Holding

The Reserve Bank of India may grant permission under section 29(1)(b) of FERA ex‑post‑facto and conditionally, the press release, circular and letter are valid, and the company cannot refuse to register the share transfer once such permission is obtained; the LIC’s requisition is not ultra vires, and no mala fides is attributable to the Union, RBI or LIC, while Punjab National Bank failed in its duties.

Summary

The case concerned the purchase of shares in Escorts Ltd by thirteen overseas companies, predominantly owned by non‑resident Indians, under the Foreign Exchange Regulation Act, 1973 (FERA) portfolio investment scheme. The Reserve Bank of India (RBI) later granted permission for the purchases, which the company had initially refused to register, alleging lack of prior RBI approval. The Supreme Court examined whether the RBI could grant ex‑post‑facto permission under section 29(1)(b) of FERA, the validity of the RBI’s press release, circular and letter, and whether the company could refuse registration of the shares. It also considered the legality of the Life Insurance Corporation’s requisition for an extraordinary general meeting and alleged mala fides of the Union, RBI and LIC. The Court held that RBI’s permission could be granted after the purchase, that the press release, circular and letter were valid, and that the company’s refusal to register the shares was not justified. It found no mala fides on the part of the Union, RBI or LIC, but identified a serious breach of duty by Punjab National Bank as an authorised dealer. The appeal of the Union, RBI and LIC was allowed, the cross‑appeals dismissed, and the matter remanded to the RBI for a detailed enquiry.

Issues considered

Whether the Reserve Bank of India can grant ex‑post‑facto (subsequent) permission under section 29(1)(b) of the Foreign Exchange Regulation Act, 1973 for purchase of shares by non‑resident entities.
Whether the press release dated 17‑Sept‑1983, circular dated 19‑Sept‑1983 and the accompanying letter are ultra vires, retrospective or valid under FERA.
Whether a company may refuse to register transfer of shares after RBI permission has been obtained.
Whether the requisition issued by the Life Insurance Corporation of India for an extraordinary general meeting is ultra vires, arbitrary, or violative of Article 14 of the Constitution.
Whether the Union of India, RBI or LIC acted mala fides or with non‑application of mind in granting permission.
Whether the corporate veil may be lifted to determine the ultimate beneficial ownership of the overseas companies.
Whether Punjab National Bank, as an authorised dealer, discharged its statutory duties under the portfolio investment scheme.

Legislation cited

Companies Act, 1956s. 108, s. 108(1), s. 108(1A), s. 111, s. 111(3), s. 173(2), s. 2(46), s. 284, s. 291, s. 292, s. 293, s. 397, s. 398, s. 428, s. 439, s. 475, s. 82, s. 84
Exchange Control Manuals. 24A.1, s. 24A.2
Foreign Exchange Regulation Act, 1973s. 13, s. 19(1)(b), s. 29(1)(b), s. 29(2), s. 29(4), s. 48, s. 50, s. 56, s. 63, s. 73(3), s. 75, s. 76
Securities Contracts (Regulation) Act, 1956s. 24A.1

Subjects

Foreign Exchange Regulation Actex‑post‑facto permissionshare transfer registrationportfolio investment schemenon‑resident Indian investorscorporate veilarticle 14 constitutional challengeauthorized dealer dutiesLife Insurance Corporation requisitionRBI authority

Judgment

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 11 Permission11 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 Regula-
tion 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 accor-
dance '11th the Foreign Exchange Regulations, the Non-Residents H
910 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

External Account Rules, 1970, the Portfolio Investment Scheme,
A
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 meet-
ing on requisition either to alter the Articles of Association of
B
removal/ change of directors - State and its instrume~talities
being shareholders have the same rights of an ordinary share-
holder - 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
c 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 permissi-
D bility - 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.
E 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.
F
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
G 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
H
L.r.c. v. ESCORTS 911

have acted malafides, in the matter of requisiting general meet- A
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 F
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 G
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 H
912 SUPREME COURT REPORTS (1985] SUPP.3 s.c.R.

A 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.

Ii 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
c 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-resi-
D dent 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
E 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,
F 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.
G
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.
H 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

A
Rs.3,85,920 had been purchased from Bharat Bhushan & Co. and
shares worth Rs.45,81;677 had been purchased from Mangla & Co.
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 Direc 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 A
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. B
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 c
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 D
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 E
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 F
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 G
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 H
dismissing the cross appeals No.497-499/85 filed by Escorts Ltd.
and Nanda, the Court
916 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

A 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 Parlia-
ment 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 legis-
lative 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 i i
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 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 B
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 c
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 D
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 r
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 F
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 G
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 h
918 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

A 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 state-
B ment setting out all material facts concerning each iten of
business to be transacted at the meeting, including in parti-
cular, 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 proceed-
ings 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

A
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
B
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
c
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 Hackman [1982] 3All E.R. 1124; Devy V•
V•
D
3 All E.R. 278; I Coagress Del~ [1981] 2
Speltbolllll! [1983]
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
E
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
F
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
G
into becoming a minority shareholder. The object of prepaymant of
loans was to get rid of the directors who the financial institu-
tions 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]
H

3.1 On an overall view of the several statutory provisions
and judicial precedents, it is clear thst a shareholder hss an
920 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

undoubted interest in a company, an interest which is represented
A 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
B 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
c 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
0 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.
E 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
F 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
G Foreign Exchange Regulation Act, the permission, if any, pres-
cribeil 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
II 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 A
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!] B

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 c
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 D
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 E
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 F
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 G
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] '
H
922 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

3•5 It is certainly not open to a company whose shares have
A 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
B 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
c Directors but will assume that they acted reasonably and bona-
fide. 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
D 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
E 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 Port-
folio 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 other-
wise, 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 desir-
able 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 require-
ment of the Foreign Exchange Regulstion Act and the Portfolio
B Investment Scheme. The object of the Act is to conserve and
regulste the flow of foreign exchange and the object of the
scheme is to attract non-resident investors of Indian nationality
or origin to invest in shares of Indian companies. In the case of
individuals, there can be no difficulty in identifying their
nationality or origin. In the case of companies and other legal
personalities, there can be no question of nationality or
c ethnicity of such company or legal personality. Who of such
oon-resident companies or legal personalities may then be permit-
ted to invest in shares of Indian cOllpanies, The answer is
furnished by the scheme itself which provides for "lifting the
corporate veil" to find out if at least 60 per cent of the shares
are held by non-residents of Indian 'nationality or origin.
Ufting the veil is necessary to discover the nationality or
D origin of the shareholders and not to find out the individual
identity of each of the shareholders. The corporate veil may be
lifted to that extent only and oo more. Further it would be
beyond the scope of the writ petition in the High Court.
(1006 F-H; 1007 A-DJ

E llall.erateiner v. Moir, [1974J 3 All E.R, 217; Tata
l!Dg1mer1ng and U..:.-tive Campany Ltd. v. State of Bihar, [1964J
6 s.c.R. 885; 'l'be Ca-1 ..imer of Income Tax v. Ke wkshi Kills,
A.I.R, 1967 S,C, 819; Vorben v. Associated Rubber Ltd·• (1985J 2
Scsle 321; and Sa!CW!Q v. A. Sal"""' & Co, Ltd., [l897J A.C. 22
referred to.
F
6.1 The permission of the Reserve Bank contemplated by the
Foreign Exchange Regulstion Act, 1973 need not be "prior" or
"previous" and it could be ex post fac{o subsequent and
conditional. (1021 HJ

G 6.2 The expression used in section 29(1) of the Foreign
Exchange Act, 1973 is "general or special permission of the
Reserve Bank of India". It is not qualified by the word "prior"
or "previous", While the word "prior" or "previous" may be
implied if the contextual situation or the object and design of
the legislation demands if, there l.s no such compelling
H circlllll8tances justifying reading any such implication into
section 29(1). Though the Parliament has not been umnindful of
the need to clearly express its intention by uaing the expressior
L.I.C. v. ESCORTS 925

"previous permission". Whenever if thought previous permission A
wss necessary, as for example, sections 8(1), 8(2), 27(1), 30 and
31 of the Act, it deliberately avoided the qualifying word
"previous" in section 29(1) so as to invest the Reserve Bank of
India with a certain degree of elasticity in the matter of
granting permission to non-resident companies to purchase shares
Jn Indian canpanies. Therefore, the word permission 111USt be
interpreted to mean "permission previous or subsequent" - and
that it is necessary that · the permission of the Reserve Bank of
India should be obtained at some stage for the purchase of shares
by non-resident companies. [979 F-H; 980 A-CJ

6.3 The achene of the Foreign Exchange Regulation Act does c
not make previous permission impertive under section 29(l)(b),
though failure to obtain prior permission may expose the foreign
investor to proaecution penalty, conviction, confiscation, if
permission is ultimately refused. Even if permission is granted,
it may be made conditional. The expression "special permission"
is wide enough to take with in its stride a "conditional D
permission", the condition being relevant to the purpose of the
statute, in this case, the conservation and regulation of foreign
exchange. [981 F-H)

6.4 Nor is the Reserve Bank of India bound to give ex post
facto permission whenever it is found that business has been E
started or shares have been purchased without its previous
permission. In such cases, wherever the Reserve Bank of India
suspects an oblique motive, it will not only refuse permission
but will further resort to action under section 50, 61 and 63 not
merely to punish the offender but also confiscate the property
involved. [981 E-F)
F
6.5 Parliament did not intend to lay dOilll in absolute
terms that the permission contemplated by section 29(1) had
necessarily to be preVious permission. The principal object of
section 29 is to regulate and not altogether to ban the carrying
on in India of the activity contemplated by clause (a) and the
acquisition of an undertaking or shares in India of the character G
mentioned in clause (b). Hence, Parliament left to the Reserve
Bank of India as the saftest authority to grant permission
previous or ex post facto, conditional or U11Coodit1onal. And the
Reserve Bank could be expected to use the discretion wisely and
in the best interests of the country and in furtherance of
declared Government fiscal policy in the matter of foreign
exchange. [982 F; G-il) B
926 SUPREME COURT REPORTS [1985] SUPP.3 S.C.R.

6.6 Reading together sections 13 and 67 of the Foreign
A Exchange Regulation Act .:ind section 11 of the Customs Act, it is
seen that an order u.~der section 13 FERA operates as a
prohibition and there, can therefore, be no question of the
Reserve Bank of India granting subsequent permission to validate
the importation of the prohibited goods and avoid the
consequences prescribed by the Customs Act. To accept the analogr,
B of section 13 to interpret sections 19 and 29, therefore, is not
possible. [933 I>-£]

6. 7 It is true that the consequences of not obtaining the
permission of the Reserve Bank or not to follow the procedure
prescribed are serious and even severe. It is also true that the
burden of proof is on the person proceeded against and that
c mensrea may consequently be interpreted as ruled out. But that
cannot lead to the inevitable conclusion that the permission
contemplated by section 29 is necessarily previous permission.
[983 G-H; 984 A]

6.8 If it was the intention of Parliament to comprehend both
previous and subsequent permission, the word "confirmation" as in
D section 19(5) would not do at all. While it may be permissible to
construe the word "permission" widely, the word "confirmation"
could never be used to convey the meaning "previous permission"•
The word "confirmation" is totally misplaced in section 29.
[984 E-FJ
E 6.9 The rule against retrospectivity cannot be imported into
the situation presented here. The rule against retrospectivity is
a rule of interpretation aimed at preventing with rights unless
expressly provided or necessarily implied. To invoke the rule
against retrospectivity in a situation where no vested rights are
involved is to give statutory status to a rule of interpretation
F forgetting the reason for the rule. [984 G-tl; 985 A-B]

6.10 Paragraph 24A, l of the Exchange Control Manual is
neither a statutory direction nor is it a mandatory instruction
issued under section 73(3) of the Foreign Exchange Regulation
Act, but is in the nature of a comment on section 29(l)(b). The
G paragraph is an explanatory statement of guideline for the
benefit of the authorised dealers. It reads as if it is in the
nature of and, indeed it is, advice given to the authorised
dealers that they should obtain prior permission of the Reserve
Bank of India, so that there may be no later complications. It
is a helpful suggestion rather than a mandate. The Manual itself
H
is a sort of gnide book for authorised dealers, money changers,
etc. and is a compendium or collection of various statutory
L.I.C. v. ESCORTS 927

directions, administrative instructio~, advisory opinions, A
comnents, notes, explanations, suggestions etc. The expression
"prior permission" used in paragraph 24.A(l) is not meant to
restrict the range of the expression "general and special
permission" found in sections 29(l)(b) and 19(l)(b). It is meant
to indicate the ordinary procedure which may be followed.
[986 B-E) B

6.11 The forms cannot control the Act, the Rules or the
dir,ections. None of the prescribed forms, no doubt, provided for
the application and grant of subsequent permission, but that is
so because ordinarily one would expect permission to be sought
and given before the act. [986 E-F) c
6.12 The Portfolio investment Scheme does not talk of any
prior or previous permission. Further a power possessed by the
Reserve Bank under a Parliamentary legislation cannot be so cut
down as to prevent its exercise altogether. It may be open to
subordinate legislating body to make appropriate rules and D
regulatiOilil to regulate the exercise of a power which the
Parliament has vested in it so as to carry out the purposes of
the legislation, but it cannot divest itself of the power.
Therefore, the Reeerve Bank, i f J.t has the power under the FERA
to grant ex post facto permission cannot divest itself of that
power under the scheme· [987 A-fl) E

Shakir l111ssafn v. CaDdoo Lal & Ors., AIR 1931 All. 567,
Vaaudev Rgmnclymc!ra Sbelat V• Pranlsl Jayanand Tbakur, [1975] 1
s.c.rr 534 referred to. '

7 .1 When construing statutes enacted in the national
interest, the Courts muat necessarily take the broad factual F
situationB contemplated by the Act and interpret its provisions
so as to advance and not to thwart the particular national
interest whose advancement is proposed by the legislation.
Traditional norms of statutory interpretation must yield to
broader notions of the national interest. [980 G-H; 981 A)
G
The object of the Foreign Exchange Regulation Act, is to
..,.rn, conserve, regulate and store foreign exchange. The entire
Bcheme and design of the Act is directed towards that end.
5-!ction 76 emphasises that every permission or licence granted
by th" Central Government or the Reserve Bank of India should be
animated by a desire to conserve the foreign exchange resources
of a country. The Foreign Exchange Regulation Act, is Ii
therefore, clearly a statute enacted in the national interest.
[980 C-G] ,
928 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

7.2 The proper way to interpret statutes iB to ~give due
A wight to the use as well as the omission to use the qualifying
words in different provisions of the Act. The significance of the
use of the qualifying word in one provision and its non-use in
another provision may not be disregarded. (980 B-C]

7,3 Every word has different shades of meaning and different
B words may have the SOiie meaning, It all depends upon the context
in which the word is used. ( 984 E]

8. l'he Press Release (Ex.A) dated 17.9.83, the circular
(El<.B) dated 19.9.83 and the letter (El<.C) dated 19.9.83 are all
valid, (1022 AJ
c 9, The Reserve Bank of India was not guilty of any malafides
in granting permission to the Caparo Group of companies. Nor was
it guilty of non-application of mind. Every question involving
investments by oon-resident canpanies and foreign exchange is
bound to have different facets which present themselves in
different lighta when viewed fran different angles. If after
full discussion with those in higher rungs of the Government who
D are concerned with policy-making, the Reserve Bank of India
changed its former negative attitude to a more positive attitude
in the interests of the econany of the country, its decision
cannot be eaid to be the result of any pressure or non-applica-
tion of the mind. And merely because, the Reserve Bank of lndis
did not choose to send a reply to the cOlllllllDications received
E fran the c:cnpany it did not follow that the Reserve Bank of India
was ~t acting bonafide. (999 E; G-il; 1000 BJ

10. No malafides could be attributed to the Union of India
either. [1022 DJ
F 11. There was a total and signal failure on the part of
Punjab National Bank in the discharge of their duties as autho-
rised dealers, under the Foreign Exchange Regulation Act and the
Portfolio Investment Scheme with the result there was no monitor-
ing of the purchases of shares made on behalf of the Caparo Group
of companies. ( 1022 D-E]
G
12. The question that would involve the adduction of
evidence or as in the instant case a probe into individual
purchase& of shares - Whether they were purchased with foreign
exchange or locally available funds would be beyond the scope of
the writ petition in the High Court under Article 226 of the
H Constitution. {1004 G)
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 929

CIVIL APPELLATE JURISDICTION Civil Appeal No. 4598 of A
1984.

From the Judgment and Order dated 9.11.1984 of the Bombay
High Court in Civil Writ No. 3063 of 1983.

K. Parasaran, Attorney General, M.K. Banerjee, Additional 1
Solicitor General, V.C. Kotwal, F.S. Nariman, K.K. Venugopal,
Soli J, Sorabjee, A.B. Divan, Q,p, Malhotra, T.R. Andhyarujina,
Hahendra H. Shah, s.c. Maheshwari, Shardul s. Shroff, Mrs.
Pallavi s. Shroff, Cyril s. Shroff, Amit Desai, Sasi Prabhu, Ms.
Prema Baxi, Suresh A. Shroff, M/s. J.B. Dadachanji, B.H. Antia,
Aapi Chonay, Ravinder Narain, o.c. Mathur, Rajive Sawhney; R.F.' c
Nariman, Mrs. A.K. Verma, Joel Peres, Miss Ratna Kapoor, D.N.
Misra, Talyarkhan, A.K. Ganguli, H.S. Parihar, A. Subba Rao, A°K 0

Chakravarty, R.N. Poddar and R.D. Aggarwala for the appearing
parties.

The Judgment of the Court was delivered by L

ClilNNAPPA REDDY, J, Problems of high finance and broad
fiscal policy which truly are not and cannot be the province of
the court for the very simple reason that we lack the necessary
expertise and, which, in any case, are none of our business 'are
sought to be transformed into questions involving broad legal E
principles in order to make them the concern of the court.
Similarly what may be called the 'political' processes of
'corporate democracy' are sought to be subject to investigation
by us by invoking the principle of the Rule of Law, with emphasis
on the rule against arbitrary State action. An expose of the
facts of the present case will reveal how much legal ingenuity
may achieve by way· of persuading courts, ingenuously, to treat F
the variegated problems of the world of finance, as litigable
public-right-questions. Courts of justice are well-tuned to
distress signals against arbitrary action. So corporate giants do
not hesitate to rush to us with cries for justice. The court room
becomes their battle ground and corporate battles are fought
under the attractive banners of justice, fair-play and the public G
interest. We do not deny the right of corporate giants to seek
our aid as well as any Lilliputian farm labourer or pavement
dweller though we certainly would prefer to devote more of our
time and attention to the latter. We recognise that out of the
dust of the battles of giants occasionally emerge some new
principles, worth the while. That is how the law has been
progressing until recently. But not so now~ Public interest liti- Ii
gation and public assisted litigation are today taking over many
unexplored fields and the dlDD.b are finding their voice.
930 SUPREME COURT REPORTS [1985] SUPP.3 S.C.R,

A In the case before us, as if to befit the might of the
financial giants involved, innumerable documents were filed in
the High Court, a truly mountainous record was built up running
to several thousa~d pages and more have been added in this court4
Indeed, and ther.e was no way out, WP. also had the advantage of
listening to learned and long drawn-out, intelligent and often
B ingenious arguments, advanced and dutifully heard by us. In the
narae of justice, we paid due homage to the causes of the high and
mighty by devoting precious time to them, reduced, as we were, at
times to the position of helpless spectators. Such is the nature
of our judicial process that we do this with the knowledge that
more worthy causes of lesser men who have been long waiting in
the queue have blocked thereby and the queue has consequently
c lengthened. Perhaps the time is ri.pe for imposing a tiwe-limit on
the length of suhmissions and page-limit on the length of
judgments. The time is probably ripe for insistence on brief
written submissions backed by short and time-bound oral
submissions. The time is certainly ripe for brief and modest
arguments and concise and chaste judgments. In this very case we
heard arguments for 28 days and our judgment runs to 181 pages
D and both could have been much shortend. We hope that we are not
hoping in vain that the vicious circle will soon break and that
this will be the last of such mammoth cases. We are doing our
best to disentangle the system from a situation into which it has
been forced over the years by the existing procedures. 'There is
now a public realisation of the growing weight of the judicial
E burden. The cooperation of the bar too is forthcoming though in
slow measure. Drastic solutions are necessary. We will find them
and we do hope to achieve results sooner than expected. So much
for sanctimonious sermonising and now back to our case.

We do not for a moment doubt that this is a case which
F require our scrutiny, more particularly so because of a most
singular and rernarkable feature of the case namely the absence of
the principle dramatis personnae from the stage. Mr. Swraj Paul,
the hero of the drama, did not appear before the High Court and
did not appear before us; nor did his broker and his power of
attorney holder, Raj a Ram Bhasin & Co, Though the investments
G madeand in question run into several crores of rupees, they have
acted as if they care a tuppence for them. Obviously, Mr. Swraj
Paul, a Foreign National, does not want to submit himself to the
jurisdiction of Indian Courts and his broker Raja Ram Bhasin &
Co. has nothing to lose by keeping away from the court and
perhaps everything to gain by stanaing by the side of his princi-
H pal. These may be excellent reasons for them for not choosing to
appear before us, but their non-appearance and abstemious
L. I. C. v. ESCORTS [ CHINNAPPA REDDY, J. J 931

silence in court have certainly complicated the case and A
embarrassed the Government of India, the Reserve Bank of India
and the Life Insurance Corporation of India to whose lot i t fell
to defend the case since it was their policies, decisions and
actions that were assailed. We must however expi:'ess Our strong
condemnation of the conduct and tactics employed by Swraj Paul
and Raja Ram Bbasin which we consider deplorable. The Pubjab F,
National Bank, the designated bank of Mr. Swraj Paul's companies
did appear before us but their appearance was of no assistance to
the court. They had put themselves in such a hapless situation.
It was apparent to us from the beginning that if there was much
front-line battle strategy, there was considerably more back
stage 'diplomatic' manouvering, as may be expected when financial C
giants clash, though we are afraid neither giant was greatly
concerned for justice or the public interest. For both of them
the court room was just another arena for their war, except that
one of the giants carefully kept himself at the back behind a
screen as it were. One was reminded of the Mahabharta War where
Arjuna kept Shikhandi in front of him while fighting Bhishma, not D
that neither of the warriors in this case can be compared with
Bhishma or Arjuna nor can the Government of India and Reserve
Bank of India be downgraded as Sikhandies. But the case does
raise some questions which do concern the pUblic interest and we
are greatly concerned for the public interest and administration
of administrative justice in the public interest. It is from that E
angle alone that we propose · to examine the several questions
arising in the Case.

The present stat.e of India economy which has to operate
under the existing World Economic· System is such that India needs
foreign exchange and, lots of it, to meet the demands of its
develoIXIJ.ental activities. It has become necessary to earn, F
conserve and build-up a reservoir of foreign exchange. So the
Parliament and the Executive Government have been taking steps,
from time to time, to regulate, to conserve and improve the
foreign exchange resources of the country and the proper
utilisation thereof in the interests of the economic development
of the country. The Foreign Exchange Regulation Act, 1973 was G
enacted for .that purpose.

'Foreign Exchange' is defined by sec. 2(h) of the Act to
mean foreign currency and includes -

"(i) all deposits, credits and balances payable in any
foreign cUrrency and any drafts, traveller's cheques, h
letters of cred~t and bills of exchange, expressed or
drawn in Indian currency but payable in any foreign
currency;
932 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

A (ii) any instrument payable, at the option of the
drawee or holder thereof or any other party thereto,
either in Indian currency or in foreign currency or
partly in one and partly in the other."

'Authorised dealer' is defined to mean a person for the time
B being authorised under sec. 6 to deal with foreign exchange.·

'Owner' is defined by sec. 2(c), in relation to any
security, as including -

"any person who has power to sell or transfer the
security, or who has the custody thereof or who
c receives, whether on his own behalf or on behalf of
any other person, dividends or interest thereon, and
who has any interest therein, and in a case where any
security is held on any trust or dividends or interest
thereon are paid into a trust fund, also includes any
trus~ee or any person entitled to enforce the
performance of the trust or to revoke or vary, with or
D without the consent of any other person, the trust or
any terms thereof, .or to control the investment of the
trust money.••

Section 3 provides for the establislunent of a Directorate of
Enforcement consisting of a Director of Enforcement and other
E officers.

Section 6(1) enables the Reserve Bank on an application made
to it, to authorise any person to deal in foreign exchange. Sec.
6(2) prescribes what may be authorised and sec. 6(4) and sec.
6(5) prescribe the duties of the authorised dealer.
F
Section 8(1) provides that, except with the previous general
or special pennission of the Reserve Bank. no person other than
the authorised dealer shall deal in foreign exchange. Sec.8(2)
provides that except with the previous general or special
pennission of the Reserve Bank, no person shall enter into any
G transaction which provides for the conversion of Indian currency
into foreign currency or foreign currency into Indian currency at
rates of exchange other than those authorised by the Reserve
Bank.

Section 13(1) prescribes that subject to such exemption as
H may be specified, no person shall, except with the general or
~.1.c. v. ESCORTS [CHINNAPPA REDDY, J.] 933

special pennission of the Reserve Bank, bring or send into India
A
any gold or silver or any foreign exchange or any Indian
currency. Sec. 13(2) provides that no person shall, except with
the general or special pennission of the Reserve Bank or with the
written pennission of a person authorised by the Reserve Bank
take or send out of India any gold, jewellery or precious stones
or Indian currency or foreign exchange other than foreign
E
exchange obtained by him from an authorised dealer or from a
money-:changer.

Section 19(l)(b) provides that no person shall, except with
the general or special pennission of the Reserve Bank of India,
transfer any security or credit or transfer any interest in the
security to or in favour of a person resident outside India.
c

Section 19(4) and (5) which are relevant for our purpose are
as follows :-

"(4) Notwithstanding anything contained in any other
L
law, no person shall, except with the pennission of
the Reserve Bank-

(a) enter any transfer of securities in any register
or book in which securi~ies are registered or
inscribed if he has any ground for suspecting' that the
tr_ansfer involves any contravention of the .provisions
of this section, or

(b) enter in any such register or book, in respect of
any security, whether in connection with the issue or
transfer of the security or oth,erwise, an address
outside India except by way of substitution for any F
such address in the same country or for .the-purpqse of
any transaction for which pennission has been granted
under this section with knowledge that it involves
entry of the said address, or

(c) transfer any share from a register outside India G
to a register in India.

(5) Notwithstanding anything contained in any other
law, no transfer of any share of a company registered
in India made by a person resident outside India or by
a national of a foreign State to another_ person
whether resident in India or outside India shall be
Ii
934 SUPREME COURT REPORTS [1985] .SUPP.3 S.C.R.

valid unless such transfer is confirmed by the Reserve
A Bank on an application made to it in this behalf by
the trans.Eeror or the transferee."

Section 29(1) which is also relevant for the purposes of
this case is as follows:

B "29(1) Without prejudice to the provisions of s.28 and
s.47 and notwithstanding anything contained in any
other provision of this Act or the provisions of the
Companies Act, 1956, a person resident outside India
(whether a citizen of India or not) or a person who is
not a citizen of India but is resident in India, or a
company (other than a banking company) which is not
C incorporated under any law in force in India or in
which the non-resident interest is more than forty per
cent, or any branch of such company, shall not except
with the general or special permission of the Reserve
!lank-

(a) carry on in India, or establish in India a branch,
D office or other place of business for carrying on any
activity of a trading, commercial or industrial
nature, other than an activity for the carrying on of
which permission of the Reserve !lank has been obtained
under sec. 28; or

E (b) acquire the whole or any part of any undertaking
in India or any person or company carrying on any
trade, commerce or industry or purchase the shares in
India in any such company. "

Section 29(2) makes provision for applying for permission to
F continue after the commencement of the Act any activity of the
nature mentioned in clause (a) of sec. 29(1) which was being
carried on at the coIDnencement of the Act, while sec. 29(4) makes
similar provision for applying for permission to continue to hold
after the commencement of the Act shares of a company referred to
in sec. 29(1) (b) which were held by a person at the
G conunencement of the Act.

