Holding

The consent granted by the Controller of Capital Issues was valid, indivisible and could not be varied or partially set aside, and the share transfer, having been bought back, does not warrant any relief.

Summary

The Supreme Court examined whether the sale of 39 lakh shares of Larsen & Toubro Ltd. by public financial institutions to Trishna Investments through BOB Fiscal Services, and the Controller of Capital Issues' consent to a mega issue of convertible debentures (including a Rs.310 crore preferential allotment to Reliance group), violated Articles 14 and 39(b),(c) of the Constitution and statutory provisions. The Court held that the Controller had given consent after due consideration of the special resolution, that the consent order is indivisible and cannot be varied or partially struck down, and that the share transfer, now bought back, does not merit relief. Consequently, the petitions were dismissed and the consent was upheld.

Issues considered

Whether the transfer of 39 lakh shares of L&T by public financial institutions to Trishna Investments via BOB Fiscal Services was arbitrary, illegal, mala fide and violative of Articles 14, 39(b) and 39(c).
Whether the Controller of Capital Issues exercised its discretion lawfully in granting consent to the Rs.820 crore convertible debenture issue, including the Rs.310 crore preferential allotment to Reliance group.
Whether the consent order can be varied, modified, or partially invalidated after it has been issued and acted upon.
Whether the writ petitions filed as public interest litigation are maintainable.
Whether the Companies Act provisions (ss.55,61,62,63,72,81(1‑A)) preclude alteration of the terms of the issue after a special resolution.
Whether the Monopolies and Restrictive Trade Practices Act, 1969, and its clearance requirements were complied with.

Legislation cited

Capital Issues (Control) Act, 1947s. Section 3, s. Section 3(6)
Companies Act, 1956s. Section 55, s. Section 61, s. Section 62, s. Section 63, s. Section 72, s. Section 81(1‑A)
Constitution of Indias. Article 139-A, s. Article 14, s. Article 226, s. Article 32, s. Article 39(b), s. Article 39(c)
Monopolies and Restrictive Trade Practices Act, 1969s. Section 21, s. Section 22, s. Section 2(g)

Subjects

public interest litigationcapital marketpreferential allotmentmonopolyArticles 14, 39(b), 39(c)Controller of Capital IssuesCompanies ActMonopolies and Restrictive Trade Practices Actshare transfercorporate governancestatutory discretionconsent ordermega issuedebentures

Judgment

N. PARTHASARATHY ETC.
A
v.
CONTROLLER OF CAPITAL ISSUES AND ANOTHER ETC.

APRIL 16, 1991

[B.C. RAY AND N.M. KASLIWAL, J.) B

Constitution of India, 1950: Articles 14, 39(b) and (c) and 298---
Shares of public company held by State Instrumentalities-Sale of-
Public interest-Chance of creating business monopoly in private
hands-Due consideration to ensure public interest-Need for.

Articles 32 and 226---Public Interest Litigation-Petition against C
grant of consent by Controller of Capital Issues-Alleged violation of
Articles 14, 39(b) and (c)-Maintainability of.

Capital Issues (Control) Act, 1947: Section 3-Issue of deben-
tures-Consent of Controller of Capital issues-Whether given after due D
consideration and application of mind-Variation in consent-Whether
permissible-Decision as to utilisation of the amount received from
public or approving a different consent order-Whether Courts have the
power/jurisdiction-Preferential issue reserved for shareholders of
inter-connected company-Validity of-Public interest-Constitutional
directive under Article 39(b) and (c)-To be ensured by Controller of E
Capital Issues while granting consent for public issue.

Companies Act, 1956: Sections 55, 61, 62, 63, 72(l)(a), 81(1-A},
108, 110 and I I I-Special Resolution at general meeting-Consent for
public issue-Granted by the Control/er of Capital Issues, after consi-
dering the Special Resolution-Third party acting on it and acquiring F
rights by purchase of debentures-Change of consent order in respect of
amount and purpose of utilisation-Whether could be effected contrary
to the Special Resolution adopted in a general meeting-Preferential
• allotment to shareholders of interconnected Group Companies-
Validity of-Transfer of shares-Done surreptitiously and with mala-
fide intention-Effect of-Whether opposed to public policy and hence G
illegal.

Monopolies and Restrictive Trade Practices Act, 1969: Sections
2(g), 21 and 22-"Interconnected undertakings"-Meaning of-
Clearance for capital issue-Approval given to Group Company-
Whether valid in respect of the inter-conneCted company. H

329
330 SUPREME COURT REPORTS [1991] 2 S.C.R.

Out of the Equity Shares of M/s Larsen & Toubro Ltd. held by
A
public financial institutions viz., UTI, LIC and GIC, 39 lakb shares
were sold to BOB Fiscal Services, a subsidiary of Bank of Baroda. .._
These shares were purchased by BOB Fiscal Services for Rs.30 crores -
which was given by four satellite companies of Reliance Group.
Immediately after the purchase, the shares were transferred and
B registered in the name of Trishna Investing and Leasing Ltd. which was
also a satellite of the Reliance Group. It had only a capital of Rs.44,000
at that point of time. It was claimed that funds for the purchase of the
shares was provided by Reliance Group from out of the amount
received by way of debentures issued to public. Two Directors of the
Reliance Group were coopted as Director of Larsen and Toubro Ltd.
,- '
even though the said shares were not registered in their names or in the
c name of Reliance Group. Even the nominee Director of the financial
institutions did not question the induction of the two Directors. One
more Director from the Reliance Group was later coopted as Director,
which paved the way for the Chairman, Reliance Group to become the
Chairman of Larsen and Toubro Ltd. also.
D
Thereafter the Board of Directors of Larsen and Toubro Ltd. at its
meeting approved a proposal to raise funds by issue of convertible .--
debentures for Rs.920 crores. In the said meeting it was also resolved to
issue a notice for convening an extraordinary General Meeting to con-
sider a special resolution for the proposed issue of convertible debeu-
E lures. Applications were made to the Controller of Capital Issues seeking
sanction to the rights issue of debentures of Rs.200 crores and for public
issue of debentures to the extent of Rs.620 crores. It was also stated in
the application that it was proposed to reserve/preferentially allot -~

Rs.310 crores out of the public issue, to Larsen and Toubro's Group
Companies viz., Reliance Industries Ltd. and Reliance Petro Chemicals
F Ltd.

In its extraordinary General Meeting, the shareholders of Larsen
and Toubro passed a resolution authorising the Board of Directors of
the company to issue 12.5 per cent fully secured convertible debentures
of the total value of Rs.820 crores. Accordingly, the Controller of Capi-
)'
G tal Issues conveyed the Central Government's consent under the Capi-
tal Issues (Control) Act, 1947, to the proposed issue of debentures by
Larsen and Toubro Ltd.

A Writ Petition was filed in the High Court pleading that the
divestment by the financial institutions of the controlling shares in
H Larsen and Toubro to the Reliance Group was a secret and circuitous
N. PARTHASARTHY v. CONTROLLER 331

arrangement and hence such a divestment was arbitrary, illegal, ma/a
fide and a fraud on the statutory powers of the financial institutions. A
> }
The High Court, however, dismissed the Writ Petition. Aggrieved by
the dismissal of their Writ Petition, the petitioners preferred Letters
Patent Appeal before the Division Bench of the High Court. The
Respondents in those Writ Petitions filed Transfer Petitions in this
Court praying for transfer of the Letters Patent Appeal as also the B
various Writ Petitions filed in the different High Courts, to this Court.
This Court allowed the Transfer Petitions .
._.
_, In all these matters, the consent granted by the Controller of
Capital Issues was assailed mainly on the ground that the sanction was
issued without application of mind and without considering the after
effect of it, viz., the Reliance Group acquiring debentures of the value c
of Rs.310 crores earmarked for preferential allotment to the share-
holders of Reliance Industries Ltd. and Reliance Petro Chemicals Ltd.
which amounted to allowing the Reliance Group to have control of
Larsen and Toubro. It was also contended that the consent was given
within 24 hours of the making of the application and the hurry with D
·-;.
which the sanction was granted showed that it was done with mala fide
intentions and with a motive to help the Reliance Group.

On behalf of the Respondents, it was contended that the shares
were sold in the interest of their constituents and for recycling the fund
for investing in the business by purchasing shares of other companies in E.
public interest and also in the interest of money market; that there was
nothing hanky and panky in it nor was it effected with the motive of
..,... diluting shares held by public financial institutions in order to facilitate
the increase in the holding of Reliance group, a private monopoly
'• house, to get into the management of Larsen & Tubro. It has been
further contended that the transfer of 39 lakh shares of Larsen & F
Toubro was not made in favour of satellite companies of that Group,
but through BOB Fiscal Services Ltd. which is a wholly owned sub-
sidiary of Bank of Baroda; that it was not made surreptitiously or
discreetly on the basis of any design or secret arrangement. It was also
-.../
contended that in transferring the equity shares the financial institu-
tions acted purely on business principles and to earn profit by these G
transactions and in the case of LI C and UTI in the interest of the policy
holders and the unit holders as the case may be. Further, it was con-
tended that the acceptance Of the requests made by the subsidiary of
Bank of Baroda i.e. BOB Fiscal Services for selling the shares of L & T
to them at the highest market price through the broker was in public
interest in as much as if all those 39 lakh shares had been put in the H
332 SUPREME COURT REPORTS [1991] 2 S.C.R.

stock market !'or sale it would have created as adverse effect on the
A company and would have adversely affected the interest of Larsen and
• Toubro Ltd., and that it was not possible to know the actual purchasers
of these shares from BOB Fiscal Services Ltd.

Dismissing the matters, this Court,
B HELD:
(Per Ray, J).
1. The application for consent was submitted on 26. 7.89 for sanc-
tion. On August 21, 1989 at the extraordinary general meeting of share-
holders of L & T, a resolution was passed, with only one shareholder ""·-·
dissenting, for the issue of debentures of Rs.820 crores. The company
c sent a copy of this resolution to the Controller of Capital Issues who
after duly considering the same accorded the consent on August 29,
1989. It cannot be said that there has been complete non-application of
mind by the Controller of Capital Issues in according the consent for
the issue. Moreover, the Controller of Capital issues sent a letter dated
D 15th September, 1989 to M/s Larsen and Toubro asking it to note
amendment of the condition of the consent order to the effect that fund
utilisation shall be monitered by Industrial Development Bank of India.
This will further go to show that the consent was given after due consi-
deration in accordance with the provisions of Section 3 of the Capital
Issues (Control) Act, 1947. [355C-E]
E
2. In view of Sections 55, 61, 62, 63 and 72 of The Companies Act
the terms of contract mentioned in the prospectus or the statements in
lien of the prospectus cannot be varied except with the approval of and
on the authority given by the Company in the general meeting. There-
fore, the consent that was given by the Central Government, may by the
F Controller of Capital Issues, on a consideration of the special resolution
adopted in the extraordinary general meeting of the shareholders of the
company on August 28, 1989 cannot be varied, changed or modified
both as regards the reduction of the amount of debentures as well as the
purposes for which the fund will be utilised contrary to what has been
embodied in the prospectus and approved by the Controller of Capital
G Issues on the basis of the special resolution adopted at the general
meeting of the shareholders of the company. [363A-C]

3. On a plain reading of section 3(6) of the Capital Issues (Con-
trol) Act, 1947, it cannot be inferred that consent order given by the
Central Government after consideration of the special resolution passed
H at the general meeting of the company on taking the no objection certifi-
N. PARTHASARTHY v. CONTROLLER 333

cation from the I.D.B.I. can be changed or varied in any manner what-
A
soever by the Central Government. The Central Government can
)
merely vary all or any of the conditions subject to the consent being
given. [363F]

4. There has been no general meeting of the company nor any
special resolution was taken for variation or reduction of the amount of B
debentures to be issued as, required under Section 81 read with clause
IA of the Companies Act. It is also evident that no steps have been taken
to have the consent already granted by Controller of Capital Issues,
...>

.. -1
varied or modified as required under the Capital Issues (Control) Act,
1947. Merely because clause (v) of the consent order provides for
monitoring of the funds by I.D.B.I., .it does not mean nor it can be
inferred automatically that the suggestion of the I.D.B.J. as regards the c
funds requirement can be automatically given effect to without comply-
ing with the statutory requirements as provided in the provisions in the
Companies Act as well as in the Capital Issues (Control) Act. The
consent order is one and indivisible and as such the same cannot be
varied or vivisected without taking recourse to the provisions of the D
___, statute. It is also well settled that the contract to purchase shares or
debentures is concluded by allotment of shares issued under the
prospectus and Section 72 of the Companies Act makes it clear that
allotment can only be made after the prospectus is issued. The Com-
pany is bound by the special resolution, the prospectus and the consent
of the Controller of Capital Issues. The power to pass a consent order is E
a statutory power vested in a statutory authority under the Capital
,.. Issues Act and the Court has no power or jurisdiction to step into the
shoes of the statutory authority and pass or approve a consent order
different from the statutory consent order given by the statutory
., authority. Moreover, the consent order cannot be varied by the Central
Government or Controller of Capital issues after the said order has F
been made public and third parties have acted on it and acquired rights
thereon. [363G-H; 364A-E]

State of Madhya Pradesh and Ors. v. Nandlal Jaiswal and Ors.,
..,, [1986] 4 SCC 566 and Aaron's v. Twiss, [1896] A.C. 273, r<forred to .
G
Palmer's Company Law, 24th Edition by C.M. Schmitthoff,
pp. 332-333, referred to.

5. In the prospectus of Larsen & Toubro Ltd. it has been
mentioned that Larsen and Toubro Ltd. is part of Reliance Group. This
is in accordance with Section 2(g) of the Monopolies and Restrictive H
334 SUPREME COURT REPORTS [1991] 2 S.C.R.

Trade Practices Act, 1969 which defines "interconnected undertak-
A
ings", which is quite In accordance with this provision of Section 81(1A)
of the Companies Act, 1956. In the extraordinary general meeting of L
& T a special resolution was made providing for preferential allotment
of debentures to the equity shareholders of R.I.L. and R.P .L. So the
reservation of debentures of the value of Rs.310 crores of Public issue
-
B for allotment to shareholders of R.I.L. and R.P.L. cannot be questioned.
In the prospectus of L & T Ltd, under Business Plants it has been
mentioned "that the requirement of funds of tbe company for the period
from 1st October 1989 to 31st March, 1992 including in respect of
Suppliers credit to be extended to customers under turnkey projects/
quasi-turnkey projects and for incurring capital expenditure on new
plant and equipment, normal capital expenditure on modernisation and
c renovation, meeting additional working capital requirements and for
repayment of existing loan Hability, is estimated to be in the region of
Rs.1425 crores. The suppliers' credits Included Rs.510 crores to be
extended to RIL in respect of its Cracker Project. The funds require-
[
ment was intended to be met out of the present issue of Debentures to
0 the extent of Rs.820 crores and the balance would be met from internal
accruals by way of short term borrowings, and out of the proceeds cf
the previous Debenture Issue (Ill Series). It is seen from the letter dated
2.12.1988 issued by Government of India to M/s Reliance Industries
Ltd. endorsing a copy of Central Government's Order dated 25. U.1988
passed under Section 22(3)(e) of the Monopolies and Restrictive Trade
E Practices Act, 1969 that it gave approval for the proposal of M/s
Reliance Industries Ltd. for setting up a cracker complex. The approval
of Central Government was made under Section 22(3)(d) of the
M.R. T .P. Act and communicated to M/s Reliance Petrochemicals Ltd.
by letter dated 30.5.1989. Consent was also given by the Central
Government under Section 22(3)(a) of the M.R.T.P. Act for the
F establishment of a new undertaking for the manufacture of Acrylic
Fibre. Thus the consent given by Controller of Capital Issues cannot be
challenged on the ground that no M.R. T .P. clearance for the issue of
Capital under Section 21 or under Section 22 of the M.R.T.P. Act was
not given. [3560-H; 357A-B]

Narendra Kumar Maheshwari v. Union of India & Ors., J.T. •
G
[1989] 2 S.C. 338, referred to.

