CCI for issue of
debentures of the face value of Rs.200 crores fully convertible into
equity shares on the following terms:
A sum of Rs. JO being 5% of the face value of each debentures by
H
43
44
SUPREME COURT REPORTS
[1989] 3 S.C.R.
A
way of first conversion immediately into one equity share at par on
allotment;
(ii) A sum of Rs.40 being the 20% of the face value of each
debenture by way of second conversion after three years but before four
years from the date of allotment at a premium to be fixed by the Con8
!roller of Capital Issues;
c
(iii) The balance of Rs. ISO representing 75% of the face value of
each debenture as third conversion after five years1 but not later than
seven years from the date of allotment at a premium to be fixed by the
Controller of Capital Issues.
The CCI accorded his sanction for the issue of debentures on
4. 7. J 988. However, the sanction was amended on 19th July, 1988. The
amendment put a non-transferability condition on the preferential
share-holders of RPL. It was limited to the corporate sharesliolders of
RIL and relaxed for individual share-holders of RIL. The amendment
D also stipulated that the Company should obtain prior approval of the
Reserve Bank of India, Exchange Control Department, for the allotment of debentures to the non-residents as required under the Foreign
E
· Exchange Regulation Act, 1973. On 26th July 1988, there was another
amendment which restricted the transfer of shares allotted to the
employees of RPL and RIL.
The consent orders issued by the CCI were challenged in various
High Courts, by way of writ petitions and a suit. Some High Courts
issued injunctions restraining the issue of the debentures.
This Court, on 19th August, 1988, restrained the aforesaid
F
issuance of injunctions by the High Courts, and issued directions for the
issue of debentures. The cases pending in various High Courts were
transferred to this Court.
G
In these transferred cases the consent orders of the CCI were
challenged mainly on the grounds that:
Despite the fact that RPL did not fulfil the requirements of a
proper application and the necessary consent and approval, RPL's
application was entertained and processed by the CCI with undue
expedition and without application of mind;
H
The guidelines issued by the CCI himself were deviate:! from;
NARENDRA KUMAR v. U.0.1.
45
-,,
The CCI had processed the application of RPL in a hurry, within
A
"'\. ,,
two months;
The CCI did not take

## Text

_Characters 0–39,899 of 225,928. This is a partial read: ask again with offset=39899 for what follows._

(
NARENDRA KUMAR MAHESHWARI
v.
UNION OF INDIA & ORS.
MAY 3, 1989
[SABYASACHI MUKHARJI ANDS. RANGANATHAN, JJ.]
Capital Issues (Control) Act, I947/Capital Issues (Exemption)
Order, 1969: Sections 2, 3 and 12-Controller of Capital Issues-Scope
of power and exercise of function in according sanction-Extent of.
Companies Act, 1956: Section 8;](5)-'Compulsorily convertible
debentures'-Floating charge-Debt equity ratio-What are-Whether
a Company can deal with its property without the permission of
debenture holders.
Practice and Procedure: Grant of Interim Orders-Regard to be
A
B
c
had to principles of comity of courts administering same laws throughD
out the country.
Reliance Industries Ltd. (RIL) and Reliance Petrochemicals
Industries Ltd. (RPL) are inter-connected and represented Companies
in the large industrial house known as Reliance Group. RIL had promoted RPL. RPL was incorporated on 11.1.1988 and has been a cent
E
percent subsidiary of RIL. It was claimed that RPL would set up the
largest petrochemical complex in India with foreign collaboration. RPL
proposed to issue convertible debentures for raising capital for the
project.
The Controller of Capital Issues (CCI), who functions under the
F
Capital Issues (Control) Act, 1947 had, on 15th September, 1984 by
way of press release issued certain non-statutory guidelines for
approval of issue of secured convertible and non-convertible debentures. These guidelines were subsequently amended on 8.3.1985.
Guidelines were also given by the CCI for issue of convertible cumulative preference shares, and for employees stock option scheme.
G
RPL had, on 4.5.1988, made an application to CCI for issue of
debentures of the face value of Rs.200 crores fully convertible into
equity shares on the following terms:
A sum of Rs. JO being 5% of the face value of each debentures by
H
43
44
SUPREME COURT REPORTS
[1989] 3 S.C.R.
A
way of first conversion immediately into one equity share at par on
allotment;
(ii) A sum of Rs.40 being the 20% of the face value of each
debenture by way of second conversion after three years but before four
years from the date of allotment at a premium to be fixed by the Con8
!roller of Capital Issues;
c
(iii) The balance of Rs. ISO representing 75% of the face value of
each debenture as third conversion after five years1 but not later than
seven years from the date of allotment at a premium to be fixed by the
Controller of Capital Issues.