Section 30 prescribes that no national of a foreign State
shall, without the previous permission of the Reserve Bank-

(i) take up any employment in India, or
H
L.r.c. v. ESCORTS [CHINNAPPA REDDY, J.] 935

(ii) practise any profession or carry on any A
occupation, trade or business in India.

Section 31 prohibits any person, who is not a citizen of
India or ·a company not incorporated in India or in which the
non-resident interest is more than 40 per cent, from acquiring or
holding or transferring or disposing of by sale, ~ortgage, lease, 1
gift, settlement or otherwise any innnovable property situate in
India, except with the previous general or special permission df
the Reserve Bank.

Section 47 deals with contracts in evasion of the Act. Sec.
47(1) prohibits any person from entering into a contract or C
agreement which would directly or indirectly. evade or avoid in
any way the operation of any provision of the Act or of any
rule, direction or order made thereunder. Section 47(2) provides
that any provision of the Act requiring that a thing shall not be
done without the permission of the Central Government or Reserve
Bank of India, shall not render invalid any agreement to do that L
thing if it is a term of the agreement that that thing shall not
be done unless permission is granted. Where such a term is not
explicit, it is to be implied in every contract. Section 47(3)
further provtdes that, subject to certain specified conditions,
legal proceedings may be instituted to recover any sum which
would be due, apart from and despite the provisions of the Act or E
any term of the contract requiring the permission of the Central
Government or the Reserve Bank of India for the doing of a thing.

Section 50 prescribes the levy of a penalty if any person
contravenes any of the provisions of the Act except certain
enumerated provisions, the adjudication is to be made by the
Director of Enforcement or an Officer not below the rank of an F
Assistant Director of Enforcement, specially empowered in that
behalf. Section 51 provides for the enquiry and the power to
adjudicate. Section 52 provides for an appeal to the Appellate
Board and sec. 54 for a further appeal to the High Court on
questions of law. Section 56 provides for prosecutions, for
contraventions of the provisions of the Act and the rules, ~
directions or orders made thereunder. Section 57 makes the
failure to pay the penalty imposed by the adjudicating officer or
the Appellate Board or the High Court or the failure to comply
with any directions issued by those authorities, an offence
punishable with imprisonment. Section 59 prescribes a presumption
of mens-rea in prosecutions under the Act and throws upon the
accused the burden of . proving that he had no culpable mental H
936 SUPREME COURT REPORTS tl985J supp,3 s.c.R.

A state with respect to the act charged in the prosecution. Section
61 _provides for congnlzance of offences. Section 6l(l)(ii)
obliges the court not to take cognizance of any offence punish-
able under section 56 or 57 except on a complaint made in writing
by - (a) the Director of Enforcement; or (b) any officer
authorised in writing in thl.s behalf by the Director of Enforce-
B went or the Central Government; or (c) any officer of the Reserve
!lank authurised by the Reserve !lank by a general or special
order. The proviso to this provision enjoins that no complaint
shall be made for the contravention of any of the provisions of
the Act, rule, airection or order made thereunder which prohibits
the doing of the Act without permission, unless the person
accused of the offence has been given an opportunity of showing
C that he had such permission. Section 63 empowers the adjudicating
office adjudi;.iOg any contravention under sec. 51 and any court
tryin;: a contravention under sec. 56, if he or it thinks fit to
direct the confiscation of any currency, security or any other
money or property in respect of which the contravention has taken
place.

D Section 67 treats the restrictions imposed by secs. 13,
18(l)(a) and 19(l)(a) as restrictions under s.11 of the Customs
Act and makes all the provisions of the Customs Act applicable
accordingly.

Section 71(1) lays the burden of proving that he had the
E requisite permission on the prosecuted or proceeded against for
contraventing any of the provisions of the Act or rule or
direction or order made thereunder which prohibits him from being
an Act without permission.

Section 73(3) enables the Reserve Bank of India to "give
F directions in regard to the makin;: of payments and the doing of
other acts by bankers authorised dealers, money-changers, stock
brokers, persons referred to in sub-sec.(1) of s~.c. 32 or other
persons, who are authorised by the Reserve lia.nk to do anything in
pursuance of this Act in the course of their business, as appear
to it to be necessary or expedient for the purpose of securing
G compliance with the provisions of this Act and of any rules,
directions or orders made thereunder."

Section 75 enables the Central Goverrnnent to give and the
lieserve Bank to comply with general or special directions as the
former may think fit.
H
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 937

Section 76 requires the Central Government or the Reserve A
Bank, while giving or granting any permission or licence under
the Act, to have regard to all or any of the following factors,
namely,

(i) conservation of the foreign exchange resources of
the country; B

(ii) all foreign exchsnge accruing to the country is
properly accounted for;

(iii) the foreign exchange resources of the country
are utilised as best subserve the common good; and C

(i~) such other relevant factors as the circumstances
of the case may require.

Section 79 invests the Central Government with the power
generally to make rules and in particular for various .specified D
purposes.

In exercise of the powers conferred by sec. 79 of the FERA,
rules called 'the Non-Resident (External) Account Rules, 1970's
have been made, Rule 3 enables, subject to the provisions of the
rules, any person resident outside India to open and maintain in E
India an account with an authorised dealer, to be called, a
Non-Resident (External) Account. Rule 4(1) prescribes that no
amount other than the amounts mentioned therein shall be credited
to a Non-Resident (External) Account. One such is 'any amount
remitted by the account holder from outside India through normal
banking channels as an amount which may be credited to a
Non-Resident (External) Account'. Rule 4(4) provides that amounts F
accruing by way of a dividend or interest on aha.res, securities
or deposits held in India, shall not be credited on Non-Resident
External Account unless certain conditions are fulfilled. One of
the conaitions is that the account-holder is the registered
holder of such shares, securities or deposits. Another condition
is that the account-holder has deposited the certificates G
relating to the shares with an authorised dealer along with an
undertaking in writing to the effect that he will not dispose of
any of the shares except with ·the previous approval of the
Reserve Bank. kule 5 further prescribes that no such amount as is
referred to in rule 4(1) shall be credited to a Non-Resident
(External) Account unless the Reserve Bank having regard to the
desirability of permitting remittance of funds held in India by Ii
Non-Residents, either by general or special order, gives
938 SUPKEME COURT REPORTS [1985] SUPP.3 s.c.R.

A permission in this behalf. Rule b provides that a person resident
outside India who wishes to open Non-Resident (External) Account,
shall make an application in this behalf to an authorised dealer.
The authorised dealer, unless there is a general or special order
of the Reserve Bank so directing, shall refer every such
application to the Reserve Bank together with the particulars.
B
The Exchange Control Manual published by the Reserve Bank of
India incorporates various statutory and administrative
instructions, advisory opinions, comments, notes, explanations
etc. issued from time to time. Paragraph 24.l(i) states,

"Investment in India by non-residents of Indian
c nationality or origin is subject to a different set of
rules in order to give them wider investment
opportunities. Ordinarily investment is allowed freely
if the investment proposed to be made is not of an
undesirable nature, but subject to the condition that
no repatriation of capital invested and income earned
thereon will be allowed. The non-resident investor is
D also required to give an undertaking agreeing to forgo
the benefits of repatriation. Investment with
repatriation benefits is allowed only in restricted
fields subject to certain conditions. The schemes
under which such investments are permitted are
explained in this Chapter",
E
Paragraph 24.l(ii), however, states

"Foreign investment in India is also subject to
regulation through the various provisions in the
Foreign Exchange Regulation Act, 1973, viz, Sec. 19
F governing issue and transfer of securities in favour
of non-residents, sec. 29 governing establishment of a
place of business by non-residents for carrying on
trading, commercial or industrial activities or
acquiring such an undertaking or shares in such
companies in India and sec. 31 governing acquisition,
G disposal, etc. of immovable property in India. But
once foreign investment is permitted by Government
under its foreign investment and industrial policy,
requisite permissioos Wider the relative sectioos of
Foreign ED:hange Regulation Act, 1973, are more or
less automatically issued."
H
Section 24A.l provides
L.r.c. v. ESCORTS [CHINNAPPA REDDY, J.] 939

"In terms of Section 29(l)(b) of Foreign Exchange A
Regulation Act, 1973, no person resident outside India
whether an individual, firm or company (not being a
banking company) incorporated outside India can
acquire shares of any company carrying on trading,
commercial, or industrial activity in India without
prior permission of Reserve Bank. Also, under sec. B
19(l)(b) and 19(l)(d) of the Act, the transfer and
issue of any security (which includes shares) in
favour of or to a person resident outside India
require prior permission of Reserve Bank. When
permission has been granted for transfer or issue of
shares to non-resident investor under sec. 19(l)(b) or C
sec. 19(l)(d), it· is automatically deemed to be
permission under sec. 29(l)(b) for purchase of shares
by him. Non-resident Indians are however permitted to
invest freely in securities of Central and State
Governments, Units of Unit Trust of India and National
Savings/Plan Certificates of Government of India (see L
paragraph 24B.2). All other investments requires
specific permission of Reserve Bank."

Paragraph 28A.4 states, -

"Authorised dealers may freely open a• Non-Resident E
(External) Account in the names of individuals of
Indian nationality or origin, resident of outside
India, provided funds for the purpose are transferred
to India in an approved manner from country of
residents of the prospective account-holder or in
other foreign country if the foreign country of
residence of the account holder and the country from E
which remittance is received are both in external
group."

Paragraph 28A.4(iii) however, prescribes that firms, companies
and other corporate bodies as well as institutions and
organisations resident abroad are not eligible to open G
Non-Resident (External) Accounts in India. Paragraph 28.A8(ii)
states that under sec. 29(l)(b) of the Foreign Exchange
Regulation Act, 1973, persons resident outside India require
prior permission of Reserve Bank for purchase of shares in Indian
companies. Investment of Non-Resident (External) Account funds in
shares of Indian companies is not therefore permitted without
prior approval of the Reserve Bank. li
940 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

A 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 Government of India decided to
provide incentives to such individuals and formulated a
'portfolio investment scheme' for investment by non-residents of
Indian nationality or origin. This scheme, announced by the
B Government on February 27, 1982, was incorporated in circular
No.9 dated April 14, 1982 of the Reserve Bank of India issued
under sec.73(3) of the Foreign Exchange Regulation Act. Paragraph
2 of the Circular explains that in order to provide further
incentives and facilitate investment by non-residents of Indian
nationality or origin in shares of Indian companies existing
facilities had been liberalised and procedural formalities had
c been simplified as explained in the subsequent paragraphs of the
circular. Paragraph 3 deals with investment without repatriation
benefits while paragraph 4 deals with investment with
repatriation benefits. Paragraph 4 (a) provides that under the
liberalised policy, non-residence of Indian nationality or origin
will be permitted to make portfolio investment in shares quoted
on stock exchanges in India with full benefits of repatriation of
D capital invested and income earned thereon provided that (a) the
shares are purchased through a stock exchange, (b) the purchase
of shares in any one company be each non-resident investor does
not exceed Rs. one lakh in face value or one per cent of the paid
up equity capital of the company, whichever is lower, and ( c)
payment for such investments is made either by fresh remittances
E from abroad or out of the funds held in the investor's non-
resident (external) account/FCNR account with a bank in India. It
further provides that the Reserve Bank will grant permission to
designated banks authorised to deal with any foreign exchange for
purchasing shares through a stock exchange on behalf of their
non-resident customers of Indian nationality/origin, subject,
F inter-alia, to the limits and conditions mentioned. Paragraph 5
deals with another significant relaxation in the existing policy
and provides "the entire gamut of the facilities of direct and
portfolio investments as outlined in paragraphs 3 and 4 above
will now be extended to overseas companies, partnership firms,
trusts, societies and other corporate bodies owned predominently
G by non-residents individuals of Indfan nationality/origin. The
criterion for determining such predominent ownership is that at
least 60% of the ownership of these entities should be with
non-residents of Indian nationality/origin. It would be necessary
for such entities to submit a certificate in this regard in the
prescribed form OAC from Overseas Auditor/Chartered Accountant/
Ii Certified Public Accountant, along with their applications for
investment in shares, to the Reserve Bank of India either through
the designated banks authorised to deal in foreign exchange or
the Indian companies offering new issues, as the case may be."
L.I.C. v. ESCORTS (GHINNAPPA REDDY, J.] 941

Applications from those entities for permission to designated A
banks for investments with repatriation benefits are required to
subnit form RPG to the Controller, Exchange Control Department,
Reserve Bank of India, Central Office (Foreign Investment
Division), Bombay. Paragraph 7 stresses the importance of
encouraging investments in India by non-residents of Indian
nationality/origin and overseas companies, etc. predominently B
owned by them and requires authorised dealers to render prompt
and efficient service by centralising their work in a few
selected branches in places where stock exchange facilities are
readily available. Paragraph 8 enables non-resident investors to
appoint residents in India (other than the authorised dealers) to
be their agents with appropriate power of attorney to arrange C
purchase/ sale of shares/securities. Such agents would include
recognised stock exchange brokers. It is however made clear that
'permission for investment in shares on behalf of such investors
will, however be granted to the designated banks authorised to
deal in foreign exchange since these banks would be responsible
for compliance with the relevant exchange control requirements. D
Proper coordination and understanding between the designated
bank and the investor's agents would be necessary for handling
the investment procedures efficiently'. Paragraph 11 prescribes
among other matters, the duty of designated banks

"to maintain separately a proper record of the E
investments made in shares with repatriation benefits
and without repatriation benefits on account of each
investor, showing the relevant particulars including
the numbers of share certificates and distinctive
numbers of shares. Likewise, the designated branches
of authorised dealers should keep a systematic and
up-to-date investor-wise record of the shares F
purchased by them through stock exchange on
repatriation basis on behalf of their overseas
customers of Indian nationality/origin so that they
are able to ensure that the purchase of shares in any
one company by each non-resident investor does not
exceed Rs. 1 lakh in face value or 1 per cent of the G
paid up equity capital of the company, whichever is
lower."

Circular No. 9 was followed by Circular No .10 dated April
22, 1982 from the Reserve Bank to all authorised dealers in
foreign exchange. The purpose of the circular was to ensure that
the overseas companies, partnership firms, societies, other h
942 SUPREME COURT REPORTS [1985] SUPP.3 S.C.R.
A
corporate bodies and overseas trusts to whom the benefits of the
investment scheme formulated by circular No. 9 were extended are
owned to the extent of at least 60 per cent by non-residents of
Indian nationality/ori~in or in which at least 60 per cent of the
beneficial interest (in the case of trusts) is irrevocably held
B by such persons. 'In order to ensure that the ow~ership interest
in the overseas company/firm/society or the irrevocable
beneficial interest in the trust held by persons of Indian
nationality/origin is not less than 60 per cent, authorised
dealers are required to obtain, along with the account opening
form, a certificate from an overseas Auditor/Chartered
Accountant/Certified Public Accountant in Form OAC enclosed with
c A.D. (M.A. Series) Circular No. 9 of 1982.' 'The account holder is
further required to submit such a certificate to the authorised
dealer on an annual basis so as to ensure that the ownership/
beneficial interest of the above persons continues to be at or
above the level of 60 per cent.'

By Circular No. 15 dated August 28, 1982, the Reserve Bank
D partially relaxed Circular No. 9 dated April 14, 1982 by
removing the monetary limit of Rs. One lakh on portfolio
investment in shares on repatriation basis. However, the limit of
one per cent of the paid-up capital of the company was retained.

By Circular No. 27 dated December 10, 1982, it was
E prescribed,

''Where permission is granted by the Reserve Bank for
purchase/sale of shares/debentures on stock exchange
in India by non-residents of Indian nationality/
origin, the transactions should be effected at the
F ruling market price as may be determined on the floor
of the stock exchange by normal bid and offer method
only. 11

On May 16, 1983 the Reserve Bank clarified and modified the
'Non-residents of Indian nationality/origin Portfolio Investment
G Scheme 1 in the following manner: Referring to Circular No. 9
which extended portfolio scheme to overseas companies, partner-
ship firms, societies and other corporate bodies which were owned
to the extent of at least 60 per cent by non-residents of Indian
nationality/origin and to overseas trusts in which at least 60
per cent of the beneficial interest was irrevocably held by such
H persons, Circular No. 12 dated May 16, 1983 imposed an overall
ceiling of (i) 5 per cent of the total paid-up capital of the
L.I.C. v. ESCORTS [ClllNNAPPA REDDY, J.] 943

company concerned and (ii) 5 per cent of the total paid-up value A
of each series of the convertible debentures issue, as the case
may be. For the purpose of determining and monitoring the 5 per
cent ceiling the cut-off date was prescribed as. May 2, 1983, the
date on which the policy was announced in Parliament. It was made
clear that purchase of equity shares and convertible debentures
in excess of 5 per cent would require prior and specific approval B
of the Reserve Bank. The procedure for making applications for
permission was prescribed and it was further provided thac where
investment in excess of the 5 per cent ceiling is to be made on
behalf of the non-resident investor who has not submitted any
application to the Reserve Bank earlier in the prescribed form,
the initial application for such investments should be made in C
the appropriate form giving details of the equity shares/
convertible debentures to be purchased. Paragraph 3 of Circular
No. 12 prescribed procedure for monitoring the ceiling of 5 per
cent. Authorised dealers through their link offices were required
to submit to the Reserve !lank a consolidated statement of the
total purchases and sales (company wise) of equity shares/ D
convertible debentures made by their designated branches. The
daily statements were to be serially numbered and submitted to
the 'Controller posit!vely on the following working day. It was
further provided "all purchases and sale tr-ansactions £.or which a
firm connnitment has been made to acquire or transfer equity
shares/convertible debentures in the form of the broker's E
contract notes issued by recognised stock exchange brokers should
be included in the daily statement irrespective of whether the
actual deliveries have been effected or not." It was further
provided that with ~ view to effectively monitor the 5 per cent
ceiling, the Reserve Bank would, as soon as the aggregate reached
the limit of 4 per cent, notify the fact to the link offices of
the authorised dealers in Bombay. Thereafter the link offices F
were required to give the total number and value of equity
shares/convertible debentures proposed to be purchased through
the stock exchange during the next 15 days. Clearance for the
purchase of equity shares/convertible debentures would be granted
by the Reserve Bank after taking into account the purchases
proposed to be made under the Portfolio Investment Scheme by all G
the authorised dealers from whom intimations have been received. ·

On September 19, 1983, another circular (18) was issued by
the Reserve Bank of India advising all authorised dealers in
foreign exchange that the facilities made available to the
overseas companies, etc. by Circular No.9 d~ted April 14, 1982
were also available where such overseas bodies were owned even H
indirectly to the extent of at least 60 per cent by such
944 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

non-residents of Indian nationality/ origin. What was necessary,
A was that the ultimate ownership of beneficial interest in the
overseas bodies to the extent of at least 60 per cent must be in
the hands of one or more non-resident individuals of Indian
nationality/origin.

The net result of all the circulars was that non-resident
B individuals of Indian nationality/origin as well as overseas
companies, partnership . firms, 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
c equity capital of such Indian company provided that the aggregate
of such portfolio investment did not exceed the ceiling of 5 ·per
cent. It was immaterial whether the investment was made directly
or indirectly. What was essential was that 60 per cent of the
ownership or the beneficial interest should be in the hands of
non-resident individuals of Indian natonality/origin. Curiously
enough though a limit of one per cent was imposed on the acquisi-
D tion 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. In the absence
of any such restriction, any non-resident determined to
destabilise an Indian Company could do so by forming a
E combination of different individuals and companies each of whom
could separately obtain permission to purchase one per cent of
the shares of an Indian company. The authority authorised to
grant permission could not, for example, refuse to grant
permission to B who has applied for permission in his own right
on the mere ground that permission has been granted to his father
F A. Similarly permission could not be refused to Company C in
which D a non-resident Indian owns 20 per cent of the share and E
another non-resident Indian owns 40 per cent of the Shares on the
ground that Company L in which owns 60 per cent of the shares
has already been granted permission. Would it make any difference
if D owns 60 per cent of the shares in both Companies C and L ?
G One can well imagine half a dozen overseas companies in which a
dozen non resident individuals of Indian origin hold shares in
varying proportions but holding in the aggregate more than 60 per
cent of the shares of the overseas companies applying for
permission to purchase shares in an Indian Company. Could
permission be refused to them 1 la the Reserve Bank to concern
H
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 945

itself with the individual identity of the share holders of the A
overseas companies or the nationality or origin of the share-
holders? Is the Reserve Bank to concern itself only with the
c.olour of the skin, as it 'were, and not with the personality. of
the share holder of overseas company? We will revert to this
question later. Obviously, the one per cent rule was introduced
to prevent largescale acquisition of shares of Indian companies B
by non-residents and their possible destabilisation. Also,
obviously the rule was a futile exercise as it was incapable of
yielding the desired result. Quite obviously therefore a better
solution had to be found and it was found by the 'aggregate of _5
per cent' rule. This would automatically limit the total outside
holdings and effectively prevent destabilisation. Of course, it C
woµld still be necessary to satisfy the requirements of the
Foreign Exchange Regulation Act, more particularly the
requirement of sec. 29 of the Act providing for the general of
special permission of the Reserve Bank to purchase the shares in
India of the company. Though the ultimate authority under the
scheme is the Reserve Bank, an important feature of the scheme is D
that the monitoring of the remittances and the investments has to
be done by the designated Bank, which is the authorised dealer.

Two of the principal questions argued before us were whether
the permission contemplated by sec.29 was previous permission or
whether the permission cou~d be granted ex-post-facto and whether E
the purchase of the shares by the foreign investor of Indian
nationality/origin in this case involved any contravention of the
FERA or the Non-Residents' Investment Scheme. To appreciate how
the questions arise it is necessary to state here a few facts.

Desiring to tnke advantage of the Non-resident Portfolio
Investment Scheme and to invest in the shares of·Escorts. Limited, F
an Indian company, thirteen overseas companies, twelve out of
whose shares was owned 100 per cent .and fue thirteenth out of
whose shares was owned 98 per cent by Caparo Group Limited,
designated the Punjab National Bank as their banker(authorised
dealer) and M/s. Raja Ram Bhasin & Co. as their brokers for the
purpose of such investment. It must be mentioned here that 61.6 G
per cent of shares of Caparo Group Limited are held by the Swraj
Paul Family Trust, one hundred per Cent of whose beneficiaries
are one Swraj Paul and the members of his family, all non-
resident• individuals of Indian origin. Their designated banker,
the Punjab National Bank, E.c.E. House Branch by their letter
dated 4th March, 1983, but despatched on 9th March, 1983 and by
another letter dated 12th flarch, 83, addressed the Controller, H
Reserve Bank of India, Exchange Control Department and requested
946 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

A the Reserve Bank to accord their approval for opening Non-
resident External accounts in the name of each thirteen
companies, three named in the First letter and ten named in the
second letter, for the purpose of 'conducting investment opera-
tions in India' through the agency of Raja Ram Bhasin & Co. ,
Stock Investment Adviser, Member of Delhi Stock & Share
B Department, Delhi. These letters were received by the addressee
on 14th and 18th March. It was mentioned in the letters that the
proposed accounts would be 'effected' by remittances from abroad
through normal banking channels and debits and credits would be
allowed only in terms of the scheme contained in the scheme for
investment by non-residents. The first letter was in respect of
(1) Caparo Tea Company Limited, UK, (2) Empire Plantation and
c Investment Limited, UK and (3) Assam.Frontier Tea Holding PLC,
UK, while the second letter was in regard to (1) Caparo Invest-
ments Limited, (2) Caparo Properties Limited, (3) Steel Sales
Limited, (4) Atlantic Merchants Limited, (5) Buchanan Limited,
(6) Seymour Shipping Limited, (7) Caparo Group Liml.ted, (8)
Natural Gas Tube Limited, (9) Single Holdings Limited and (10)
Deborne Hotel Torkey Limited. Forms RPC signed by each of the
D companies and forms OAC signed by the auditors of the companies
accompanied the two letters. Each form RPC mentioned that the
company was incorporated in England and that 61.6% of the company
was owned by non-residents of Indian nationality/origin. In each
form OAC the auditor certified that the percentage of holding of
the company by persons of Indian nationality/and/or origin was
E 61.6% and that the name of the share-holder \<as 'Swraj Paul
Family Trust through their interest in the holding company.' The
auditors certified that the ownership. interest• of persons of
Indian origin in the company was 61.6% Of the total ownership of
interest as on the . date of certificate and that the entire
beneficial interest in the family trust was held irrevocably by
F persons of Indian origin. On 23rd April, 83, Punjab National Bank
addressed the Controller, Reserve Bank of India, Exchange Control
Department, inviting their attention to their former letters
dated 4th and 12th March, 1983, which were accompanied by the RPC
and OAC forms relating to the l3 companies and advising the
Reserve Bank that the investment operations were being conducted
G through the company Raja ~ Bhasin & Co., Share & Stock Invest-
ment Advisers, Member of Delhi Stock Exchange Association Ltd.
The Reserve Bank was also advised that four remittances had been
received from Caparo Group Limited, the holding Company on
9.3.83,12.4.83, 13.4.83 and 23.3.83 of amounts equivalent to
Rs.1,35,36,000, Rs.2,36,59,000, Rs.76,35,000 and Rs.1,31,38,681.
H 13p. The Punjab National Bank also 'mentioned in the letter that
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 947

although all necessary formalities prescribed by the Reserve
A
Bank's Circular dt. 22.4.82 had been complied with, approval had
not yet been accorded to their clients. It was requested that the
approval might be communicated to their client by cable.

We would like to mention at this juncture that the letters
dated 4th March, 12th March and 23rd April, 1983 as well as all
B
other subsequent letters written by the Punjab National Bank,
E.C.E. House Branch to the Reserve Bank are totally silent about
a remittance of L 1,30,000 equivalent to Rs. 19,63,000 made by
Mr. Swraj Paul to the Punjab National Bank, Parliament Street
Branch on 28.1.1983 for the purpose of opening an NRE account in
the name of Mr. Swraj Paul. The remittance was said to have been
made pursuant to the discussion of Mr. Swraj Paul with the
c
Chairman of Punjab National Bank. We have no information as to
what those instructions were. We are told that the cable and the
letter relating to the remittance were handed over to the judges
across the bar when the writ petition was being argued in the
High Court. We may further mention here that on 26th January, 83,
D
three of the Caparo Companies, namely, Assam Frontier Tea Holding
Public Limited Company, Caparo Tea Company Limited and Empire
Plantations and Investment Limited addressed three icentical
letters to Raja Ram Bhasin & Co. instructing the broker to
purchase equity shares of Delhi Cloth Mills Limite.d at the best
market price on a repatriation basis. Each letter mentioned that E
a letter addressed to the Punjab National Bank, Parliament Street
authorising payment of an advance of Rs. 20 lakhs was enclosed.
Delivery of shares could be given as and when they were received
from the market. It was also mentioned that the Bank would pay
the full purchase value of the shares delivered and the advance
of Rs.20 lakhs would be adjusted on the final delivery of the
shares. Curiously enough, these letters were tendered by the
F
company Escorts Limited. Letters to the Punjab National Bank said
to accompany the letters were nc:it placed before us and the
counsel for the Punjab National Bank denies that any such 1etter
was ever received by the Punjab National Bank. Be that as it may,
we have the circumstance that a remittance of L 1,30,000 was
undoubtedly made. to the Parliament Street Branch of the Punjab G
National Bank, unbeknown or at any rate said to be unknown to the
ECE House Branch of the Punjab National Branch. The record
produced before us does not indicate what was done with the
aioount of L 1,30,000 nor does it indicate that the Reserve Bank
of India was ever informed of this remittance by the Punjab
National Bank. The money appears to have come in and disappeared
like a will-o'-the-wisp. The learned counsel for the Punjab H
948 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

A National Bank frankly confessed before us that the EGE House
llranch of the Punjab National Bank which was monitoring NRE
accounts and the purchase of shares by the Caparo Group of
Companies was not aware of the remittances received by the
Parliament Street Branch. In other words, the right hand did not
know what the left hand was doing. It is surprising that in a
B matter concerning valuable foreign exchange the Punjab National
Bank, a nationalised bank and an authorised dealer under the
Foreign Exchange Regulation Act, should have acted in such an
irresponsible manner. Whatever else requires a probe by the
Reserve Bank of India, the disappearance or the expending of the
amount of L 1,20,000 without the knowledge of the Reserve Bank is
a matter which requires thorough investigation. No one should be
C allowed to break the law with impunity, if he has so done, and
get away with it in this bizarre way.