6.1. The public financial institutions should be very prudent and
cautious in transferring the equity shares held by them not only being
guided by the sole consideration of earning more profit by selling them
H but by taking into account also the factors of controlling the f"mances in
N. PARTHASARTHY v. CONTROLLER 335

the market in public interest. The public financial institutions while
A
transferring or selling bulk number of shares must consider whether
such a transfer will lead to acquisition of a large proportion of the
' shares of a public company and thereby creating a monopoly in favour
of a particular group to have a controlling voice in the company if the
same is not in public interest and not congenial to the promotion of
business. [351F-G] B

6.2. Considering the entire sequence of events and the manner in
which the financial institutions sold those 39 lakh equity shares of L & T
to BOB Fiscal Service which immediately after purchase of those shares
with the 30 crores of rupees given by 4 satellites of the Reliance Group
transferred those shares to Trishna Investment and Leasing Ltd., a satel-
lite of Ambani Group though it had a capital of only Rs.44,000 and C
money required for purchase was at least Rs.39 crores, leads to the
conclusion that such transfers had been made to help the Amhanis to
acquire the shares of L & T Company in a circuitous way. In the instant
case, all the circumstances taken together clearly spell some doubt
whether the transfer of such a huge number of 39 lakh shares by the D
Public Financial Institutions was for public interest and was made
on purely business principles. However, since the financial institu-
tions have already bought back all the 39 lakh shares from Trishna
Investment and Leasing Ltd. with the accretions thereon, nothing turns
on it. [350F-H; 351A-F]
E
L.l. C. of India v. Escorts Ltd., A.I.R. 1986 SC 1370, distinguished.

~ 7. The Writ Petitions filed as Public Interest Litigation challeng-
ing the consent issued by the Controller of Capital Issues, are
maintainable.
F
S.P. Gupta & Ors. v. Union of India & Ors., [1982] 2 SCR 365;
Bandhua Mukti Morcha v. Union of India & Ors., [1984] 2 SCR 67 and
LIC of India v. Escorts Ltd., [1986] 1 SCC 264, relied on.

(Per Kasliwa/, J., Concurring)
G
1. So far as the relief of a writ of mandamus directing the respon-
dents to recover 39 lakh shares of L & T and pay back the amounts
received therefor, does not survive in view of the shares having been
already bought back by the fmancial institutions from Trishna Invest-
ments. However, for future guidance it may be worthwhile to note that
public financial institutions while making a deal in respect of a very H
336 SUPREME COURT REPORTS [1991] 2 S.C.R.

large number or bulk of shares worth several crores of rupees must also
A
make some inquiry as to who was the purchaser of such shares. Such
transactions should he made with circumspection and care to see that
the deal may not be to camouflage some illegal contrivance or in built '
conspiracy of a privjlte monopoly house in order to usurp the manage-
ment of a public company and which may not be in public interest. [371E-G]
B
State of Maharashtra v. Ramdas Shriniwas Nayak & Anr., [1983]
l SCR 8, referred to.

2. It cannot be said that there was nothing wrong or illegal even if ~

the action of Reliance Group was to corner or purchase all the shares of
,-
L & T, and even if done through intermediaries or surreptitiously, cannot
c become illegal.

Babula/ Chaukhani v. Western India Theatres, AIR 1957 Cal.
709, disapproved.

D 3.1. No doubt any person or company is lawfully entitled to
purchase shares of another company in open market, but if the transac-
tion is done surreptitiously with a ma/a fide intention by making use of .-
some public financial institutions as a conduit in a clandestine manner,
such.deaJortransaction would be contrary to public policy and illegal. [372R]

E 3.2. In the instant case, all the circumstances taken together
clearly spell some doubt whether the transfer of such a huge number of
39 lakh shares by the public financial institutions was for public interest

F
and was made on purely business principles. [372H; 373A]

4. As regards the preferential issue of Rs.3 JO crores in favour of
shareholders of the Reliance Group of companies is concerned, L & T
_..,.,
l
and Reliance Group of companies were interconnected within the mean-
ing of Section 2(g) of the MRTP Act and it is permissible according to
law. The size of the issue was so large that it was considered necessary
to reserve a substantial portion of it in favour of the shareholders of
Reliance group of companies, in order to ensure the successful absorp-
tion of the entire issue. It may also be noted that the shareholders of the ....
G
Reliance Group of companies are numbering about 35 lakhs and they
represent the investor base of the entire shareholding community of the
country. Preferential issue per se is not a novel idea. The Controller of
Capital Issues has been permitting reservations for various categories
out of public issue based on the request made by companies after pas-
H sing a special resolution in the general body meeting and there is no
N. PARTHASARTHY v. CONTROLLER 337

restriction on the shareholders of a company to offer shares of their
A
company to anybody after passing a special resolution as required
under Section 81(1-A)(a) of the Companies Act. The question of
bifurcating or vivisecting the consent order given hy CCI does not
sur.vive. The legal controversy thus raised that the consent given hy CCI
under the Capital Issues (Control) Act can he held valid or invalid as a
whole but not some part of it as valid and the rest invalid, does not B
require to be decided in this case and the same is left open. [385A-F]

State of Madhya Pradesh v. Nandlal Jaiswal & Ors., [1987] 1 SCR
54; Life Insurance Corporation of India v. Escorts Ltd & Ors., (1985]
Suppl. 3 SCR 909; Jai Narain v. Surajmu!l, AIR 1949 F.C. 211 and
Anisminic Ltd. v. The Foreign Compensation Commission, (1969] 2
A.C. 147, referred to.
c
De Smith's Judicial Review of Administrative Action, 4th Edition,
p. 285, referred to.

5. It is the bounden duty of the CCJ before giving an order of D
...._,
.
consent for the issuance of any mega issue to keep in mind and to carry
out the Directive Principles of State Policy as enshrined in Article 39(h)
and (c) of the Constitution. It is no doubt correct that the CCI is not
required to probe indeptb into the technical feasibilities and financial
soundness of the proposed project• or the sufficiency or otherwise of the
security offered, but at the same time it has to see that the capital E
available for investment at •my given time has to be sized and allocated
according to the national priorities, a!ld in the changed 'ocio-economic
conditions of the colll!try to SOC!ml a balllnced investment of the 001mtry's
resources in industry, agrici!ltw:e and socifil services. [386D-H; 387A-B]

Narendra Kumar Maheshwari v. Union of India, JT 1989 2 SC F
238, explained.

6. It would not be in the interest of general investor public to
cancel the entire mega issue. Many transactions must have already
taken place on the floor of the stock exchange regarding the sale and
purchase of the debentures during this intervening period. Under the G
order of this Court dated 9.11.89, no restrictions were placed on L & T
in the matter of utilisation offunds. According to L & T against Rs.410
crores due on application and allotme11t, the L & T bas so far received
Rs.396 crores out of which approximately Rs.300 crores have been
utilised tow3rds issu• expenses, capital expenditure, repayment of loans
abd working capital in terms of the objects of the issue. The balance H
338 - SUPREME COURT REPORTS (1991) 2 S.C.R.

A available with the company is approximately Rs.96 crores only. There
is already a safegnard provided in the order of the CCI dated -15.9.89
that the fllnd ntillsation shall be with the approval or the IDBI. In any
case, the consent order given by CCI cannot be held invalid on any of - ~
the grounds of challenge raised by the jietitioners. In these proceed·
ings this Court is neither called upon nor is entitled to decide as to
B how and in what manner the amount mopped up from the public by
this mega issue could be utilised or spent. Thus, the consent given
by CCI is valid. [JSSCD)
CIVIL.APPELLA1E JURISDICITON: Transferred Case No.
61of1989 etc. etc._ ,-
(Under Article 139-A of the Constitution ofJndia).
c
Soli J.Sorabjee, Attorney General, Ashok Desai, Solicitor General,
N. Santosh Hegde, Addi. Solicitor General, B.R.L. Iyengar, F.S.
Nariman, T.R. Andhiyarujina, I. Chagla, Dr. Y.S. Chitale, Dr. L.M.
Singhvl, Tapas Ray, G. Ramaswamy, S.S. Ray, Ashok Sen, R.K.
D _Garg, K. Parasaran, Ram Jethmalani, M.S. Ganesh, G.V. Shantaraju,
LR. Singh, Aspi Chinoy, Mahesh Jethmalani, Rajesh Kumar,
R. Karanjawala, Mrs. M. Karanjawala, Ram Dashandhi, N.P. Midha,
F.H.J. Talayarkhan, Gopal ,Subramaniam, R.F. Nariman, V.B.
Trivedi, S.C. Sharma, Bharat Sangal, Miss A. Subhashini, Rajan
Mahapatra, S.S. Shroof, S.A. Shroff, N. Roy, Mrs. Pallavi S. Shroff,
A.K. Ghose, A.M. Singhvi, Sandeep Junarkar, Shahid Rizvi, D.K.
E Singh, Dalveer Bhandiiri, A.K. Sangal, K. Swami, N.D.B. Raju,
Vineet Kumar, H. Salve, Ms. Bina Gupta and Ms. Monika Mohil for
the appearing parties.
Onkar Seth appeared in person for the Intervenor.

F The Judgment of the Court was delivered by

RAY, J. One Mr. Haresh Jagtiani, a practising advocate of the
High Court of Bombay and a policy-holder under the Life Insurance
Corporation of India and also holder of units issued by the Unit Trust
of India and Mr. Shamit Majumdar, a holder of shares and debentures
G of Larsen & Toubro Ltd. filed a writ petition being No. 2595 of 1989 in
the High Court of Judicature at Bombay against the Union of India
and others including the financial institutions questioning the legality
and validity of the consent given by the Controller of Capital Issues for
the proj:>osed issue of convertible secured debentures aggregating
Rs.820 crores by Larsen & Toubro Limited insofar as the~said issue
H seeks to offer such convertible debentures to persons other than the
- -·
N. PARTHASARTHY v. CONTROLLER [RAY, J.] 339

existing shareholders and members and the employees of Larsen &
Toubro Limited and praying for quashing the same as well as for a A
declaration that the transfer of 39 lakh shares of Larsen & Toubro Ltd.
+ held by Unit Trust of India, Life Insurance Corporation of India,
General Insurance Company and its subsidiaries to Trishna Invest-
ment & Leasing Ltd. through the instrumentality of BOB Fiscal
Services Ltd. is arbitrary, illegal, ma/a fide and a fraud on the statutory B
powers of the respondents and is clearly ultra vires of Article 14 and
39(b) and (C) of the Constitution on the allegations that in or around
the middle of the year 1988 the respondents entered into a secret
agreement by which a large chunk of the equity shares of Larsen &
-' Toubro Ltd., the largest engineering company in India, would stand
surreptitiously divested by the respondents in favour of the Ambani .
Group, the third largest monopoly house in India. This divestment was C
achieved not directly but, indirectly and with a motive to conceal the
real nature of the deal by interpolating BOB Fiscal Services Ltd. (a
wholly owned subsidiary of Bank of Baroda) as the conduit for the
transfer of shares from the public financial institutions to the satellite
companies of the Ambani Group. D

-< The petitioners also alleged in the petition that pursuant to this
secret agreement, the following events took place in quick succession:

In or around August 1988, four satellite companies of Reliance
Group, namely Skyiab Detergents Limited, Oskar Chemicals Private E
Limited, Maxwell Dyes and Chemicals Private Limited and Pro-lab
Synthetics Private Limited, gave a total deposit of Rs.30 crores to an
y- investment company associated with Ambanis who, in turn, deposited
this amount with BOB Fiscal Services Ltd., a wholly owned subsidiary
of Bank of Baroda, a nationalised bank.
F
BOB Fiscal Services Ltd., which had been formed only three
months earlier acquired either immediately before the above deposit,
or immediately subsequent thereto, 33 lakh equity shares of Larsen &
Toubro from UTI, LIC, GIC and its subsidiaries. Later, in January,
1989 it acquired a further 6 Jakh shares from the LIC.
G
Within weeks after the deposit by the four companies mentioned
above, Trishna Investments and Leasing Limited, another satellite
company of the Ambani Group, paid the requisite amounts for the
acquisition of the said 33 lakh shares in Larsen & Toubro from BOB
Fiscal Services Ltd. to the latter through a stock broking firm and
immediately thereafter the money advanced by the above four com- H
340 SUPREME COURT REPORTS [1991] 2 S.C.R.

A parries was returned by BOB Fiscal Services Ltd. through the invest-
ment company associated with Ambanis, which was earlier used as a
conduit for making the deposit from the four satellite companies of
Reliance Group.

The deposit by the four companies was made immediately after
B the divestment of the shares by the respondents was okayed by the
highest level in the Government and the deposit was returned
immediately after the Ambani Group was able to divert moneys taken
by them in the name of Reliance Petrochemicals Ltd. by the issue of
convertible debentures of the order of Rs.594 crores.

The said 33 lakh shares were registered in the name of BOB
c Fiscal Services Ltd. in the Register of Members of Larsen & Toubro
Ltd. on 11.10.1988 and later, on 6.1.1989, a further 6 lakh shares were
registered in the name of the BOB Fiscal Services Ltd. on any valua-
tion based on market values of Larsen & Toubro Ltd. shares at the
relevant time, the value of 39 lakh shares would cost not less than
D Rs.45 crores.

On the very day of the registration of the shares in the name of
BOB Fiscal Services Ltd., namely, I 1.10.1988, two nominees of the
Ambani Group, Mr. Mukesh Ambani and Mr. M. Bhakta, a solicitor
of Reliance Industries, joined the Board of Larsen & Toubro Ltd. and
E were co-opted as additional directors.

Subsequently, on 30th December, 1988, Mr. Anil Ambani
another nominee of the Ambani Group was also co-opted on the -("
Board of Larsen and Toubro Ltd., as an additional director.

F On 6th January, 1989, the entire 39 lakh equity shares of Larsen
and Toubro Ltd. registered in the name of BOB Fiscal Services
Limited (of which 6 lakh shares tansferred to BOB Fiscal Services Ltd.
by UC was registered in the name of BOB Fiscal Services Ltd. only
on 6.1.89). were transferred to Trishna Investments and Leasing Ltd.,
which is a satellite company of the house of Ambanis.
G
Thus, BOB Fiscal Services merely acted as a conduit for funnel-
ing shares from the public financial institutions to the Amhani group
and this interpolation of BOB Fiscal Services was necessitated to get
over the legal impediments in the way of selling any part of the con-
trolling shares held by public financial institutions to private parties by
H private deals except to those already in management and at a price
N. PARTHASARTHY v. CONTROLLER [RAY, J:J 341

equal to two times the market price.
A
The Chairman of Bank of Baroda, Mr. Premjit Singh, is closely
linked to the house of Ambanis through the business of his son Harin-
der Singh. BOB Fisc~I Services Ltd. is the wholly owned subsidiary of
Bank of Baroda and it was incorporated only two months preceding
the acquisition of Larsen & Toubro Ltd. shares by BOB Fiscal Services B
Ltd. ln fact, the acquisition of L & T shares for the Ambani Group for
which it had acted as a conduit is the first business of BOB Fiscal
Services Ltd.

Subsequently, on 28th April, 1989, Mr. Dhirubhai Ambani, the
Chairman of Reliance Group, became the Chairman of Larsen &
Toubro Ltd., thus completing the process of take-over of the manage- C
ment of Larsen & Toubro by the Ambani Group.