The CCI accorded his sanction for the issue of debentures on
4. 7. J 988. However, the sanction was amended on 19th July, 1988. The
amendment put a non-transferability condition on the preferential
share-holders of RPL. It was limited to the corporate sharesliolders of
RIL and relaxed for individual share-holders of RIL. The amendment
D also stipulated that the Company should obtain prior approval of the
Reserve Bank of India, Exchange Control Department, for the allotment of debentures to the non-residents as required under the Foreign
E
· Exchange Regulation Act, 1973. On 26th July 1988, there was another
amendment which restricted the transfer of shares allotted to the
employees of RPL and RIL.
The consent orders issued by the CCI were challenged in various
High Courts, by way of writ petitions and a suit. Some High Courts
issued injunctions restraining the issue of the debentures.
This Court, on 19th August, 1988, restrained the aforesaid
F
issuance of injunctions by the High Courts, and issued directions for the
issue of debentures. The cases pending in various High Courts were
transferred to this Court.
G
In these transferred cases the consent orders of the CCI were
challenged mainly on the grounds that:
Despite the fact that RPL did not fulfil the requirements of a
proper application and the necessary consent and approval, RPL's
application was entertained and processed by the CCI with undue
expedition and without application of mind;
H
The guidelines issued by the CCI himself were deviate:! from;
NARENDRA KUMAR v. U.0.1.
45
-,,
The CCI had processed the application of RPL in a hurry, within
A
"'\. ,,
two months;
The CCI did not take into account the fact that RIL had earlier
issued debentures for manufacture of identical products;
The CCI failed to note that RPL did not have the necessary
licences, consents and approvals, from the relevant departments of the
Government of India;
.....____
The CCI failed to consider the financial soundness and feasibility
of the project of RPL;
--r ·
The CCI did not take adequate care to examine the terms of the
issue and had blindly accepted the terms as proposed by RPL;
RPL in its brochures has misled the public by describing the
debentures as fully secured convertible debentures;
The security for the debentures was inadequate;
RPL has been permitted to create securities which would have
priority over the securities available to the present debenture holders
and without their consent;
RPL has misled the public in that in its prospectus it had stated
that security would be provided to the satisfaction of the trustees;
The CCI had failed to examine whether RIL had misused the
"'-- funds raised on its debentures;
There has been a discrimination in favour of RIL in that RIL
would be entitled to allotment of shares of the face value of Rs.57 .50
crores, whereas only 5% of the investment of the debenture-holders
could be converted;
B
c
D
E
F
-+
Whereas RIL 's loan of Rs.SO crores would be converted into shares
G
at par, the debenture holders would have to pay premium to be fixed by
the CCI at the time of second conversion of 20% of the debentures; and
In the application filed by RPL, no shares were earmarked for the
employees of RIL and RPL, but ultimately it was done.
H
46
SUPREME COURT REPORTS
[1989] 3 S.C.R.
On behalf of the petitioners, it was contended inter alia that the
A issne of the debentures in question was detrimental to public interest,
and that public interest had been ignored.
On behalf of Respondents it was argued that the sanction issued
by the CCI had been genuine and valid, and that no irregularity had
B been committed. It was submitted that it was a misconception that the
CCI had not followed his own guidelines relating to sanction of the issue
of the debentures, and it was incorrect to say that there had not been
proper security.
c
Dismissing the writ petitions and the suit, this Court,
HELD: I. I. The CCI functions under the Capital Issues
(Control) Act, 1947, an Act to provide for control over the issue of
capital. The purpose of the Act must be found from the language used.
The scheme and the language used, strictly speaking, do not indicate
any positive role for the CCI in discharging his functions in respect of
o grant of sanction. But it has to be borne in mind that he is a part of
State instrumentalities committed to the endeavours of the constitu·
tional aspiration to secure justice-social and economic-and also
under Article 39(b) & (c) of the Constitution to ensure that the ownership and control of the material resources of the community are so
distributed as to best subserve the common good and that the operation
E of the economic system does not result in concentration of wealth and
means of productior. to the common detriment. Yet, every instrumentality and functionary of the State must fulfil its own role and should not
trespass or encroach/entrench upon the field of others. Progress is
ensured and development helped if each performs his role in the
common endeavour. [90B; J24F-H; 125A]
F
1.2. In the changed socio-economic conditions of the country one
who is charged to ensure capital-investment has to perform a social
role in capital formation and to protect the interest of the capital
market, and to oversee the growth of industrialisation and investment
in such a manner as to ensure employment and demand in the national
G
economy, to prevent wasteful investment and to promote sound methods
of corporate finance. In recent years, there has been a vast increase in +
the number of members of public who have surplus money to invest.