The statements filed by Raja Ram Bhasin & Co. show that
prior to 9.3.1983, the date of the first remittance as disclosed
by Punjab National Bank to the Reserve Bank, Raja Ram i!hasin &
Co. had purchased shares of Escorts Limited worth Rs.33,40,865.00
D from Mangla & Co. We have already mentioned that according to tbe
correspondence which passed between the Punjab National Bank and
the Reserve Bank, the remittances were made on 9.3.83, 24.3.83,
12.4.83, 15.4.83, 28.4.83 and 28.4.84. In the correspondence,
there is no mention of any remittance having been made prior to
9.3.83. We may also notice here that the letter dated 4.3.83 from
E the Punjab National Bank seeking permission for investment in
shares by three of the Caparo Group of Companies was actually
despatched on 9th and received by the Reserve Bank on 14.3.83
only, while the letter dated 12.3.83 seeking permission on behalf
of the remaining Caparo Group of Company was received by the
Reserve Bank on 18.3.83. The statements of purchases of shares
F made by Raja Ram Bhasin & Co. show that even by 14.3.83, shares
of Escorts Limited worth Rs. 3,85,920.00 had been purchased from
Bharat Bhushan & Co. and shares worth Rs.45,81,677.00 had been
purchased from MangLa & Co. Based on the circumstances that
shares appeared to have been purchased even before remittances
were received a seemingly serious complaint has been made that
G Rupee funds must have been freely used to purchase shares for the
Caparo Group under the Non-Resident Inve_stment Scheme. We do not
think that there is any genuine basis for the complaint. Payments
under the Stock Exchange Rules may be made within two weeks after
the purchases contracted for. In the present case the remittances
from abroad started coming in less than two weeks after the first
H purchase and there would have been no difficulty in making
payments out of foreign remittances.
L.I.c. v. ESCORTS [CHINNAPPA REDDY, J.] 949

The Reserve Bank of India having been approached for A
permission to purchase shares on behalf of the thirteen Caparc
Group of companies by the letters of 4th and 12th March, 1983,
wrote to the Punjab National Bank on 29.4.83 seeking information
regarding "the exact percentage of holding of (i) Mr. Swraj Paul
and other Non-resident individuals of Indian 'origin (ii) Family
Trusts and (iii) others separately in respect of each of the
thirteen companies." Information was also sought .as to whether
any shares of Indian Companies had already been purchased by or
on behalf of their Indian clients. It is not clear why' the
Reserve Bank wanted information as to "the exact percentage of
holdings" etc. since the relevant information had already been
furnished in the RPC and OAC forms sent along with the letters c
dated 4.3.83 and 12.3.83. 'The letter dated 29.4.83 is also
important: for the reason that the Reserve Bank merely wanted to
know whether any shares of Indian Cmpani es bad already been
purchased but did not give any indication that it -would be objec-
tionable to do so without prior permission of the lleserve Bank.
Thereafter the Punjab National Bank wrote three letters to the L
Reserve Bank on 6.5.83, 19.5.83 and 25.5.83, the purport of which
was that the Swraj Paul Family Trust held 61.6% of the share
capital of Caparo Group Limited which in turn held 100 per cent
of the Share Capital of eleven of the Companies and 98% of . the ·
share capital of the twelfth Company. The names of the benefi-
ciaries of the Trust were given as Shri SWraj Paul, Mrs. Aruna E
Paul, Mr. Amber Paul, Mr. Akash Paul, Miss Anjali Paul and Mr.
Angad Paul. In all the three letters it was pointed out that the
necessary RPC and OAC forms had already been submitted. The
request for expedition of approval was reiterated. The Reserve
Bank of India was also 'informed that their non-resident clients
bad advised them that details of shares of Indian Companies pur-
chased by or on their behalf would be supplied as soon as the F
purchases were complete. On 25.5.83 the Reserve Bank of India
wrote to the Punjab National Bank, in answer to the letter dated
23.4.83 and without reference to any of the later letters, asking
for clarification as to how, without obtaining the Reserve Bank's
permission for purchase of shares on behalf of thirteen overseas
companies, the purchase consideration of the shares of Indian G
Companies was paid to Indian sellers out of the Non-Resident
External account of the overseas purchasers. Information was once
again sought regarding the exact percentage of share holding of
(i) Mr. Swraj Paul (ii) other non-resident individuals of Indian
nationality/origin (if any), and· (iii) Family Trusc of such
persons in Caparo Group Limited in U.K. separately. On 28.5.83,
the Punjab National Bank sent a telegram to the Reserve Bank and H
950 SUPROO COURT REPORTS [1985] SUPP.3 S.C.R.

A followed it up with a letter dated 30.5.83 to the effect that the
beneficial interest of Mr. Swraj Paul and his family trust in
Caparo Group Limited was 61.6% as already clearly nientioned in
forms RPG and certificates OAC delivered to the Reserve Bank in
February, 83. The other non-residents of Indian origin who were
members of the Family Trust were Mrs. Aruna Paul, Mr. Akash Paul,
B Mr. Ambar Paul, Mr. Angad Paul and Miss Anjali Paul, all members
of Mr. Swraj Paul's fal)lily. It was further pointed out in the
letter that as required by the scheme which mentioned that the
Reserve Bank of India will grant permission on application being
made in the prescribed manner, the thirteen companies had submit-
ted their applications complying with all the formalities. The
letter of 23.4.83 was also referred to and it was mentioned that
c all particulars were given therein. The Punjab National Bank
further expressed its view that they were not required under the
provisions of the scheme to await the clearance of the Reserve
Bank before purchasing shares of Indian companies, once proper
applications had been submitted. The Reserve Bank was infomed
that the remittances from Caparo Group Limited were made in
favour of Raja Ram Bhasin and Co., their designated brokers and
D power of Attorney holders.. So the operations were executed by
Punjab National Bank through NRE account on various date upto
23.4.83 and thereafter. Payments were made according to the bye-
laws and regulations of Delhi Stock Exchange. On 31.5.83, a
further telegram was sent by the Punjab National Bank to the ·
Reserve Bank infoming them that they had been advised by the
E agent brokers that up till 28.4.83 they had purchased 80,000
equity shares of Delhi Cloth and General Company Limited and
75,000 equity shares of Escorts Limited on behalf of each one of
the thirteen overseas companies predominantly owned by non-
residents of Indian origin.

F On 1.6.83, the Assistant Controller, Reserve Bank of India,
wrote to the Government of India informing them about the receipt
of applications from the Punjab National Bank on behalf of
thirteen overseas companies, eleven of which were wholly owned by
Caparo Group Limited which in turn owned by Family Trust of Mr.
Swraj Paul to the extent of 61.6%. In the twelfth company, Caparo
G Properties Limited, Caparo Group Limited had a holding of 98 per
cent. Caparo Group Limited was owned to the extent of 61.6% by
the family trust of Mr. Swraj Paul, the other members of the
family trust being Mrs. Aruna Paul, Mr. Akash Paul, Mr. Ambar
Paul, Mr. Angad Paul and Miss Anjali Paul. The Reserve Bank
pointed out that-it was to be noticed that even the Caparo Group
H Limited was not directly owned by non-resident individuals of
Indian origin but only indirectly to the extent of 61.6% through
L. I .c. v. ESCORTS [CHINNAPPA REDDY, J.] 951

the family trust whose beneficiaries were persons o_f Indian A
origin. The Reserve Bank appeared to be of the view that the
investment facilities under the scheme were intended to be
extended to Overseas Companies, Family Trusts etc. owned
predominantly non-residents of Indian Nationality/origin atleast
to the extent of 61.6% and that it' was not the intention
'
to open
these investment facilities to overseas companies which were not
directly owned by non-resident individuals of Indian nationality/
origin but owned by them indirectly via some other trust or
company. It was observed that if investment facilities were to be
extended to overseas companies indirectly owned by non-residents
of Indian nationality/origin, it would be very difficult to
enforce the scheme and the conditions of FERA. The Reserve Bank
also informed the Government that their Legal Department
c
supported thair view that none of the thirteen overseas companies
were eligible to invest in shares of Indian companies and the
existing policy. They, ' therefore, proposed to reject the
applications of all the thirteen overseas companies. They
requested the Government of India to confirm by telex. To this
the Government of India replied by telex on 8.6.83 in these
words:

"REFERENCE D.O.NO. EC.co. FID (II) 294/344-82/83 DATED
NIL JUNE 1983 REGARDING APPLICATION FROM THIRTEEN
OVERSEAS COMPANIES FOR PURCHASING SHARES ON OF INDIAN
E
COMPANIES THROUGH THE STOCK EXCHANGE WITH REPATRIATION
RIGHTS UNDER THE PORTFOLIO INVESTMENT SCHEME (.) IT IS
REPORTED THAT SOME PURCHASES HAVE ALREADY BEEN MADE IN
TERMS OF THE ABOVE PROPOSAl BY THE PUNJAB NATIONAL
BANK( • ) ALTHOUGH IT DOES APPEAR THAT PRIOR TO SECOND
MAY 1983 UNDER THE PORTFOLIO INVESTMENT SCHEME
AUTHORISED DEALERS COULD WITHOUT RBI' S PRIOR APPROVAL
F
PURL11ASE SHARES THROUGH STOCK EXCHANGE ON BEHALF OF
THEIR NON RESIDENT' CLIENTS, THE CIRCUMSTANCES IN WHICH
SOME SUL'H PURCHASES WERE ALREADY MADE BEFORE THE
CONCERNED COMPANIES GOT THE NECESSARY APPROVAL FROM
THE R. B. I. DO NOT SEEN TO BE CLEAR ( • )
GI
THE RBI IS REQUESTED TO ENQUIRE FURTHER INTO THE
MATTER AND SUBMIT A DETAILED REPORT TO THE GOVERNMENT
COVERING ALL ASPECTS OF THE MATTER INCLUDING THE
DETAILS OF SUCH PURCHASES, THE FINANCIAL STATUS AND
THE ACTIVITIES OF THE APPLICANT COMPANIES AND THEIR
DATES OF INCORPORATION AND ALSO .THE GENERAL LEGAL
ISSUE AS TO WHETHER SUC.'H PURCHASES ON THE STOCK
li
952 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

A EXCHANGE BY OVERSEAS NON RESIDENT INDIAN COMPANIES
ETC. PRIOR TO SECOND MAY 1983 ARE VALID WITHOUT THE
PRIOR SPECIFIC APPROVAL OF THE RBI(.) YOUR REPORT
SHOULD REACH US QUICKLY AS POSSIBLE IN ORDER TO ENABLE
THE GOVERNMENT TO TAKE DECISION(.)"

B The importance of 2nd May, 1983 so frequently mentioned in the
tele>< message is apparently because 2nd May, 1983 was fixed as
the cut-off date for the introduction of the ceiling of 5 per
cent in shares of Indian companies by foreign investors of Indian
origin by the Circular No. 12 dated May 16, 1983 issued by the
Reserve Bank of India.

C In the meanwhile, on 31.5.83, Punjab National Bank wrote to
Escorts Limited informing them that the thirteen overseas
companies had been making investments in shares of Escorts
Limited in terms of the scheme for investment by overseas
corporate bodies predominantly owned by non-residents of Indian
nationality/ origin to an extent to atlest 60 per cent and that
the thirteen overseas had designated them as their banker and M/s
D Raja Ram Bhasin & Co. had been designated as the brokers for the
purpose of investment. The brokers had advised the bank that upto
28th April, 83, 75,000 equity shares of Escorts Limited had been
purchased by them for each of the thirteen overseas companies.
Out of the shares so purchased 35,560 shares purchased by each of
companies had been lodged by the brokers with Escorts Limited in
E the names of H.C. Bhasin and Mr. Bharat Bhushan for the purpose
Of transfer of the shares in the books of the company. 35,667
shares purchased for the 13th company were also lodged for the
purpose of transfer in the name of Mr. H.C. Bhasin and Mr. Bharat
Bhushan. Escorts Limited replied on June 1st, 1983 and requested
the Punjab National Bank to furnish informations whether the
F non-resident companies had executed and handed over applications
to be filed with Reserve Bank of India for prior permission to
purchase the shares of the company through them as the designated
bank and whether any permissi~n had been granted by the Reserve
Bank of India to Punjab National Bank to purchase shares on
behalf of the thirteen companies mentioned in the letter. Escorts
G Limited did not refer in this letter to the circumstance that
H.C. Bhasin and Bharat Bhushan had lodged the shares with them
for transfer in their own names instead of the names of any of
the overseas companies. Escorts Limited obviously did not think
it strange that the brokers lodged the shares in their own names
instead of their principals, for the simple reason that Bye-law
H 242 of the Stock Exchange Re'(Ulations permit the brokers to do so
if they are unable to complete the formalities before the cl0sing
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 953

of the books. They now seek to make a point of it. It is A
obviously without substance. In fact in their letter to Punjab
National Bank, Escorts Limited did not even think it worthwhile
mentioning that when they wrot~ to the brokers on 27.5.83
requesting information whether they were the beneficial owners of
the shares and whether the shares had been purchased on behalf of
non-residents of Indian origin with the requisite permission of B
the Reserve Bank of India they had been curtly refused the
information by Mr. H.C. Bhasin and Mr. Bharat Bhushan who had
also questioned their authority to ask for such information, and
even threatened legal action of the transfer was not registered.
We are unable to fathom the reason behind the attitude of the
brokers. We can but make a guess. It was probably they were still c
awaiting the permission of the Reserve Bank of India. That they
had purchased the shares for overseas investors was no secret
since they had already so informed the Punjab National Bank. They
seem to have, thought that they were within their rights under
the Stock Exchange Regulations in asking the shares to be trans-
ferred in their names. It was suggested by the learned counsel D
for Escorts Limited that the brokers were loath to disclose the
names of their principals as they had utilised rupee funds and
wanted to cover up that fact. The suggestion appears to be far
fetched as the funds remitted till then from abroad were more
than ample to cover the purchase of the shares until then lodged.
We must, however, notice that the record does not disclose how E
Bharat Bhushan came into the picture, who authorised him to
purchase the shares on behalf of Caparo Group and who directed
him to deposit the shares in his own name? He was not the stock
broker designated to purchase shares on behalf of the overseas
companies. If so, one wonders what authority he had to enter
into transactions on behalf of. overseas companies! This is also a
matter which may require investigation by the Reserve Bank. As F
already mentioned the Punjab National Bank wrote to Escorts
Limited on 31.5.83 about purchase of shares by each of the
thirteen companies and the lodging of the shares with the company
in the names of H.c. Bhasin and Mr. Bharat Bhushan for the
purpose of transfer of shares in the books of the company. We
have also referred to the reply of Escorts Limited to Punjab G
National Bank on 1.6.83. Punjab National Bank immediately wrote
to Escorts Limited on 2. 6. 83 that they had already informed the
company that the purchase of shares for the thirteen companies
had been handled by designated brokers M/s. Raja Ram Bhasin & Co.
and wanted to know the purpose for which Escorts Limited was
seeking information from them. They however, stated that they
H
954 SUPREME COURT REPORTS [1985] SUPP.3 S.C.R.

A were designated as bankers of the thirteen companies and that
they had acted in terms of the procedure laid down by the scheme.
Without much further ado, that is, without making any further
enquiry either from M/s. Raja Ram lihasin or from the Punjab
National Bank or without seeking any information of guidance from
the Reserve Bank of India, Escorts Limited proceeded to consider
8 the question of registering the transfer of shares. A Committee
was constituted by Escorts Limited to scrutinize the transfer of
the shares. After taking expert legal opinion, the Committee
submitted a report to the Board of Directors of Escorts Limited
recommending against the registration of the transfer of shares.
The primary ground on which the recommendation was based and with
c which we are now concerned is ground No.5 which stated,

"that the company is prohibited by the provisions of
section 19 of FERA from registering transfer of shares
in its books when it has reasons to suspect that there
has been a violation of the provisions of section 19
D of FERA."

The Committee reported that it had reasonable ground to believe
that the requisite permission of the Reserve Bank of India has
not been obtained for the purchase of the shares in question. It
was also mentioned in the report of the Committee that they took
serious notice of 'attempts made to intimidate and coerce the
E company to register the shares and to pre-empt the free and
proper exercise of the Board's discretion in accordance with the
Articles of Association of the Company and the provisions of
Law.' However, the report did not mention what the attempts were
that were made 'to intimidate and coerce the company to register
the shares and to pre-empt the free and proper exercise on the
Board's discretion.'
F
On 9.6.83, the Board of Directors of Escorts Ltd. considered
the Conmittee's Report and passed a resolution refusing to
register the transfer of shares. The resolution was in the
following terms:-
G "The Board considered the report of the Share Scrutiny
and Transfer Committee of Directors. The Board further
considered exhaustively all aspects of the matter, all
the materials which were gathered and placed before
the Board and legal opinions and records of legal
advice which had been secured by the Company on the
H points in issue. The Board further considered whether
- having regard to the provisions of FERA and FERA
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.) 955

regulations and other relevant laws including the A
Company Law, the Stamp Act, the Public Securities Act
and other regulations relating to the Stock Exchange
and transfer of shares - requirement of law have been
complied with. The Board further considered the
various statements reported in the Press and made by
the non-resident concerned, as also by his associates B
in Delhi which are contradictions to the policy of the
Government underlying the liber.alised scheme for
'Portfolio Investment' by eligible residents. The
Board further considered whether the purchases of the
shares in question would qualify as 'Portfolio
Investment' as envisaged under the RBI Scheme. The c
Board further considered whether it is in the interest
of the Company and its shareholders to approve of the
proposed transfers and whether it is desirable in the
aforesaid interests to accept the proposed transferees
as Shareholders. Upon full discussion of the Share
Scrutiny and Transfer Connnittee' s Report - the Board D
in acceptance thereof adopted the same. Further after
a full examination of the issues legal as well as
factual and the circumstances and further on accot.int
of the reasons contained in the Share Scrutiny and
Transfer Connnittee' s Report ,and in the light of the
said Committee's recommendations and further on E
account of the view of the Board of Directors that it
would not be in the interest of, the company or the
General Body of shareholders to register the transfer
of the shares in question an4 on account of the
Board's view that the transfere_es in question could
not be approved for purposes of admitting them as
members in view of the facts and circUIJlStances taken F
note of by the Board of Directors, the Board decided
to refuse registration of the shares under
consideration.

Accordingly it was -
(
Resolved that the transfer of 2,88,390 Equity Shares
in Rs.10 each fully paid-up lodged by Mr. Harish
Chander Bhasin and Rs.1,73,947 Equity Shares of Rs.10
each fully paid-up lodged by Mr. Bharat Bhushan as per
distinctive Nos. appearing in the lists marked
Annexure A and B respectively placed before the
Directors and initialled by the Chairman for the h
purpose of identification ·be and is hereby refused.
956 SUPREME COURT REPORTS (1985] SUPP.3 S.C.R.

A
Further resolved that Mr. Charanjit Singh, Vice-
President and Secretary of the Company be and is
hereby authorised to give and send notices of the
refusal to the transferors under sec.111(2) of the
Companies Act, 1956 and take such other steps as may
be necessary and appropriate in the matter of the
B above resolution.

The resolution was passed with all the 13 Directors
(out of total 15 Directors of the Company) present and
voting for the resolution excepting Mr. D.N. Davar,
who did not take part of the discussion and voting on
the resolution. There was no dissenting vote."
c
In respect of another block of shares lodged with Escorts Ltd. on
19th and 22nd August, 1983 for registration in the name of the
thirteen foreign non-resident companies, a similar report was
submitted by the committee on 29. 9. 83 and a similar resolution
was passed by the Board of Directors on the same day.
D
Escorts Limited, although they had already refused to
register the transfer of shares, nonetheless, wrote to the Punjab
National Bank for information on various points as they desired
to make a representation to the Reserve Bank of India in the
enquiry being conducted by the Reserve Bank under the directions
of the Government. The Company wanted to know whether the
E remittances were received from M/s. Caparo Group Limited only and
from none of the other twelve foreign companies. The company also
wanted to know why 4,62,337 shares only had been lodged with them
for transfer although it had been stated that 9.75 lakhs shares
had been purchased by thirteen non-resident comPanies. The
Company further wanted to know whether instructions to purchase
F the shares were given to the brokers by the Punjab National Bank
and whether the non-resident companies indicated the maximum
price at which the shares might be bought. The company further
desired to know to whom the share scripts should be returned as
they had decided to refuse registration of the transfer of
shares. The Punjab NatiGnal Bankt, we may state here, refused to
G receive the share scripts and suggested to Escorts Limited that
they should return the scripts to those that had lodged them with
the Company.

More important still is the fact that Escorts Limited,.
having already rejected the registration of the transfer of
H shares, wrote to the Reserve Bank of India on 14th June, 1983,
20th June, 1983 and 23rd July, 1983 purporting to give informa-
tJ.r.m regarding various illegalities committed in the matter of
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 957

purchase of shares of their company by the thirteen foreign A
companies, Caparo Group Limited, etc. It was stated that the
information was being furnished to the Reserve Bank because it
was understood that the Reserve Bank was holding an enquiry in
the matter of the purchase of shares in Indian companies by the
Caparo Group Companies. One remarkable feature about the letters
is that for some reason best known to themselves, Escorts Limited B
did not disclose to the Reserve Bank the circumstance that they
had already refused to register the transfer of shares. In the
first letter, it was stated that their information revealed that
Caparo Group Limited was the holding company and the remaining
twelve companies were its subsidiaries and that a majority of
them we~e in no financial position to make such large C
investl'ients. The Reserve Bank was particularly requested to
cons5.der whether it was ever intended that an overseas company
could circumvent the stipulated cei Ung of one per cent by
channelling inveatment through a dozen subsidiaries. It was
pointed out that a colourable device of that nature would def eat
the very purpose of the ceiling. The Reserve Bank was also L
requested to take serious notice of the fact that while the
scheme permitted repatriation benefits to investments upto the
maximum of one per cent in an Indian company, shares to the twle
of over 7 per cent had been acquired in the names of thirteen
companies though funds were remitted only by one company. It was
also mentioned that the stock-brokers and not the bank purchased E
the shares and that the stock brokers unauthorisedly lodged for
registration their own names, the shares purchased on behalf of
non-residents. The Reserve Bank was requested to enquire into the
dates and rates of the purchases of the shares, whether the
shares were purchased on the floor of the stock exchange, whether
the delivery of shares was taken, whether the bank had a day-to-
day record of the transactions and so on. The Reserve Bank was F
also requested to seize the scrips and the books of account in
the possession of the stock exchange. The next letter dated 20th
June, 1983 drew attention to the circumstances that though
9,75,000 shares were purported to have been purchased before 28th
APril, 1983, only 4,62,337 shares had been lodged by 13th May,
1983 and therefore, it appeared that there were forward transac- G
tions and the purchases were not in accordance with the scheme.
In their third letter dated 23rd July, 1983, Escorts Limited
asserted that a large amount of money to the tune of about
Rs.2.61 crores were remitted from overseas to the Punjab National
Bank and was utilised to purchase shares in addition to the
shares purchased in the names of thirteen companies. The
provisions of the FERA were violated and the ceilings of one per R
958 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R.

cent and 5 per cent imposed under the scheme were also
A
circumvented. Rupee funds to the tune of Rs.4.0 crores appeared
to have been unauthorisedly diverted for the purchase of the
shares for and on behalf of the thirteen non-resident companies
in the two Indian Companies, that is, Escorts Limited and Delhi
Cloth and General Mills Limited. Though the purchases made on
behalf of the thirteen non-resident companies were said to have
B
been purchased before 28th April, 1983, only 4,62,337 shares were
lodged with the company for registration of transfer, leaving a
shortfall of 5,12,663 shares. The non-lodgment of these shares
raised a doubt whether those shares had been purchased in accor-
dance with the scheme. It was pointed out that the share transfer
deeds lodged with Escorts Limited bore the date 28th April, 1983
and disclosed consideration of Rs.65 per share although the
c highest rate at which sales of Escorts shares were transacted at
the Stock Exchange upto 28th April, 1983 was Rs.55 only per
share. This fact demonstrated that an incorrect statement had
been made that the shares had been purchased prior to 28th April,
1983. Further the share transfer deeds lodged with the companies
in regard to the 9,75,000 shares of Escorts Limited and 10,30,000
shares of Delhi Cloth Mills Limited said to have been purchased
D
on behalf of non-resident Indian companies showed that a total
amount of Rs.6,33,75,000 of non-resident funds was spent for
purchasing the shares of Escorts Limited and a sum of
Rs.9,88,69,020 of non-resident funds was spent of purchasina
shares of Delhi Cloth Mills Limited making ~ grand total of
Rs.16,22,44,020. As against this a sum of Rs.13 crores only had
E been remitted from abroad for the purchase of shares. Out of the
Rs .13 crores , a sum of Rupee One crore had been frozen by the
Reserve Bank of India making only a balance of Rs .12 crores of
non-resident funds available for purchase of shares. There was
thus a short-fall of Rs.2.61 crores which was unaccounted. It was
also brought to the notice of the Reserve Bank that the brokers
F had lodged the shares for registration of the transfers in their
names of the foreign companies • When asked by the company to
disclose the names of the principals, the brokers had refused to
do so. The company cherefore, suggested various steps that should
be taken by the Reserve Bank to detect the several illegalities
committed and to prevent the circumvention of the one per cent
G limit imposed by the scheme for acquisition of shares by any
single non-resident individual or company.

To none of these letters did the Reserve Bank of India deign
a reply or even the courtesy of an acknowledgement. Though the
Reserve Bank did not choose to write or make any further enquiry
H from Escorts Limited, there is no doubt that the Reserve Bank did
L.1.c. v. ESCORTS. [CHINNAPPA REDDY, J.] 959

enquire in its own way into the allegations made by Escorts A
Limited against the Cap!ro Group of Companies. It was not as if
the Reserve Bank want only refused to worry itself in regard to
the allegations against the Caparo Group of Companies. The Punjab
National Bank was the designated bank of the Caparo Group of
Companies and i t was an authorised dealer under the FERA, owing a
serious responsibility to the Reserve Bank under the FERA and the B
Portfolio Investment Scheme. It was, therefore, to the Punjab
National Bank that the Reserve Bank turned for elucidation in the
matter.