By this process, the public financial institutions which had virtual
ownership and control of Larsen & Toubro Ltd. holding about 40%
shares of the company (with no other individual shareholder holding D
more than 2% ), voluntarily diluted their holdings to 33% and parted
with approximately 7% to the house of Ambanis and made them the
single largest private sharesholder. This was done, in the submission of
the petitioners, deliberately and by a design to legitimise the eventual
take-over of Larsen & Toubro by the Ambanis. While the petitioners
challenge the divestment of 7% ownership rights in Larsen & Toubro E
Ltd. and the management of the company to the Ambani Group, the
immediate and proximate provocation for this writ petition is the pro-
posed issue of convertible debentures by Larsen & Toubro Ltd. now
under the management of the house ofAmbanis to raise Rs.820 crores
from stock market.
F
The proposed issue has the effect of aggravating and perpetuat-
ing, and irretrievably divesting and transferring the ownership, of
Larsen & Toubrq in favour of the Ambani Groui). rfhe concealed and
covert intent which is manifest in the direct effect of the proposed Issue
is to make Larsen & Toubro Ltd. a complete family owned and a·
decisively family controlled Industrial Corporation-whereas the G
openly declared policy of the Government is to force the reverse viz.
professionalise the existing family controlled companies. By the pro-
posed issue, the house of Ambanis and the shareholders, debenture-
holders and employees of Reliance Industries and Reliance Petro-
chemical Industries Ltd. would collectively hold 35.5% of the owner-
ship rights in Larsen and Toubro and will be single largest block or H
342 SUPREME COURT REPORTS [1991] 2 S.C.R.

A group in the company. This preferred group which is not in law
entitled to any issue of shares from Larsen & Toubro Ltd., has been
chosen to be the preferential .beneficiaries of the scheme under which
they would get shares in Larsen & Toubro Ltd. at Rs.60 per share
when the share holders of Larsen & Toubro Ltd. themselves (who, by
law, are entitled to further issue of shares from Larsen & Toubro Ltd.)
B would be issued Larsen & Toubro shares under the convertible
debentures issued in April 1989 only at Rs.65 per share. Thus, as
against 35.5% holding of Ambani-Reliance Group, the public
finance bodies, which held 40% shares before they diluted their hold-
ings in favour of the Ambani group, would have had their holding
further diluted to only 22.9% as a result of the present issue. In other
C words, by approving the terms of the proposed issue the public finan-
cial institutions have agreed to a further dilution of their holdings from
32.8% to 22.9% without any consideration whatsoever for agreeing to
such reduction and to pass on their vested rights u/s 81 of the Com-
panies Act to pre-emptive allotment of shares in Larsen & Toubro to
the members, debentureholders and employees of Reliance Industries
D Ltd. and Reliance Petrochemicals Ltd. It is in this background signi-
ficant that the preferential allotment to the shareholders, debenture-
holders and employees of the house of Ambanis who have no statutory
right, offers to them shares in Larsen & Toubro Ltd. at a premium of
only Rs.50 per share, while in the fully convertible debentures issue
made by Larsen & Toubro Ltd. in April/May, 1989 the existing share-
E holders of Larsen & Toubro were given conversion rights at a premium
of Rs.50 per share in the first conversion and Rs.55 per share in the
second conversion i.e. Rs.5 more than what the Reliance Group is
called upon to pay. It means that while the existing shareholders of
Larsen & Toubro were paying for their own shares a premium of Rs.50
or Rs.55 per share, new group of shareholders, debentureholders and
F employees of the house of Ambanis would be getting Larsen & Toubro
shares at a premium of only Rs.50. It means that, by making extra-
ordinay favour to a totally different group which is not entitled to
Larsen & Toubro shares, the Ambani group is creating a favoured
lobby of their own, almost a ciao, who are already their shareholders,
debeotureholders and employees to act as a group to own and control
G Larsen & Toubro Ltd. This is a device to perpetuate and aggravate
their own decisive control over Larsen & Toubro, to which the public
financial institutions are willing and enthusiastic parties inside the
Board room and in the general meeting of Larsen & Toubro Ltd.

In the facts and circumstances the petitioners pleaded that they
H are entitled to a declaration that the divestment by the respondents of
N. PARTHASARTHY v. CONTROLLER [RAY, J.] 343

the controlling shares in Larsen & Toubro to the house of Ambanis in
A
a secret and circuitous arrangement is arbitrary, illegal, ma/a fide and a
fruad on the statutory powers of the respondents. It was further
4
pleaded that pursuant to this secret arrangement the financial institu-
lions such as the UT!, LIC, GIC and its subsidiaries divested them-
selves of 7% shares of Larsen & Toubro Ltd. in favour of Ambani
Group in an illegal and arbitrary manner as a result of which the B
Ambani Group became the single largest private shareholder. This
paved the way for the said private monopoly group and the Govern-
ment to rationalise the take-over of the management of Larsen &
_, Toubro Ltd. by the Ambani Group with the active connivance and
support of the Central Government.

The modus operandi adopted for the transfer was as under:
c

(a) In the month of May 1988, Bank of Baroda of which Mr.
Premjit Singh is the Chairman, forms a subsidiary for merchant
banking under the name and style of BOB Fiscal Services P. Ltd.
This Company became a public company u/s 43A of the Com- D
....._. panies Act 1956, in June, 1988. Mr. Harjit Singh, son of Premjit
Singh, owned a company 'Krystal Poly Fab. Ltd.' whose only
business is texturising of partially oriented yam from Reliance
Industries Ltd. and the supply of texturised yam back to
Reliance Industries Ltd. or its nominees.
E
(b) On 5th August, 1988, four satellite companies of the House

I
... of Ambanis, viz. SKYLAB Detergents Ltd., OSCAR Chemicals
Pvt. Ltd., MAXWELL Dyes & Chemicals Pvt. Ltd. and PRE-
LAS Synthetics Pvt. Ltd. gave a total deposit of Rs.30 crores to

~ an investment company, associated with Reliance who, in tum,
deposited the same amount with BOB Fiscal Services. F

I ·-<
(c) Either immediately preceding this deposit or immediately
thereafter, BOB Fiscal Services acquired 33 lakh equity shares in
Larsen & Toubro Ltd. from the UT!, LIC and GIC and its sub-
sidiaries. Later, it acquired a further 6 lakh shares in Larsen &
Toubro Ltd. from the LIC. The manner in which the transfer had G
been effected by the public financial institutions and the bulk
sale amounting to about 7% of the then share capital of Larsen &
Toubro Ltd. left no one in doubt about what the financial institu-
lions intended to do, viz. they intended to shed a vital seven per
cent of the ownership rights held by them in Larsen & Toubro
Ltd. H
344 SUPREME COURT REPORTS (1991] 2 S.C.R.

(d) In July, 1988 Reliance Petrochemicals Ltd. of the Ambani
A
Group had issued convertible debentures for Rs.594 crores to
public and others and had raised a vast sum of monies as sub-
scription. The petitioners understand that as soon as the above
funds became available to the Ambani group for employment, a
part of it was diverted for acquisition of Larsen & Toubro Ltd.
B shares not directly in the name of Reliance Industries Ltd. or
Reliance Petrochemicals Ltd. but in the name of faceless,
benami concerns of the Ambani group with virtually no financial
standing of their own.

(e) Thereafter on October 11, 1988 the 33 lakh equity shares of
Larsen & Toubro Ltd. acquired by BOB Fiscal Services Ltd.
c were registered in the register of members of Larsen & Toubro
Ltd. in Folio No. B 69567 at pages 1851 to 1858. These shares
had been transferred by LIC, UTI, GIC and its subsidiaries to
BOB Fiscal Services Ltd.

D (f) On the same day two nominees of the A~bani Group Mr.
Mukesh Ambani and Mr. M.L. Bhakta, a Solicitor of Reliance
Industires Ltd., who are also directors of Reliance Industries
Ltd. and Reliance Petrochemicals Ltd., were co-opted on the
Board of Larsen & Toubro Ltd.

E (g) It is evident from the above events that the sate to BOB
Fiscal Services Ltd. by the financial institutions was accepted by
all parties concerned to be a sale to the Ambani Group itself.
Otherwise there is no provocation or justification for the financial
institutions to propose or to support appointment of Mr. Mukesh
Ambani and Mr. M. Bhakta, who are the nominees of the
F Ambani Group, on the Board of Larsen & Toubro Ltd. The date
of the transfer to BOB Fiscal Services Ltd. and the date of
appointment of the Ambani Group nominees on the Larsen &
Toubro Ltd. Board being the same and not a mere coincidence.

(h) Again, in December, 1988, Mr. Anit Ambani, another
G nominee of the Ambani Group was co-opted on the Board of
Larsen & Toubro Ltd. as an Additional Director with the
support of financial institutions even though the 33 takh shares
still stood in the name of BOB Fiscal Services Ltd.

It has been further pleaded that Trishna Investments & Leasing
H Ltd. to which the 33 lakh equity shares of Larsen & Toubro Ltd. were
N. PARTHASARTHY v. CONTROLLER [RAY, J.] 345

sold by the financial institutions through the instrumentality of BOB
A
Fiscal Services Ltd. was incorporated as a private limited company on
1st October, 1986with a paid up capital ofRs.11,000. It is evident that
even after acquisition of 3,300 equity shares of Rs.10 each to Reliance
Industries Ltd., the paid up share capital was only Rs.44,000.

An affidavit in opposition was. filed on behalf of the respondents B
by Mr. S_.D. Kulkarni, a whole-time Director and Vice-President
(Finance) of Larsen & Toubro Ltd. In para 6 of the said affidavit it has
been stated that the shareholders are different and distinct from the
company and do not have any interest whatsoever in the property of
the company unless and until the winding up takes place. The company
is a distinct legal entity and it does not have in law or fact any control
over the shareholders in regard to the dealing with their investment in
c
the new company or any other company. It has been further stated.that
the Resolution regarding the issue of the debentures was taken at a
special General Meeting of the Company and the decision is a near
unanimous decision of the 1.5 lakh shareholders with only one dissent
among them. It was stated in these circumstances the writ petition D
under Article 226 )Vas not maintainable. It has also been stated that
the entirety of the consent granted by the CCI under the Act is legal
and valid. These statements have been made by the deponent without
filing any proper verification or affidavit and as such there was no
proper controvertion or denial of the statements made in the writ
petition. The other affidavits filed on behalf of the respondents are E
also not affirmed or verified duly in accordance with the provisions of
the rules of the Supreme Court nor in accordance with the provisions
of Order 19 Rule 3 of the Code of'Civil Procedure.

The High Court of Bombay by its judgment and order dated
September 29, 1989 dismissed the writ petition at the preliminary F
hearing.

A Letters Patent Appeal was filed in the High Court at Bombay
against the said judgment by the petitioners. The respondents filed
Transfer Petition Nos. 506-507 /89 and Transfer Petition Nos. 571-573
of 1989 in this Court under Article 139A of the Constitution of India G
praying for the transfer of the said Letters Patent Appeal No.----------/89
as well as writ petition No. 13199/89 filed in the High Court at Madras
of one Mr. N. Parthasarathy, a shareholder of L & T Ltd. againstthe
Controller of Capital Issues and Larsen & Toubro Ltd. and Writ Peti-
tion No. 18399 of 1989 filed in the Karnataka High Court by Prof. S.R.
Nayak and Anr. against the Union of India & Ors. raising the similar H
questions.
346 SUPREME COURT REPORTS (1991) 2 S.C.R.

This Court vide its order dated November 9, 1989 allowed the
A
Transfer Petition Nos. 506-507 of 1989 and 571 to 573 of 1989 and
directed that the LP.A. No,----------of 1989 against the judgment pas-
sed in Writ Petition No. 2595 of 1989 pending in the Bombay High
Court be transferred to this Court for final disposal. The Writ Petition
No. 13199 of 1989 filed in the Madras High Court and the Writ Petition
B No. 18399 of 1989 filed in the Kamataka High Court were also trans-
ferred to this Court. These matters on transfer to this Court were
numbered as Transfer Case No. 1 of 1989, Transfer Case No. 61 of
1989 and Transfer Case No. 62 of 1989 respectively.

The Transfer Petition Nos. 458-467 of 1990 praying for the trans-
C fer of cases filed in different High Courts raising the similar grounds
are allowed and the Transferred Cases arising out of these are also
heard along with the Transferred Cases Nos. 1 of 1990, 61 of 1989 and
62of1989.

Two questions that pose themselves for consideration jn alf
D these above cases are:-1) whether the surreptitious divestment of 39
lakhs shares of L & T, large Industrial undertaking by sale through the
instrumentality of BOB Fiscal Services Ltd., a subsidiary of a nationa-
lised Bank i.e. Bank of Baroda by the public financial institutions
G.I.C., L.I.C., U.T.I. and thereby helping a private monoploy house
of the Ambani Group to acquire the said shares and thereby to get into
E the management of the Public Company amounts to an arbitrary exer-
cise of statutory power of the State and the respondents. Secondly,
whether the consent accorded by Controller of Capital Issues, to pre-
ferential issue of debentures by-Larsen & Toubro Ltd. of Rs.310 crores
for being subscribed by the shareholders and employees of R.P .L.,
R.I.L. amounts to immeasurable injury and prejudice to the public
F without any application of mind and thereby enabling the Ambani
group to have the largest share holding and thereby to control the L &
T Company which is ultra vires of Article 14 and 39(b) and (c) of the
Constitution.

The Larsen & Toubro Ltd. is a public limited company incor-
G porated under the Companies Act 8 of 1913 and it is recognised as a
Premier Engineering Company in the country with a pool of highly
'traine_d and experienced people. It has been engaged in diverse
activities in the engineering filed, cement manufacture, shipping,
·switch gear, industrial machinery, electrical equipments etc. and vari-
ous other core Sector industries including manufacture of sophistica-
H ted equipment for space and defence programmes of the country. On
N. PARTHASARTHY v. CONTROLLER [RAY, J.I 347

October 1, 198<), Trishna Investment and Leasing Ltd., a satellite
company of the Ambani group was incorporated with paid up capital A
of Rs.11000 (1,100 shares of Rs.10 each). This continued till
29.12.1988 when its capital was raised to Rs.44,000.