The size of the issues has assumed macro proportions and the type of
investments are also more sophisticated. Entrepreneurs with expert
legal assistance could easily trap unwary investors and the development
H
of a public interest lobby that can scrutinise issues carefully and advise
prospective investors may be desirable. [125A, B, F, G]
NARENDRA KUMAR v. U.0.1.
47
A
1.3. The guidelines are only a guide and nothing more. The application of mind by the CCI before sanction must be in the perspective for
which he is enjoined by the Act. He must endeavour to secure a
balanced investment of the country's resources in industry, agriculture
and social services. The Controller should perform the role of social
control and fulfil the social purpose in conjunction with other authorities and functionaries. It is necessary for him in the discharge of his
B
functions to ensure that there is not too much concentration of particular industries in particular areas, and that there is a scientific
development and proper investment in key and.core projects. [125C-D I
1.4. The duties of the CCI have to be construed in the context of
the above, particularly when there is no clear cut delineation of their
scope in the enactment. This is also reinforced by the expanding scope C
of the guidelines issued under the Act from time to time and the increasing range of financial instruments that enter the market. The responsibilities of the CCI in this direction should not be widened beyond
the range of expeditious implementation of the scheme of the Act and
should, atleast be restricted and limited to ensuring that the issue to D
which he is granting consent is not, patently and to his knowledge, so
manifestly impracticable or financially risky as to amount to a fraud on
the public. While it is true that some procedure may have to be evolved
to ensure that the CCI gets the benefit of the comments, suggestions and
objections from the public before arriving at his decision whether to
grant consent or not, and if so, on what terms and conditions, it will be E
too cumbersome to have a provision that the details of every proposed
application for consent should be publicised to the maximum extent by
the CCI, that objections and comments from the pYblic should be called
for, that there should be public hearing by the CCI and that he should
pass a reasoned order granting or withholding consent. That would
delay the whole process of approvals which should be as expeditious as F
possible. [9JC-E; 125G-H; I26A·Bl
1.5. The CCI has also a role to play in ensuring that public
interest does not suffer as a consequence of the consent granted by him.
To go beyond this and require that the CCI should probe in depth into
the technical feasibilities and financial soundness of the proposed proG
jects or the sufficiency or otherwise of the security offered and such
other details may be to burden him with duties for the discharge of
which he is as yet ill-equipped. [9JD-F]
1.6. Being non-statutory in character, the guidelines are not judicially enforceable. A policy is not law. A statement of policy is not a
H
A
B
c
D
E
48
SUPREME COURT REPORTS
[1989] 3 S.C.R.
prescription of binding criterion. The competent authority might
depart from these guidelines where the proper exercise of his discretion
so warrants. In the instant case, the statute provided that rules can be
made by the Central Government only. And according to s. 6(2) of the
Act, the competent authority has the power and jurisdiction to condone
any deviation from even the statutory requirements prescribed, under
sections 3 and 4 of the Act. The CCI applied his mind to the facts of this
case and the factors in general. The CCI did not act malafide or on
extraneous consideration. I 122D-F; 1248-D]
Fernandez v. State of Mysore, [1967) 3 SCR 636; R. Abdullah
Rowther v. State of Tansport, etc., AIR 1959 SC 896; Dy. Asst. Iron &
Steel Controller v. Manekchand Proprietor, !1972) 3 SCR I; Andhra
Industrial Work v. CCI & E, [1975) I SCR 321; K.M. Shanmugham v.
S.R. V.S. Pvt. Ltd., [1964) I SCR 809; Sagnata Investments Ltd. v.
Norwich Corpn., [1971) 2 QB 614; British Oxygen Co. v. Board of
Trade, [197l]AC610,reliedon.
Ramanna Dayaram Shetty v. International Airport Authority,
[1979] 3 SCR 1014; Motilal Padampat Sugar Mills v. Uttar Pradesh,
[!979) 2 SCR 641; Ex P. Khan, [1981] I All. E.R. 40; IRCv. National
Federation, [1982] AC 617; Reqina v. Preston Supplementary, [1975) I
WLR 624; Council of Civil Service Unions & Others v. Minister for the
Civil Service, [1985] AC 407, referred to.
Foulkes' Administrative Law, 6th Edn. pp 181to184, referred to.