On llth June, 1983, the Reserve Bank of India wrote to the
Punjab National Bank advising them that mere submission of an C
application under sec. 29 (l) (b) of FERA was not sufficient to
enable the non-resident Indian company to purchase shares without
the general or special permission of the Reserve Bank. Reserve
Bank's permission had to be obtained before buying.any shares of
Indian companies. The contention of Punjab National Bank that
submission of an application was sufficient to enable a o
non-resident company to purchase shares was not accepted as
correct and the bank was told that they had committed a serious
irregularity in purchasing shares. The Punjab National Bank was
also asked to explain as to how they had allowed the Non-Resident
External Account of Caparo Group Limited to be debited in contra-
vention of the provisions of paragraph 28B.9 of the, Exchange E.
Control Manual. The Punjab National Bank was informed that the
applications of all the companies for approval of opening of
Non-Resident Accounts were pending with them and that until
specific permission for purchase of shares was granted, no
payment should be made out of the accounts for purchasing shares
on behalf of any of the thirteen companies. On the same date,
another letter was written by the Reserve Bank of India to the F
Punjab National Bank asking for particulars of the thirteen
companies purchased by them and the dates of remittances so far
received from the thirteen companies. On 17th June, 1983 and 23rd
June, 1983, the Punjab National Bank sent their reply to the
Reserve Bank by telex and by letter. They stated in the telex
message that consequent on the letter of the Reserve Bank, they G
had withheld payment of a sum of Rs.107,22,610 in favour of the
brokers and that they had advised the remitter about the same. It
was stated that the brokers had written to them asking for
payment stating that it would amount to default i f payment
pertained to shares purchase prior to 2nd May; 1983 under the
portfolio investment scheme. By their letter dated 23rd June,
1983, they informed the Reserve Bank that upto December 1982 and h
from 1st January, 1983 to 28th February, 1983 no shares on behalf
960 SUPREME €0URT REPORTS (1985] SUPP.3 s.c.R.

of the thirteen non-resident companies were purchased. Between
A 1st March, 1983 and 2nd May, 1983, 80,000 shares of Delhi Cloth
and General Mills Company Limited and 75,000 shares of Escorts
Limited were purchased for each of the thirteen companies. After
2nd May, 1983 no share was purchased. All remittances were
received through their London 8ranch for the credit of M/s. Raja
Ram Bhasin & Co., for purchase of shares on behalf of the
B thirteen companies. On 9th March, 1983, 24th March, 12th April,
15th April, 28th April and 28th April, 1983 remittances of
lls.1,35,36,000 lls.1,31,38,681, Rs. 2,36,59,900, Rs.76,35,000,
Rs.1,56,76,QOO and Rs.1,56,80,000 were received and transferred
to the account of Raja Ram Bhasin & Company from the account of
Caparo Group IJ.mited. A balance of Rs.38,682 in the NRE account
of Caparo Group Limited was allocated pro rata to the thirteen
C accounts on 2nd June, 1983 in terms of the letter of their broker
M/s.Raja Ram Bhasin & Company. The broker derived his authority
in terms of the investors' letters which were annexed to the
letter of the bank. The Punjab National Bank also stated that the
broker had confirmed by their letter dated 22nd June, 1983, a
copy of which was enclosed, that apart from the shares mentioned
they had not purchased any other shares for the thirteen
D companies. Along with their letter the Punjab National Bank also
sent to the Reserve Bank, copies of the certificates of incor-
poration, the memoranda of articles of associations and the
balance sheets of the thirteen companies. One, of the letters
enclosed with the letter of the Punjab National Bank was a letter
from the Caparo Group IJ.mited to the Punjab National Bank
E confirming that they had appointed M/s. Raja Ram Bhasin &
Company as their designated brokers and that the bank was autho-
rised to act upon the instructions of the aforesaid brokers,
entirely at the risk and responsibility of Caparo Group Limited.
On 24th June, 1983, the Punjab National Bank again wrote to the
Reserve Bank in reply to their letter of 11th June, 1983, they
F stated that they were under the impression that the clause
11
• • • • • • • RBI will grant permission to designated bank. •••••• meant
11

that permission would automatically be granted on the submission
of applications in the prescribed form by the NRE Investors,
accompanied by auditors' certificates of the eligibility. As a
matter of abundant caution they had intimated the NRE investors
G and their brokers that the transactions were being put through
entirely at their risk and responsibility. Details of the remit-
tances received and transferred to the account of Raja Ram Bhasin
& Company were once again given and the request for permission
was reiterated.

H On 6th July, 1983, the Controller Foreign Exchange, Reserve
Bank of India, wrote to the Government of India informing them
that the relevant documents had been called for and examined and
L.r.c. v. ESCORTS [CHINNAPPA REDDY, J.] 961

the report which was desired by the Government's telex dated 8th A
June, 1983 was being submitted along with the letter. It was
stated that they had taken the legal opinion 'an eminent jurist
and senior counsel' ~lr. H.M. Seervai, whtch was to the effect
that the circular did not grant general permission to
non-residents or their designated banks and that overseas bodies
where they were not directly owned by non-resident individuals B
were not eligible to invest under the liberalised scheme. It was,
therefore) stated that none of the thirteen overseas companies
was eligible to invest in shares of Indian companies under the
scheme. The question of further action in the matter of failure
of the Punjab National Bank to follow the relevant Exchange
Control Regulations would be taken up separately after a final C
decision was taken on the applications, that is, the applications
of the overseas companies for permission to purchase shares. The
Report of the Reserve Bank of India which was sent along with
their letter was not produced before the High Court, nor has it.
been placed before us. The Goverrunent of India, on 11th August,
1983, replied the Reserve Bank's letter of 6th July, 1983 D
colllll1Unicating to the latter the opinion given by the Attorney
General and asked the Reserve Bank to dispose of the applications
made by the Punjab National Bank in the light of the opinion of
the Attorney General. The G6vernment of India also mentioned that
they agreed with the opinion of the Attorney Genera~ who had
given primary importance of the intention behind the Government E
policy which was spelt out in the report of the working group. By
another letter dated 17th September, 1983, the Government of
India clarified the position and it was pointed out that the
portfolio investment scheme by companies and overseas bodies
owned by non-residents of Indian nationality/origin was
introduced as part of a package of measures to facilitate remit-
tances and investments by non-residents of Indian nationality/ t
origin in India in the overall context of the difficulties of our
balance of payments. It was pointed out that in formulating the
scheme, there were three paramount considerations~

(a) as much flexibility as possible should be
available to non-residents for bring foreign exchange '7
into India and the concern should be the purpose of
investments rather than legal entity of the
non-resident investor of Indian origin;

(b) it was to be ensured that the benefits of the
scheme should not be available to non-resident persons
or overseas bodies other than those of Indian H
nationality/origin; and
SU~REME COURT REPORTS [1985] SUPP.3 s.c.R.

A (c) the investrnent of funds iinder the scheme should
n:)t lea.j to take over of existing companies through
ope:rdtions in the stock market.

It was in the contex:t of the f.irst two considerations that it was
insisted that the overseas companies etc. should be owned by
non-residents of Indian nationali.ty/or1.gin to the extent of at
least 60% and it was in the context of the third consideration
that a ceiling of one per cent of paid up capital for eacb
investor "{as imposed. Further to ,the same considerations, in May,
1983, a ceiling of ) per cent on aggregate investment was also
imposed. The Government of India pointed out that the question of
direct or indirect ownership should be considered ln the context
C of these considerations. It was pointed out:

"In many countries there is no bar on the number of
companies an individual can pre-dominantly own
directly or indirectly. A person of Indian origin
could, if he wished, set up a nLUUber of companies
directly owned by him and investment through each of
D these companies upto one per cent of the paid up
capital of a company in India within the framework of
our portfolio Investment Scheme. This situation is not
different in its economic implications than if the
same amount of investment was made by the same person
in the same companies in India by the same number of
E companies, which were indirectly (and not directly)
owned by him. As such having regard to the objectives
of the scheme and the intention of the Government, the
fact whether a company is predominantly directly owned
or predominantly indirectly owned is not a material
consideration.
F
Taking the above consideration into account, and in
order to remove any doubt regarding the eligibility of
companies, it is clarified that overseas bodies,
whether owned directly or indirectly, are eligible to
invei:;t under the scheme so long as it is clear that
G the ultimate ownership to the extent of at least 60
per cent is in the hands of non-residents of Indian
nationality/origin. Each such applicant company is
eligible to make investment subject to the existbg
ceiling of one per cent irrespective of whether the
ultimate ownership is in the hands of one or more
H individuals.
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 963

•
Since this clarification merely reflects the original A
intention of the Goverrunent, the investments made by
the applicants before 2nd May, 1983 but pending for
approval should not be subject to five per cent
ceiling. Pending applications may be disposed of
accordingly." ·
E

This letter was apparently delivered personally to Dr. Man
Mohan Singh, Governor of the Reserve Bank of India and he made
the following endorsement on the letter :

c
"I have discussed this case with FS and FM. This
matter has been approved by CCPA. As such we should
faithfully carry out consequential action. I have
discussed with FS, FM and Principal Secretary to PM
the issue of Press Note regarding clarification by the
Government regarding the NRl Scheme. It has been D
agreed that the Press Note will be issued at 6.30 PM
by RBI in Delhi itself."

We are told that the letters FS stand for Finance Secretary, FM
for Finance Minister and CCPA for Cabinet Committee on Political E
Affairs.

As mentioned in the note of Dr. Marunohan Singh, a Press
release was issued by the Reserve Bank the same day to the effect
that the Government, having regard to the objectives of the
scheme for investment by non-residents of Indian nationality/
origin had clarified that their original intention was that the F
facilities of direct and portfolio investments in shares/
debentures of Indian companies and deposits with public limited
companies should be available to lhe overseas companies,
partnership firms, trusts, societies and other bodies in which
the ownership/beneficial interest was indirectly but ultimately
held to the extent of at least 60 per cent by non-resident G
individuals of Indian nationality or origin. It was further
stated in the Press release that the Government had also
clarified that each overseas body was eligible to invest up to
one per cent of the equity capital under the portfolio investment
scheme irrespective of whether the ultimate ownership/beneficial
interest in such body was in the hands of one or more
Ii
964 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

A non-resident individuals of Indian nationality/origin subject to
an overall ceiling of 5 per cent of the total paid up equity
capital if the investment was made after 2nd May, 1983. The
overseas bodies desiring to make investment under the scheme were
required to sulxnit their applications to the Controller, Reserve
Bank of India, Exchange Control Department, Bombay. The overseas
B bodies were required to maintain accounts with banks authorised
to deal in foreign exchange in India under the Non-resident
(External) Account Scheme. '

On 19.9.1983, the Reserve Bank also issued Circular No. 18
under sec. 73(3) of FERA. We have already referred to the
C Circular earlier. On the same day (19.9.1983), the Re&erve Bank
by a telex message, conveyed to the Punjab National Bank their
permission to release the money remitted by the Caparo Group of
companies from abroad for making payment against shares of DCM
and Escorts Limited purchased on behalf of the 13 Caparo Group of
Companies provided the shares in question were purchased up to
and incluaive to 2nd May, 1983. It was also mentioned that the
D purchase of shares shall be deemed to have taken place up to and
inclusive of 2nd May, 1983 if firm purchase commitments as
evidenced by brokers' contract notes had been entered into and
the shares had been/would be taken deli very of pursuant to such
firm commitments at the price mentioned in the relative brokers'
contract notes. The letter granting permission for purchase of
E shares was stated to follow. A letter did follow on the same day
by which the 13 group of companies were given the approval of the
Reserve Bank 'to make investments in and hold shares of Delhi
Cloth and General Mills Limited and Escorts Limited to the extent
of one per cent of the paid up capital of the respective
companies subject, where the purchase had been made after 2nd
F May, 1983 subject to an overall ceiling of 5 per cent of paid up
equity capital of each of the investee companies.' Purchases made
up to and inclusive of 2nd May, 1983 were not subject to the 5
per cent ceiling. Information was requested as to the number of
face value of the shares purchased up to 2nd May, 1983 as also
details of shares, if any, purchased after 2nd May, 1983.
G Permission was also accorded for purchase of shares/debentures cf
other Indian companies on behalf of 13 non-resident companies,
through stock exchanges in India at the ruling market price
subject to the condition that the shares/debentures would be
purchased out of fresh remittances received from abroad and/or
out of the funds held in the applicant companies' Non-Resident
H (External) Account to be opened with the banker. Purchases of
equity shares with repatriation benefits could be purchased up to
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 965

one per cent of the total paid up equity capital of the company, A
subject to the overall ceiling of 5 per cent. Another condition
was that the shares acquired under · the permission should be
retained by the non-resident investor company for a minimum
period of one year from the date of their registration with the
Indian company. The permission was to be valid for a period of
three years from the date of the letter. B

In the meanwhile, Escorts Limited wrote several frantic
letters to the Reserve Bank of India and the Government of India
on 23.7.83, S.9.1983, 16.9.1983 and 17.9.1983 reiterating the
allegations in regard to the purchase of shares by the 13 C
non-resident companies. Although the Reserve Bank granted the
requisite permission to the non-resident companies on 19.9.83,
the Reserve Bank of India, on 22.10.1983, perhaps in view of the
persistence with which Escorts Limited continued making
allegations against the non-resident companies and perhaps with a
view to further satisfy itself, wrote to the Punjab National Bank D
asking them for a report on the issues raised in the letters of
Escorts Limited dated 5th and 17th September'83, the DCM's
letters dated 11th and 24th August '83 and the letters of their
advocates. Copies of the letters were forwarded to the Punjab
National Bank who in turn asked the brokers Raja Ram Bhasin & co.
to submit a report to them about the various issues raised in the E
Reserve Bank's letter. Raja Ram Bhasin & Co. replied on
12.12.1983 and expressed their surprise that these questions were
being raised after the Reserve Bank had granted its permission on
19. 9 .1983. However, they explained that no illegality had been
counnitted by them or their clients the caparo Group of Companies
with regard to the purchase of shares before 2.5.1983. The
queries raised by the companies did not dispute the date of F
purchases made by them up to 28.4.1983. The queries were
misleading and were merely an attempt to create a confusion. The
Reserve Bank had satisfied itself and declared the eligibility of
th~ companies to invest. All contracts for the sale or purchase
of shares were made subject to the rules, bye-laws and
regulations of the stock exchange and delivery could be made and G
accepted pursuant to the contracts earlier entered into. It was
not essential that the transfer deeds must bear the date of stamp
of the Registrar of Companies as the date of the contract.
Deliveries could be taken even after 28.4.1983 • The dates stated
in the transfer deeds were the dates of execution of the deeds of
transfer by the transferee and had no relevance to the date of
fl
966 SUPREME COURT REPORTS (1985] SUP~. 3 s.c.R.

A purchase of the date of delivery. The sale consideration shown in
the transfer deed was for the purpose of computation of the stamp
duty had to be paid at the rate prevalent on the dates stated on
the transfer deeds and not as on the actual date or purchase. No
shares were purchased in the benami names. The queries for which
answers were now sought, were already before the Reserve Bank of
B India and considered by them before permission was granted.

Raja Ram Bhasin & Co. wrote a further letter on ·27.12.1983
with regard to the query whether shares were purchased from rupee
loan raised in India from the Reserve Bank of India. It was
stated that a remittance of about Rs.107 crores was with-held by
the Punjab National Bank without disclosing any reason. Shares
c had already been purchased and consequently, the brokers had to
take delivery from the seller broker and monies had to be paid to
them. Otherwise the brokers would be declared as defaulters for
non-payment. In the premises, the brokers had to take deliveries
and arrange payments. Reserve Bank's permission was not necessary
for this purpose.

D Thereafter, the Punjab National Bank wrote to the Reserve
Bank of India answering the queries raised by them and
reiterating that they had acted in accordance with the
instructions and guidelines contained in the Reserve Bank's
letter dated 19.9.1983. All the other points raised by the
Escorts Limited and DCM Limited required answers from the
E brokers. So they wrote to the brokers and the brokers had replied
to them stating that no illegality had been committed. The
conments of the brokers were summarised and it was then added
that a sum of Rs.1,05,30,000 was released to the brokers in
accordance with the directions of the RBI as conveyed by their
telex message and letter dated 19.9.1983.
F
Subsequent to the grant of permission by the Reserve Bank
of India another attempt was made to have the transfer of shares
registered. The request was turned down once again by the Escorts
Ltd. who by their letter 13.10.83 stated that apart from the
question of obtaining the permission of the Reserve Bank of India
G the decision of the Board of Directors to refuse to register the
transfer of shares was based on other grounds also which continu-
ed to be valid. We may mention here that before the High Court,
all the other grounds mentioned by the Board of Directors were
abandoned except the ground relating to want of permission of the
Reserve Bank of India. Before the High Court, a resolution passed
H by the Directors by Circulation was filed and it was to this
effect:-
L.I.c. v. ESCORTS [ClllNNAPPA REDDY, J.J 967

"Resolved that it is not the Board's intention to get
A
adjudicated in some other proceeding the grounds of
rejection contained in para 7 of the Share· Scrutiny
and Transfer Comnittee of Directors Report· dated 8th
June, 1983 or in paras 6, 7 and 8 of the Report dated
29th August 1983 and the Board hereby resolve not to
rely on the said grounds in any proceeding."

The High Court also recorded the concession in the following
words:

"Para 214 : In the rejoinder affidavit filed by
petitioner No.2 it vas specifically pleaded that the
c
petitiouers do not want adjudication on the other
giouuds of refusal of registration of shares, and as
such failure to obtain prior permission under section
29 of the FERA reulned the sole grouud for rejection.
The respondents urged that since other grounds of
refusal to register the shares are not now pressed and
are not required to be adjudicated in this Writ
Petition, the Court should refuse to go into this
question. That would amount to piece-meal adjudication
on the validity of the purchase and refusal to
register, which is not permissible even in the case of
E
a suit, which principle, according to the learned
Attorney-General, also applies to Writ Petition
mutatis mutandis.

Para 215 : Whether there is a live issue for
adjudication and whether the petitioners have locus
F
standi cannot be viewed in isolation or in the
abstract, divorced from the facts and circumstances of
the case.

Para 216 : In our view, in raising this contention
G
certain relevant factors are being overlooked. The
Union of India, the RBI and PNll and the other
respondents dispute the correctness of the decision
taken by the petitioners not to reglster the transfer
of shares purchased by respondents Nos • 4 to 17 •
Respondent No.19 has preferred an appeal under section
H
968 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

111 of the Companies Act before the Company Law Board
A and the same is still pending. Respondent Nos. 20 and
21, the stock-brokers, continue to insist upon
reconsideration of the decision taken by the Board of
Directors in regard tQ registration of the shares,
D.N. Davar, on behalf of the financial institutions,
put in written note on 6.1.1984 signed by him
B demanding the Eoard of Directors to reconsider its
decision. Further the petitioner-company has to pay
dividend on these shares accruing from time to time to
the holders of these shares. The dividend on these
shares amounting to Rs.7,50,000 per·annum is obviously
payable to those in whose names the shares stand
registered in the books of the company. If the divi-
C· dend is not paid within the stipulated time, the
petitioner-company and its Directors would be exposed
to penalties under the Companies Act. The question of
payment of dividend would recur year after year. In
fact, on the question·of payment of interim dividend
arose, while the respondent-companies claim to be
entitled to the payment of the dividend because they
D have purchased the shares, the petitioners object to
payment because the registration of transfer of shares
purchased without prior permission could not be
effected and the dividend cannot be paid to persons
whose shares are not registered. When petitioner No.2
addressed a letter dated 2nd December 1983 to D.N.
Davar, Executive Director, IFCI, inviting his comments
on the decision to withhold the interim dividend with
respect to shares purchased by the respondent-compani-
es, he replied through his letter dated 17th December,
1983 inter alia as follows:
F
"Since the payment of di v1dend in question, as
referred to in your letter under reply pertains to
interim dividend as resolved by the Board of Directors
on the 20th July 1983 there does not appear to be
legal bar in withholding the same according to the
G second opinion. However in view of the conflicting
legal opinions on the issue, we are referring the
mattor to the Ministry of Law, Department of Company
Affairs for their clarHication. On hearing from them,
we shall revert to you, on the subject".

H
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 969

Tilus the matter was under reference to the GOvernment A
of India and the question whether registration of
transfer of shares should be effected or not and who
would be entitled to receive dividend on these shares
was a live is sue even on 17th December 1983 and was
not decided even by the time the writ petition was
filed. None of the respondents has taken back the B
shares lodged with the petitioner-company for
registration of transfer. Upon the sale of the shares
and lodging of application for ~their transfer with the
petitioner-company, it had to take a decision. The
Company has rejected the request for registration on
grounds which, according to the well considered c
opinion of their legal advisers, are valid and
justified. The RBI as well as the other respondents
and their legal advisers seem to hold a different
view. Of course, as discussed above, that legal opini-
on has not been placed before the court; nor is the
Court entitled to require them to disclose it. It IIDJSt D
be recorded that petitlooers' learned counsel, Hr.
Nariman, fairly conceded that it was an error on the
part of the petltiooers to have referred in t:be
petitioner No.2' s affidavit to the legal advice
tendered to t:be respondents and requested that i t may
be treated as withdrawn. I t was not pressed at the E
hesrlng of the writ petition. Be that as it may, the
fact remains that the respondents held a different
view on this legal issue and have pressed the same
before this court. The question whether prior pennis-
sion is necessary or not is thus not concluded by the
rejection of transfer of the shares purchased by
respondents Nos.4 to 16. It would arise from time to F
time as and when such purchases are made in future.
The petitioner-company itself would have to consider
the same whenever such shares are presented for
registration. Even the Solicitors of respondent Noel8
in their letter dated 27th February 1984 addressed to
the Petitioners' Solicitors stated : G

"• • • • .. the controversy regarding tran.Sfer of shares
has been raging throughout the length and breadth of

R
970 SUPREME COURT REPORTS [1985] SUPP, 3 S.C.R.

the country and various forums including the
A shA.reholders associations, chambers of commerce and
other public bodies have been making observations and
suggestions on such issues . ••••• "

They also specifically said in that letter that they
would refer to that letter at the hearing of the writ
B petition. This legal issue would arise for decision
whenever the action of the petitioners not to register
the shares is questioned by any of the transferors or
transferees of the shares. If the respondents could
still insist upon the registration of the shares and
claim that permission granted to the respondent-
companies by the respondent No.z subsequent to the
c purchase of shares is valid which claim is strongly
supported by the stand taken by respondents Nos.1 and
2, the petitioners are certainly entitled to seek a
declaration in this behalf, Whether such a declaratory
relief in this behalf could be granted or not will be
considered in due course, but certainly it cannot be
said that the petitioners have no cause of action for
D seeking a declaration. Notwithstanding the decision
taken by the Board of Directors, the company continues
to be under pressure to transfer the shares. If the
stand taken by the petitioners is incorrect, then they
would be bound under the statute as well as under the
directions of the RBI, to register the transfer of
E shares in the books of the Company even now. While
forwarding the copy of the letter dated 27th September
1983 addressed by the PNB to the respondent No.4
Company, Haresh Bhasin (respondent No.20) by his
letter dated 8th October 1983 addressed to the
petitioner-company and sent by Registered Post A.D.,
F had requested that the decision of the Board of
Directors dated 29th August 1983 refusing to register
the shares be reviewed. In reply the petitioner-
company conveyed through its letter dated 13th October
1983 that notwithstanding the impugned Circular and
the letter of the RBI, the refusal to register
G continued to hold good for various other reasons. In
that letter the petitioners-company also disputed the
claim that the thirteen non-resident companies had
purchased the shares prior to 2nd May 1984. The
petitioner-company thus maintained that the
permission granted subsequently is not valid and that
H the refusal to register the shares for other reasons
L.I.c. v. ESCCRTS [CHINNAPPA REDDY, J.] 971

still holds good. Of course, at the hearing of the A
writ petition, having regard to the decision of the
Supreme Court in Bajaj Auto Ltd. v. N.K. Firodia
A.I.R. 1971 s.c. 321 the learned counsel Mr. Nar1man
conceded that the other grounds for not registering
the shares ""re not being pressed in support of the
refusal of registration. It was, therefore, argued for B
the respondents that this letter would indicate that
even the petitioners at that stage accepted that the
permission granted under Exh."B" and Ext."C" validated
the purchase and no longer stood in the way of
registration of the shares. We are unable to agree
with this content:l.on; firstly because if under sec·.29 c
prior permission was require for a valid purchase, any
such statement made in the letter on behalf of the
petitioner-company cannot validate such transfer so as
to entitled the purchase to claim registration of the
shares. Any registration of transfer by the
petitioner-company would steel be in contravention of
section 19 read with section 29 of the FERA; secondly
the letter cannot be interpreted to mean that the
stand taken by the company and its Board of Directors
unanimously that the purchase is invalid for not
obtaining prior permission was given up. Further even
if Exh. 'B' and Ex:h. 'C' are construed as a grant of E
permission, i t would amount to granting permission
subsequent to the purchase. When the letter of the
petitioner-company expressly states that "notwith-
standing grant of the permission by the RBI as refer
by you", it could only mean the grant of permission
subsequent to the purchase could not hold good and
that they were not prepared to transfer the shares on
F
the basis of that permission. The fact that they
actually proceeded to challenge the very permission
granted by way of Writ Petition fully establishes that
the company repudiated its liability to transfer the
shares on the strength of the impugned Circular and
letter. While so, it is the case of the petitioners
G
that D.N. Davar one of the Directors, armed with the
authority to speak for all the Financial institutions
including the LIC continued to insist that the writ
petition be withdrawn. Apart from the other pressures
exerted on the petitioner-company and its Managing
Director, already discussed above, at the meeting of
the Board of Directors of the petitioner-company held
on 6th January 1984, D.N. Davar tableo four pages of
972 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

signed note inter alia insisting upon the Board of
A Director to recall the cheques lodged with the insti-
tutions towards repayment of loans and to withdraw the
writ petition filed in the court and not to take note
of the correspondence exchanged between the financial
institutions and the management. The Board of
Director, however, did not concur with his proposal;
B
on the contrary, it ratified the filing of the writ
petition. Apart from petitioner No.2 each of the other
nine Directors filed an affidavit in this court
supporting the filing of the writ petition. It is also
the allegation of the petitioners that financial
institutions, finding that notwithstanding the unani-
mous request made on their behalf by D.N. Davar at the
c meeting of the Board of Directors, the Company and its
Managing Director were refusing to withdraw the Writ
Petition and effect the transfer of shares, with the
ulterior purpose of obtaining registration of shares,
requisitioned an EGM of the petitioner-company so
that they may secure a controlling majority in the
Board of Directors. The petitioners allege that the
D acfion of the LIC (respondent no. 18) which by itself
holds 30% of the shares and along with this other
financial institutions, collectively represented by
Davar, holds 52% shares, is malafide and is calculated
to secure the registration of the shares which were
purchased in contravention of FERA. In the circum-
E stances referred to above, it cannot be said that the
company and its Managing Director had no cause of
action to file this Writ Petition hold that there was
no longer any live issue to be adjudicated. The
petitioner-company thus maintained that the permission
granted subsequently is not valid and the refusal to
F register the shares for other reasons still hold good.
Of course, at the hearing of the Writ Petition, having
regard to tbe decision of tbe Supreme Court in Bajaj
Auto Ltd. v. N.K. Firodia, the learned counsel Mr.
Iiar1-n conceded that the other grounds for not
registering the shares were not being pressed in
G support of tbe refusal of registration. "

In view of the rejoinder and the concession made before the
High Court, in regard to the refusal of the company to register
the transfer of shares, the ouly ground which it is necessary for
H
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 973

us to consider is whether the permission granted by the Reserve A
Bank of India was in order.