In May, 1988, Bob Fiscal Services Ltd., was incorporated as a
wholly cwned subsidiary of Bank of Baroda, a nationalised bank. The B
entire share capital of Bob Fiscal Services Ltd. was conttibuted by
Bank of Baroda aggregating to about Rs.10,00,00,000 (Ten Crores) to
nndertake mutual fnnd activities. It is to be taken notice o! in this
connection .that Premjit Singh, was the Chairman of the Bank of
Baroda at the relevant time and his son Harjeet Singh owned Kristal
Poly Fab. Ltd. whose only business~s with RJ.L. Ltd. Premjit Singh is C
closely linked to the house of Ambani's through the business of his son
Mr. H.arjeet Singh. Bob Fiscal Services Ltd., was incorporated as a
subsidiary of Bank of Baroda only two months prior to the acquisition
of shares of Larsen ~ Toubro Ltd., for the Am bani group for which it
had acted as a conduit and it was the first business of Bob Fiscal
Services Ltd. On July 15, 1988 Bob Fiscal Services Ltd., approached o 1
Life Insurance Corporation of India and Unit Trust of India to sell to it
two 'baskets', of blue chip shares of the value of Rs.25 crores approxi-
mately each. This will be evident from para 6(c) of the affidavit of Unit
Trust of India. On August 1, 1988 U.T.I. and L.l.C. each offered to
sell to Bob Fiscal Services Ltd. a basket of shares valued at Rs.25
Crores. The U .T.I. basket was valued at Rs.23.66 crores including 10 B
lakh Larsen & Toubro Ltd. shares which were sold at Rs.108 per
share. The L.1.C. Basket was valued at Rs.25.56 crores and it included
15 lakh L & T shares. L & T shares constituted approximately 55% of
the value of the two baskets. This is clear from para 6( d) of the
affidavit of Unit Trust of India. On 3.8,88 Bob Fiscal Services Ltd.
accepted the two baskets of shares comprising of 25 lakhs L & T shares F
and shares of 7 other companies valued in total Rs.50.23 crores: On
August 5, 1988 four satellite Companies of the Reliance Group gave
Rs.30 crores toy.B. Desai, Finance Broker, who in tum gave a short
.term call deposit of Rs.30 crores to Bob Fiscal Services Ltd. as is
evident from the affidavit filed by Bob Fiscal Services Ltd. On August
5; 1988, Bob Fiscal Services Ltd. sold 25 lakhs L & T shares to V.B.. G
Desai, the Broker. Thus Bob Fiscal Services Ltd. acquired 33 lakhs
equity shares of L & T from U. T. I., L. I. C., G. I. C. and its subsi-
diaries. Later in January, 1989 it acquired a fnrther 6 lakh shares from
the L.I.C. within weeks aftey the deposit by the four comphrues
mentioned above. Trishna Investment and Leasing Ltd., another
satellite company of the Ambani Group paid the requisite amounts ff1
348 SUPREME·COURT REPORTS [1991] 2 S.C.R;

A for the aequisition of the said 33 lakh shares of L & T from Bob Fiscal
Services Ltd. through the Finance Broker, V..B. Desai, associated with
Ambanis. It is convenient to mention in this connection that in July,
1988 the Reliance Petro Chemicals Ltd; of the Ambani Group issued
convertible debentures for Rs.594 crores to the public and others and
had raised a vast sum of f!!pees as subscription. The Ambani Group
B diverted a part of it for acquisition of L & T shares in the name of
benami concerns of their group who had virtually no financial
standing.

On October 11, 1988, 33 lakh shares were registered at a meeting
I-
of Board of Directors of L & Tin the name of Bob Fiscal Services Ltd.
On the same day two nominees of R.J.L., M.L. Bhakta and Mukesh
c Ambani, who are directors of R.l.L./R.P.L. were co-opted as
Directors of L & T. The nominee directors of U.T.I., L.1.C. and
l.D.B.I. did not raise any question as to the induction of Ambani's on
the Board of L & T Company even though not a single share of L & T
stood in their names. On December 30, 1988, Trishna Investment &
D Leasing Ltd, issued 3, 300 equity shares of Rs.10 each to R.I.L. and
R.P.L. Ltd. The capital of Trishna Investment was Rs.44,000. On that
day the registered Office of Trishlla Investment was shifted to Maker
Chamber IV i.e. the office of R'.I.L. Ltd. On 30.12.1988 Anil Am bani
was co-opted as Director of L & T without any question being raised
by nominee directors of U.T.1., L.I.C. and l.D._B.I. On 6.1.89 the 39
E lakh-shares sold by U.T.I. L.l.C. and G.l.C.. to.Bob Fiscal Services
. Ltd. were lodged by Bob Fiscal Services Ltd. for transfer in favour of
Trishna Investment & Leasing Ltd. whose registered office was
located at the office ofR.I.L. Thus Bob FISCal Services Ltd. merely
acted as a conduit for funneling shares from the public financial institu-
tions to the Ambani group. This is apparent from the fact that Mr..
Premjit Singh, the Chairman of Bank of Baroda who is closely linked
to the house of Ambani through the business of his son Mr. Harjeet
Singh and Bob Fiscal Servires Ltd. is the wholly owned subsidiary of
Bank of Baroda and it was incorporated only two months preceding
the acquisition of Larsen and Toubw Ltd. shares by it. ·.

G On 28th April, 1989 Dhirubhai ·Ambani, the chairman of
Reliance Group, became the Chairman of Larsen and Toubro. By this
process the public Financial Institutions which held 40% of the shares
of L & T company voluntarily diluted their holding to 33% and parted
with approximately 7% to the house of Ambani's and made them the
single largest private shareholder. This was done as submitted by the
H appellants delibeately and with a design to legitimise the eventual take
,... ---
N. PARTHASARTHY v. CONTROLLER [RAY, J.] 349
. over of Larsen & Toubro by the Ambanis. It is to be noticed that on
A
26.5.89 the Board of Directors of L & T decided to convence an annual
~
General Meeting on 27. 7 .89. Board also resolved to recommend that 8
crores be invested in two specified companies and that a further sum of
Rs.50 crores be invested in the purchase of equity shares in any other
company. On 23.6.1989 Board of Directors of L & T further resolved
to invest a sum. of Rs. 76 crores in the purchase of Equity Shares of B
R.I.L. On 21.7.89 R.I.L. and R.P.L. wrote letters to L & T seeking
suppliers credit to the extent of Rs.635 crores for projects which they
planned to' entrust to L & T. It is appropriate to note that prior to this

,
-. the total inter corporate investment of L & Twas approximately Rs.4
crores and investment in the shares of other companies was less than
:~
Rs.50 lakhs. On 22.7.89 the Board of Directors of Larsen & Toubro
approved a proposal to raise funds by issue of convertible debentures c
amounting to Rs.920 crores. Board resolved that notice should be
issued convening an extraordinary general meeting on 21.8.89 to con-
sider special Resolution for issue of convertible debentures of Rs.920
i crores.
D
--. On 26.7.89 two applications were made to C.C.I. for (1) the right
issue of Rs.200 crores and (JI) the public issue of Rs.720 cores. The
applications states that it is proposed to reserve preferentially allot-
'\. men! of Rs.360 crores out of public issue (i.e. 50% of the public issue)
for L & T group companies viz. Reliance Industries Ltd. and Reliance
~ Petrochemicals Ltd. The application further mentions that Dhirubhai E
Ambani is the Chairman and Mukesh Ambani is the Vice-Chairman of
L & T and that Anil Ambani and Mr. M.L. Bhakta are Directors. On
""' 11.8.89 further letter was addressed by L & T to the C.C.l. forwarding
copies of M.R.T.P. clearance with regard to projects awarded to L &
..... T made by Central Government under Section 22(3)(a) of M.R.T.P .
Act. On 29.8.1989 C.C.l. passed an order approving the issue of con- F
,:?
vertible debentures. The prospectus is dated 5.9.89 stating that the
company is part of the Reliance Group.

We have heard the arguments of the respondents. The public
~
financial institutions tried to justify the transfer of blue chip equity
shares of Larsen & Toubro Ltd. On the ground that while deciding to G
sell those shares they acted purely on business principles and sold
those shares at a very high market price and thereby earned huge
profit. These sales were made in order to earn much profit for the
interest of their constituents and for recycling the fund for investing in
the business by purchasing shares of other companies in public interest
· 1) and for interest of money market. There is nothing hanky and panky in H
...
350 SUPREME COURT REPORTS [1991] 2 S.C.R.

A it nor it is effected with the motive of diluting shares held by public
financial institutions in order to facil\tate the increase in the holding of
Ambani group, a private monopoly house,_ to get into the management
+
of this public company, It has been further contended on behalf of the
respondents Nos. 3 to 6 and 9 that the transfer of 39 lakh shares of
Larsen & Toubro were not made in favour of satellite companies of
B Ambani Grou_p, through Bob Fiscal Services Ltd. which is a wholly
owned subsidiary of Ban!<: of Baroda, surreptitiously and discreetly on
the basis of a design and a secret arrangement by transferring 7% out
of 40% of the shareholding in L & T and thus reducing their sharehold-
ing in the Company to 33%. It has also been submitted that in transfer-
ring those equity shares the financial institutions acted purely on busi- ·- "
ness principles and to earn profit by these transactions and in the case
c of L.I.C. and U.T.I. in the interest of the policy holders and the unit
holders as the case may be. It has also been urged that the acceptance
of the requests made by the subsidiary of Bank of Baroda i.e. Bob
Fiscal Services for selling the blue chip shares of L & T to them at the
highest market price throug_h the broker was in public interest in as
D much as if all those 39 lakh shares had been put in the stock marke~
for sale it would have created an adverse effect on the company and ,-
there would have been a run affecting adversely the interest of the
L & T company. It has also been contended _that it was not possible to
know the actual purchasers of these shares fro111 respondent No. 10, Bob
Fiscal Services Ltd, Certain decisions of this court have been cited at
E the Bar.

Considering the entire sequence of events and the manner in
y
which the financial institutions sold those 39 lakh equity shares of
L & T to Bob Fiscal Service and it immediately after purchase of those
shares with the 30 crores of rupees given by 4 satellites of the Reliance
F Group transferred those shares to Trishna Investment and Leasing
Ltd., a satellite of Ambani Group though it had a capital of only
Rs.44,000 and money required for purchase was at least Rs.39 crores
leads to the conclusion that such transfers had been made to help the
Ambanis to acquire the shares ofL /it. T Company in a circuitous way.
Moreover, the fund for purchase of the said shares was provided by
G Ambani Group from out of the money received by issue of convertible "
debentures for Rs.594 crores to public and others. Furthermore,
immediately after acquisition of share of L & T Ltd. Mukesh Ambani
and M.L. Bhakta, who are Directors of R.I.L./R.P .L. were co-opted
as Directors without any question as to their induction in the Board of
Directors even by the nominee Directors of financial institutions even
H thougl! the shares were not registered in their names. Anil Ambani
N. PARTHASARTHY v. CONTROLLER (RAY, J.] 351

was also co-opted as Director in December, 1988 and in April 1989,
Dhirubhai Ambani became Chairman of L & T. All these circums-
A
tances taken together clearly spell some doubt whether the transfer of
such a huge number of 39 lakh shares by the Public Financial Institu-
tions was fro public interest and was made on purely business princi-
ples.· The public financial institutions should be very prudent and
cautious in transferring the equity shares held by them not only being B
guided by the sole consideration of earning more profit by selling them
but by taking into account also the factors of controlling the finances in
the market in public interest. In L.J. C. of India v. Escorts Ltd., A.LR.
1986 SC 1370 at 1424 it was observed:

"Broadly speaking, the Court will examine the actions of
the State if they pertain to the public law domain and ref- c
rain from examining them if they pertain to the private law
field. The difficulty will be in dem~rcating the frontier bet-
ween the public law domain and the private law field
............. The question must be decided in each case
with reference to the particular action ......... When the D
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 shareholder, and
dons the robes of a shareholder with all the rights available
to such a shareholder."
E
This o.bservation, in my considered opinion, has no application to the
facts of the instant case as the public financial institutions are not
purchasing the shares of a company.

·However, I do not think it necessary to dilate on this point as· the
financial institutions have already bought back all the 39 lakh shares F
from Trishna Investment and Leasing Ltd. with the accretions thereon
but at the same time we add a note of caution that the public financial
institutions while transferring or selling bulk number of shares must
consider whether such a transfer will lead to acquisition of a large
proportion of the shares of a public company and thereby creating a
monopoly in favour of a particular group to have a controlling voice in G
the company if the same is not in public interest and not congenial to
the promotion of business.

The contention regarding the maintainability of the Writ Petition
as a public interest litigation cannot be taken into consideration in
view of the decisions of this Court in S.A. G~pta & Ors. v. Union of H_
352 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

A India & Ors., [1982] 2 SCR 365; Bandhua Mukti Morcha v. Union of
India & Ors., [1984] 2 SCR 67. Even the case of LIC of India v.
Escorts Ltd., [1986] 1SCC264 arose out of a public interest litigation.

The next crucial question that falls for consideration is about the
legality and validity of the consent given to the mega issue of
B debentures for the right issue of Rs.200 crores and for convertible
issue of debentures of Rs.620 crores out of which 310 crores of
debentures were earmarked for issue to the shareholders and deben- ,,
'·
tureholders of Reliance Indutries Ltd. and Reliance Petrochemicals
Ltd. As stated hereinbefore that after the purchase of 39 lakh equity
shares of L & T company from the public financial institutions, Bob
c Fiscal Services, a subsidiary of Bank of Baroda transferred the same
on the same day on which the transferred shares were registered in its
name in the Register of L & T to Trishna Investing and Leasing Ltd., a
satellite. of Ambani Group. It has also been alleged that after
Dhirubhai Ambani became the Chairman of the Board of Directors of
L & T Ltd. on April 28, 1989, Mukesh Ambani and M. L. Bhakta,
D Directors of R.l.L./R.Jil.L. and Anil Ambani were co-opted as
Directors of L & T. The Board of Directors of L &-T at its meeting
held on 22.7.1989 approved a proposal to raise funds by issue of con-
,!';,-
vertible debentures of Rs.920 crores and further resolved that notice
should be issued convening an extraordinary general meeting on
21.8.89 to consider special resolution for issue convertible debentures
E of Rs.920 crores. Immediately thereafter on July 26, 1989 two applica-
tions were made to the Controller of Capital Issues, Department of
Economic Affairs for sanction to the Right issue of debentures of
Rs.200 crores and for the public issue of debentures worth Rs.720
crores. The application records that it is proposed to reserve/preferen-
tially allot Rs.360 crores out of the public issue (i.e. 50% of the public
F issue) for L & T's group companies viz. Reliance Industries Ltd. and
Reliance Petrochemicals Ltd. The application also mentions that
Dhirubhai Ambani is the Chairman and Mukesh Ambani is the Vice-
Chairman of L & T and that Arri! Ambani and Mr. M.L. Bhakta are
Directors. On 11.8.89 another letter was sent by L & T to the Control-
ler of Capital Issues, Respondent No. 2 stating inter a/ia that the
G Company wishes to modify their proposal by reducing the reservation
for the shareholders of R.I.L./R.P.L. from Rs.360 crores to Rs.310
crores etc. and the issue of total debentures was reduced to Rs.820
crores. On August 21, 1989 at the extraordinary general meeting of
L & T Ltd. resolution was passed authorising the Board of Directors of
the company to issue 12.5% fully secured convertible debentures of
H the total value of Rs.820 crores to be subscribed in the manner as
.,
N. PARTHASARTHY v. CONTROLLER [RAY, J.] 353

stated therein. The respondent No. 2, Controller of Capital issues, by
A
its letter dated 29.8.89 addressed to M/s Larsen & Toubro Ltd. with
reference to its letter dated 26.7.89 intimated that the Central Govern-
ment in exercise of the powers conferred by the Capital Issues (Con-
trol) Act, 1947 gave their consent to the issue by L & T Ltd. of 12.5%
secured fully convertible debentures of the value of Rs.820 crores in
the manner specified therein. B

The consent given by the Controller of Capital Issues was chal-
lenged on the ground that it was given in undue haste without duly
considering the question that providing the preferential allotment of
-. debentures of Rs.3 JO crores to the equity shareholders of R.l.L. and
R.P.L. will increase considerably the holding of equity shares by the
Ambani group to' control the public limited company. The consent c
order made by the Controller of Capital Issues was attacked mainly on
the ground that the said order was made casually without any applica-
tion of mind and without considering that the effect of the same order
will be to help the Ambani Group to acquire debentures of the value of
Rs.310 crores specifically earmarked for preferential allotment to the D
shareholders of Reliance Industries Ltd. and Reliance Petrochemicals
Ltd and thereby to have the control of the L & T, a public limited
company. It has also been alleged that this consent has been given
hurriedly within 24 hours of the making of the application for consent
to the Controller of Capital Issues.
E
An affidavit in reply has been filed on behalf of respondent Nos.
I & 2, Union of India and the Controller of Capital Issues denying all
these allegations. It has been submitted that ·the claim made in the
Writ Petition that the undue haste in clearing the application (under
the CCI Act) was shown by Respondent Nos. 1 & 2 and the application
was cleared in just 24 hours, is not correct. !tis not correct that the F
approval was given by the empowered committee on 21.8.89 at 4.00
p.m., even before the General body meeting of L & T took place. It
has been submitted that the application by M/s L & T Ltd. was dated
26.7.89 and the consent was given on 29.8.89. The charge 'is false,
baseless and mischievous. It has been stated in paragraph 3 of the said
affidavit that the preferential issue, per-se, is not a novel idea. It has G
been stated that CCI has been permitting reservations for various
categories out of public issue based on the requests made by com-
panies after passing a special resolution in their general body meeting
to that eftect. There is no restriction on the shareholders of the com-
pany to offer shares of their company to anybody after passing a
special resolution in the General Body meeting as per Section Rl(IA) H
354 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

A of the Companies Act. Through such resolution resolved at such meet-
ings shareholders can also offer shares of their company to any person
or corporate body who is not even connected with the company. How-
ever, CCI would not normally permit reservations for shareholders of
any unconnected company out of public issue, unless it is offered to
shareholders of Associate/Group company of the Issuing Company. It
B is submitted that Larsen and Toubro had indicated that Reliance
Industries Ltd. (RIL) and Reliance Petrochemicals Ltd. (RPL) are
their group Companies. It is also submitted that Larsen and Toubro
filed a copy of the special resolution passed in the General Body meet-
ing held on 21.8.89 which permitted the company to offer its converti-
ble debentures worth Rs.310 crores to the shareholders of RIL and
RPL. It is submitted that the CCI permitted similar reservation for
.-
c shareholders of Associate/Group companies in the public issue of M/s.
Apollo Tyres Ltd., Mis Essar Gujarat Ltd., Mis Bindal Agro Ltd.,
Mis Chambal Fertilizers and several other companies. It is submitted
that there was no reason for CCI to reject the request of Larsen and
Toubro for this reservation as the shareholder of L & Thad approved
D such reservation.