2. As regards the contention that the sanction of the CCI was
accorded with undue haste and favouritism, in the first place, an application of this type is intended to be disposed of with great expedition. In
F
a project of the type proposed to be launched by the petitioner, passage
of time may prejudicially atlTect the applicant and it is not only desirable
but also necessary that the application should be disposed of within as
short a time as possible. It is, therefore, difficult to say that the period
of two months taken in granting consent in the present case is so short
that an inference of haste must follow. Secondly, on behalf of the Union
G
of India, a list of various applications received and disposed of by the
office of the CCI between September, 1987 and September, 1988 has been
produced to show that, generally speaking, these applications are disposed of within a month or two. It is true that none of these issues is of
the same colossal magnitude as the present issue. Nevertheless, the CCI
could hardly keep the application pending merely because the amount
H
involved is heavy. It is not possible therefore to say merely from the
NARENDRA KUMAR v. U.0.1.
49
--./ '
short span of time that there was a hasty grant of consent in the present
case. [73G-H; 74A-C]
A
3.1. The consent of the CCI was not accorded in ignorance of the
facts pertaining to the G series of RIL debentures. The application for
--(
consent makes it clear that the petitioner company is a new company
promoted by RIL and that RIL was promoting this company to manufac·
B
tore High Density Polyethylene (HDPE), Poly Vinyl Chloride PVC and
Mono Ethylene Glycol (MEG). The application refers to the fact that the
total· cost of the project was expected to be Rs.650 crores and that this
~-
cost had been approved earlier in 1985. Considering that RPL had come
into existence only on ll.1.1988, this was a clear indication that the
projects for which the debenture issue was being proposed were pro- c
y
jects which had been mooted even by the RIL as early as 1985. Again in
the detailed application form submitted by the RPL it has been
mentioned that the RIL had already obtained approval of the Central
Government for implementation of the aforesaid projects under the
MRTP Act. In part C of the application form it has been mentioned that
the promoter company had made necessary applications for endorseD
ment in favour of the company of the Letter of Intent/Industrial
Licences already issued by the Central Government under the Indus-
•
tries (Development & Regulation) Act, 1951, in the name of the holding
,)
..
company, viz., RIL. It is, therefore, extremely difficult to agree that the
fact of issue of the earlier series of debentures by the RIL or the
purposes thereof could have escaped the notice of the CCI, particularly,
E
when it is remembered that the issue of G series of debentures by the RIL
was quite recent and had also attracted a lot of publicity. [74D-H; 75C-D]
3.2. The CCI was not performing the role of a social mentor
~.
taking into account the purpose of RIL. If RIL has misutilised any of its
;
funds or the funds had not been utilised for G-series, then RIL would be F
responsible to its shareholders or to authorities in accordance with the
relevaut provisions of the Companies Act, 1956. This aspect does not
enter into sanctioning the capital issue for the new project in accordauce with the guidelines. Even if RIL and RPL have to be treated as one
for this purpose and the grant of consent for earlier debenture issues in
favour of RIL are to be taken into account in judging the necessity of G
·+
the issues, there is no illegality or irregularity in the grant of consent to
RPL. RIL had not been able to utilise any part of the 'G' series of
debentures on the MEG project as there had been a cost overrun and it
was decided to have a wholly-owned subsidiary. Hence the projects
are those of the RIL to be implemented by RPL. The additional
finances were needed for the extension, expansion and diversification of H
•
A
B
c
50
SUPREME COURT REPORTS
[1989] 3 S.C.R.
the projects originally envisaged. This is one of the objects for which a
debenture issue is permissible under the guidelines. [IOIF-H; 102A, B]
4.1. So far as HDPE is concerned, it appears that there was a
valid licence; and it may be mentioned that on 24th August, 1985
pursuant to an application made by RIL under section 22(3)(a) of the
MRTP Act, the Govt. granted approval for the establishment of a new
undertaking for manufacture of HDPE. [77F]
4.2. Regarding foreign collaboration, an application was made
by RIL in I984 for approval of foreign collaboration with M/s Du Pont
Inc. Canada, for manufacture of HDPE. The approval was given and
the validity was extended and the foreign collaboration approval was
endorsed in favour of RPL on 12th October, 1988. Similar other consents were there. Finally, capital goods clearance was endorsed in
favour of RPL for the PVC project on 12th August, 1988. Capital goods
clearance was also endorsed in favour of RPL for HDPE project on 23rd
August, 1988. Thus, it will be seen that all the basic groundwork had
D
already been done by the RIL. [77G, H; 78A]
4.3. On 16th June, 1987 by a Press Note issued by the Deptt. of
Industrial Development in the Ministry of Industry of the Govt. of India
declared that wnere a transferee Company is a fully owned subsidiary
,,..\_
of the Company holding the Letter of Intent or licence, the change of
E
the Company implementing the project would be approved. It is in the
light of this that the Board of RIL on 30th December, 1987 passed a
resolution to incorporate a JOO% subsidiary ·Company whose main
objects were to implement the licences/Letters of Intent received by RIL
and to carry on the activities relating to production and distribution.