Escorts Limited having refused permission to register the
transfer of shares, one would have thought that it was thereafter
upto the purchasers or the sellers of the shares, if they were so
winded to proceed to take further appropriate action in the B
matter to have the transfer of shares registered. However it was
not they that moved but it was the Escorts Limited that filed the
writ petition out of which the present appeals arise. They
explain that the pressure of circumstances was such th/it they had
no option except to go to court under Art.226 of the
Constitution. It appears that on 18.10.83, Escorts Limited met c
with the representatives of the Financial Institutions, the
ICICI, the U'C, the IDBI and the UTI. It has to be mentioned here
that 30 per cent of the shares of Escorts Limited are held by the
Life Insurance Corporation, 16 per cent by the Unit Trust of
India and 6 per cent by the General Insurance Corporation and its
subsidiaries. According to Escorts Limited, at this meeting L
their representatives gave full particulars of the various
illegalities committed by the Caparo Group of Companies in the·
purchase of shares of Escorts Limited but they were repeatedly
pressed by the representatives of the institutions to get their
Board of Directors to reconsider their earlier refusal to
register the transfer of shares. It was said that Mr. Patel the
Chairman of the Unit Trust of India even said that the Financial
Institutions who owned 52 per cent of the shares were in a
position to remove the managemeri:t at will. There were other
meetings also with the representatives of the Financial
Institutions. Mr. Nanda, the Chairman of Escorts Limited was
requested to meet with Mr. Punja, Chairman of IDBI, and a
Director of Life Insurance Corporation who had just returned from
F
abroad. At this meeting also, it was said, Mr. Punja insisted
that the transfer of shares purchased by the thirteen Caparo
Companies should be registered. Again on 1.11.83 there was a
meeting between the lawyers of Escorts and the legal advisers of
the Financial Institutions. There was a further meeting between
Mr. Nanda and Mr. Punja on 9.11.83 when Mr. Nanda of Escorts G
Limited requested Mr. Punja to expedite the proposal for merger
of goetze lridia Limited with Escorts Limited and the proposal for
pre-payment of the outstanding loans of Escorts Limited to the
Financial Institutions at the inter-institutional meeting to be
held on the afternoon of 9th. Mr. Nanda was later informed by Mr.
Davar that the proposals of Escorts Limited had been discussed
R
974 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

and accepted but the formal clearance would have to await Mr.
A
Punja's discussion with Mr· Nanda. Thereafter, it was said, Mr·
Nanda was informed by Mr. Punja that Escorts Limited must
register some shares purchased by the Caparo Group of Companies.
In answer Mr. Nanda informed Mr. Punja that the RBI itself was
enquiring into the purchase of shares by Caparo Group of
Companies and therefore Mr· Punja should await the outcome of the
B
investigation. On 10.11.83 Mr. Sen Gupta, the Controller of
capital issues telephoned to Mr. Nanda and insisted that Escorts
Limited should atleast register some shares purchased by the
Caparo Group immediately. On 12.11.83 Mr· Punja once more
insisted that some shares atleast should be registered imniediate-
ly. On 16.11.83 Mr. Nanda met Mr. Nadkarni, the Chairman of ICICI
who informed him that Mr. Punja was most upset at the refusal of
c Escorts Limited to register the transfer of shares. Thereafter in
the first week of December, the Unit Trust of India wrote a
letter to Escorts Limited to induct their Dy. General Manager as
a nominee Director on the Board of Directors of Escorts Limited.
On 13th December, 83 there was a meeting between Mr. Nanda and
the representatives of Financial Institutions when once again
there was renewed insistence that the transfer of shares should
D
be registered. On 20.12.83 Mr. Nanda telephoned and had a discus-
sion with Mr. Punja who, it was said, informed him that the
question of clearance of the proposal of Escorts Limited for
merger, for pre-payment of loans and issue of debentures were
inter-linked with the question of register of transfer of shares
purchased by the Caparo Group of Companies. According to Mr.
E
Nanda this conversation was contemporaneously recorded by him in
a letter addressed by him to Mr. Punja that very day.

While so the 'Telegraph' and the 'Financial Express'
published a statement by Mr. Swraj Paul that the fight was now
between the Government and the management of Escorts Limited and
F
that he would consider himself defeated if the Government cleared
the proposal of Escorts for the issue of debentures without first
settling the matter of registration of transfer of the shares
purchased by him. Mr. Swraj Paul was also reported to have said
that the Governor of the Reserve Bank (Dr. Man Mohan Singh, a
highly respected Civil Servant of our country) was applying
G
double standards and was feeding wrong information to the Union
Finance Minister. (If the reported statement is correct, we can
only characterise it as saucy, rude and impudent coming as it
does from a foreign national seeking the permission of the
Reserve Bank to invest in shares of Indian Companies. Perhaps
those are the ways of the markets in which he operates. People
H
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 975

afflicted witi?"double vision are reaay to see double standards in
others. We appreciate r1either his conduct nor his statements. Dr. A
Man Mohan Singh, we presume, could not and did not think it
proper to go to the press as readily as Mr. Swraj Paul and
involve himself in an unsavoury controversy). On 24.12.83, there
was a report of a speech of the Union Finance Minister (Mr.
Pranab Mukherjee), at the Platinum Jubilee Celebration of the
Galcutta Stock Exchange in which he referred to the dominant B
position held by the Financial Institutions in the equity shares
of some large private companies and added, "I have a very
effective instrunent under my command to erid the uncertainty."
According to Escorts Limited it was in this factual background,
that they were compelled to file the writ petition in the High
Court of Bombay. One remarkable tactic of Mr. Nanda of Escorts c
deserves special mention here. The Writ Petition was filed on
29.12.83 and some interim directions were also sought on the same
day. On that very day Mr. Nanda also had a meeting with the
representatives of the Financial Institutions at the Office of
Mr. Punja at which Mr. Nanda was asked to arrange for the
induction of a representative of the U.T.I. on the Board of L
Escorts and was further informed that the proposal for merger of
Goetze Limited may not be acceptable as it would reduce the
holding of the financial institutions from 52 per cent to 49
percent but that the matter was still under consideration. What
is remarkable and what may even be considered dubious conduct on
the part of Mr. Nanda is his failure to inform the E
representatives of the financial institutions about the filing of
the Writ Petition that very day.

Writ Petition No.3063 of 83 thus filed in the High Court of
Bombay was perhaps both protective and a pre-emptive strike. The
writ petition is at once remarkable for its length and the number F
of prayers. The Writ Petition runs to as many as 172 pages and
innumerable documents running into several volumes are now placed
before us. There were originally thirteen prayers(a) ••• to (m). To
these prayers four more prayers were added subsequently. Prayer
(a), (b) and (c) seek declarations that Circular No.18 dated
19.9.83 are illegal and void as contrary to the provisions of the G
Foreign Exchange Regulation Act as arbitrary and issued for
collateral purposes, as const:i.tuting an abuse of statutory
authority and as violative or Articles 14, l'\l)\cj and 19(l)(g)
of the Constitution. Prayer (d) is for a declaration that the
purchases of shares made by and/or on behalf of the Caparo Group

Ii
976 SUP!{EME COURT REPORTS [1985] SUPP. 3 S.C.R.

A Limited are illegal and violative of the Foreign Exchange
Regulation Act, the circulars of the Reserve Bank of India issued
from time to time and the provisions of the Securities Contracts
Regulation Act and the bye-laws of the Stock Exchange. Prayers
(e),(f),(g),(h),(i) again relate to Circular No. 18 dated 19.9.83
and the letter dated 19.9.83. Prayer (j) is directed towards
B securing the relevant documents. Prayer (k) is to restrain the
first respondent (Union of India) from pressuring the company to
register the transfer of shares. Prayer (1) is for ad-interim
reliefs in terms of prayers (j) and (k). Prayer (m) is for costs
of the Petition. It will be of interest to notice at this
juncture that the learned single judge before whom the writ
petition came up for preliminary hearing thought fit not to issue
c a rule nisi in regard to prayer(d). The learned judge made a
speaking order refusing to issue a rule nisi in regard to prayer
(d). There was no appeal against that order by Escorts Limited
and the order became final so far as prayer(d) was concerned. The ·
entire cause of action of the petitioner centres round the
purchase of shares made by and on behalf of Caparo Group Limited
and if those purchases are left unquestioned, one is left
D .,,ondering what survives in the writ petition, particularly in
view of the fact that the Board of Directors of the Company had
already refused their permission to register the transfer of
shares. The prayers relating to Circular No. 18 dated 19.9.83 and
the letter dated 19.9.83 were only in aid of prayer (d) which, as
we see -it, was 'the main prayer in the writ petition. But we do
E not propose to dispose of the case on .any such preliminary
ground. Apparently, when the learned single judge refused to
issue a rule nisi in regard to prayer(d) what he meant was that
transactions of purchase of shares would not be allowed to be
separately and individually questioned as that would involve
adduction of evidence in regard to each of the transactions and
F would be ordinarily outside the province of a court exercising
jurisdiction under Article 226 of the Constitution. This becomes
clear from what the learned judge has himself stated• He has
referred to the objection to prayer(d) in the following words:

G "It was also submitted that prayer (d) should not be •
entertained and if the Petitioners wanted tu urge the
contentions beyond those restricted to Exhibit 'B' and
'C' they should be relegated to an ordinary action or
to urge these contentions in the pending appeal before
the Company Law Board."
H
He has dealt with the objection and concluded
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 917

"As stated earlier I think what is sought for in
A
prayer(d) must be regarded as ordinarily beyond the
function of the Writ Court but this should not be
taken to imply that there is no warrant in the various
complaints made by Escorts and Petitioner No.2 in
connection with this aspect of the matter. Indeed it
would be clear that what had been stated by Petitioner
B
No. 2 in his letter dated 19th September 1983 was
substantial and serious but these allegations have not
been gone into either by the Government of India or
the Reserve Bank of India."

Ex.B we may mention in the Circular dated 19.9.83 and Ex-C in the
c
peraiission granted by the Reserve Bank of India •

. Subsequent to the filing of the Writ Petition the Life
Insurance Corporation of India (who later was impleaded as the
18th respondent in the Writ Petition) who _along with other
D
financial institutions held as many as 52 per cent of the total
number of shares in the Company, issued a requisition dated
11.2.84 to the company to held an extraordinary 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
E
India was malaf ide and part of a concerted action by the Union of
India, the Reserve Bank of India and the Gaparo Group Limited to
coerce the company to register the transfer 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 etc. The writ petition was
F
amended. Paragraphs 149A(l) to (44) were added as also prayers
(ia), (ib), (ic) and (id).

The High Court after an elaborate enquiry summarised their
conclusions and granted reliefs in the following manner:
G
"Rule nisi is made absolute as under :

Section 29(l)(b} of FERA is mandatory. No NRl Investor
is authorised to purchase shares in an Indian company.
without prior permission of the RBI under section
29(l}(b) of FERA; any purchase of share_s without such
Ii

•
978 SUPREME COURT REPORTS (1985] SUPP.3 s.c.R.

A prior permission is illegal. Neither the Union of
India nor the RBI is empowered to order otherwise
either by issuing directions under section 75 or under
section 73(3) of the FERA; nor are they empowered to
grant permission after the shares are purchased so as
to validate such purchases or to'permit holding of the
B shares purchased without obtaining prior permission.
The press release dated 17th September, 1983 (Exh.
'A'), the Circular dated. 19th September, 1983 (Exh.
'B') and the letter dated ! 9th September, 1983 (Exh,
'C ') cannot operate retrospectively so as to validate
the purchase of shares made by NRI Companies which
were ineligible on the date of purchase; nor can they
c authorise purchase of shares without obtaining prior
permission of the RBI under section 29(l)(b) of the
FERA. In so far as the ifupugned press release,
circular and the letter permit the respondent-
companies to hold the shares purchase without obtain-
ing prior permission of the RBI, they are .ultra vires
of section 29(1)(b) of the FERA and the powers vested
D in the union of India under section 75 and the RBI
under sec. 73(3) of the FERA. To that extent, they are
void and inoperative both prospectively and retrospec-
tively. The impugned press release and the Circular,
however amount to amending the Portfolio Investment
Scheme with full repatriation benefits introduced
E under Circular No. 9 dated 14th April, 1982 (Exh.'G')
and such amendment operates only prospectively. A writ
of mandamus shall issue restraining respondents Nos. l
and 2 from issuing any directions -

(a) to register transfer of shares purchased by the
F respondent-companies (which form the subject-matter of
this writ patition) pursuant to the letter dated 19th
September, 1983 (Exh.'C'); and
'

(b) to further forbear from implE\menting the said
G Circular dated 19th September 1983 (Exh. 'B') and the
said letter dated I 9th September 1983 (Exh. 'C') with
respect to the shares purchased by the respondent-
companies which form the subject-matter of this writ
petition.

H
L.I.c. v. ESCORTS [CHINNAPPA REDDY, J.] 979

There shall be a declaration that the action of
respondent No.18 b issuing the impugned requisition A
notice is contrary to the provisions of sec.284 of the
Companies Act and ultra vires the powers vested in the
LIC under section 6 of the LIC Act aild contrary to the
intendment of the provisions of the LIC · Act. The
impugned requisition notice offends the principles of
natural justice. The action of the LlC in issuing the B
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 RBI, respondents Nos.l and
2, are in no way responsible for the action of the LIC
in this regard. The allegation of this mala fides made c
against them and the Union Finance Minister are
unsubstantiated. The requisition notice and the reso-
lutions passed at the meeting held in pursuance of the
said notice are quashed. A writ of mandamus shall
issue restraining the respondents from taking any
])
steps or action in pursuance of the resolutions passed
any meeting held pursuant to that notice any step or
action on or under or in furtherance of the imptigned
requisition notice."

From what has ·been narrated above, one of the principle E
questions to be considered is seen to be whether the Reserve Bank
of India had the power or authority to give ex-post· ·facto
permission under sec.29(l)(b) of the Foreign Exchange Regulation
Act for the purchase of shares in India by a company not
incorporated in India or whether such permission had necessarily
to be "previous" permission.
F
We do not propose to refer to any dictionary to find out the
meaning of the word 'permission', whether the word is compre-
hensive enough to include subsequent permission. We will only
refer to what Sir Shah Sulaiman, CJ. said in Shakir llUBsain v.
Cbandoo Lal & Ors., A.t.R. 1931 Allah, 567.
G

"Ordinarily the difference between approval and
permission is that in the first the act holds good
until disapproved, while in the other case, it does
not become affective until permission is obtained. But
permission subsequently obtained may all the same
validate the previous act." H
980 SUPREME COURT REPORTS [1986] SUPP.3 s.c.R.

A We have already extracted sec.29(1) and we notice that the
expression used is "general or special permission of the Reserve
Bank of India" and that the expression is not qualified by the
word "previous" or "prior". While we are conscious that the wrd
"prior" or "previous" may be implied if the contextual situation
or the object and design of the legislation demands it, we find
B no such compelling circumatances justifying reading any such
implication into sec.29(1). On the other hand, the indications
are all to th·, contrary. We find, 0" a perusal of the several,
different sections of the very Act, that the Parliament has not
been unmindful of the need to clearly express tts intention by
using the expression "previous pemission" whenever it ins
thought that "previous permission" was necessary. In sec•• 27(1)
c and 30, we find that the expression 'permission' is qualified by
the word 'previous' and in sections 8(1), 8(2) and 31, the
expression 'general or special permission' is qualified by the
word "previous", whereas in sections 13(2), 19(1), 19(4), 20,
21(3), 24, 25, 28(1) and 29, the expressions 'perioission' and
'general' or 'special permission' remain unqualified. The
distinction made by Parliament between permission simpliciter and
o previous permission in the several provisions of tk 3ame Act
cannot be ignored or strained to be explained away by us. That is
not the way to interpret statutes. The proper way i1 to give due
weight to the use as well as the omission to use the qualifying
words in different provisions of the Act. The significance of the
use of the qualifying in one provision and its non-use in another
E provision may not be disregarded. In our view, the Parliament
deliberately avoided the qualifying word 'previous' in sec.29(1)
so as to invest the Reserve Bank of India with a certain degree
of elastic! ty in the matter of granting permission to
non-resident companies to purchase shares in Indian companies.
The object of the Foreign Exchange Regulation Act, as already
F explained by us, undoubtedly, is to earn, conserve, regulate and
stored foreign exchange. The entire scheme and design of the Act
is directed towards that end. Originally the Foreign Exchange
Regulation Act, 1947 was enacted as a temporary measure, but it
was placed permanently on the Statute Book by the Amendment Act
of 1957. The Statement of Objects and Reasons of the 1957 Amend-
G ment Act expressly stated, "India still continues to be short of
foreign exchange and it is neceasary to ensure that our foreign
exchange resources are conserved in the national interest." In
1973, . the old Act was repealed and replaced by the Foreign
Exchange Regulation Act, 1973, the long title of which reads :
"An Act to consolidate and amend the law regulating certain
H payments, dealings in foreign exchange and securities, tran-
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.J 981

sactions indirectly affecting foreign exchange and the import and A
export of currency and bullion, for the conservation of foreign
exchange resources of the country and the proper utilisation
thereof in the interest of the econcmic developDent of the
country.• We have already referred to sec. 76 which emphasises
that every permission or licence granted by the Central Govern-
ment or the Reserve Bank of India should be animated by a desire B
to conserve the foreign exchange resources of the country. The
Foreign Exchange Regulation Act is, therefore, clearly a statute
enacted in the national economic interest. When construing
statutes enacted in the national interest, we have necessarily to
take the broad factual situations contemplated by the Act and
interpret its provisions so as to advance and not to thwart the c
particular national interest whose advancement is· proposed by the
legislation. Traditional norms of statutory interpretation must
yield to broader notions of the nstionsl interest. If the legis-
lation is viewed and construed from that perspective, as indeed
it is imperative that we do, we find no difficulty in interpret-
ing 'permission' to mean 'permission' , previous or subsequent, L
and we find no justification whatsoever fer limiting the expres-
sion 'permission' to 'previous permission' only. In our view what
is necessary is that the permission of the Reserve Bank of India
should be obtained at some stage for the purchase of shares by
non-resident companies.

An argument was strenuously pressed before us by Shri
F.S. Nariman, learned Senior Advocate for the company, was that
the very scheme of the Act shows that the permission contemplated
by Sec. 29(1) could only be previous permission, notwithstanding
the circumstance that the word 'previous' does not qualify the
expression 'general or special permission' in sec.29(1) though it F
does in several other provisions. According to Sri Nariman, the
Act was designed not merely to attract but also to regulate the
inflow of Foreign Exchange. That was why, he said, the provisions
were very stringent. We have no hesitation in agreeing with Mr.
Nariman that while the inflow of Foreign Exchange is
welcomed by the . Act, the inflow is also subject to G
stringent checks as otherwise in no time the economy of the
country will be swamped with Foreign money and taken over by
giant multinationals. But that really does not affect the
interpretation of the expression 'permission' in Sec.29(1). The
Reserve Bank of India is not bound to give ex-post-facto
pennission whenever it is found that business has been started or
H
982 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

shares have been purchased without its previous permission. In
A such cases, wherever the Reserve Bank of India suspects an
oblique motive, we presume that the Reserve Bank of India will
not only refuse pemission but will further resort to action
under sections 50, 61 and 63, not merely punish the of fender but
also confiscate the property involved. We do not think that the
scheme of the Act makes previous permission imperative under
B sec.29(1) though the failure to obtain prior permission may
expose the foreign investor to prosecution, penalty, conviction
and confiscation if permission is ultimately refused. Even if
permission is granted, it may be made conditional. The expression
'special pemission is wide enough to take within its stride a
'conditional permission', the condition being relevant to the
purpose of the statute, in this case, the conservation and
c regulation of foreign exchange. For example, ex-post-facto
permission may be granted subject to the condition that the
person purchasing the shares will not be entitled to repatriation
benefits.

Snri Nariman then suggested that even if we look at the
D provisions of s.29 by themselves it would clear that the permis-
sion contemplated by s .29 could only be 'previous'. He pointed
out to us that while secs. 29(2) and 29(4) made due provision for
applying for permission to continue to carry on any activity of
the nature mentioned in s.29(l)(a) and continue to hold shares of
a company of the character mentioned in s.29(l)(b) if such acti-
E vity was carried on and such shares were held on the date of the
commencement of the act, no such provision was found for the
application for permission to carry on such activity or to hold
such shares if such activity was commenced or if such shares were
acquired after the commencement of the Act but without the previ-
ous permission of the Reserve Bank of India. It was suggested
F that the very absence of any prescribed fora for the grant of
permission for an activity started or shares acquired subsequent
to the commencement of the Act without previous permission of the
Reserve Bank of India, were clearly indicative of the imperative
nature of the need for previous pemission. It was submitted that
whatever argument was possible in regard to the acquisition of
G shares it was clear that no activity of the nature mentioned in
sec.29(l)(a) could be commenced without the previous pemission
of the Reserve Bank. Since the word 'general or special permis-
sio"' of the Reserve Bank occuring in sec.29(1) qualified both

H
L.I.C. v. ESCORTS [CRINNAPPA REDDY, J,] 983

clauses (a) and (b) the expression had to be given the same
meaning with reference to clause (b) as it had to be given with A
reference to clause (a) and that was that previous permission was
necessary. The argument is attractive and not altogether without
substance but it proceeds on the assumption, for which there is
no basis, that permission required for carrying dn business under
sec.29(l)(a) must necessarily be previous permission. We do not
think that the Parliament intended to lay down in absolute te""18 B
that the permission contemplated by sec.29(1) had necessarily to
be previous permission. The principal object of sec. 29 . is to
regulate and not altogether to ban the carrying on in India of
the activity contemplated by clause (a) and the acquisition of
an undertaking or shares in India of the· character mentioned tn·
clause (b). The ultimate object is to attract and regulate the c
flow of Foreign Exchange into India. If that much is obvious, it
becomes evident that the Parliament did not intend to adopt too
rigid an attitude in the matter and it was, therefore, left to
the Reserve Bank of India, than whom there could be no safer
authority in whom the power may be vested, to grant permission,
previous or ex-post-facto, conditional or unconditional. The L
Reserve Bank could be expected to use the discretion wisely and
in the best interests of the· country and in furtherance of
declared Governmental fiscal policy in the matter of Foreign
Exchange.
E
It was contended on behalf of Escorts Limited that sec. 13
of the Foreign Exchange Regulation Act which enable the Central
Government, by a notific;:ation in the gazette, to order that no
person shall except with the general or special permission of the
Reserve Bank bring or send into India any gold or silver or any
Foreign Exchange or Indian currency, would be rendered
ineffective if the expression 1 general or special permission' F
accuring in sec. 13 could be construed to include subsequent
permission. So, it was urged, both in s.13 and secs. 19 and 29
the expression should be construed to exclude subsequent
permission. There is no force in this submission. Section 67 of
the Foreign Exchange Regulation Act provides that the restriction
imposed by or under sec. 13 is to be deemed to have been imposed G
under sec. 11 of the Customs Act, and, further, makes the
provisions of the Customs Act applicable accordingly. Section 11
of the Customs Act empowers the Central Government to prohibit
absolutely or subject to conditions the import or export of goods
of any specified description. Reading together sections 13 and 67
H
984 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

A of the Foreign Exchange Regulation Act and Section 11 of the
Customs Act, it is seen that an order under sec. 13 of the
Foreign Exchange Regulation Act operates as a prohibition and
there, can, therefore, be no question of the Reserve Bank
granting subsequent permission to validate the importation of the
prohibited goods and avoid the consequences prescribed by the
B Customs Act. It is, therefore, not possible to accept the analogy
of section 13 to interpret sections 19 and 29.

Our attention was drawn to the very serious nature of the
consequences that follow the failure to obtain the permission of
the Reserve Bank, and the circumstance that even the burden of
c proof that requisite permission had been obtained, was on the
person prosecuted or proceeded against for contravening a
provision of the Act or rule or direction or order made under the
Act thus ruling out mensrea as an essential ingredient of an
offence. It is true that the consequences of not obtaining the
requisite permission where permission is prescribed are serious
and even severe. It is also true that the burden of proof is on
D
the person proceeded against and that mensrea may consequently be
interpreted as ruled out. But that cannot lead to the inevitable
conclusion that the permission contemplated by section 29 is
necessarily previous permission. Action under section 50 or under
section 56 is not obligatory and in the case of a prosecution
under section 56, the delinquent is further protected by the
requirement that the complaint has to be made by one or other of
E
the officers specified by section 61(2)(ii) only and even then
only after giving an opportunity to the person accused of the
offence of showing that he had the necessary permiseion. We
presume that when called upon to show that he had the n~cessary
permission, the person accused of the offence could satisfy the
officer concerned that he had applied for permission as that
F
there was a reasonable prospect of his obtaining the permission.
We may further add here that ordinary prudence would warn a
foreign national who is man of the world, particularly of the
coomercial world, to seek and obtain permission before venturing
to invest his money in shares of Indian Companies. If not he
would chance a refusal of permission and risk other conse-
G
quences. The chance and the risk, of course, would not be there
if everything was clean. Even i f permission is granted, it may be
subject to a c~nuition such as withholding of repatriation
benefits, which may nor be pl.atable to him. That is another
chance that he take8 W-' -!n he seeks ex-post-facto permission. f-·1e

H
'
/ L.I.c. v. ESCORT~ (CHINNAPPA REDDY, J.] 985

of the subnissions of Shri Nariman was that the Parliament took
care to use the word 'confirmation' as distinguished from the A
"°rd 'permission' where it thought such confirmation was suffi-
cient, as in sec. 19(5). The Parliament, according to Shri
Nariman, could well have made a provision for confirming transac-
tions coming into existence after the comnencement of the Act, if
it was so minded, but since, it did not do so, but chose the word
permission', it must follow that sec. 29 contemplates previous B
permission only. We see no true foundation for this subnission. A
reference to any dictionary or any book of synonyms will show
that every word has different shades of meaning and different
words may have the same meaning. It all depends upon the context
in which the word· is used. If it was the intention of Parliament
to comprehend both previous and subsequent permission, the word c
'confirmation' would not do at all. While it may be permissible
to construe the word 'permission' widely the word .'confirmation'
could never be used to convey the meaning 'previous permission'.
The word confirmation would be totally misplaced in sec.29.

D
It was also subnitted on behalf of the company that if the
1
word perm1Ssion' was construed to include ex-post-facto
permission, it would ,really amount to giving retrospective
operation to the permission. The Reserve Bank, it was said was
not competent to grant permission with retrospect effect. In our
view, the rule against retrospectivity cannot be imported into E
the situation presented here. The rule against retrospectivity is
a rule of interpretation aimed at preventing interference with
vested rights unless expressly provided or necessarily implied.
To invoke the rule against retrospectivity in s situation where
no vested rights are involved is to give statutory status to a
rule of interpretation forgetting the reason for a rule.
F

One of the subnission very strenuously urged before us was
that the very authority which was primarily entrusted with the
task of administering the Foreign Exchange Regulation Act,
namely, the Reserve Bank .of India was itself, of the view that
the 'permission' contemplated by sec. 29(l)(b) of the Foreign G
Exchange Regulation Act wse 'prior permission. Our attention was
invited to paragraph 24-A.l of the Exchange Control Manual where
the first three sentences read as follows :-

"'In terms of sec. 29(l)(b) of Foreign Exchange
Ii
986 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

Regulation Act 1973, no person resident outside India
A
whether an individual, firm or company (nor being a
banking company) incorporated outside India can
acquire shares of any company carrying on trading,
cOIIlllerce or induatrial activity in India without prior
permission of Reserve Bank. Also under sec. 19(l)(b)
and_ 19(l)(d) of the Act, the transfer and issue of any
B
security (which includes shares) in favour of or to
any person outside India require prior permission of
the Reserve Bank of India. When permission has been
granted for transfer or issue of shares to
non-resident investors under sec. 19(l)(b) or 19(l)(d)
it is automatically deemed to be permission under sec.
29(l)(b) for purchase of shares by him.
c
The submission of Shri Nari.man was two-fold. He urged that
paragraph 24-A.l was a statutory direction issued under sec.
73(3) of the Foreign Exchange Regulation Act and, therefore, had
the force of law and required to be obeyed. Alternately he urged
that it was the official and contemporary interpretation of the
D
provision of the Act and was, therefore, entitled to our
acceptance. The basis for the first part of the submission was
the statement in the preface to the Exchange Control Manual to
the effect:

E
"The present edition of the Manual incorporates all
the directions of a standing nature issued to
authorised dealers in the form of circulars upto 31st
May, 1978. The directions have been issued under sec.
73(3) of the Foreign Exchange Regulation Act which
empowers the Reserve Bank of India to issue directions
F necessary or expedient for the administration of
exchange control. Authorised dealers should hereafter
be guided by the provisions contained in this Manual."