It has been further submitted that the charge for favouring
Reliance Group/ Ambani Group is frivolous and misleading and seeks
to convey a wrong impression and imputes motives for which there is
no basis. It has been further submitted that the impugned issue had
E been consented by Central Government after due consideration,
including the need for funds. It is submitted that the funds are required
by the company for working capital needs, normal capital expenditure
and for executing the tum-key contracts of L & T Ltd. It is submitted
y'
that L & T indicated the Turn-key contracts including inter alia the
Gas Cracker Project and Acrylic Fibre Project of Reliance Industries
F Ltd. and Caustic Chlorine Project of Reliance Petrochemicals Ltd. for
Rs.635 crores as projects are to be executed. CCI has not permitted
Reliance Industries Ltd. and Reliance Petrochemicals Ltd. to raise
funds for. these projects so far. Earlier funds raised from capital
markets were used or/are being used for the following projects:

G RIL-PSF, PFY, PTA, LAB and Textile Units;

RPL-HDPE. PVCL MEG.

The allegation that for the same projects, CCI permitted L & T to raise
funds is baseless. The financing detail of projects of RIL and RPL
H were also examined in Maheshwari's case in Supreme Court and no
N. PARTHASARTHY v. CONTROLLER [RAY, J.l 355

double financing_ of same 2roject was found. Reliance Industries Ltd.
A
and Reliance Petrochemicales Ltd. have given undertaking that these
companies will not raise funds from public for financing the cost of
projects to the extent suppliers' credits are extended by L & T. It is
stated that MRTP approval to Reliance Industries Ltd. for gas cracker
does not provide for suppliers' Credit from L & T in the scheme of
finance and it is submitted that this statement is correct. It is also B
submitted that CCI will take this aspect into account before permitting
any further issue, in future, to Reliance Industries Ltd. and Reliance
Petrochemicals Ltd. for these projects. However, this aspect does not
affect the consent order of L & T in view of the undertaking of RIL
~ • and RPL mentioned above.

The application for consent was submitted to the respondent No.
c
2 on 26.7.89 for sanction. On August 21, 1989 at the extraordinary
general meeting of shareholders of L & T, a resolution was passed with
only one shareholder dissenting for the issue of debentures of Rs.820
crores as provided therein. A copy of this resolution was sent to the
Controller of Capital Issues who after duly considering the same D
accorded the consent on August 29, 1989. The argument that there has
been complete non-application of mind by the Controller of Capital
Issues in according the consent is not sustainable. Moreover, the Con-
troller of Capital Issues issued a letter dated 15th September, 1989 to
M/s Larsen and Toubro to note amendment of the condition of the
consent order to the effect that fund utilisation shafl be monitered by E
Industrial Development Bank of India. This will further go to show
that the consent was given after due consideration in accordance with
the provisions of Section 3 of the Capital Issues (Control) Act, 1947
(Act 29 of 1947).

Much arguments have been made as to the prov1S1on in the F
prospectus reserving preferential allotment of debentures of Rs.310.
crores to the equity shareholders of Reliance Industries Ltd. and
Reliance Petrochemicals Ltd. mainly on the ground that it will
increase the share holding of the Am bani group and thereby add to the
monopoly control of Ambani group over this public limited company.
" Under Section 2(g) of the Monopolies and Restrictive Trade Practices G
Act, 1969 "interconnected undertakings" mean two or more undertak-
ing which are interconnected with each other in any of the manner
mentioned therein, Explanation ( 1)-For the purposes of this Act, two
bodies Corporate, shall be deemed to be under the same management
(II) if one such body corporate holds not less than one fourth of the
total equity shares in the other or controls the composition of not less H
356 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

A than one fourth of the total membership of the Board of Directors of
the other. In the prospectus of Larsen & Toubro Ltd. obviously it has
been mentioned that Larsen and Toubro Ltd. is part of Reliance
group. Referring to the said provisions it has been contended on
behalf of the respondents i.e. the financial institutions that mention of
L & T company as part of the Reliance group is quite in accordance
B with this provision. Apropos to this reference may lie made to the
provisions of Sec. 81(IA) of the Companies Act, 1956 which are set out
hereunder:

"Notwithstanding anything contained in sub-section ( 1),
the further shares aforesaid may be offered to any persons
(whether or not those persons include the persons referred
c to in clause (a) of sub-section ( 1) in any manner whatsoever-

(a) if a special resolution to that effect is passed by the
company in general meeting, or"

D In the extraordinary general meeting of L & T a special resolu-
tion was made providing for preferential allotment of debentures to
the equity shareholder of R.I.L. and R.P.L. so the reservation of
debentures of the value of Rs.310 crores of Public issue for allotment
to shareholders of R.I.L. and R.P.L. cannot be questioned. In the
prospectus of L & T Ltd. under Business Plans it has been mentioned
B that the requirement of funds of the company for the period from 1st
October 1989 to 31st March, 1992 including in respect of Suppliers
credit to be extended to customers under turnkey projects/quasi-
turnkey projects and for incurring capital expenditue on new plant and
equipment, normal capital expenditure on modernisation and renova-
tion, meeting additional working capital requirements and for repay-
fl ment of existing loan liability, is estimated to be in the region of Rs.1425
crores. The suppliers' credits, inter a/ia include Rs.510 crores to be
extended to RIL in respect of its Cracker Project. The funds require-
ment is intended to be met out of the present issue of Debentures to
the extent of Rs.820 crores and the balance would be met from internal
accruals by way of short term borrowings, and out of the proceeds of
G the previous Debenture Issue (III Series). The consent was challenged
on the ground that no M.R.T.P. clearance for the issue of capital
under Section 21 or under Section 22 of the Monopolies and Restric-
tive Trade Practices Act, 1969 was given. It appears from the letter
dated 2.12.1988 issued by Government of India to M/s Reliance
Industries Ltd. endorsing a copy of Central Government's Order dated
H 25.11.1988 passed under Section 22(3)(e) of the M.R.T.P. Act 1969
N. PARTHASARTHY v. CONTROLLER !RAY, J.] 357

that it gave approval for the proposal of Mis Reliance Industries Ltd.
for setting up a cracker compfox. The approval of Central Government A
was made under section 22(3)(d) of the M.R.T.P. Act and com-
municated to Mis Reliance Petrochemicals Ltd. by letter dated
30.5.1989. Consent was also given by the Central Govt. under section
22(3) (a) of the M.R.T.P. Act for the establishment of a new undertak-'
ing for the manufacture of 20,000 of Acrylic Fibre. Thus challenge Hf B
the consent given by Controller of Capital issues is, therefore, merit-
less and so it is rejected.

It is pertinent to refer in this connection this Court's judgment in
the case of Narendra Kumar Maheshwari v. Union of India & Ors.,
J.T. 1989 2 S.C. 338 in which considering the duties of the C.C.l.
under the Controller of Capital Issues Act while giving consent it has c
been observed:

"That apart, whatever may have been the position at the
time the Act was passed, the present duties of the CCI have
to be construed in the context of the current situation in the D
country, particularly, when there is no clear cut delineation
of their scope in the enactment. This line of thought is also
reinforced by the expanding scope of the guideline's issued
under the Act from time to time and the increasing range of
financial instruments that enter the market. Looking to all
this, we think that the CCI has also a role to play in ensur- E
ing that public interest does not suffer as a consequence of
the consent granted by him. But as we have explained,
later, the responsibilities of the CCI in this direction should
not be widened beyond the range of expeditious implimen-
tation of the scheme of the Act and should, at least for the
present, be restricted and limited to ensuring that the issue F
to which he is granting consent is not, patently and to his
knowledge, so manifestly impracticable or financially risky
as to amount to a fraud on the public. To go beyond this
and require that the CCI should probe in-depth into the
technical feasibilities and financial soundness of the pro-
posed projects or the sufficien.cy or otherwise of the secur- G
ity offered and such other details may be to burden him
with duties for the discharge of which h.e is as yet ill-
equipped."

Three applications for directions being I.A. No. 1, I.A. No. 2
and I.A. No. 3 of 1990 have been filed in T.C. Nos. 61 of 1989, T.C. H
358 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

A No. 62 of 1989 and in T.C. No. I of 1990 by the L & T. Ltd. It has been
stated therein that the Deputy Controller of Capital Issues by a letter
dated 15th September, 1989 has intimated M/S Larsen & Toubro Ltd.
that condition No. V of the consent letter provides that the utilisation
of fund shall be monitered by Industrial Development Bank of India
Ltd. The representatives of Industrial Credit and Investment Corpora-
B lion of India Ltd. (instant ICICI) issued a letter to the L & T stating
that it would not be correct for them as Debenture Trustees to give
conversion of those debentures of equity shares before a reference was
made to the Controller of Capital Issues and without obtaining prior
written consent of the IDBI. The IDBI considered the unaudited state-
ment of the utilisation of debenture fund upto March 31, 1990 and
C were of the opinion that the applicants should make the first call only
after utilising substantially the surplus funds available to the extent of
Rs.226 crores in investments (after expenditure) upto June 30, 1990
satisfying the IDBI about the need for raising further funds by way of
first call. This was communicated to the applicants by IDBI's letter
dated 7th May, 1990.
D
The Board of Directors at its meeting held on 11th May, 1990
considered the above circumstances as well as the proceedings pending
in this Hon'ble Court and decided that the Company could not pro-
ceed with the conversions of Part A of the debentures which was due
on 23rd May, 1990. The Board authorised the Company Secretary to
E make the necessary application to the Controller of Capital Issues
seeking direction for the course of action to be followed by the Com-
pany in regard to the conversion. The applicant's letter dated 15th
May, 1990 to the Controller of Capital Issues pursuant to the aforesaid
Board Meeting refers to the letter dated 7th May, 1990 from IDBI as
well as to the objections raised by the ICICI.
F
The applicants sent a letter dated 15th May, 1990 t.J the Control-
ler of Capital Issues pursuant to the above Board's meeting. After
lengthy and detailed discussion by the I.D.B.I. with the applicant, the
IDBI was satisfied that the amount of funds that would be presently
required would be to the tune of Rs.650 to 700 crores. The company
G keeping this in view proposed to make a call '(first and final) of Rs.85
on or before 31st October, 1990 in place of originally envisaged first
call of Rs.75 and the final call of Rs.75 aggregating Rs.150. The appl-
icants recorded the above discussions-and intimated IDBI of its mod-
ified proposal by its letter dated 28.6.90.

H On 29th June, 1990 the Board of Directors of the Company were
-~ N. PARTHASARTHY v. CONTROLLER [RAY, J.] 359
'
apprised of the relevant proposals as approved by the IDBI. In the
A
meeting of the Directors it was decided (though not unanimously) that
directions of the Supreme Court be sought on the said proposals and
that the company should take necessary steps to approach this Court
and Madras High Court and implement the proposals after obtaining
the directions and vacating the order of the Madras High Court.
B
These Interim Applications were filed for following directions:

(a) (i) that the size of the issue do stand reduced from Rs.820
~,
crores to Rs.640 crores as followes:

Public issue of debentures of Rs.235 each. Rs.485 crores
Rights issue of debentures of Rs.225 each Rs.155 crores c
----------------
Total Rs.640 crores
-----------------
(ii) that in place of the first call of Rs.75 and the final call of D
- ' Rs. 75 as originally provided for in the prospectus, a first and final
call of Rs.85 in the case of the public issue and Rs.SO in the case
of the rights issue be made on the debentureholders on or before
3 lst October, 1990.

(iii) that the first conversion of Part A of the debentures into E
one equity share of Rs. 10 at a premium of Rs.40 (premium of
'...- Rs.30 in the case of rights issue) be made on 1st December, 1990.

(iv) that the second conversion of Part B of the debentures into
two equity shares of Rs.10 each at a premium of Rs.50 be made
on the date originally scheduled viz. 23rd May, 1991. F

(v) that the third equity conversion of Part C of the debentures
be made on the date originally scheduled viz. 23rd May, 1992 at
such premium per equity share as may be fixed by the Controller
~ of Capital Issues but not exceeding Rs.55 per share and such
conversion be made into one or more equity shares of Rs. 10 each G
as against two or more equity shares as originally provided in the
prospectus.

(b) that in case of any debenture holder not agreeing to the
modifications, in prayer (a) above and on intimation being recei- •
ved by the applicant company as mentioned in prayer (c) below H:
360 SUPREME COURT REPORTS [1991] 2 S.C.R.
.....
the applicants do refund to such debentureholders their/its appli-
A
cation and allotment money with interest thereon at such rate as
may be directed by this Court;
~

(c) that this Court be pleased to direct the applicants to give
notice to all debentureholders individually and by publication in
B national newspapers of the order passed in terms of prayers (a)
and (b) above that in case of any debentureholder not agreeing
to the modifications in prayer (a) such depentureholders do give
intimation to the applicant company within 30 days of such
notice in which case the applicant company would refund the ap- .~

plication/allotment money with interest.
c (d) for further orders and directions consequential to the orders
passed by this Court;

(e) for costs of the applications."

D Larsen & Toubro Ltd. respondent No. 2 in T.C. No. 61of1989
filed a rejoinder affidavit to the statement of objections filed by N.
Parthasarathy to the interim application No. I of 1990 in T.C. No. 61
, -
of 1989. In para 2 of the said rejoinder affidavit it has been stated that:

"By his order dated November 9, 1989 this Court
E specifically directed Larsen & Toubro Ltd. to make allot-
ment subject to the decision of this Court in the said mat-
ters. This Hon'ble Court therefore allowed the issue to ,/
proceed on the basis of the original consent purported to be
impugned by the petitioner in the Madras High Court Peti-
lion. I, therefore, submit that Larsen & Toubro Limited
F was fully justified in seeking the directions of this Hon'ble
Court as prayed for in the Interim Application. I deny that
the directions in the Interim Application, if granted, would
render nugatory the Petition filed by the Petitioner or that
the same would amount to a determination of the issue in
G
the Petitioner's writ petition as erroneously contended by ..
the petitioner. I deny that Larsen & Toubro Limited are at
all misleading this Hon'ble Court or that it committed any
act which is at all illegal, as falsely alleged. I submit that a
decision of this Hon'ble Court on the legality of the original
consent order is not necessary for the issue of interim direc-
lions of the nature prayed for by Larsen & Toubro Limited
H
in the above Interim Application."
N. PARTHASARTHY '· CONTROLLER [RAY, J.l 361

It has also been stated in para 3 of the said. affidavit that this
A
Court does not have jurisdiction to entertain the said interim applica- I

tion either for the reasons alleged or otherwise. The said application, it
is submitted, does not amount to performance of any executive func-
tion by this Court as erroneously alleged by the petitioner.