The resolution approved the name of the Company as RPL. On 11th
_'TF
January, 1988 the RPL was incorporated and the Certificate of
'
Incorporation was issued. Thereafter, on 12th January, 1988 letters
were written by RIL for endorsement of licences/Letters of Intent in
favour of RPL. The certificate of commencement of business was thereafter issued. [78B-E]
G
4.4. The Press Note is clekr that the transfers from.one company
to an allied company were considered unexceptionable except where
-}-
trafficking in licences is intended. In this situation the change of name
from RIL to RPL, of the licences, letter of intent and other approvals
was only a matter of course and much importance cannot be attached to
the fact that CCI did not insist upon these endorsements being obtained
H
even before the letter of consent is granted. In any event the letter of
NARENDRA KUMAR v. U.0.1.
consent is very clear. Clause (h) of the conditions attached to the consent letter makes it clear that the consent should not be construed as
exempting the company from the operation of the provisions of the
Monopolies & Restrictive Trade Practices Act, 1969, as amended.
Clause (c) makes it clear that it is a condition of this consent that the
company will be subject to any measures of control, licensing, or
~
acquisition that may be brought into operation either by the Central or
any State Government or any authority therein. Under clause (t) the
approval granted is without prejudice to any other approval/permission
•
that may be required to be obtained under any other Acts/laws in force.
_.-Having regard to the above and also to the terms and conditions of the
consent letter, the grant of consent itself being conditioned on RPL
obtaining the necessary approvals, consents and permissions before
r
embarking on the project, there was no impropriety in the CCI granting the consent without waiting for the formal endorsement of the
various licences, letters and approvals in favour of RPL. Moreover,
CCI is aware of the progress of the various applications made by the
company. The Controller is also aware that the ICICI bad looked into·
the financial soundness and feasibility of the project and there is material to show that the comments of the ICICI were made available to
him. When a project is being appraised by the institution like the ICICI
and when the CCI is also aware, by reason of the participation of his
~~ representatives at the meetings of the Department of Industry and the
Department of Company Affairs about the stage or outcome of the
proposals made under the IDR and MRTP Acts, it is clear that the CCI
did not overlook any crucial aspect and that his grant of consent in
anticipation of the necessary transfers to the RPL was based on a practical appraisal of the situation and fully in order. [78F-H; 79A, B; 808-D]
A
B
c
D
E
5. There has been sufficient compliance with the guidelines on the
quantum of issue, debt-equity ratio, interest rate and the period of F
redemption. There was sufficient security for the debentures in the facts
and circumstances of this case. The preference in favour of sharesholders of RIL was justified and based on intelligible differentia.
Indeed, if one considers the role of the CCI, he is primarily concerned to
ensure a balanced investment policy and not to guarantee the solvency
or sufficiency of the security. Most of the criticisms directed against G
deviation from guidelines were misplaced. [94G, H; 95A, B]
6.1. The discrimination alleged is on two grounds. The first is
that RIL is entitled straightway to the allotment of shares of the face
value of Rs.57 .SO crores whereas only 5% of the investment by the
debenture holders can be converted into shares at par simultaneously
H
52
SUPREME COURT REPORTS
[1989] 3 S.C.R.
A
with the issue. The second is that a loan of Rs.SO crores advanced by
RIL to RPL will be converted into shares at par at the end of 3 years
whereas the debenture holders will have to pay a premium even for
converting 20% of their debentures into shares by that time, These
allegations do not bear scrutiny. So fas as the first ground is concerned,
there is no justification for a comparison between these two categories
B
of investors. RIL is the promoter company which has conceived the
projects, got them sanctioned, invested huge amounts of time and
money and transferred the projects for implementation to RPL. It is,
therefore, in a class by itself and there is nothing wrong if it is allotted
certain shares in the company, quite independently of the debenture
issue, in lieu of its investments. So far as the second ground is cone cerned, it overlooks certain disadvantages attached to RIL in regard to
the loan of Rs.SO crores advanced by RIL as compared with ihe investor
in the debentures. Firstly, RIL's advance is interest free for 3 years
whereas the debenture holders got interest at the rate of 12.S% during
the period. Secondly, the debenture loan is secured while the RIL's are
not. Thus the debenture holders have certain benefits which RIL does
D
not have and, if the debenture holders have the disadvantage of having
to pay a premium, that cannot constitute basis for a ground of discrimination. I l03E-H; 104 A, B]
6.2. RPL is a company-not the State or a State instrumentaA
lity-that is issuing the shares and debentures. It is entirely for the
E
company to issue the shares and debentures on such terms as they may
consider practicable from their point of view. There is no reason why
they shonld not so structure the issue that it confers certain great
advantages and benefits on the existing share holders or promoters than
on the new subscribers. It is not permissible for the CCI to withhold
consent only for this reason er to stipulate that consent can be given
.'(
F
only if the share holders and promoters as well as prospective debenture
holders are all treated alike. The subscribers to the debenture are only
lenders to the company who have an option to convert their debt into
equity on certain terms. It is perfectly open to the subscribers to
balance the pros and cons of the issue and to desist from taking the
debentures if they feel that the dice are loaded unfavourably in favour
G
of the "proprietors" of the company. [I04B-E]
7. I. In the present case, a legal mortgage has been created by
RPL in favour of the trustees in respect of its immovable and mo,,able
assets, except book debts, in respect of which financial institutions will
hold a first charge on account of foreign loan. RPL does not have any
H
existing loans. Therefore, the charge in favour of the debenture holders
NARENDRA KUMAR v. U.O.l.