There is no force whatever in this part of the submission. A
G perusal of the Manual shows that i t is a sort of guide book for
authorised dealers, mney changers etc. and is a compendium or
collection of various statutory directions, administrative
instructions, advisory opinions, comnents, notes, explanations
suggestions, etc. For example, paragraph 24-A.l is styled as
Introduction to Foreign Investment in India. There is nothing in
H
L,I,C. v. ESCORTS [CHINNAPPA REDDY, J,] 987

A
the whole of the paragraph which even remotely is suggestive of a
direction under sec.73(3). Paragraph 24-A.l itself appears to be
in the nature of a comment on sec. 29(1 )(b), rather than a
direction under sec.73(3). Directions under sec. 73(3), we.
notice, are separately issued as circulars on various dates. No
Circular has been placed before us which corresponds to any part
B
of paragraph 24-A. l. We do not have the slightest doubt that
paragraph 24-A.l is an explanatory Statement of guideline for the
benefit of the authorised dealers. It is neither a statutory
direction nor is it a mandatory instruction. It reads as if it is
in the nature of and, indeed it is, advice given to authorised
dealers that they should obtain prior permission of the Reserve
Bank of India, so that there may be no later complications •. It is c
a helpful suggestion, rather than a mandate. The expression
'prior permission' used in paragraph 24-A. l is not meant to
restrict the range of the expression 'general and special
permission found in sections 29(l)(b) and 19(l)(b). It is meant
to indicate the ordinary procedure which may be followed. Shri
D
Nariman argued that none of the prescribed forms provided for the
application and grant of subsequent permission. That may be so
for the obvious reason that ordinarily one would expect
permission to be sought and given before the act. Surely, the
Form cannot control the Act, the Rules or the directions. As one
learned judge of the Madras High Court was fond of saying 'it is
E
the dog that wags the tail and not the tail that wags the dog.'
We may add what this Court had occasion to say in Vasudev
llamchandra Sbelat v. Pranlal Jayanand Thakkar, [1975] l s.c.R.
534:

"The subservience of substance of a transction to some
• rigidly prescribed form required to be. meticulously
F
observed, savours of archaic and outmoded jurispru-
den'ce."

According to Shri Nariman even if as found by us, the
permission to purchase shares of an Indian company by a
non-resident investor of Indian origin or nationality under
section 29(l)(b) of the FERA could be obtained after the G
purchase, the Reserve Bank ceased to have such power after the
formulation of the Port.folio Investment Scheme since it did not
reserve to itself any such power under the Portfolio Investment
Scheme promulgated in exercise of its powers under sec. 73(3) of
the Foreign Exchange Regulation Act. We do not see any foundation
for this argument in the scheme itself. The scheme does not talk
H
of any prior or previous permission, nor are we able to
988 SUPREME °COURT REPORTS [1985] SUPP. 3 s.c.R.

A understand how a power possessed by the Reserve Bank under a
Parliamentary legislation can be so cut down as to prevent its
exercise altogether. It may be open to a subordinate legislating
body to make appropriate rules and regulations to regulate the
exercise of a power which the Parliament has vested in it, so as
to carry out the purposes of the legislation, but it cannot
B divest itself of the p0wer. We are, therefore, unable to appre-
ciate h¢w the Reserve Bank, if it has the power under the FERA to
grant ex-post-facto permission, can divest itself of that power
under the scheme. The argument was advanced with particular
reference to the forms prescribed under the scheme. We have
already pointed out that the forms under the scheme cannot
abridge the legislation itself.
c
Before proceeding further, it is just as well to have a
clear picture of the nature of the property in shares, the law
relating to transfer of property in shares under the law and the
effect of the provisions of the FERA. For that purpose, it is
desirable that we read together all the relevant statutdty
provisions relating to the acquisition, transfer and registration
D
of shares. Besides referring to the relevaat statutory
provisions, we will also refer to the leading cases on the topic.

Section 2(46) of the Companies Act defines "shares" as mean-
ing "share in the share capital of a company, and includes stock
E
except where a distinction between stocks and shares is express
or implied." Section 82 of the Companies Act states "the shares
or other interests of any member in a company shall be movable
property transferable in the manner prescribed by the articles of •
the cmpany." Section 84 makes a certificate, under the common
seal of the company, specifying any shares held by any member
F
prima facie evidence of the title of the member to such shares.
Sectio;:;--sr-gives every member of the company holding any equity
share capital there-ia a right to vote, in respect of such
capital, on every resolution placed before the company, his
voting right to be in proportion to his share of the paid-up
equity capital of the company. Section 106 makes provision for
G 'alteration of rights of holders of special classes of shares'
under certain circumstances. Section 108(1) prohibits a company
from registering a transfer of shares in a company unless a
proper instrument of tr,ansfer duly stamped and executed by or on
behalf of the transfer or and by or on behalf of the transferee
H
L.I.C. v. ESCORTS' [CHINNAPPA REDDY, J,] 989

has been delivered to the company along with the certificate A
relating to the shares. Section 108(la) (a) provides for the
presentation of the instrument of transfer, in the prescribed
form, to the prescribed authority for the purpose of having duly
stamped on it the date of such presentation. Section 108(1A)(b)
provides for the delivery of the duly stamped instrument to the
company generally within two months from the date of such B
presentation. Sections 108-A to 108-ti impose certain restrictions
on transfer of shares in the company with which we are not
concerned for the purpose of this case. Section 110 provides for
application for transfer of shares. Section 111 (I) preserves the
power of the company under its articles to refuse to register the
transfer of any shares of the company, and sec.111(3) provides c
for an appeal to the Central Government agairwc such refusal
to register. Section. 206 obliges a company not to pay the divi-
dend in respect of any share except to the registered holder of
such share or to his order or to his bankers or where a share
warrant has been issued in respect of the share to the bearer of
such warrant or to his banker. Default in payment of dividend is D
also made punishable under sec. 207. A share-holder along with
others, making a minimum of one hlUldred members of the company
or one-tenth of the total number of members, has the r.ight to
apply to the court under sec. 397 for relief in case of oppres-
sion and under sec. 398 for relief in case ~f mismanagement.
Section 428 defines 'contributory' and it includes the holder of E
any shares which are fully paid-up. The share-holder, as a
contributory, has also the right to apply for winding up of the
company under sec. 439. On winding up, sec. 475 enables the court
to adjust the rights of the contributories amor.gst themselves and
to distribute the surplus among the persons entitled thereto.
F
We have also no notice here sec. 27 of the Securities
Contracts (Regulation) Act which provides that it shall be lawful
for the holder of any security, whose name appears on the books
of the company issuing the said security to receiVe aud retain
any dividend declared by the company in respect thereof for any
·year, notwithstanding that the said security has already been G
. transferred by him for consideration, unless the transferee, who
claims the dividend from the transferer has lodged the security
and all other documents relating to the transfer 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.
H
990 SUPREME COURT REPORTS [1985] SUPP. 3 S.O,R,

A We have to further notice here that the sale of Goods Act
also applies to stocks and shares. Section 2(7) of the Sale of
Goods Act defines 'goods' as meaning "every kind of movable
property other than actionable claims and money; and includes
stock and shares, growing crops, grass and things attached to or
forming part of the land which are agreed to be sold before sale
B or under the contract of sale."

Section 19 prescribes that where there is a contract for the
sale of specific or ascertained goods the property in them i•
transferred to the buyer at such time as tht! parties to the
contract intend it to be transferred. Intention may be
ascertained having regard to the terms of the contract the
c conduct of the parties and the circumstances of the case. Unless
a different intention appears, the rules contained in section 20
to 24 are to determine the intention as to the time at which the
property in the goods is to pass to the buyer. Section 20 deals
with specific goods in a deliverable state. Section 21 deals with
specific goods to be put into a deliverable state. Section 22
deals with specific goods in a deliverable state when the seller
D has to do anything thereto in order to ascertain the price.
Section 23 deals with sale of unascertained goods and
appropriation and section 24 deals with goods sent on approval or
"on sale or return".

E We have referred at the outset and indeed we have extracted
some of the important provisions of the Foreign Exchange Regula-
tion' Act which have relevance to the case before us. We have seen
that while sec. 19(1)(b) prescribes that no person shall, except
with the general or special provision of the Reserve Bank, trans-
fer any security or create or transfer any interest in a secur-
F ity, to or in favour of a person resident outside India, sec.
29(l)(b) provides that no person resident outside India (whether
a citizen of India or not) or a company is not incorporated under
any law in force in India or in which the non-resident interest
is more than 40 per cent, shall except with the general or
special permission of the Reserve Bank purchase the shares in
G India or any company carrying on any trade, coDlllerce or industry.
The provisions of sec. 29 are stated to be without prejudice to
the provisions of sec. 47 which while prohibition any person from
entering into any contract or agreement which would directly or
indirectly evade or avoid in any way the operation of any provi-
sion of the Act or rule or direction or order made thereunder
H
L,l,C, v. ESCORTS [CHINNAPPA REDDY, J,] 991

also provides that the provisions of the Act requiring that any- A
thing for which the permission of the Central government or the
Reserve Bank is necessary shall not prevent legal proceedings
being brought in India to recover any sum which, apart from the
said provisions would be due as debt, damages or otherwise, sub-
ject to the condition that no step shall be taken for the purpose
of enforcing any judgment or order for the payment of any sum, B
unless the Central Government or the Reserve Bank as the case may
be, may pe~mit the sum to paid. We have also referred earlier to
sec. 19(4) which stipulates that no person shall, except with the
permission of the Reserve Bank, enter the transfer of securities
in any register if he has any ground for suspecting that the
transfer involves any contravention of the provisions of sec. 19, C
Sections 48, 50, 56 and 63 prescribe the consequences of
non-compliance with the provisions of the Act and the rules,
orders and directions issued under the Act and provide fq_r penal-
ties and prosecutions. The provisions of the Foreign Exchange
Regulation Act, to which we have just now referred, do not appear
to stipulate that the purchase of shares without obtaining the D
permission of the Reserve Bank shall be void. On the other hand,
legal proceedings arising out of such transactions are contempla-
ted subject to the condition that no sum may be recovered as
debt, damages or otherwise, unless and until requisite permission
is obtained. We have already held that the permission may be
ex-post-facto. If permission may be granted ex-post-facto, quite E
obviously the transaction cannot be a mullity and without any
effect whatsoever.

In the course of the submissions we were referred to Manekj i
Pestonj i Bharucha and Anr. v. Wadilal Sarabhai and Company, 52
I.A.92, Bank of India v. Jamshetji A.H. Cldooy, A.I.R. 1950
P.C.90, In Re Fry, 1946 (2) All E,R, 106 Swiss Bank. Corporation F
v. Llodys Bank. Ltd. 1982 A.C. 584, <liaranjit Lal Choudhury v.
Union of India A.I.R. 1951 S.C. 41, llathalone and Ors. v. Bombay
Life Assurance Company Limited A.I.R. 1953 S.C. 385 and Vasudev
R....,cbandra Sbelat V• Pranlal Jayanand 'l.'hakkar, (supra) A..K.
Kamiah v. Reserve Bank 1970 (1) M.L,J. l and Baliv Chopra I.A.R.
1971 (2) Delhi 637. We have read all of them and we think it is G
enough if we ref er to some of them.

In <liaranjit Lal Choudhury V• Union of India (supra),
Mukherjee, J. summarised the rights of a shareholder in a company
in the following manner :
11
The petitioner as a shareholder has undoubtedly an H
interest in the company. His interest is represented
by the share he holds and the share is a movable
992 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

property according to the Indian companies Act, with
A
all the incidence of such property attached to it,
Ordinarily, he is entitled to enjoy the income arising
from the shares in the shape of dividends; the share
like any other marketable commodity can be sold or
transferred by way of mortgage or pledge. The holding
of the share in his name gives him the right to vote
B
at the election of Directors and thereby take a part,
though indirectly in the management of the company's
affairs. If the majority of share-holders sides with
him, he can have a resolution passed which would be
binding on the Company and lastly, he can institute
proceedings for winding up of the Company which may
result in a distribution of the net assets among the
c share holders. 11

It is interesting to notice that Mukherjee, J, in the course of
his opinion, expressed the view that a Corporation, which is
engaged in the production of a commodity vitally essential to the
community has a social character of its own and it must not be
regarded as the concern primarily or only of these who invest
D
their money in it.

In Mathalone and Ors. v. Bombay Life Assurance Company Ltd.
(supra), the question of relationship between the transferor and
transferee of shares before registration of the transfer in the
books of the company came to be considered in connection with the
E
right of the transferee to the 'right-shares' issued by the
company. On the transfer of shares transferee became the owner of
the beneficial interest though the legal title was with the
transferor the relationship of trustee and 'cestui que trust' was •
established and the transferor was bound to comply with all the
reaaonable directions that the transferee might give and that he
F
became a trustee of dividends as also a trustee of the right to (
vote. The relationship of trustee and cestui que trust arose by
reason of the circumstance that till the name of the transferee
was brought on the register of shareholders in order to bring
about a fair dealing between the transferor and the transferee
equity clothed the transferor with the status of a constructive
G
trustee and this obliged him to transfer all the benefits of
property rights annexed to the sold shares of the cestui que
trust. The principle of equity could not be extended to cases
where the transferee had not taken active steps to get his name
registered as a member on the register of the company with due
diligence and in the meantime, certain other privileges or
H
opportunities arose for purchase of new shares in consequences of
L.I.c. v. ESCORTS [CHINNAPPA REDDY, J.] 993

the ownership of the shares already acquired. The benefit A
obtained by a transferor as a constructive trustee in respect of
the share sold by him cannot be retained by him and must go to
the beneficiary, but that cannot compel. him to make himself
liable for the obligations attaching to the new issues of shares
and to make an application for the new issue by making the
necessary payments, unless speci~lly instructed to do so by the B
beneficiary.

In Vasudev R8JD8chandra Shelat v. Pranlal Jayanand Thakkar
(supra), the q ues ti on arose this way, The donor gifted certain
shares in companies to the appellant by a registered deed. She
also signed several blank transfer forms to enable the donee to c
obtain transfer of shares in the register of companies. However,
she died before the shares could be transferred to the appellant
in the books of the companies. The respondent, a nephew of the
donor, filed the suit, claiming the shares on the ground that the
gift was incomplete for failure to comply with the formalities
prescribed by the Indian Companies Act 1913 for transfer of D
shares. Noticing that in 53 Indian Appeals, 92 a distinction was
made between· "the title to go on the register" and "the full
property in the shares in a company",the court expressed the view
that sec.6 of the Transfer of Property Act also justified such a
splitting up of a right constituting "property" on shares just as
it was well recognised that rights of ownership of property might E
be split up into a right to the "Corpus" and another to the
"usufruct" of the property and then separately dealt with. On
the delivery of the registered deed of gift together with the
share certificate to the donee, the donation of the right to get
the share certificate transfereed in the name of donee became
irrevoeable by registration as well as by delivery. Either was
sufficient. The actual transfer in the registers of the companies F
constituted more enforcement of this right to enable the donee to
exercise the rights of the shareholder. The more fact that such
transfers had to be recorded in accordance with the Company Law
did not detract from the completeness of whet was donated.
Referring to Regulation 18 of the first schedule to the Companies
Act of 1913 which prescribed the mode of transfer of shares, i t G
was observed by the court that there was nothing either in the
Regulation or elsewhere to indicate that without strict
compliance with some rigidly prescribed form, the transaction
must fail to achieve its purpose. It was said, "the subservience
of substances of a transaction to some rigidly prescribed from
required to be meticulously observed, savours of arohsic and
outmoded jurisprudence." The Court referred to the passage in H
Bucl<ley on the Canpan1 es Acts XXXI Edn. Page 813
994 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

"Non-registration of a transfer of shares made by a donor does
A not render the gift-imperfect", and the pass"f,e in Palmar's
Calmon Law : 21st Edn. page 334 : A transfer is incomplete until
registered. Pending registration, the transferor has only an
equitable right to the shares transferred to him. He does not
become the legal owner until his name is entered on the register
in respect of these shares." The two statements of law were
B reconciled by the court and its was stated "the transferee under
a gift of shares, cannot function as a shareholder recognised by
Company Law until his name is formally brought upon the register
of a company and he obtain a share certificate as already indi-
cated above. Indeed, there may be restrictions on transfers of
shares either by gift or by sale in the articles of association."
It was pointed out that, "a transfer of "property" rights in
c shares, recognised by the Transfer of Property Act, may be
antecedent to the actual vesting of all or the full rights of
ownership of shares and exercise of the rights of shareholders in
accordance with the provisions of the Gompany law," and that
while transfer of property in general was not the subject matter
of the companies Act, it deals with "'transfers of shares only
because they give certain rights to the legally recognised share-
D holders and imposes some obligations upon them with regard to the
companies in which they hold shares. A share certificate not
merely entitles the shareholder whose name is found on it to
interest on the share hold but also to participate in certain
proceedings relating to the company concerned.

E In lie Fry, (supra), F, a resident of the United States· of
America desiring to make a gift to his son of certain shares of
an English company, executed a deed of transfer and sent i t to
the company for registration. As the Lefence (Finance)
Regulations prohibited any transfer of any securities or any
interest in securities held by a non-resident ~ithout permission
F from the Treasury, the company wrote to F that certain forms had
to be completed by him and the transferee and that a licence had
to be obtained from the Treasury. Before F could apply and obtain
the permission of the Treasury, he died. The question arose
whether. F's son was entitled to require F's personal
representatives to obtain for him legal and beneficial position
G of the shares. It was held that the permission of the Treasury
not having been obtained, the company could not register the
transfer and, therefore, the son acqujred no legal title to the
shares in question. !\or was there a complete gift of the
equitable interest in the shares to the son because F had not

H
L.I.C. v. ESCOR1S [QiIN1'APFA RELLY, J.] 995

obtained the consent of the Treasury and had, therefore, not done
all that was necessary to divest hin£elf of his equitable A
interest in favour of his son. The son was, therefore, not
entitled to sue. the father's personal representatives to obtain
for him legal and beneficial position of the shares.

ln Swiss Bank Corporation v. Uoyds Bank Ltd. & Ors.,
(supra), the question was about the Consequence of an authorised D
depositary under s. 16(2) of the Exchan[;e Control Act, parting
with a certificate relating to a foreign currency security
without the permission of the 1reasury contrary to Bank of
England Exchange Control Notice E.C.7. In the court of appeal,
Buckley L.J. observed :
c
" •••• the Bank of England, we must assume for
sufficient reasons, declined to validate the transfer
of custody. It must consequently be treated as havin[;
been made in contravention of section 16(2), which, as
I have already mentioned, is conceded; but an act done
in contravention of a statute is not necessarily L
nullity. Whether it is so or not must depend upon the
terms and effect of the statute, and may depend upon
the policy of the statute and the nature of the act
itself. By section 34 of the act effect is given to
the provisions of Schedule 5 to the Act for the
purposes of the enforcement of the Act. Paragraph 1(1) E
of Part II of that Schedule provides that any person
in or resident in the United Kingdom who contravenes
any restriction or requirement imposed by or under the
Act shall be guilty of an offence punishable under the
part of that Schedule. 'Ihe subsequent provisions of
that part of the Schedule in.pose maximum penalties by
\.Jay of imprisonment or find for such of fence - F

"In ruy judgment, offences under the Act are clearly
mala prohibita, not rr.ala in se; they are not acts the
validity of which the· law refuses to countenance for
any purpose. As such they are not devoid of any
effect; they ruerely expose the culprits to the G
penalti~s prescribed by the Act none of which, so far
as I am aware, has been exacted or sought to be
exacted in this case ••••••••••••••••••.••••••••••••••
••••••••••• If the legislature had intended that such a

• security, if transfered from the custody· of the one
authorised depositary to the custody of another
R
996 SUPIJM. COUF,T REPORTS [1985] SUPP. 3 s.c.R.

A without collipliance· with all the conditions of any
relevant permission, should not be treated as being in
the custody of the latter depositary, one would. I
think, expect to find an express provision to that
effect, for otherwise the consequences of an irregular
transfer of custody is left in doubt."
B
Earlier we mentioned that S.111 of the Companies Act
preserves the power of the company under its articles to refuse
to register the transfer of any shares of the company. The nature
and extent of the power of the collipany to refuse to register the
transfer of shares has been explained by this court in Bajaj Auto
Limited v. N.K. Ferodia and Arrr. 41 Company Cases 1 = [1971] 2
s.c.R. 4C. It was said that even if the article of the company
c provided that the directors might at their absolute and
uncontrolied discretion decline to register any transfer of
shares, "such discretion does not mean a bare affirmation or
negation of a proposal. Liscretion implies just and proper consi-
deration of the proposal in the facts and circumstances of the
case. In the exercise of that discretion, the Directors will act
for the general interest of the shareholders because the
D
Directors are in a fiduciary position both towards the company
and towards every shareholder. The Lirectors, are, therefore,
required to act bona fide and not arbitraily anci not for any
collatoral motives" \Vhere the articles permitted the Directors to
decline to register the transfer of shares without assigning
reasons, the court would not necessarily draw adverse inference
E
against the Directors but will assume that the acted reasonably
and bona fide. Where the Directors gave reasons the court would
consider whether the reasons were legitimate and whether the
Directors proceeded on a right or wrong principle. If the
articles r-ernd.tted the Directors not to disclose the reasons,
they could be interrogated and asked to disclose the reasons. If
F
they failed to disclose that reason, adverse presumption could be
drawn against them.

On a overall view of the several statutory- provisions and
judicial i;recedents to which we have referred we find that a
shareholder has an undoubted interest in a Company, an interest
G
which is represented by his share-holding. Share is movable
property, with all the attributes of such property. The rights of
a shareholders are (i) to 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
R
L.r.c. v. E5CORTS [C.hINNAHA F.ELuY, J.] 997

relief in the case of oppression; (v) to apply to the Court for A
relief in the case of ndsmanagement; (vi) to appl} to the Court
for winding up of the Company; (vii) to share in the surplus on
winding up. A share is transferable but while a transfer may be
effective between transferor and transferee from the date of
transfer, the transfer is truly cotL.f>lete and •the transferee
becomes a shareholder in the true and full sense of the tenn., E
with all the ri5hts of a shareholder, onll when the transfer is
registered in the company's register. A transfer effective
between the 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 register in the books of the company c
the person whose na1lle is found in the register alone is entitled
to receive the dividends, notwithstanding that he has already
parted with his interest,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 'cestui que trust' is established L
and the transferor is bound to comply with all the reasonable
directions that the transferee may give. lie also becomes a
trustee of the dividends as also of the rie,ht to vote. The right
of the transferee 'to get on the register' nrust be exercised with
due diligence and the principle of equity which makes the trans-
feror a constructive trustee does. not extend to a case where a
transferee takes no active interest 'to get on the register'.
Where the transfer is regulated by a statute, as in the case of a
transfer to a non-resident which is regulated by the Foreign
Exchange Regulation Act,. the permission, if any, prescribed 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
F
is obtained. A transferee who has the right to get on the
register, where no permission is required or where permission has
been 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 a bona fide
reason, neither arbitrarily nor for any collateral purpose. The G
paramount consideration is the interest of the company and .the
general interest of the shareholder. On the other hand, where,
for instance, the requisite permission under the FERA is not
obtained, it is open to the company and, indeed, it is bound to
refuse to re5ister the transfer of shares of an Indian company in
favour of a non-resident. but once permission is obtained,
whether before or after the purchase of the shares, the company h
cannot, thereafter, refuse to register the transfer of shares.
998 SUPREME COURT REPOR1S [1985] SUPP. 3 s.c.R.

Nor is it Open to the company or any other authority or indivi-
A dual to take upon itself or himself, thereafter, the task of
deciding whether the permission was rightly granted by the
Reserve Bank of India. 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
B
orders from time to time have been fulfilled and whether
permission should be ~ranted 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 lndividual or authority functioning outsirie the Act to
c determine for his own or its own purpose whether the Reserve Bank
was right or wrong in granting permission under sec. 29(1) of the
Act. As we said earlier, under the scheme of the Act, it is the
Reserve Bank of India that is constituted and entrusted with the
task of regulating and conserving foreign exchange. If one may
use such an expression, it is the 'custodian-general' of foreign
exchange. The task of enforcement is left to the Lirectorate of
D 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 sec. 29(1) of the Act. 1he 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
E
or whether it ought or ought not to have been granted. The
question may not be permitted to be raised either directly or
collaterally. We do not, however, rule out the limited class of
cases where the grant of permission by the Reserve Bank of India
may be questioned, by an interested party in a proceeding under
Art. 226 of the Constitution, on the ground that it was mala fide
F or that there was no application of the lilind or that it was
opposed to the national interest as conten.plated by the Act,
being in contravention of the provisions of the Act and the
rules, orders and directions issued under the Act. Once permis-
sion is granted by the Reserve Bank of India, ordinarily it is
not open to anyone to go behind the permission and seek to
G question.it. 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 FEfu'. It is necessary to remind
ourselves that the permission contemplated by sec. 29(1) of the
H Foreign Exchange Regulation Act is neither intended to nor does
L.I.C. v. ESCOB1S [C!UliNAFPA F.E.LLY, J.] 999

it impinge in any manner or any legal right of the company or any
of its shareholders. Conversely neither the company nor any of A
its shareholders is clothed with any special right to question
any such permission.

Much was said before us about the ruala f ides of the Govern-
ment of India and the Reserve Bank of India and the non-applica-
tion of mind by the Reserve Bank of lndia which was said to B
amount to legal mala fides. Thou5h Shri Nariman, learned counsel
for the company, now and then, in the course of his argument
mentioned that Shri Swraj Paul had been issuing press statements
which were generally followed up, according to him, by some
action or the other by the Government or the Reserve Bank, he
properly refrained from reading to us the press statements said C
to have been made by Shri Swraj Paul. however, the gist of some
of the press statements and releases .of Shri Swraj Paul has been
included in the pleadings which were read out to us. It may be
that Shri Swraj Paul was ever ready and anxious to issue press
releases for his own ends either because he had an inkling or
made a guess of what course of action the GoverllIL.ent or the t
Reserve Bank lYas likely to pursue or because he, like every
interested party, was interested in niaking statements which may
find some respective ears some where. There is nothing whatever
to indicate that Shri Swraj Paul had any access to anyone who was
in a position to take a decision in the matter or influence a
decision in the matter. We do not think we can attach any E
importance to the vainglorious and grandiloquent press statements
and releases ruade by Shri Swraj Paul. They deserve to be ignored
as the over-rated staten.ents of a person, who rated himself very
high. The most in..portant circumstance on which reliance was
placed on behalf of the company in support of the argument
relating to mala fides was the 'turn-about of the attitude of the
Reserve Bank of India in the matter. It was said that in the F
beginning, the Reserve Bank of 'India had serious reservations on
the question whether indirect purchase of shares by non-residents
of Indian nationality/origin was permissible under the original
scheme. Later after the Governor of the Reserve Bank had discus-
sions with the Finance SecretarY, Finance 1.'"i.inister and the
Personal &ecretary to the Prim.e }dnister the Reserve Bank of G
India changed its attitude and issued the impugned circular and
the permission. Our attention ;,as particularly invited to: (i)
the letter dated June 1, 1903 from the Reserve Bank of India to
the Governrr.ent of India in which the Reserve hank appeared to
take the view that the scheme did not contemplate indirect

R
1000 SUPREME COURT REPORTS [1985] SUPP. 3 s.c,R.