The statement that the Controller of Capital Issues has no power B
to modify or vary a consent as alleged has been denied. It has been
submitted that the Controller of Capital Issues has not varied his con-
sent nor is any such variation of the consent order per-se being sought
~ .. by the Respondent No. 2. It has also been stated that under sub-
section (6) of Section 3 of the Capital Issues (Control) Act, 1947, the
Central Government has the power to vary all or any of the conditions
qualifying a consent. c
It has been denied in para 8 of the said affidavit that the consent
order of the Controller of Capital Issues is at all illegal or improper as
alleged. It has been denied that it is not open for this Court or for the
Controller of Capital Issues to modify the .terms of the said consent D
order.

It is to be noted that the Industrial Development Bank of India
by its letter dated June 28, 1990 to the Managing Director, Larsen &
Toubro Ltd. stated that:
E
" .... From a quick review of the status of the new pro-
posal mentioned in your letter dated June 22, 1990, we feel
that the net requirements of funds to be met out of
debenture funds would be in the region of Rs.600 to Rs.650
crores as indicated by you.
F
We further note that from your letter dated June 28,
1990 that you propose to make first and final call Rs.85 on
the debentures on or bdure 31st October and to effect the
first conversion by the end of November, 1990 and second
and third conversion accordinll to the original dates
mentioned in the prospectus. G

The L & T Board will have to take a view on the size
of the debenture issue in the light of the requirements of
funds indicated in your letter and other modifications
suggested in the terms of the debentures. The company will
no doubt obtain necessary approvals from CCI, debenture- H
362 SUPREME COURT REPORTS [1991) 2 S.C.R.

.A holders/shareholders, etc. in consultation with its Legal
Advisers.''

A meeting of the Board of Directors of the Company was held on ~

June 29, 1990 and it was resolved that the directions of the Supreme
Court of India be sought on the said proposals and necessary steps the
B taken to approach the Hon'ble High Court at Madras to vacate the
said order and/or modify the same suitably and implement the propo-
sals only after the directions from the Supreme Court were obtained
and the Order passed by the Hon'ble High Court at Madras was
vacated and/or modified suitably.
,J.

It appears that Section 55 of The Companies Act, 1956 en joins
c that:

"The prospectus issued by or on behalf of a company or in
relation to an intended company shall be dated, and that
date shall, unless the contrary is proved, be taken as the
D date of publication of the prospectus."
,~
Under Section 61 of The Companies Act it is specifically pro-
vided that:

"A company shall not, at any time, vary the terms of a
E contract referred to in the prospectus or statement in lieu
of prospectus, except subject to the approval of, or except
on authority, given by, the company in general meeting."
-,/
Section 62 of the said Act provides for payment of compensation
to every person who subscribes for any shares or debentures on the
F faith of the prospectus for any loss or damage he may have sustained
by reason of any untrue statement included in the prospectus. Simi-
larly, Section 63 of the said Act provides for criminal liability for
mis-statements made in the prospectus. Section 72 of The Conpanies
Act provides that:
-f
G "No allotment shall be made of any shares in or debentures •
of a company in pursuance of a prospectus issued gener-
ally, and no proceedings shall be taken on applications
made in pursuance of a prospectus so issued, until the
beginning of the fifth day after that on which the pros-
pectus is first so issued or such later time, if any, as may be
H specified in the prospectus."
N. PARTHASARTHY v. CONTROLLER {RAY, J.I 363

Thus, it is evident from a consideration of the above provisions A
of The Companies Act that the terms of contract mentioned in the
prospectus or the statements in lieu of the prospectus cannot be varied
except with the approval of and on the authority given by the Com-
pany in the general meeting. Therefore, the consent that was given by
the Central Government nay by the Controller of Capital Issues, on a ti
consideration of the special resolution adopted in the extra-ordinary B
general meeting of the shareholders of the company on August 28,
1989 cannot be v.aried, changed or modified both as regards the reduc-
tion of the amount of debentures as well as the purposes for which the
fund will be utilised contrary to what has been embodied in the
prospectus and approved by the Controller of. Capital Issues on the
basis of the special resolution adopted at the general meeting of the C
shareholders of the company. Sub-section (6) of Section 3 of The
Capital Issues (Control) Act, 1947 states that:

"The Central Government may by order at any time-

(a) revoke the consent or recognition accorded under any D
of the provisions of this section; or

(b) where such consent or recognition has been qualified
with any conditions, vary all or any of those conditions:

Provided that before an order under this sub-section is E
made, the company shall be given a reasonable opportunity
of showing cause why such order shall not be made."

On a plain reading of this provision, it cannot be inferred that
consent order given by the Central Government after consideration of
the special resolution passed at the general meeting of the company on F
taking the no objection certification from the I.D.B.l. can be changed
or varied in any manner whatsoever by the Central Government. The
Central Government can merely vary all or any of the conditions sub-
ject to the consent being given.

It is appropriate to mention in this connection that the l.D.B.l. G
also asked the Larsen & Toubro Ltd. to obtain the necessary approval
from the Controller of Capital Issues, debentureholders/shareholders
etc. in respect of the reduction in requirement of funds. There has
been no general meeting of the company nor any special resolution
was taken for variation or reduction of the amount of debentures to be
issued as required under Section 81 read with clause IA of The Com- H
364 SUPREME COURT REPORTS [i991] 2 S.C.R.

panies Act. It is also evident that no steps have been taken to have
A the consent already granted by Controller of Capital Issues, varied or
modified as required under The Capital Issues (Control) Act, 1947.
Merely because clause (v) of the consent order provides for monitor-
ing of the funds by I.D.B.I., it does not mean nor it can be inferred
automatically that the suggestion of the I.D.B.I. as regards the funds
B requirement can be automatically given effect to without complying
with the statutory requirements as provided in the provisions in The
Companies Act as well as in The Capital Issues (Control) Act. The
consent order is one and indivisible and as such the same cannot be
varied or vivisected without taking recourse to the provisions of the
statute. It is also well settled that the contract to purchase shares or
'
debentures is concluded by allotment of shares issued under the
C prospectus and Section 72 of the Companies Act makes it clear that
allotment can only be made after the prospectus is issued. The
Company is bound by the special resolution, the prospectus and the
consent of the Controller of Capital Issues. The power to pass a con-
sent order is a statutory power vested in a statutory authority under
D the Capital Issues Act and the Court has no power or jurisdiction to
step into the shoes of the statutory authority and pass or approve a
,•
consent order different from the statutory consent order given by the
statutory authority. Moreover, the consent order cannot be varied by
the Central Government or Controller of Capital Issues after the said
order has been made public and third parties have acted on it and
E acquired rights thereon.

In Palmer's Company Law (24th Edition) by C.M. Schmitthoff
under the caption The "golden rule" as to framing prospectuses at -,/
page 332-333 it is stated that:

F "Those who issue a prospectus, holding out to the I
public the great advantages which will accrue to persons 'I
who will take shares in a proposed undertaking, and invit- /
ing them to take shares on the faith of the representations
therein contained, are bound to state everything with strict
and scrupulous accuracy, and not only to abstain from stat-
G ing as fact that which is not so, but to omit no one fact
within their knowledge, the existence of which might in any
degree affect the nature, or extent, or quality, of the pri-
vileges and advantages which the prospectus holds out as
inducements to take shares."

H Reference may also be made to the observations in Aaron's v.
N. PARTHASARTHY v. CONTROLLER (KASLIWAL. J.} 365
.,
Twiss, [1896] A.C. 273 in which Lord Watson said: A

"It was argued for the company that, inasmuch its contracts
for the purchase of the concession are generally referred to
towards the end of the prospectus, the respondent must be
held to have had notice of their contents. This appears to B
me to be one on the most audacious pleas that ever was
put forward in answer to a charge of fraudulent misreprsen·
talion. When analysed it means simply that a person who
has induced another to act upon a statement made with
intent to deceive must be relieved from the consequences
of his deceit if he bas given his victim constructive notice of
a document, the perusal of which would expose the fraud." C

In the case of State of Madhya Pradesh and Ors. v. Nandla/Jaiswal and
Ors., [1986] 4 SCC 566 this Court while dealing with the !aches and
delay held that:
D
"The High Court does not ordinarily permit a belated
resort to the extraordinary remedy under the writ jurisdic-
tion because it is likely to cause confusion and public incon-
venience and bring in its train new in justices. The rights of
third parties may intervene and if the writ jurisdiction is
exercised on a writ petition filed after unreasonable delay, E
it may have the effect of inflicting not only hardship and
inconvenience but also injustice on third parties."

For the reasons aforesaid I dismiss all these Transferred Cases.
There will no be order as to costs. All the interim applications filed in
these Transferred Cases stand disposed of in view of the observations F
made hereinbefore.

The Special Leave Petition (C) No. 13801 of 1989 filed against
the order of the Bombay High Court in Contempt Petition No. 1 of
1989 in writ petition No. 2595 of 1989 is dismissed.
G
The Contempt Petition Nos. 121 and 130 of 1989 are also dismis-
sed without costs.

KASLIW AL, .T. I have gone through the judgment of my learned
brother B.C. Ray, J. and I agree with the conclusions drawn by him.
But, I would like to express my own views. H

~-------
366 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

A Writ Petition No. 2595 of 1989 was filed by Haresh Jagtiani and
Shami! Majumdar (hereinafter called 'the petitioners') in the Bombay
High Court challenging the validity of the consent given by the Con-
troller of Capital Issues (CCI) dated 29.8.89 and subsequently
amended by Order dated 15.9.89 for the issuance of Fully Convertible
Debentures of Rs.820 crores by Larsen & Toubro, a Public Limited
B Company (in short L & T). Challenge was also made in respect of
transfer of 39 lac shares of L & T held by Unit Trust of India (UTI),
Life Insurance Corporation of India (LIC), General Insurance Com-
pany (GIC) and its subsidiaries to Trishna Investments and Leasing
Limited (in short Trishna Investments) through the instrumentality of
Bob Fiscal Services Limited (in short Bob Fiscal). The Writ petition
C was dismissed on 29.9.89 by learned Single Judge of the Bombay High
Court. Letters Patent Appeal against the said judgment was filed in
the Bombay High Court. Several other writ petitions and suits were
filed in various other High Courts. Some Contempt Petitions were also
filed and all the above matters were transferred to this Court. Some
Interim Applications were also filed by L & T before this Court. The
D issues raised in these cases are of far reaching impact on the affir-
matory public duty and public obligations on the Government of India
and its instrumentalities, to preserve and to refrain from squandering
away the property and economic power of the State and to prevent
illegitimate growth of private monopoly power and to ensure honesty
and probity in public life and in industry and business. This is a largest
E mega issue so far as India is concerned and involves to a great extent
the investment of the country's bulk economic resources to be invested
for industrial growth or development of the country to a public limited
company. The matter has to be looked into on the basis of larger
public interest which can be fulfilled by a balanced investment of I
country's resources. \
F
My learned brother has already given the details regarding the (
)

manner and circumstances in which 39 lac shares of L & T were trans-
ferred by public financial institutions to Trishna Investments, a sub-
sidiary of Reliance Group of Industries i.e. Reliance Industries
Limited (RIL) and Reliance Petro-chemicals Limited (RPL), through
G the conduit of Bob Fiscal, as such I need not repeat the same.

On the date of the filing of the writ petition in the Bombay High
Court a prayer was made in this regard to declare that the transfer of
39 lac shares of L & T held by UTI, LIC, GIC and its subsidiaries to
Trishna Investments through the instrumentality of Bob Fiscal is
H arbitrary, illegal, ma/a fide and a fraud on the statutory powers of the
N. PARTHASARTHY v. CONTROLLER [KASLIWAL, J.] 367

respondents and is clearly ultra vires Articles 14, 39 (b) & (c) of the
A
Constitution and to issue a writ of mandamus directing the respon-
dents to recover the shares of L & T and pay back the amount received
there for. This later part of the prayer for writ of mandamus has now
become infructuous in view of the changed circumstances that the 39
lac shares of L & T have already been reforned back to the public
financial institutions, but Mr. Chinoy, counsel for the petitioners has B
prayed that it would be very necessary to declare that such transfer of
39 lac shares at the relevant time was arbitrary, illegal, ma/a fide and a
fraud in order to further hold that the consent given by the CCI for the
proposed issue of convertible debentures of Rs.820 crores by L & T
was not only arbitrary but based on ma/a fide exercise of power based
on extraneous grounds. In this regard it would be necessary to state
some more facts which happened after the dismissal of the writ peti- c
tion by the learned Single Judge of the Bombay High Court dated
29.9.1989. The petitioners aggrieved against the judgment of the
learned Single Judge filed a Letters Patent Appeal before the Division
Bench of the High Court. Some shareholders filed writ petitions and
suits in several High Courts and this Court in the above circumstances D
thought it proper to transfer all the cases to this Court. Pursuant to the
order of this Court dated October 27, 1989 learned Additional
Solicitor General appearing on behalf of the financial institutions sub-
mitted a memorandum. It was stated in the memorandum that the
financial institutions had already bought back 39 lac shares of L & T
with accretion thereto from Trishna Investments. It was further stated E
that by buying back the said shares, the financial institutions were in
no way either remotely or impliedly acceding the position that the
original transactions of sales were illegal or void. The financial institu-
tions stood by their contentions which had been upheld by the Bombay
High Court in its Judgment dated September 29, 1989. It was further
stated that the Transactions had been completed on the expectation F
that the petitioners would withdraw the proceedings as even otherwise
a basic portion of the petitions filed in the High Court had become
infructuous.

Mr. Jethmalani, Learned counsel appearing on behalf of Haresh
Jagtiani also filed a draft of consent terms to be recorded in the trans- G
fer petition. On 9.11.89 this Court after considering all the circums-
tances of the matter thought it just and fair to pass an order that the
allotment of debentures will be made by the petitioner company i.e. L
& T and such allotment will abide by the decision of this Court in the
said matters. It was further directed that the L & T will also affix a
similar notice at its Registered Office for the information of the share- H
368 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

holders as well as the original allottees. The Court also indicated in the
A above order as under:

"The Court will further make it clear that no equities will
be pleaded in respect of allotment of shares."

B After the passing of the above order debentures were released and
several lacs of persons have purchased these debentures.

Trishna Investments had not filed any counter to the writ peti-
tion before the Bombay High Court, but have filed counter affidavit
and written submissions before this Court. Dr. L.M. Singhvi, learned
Sr. advocate appearing on behalf of Trishna Investments contended
C that Trishna Investments had agreed to the retransfer of 39 lac shares
to the financial institutions and it was agreed by learned counsel for
the petitioners that it would form the basis for fully comprehensive and
wholistic seitlement of the matter. Indeed, Shri Ram Jethmalani
learned counsel appearing for the petitioners so stated that this
D Hon'ble Court was also pleased to record the same in its order dated
9.11.89. Since the petitioners have now resiled from their categorical
offer, Trishna Investments also cannot be made to agree to a settle-
ment upon de nova terms and conditions. It has been submitted that in
its affidavit dated 7.11.90 filed by Trishna Investments, it has been
stated that the retransfer of shares resulted in a loss of Rs.10 crores to
E Trishna Investments. It has also been submitted that though Trishna
Investments is a company wholly owned and subsidiary of RIL but
contracts made by Trishna Investments in the present case should not
be construed to mean that this Hon'ble Court may hear and adjudicate
all other allegations against Reliance group without making the later
as party to the present proceedings. Trishna Investments cannot be
F treated as a substitutable alter ego without making RIL/RPL as
parties.