53
is presently the first charge. No further borrowing is contemplated at
this stage except the foreign currency loan to the extent of Rs.84 crores.
Even if the value of the foreign currency which has been sanctioned in
principle by the three financial institutions is taken into account, the
assets coverage goes down at each stage and does not make any critical
difference to the value of the security of the debenture holders under the
Trust Deed. The purposes of borrowings, namely, term-loan borrowB
ings, deferred payment credits/guarantees and borrowing for financing
new projects do not, on analysis, raise any difficulty. There are sufficient in-built checks and controls. The company, being an MRTP company would have to obtain both MRTP permission for creating any
security irrespective of its value and fresh CCI consent under the CCI
Act, except in case of exempted securities. [IJ9G, H; 120A-C]
A
c
7.2. With the escalation in the value of the fixed assets due to
passage of time on the one hand and the redemption of a good portion of
the debentures by the end of three years on the other, the security
provided is complete and, in any event, more than adequate to safeguard the interests of the debenture holders. [96G, HI
D
8. Clauses 5 and 6 are only enabling clauses and in the nature of
permitting the Company, despite the mortgage in favour of the
debenture holders, to carry on his business normally. What is referred
to therein as residual charge is really a floating charge. The Company's
normal business activities would necessarily involve alienation of some
E
of its assets from time to time such as goods manufactured by it as well
as procurement and discharge of loan and accommodation facilities
from banks, financial institutions and others. The entire progress of the
company would come to a standstill in the absence of such enabling
provisions. They are not only usual but essential because the basic idea
is that the finances raised by the debentures should be employed for F
running the project profitably and thereby generate more and more
funds and assets which will also be available to the debentures holders.
Further what the clauses provide is only that the consent and concurrence of the debenture holders need not be obtained by the company
before creating securities that may have priority over the present issue
of debentures. But the trustees for the debenture holders have to concur G
before the company can raise any future borrowings and create, therefor, the security which will have priority over the security available to
the present debenture holders. The ICICI is not only a financial institution in the public sector but also one of the institutions financing the
project and thus has a stake in its success and so can be trusted to
safeguard the interests of the debenture holders. The debenture trust H
A
B
54
SUPREME COURT REPORTS
[1989) 3 S.C.R.
deed also contains a provision by which at the time of creation of any
future charge the terms and ranking have to be agreed upon between
RPL and ICICI. Clause 16 of the trust deed authorises the trustees to
intervene and crystallise the charge in certain circumstances and stultify
an attempt by the company to create higher ranking charges. There are
also restraints on the company under the Companies Act and the MRTP .....,_
Act involving the consent of public financial institutions, Commercial
I""
Banks, the term lenders, share holders, the MRTP Commission,
the Central Govt. and the CCI before the creation of such securities.
[98B-H; 99A, E, F)
~
9. In certain brochures and pamphlets issued by RPL, the debentures were described as "fully secured convertible debentures".
c The company admitted that there was such a description but explained -..,.
that this was due to an oversight; the words "fully secured convertible
debentures" were printed in some brochures instead of the words
"secured fully convertible debentures" without meaning or intending
any change. It was stated that the company's representation was that
D
the debentures were "secured fully convertible" ones. This is also
what had been set out in the application for consent. Though the
company did claim that the debentures were also fully secured, the
emphasis in the issue was that the debentures were fully convertible
E
F
and secured. This explanation is plausible. No importance or signi-
,.,.~
ficance need be attached to the different description in some places,
particularly, in the context of the nature of security actually provided
for the debentures. [95F-H; 96A)
JO. Prospectus issued by RPL is not misleading because it stated
that security will be provided to the satisfaction of the trustees and the
CCI accepted that statement in the application for consent. The \..