A investment by non-resident individuals of Indian nationality
origin and proposed to reject the application of all the 13 over-
seas companies, but sought the confirmation of the Government of
India, (ii) the reply dated September 17, 1983 of the Government
of Indi.a to the Reserve Bank of India and (iii) the endorsement
made on the letter dated 17.9.83 by the Governor or the Reserve
B Bank of India. We have already referred to the contents of (i)
and (ii), the two letters in the proceeding paragraphs. We have
also extracted the endorsement of Dr. Man 1-bhan Singh in full.
The inference sought to be drawn from (i), (ii) and (iii) is that
though the Reserve Bank of India had expressed itself strongly in
(i), it was under the pressure of the Finance Secretary, Finance
Minister and the Personal Secretary to the Prime Minister that
C the Governor of the Reserve Bank of India finally agreed to adopt
the line suggested by the Government in its letter dated 17.9.83
and that the decision of the Reserve Bank of India was not that
of a free agent. The Circular issued by the Reserve Bank of India
and the permission granted by it, it was suggested, were so
issued and granted under the pressure of the Government of India.
We do not think that we will be justified in drawing any such
D inference. It would be wholly unfair and uncharitable to Dr. Man
1-bhan Singh. An enormous amount of foreign exchange vital to the
economy of the country was involved. Though the Reserve Bank of
India appeared to have taken, in the beginning, a certal.n
position in the matter, it thought it necessary to consult and
seek the advice of trui Government of India in the matter. There
E were high level discuasions obviously becauae of the amount of
foreign exchange and the question of policy involved and the
matter had also attracted considerable attention from the Press
as the public. If after high level discussions the Reserve Bank
of India changed its views, it would be unreasonable and
impermissible to hold that it was done under pressure. Every
F question of this nature is bound to have different facets which
present themselves in different lights when viewed from different
angles. If after full discussion with those in the higher rungs
of the Government who are concerned with policy-making, the
Reserve Bank of India changed its former negative attitude to a
more positive attitude in the interests of the economy of the
G country, one fails to see how its decision can be said to be the
result of any pressure.

It was argued that, from time to time, the company had
addressed several colll!lllni~tions to the Reserve Bank of India
drawing the latter's attention to several irregularities and
H illegalities, which it claimed, had been coomitted by Mr. Swraj
L.I.c. v. ESCCRTS [CllINNAI'PA REDDY, J.] 1001

Paul and the Caparo Group of Companies, but to no avail, as the
Reserve Bank failed to respond and make any enquiry into the A
matter. It was said that the Reserve Bank of India was guilty of
total non-application of the mind and, therefore, n.ala fides in
law could be attributed to it. We are unable to agree with this
submission. Merely because the Reserve Bank of India did not
choose to send a reply to the communications received frOlll the
company, it did not follow that the Reserve Bank of India was not B
acting bonafide. While we may say that the Reserve Bank would
have done well to acknowledge the conmnmications received from
the company and to reply ·to them, we are unable to infer malafide
from their failure to do so. It was not as if the Reserve Bank
ignored the complaints of the company. They did enquire into the
matter in their own way. As already mentioned by us during the c
course of the narration of events, the Reserve Bank pursued its
enquiry by seeking information from the Punjab National Bank, who
was an authorised dealer appointed under the provisions of the
Foreign Exchange Rei,,ulation Act and who, therefore, could be
expected to supply the Reserve Bank with full and accurate
information. At that stage, there was nothing to doubt the bona
fides and the ineptitude of the Punjab National Bank. The company
also in its several communications to the Reserve Bank did not
make any allegations against the Punjab National Bank. In those
circumstances, if the Reserve Bank thought fit to seek informa-
tion from the Punjab National Bank and proceeded to act on the
E
information obtained from the Punjab National Bank, the Reserve
Bank cannot be accused to non-application of mind. The Reserve
Bank was entitled to rely on the Punjab National Bank and the
information supplied by that bank as the bank held a statutory
position under the Foreign Exchange Regulation Act. It may be
that the Punjab National Bank did not act with that degree of
·competence and diligence as should be expected from it, but at
F
that stage, there was nothing to provoke any suspicion in the
iiiind of the Reserve Bank. We will revert to the part played by
the Punjab National Bank presently, but there is no reason to
change the Reserve Bank with want of bona fides and non-applica-
tion of mind merely because H placed reliance upon the Punjab
National tank and the informatio11 supplied by it although with
the aid of some of the material now ~rought out during the G
hearing, we perceive that the Reserve Bank could have acted with
greater wisdom than to rely on the Punjab National Bank. But that
would really be speaking with 'hind-..ight'.

Earlier we referred to the failure of the Punjab National
Bank to iilform the Reserve Bank, as it.was bound to do, about the
remittance of L 1,30,000 received from M.r. Swraj Paul by their Ii
1002 SUPl\fil'£ COURT REPORTS [1985] SUPP. 3 s.c.R.
1
A Parliament Street Branch. It was a sorry confession to hear from
the Punjab National Bank that their ECL House Branch which was
monitoring the NRE Accounts and the purchase of shares by the
Caparo Group of Companies was not aware of the remittance
received by the Parliament Street Branch. Ive are now told that
this amount of L 1,30,000 was also utilised for purchasing shares
B for the Caparo Group of Companies. If that was so, the ECE House
Branch should have _known about it. Otherwise, one wonders what
was the monitoring that was done by the E.CE House Branch, if i t
was not even aware that a large remittance of L 1,30,000 received
by their Parliament House Branch had been utilised for purchase
of shares for the Caparo Group of Companies. If the amount was
not utilised for the purchase of shares for the Caparo Group of
c Companies, i t must necessarily follow that locally available
funds and not foreign remittances must have been utilised for
purchasing some of the shares. The fact that this large sum had
been remitted by Shri Swraj Paul and received by the Punjab
National Bank was never brought to the notice of the Reserve Bank
of India who was apparently kept in the dark about it. We
consider this a serious matter which requires further probe by
D the Reserve Bank. We find that the entire conduct of the Punjab
National Bank in this affair has been most irresponsible. They
had been appointed as authorised dealers under the Foreign
Exchange Regulation Act and by virtue of such appointment great
confidence had been reposed in them for the purpose of regulating
the flow and conserving the foreign exchange and protecting the
E national interest. The FortfOlio Investment Schellie ~rovided that
the banks which were designated as authorised dealers could
purchase shares on behalf of their non-resident customers of
Indian nationality/origin through a stock exchange. The
applications of the foreign investors for permission to invest in
shares of Indian companies were in fact to be made through the
F designated banks. By paragraph 11 of Circular No.9 dated April
14, 1982 the designated banks were required to maintain
separately a proper record of the investment made in shares, with
and without repatriation benefits, on account of the investor,
showing all relevant particulars including the nUllibers of share
certificates and distinctive numbers of shares. They were
G required to keep a systematic and upto-date record of the shares
purchased by them for each investor through the stock exchange so
that they would be able to ensure that the purchase of shares in
any one con;pany by a single investor would not exceed Rs. One
lakh in face value of the company. Again by circular No. 10 of
April 22, 1982, the authorised dealer (designated bank) was
H required to obtain from the investing overseas companies a
certificate fron; an auditor/chartered accountant/certified public
L.r.c. v. ESCORTS [ClilNNAPPA REDLY, J.] 1003

accountant in form OAC. The certificate was to be obtained by the A
authorised dealer every year. when by circular No. 12 of May 16,
1983, an overall ceiling of 5 per cent of the total paid-up
equity capital of the company was imposed, it was prescribed,
for the purpose of monitoring the ceiling of 5 per cent, that
authorised dealers who were permitted to purchase shares under
the Portfolio Investment Scheme on behalf of the eligible B
non-resident investors should nominate a link office in Bombay
for the purpose of coordinating the purchases and sales of equity
shares made by their designated branches on a daily basis and
notify the same to the Controller, Control Exchange Department,
Reserve Bank of India. The link officers were required to submit
a consolidated statement of the total purchases and sales of c
equity shares made by the designated branches in the prescribed
form. The daily statements were to be submitted to the Controller
positively on the succeeding day. We may straight away say that
the Punjab National Bank, apart from receiving the remittances
from the Caparo Group Limited and passsing on the amounts to the
stock brokers, Raja Ram Bhasin & Co. did nothing whatsoever to D
discharge their prescribed duties as authorised dealers. It is
now admitted that they did not give any instructions to Rajaram
Bhasin & Co. regarding the purchase of shares, that they never
maintained any systematic, uptodate and proper record of the
investments made in shares and that they did not submit daily
statements of purchases and sales of shares to the Controller. Of E
course, in the beginning, they submitted the applications of the
Caparo Group of Comi>anies to the Reserve Bank for permission to
purchase shares in Indian Companies. 1hat was on the 4th and the
12th of tiarch, 1983. Thereafter, they wrote to the Reserve Bank
on April 23, 1983 reminding the latter about the applications of
their customers for permission e.nd informing them about the
receipt of four remittances on 9.3.1983, 12.4.1983, 13.4.1983 and F
23.3 .1983. They also mentioned that investruent operations were
being conducted through Raja Ram Bhasin & Co. What shares, how
many, and for what amount, these details were not mentioned, not
even the total number of ~hares purchased and the amount expended
till then. T~erefore, in answer to a letter from the Reserve
Bank, they wrote on Nay 6, 1983 that they had been advised that G
Mr. Swraj Paul and famJ,ly members hold 61.6 per cent of share
capital of Caparo Group Limited and that Caparo Group hold 100
per cent of share capital of the remaining companies except
Caparo Properties in which the holding was 98 per cent. In this
letter, it was expressly stated "As regards details of shares of
Indian Co~panies purchased by or on behalf of said non-resident
clients, they have advised us that the same would be supplied H
when the purchases were complete." This statement appears to us
1004 SUFF.EME COURT REPORTS [1985] SUPP. 3 s.c.R.

A to be in complete breach of the duties of the authorised dealer
under the Portfolio Investment Scheme. The letter shows that not
only the sales were not put through by the authorised dealers,
the authorised dealers were not even aware of the transactions
that had taken place till then, though we are now told that all
the shares had been purchased by April 28, 1983. It was only on
B 31.5 .1983 that the Punjab National Bank sent a telegram to the
Reserve Bank of India that they had been advised by the brokers
that up to 28.4.83, 75,000 equity share& of Escorts Limited had
been purchased on behalf of and for the benefit of each of the
thirteen overseas companies. The Reserve Bank sought information
by their letter dated 11.6.1983 of the purchases of shares made
for the benefit of the overseas companies, (i) upto December,
c 1982; (ii) from 1.1.83 to 28.2.83; (iii) from 1.3.83 to 2.5.83;
and (iv) after 2.5.o3. Letails of purchases including the total
number and face value of the shares were required to be given.
The Punjab National Bank replied on 23 .6 .83 to the effect that
their brokers had informed then. by their letter dated 22.6.83
that 75,000 shares of Escorts Limited had been purchased for each
of the thirteen companies during the period fro!Ii 1.3.83 to
D 2 .5 .83, but none were purchased before or after. It was also
stated that the brokers had confirmed that no other purchases had
been made besides these shares. This letter again discloses how
casual they were in the discharbe of their duties as authorised
dealers. !.ot only did they not maintain upto date and proper
record of the purchases made on behalf of each of the companies,
E not only did they not submit daily statements to the Controller,
they were not even aware of the transactions which had taken
place but were solely dependant on the information supplied to
them once in a way by Raja Ram Bhasin & Co. Though the Reserve
Bank did make some enquiries from the Punjab ~ational Bank, the
Reserve Bank did not pursue the matter as vigorously as they
F might have done but, apparently, preferred to rely upon the
Punjab National Bank probably for the reason that they were auth-
orised dealers under the Foreign E.xchange Regulation Act and
could be expected to have been doing everything properly and in a
manner authorised and contemplated by the Act and the scheme. It
has to be remembered that Escorts Limited also had made no com-
G
plaint regarding the Punjab National Bank. It is only now it has
come to light that the Punjab National Bank acted no better than
a mere dumb, dunmy and signally failed to discharge the functions
entrusted to then. under the Act and the scheme.

H
L.I.C. v. ESCORTS [CRINNAPPA REDDY, J.] 1005

The result of the dereliction of duty on the part of the A
Punjab National Bank is that there had been no proper monitoring
of the purchase of shares by the thirteen Caparo Group of
Companies. while we are unable to hold that the Reserve Bank of
India did not act bona fide or apply its mind to the relevant
facts and circumstances which were required to be considered by
it before &rantillf; permission, because, it did bona fide apply B
its mind to whatever material was then available to it and
supplied to it by the Punjab National Bank, we must hold on the
material now available to us that their implicit reliance on the
Punjab National bank was entirely misplaced. what further action
must be taken on that finding is a question which we have to
consider. •e will do so later after considerating the other C
questions argued before us.

Shri ~ariman contended that there were several circum-
stances in the record which established that a large number of
shares were purchased with funds which were made available
locally and not funds remitted from abroad and also that the D
shares were purchased subsequent to 2.5.83. lhe circumstances
were : (i) the purchase of shares commenced before the remittan-
ces started; (ii) the price at which the shares were available in
the market showed that funds in excess of what was remitted must
have been utilised for purchasing the shares and this could only
have been with rupee funds; (iii) the company was able to obtain E
two brokers' notes from two of the sellers' brokers which showed
that the sales were made lone, subsequent to 2.5.83 and (iv) out
of the total number of shares purchased on behalf of the thirteen
companies, 4,62,000 shares only were lodged with the company on
14.5.83 for re&istering the transfers. 3,68,463 shares were
lodged on 19.8.83, that is 3-1/2 months after 2.5.83, which was
the cut-off date fixed for the imposition of the ceiling of 5 per F
cent. 1,44,200 shares were not lodged at all with the company.
The failure to lodge the shares within a reasonable period at
28.4.83 which was supposed to be the date by which all the pur-
chases had been made indicated that the purchases nrust have been
made long afterwards. Everyone of these circumstances is capable
of some explanation, adequate or not, we do not have the neces- G
sary material to say on the record now before us .. 'lhe question
will involve a probe into individual purchases and the adduction
of evidence. That would be beyond the scope of the writ petition
in the Hi&h Court. It is to be remembered that the High Court
refused to issue a rule nisi in regard to prayer(d), obviously as
it was thought that the court exercising jurisdiction under
Article 226 of the Constitution should not explore the evidence li
1006 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

to determine the dates of the various transactions of purchase of
A shares and whether they were purchased with foreign exchange or
locally available funds. We consider that it is really a matter
for the consideration of the final monitoring authority, namely,
the Reserve Bank of India. We will later indicate what we propose
to do about this aspect of the matter.

B It was submitted that the thirteen Caparo Companies were
thirteen companies in name only; they were but one and that one
was an individual, Mr. Swraj Paul. One had only to pierce the
corporate veil to discover Mr. Swraj Paul lurking behind. It was
submitted that thirteen applications were made on behalf of
thirteen companies in order to circumvent the scheme which
prescribed a ceiling of one per cent on behalf of each
c non-resident of Indian nationality or origin of each company 60
per cent of whose shares were owned by non-residents of Indian
nationality/origin. Our attention was drawn to the picturesque
pronouncement of Lord Denning M.R. in Wallersteiner v. lbir 1974
3 All E.R. 217, and the decisions of this court in Tata F.ogineer-
ing snd Locomotive Company Ltd. v. State of Bihar 1964 6 s.c.R.
885, The ec-J.ssioner of Ince.! Tax v. Meenakshi Mills A. I. R.
D 1967 S.C. 819, and Workmen v. Associated Rubber Ltd. 1985 2 Scale
321. While it is firmly established ever since SalOllKln v. A.
SslOllllll & Co. Limited 1897 A.G. 22, was decided that a company
has an independent and legal personality distinct from the
individuals who are its members, it has since been held that the
corporate veil may be lifted, the corporate personality may be
E ignored and the individual members recognised for who they are in
certain exceptional circumstances. Pennington in his Company Law
(Fourth Edition) states :

"Four inroads have been made by the law on the
principle of the separate legal personality of
F companies. By far the most extensive of these has been
made by legislation imposing taxation. The Government,
naturally enough, does not willingly suffer schemes
for the avoidance of taxation which depend for their
success on the employment of the principle of separate
legal personality, and in fact legislation has gone so
G far that in certain circumstances taxation can be
heavier if companies are employed by the tax-payer in
an attempt to minimise his tax liability than if he
uses other means to give effect to his wishes.
Taxation of Companies is a complex subject, and is
outside the scope of this book. The reader who wishes
H
L.I.C. v. ESCORTS [CllINNAPPA REDDY, J.] 1007

to pursue the subject is referred to the many standard
text books on Corporation Tax, Income Tax, Capital A
Gains Tax and Capital Transfer Tax.

"The other inroads on the principle of separate
corporate personality have been made by two section of
the Companies Act, 1948, by judicial disregard of the
principle where the protection of public interests is B
of paramount importance, or where the company has been
formed to evade obligations imposed by the law, and by
the courts. implying in certain cases that a company is
an agent or trustee for its members."
c;
In Palmer·1 s Company Law (Twenty-third Edition), the present
position in England is stated and the occasions when the
corporate veil may be lifted have been enUIIlerated and classified
. into fourteen categories. Similarly in Gower's Company Law
(Fourth Edition), a chapter is devoted to 'lifting the veil' and
the various occasions when that may be done are discussed. In
Tata EogineeriDg and Locanotives r.o.Ltd. (supra), the company D
wanted the corporate veil to be lifted so as to sustain the
maintainability of the petition, filed by the company under
Art.32 of the Constitution, by treating it as one filed by the
shareholders of the company. The request of the company was
turned down on the ground that it was not possible to treat the
company as a citizen for the purposes of Art.19. In Camn1118iODer E
of lDcme Tax v. Meenakshi Mills (supra), the corporate veil was
lifted and evasion of income tax prevented by paying regard to
the economic realities behind .the legal facade. In Workmen v.
Association Rubber Industry (supra), resort was had to the
principle of lifting the veil to prevent devices to avoid welfare
legislation. It was emphasised that regard must be had to
substance and not the form of a transaction. Generally and F
broadly speaking, we may say that 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 beneficent 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 G
desirable to enUIIlerate the classes of cases where lifting the
veil is permissible, since that must necessarily depend 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, the effect on parties who may be affected
etc.
Ii
1008 SUPREME. COURT REPORTS [198S] SUPP. 3 S.C.R.

In the present case, we do not think 'lifting the veil' is
A necessary or permissible beyond the essential requirement of the
Foreign Exchange Regulation Act and the Portfolio Investment
Scheme. we have noticed that the object of the Act is to conserve
and regulate the flow of foreign exchange and the object of the
scheme is to attract non-resident investors of Indian nationality
or origin to invest in shares of Indian companies. In the case of
B individuals, there can be no difficulty in identifying their
nationality or origin. In the case of companies and other legal
personalities, there can be no question of nationality or
athnicity of such company or legal personality. V.ho of such
non-resident companies or legal personalities may then be
permitted to invest in shares of Indian companies? !he answer is
furnished by the scheme its elf which provides for 'lifting the
c corporate veil' to find out if at least 60 per cent of the shares
are held by non-residents of Indian nationality or origin.
Lifting the veil is necessary to discover the nationality or
origin of the shareholders and not to find out the individual
identity of each of the shareholders. The corporate veil may be
lifted to that extent only and no more.

D !he particulars of the scheme have already been extracted by
us. First, a ceiling of one per cent of the equity capital of the
Indian company was imposed on the purchase of its shares by any
single foreign investor. The obvious object of the imposition of
the ceiling was the prevention of destabilisation of the Indian
company by foreign investors purchasing large blocks of shares
E and attempting to take over the Indian company. we have already
explained the futility of the imposition of the one per cent
ceiling since that would not effectively prevent a group of
foreign investors of Indian origin from investing in shares of
the Indian company by each of them purchasing one per cent of the
shares. we also pointed out that different Foreign companies in
F which several different groups of resident Indians with one
individual common to all together held more than 60 per cent of
the shares could not be denied the facility of investing in
shares of Indian companies merely because the Foreign companies
were dominated by the single common non-resident individual. !hat
would be unfair to the other non-resident Indian shareholders of
G the Foreif;n companies who would otherwise be entitled to the
benefit of investment in Indian companies, via the Foreign
companies in which they held shares. Clearly, it was the
realisation of the futility of the one per cent limit that led to
the imposition of the five per cent aggregate limit. The five per
cent aggregate limit would effectively prevent any single foreign
Ii
·.

L.I.c. v. ESCORTS [CliINNAFFA RELDY, J.] 1009

investor or a combination of foreign investors from attempting .to
destabilise Indian companies by purchasing large blocks of A
shares. If this is borne in mind it will be clear that the
lifting of the corporate veil is necessary and permissible in the
present case, only to find out the nationality or origin of the
shareholders of the Foreign companies seeking to invest in shares
of Indian companies and not to explore the individual identity. of
the shareholders. We do not think that n.erely because more than B
60 per cent of the shares of the several Foreign companies who
have applied for permission are held by a trust of which lir.
Swraj Paul and the members of his family are the beneficiaries,
the companies can be denied the facility of investing in Indian
companies. In fact, if each of the six beneficiaries of the trust
had separately applied for permission to purchase shares of C
Indian companies, they could not have been denied such
permission. It cannot, therefore, be said that there has been any
violation of the Portfolio Investment Scheme. merely on that
account or that the pern.ission granted is illegal.

We now turn to the case of Escorts Limited against the Life D
Insurance Corporation of India, while narrating the sequence of
events, we referred to the impleading of the Life Insurance
Corporation of India as a respondent to the Writ Petition a few
months after it was originally filed. lhe primary allegation
which led to the impleading of the Life Insurance Corporation of
India was that there was confabulation between ·the Government of E
India, Reserve Bank of India and the Life Insurance Corporation
to pressurise the Escorts Limited to register the transfer of
shares in favour of the Caparo Group of Companies. lhe inference
of collusion and conapiracy was sought to be drawn from the sequ-
ence of certain events which we will mention iiillllediately. A few
days before the filing of the writ petition there was the report
of a speech of the Finance Minister, to which we have earlier F
made a reference, to the effect that he has in his possession an
~ effective weapon to end the uncertainty. After the writ petition
'
' was filed and before it was admitted, there was a meeting of the
Board of Directors of Escorts Limitecl on 6th January, 1984 at
which Mr. L.N. Davar, claiming to speak for the financial insti-
tutions holding 52 per cent of the shares of Escorts Limited, G
circulated three notes and moved resolutions the purport of which
was that the writ petition should be withdrawn as it had been
filed without consulting the financial institutions and that the
matter should be placed before the Board for careful considera- ·
tion of all aspects of the case and that the cheques sent in part
payment of certain institutions loans should be recalled as the
h
..
1010 SUPF.Eliil COURT REFOR1S [1985] SUFP. 3 s.c.R. ,
..

question was still under consideration. 1he resolutions proposed
A
by Mr. Davar were rejected. On 9th January, 1984 Mr. handa wrote
to Mr. Punja inforndng him about the events that took place at
the Board meeting on 6.1.1984 and pointing out that in the last
20 years, there had not been a single occasion on which the
financial institutions had even a single word to say against any
decision taken or proposed by the ~iana£eruent. Complete confidence
B
was reposed in each other in the past by the mansgement of
Escorts Limited and .the Financial Institutions. Mr. Nanda
explained the position of the ~ianageruent ot Escorts Limited in
regard to pre-paYffient of loans of financial institutions and the
filing of the writ petition. Mr. Nanda pointed out that though
the Reserve Bank had granted peruission to the Caparo Group of
Companies to purchase shares, it had not conaoned any of the
c illegalities that had already been committed arn:l it was slrange
that the financial institutions should continue to press 'the
company to register the shares. It was also state.d by ?!Ir- r;anda
that he had repeatedly drawn the attention of Mr. Punja and
others to the fact that funds far in excess of those remitted by
the Caparo Group of Companies had been invested in the purchase
of shares and, therefore, repatriation benefits in foreign
D
exchange could not be allowed to such shares by registering their
transfer. Mr. Nanda complained that he was forced to believe that
the institutions were adopting this attitude against the company
because of external pressures brought upon the institutions as a
result of the non-registration of the shares purchased by Mr.
E
Swraj Paul's companies. There was no reply to this letter by Mr.
Punja. But on 13.1.1984, Mr. Funja informed Escorts that the
financial institutions had decided to accept the proposal of
Escorts Limited for pre-payment of the outstanding loan. At this
stage, that is on 7 .1.1984, a meeting of the Board of the Life
Insurance Corporation was held and it was resolved that a requi-
sition should be served on Escorts LiuJ.ted to convene an extra-
F
ordinary general meeting to pass resolutions for the removal of 1-
the nine non-Executive Directors and for the appointn.ent as new
Directors, officers and nominees of the financial institi~tions,
in their place. This subject was not one of the matters listed in
the agenda for the Tueeting of the Board of Life Insurance Corpo-
ration. The resolution was considered after all the officers of
G
the Corporation, except one, left the meeting. The minutes of the
meeting did not record any discussion. But the ndnutes do show
that Hr. Funja of the I.D.B.I. was present in his capacity as a
Director of the Life Insurance Corporation. It was thereafter
that the Life Insurance Corporation served a requisition on
Escorts Limited to call an extraordinary general meeting of the
H
company.
L.I.C. v. ESCORTS [CHitiNAPFA REDDY, J.] 1011

What does the sequence of events go to show? It shows that
A
the financial institutions which held 52% of the shares of the
company and, therefore, had a very big stake in its working and

I
future were aggrieved that the management did not even choose to
consult them or inforffi them that a writ petition was proposed to
be filed which would launch and involve the company in difficult
and expensive litigation against the Government and Reserve Bank
of India. The financial institutions n;ust have been struck by the B
duplicity of Nr. Nanda who was holding discu~sions with them
while he was simultaneously launching the company .of which they
were the majority shareholders into a possibly trouble some
litigation without even informing them. The financial
institutions were instrumentalities of the State and so was the
Reserve Bank and it must have been thought unwise to launch into
c
such a litigation. The institutions were, therefore, 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 Lirectors so as to enable the new Board to
consider the question whether to reverse the decision to pursue
the litigation. Evidently the financial institutions wanted to
avoid a confrontation with the Goverillltent and the Reserve Bank
and adopt a more conciliatory approach. At the same time, the
resolution of the Life Insurance Corporation did not seek rem.oval
of the Executive Directors, obviously because they did uot intend
E
to disturb the management of the company. It is, therefore,
difficult to accuse the Life Insurance Corporation of India of
having. acted mala fide in seeking to remove the nine
non-Executive Directors and to replac~ 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 bad been adopted by the Board in launching into
a litigation could· be reconsidered and reversed, if necessary. It F
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
share-holders were opposed. That is not how corporate democracy
may function.
G
A Company is, in some respects, an institution like a State
functioning under its 'basis Constitution' consisting of the
Companies Act and the ~.emorandum of Association. Carrying the
analogy of constitutional law a little further, Gower describes
"the members in general meeting"' and the directorate as the two
primary organs of a company and compares them -with the legis-
H
1012 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

A lative and the executive organs of a Parliamentary democracy
where legislative sovereignty rests with Parliament, while
administration is left to the Executive Government, subject to a
measure of control by Parliament through its power to force a
change of Government. Like the Government, the Directors will be
answerable to the 'Parliament' constituted by the general
B meeting. But in practice (again like the Government), they will
exercise as much control over the Parliament as that exercises
over them. Although it would be 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 - companies) for day-co-day admini•Lration to
be undertaken by such a cumbersome piece of machinery, So the
C modern practice is to confer on the Directors the right to
exercise all the com¥;ny's po•ers ei<cept such as gen ral law
expressly provides must be exercised in general meeting. Gower's
Principles of Modern Company Law. Of course, powers which are
strictly legislative are not affected by the conferment of powers
on the Directors as section 31 of the. Companies Act provides that
an alteration of an article would require a special resolution of
D the company in general meeting. But a perusal of the provisions
of the Companies Act itself makes it clear that in many ways the
position of the directorate vis-a-vis the company is more
powerful than that of the Government vis-a-vis the Parliament.
The strict theory of Parliamentary sovereignty would not apply by
analogy to a company since under the Companies Act, there are
E many powers exerciseable by the Directors with which the members
in general meeting cannot interfere. The most they can do is to
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. Gower himself recognises that the analogy of the
legislature and the executive in relation to the members in
F general meeting and the Directors of a Company is an over-simpli-
fication and states "to some extent a more exact analogy would be
the division of powers between the Federal and the State Legis-
lature under a Federal Constitution." As already noticed, the
only effective way the members in general meeting can exercise
their control over the Directorate in a democratic manner is to
G alter the articles so as to restrict the powers 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. And, an injunction cannot be granted to restrain
H the holding of a general meeting to remove a director and appoint
another.
L.I.c. v. ESCORTS [CBINNAPFA REDDY, J.] 1013

In Shaw & Sons (Salford) Ltd. v. Shaw 1935 2 K,Jl, 113,
Greer, L.J. expressed A

I
"1he only way in which the general body of the
shareholders can control the exercise of powers vested
by the articles in the Directors is by altering the
articles or, if opportunity arises under the articles,
by refusing to re-elect the Directors on whose action B
they disapproved."