It was contended by Dr. Singhvi, learned counsel for Trishna
Investments that the present proceedings have now become infructu-
ous in view of the admitted retransfer of 39 lac shares by Trishna
G Investments to financial institutions. It is well setiled that the Court
should not decide merely academic points. In this regard it is submit
ted that the principal relief as sought in prayers (a) and (c), no longer
exist and the aforesaid transaction of retransfer of 39 lac shares waso0n
the expectation. that the petitioners will withdraw the proceedings. In
support of the above contention reliance is placed on State of
H Maharashtra v. Ramdas Shriniwas Nayak & Anr., [(1983) 1 SCR, 8 at
N. PARTHASARTHY v. CONTROLLER [KASLIWAL, J.] 369

p. 121. It has been further submitted that in the alternative Trishna
A
Investments must be put in the identical status quo ante position by
retransfer of its 39 lac shares back to it, alongwith all accretions. It was
also urged that there are large number of disputed questions of fact
which cannot be decided in exercise of extraordinary jurisdiction con-
tained in Art. 226 of the Constitution.
B
Dr. Singhvi also urged that even if the action of the Reliance
group was to corner or purchase all shares of L & T, there is nothing
wrong or illegal about it. There was no law or rule prohibiting the
purchase of shares of a company. Thus there was nothing wrong or
illegal in purchasing the shares by Trishna Investments. Apart from
that the total shareholding vested in Trishna Investments was only
about 6.5% and the representation of Ambanis including Mr. Bt>akta c
on the Board of Directors of L & Twas only 4out of 20. It was wholly
misleading, deliberately mischievous and erroneous to suggest on the
part of the petitioners that the real value of the shares transferred/sold
by financial institutions was far more than the market value. There are
no guidelines, rules, regulations, directions or documents prescribing D
any method of sale of shares where such shares are sold individually or
in chunk. No control can be said to have been transferred on the basis
of 6.42% shareholding and representation of Board of Directors after
the transfer to Trishna Investments. Reliance in support of the above
contention is placed on Babula/ Chaukhani v. Western India Theatres,
AIR 1957 Cal. 709 at p. 715 on the passage which reads as under: E

"It is in evidence that Modi has been purchasing large
blocks of shares of this company, but cornering as such or
purchase of large block of shares as such, so long as they
are permissible by law is not unjustified. That by itself does
not prove mala fides or bad faith either in fact or in law. To F
acquire a control which the law permits cannot be illegal."

It was further submitted in this regard that if purchase or corner-
ing, per se and by itself, is neither illegal nor impermissible, then
purchase or cornering through intermediaries or even if done surre-
ptitiously cannot become illegal merely by the existence of such G
intermediaries or by the allegedly surreptitious nature of the transac-
tions. The aforesaid decision of the Calcutta High Court has been
applied in a large number of decisions of statutory authorities dealing
with allegations of chunk purchase or cornering of shares.

Dr. Chitale appearing on behalf of Bob Fiscal pointed out that H
370 SUPREt,IE COURT REPORTS I 1991] 2 S.C.R.

the members of the Bob Fiscal Services Private Limited ai an extra-
A
ordinary general meeting held on 24th September, 1990 have passed a
special resolution for voluntary winding up of the company in accor-
dance with etc. 484(i)(b) of the Companies Act, 1956. By the said
resolution Chartered Accountant has also been appointed as liqui-
dator for the beneficial winding up of the Bob Fiscal Services Pvt. Ltd.
B It was further submitted by Dr. Chitale that essential grievance of the
writ petitioners related to the transfer of 39 lac shares of L & T by the
investment institutions and its subsidiaries to M/s Trishna Investments
and Leasing through the alleged conduit or instrumentality of Bob
Fiscal. It has been alleged by the petitioners that a conspiracy was
hatched between investment institutions and Ambani group repre-
sented by Trishna and Bob Fiscal in order to camouflage the transac-
C tions and to prove the transfer of shares to Bob Fiscal in order to avoid
compliance of the alleged guidelines and policy of the financial institu-
tions to charge at two times the market price for such sale of shares.
The allegations were denied by various respondents which were
upheld by Bombay High Court by its judgment dated 29th September,
D 1989. It was further submitted that during the course of the proceed-
ings before this Court on 18th October, 1989 Trishna Investments
made offer in open Court to sell back or retransfer the 39 lac shares in
question together with accretions to the investment institutions on no
loss no profit basis. On 27th October, 1989 the institutions agreed to
buy back the said 39 lac shares with accretions thereon. It was expre-
E ssly submitted and clarified by Trishna Investments and the institu-
tions that Trishna Investments was selling back the said shares and the
institutions were buying back the same without in any manner admit-
ting any of the allegations in the writ petitions, nor were they admit-
ting the position that the original transfer of shares by investment
institutions to Bob Fiscal were in any manner arbitrary or unlawful.
F Subsequently, it transpired that on or about 8th November, 1989
institutions had purchased the said 39 lac shares on full payment. As a
sequel to the above, the main relief sought by the petitioners have
become infructuous and do not survive at all. The entire challenge of
the writ petitions in regard to the actions of the financial institutions
for sale of shares to Trishna Investments through Bob Fiscal had
G become merely academic and any trial of the issue in relation thereto ...
would only be an abuse of the process of law and wholly unnecessary
and waste of time of this Hon'ble Court. Bob Fiscal is not concerned
with the challenge of the petitioners in regard to the order of CCI. It
was thus submitted that the entire petition has become infructuous but
if for any reasons this Hon'ble Court desires to continue with the case
H in respect of the challenge to the consent of the CCI then Bob Fiscal
N. PARTHASARTHY v. CONTROLLER [KASLIWAL, J.] 371

and iis Chairman should be dropped from the array of parties.
A
The stand taken by the public financial institutions in this regard
is that while deciding to sell those shares they acted purely on business
principles and sold those shares at a very high market price and thereby
earnec huge, profit. There was no basis in the allegation made by the
petitioners that the investment institutions ought to have charged and B
recovered substantially higher price (which according to the petitio-
ners should have been at least 200% of the market price) for the
transfer of such shares had the shares been transferred directly to
...... Trishna Investments being a company, representing a group/persons
other than those in the management. The investment institutions had
transferred 39 lac shares to Bob Fiscal as part of a 'basket' of securities
purely on commercial considerations. Investment institutions were in c
no way concerned with any subsequent dealings of the said shares by
Bob Fiscal. The entire challenge of the writ petitioners to the actions
of the financial institutions was now merely academic and any decision
in this regard would be a waste of judicial time and totally unneces-
sary. It was also submitted that all allegations of conspiracy between D
the financial institutions and any other party are denied. It is denied
that investment institutions at any time were aware of the fact that 39
lac shares which were sold to Bob Fiscal were at any time intended or
destined for the Ambani group as alleged.

I agree with the observations made and conclusions arrived at by E
my learned brother B.C. Ray in respect of transfer of 39 lac sh~res. I
may, further add that so far as the relief of a writ of mandamus direct-
"< · ing the respondents to recover 39 lac shares ot'L & T and pay back the
amounts received there for, does not survive in view of the shares
having already bought back by the financial institutions from Trishna
Investments. However for future guidance it may be worthwhile to F
note that public financial institutions while making a deal in respect of
a very large number or bulk of shard worth several crores of rupees
must also make some inquiry as to who was the purchaser of such
shares. Such transactions should be made with circumspection and
care to see that the deal may not be to camouflage some illegal con-
trivance or in built conspiracy of a private monopoly house in order to G
usurp the management of a public company and w'iich in its opinion
may not be in public interest.

We cannot subscribe to the contention raised by Dr. Singhvi that
there was nothing wrong or·illegal even if the action of Reliance Group
was to corner or purchase all the shares of L & T, and even if done H
372 SUPREME COURT REPORTS [1991] 2 S.C.R.

A through intermediaries or surreptitiously cannot become illegal. If,
that is the law laid down by Calcutta High Court in Babula/ Chaukhani
v. Western India Theatres, (supra), we disapprove it.

It is no doubt correct that any person or company is lawfully
entitled to purchase shares of another company in open market, but if
B the transaction is done surreptitiously with a mala fide intention by
making use of some public financial institutions as a conduit in a
clandestine manner, such deal or transactions would be contrary to
public policy and illegal. If the, matter was so simple as propounded by
Dr. Singhvi, why Trishna Investments did not come forward directly to
purchase 39 lac shares from public financial institutions and why
c entered in a deal through the conduit of Bob Fiscal in a clandestine
manner. That apart why Trishna Investments readily agreed to sell
back these shares to public financial institutions even at a loss of Rs.10
crores as suggested, after the filing of these petitions. This itself
speaks volumes against the conduct of Trishna Investments who was a
subsidiary of Relinace Group. There is no force in the contention that
D the propriety of such deal cannot be considered without impleading
RIL/RPL as parties to these proceedings. It may be stated that the
entire transactions have been made by Bob Fiscal and Trishna Invest-
ments who are already parties. It may be noted that Bob Fiscal and
Trishna Investments were made parties to the writ petition filed in the
Bombay High Court and serious allegations were made against them
E but they did not choose to refute any allegations by filing any counter
affidavit in the High Court. In any case we have derived our conclu-
sions on the basis of admitted facts and not otherwise. It may be worth
mentioning that Bob Fiscal was formed in June. 1988 and soon there-
after entered into transactions of purchase of 39 lac shares of L & Ton
the strength of deposit of Rs.30 crores by the four satellite companies
F of the Ambani Group and soon thereafter transferred the shares in
favour of Trishna Investments. It has now, been stated before us by
Dr. Chitale appearing on behalf of Bob Fiscal that in an Extra-
ordinary General Meeting held on 24.9.90 a special resolution has
been passed for voluntary winding up of Bob Fiscal. This leads one to
draw a legitimate inference that Bob Fiscal was brought into existence
G merely to act as a conduit and was merely an interloper to affect the
transfer of 39 lac shares of public financial institutions in favour of
Ambani Group and their satellite firms. It came into existence like a
rainy insect and lived out its utility after acting as a conduit for the
transfer of 39 lac shares in favour of Trishna Investments. I do not
consider it necessary to further dilate on t~is point and fully agree with
H my learned brother that all the circumstances taken together clearly
N. PARTIIASARTIIY v. CONTROLLER [KASLIWAJ •• J.] 373

spell some doubt whether the transfer of such a huge number of 39 lac A
shares by the public financial institutions was for public interest and
.,. was made on purely business principles .

Another important question is with regard to the consent given
by CCI. L & Thad filed two applications to CCI on 26.7.89. One for
the Rights Issue of Rs.200 crores and another for the Public Issue of B
Rs.720 crores (subsequently reduced to Rs.620 crores). It may be
noted that upto this time 39 lac shares of L & T had come to Trishna
Investment and M.L. Bhakta. Mukesh Ambani and Anil Ambani had
£
been coopted as Directors of L & T and lastly Dhirubhai Ambani had
become the Chairman of L & T on 28.4.89. On 23.6.89 Board of
Directors of L & T had resolved to invest a sum of Rs. 76 crores in the
c
purchase of Equity Shares of RIL. On 21. 7 .89 RIL and RPL had
written letters to L & T seeking suppliers credit to the el(tent of Rs.635
crores for turnkey projects which they planned to entrust to L & T.
Out of the above public issue of Rs.820 crores it was proposed to
reserve preferential allotment of Rs.310 crores (50% of the issue after
deducting Right Issue) for the shareholders of RIL and RPL treating D
.. them as group companies of L & T. On 29.8.89 CCI passed an order
approving the above issue of Convertible Debentures. The Prospectus
was issued on 5.9.89 in which it was stated that L & Twas part of the
Reliance Group. CCI by a further order dated 15.9.89 amended the
earlier consent order dated 29.8.89 to the effect that fund utilisation
shall be monitored by Industrial Development Bank of India (IDBI). E
cc:i in another letter of.the same date namely 15.9.89 also stated that
50% to be raised in calls would be based upon the monitoring by IDBI
' ..., for utilisation. This Court on 9 .11.89 allowed the L & T to open the
issue subject to the condition that allotment will abide by the decision
of this Court. The issue was then opened and it was over subscribed
and more than 11 lac applicants applied for the allotment of the F
debentures. On the ground that by virtue of the conditions in the
consent Order, IDBI being the monitoring agency required the L & T
to furnish its funds requirement before making calls and since consi-
derable details had to be worked out by the L & T, it became necessary
to postpone the first call originally due on 30th April. Accordingly the
~

Board of Directors of L & T resolved that the date ()fpayment o1 the G
first call money payable by the debenture holders on or before 30th
April, 1990 would be postponed till such time as may be decided by the
Directors. Meanwhile the Industrial Credit Investment Corporation of
India (ICICI) who are the debenture trustees in respect of Series IV
debentures issued a letter dated 30th April, 1990 to L & T stating that
it would not be correct for them as debenture trustees to give conver- H
374 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

A
sion of these debentures into equity shares before a reference was
made to the CCI and without obtaining prior written consent of the
IDBI. IDBI then considered the unaudited statement giving details of
the utilisation of debenture funds upto 30th March, 1990 and were of
the view that the applicants (L & T) should make the first call only
after utilising substantially the surplus funds available to the extent of
B Rs.226 crores in investments {after expenditure) upto June 30, 1990
and after satisfying IDBI about the need for raising further funds by
way of first call. After a prolonged discussion and correspondence with
all the concerned authorities L & T proposed to make a call (first &
final) of Rs.85 on or before 31st October, 1990 in place of the origi-
nally envisaged first call of Rs.75 and the final call of Rs.75 aggregat-
ing to Rs. 150. L & T thus proposed to affect the first equity conver-
c sion by end of November, 1990. IDBI approved the above proposal. In
view of the fact that the postponement of the first call upon "the
debenture holders to be made on 30th April, 1990 and the postpone-
ment of the first conversion of Part-A of the debentures into equity
shares as originally scheduled to be on 23rd May, 1990 was occasioned
D by IDBI requiring L & T to first satisfy IDBI as to its requirement of
funds and an objection raised by ICICI for giving its consent to the
conversion of Part-A of the debentures, L & T submitted interim
applications before this Court for directions which have been
mentioned in extenso in the judgment of my learned brother.

E Mr. Nariman, learned Sr. advocate appearing on behalf of L & T
in the changed circumstances submitted that the impugned issue of
convertible debentures was passed by a special resolution in the
Extraordinary General Meeting of the shareholders of L & T dated ./
21.8.89 and the said special resolution had not been challenged by any
of the petitioners. Only consent order of the CCI had been challenged
F and thus the debentures which had been issued on the authority of a
special resolution remained unchallenged. It was further argued that
as regards the authority of CC!'s consent order the scope and para-
meters of the Court's power to scrutinise the consent order have
already been laid down in a recent decision of this Court in N. K.
Maheshwari v. Union of India, [1989] 3 SCR 43. It was submitted that
G the limits as laid down in N.K. Maheshwari's case (supra) have not ~
been transgressed so as to call for any interference in the consent
order. Mr. Nariman thus justified the sanctioning of preferential allot-
ment of shares worth Rs.300 crores for the shareholders of Reliance
Group as well as the consent order for the entire issue of Rs.820
crores. It may be further noted that initially L & T had taken the stand
H to reduce the total amount of the issue to Rs.640 crores instead of
N. PARTHASARTHY v. CONTROLLER [KASLIWAL, J.] 375

Rs.820 crores, but finally took the stand that the issue may be pro-
A
ceeded to the full extent of Rs.820 crores in view of the fact that the
IDBI had itself in an affidavit in reply to their application before this
Court had taken the stand that it was not IDBI's view to curtail the
amount of issue and that it was L & T's own decision. The L & T thus
in its affidavit dated 11th September, 1990 make it clear that the issue
may be proceeded to the full extent of Rs.820 crores and only a post- B
ponement of the dates of the first call, first equity conversion and the
second call may be permitted.