debenture trustees are well known financial institutions and it is not "\ .•
possible for the CCI to ensure more than the usual practice which was
followed in the.present case. [JOOD, E)
11. The CCI modified paragraph 5 of the consent by his letter of
the 19th Jnly, 1988 to say that allotment to the employees shall not
G
exceed 50 debentures per individual. It does not appear that the restriction of the allotments to the employees was at the instance of the Company; nor does it seem that any discrimination was intended in respect
of the allotments to the employees. Nor has attention been invited to any
legal requirements or guidelines prescribing any fixed or minimum
quota of allotment to the employees of the Company. Under the cirH
cumstances, the question of discrimination does not arise. [J07C, D)
\ .• ,,
/
NARENDRA KUMAR v. U.0.1.
55
12. The consent order of the CCI clearly indicated that the conA
sent conveyed in the letter shall lapse on the expiry of 12 months from
the date thereof. The consent order categorically stated that the approval was without prejudice to any other approval/permission that
may be required to be obtained under any other Acts and laws in force.
It necessarily follows that the obligation to obtain other permissions
continued. There was no legal conditions that other approvals should be
B
examined by the CCI before grant of its own consent. lll2E, Fl
13. t. As defined in the Companies Act, a debenture need not be
secured. Therefore, guideline 10 means that security should be provided as is customarily adopted in corporate practice. In the present
case, the debentures are compulsorily convertible and so no repayment
is really involved. The debenture is essentially an acknowledgement of C
debt with a commitments to repay the principal with interest. The
question of security becomes relevant for the purpose of payment of
interest only in the unlikely event of winding up. The guidelines did not
provide for the quantum and the nature of the security. A debenture
may, therefore, be secured or unsecured. An ordinary debenture has to D
be distinguished from a mortgage debenture which necessarily creates
mortgage on the assets of a Company. A compulsorily convertible
debenture does not postulate any repayment of the principal and so
does not constitute a debenture in the classic sense. Even a debenture
which is only convertible at option has been recognised as a hybrid
debenture. The guidelines for the protection of debenture holders
E
issued on 14.1.1987 recognise the basic distinction between convertible and non-convertible debenture. Comopulsorily convertible
debentures in corporate practice were adopted in India sometime after
1984. Wherever the concept of compulsorily convertible debenture is
involved, various guidelines issued by the Government of India treat
them as equity and not as loan or debt. Even a non-convertible
F
debenture need not always be secured. In fact, modern tendency is to
raise loan by unsecured stock which does not create any charge on the
'
assets of a Company. Whenever a security is created, it is invariably in
the form of a floating charge. In addition they are frequently secured by
a trust deed as in the present case where specific property /land etc. has
been mortgaged to the trustees. I ll6E, F; I 17B-G]
G
13.2. In the instant case. if the permission of the debenture
holders were required or is insisted upon to create future security, 2.5
million debenture holders have to be informed and invited for the meeting. The extravagant effects of this course would be collosal especially
when a shareholders meeting is also additionally called for the same
H
A
B
c
D
56
SUPREME COURT REPORTS
[1989] 3 S.C.R.
body of persons. It is. therefore. incorrect to say that a floating charge
creates an illusory charge because future securities can be created ranking in priority over it. [Jl8D-E]
The British India Steam Navigation Co, v. The Commissioner of
Inland Revenue, [1881] 7 QBD 165; Re. Colonial Trusts Corporation,·
[1879] 15 Ch. 465; Speyar Brothers v. The Commissioner of Inland
Revenue, [1907] I KB 246; Lemon v. Austin Friars Investment Trust
Ltd., [1926] l Ch. 15; Florence Land & Public Works Co., [1878] IO
Ch. 530; Re. Panama, New Zealand, and Australian Royal Mail Co.,
[1870] L.R. 5 Ch. 318; Re. Standard Manufacturing Co., [1891] l Ch.
627; Re. Barak Foster v. Borax Co., [1901] 1 Ch. 326; Creatnor
Maritime Co. Ltd. v. Irish Marine Management Ltd., [1978] I WLR
966, referred to.
Palmer's Company Law, 24th Edn. pp. 672, 675, 676, 706; The
Encyclopaedia of Forms and Precedents, 4th Edn., Vol. 6 p. 1094,
1095, 1097, 1098, referred to.
14. The Court, would be reluctant to interfere simply because
one or more of the guidelines have not been adhered to even where there
are substantial deviations unless the deviations are by nature and extent
such as to prejudice the interests of the public which it is their avowed
object to protect. Per Contra, the Court would be inclined to overlook
E
or ignore such deviations, if the object of the statute and public interest
warrant, justify or necessitate such deviations in a particular case.