In Isle of Wight l!ailway Canpany v. Tahourdin ( 1883) 25
Chancery Division 320, Cotton L.J, said :

"Then there is a sec~nd object, "lo remove (if deemed C
necessary or expedient) any of the present directors,
and to elect directors to fill any vacancy in the
board." The learned Judge below thought that too
indefinite, but in my opinion a notice to remove "any
of the present directors" would justify a resolution
for removing all who are directors at the present D
time; "any" would involve "all", I think that a notice
in that form is quite sufficient for all practical
purpose.

Fry, L .J. said,
E
"lhe second objection was, that a requisition to call
a meeting ''to remove (if deemed necessary or
expedient) any of the present directors" is too vague.
I think that it is not. It appears to me that there is
a reasonably sufficient particularity in that
statement. It is said that each director does not know
whether he is attacked or not. The answer is, all the F
directors know that they are laid open to attack. I
think that any other fo= of requisition would have
been embarrassing, because it is obvious that the
meeting might think fit to remove a director or allow
him to remain, according to his behaviour and
demeanour at the meeting· with regard to the proposals G
made at it.••

In the same case considering the question whether an injunction
should be granted to restrain the holding of general meeting, one
of the purposes of the meeting being the appointment of a
committee to reorganise the management of the company, Cotton
L.J. Said : R
1014 SUPJlE.ME OlURT REPORTS [1985] SUPP. 3 s.c.R.

"It is a very strong thing indeed to prevent
A shareholders from holding a n.eeting of the company,
when such a meeting is the only way in which they can
interfere if the majority of them think that the ~
course taken by the Director, in a matter intra vires
of the Directors, is not for the benefit of the
company."
B
In Indeniick v. Snell, 42 English Reports 63, the deed of
settlement of a company provided for the removal of any director
"for negligence, misconduct in office or any other reasonable
cause". Some directors were removed and others were appointed.
The directors who were removed sued for the injunction to prevent
the new directors from acting on the ground that there was no
c reasonable cause for their removal. The Court negatived the claim
for judicial review of the reasons for removal and made the
following interesting observations:-

"lhe argument for the Plaintiffs rested on the
allegation that the general cause of removal referred
to in the clause being expressed to be 'reasonable'
D prevents the power ref erred to from being a power to
remove at pleasure arbitrarily or capriciously, and
made it requisite that the proceeding for exercising
the power should be in its nature judicial, and that
the .reasonable cause should be such as a Court of
Justice would consider good and sufficient. If this
E argument could be sustained, all proceedings at such
meetings would be subject to the review of the Courts
of Justice, which would have to inquire whether the
cause of removal which was charged was in their
reasonable, whether the charges were bona fide brought
forward, whether they were substantiated by such
F evidence as the nature of the case required, and
whether the conclusion was come to upon a due
consideration of the charge and evidence. But the deed
is silent as to these matters, and the question is
whether any such power of control in the Courts of
Justice is to be inferred from the words "reasonable
G cause" contained in the 27th clause; whether the
expression "reasonable clause" contained in such a
deed of a trading partnership can be held to be such a
cause, as upon investigation in a Court of Justice
nrust be held to be bona fide founded on sufficient
evidence and just; or whether it ought not to be held
H to mean such cause as in the opinion of the
L.I.C. v. ESCORTS [CHINKAPPA REDDY, J.] 1015

share-holders duly assembled shall be deemed A
reasonable. We think the latter is the true
construction aGd effect of the deed.

In a moral point of view, no doubt every charge of a
cause of removal ought to be made bona fide
substantiated by sufficient evidence, and determined B
on a due considerat~on of the charge and evidence; and
those who act on other principles may be guilty of a
moral offence; they may be very unjust, and those who
(being misled by the statements made to them, have no
doubt a just right to complain that they have been led
to concur in an unjust act. But the question is, c
whether by this deed the sharesholders duly assembled
at a general meeting might not, or had not a right to,
remove a director for a cause which they thought
reasonable, without its being incumbent upon them to
prove to this. or any other Court of justice that the
charge was true and the decision just, or that the D
case was substantiated after a due consideration of
the evidence and charge. We cannot take upon ourselves
to say that in the case of a trading partnership like
this, this Court has upon such a clause in the deed of
partnership jurisdiction or authority to determine
whether, by the unfounded speech of any supporter of E
the charge, the shareholders present may not have been
misled or unduly influenced.

All such meetings are liable to be misled by false or
erroneous statements, and the amount of error or
injustice thereby occasioned can rarely, if ever, be
appreciated. This Court might inquire whether the
F
meeting was regularly held, and in cases of fraud
clearly proved, might perhaps interfere with the acts
done; but supposing the meeting to be regularly
convened and held the shareholders assembled at such
meeting may exercise the powers given them by the
deed. The effect of speeches and representations
G
cannot be estimated, and for those who think
themselves aggrieved by such representations, or think
the conclusion unreasonable, it would seem that the
only remedy is present defence by stating the truth
and demanding time for investigation and proof, or the
calling of another meeting, at which the whole matter
may be re-considered. The Plaintiff, objecting to this
H
1016 SUPW£ COURT REPORTS [L85] S<JPP. 3 s.c.R.

meeting and considering it illegal, protested against
A it, but abstained from attending and, therefore, made
no answer or defenct to, and required no proof of, the
charges made against them. The adoption of this course
was unfortunate, but does not afford any grounds for
the interference of this Court."
B Again in Bentley-Stevens v. Jooea, 1971 (2) All E.R. 653,
it was held that a share holder had a statutory right to move a
resolution to remove a Director and that the court was not
entitled to grant an injunction restraining him horr, calling a
meeting to consider such a resolution. A proper re,.,,dy of the
Director was to apply for a winding-up order on the ground that
it was 'just and equitable' for the court to make such 8.n order.
c The case of Ebrahimi v. liestboume Galleries Ltd., 1972 (2) All
E.R. 492, was explained as a case where a winding-up of order was
sought. In the case of Kbrclibd V• 'Westboume Galleries Ltd.
(supra), th~ absolute right of the general meeting to remove the
director• was recognised and it was pointed out that it would be
open to the Director sought to be removed to ask th" Company
Court for an order for winding-up on the ground that it would be
D 'just and equitable' to do so. The House of Lords said,

''My Lords, this is an expulsion case, and I must
briefly juc tify the application in such case. of the
just and equitable clause •••••••••••••••••••••••••••
The law of c0.:..panies recognises the right, in many
E · way, tc remove a director from the board. Section 184
of the CompanitB Act 1948 confers this right on the
company in gePf "al meeting whatever the arti .. ,es may
say. Some art1 .les may prescribed other methods, for
example, a governing director may have the power to
remove (~'Re Wondoflex Textiles Pvt. Ltd.). And quite
F apart from removal powers, there are normally
provisions for retirement of directors by rotation so
the.t their re-election c.an be opposed and defeated by
a majority, or even by a casting vote. In all these
ways a particular director- member may find himself no
longer a director, · through ren:oval, or non-re-
G election: this situation he must normally accept,
unless he n':1.de.rtakes the burden cf providing fraud or
mala fides. The just and eq·LUable pr.ovisic;
neve1theJ<?.ss .::Qlll.es to his assistance if he can poir;:
to, and provi, some spec1.al underlying obligation f
h.!.f :ff'liow ~,Gll.Lb-?:·r(s) !'u. good fe1 t "1, or confiCen ~-.
H that f long av t;~. '.· ~ J.Siness cor:.l.lol~·!f:i he s1i.all be
er.•. i'.Jc.d to n..,,i.iatet-u... ; t i-articipation~ an obligation so
L.I.C. v. ESCORTS [ChINMFFA RELLY, J.] 1017

basic that if broken, the conclusion must be that the
association must be dissolved". A

Thus, we see that every shareholder of a company has the
right, subject to statutorily prescribed procedural and numerical
requirements, to call an extraordinary general meeting in
accordance with the provisions of the Companies A~t. he cannot be
restrained from calling a meetinb and he is not bound to disclose b
the reasons for the resolutions proposed to be moved at the
meeting. Nor are the reasons for the resolutions subject to
judicial review. It is true that under s. 173(2) of the Companies
Act, there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each item of
business to be transacted at the meeting including, in C
particular, the nature of the concern or the interest, if any,
therein, of every director, the managing agent i f any, the
secretaries and treasurers, if any, and the manager, if any. This
is a duty cast on the management to disclose, in an explanatory
note, all material facts relating to the resolution coming up
before the general meeting to enable the shareholders to form a D
judgment on the business before them. It does not require the
shareholders calling a meeting to disclose the reasons for the
resolutions which they propose to move at the meeting. The Life
Insurance Corporation of India, as a shareholder of Escorts
Limited, has the same right as every shareholder to call an
extraordinary general meeting of the company for the purpose of E
moving a resolution to remove some Directors and appoint others
in their place. 1he Life Insurance Corporation of India cannot be
restrained from doing so nor is it bound to disclose its reasons
for moving the resolutions.

It was, however, urged by the learned counsel for the
company that the Life Insurance Corporation was an instrumental- F·
ity of the State and was, therefore, debarred by Art. 14 from
acting arbitrarily. It was, therefore, under an obligati.on to
state to the court its reasons for the resolution once a rule
nisi was issued to it. If it failed to disclose its reasons to
the court, the court would presume that it had no valid reasons
to give and its action was, therefore, arbitrary. The learned G
counsel relied on the decisions of this court in Sukhdev Singh,
Maneka Gandhi, International Airport Authority and Ajay Hasia.
The learned Attorney General, on the other hand, contended that
actiona of the State or an instrumentality of the State which do
not properly belong to the field of public law but belong to the
field of private law are not liable to be subjected to judicial
<eview. He relied on O'Reilly v. hacbnan [1982] 3 All E.R. 1124, Ii
1018 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

A Davy V• Spelthonne (1983] 3 All E.R. 278, I Congress del Partido
1981 2 All E.R. 1064, R. v. East Berkshire Health Authority
[1984]3 All E.R. 425, and Radha Krishna Aggarwal and Ors. v.
State of Bihar [1977] 3 S.C.R. 249. While we do find considerable
force in the contention of the learned Attorney General it may
not be necessary for us to enter into any lengthy discussion of
the topic, as we shall presently see. We also desire to warn
4
•

ourselves against readily ref erring to English cases on questions
of Constitutional law, Administrative Law ·and Public Law as the
law in India in these branches has forged ahead of the law in
England, guided as we are by our Constitution and uninhibited as
we are by the technical rules which have hampered the development
of the English law. While we do not for a moment doubt that every
c action of the State or an instrumentality of the State must be
informed by reaso~ and that, in appropriate cases, actions
uninfonned by reason may be questioned as arbitrary in proceed-
ings under Art. 226 or Art. 32 of the Constitution, we do not
construe Art.14 as a charter for judicial review of State actions
and to call upon the State to account for its actions in its
manifold activities by stating reasons for such actions.
D
For example, if the action of the State is political or
sovereign in character, the court will keep away from it. The
court will not debate academic matters or concern itself with the
intricacies of trade and commerce. If the action of the State is
related to contractual obligations or obligations arising out of
E the tort, the court may not ordinarily examine it unless the
action has some public law character attached 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. The difficulty will lie in
demarcating the frontier between the public law domain and the
F private law field. It is impossible to draw the line with
precision and we do not want to attempt it. The question must be
decided in each case with reference to the particular action, the
activity in which the State or the instrumentality of the State
is engaged when perfonning the action, the public law or private
law character of the action and a host of other relevant circum-
G
stances. When the State or an instrumentality of the State
ventures into the corporate world and purchases the shares of a
company, it assumes to itself the ordinary role of a shareholde.r,
and dons the robes of a shareholder, with all the rights avail-
able to such a shareholder. There is no reason why the State as a
shareholder should be expected to state its reasona when it seeks
H
to change the management, by a resolution of the Company like any
other shareholder.
L,I,C, v. ESCORTS [CHINNAPPA REDDY, J,] 1019

A
In the instant case the reason for the resolution stares
one in the face. The financial institutions who held t~e majority
of the stock were not only not told by the management about the
filing of the Writ Petition in the High Court but were
deliberately kept in the dark about it. The matter was not even
discussed at a meeting of the directors before the Writ Petition B
was filed. It was filed in a furtive manner even as Mr. Nanda was
purporting to hold disc.ussions with Mr. Punja and others. And
that was not all. Mr. Nanda was also unduly exerting himself in
certain matters to the detriment of the majority shareholders. We
will immediately refer to those matters.

One of the circumstances relied upon to establish the mala
c
fides of the Life Insurance Corporation of India, a consideration
of which leads us to the conclusion that the boot was on the
other leg, was the attitude taken by the Life Insurance
Corporation of India in regard to (i) the issue of Equity-Linked-
Debentures; (ii) Repayment of loans to Indian Financial Insti-
D
tutions; and (iii) the proposal for the merger of Goetze with
Escorts, It was argued that the facts clearly disclosed an
attempt on the part of the Life Insurance Corporation of India to
exert pressure on Escorts Limited. It is impossible to agree with
the submission.
E
In regard to the proposal for the issue of Equity-Linked-
Debentures, the facts are as follows : Escorts .obtained the
approval of the Government under the M.R.T.P. Act to establish a
new undertaking to manufacture motor cycles/ scooters. According
to Escorts, the proposal for the issue of Equity-linked-
Debentures was conceived to meet the cost of the new project.
According to the Life Insurance Corporation, the issue was solely
F
motivated by an anxiety to reduce the percentage of the holdings
of the Life Insurance Corporation and. other financial
institutions in the equity capital of the company. The barest
scrutiny of the proposal as it finally emerged from Escorts
Limited is sufficient to expose the game of Escorts Limited. The
proposal, as it finally emerged from Escorts Limited, was to
G
issue debentures 17,50,000 Secured Redeemable Debentures of
Rs.100 each and equity shares of the value of Rs,17.50 crores
divided into 87,50,000 equity shares of Rs.10 each for cash at a
premium of Rs.10 per share. It was proposed trui:t 20 per cent of
the new issue would be offered on preferential basis to existing
resident equity share holders of Escorts Limited and Goetze
Limited (in accordance with amalgamation proposal) subject to H
max1JDIQ! allotment of 100 debentures and 500 equity shares to any
single shareholder. The Promotors, Directors and their friends
and relatives, business associates and employees were to be
1020 SUPRE.1'£ COURT REPORTS [1985] SUPP. 3 s.c.R.

offered 15 per cent of the new issue on a preferential basis, but
A in their case there was to be no ceiling on the number of shares
which might be allotted to any one of them. 30 per cent of the
new issue was to be offered to the public. Raving regard to the
ceiling of 500 shares proposed to be imposed in the case of
allotment to existing equity shareholders, the Life Insurance
Corporation, notwithstanding the fact that it 0"111ed 30 per cent
B of the shares of E.scorts Limited would be entitled to a meagre
500 shares in the new issue. The result would be that its holding
would be reduced from 30 per cent to 18.14 per cent. 1he holding
of all the financial institutions would be reduced from 51.62 to
31.21 per cent. Not merely would it result in the reduction of
the percentage of the holding of the financial institutions in
the capital stock cf the company, but it would also result in
c great financial loss to the institutions in the following manner: ,
if the existing shareholders were to be given preferential
allotment in the new issue on the basis of their existing
holdings, without any ceiling, the Life Insurance Corporation and
other financial institutions would be entitled not to the meagre
500 shares each, but to some tons of thousands of shares in the
new issue. Taking the market value of the shares into account at
D Rs.SO per share, the loss to the financial institutions would be
in the neighbourhood of about Rs. 10 crores. we do not think that
any financial institution with the slightest business acumen
could possibly accept the proposal as it finally emerged from
Escorts Limited. No man of ordinary prudence would have accepted
the proposal. To expect the financial institutions to agree to
E the proposal, we must say, was sheer audacity on the part of
these that made the proposal. That was evidently the reason why
at all the initial stages, the details of the proposal were never
put to the financial institutions or before the Board of
Directors. It was urged by Shri Nariman that hr. Lavar, who
represented the financial institutions in the Board of Directors
F also voted in favour of the proposal at earlier stages, and,
therefore, it must be inferred that the later change of attitude
on the part of the financial institutions was not bonafide. We
are afraid we cannot agree with Mr. tiariman. The resolution of
the Board of Directors merely accepted in principle the issue of
convertible debentures to raise finances required by the company,
G subject to the approval of financial institutions. At that stage
no details of the proposal were placed before the Board and even
then there was the reservation that it was subject to the
approval of the financial institutions. We think that it was too
much for ~o:. Nanda and his associates to expect the financial
institutions or for that matter any other shareholder having
H large holdings in the company to af,ree to the proposal as it
finally emerged. We reach the limit when we hear the complaint of
L.I.C. v. ESCORTS [ChINNAPPA REDDY, J.] 1021

Mr. Nanda and his associates that the refusal of the financial
institutions to accept their proposal was mala fide. It is a A
clear case of an attempt on the part of Mr. ~anda and his
associates to over reach themselves. We do not think it is
necessary for us to go into any further details in regard to the
t Equity-Linked-Debenture issue.

'lbe proposal to merge Goetze with Escorts Limited was also B
agreed ·to in principle in the first instance. However, the share
exchange ratio had apparently not been agreed to by the f insncial
institutions even at that time. 'Ibis is evident from the letter
dated 30.12.1983 of ~.r. handa to Mr. Nadharna ICICI in which he
stated :
c
"'lbe proposals together with the report of the
Chartered Accou.~tants and the Resolution of the Board
of Directors are with ICICI and IFCI and we understand
that the matter has been discussed in the lnter-lnsti-
tutionsl meeting of the Financial Institutions. We
have been eagerly waiting and have made several D
requests to all the financial institutions to expedite
their approval so that the other processes of the
merger including the permission of the High Court
followed by the Extraordinary Shareholders meeting of
both the Companies may proceed. Yesterday's meeting
with the Chairman and Senior Executive of the Finan- E
cial Institutions, I was informed, for the first time,
that the financial Institutions were still examining
our request for approval they were primarily concerned
about the 53% holding of all the investing financial
institutions (LIC, GIC, UT!) post merger coming down
close to 49 per cent."
F
It is seen from the letter that Mr. Nanda was not proceeding on
the basis that the financial institutions had already agreed to
the proposal for merger, but was in fact awaiting their approval.
When he learnt the reason for the hesitation of the financial
inatitution to agree to the proposal, he wrote a letter on
30.12.1983 explainin& his views and requesting the financial G
institutions to expedite the approval of the proposal. It is,
therefore, futile for Mr. Nanda to centend that the proposal for
merger of Goetze with Escorts Limited was a lever which the
Financial Institutions were using to exert pressure on him to
agree to register the transfer of shares in favour of the Caparo
Group of Companies. It is difficult to understand why anyone
holding a majority of the equity capital of a company should H
allow himself to be hustled into becoming a minority shareholder.
1022 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

A The proposal for pre-payment of institutional loans, though
finally agreed to by the institutiona, was not quite as straight
as claimed by Escorts. In the first place, Escorts asked for
pre-payment of loans by Indian financial institutiona, but not
the foreign currency loan. In the second place, the cost of

B
pr<;-payment of institutional loana was to be met by part of the
debenture issue which would entail payment of interest at the
rate of 14 per cent whereas the institutional loans carried
t
interest at the rate of 10 per cent only. It certainly could not
be said to be in the interests of the company to pay interest at
a higher rate than that payable to Indian financial institutions.
Obviously the object of pre-payment was to get rid of the
directors who the financial institutiona had a right to nominate.
c 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 the director on sufferance.

We do not think that it is necessary to discuss these
proposals at greater length than we have done. The correspondence
D which passed between the parties and which has been read to us
shows that Mr. Nanda was certainly trying to hustle the financial
institutions into accepting the proposals.

We have discussed the submissions made to us in broad
pe~spective. We have not referred to the myriad minutiae which
E were presented to us, as we consider it unnecessary to do so and
~e do not wish to further lengthen an already long judgment. This
does not mean that we have not taken into account all the little
aubmissicns and trifling details which were brought to our
notice.

F We may now state our conclusions as follows :

1. The permission of the Reserve Bank contemplated by the
FERA could be ex-post-facto and conditional.

2. The press· release (Ex.A) dated 17.9.83, the circular
G (Ex.B) dated 19.9.83 and the letter (Ex.C) dated 19.9.83 are all
valid.

3. Under the scheme, any foreign company whose shares ~ere
owne.d to the extent of more than 60 per cent by persons of Indian
nationality or origin could avail the facility given by the
H scheme irrespective of the fact whether the same group of share-
holders figured in the different companies.
L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 1023

4. Where any of the purchases were made subsequent to
2.5.83, they were subject to the 5 per cent ceiling in the
aggregate.

5. The Reserve Bank of India was not guilty of any mala
fides in i;.rauting permission to the Caparo Group of Companies.
Nor was it guilty of non-application of mind.
B
6. No mala fides could be attributed to the Union of India
either.

7. There was a total and Sicinal failure on the part of the
Punjab National bsnk in the discharge of their duties as
authorised dealers under the FERA and the schen.e with the result
c
that cbere was no lliOnitoring of the purchases of shares made on
behalf of the Caparo Group of Companies.

8. The allegation of mala fides against the Life Insurance
Corporation of India was bsseless.
Ii
9. The notice requisitioning a meeting of the Company the
Life Insurance Corporation of India was not liable to be
questioned of any of the grounds on which it was sought to be
questioned in the writ petition.
E
On our finding that there was no monitoring whatsoev€r of
the purchase of shares ILBde on behalf of the Caparo Group of
Companies by the Punjab liational Bank and on our further finding
that though the Reserve Bank of India was not actuated by malice
and was not guilty of non-application of mind, the reliance
placed by the Reserv" Bank of lndia on the Punjab National Bartl<
was misplaced in the event, the Punjab l'ational Bank having
F
totally aband0ned its duties as authorised dealer, it follows
that the permission granted by the Reserve Bank must be reconsi-
dered by the Reserve Ba1il< in the light of the failure of the
Punjab National Bank to discharge its duties. 1herefore, while
allowing the appeals of the Union of India, the Reserve Bank of
India and the Life Insurance Corporation of India and dismissing
G
the appeal of Escorts Limited and settilll', aside the judgment of
the High C0urt, we dicect the Reserve Eank of India to make a
full and detailed enqu'!'.ry into the purchase of ohares of Escorts
Limited by the Caparo Group of Companies and consider afresh the
question lNhether permission ought or ou.ght not to have been
granted. If the Reserve hank of India is satisfied that permis-
sion ought not to have been granted, it may cancel the permission
li
already granted and take such further action as may be necessary
under the FERA if it considers that there has been any infraction
1024 SUFREJ.JE COURT REPORTS [1985] SUPP. 3 s.c.R.

A of the FERA or the scheme: if the Reserve Bank of India is of the
view that the permission may be granted subject to restrictions,
it may impose such restrictions and conditions as it may think
fit, in addition to the condition that either the capital or the
profits or both cannot be repatriated. We further direct
Respondents 3 to 17, 20 and 21 (in the Writ Petition), that is
B the Punjab National Bank, the thirteen Caparo Group of Companies,
Mr. Swraj Paul, M/s Raja Ram Bhasin and Co. and M/s Bharat
Bhushan and Co., to make available to the Reserve Bank of India
each and every document in their possession pertaining to the
remittances made for the purchase of shares on behalf of thirteen
Caparo Group of Companies and the purchase of shares made on
their behalf. They are also directed to produce every document
c which the Reserve Bank of India may require them to produce. The
enquiry by the Reserve Bank should be concluded within three
months from today.

We also direct the Reserve Bank of India to enquire into the
conduct of Punjab National Bank and take such action as may be
necessary including cancellation of the authorisation granted
D under sec. 6 of the Foreign Exchange Regulation Act. In regard to
costs, the Union of India, the Reserve Bank of India and the Life
Insurance Corporation of India are certainly entitled to their
costs. We do not see any reason why the company Escorts Limited
should be mulcted with costs. The litigation was launched by Mr.
Nanda and he should be personally made liable for the costs. We
E also think that the litigation has been unnecessarily complicated
by the failure of Mr, Swraj Paul and Raja Ram bhasin & Co. to
cooperate by appearing before the court. We think that they
should also be liable for a portion of the costs. So also the
Punjab National Bank. The appeals filed by the Union of India,
the Life Insurance Corporation of India and the Reserve Bank of
F India are allowed with costs payable as follows : Three-fifths of
the taxed costs in each case will be payable by har Prasad Nanda,
one-fifth by Swraj Paul and one-fifth by the Punjab National
Bank. The cross appeal filed by Escorts Limited and Nanda is
dismissed with the costs of the Union of India, the Reserve Bank
of India and the Life Insurance Corporation of India. The Union
G of India, the Reserve Bank of India and the Life Insurance
Corporation of India are entitled to their costs in the High
Court, three-fifths payable by Nanda, one-fifth by Swraj Paul and
one-fifth by Punjab National Bank. In modification of our order
dt. 4.4.85 in C.M.P. No. 12832/85, we direct Shri H.P. Nanda and
Rajan Nanda to continue as Managing Directors until the Board of
H Direcotrs takes a decision in the matter.