Judicial control takes over only where the deviat1on either involves
arbitrariness or discrimination or is so fundamental as to undermine a
basic public purpose which the guidelines and the statute under which
they are issued are intended to achieve. In the instant case, there is no
F
such infraction of the norms required to be followed in granting the
sanction. [123F-H; 124A, Bl
I
15. Before the Courts grant any injunction they should have
regard to the principles of comity of courts in a federal structure and
have regard to self-restraint and circumspection. It may be impossible
G
to lay down hard and fast rules of general application because of the
diverse situations which give rise to problems of this nature. Each case
+.:.
has its own special facts and complications and it will be a disadvantage,
rather than an advantage, to attempt and apply any stereo-typed
formula to all cases. Perhaps in this sphere, the High Courts themselves
might be able to introduce a certain amount of discipline having regard
H to the principles of comity of courts administering the same general
NARENDRA KUMAR v. U.0.1. IMUKHARJI, J.]
57
laws applicable all over the country in respect of granting interim
A
orders which will have repercussion or effect beyond the jurisdiction of
the particular courts. Such an exercise will be a useful c-0ntribution in
evolving good conventions in thetederal judicial system. I I26F, G; 127 A)
[Having considered the facts and circumstances of the present
~ cases, this Court directed refqnd of the sum of Rs.one lakh deposited by
RPL as ordered by the C-0urt on 9.9.1988. The deposit amount was
meant for payment to the petitioners in case they were to spend
B
111&.t
unduly.]
'
':;\......
i '
ORIGINAL JURISDICTION: Transfer Case Nos. 161-165 of
1988.
S. Ganesh, Arnn Jaitely, Miss Bina Gupta, Miss Madho Khatri,
A.N. Haksar, Praveen Anand, Anip Sachthey, B.L. Pagaria, P.K.
Jain, Udai Holla and T. Sridharan for the petitioners.
c
G. Ramaswamy, Soli, J. Sorabjee, M.H. Baig, F.S. Nariman,
D
. H.N. Salve, R. Sasiprabhu, s:s. Shroff, Mrs. P.S. Shroff and S.A.
Shroff for the Respondents .
.. A.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. In these transferred writ peti10
tions and one suit, we are concerned with the powers, functions and
the role of the Controller of Capital Issues. By an order dated 9th
September, 1988 this Court had directed that the four writ petitions
and one civil suit i.e., W.P. No. 1791/88 pending before the Delhi
High court, W.P. No. 2708/88 pending before the Jaipur Bench of the
Rajasthan High Court, W.P. No. 12176/88 pending before the
F
Karnataka High court, W.P. No. 4388/88 pending before the High
Court of Bombay and Civil Suit No. 1172/88,pending before the Civil
Judge, Junior Division Bench, Baroda, Gujarat, be transferred to this
Court for disposal. It would be appropriate to deal with the facts of
one of these, i.e., W.P. No. 1791/88, which was filed in Delhi High
Court in T.C. No. 161/88. The other writ petitions and the suit raise
G
more or less identical problems and issues on more or less same facts.
The petitioner in that writ petition is one Narendra Kumar
Maheshwari and the respondents are the Union of India, the Controller of Capital Issues, and Reliance Petro-chemicals Ltd. (RPL). The
case of the petitioner is that he is an individual who is a public spirited
1-1
A
B
c
58
SUPREME COURT REPORTS
[1989] 3 S.C.R.
person and is an existing shareholder of the Company known as Re- 'r
liance Industries Ltd. (RIL), which was the promoter of Reliance
Petrochemicals Limited, being the respondent No. 3. The petitioner
held at all relevant times 144 shares of RIL and 100 debentures of
different categories. The respondent No. 3, being RPL, was a newly
set up public limited company for the purpose of carrying on the busi-
',,.._.
ness of manufacture of petrochemicals. These petitions were filed in
r
different courts challenging the consent of the Controller of Capital
Issues granted for the issue of shares (Rs. 50 crores) and debentures
(Rs.516 crores) by the RPL. It was contended in the petition that the
.
respondents Nos. 1 & 2, being the Union of India and the Controller of -r.
Capital Issues, ought not to have granted consent to respondent No. 3,
'
namely, RPL to issue share and debenture capital at an aggregate
value of approx. Rs.600 crores. It may be mentioned that after these ]
writ petitions and suit were filed, attempts were made to obtain injunction restraining the issue of share-capital and debentures as advertised.
By an order dated 19th August, 1988 passed by this Court, this Court
had restrained the issue of such injunctions and directed that the
D shares and debentures would be issued irrespective of any order of
injunction passed by any court or authority in India.