Mr. Chinoy, learned counsel appearing for the petitioners vehe-
mently submitted that the petitioners had not come forward with a
grievance regarding the validity of issue of debentures only. His con- C
tention was that the petitioners had come forward raising larger issues
affecting the entire economy of the country and the under hand
practice adopted by the financial institutions and the big private
industrialists. It was submitted that there was a limited financial capa-
city of the investor public in the shares and CCI as a controller ought D
to see that such public investment should not go in the hands of a few
industrialists which would be ccintraray to the Directive Principles
enshrined in Article 39 (b) & ( c) of the Constitution oflndia. It should
adhere to the above State Policy enshrined in the Directive Principles
that the ownership and control of the material resources of the com-
munity are so distributed as best to subserve the common good and
that the operation of the economic system does not result in concentra- E
tion of wealth and means of production to the common detriment. It
was submitted that the facts on record clearly establish that the mega
' -~

issue was conceived, proposed and implemented with the intent and
object of utilising the reputation and goodwill of L & T to raise funds
to the extent of Rs.635 crores for funding projects of Reliance Group
of Industries. The consent so given by CCI was vitiated on account of F
the non application of mind and its failure to consider the facts of the
case in the light of its application to act in public interest and in
consonance with the principles embodied in Article 39 (b) & ( c).

Dr. Singhvi, learned Sr. advocate appearing on behalf of Trishna
Investments submitted that economic and corporate issues can never G
be a subject matter of judicial review, as already laid down in State of
Madhya Pradesh v. Nandlal Jaiswal & Ors., [1987] 1 SCR, 54 and Life
Insurance Corporation of India v. Escorts Ltd. & Ors., [1985] Supp 3
SCR, 909 at p. 1017 & 1018. It was submitted that CCI had given
consent after thoroughly applying its mind in any case the impugned H
consent order is a single, composite indivisible order which cannot be
376 SUPREME COURT REPORTS [1991] 2 S.C.R.

A appropriately bisected or bifurcated. Even if for arguments sake it may
be considered that the consent was not proper then the whole consent
must go and it cannot be selectively upheld and selectively quashed.
As regards suppliers credit it has been urged that provision of suppliers
credit is an extremely common and well known commercial modality
and indeed, construes and alternative scheme and mechanism of
B finance. In deed, the concept of suppliers credit is integrally connected
and inextricably intertwined with the concept of a turnkey project. In
sum and substance the concept of suppliers credit simply means that
the entire turnkey project is the property of L & Twho executes it and
then hands it over to the purchaser (in this case RIL/RPL) and extends
credit for payment to RIL/RPL with effect from the date wheIJ the
project is handed over as a running unit by L & T. The suppliers/
C workers contractor (L & T) gives credit in the sense that the purchaser
promises to pay, inter alia by bills of exchange or other customary
payment organised with the price of the project would be paid in
instalment inclusive of further running interest from the date of hand-
ing over till the date of payment. It has been submitted that all official
D documents and other materials in the present case specifically stipulate
and specify the precise particular projects for which the moneys were
sought to be raised by L & T. Thus it is uncontrovertibly ckar that the
sole and only purpose for raising of funds and the sole and only
requirement of funds by L & T .related to the extension of suppliers
credit to RIL, inter alia in respect of its cracker project which has also
E been shown on pages 10 and 11 of the prospectus. Similarly, reference
has been made to other trunkey projects of RIL/RPL in the pros-
pectus. It has thus been argued that if the consent of CCI was given
taking note of all these circumstances then L & T has no right to
change the same and utilise the funds for other purposes. The issue
was only of Rs .820 crores for specific projects of RIL/RPL worth 635
F crores and the entire issue would be subject to the fulfillment of the
above contracts made with RIL/RPL. The original consent of the Con-
troller was given on 29.8.89 and the same cannot be changed by subse-
quent letters of the Controller dated 15.9.89. Those letters can only be
construed harmoniously and in conjuction with the sanction of
29.8.89. They can only be construed as nominating IDBI to monitor
G the sanction of 29.8.89 which is based on the proposal and the special
resolution of the company. It was argued that the issue was carried out
according to the prospectus filed on 6th September, 1989. The two
letters of 15th September, 1989 cannot be c.onstrued as authorising
IDBI or L & T to redraw the consent or to override the special resolu-
tion or the prospectus for that would be completely violative of the
H provisions of the Companies Act. Capital Issues Control Act and the
Rules made thereunder.
N. PARTHASARTHY v. CONTROLLER [KASLIWAL, J.) 377

Mr. Ashok Sen, learned Sr. advocate appearing on behalf of
A
K.B.J. Tilak opposed the interim applications submitted on behalf of
L & T. It was contended that L & T had no right to change the
..;
conditions of the consent order as well as the terms and conditions
mentioned in the prospectus. Mr. Sen also placed reliance on the
principles s~t gut in De Smith's Judicial Review of Administrative
Actio,1 4th Ed. page 285 which sets 0111 the principles governing the B
exercise of discretionary powers as under:

"The relevant principles formulated by the courts may be
.J.. broadly summarised as follows. The authority in which a
discretion is vested can be compelled to exercise that dis-
cretion, but not to exercise it in any particular manner. In
general, a discretion must be exercised only by the author- c
ity to which it is committed. That authority must genuinely
address itself to the matter before it: it must not act under
the dictation of another body or disable itself from exercis-
ing a discretion in each individual case. In the purported
exercise of its discretion it must not do what it has been D
..., forbidden to do, nor must it do what it has not been
authorised to do. It must act in good faith, must have
regard to all relevant considerations and must not be
swayed by irrelevant considerations, must not seek to pro-
mote purposes alien to the letter or to the spirit of the
legislation that gives it power to act, and must not act E
arbitrarily or capriciously. Nor where a judgment must be
made that certain facts exist. can a discretion be validly
' exercised on the basis of an erroneous assumption about
those facts. These several principles can conveniently be
grouped in two main categories: failure to exercise a discre-
tion, and excess or abuse of discretionary power. The two F
classes are not, however, mutually exclusive. Thus, dis-
cretion may be improperly fettered because irrelevant con-
siderations have been taken into account; and where an
authority hands over its discretion to another body it acts
-~
ultra vires. Nor, as will be shown, is it possible to differen-
tiate with precision the grounds of invalidity contained G
· within each category." ·
r
When such order is Jlassed withou\ regard to relevant con-
sideration or irrelevant grounds or for an improper purpose or in bad
faith then the order becomes void. Mr. Sen also cited a passage of
House of Lords in Anisminic Ltd. v. The Foreign Compensation Com- H
378 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

A mission, [1969] 2 A.C. 147 which has been quoted by the Supreme
Court in [(1971) 3 SCR p. 557] at page 570which reads as under:
.,.
"It has sometimes been said that it is only where a tribunal
acts without jurisdiction that its decision is a nullity. But in
such cases the word "jurisdiction" has been used in a very
B wide sense and I have come to the conclusion that it is
better not to use the term except in the narrow and original
sense of the tribunal being entitled to enter on the enquiry
in question. But there are many cases where, although the
tribunal had jurisdiction to enter on the enquiry, it has
done or failed to do something in the course of the enquiry
which is of such a nature that its decision is a nullity. It may
c have given its decision in bad faith. It may have made a
decision which it had no power to make. It may have failed
in the course of the enquiry to comply with the require-
ments of natural justice. It may in perfect good faith have
misconstrued the provisions giving it power to act so that it
D failed to deal with the question remitted to it and decided
some question which was not remitted to it. It may have
refused to take into account something which it was
....
required to take into account. Or ii may have based its
decision on some matter which, under the provisions set-
ting it up, it had not right to take into account. I do not
E intend this list to be exhaustive. But if it decides a question
remitted to it for decision without committing any of these
errors it is as much entitled to decide that question wrongly
as it is to decide it rightly."

It was also submitted that the consent order of the Controller is an
F integrated and composite order and it cannot be vivisected either by
the IDBI or by the High Court. It is a statutory order which has been
made by a statutory authority in accordance with the Capital Issues
(Control) Act and Rules, approved by the Controller and the issue was
subscribed on the basis of such consent order and prospectus and on
other functionaries can change fliis order. It was submitted that the
G prospectus did not specify any contract apart from the turnkey con-
tract of RIL and also did not mention anything except the supply credit
necessary for financing these turnkey projects which would require
Rs.635 crores out of 820 crores. In other words, the principal purpose
of the issue was the financing of the turnkey projects of the value of
Rs.635 crores. It is fallacious to argue that the issue was for Rs.1425
H crores as is sought to be argued on behalf of L & T. The propectus
N. PARTIIASARTHY v. CONTROLLER [KASLIWAL, J.] 379

mentions at page 45 of the interim application under the head 'busi-
A
ness plans' that for the period 1st October, 1989 to 31st March, 1992
funds requirement was estimated at Rs.1425 crores. It was further
specifically stated that the supplieis credit, inter a/ia included Rs.510
crores to be extended to RIL in respect of its Naptha Cracker project.
It was further specifically stated that the funds requirement was
intended to be met out of the present issue of the debentures to the B
extent of Rs.820 crores and the balance would be met from internal
accruals, in other words. from the internal resources of the company
and not borrowin$ or debenture proceeds.

Mr. Parasarn, learned Sr. advocate appearing on behalf of the
petitioners in writ petitions Nos. 11112-11113 of 1990 filed in the High C
Court of Madras and subject matter of Transfer Petitions in this Court
argued that each compulsorily convertible debenture holder has rights
accrued in his favour pursuant to the allotment. Each debenture
holder has his own perception of the rights accrued in his favour which
he may seek to enforce. Such enforcement of right accrued in his
favour will Ilecessarily result in his taking up a legal position which D
"' . may agree with the stand taken by one or other of the parties. It has
been submitted that the consent order passed by CCI is either valid or
invalid. There is no third position possible. It was further submitted
that prospectus is an invitation for offer from the public for the sub-
scription or purchase of any shares or- debentures. The invitation is
accepted and the offer is made when an application is made for allot- E
ment of debentures. Once the debentures are allotted, the contract is
concluded. It was further contended that each and every allottee of the
debenture is entitled to specifically enforce the contract for specific
performance. The Court will enforce specific performance in favour
of the allottee debenture holder and maintain consent as a whole and
bind other allottees on grounds of equity as all have acted on the basis F
of the consent. It was contended that with regard io the shares, specific
performance is the rule. Reliance in support of this contention is
placed on Jai Narian v. Surajmul/, AIR 1949 F.C., 211. It was pointed
out by the Federal Court that shares of a company are limited in
number and are not ordinarily available in the market, it is quite
proper to grant a decree for specific performance of a contract for sale G
of such shares. The IDBI can only monitor the utilisation of funds by
L & T as they are collected in terms of the clause as specified in tlie
prospectus to ensure that the funds are actually utilised for the specific
predetermined projects for which they are raised and this condition
cannot be so interpreted to confer right on IDBI to decide as to the
mode and manner and collection of funds itself. H
380 SUPREME COURT REPORTS [1991] 2 S.C.R.

Mr. S.S. Ray, learned Sr. advocate contended that consent order
A
dated 29.8.89 was perfectly lawful and valid and the judgment of the
Bombay High Court in this regard was correct. It was not possible for
the Court to bisect or vivisect the consent order or to apply the 'blue ...
pencil theory' thereto and also to hold that a part of it is valid while the
rest is invalid. The consent order was an integral part of a single
B scheme having a single purpose and had to be considered in total
conjunction of a series of documents and happenings. Mr. Ray drew
attention of the Court to the correspondence which took place from
26.7.89 to 25.9.89 between the L & Tand the CCI.
I Mr. Ray also brought to the notice of the Court two events •
_..
happened thereafter namely order of this Court dated 9.11.89 by
c which allotment of the debentures was allowed without claiming any
equity by the allottee and allotment of the debentures to the plaintiff on
·23.11.89. Mr Ray also brought to the notice of this Hon'ble Court
further events relevant for the purpose of this case. Notice given by
LIC to L & Ton 2.4.90 to call an Extraordinary General Meeting to
remove Ambanis from the board but no meeting was held. On 19.4.90
D Mr. Dhirubhai Ambani stepped down as Chairman of L & T. Various
correspondence between L & T and IDBI vide two letters dated
22.6.90 and one dated 28.6.90. IDBI also sent a reply on 28.6.90 to
...
both the letters dated 22.6.90 and 28.6.90 sent by L & T. In this reply
letter IDBI stated as under:
E "From a quick review of the status of the new proposal
mentioned in your letter dated 22.6.90 we feel that the net
requirement of funds to be met out of debenture funds /
would be in the region of Rs.600 to Rs.650 crores as y'

indicated by you . . . . . . .... The L & T Board will have to
take a view on the size of the debenture issue in the light of
F the requirement of funds indicated in your letter and other
modifications suggested in the series of the debentures.
The company will no doubt obtain necessary approvals
from CCI, debenture holders/shareholders, etc. in consul-
tation with its legal advisors."

G
It is clear that ID BI also realised that further approvals from CCI ..
was necessary and also of the debenture holders, but this was never done.
A meeting by the Board of Directors of L & T was held on
26.9.90 in which the mega issue was reduced from Rs.820 crores to
Rs.640 crores. The date of conversion of debentures were varied and
the suppliers credit for Rs.545 crores in respect of turnkey projects of
H RIL were cancelled. It was pointed out by Sh. Ray that taking note of
N. PARTHASAR1HY v. CONTROLLER [KASLIWAL, J.I 381

the above documents and the happenings even if a part of the consent A
order dated 29.8.89 is found to be bad or unlawful, nothing can remain
of the consent order and it has to go in its entirety .
..,
Mr. Hegde, learned Additional Solicitor General appearing on
behalf of the Financial Institutions submitted that it was wrong that the
Ambani holding in L & T has increased from 12% to 35.3%. it is based B
on a completely erroneous hypothesis that the shareholdings in RILi
RPL are only of Ambanis. 35 lac shareholders comprised of 50 per
cent of the investing public of India are in fact the public at large. 200
~
crores worth of debentures were under the rights issue and it was
mandatory under the guidelines for subscribing any issue. Out of
remaining 620 crores, approximately 320 crores debentures were
reserved for preferential entitlement to equity shareholders of RILi
c
f
_RPL. The pros{lectus itself mention that any unsubscribed portion in
the public offered by prospectus would go to the category of public.
·~)'.
The claim of any loss as suggested in the statement given by the
petitioners is completely wrong and baseless. The allegation that an
illegal benefit is made by the Ambanis from the 7% transfer of shares D
.., does not survive as the entire shares with accretions have been handed
. over back to the public financial Institutions.

• Mr. R.K. Garg, learned Sr. advocate appearing on behalf of
~·~
"·'1 respondent Nos. 1 and 5 in Transfer Petitions Nos. 458-467/90 con-
tended that the sole question involved in all the cases is whether the E
Controller of Capital Issues was acting illegally or constitutionally in
giving consent to L & T for coming out with mega issue of Rs.820
~-~
crores, primarily and substantially for execution of turnkey contracts
for.Reliance projects, with a stipulation in the contract that the cost of
construction. would be Rs.510 crores and suppliers credit will be
extended on mutually agreed terms and conditions. The CCI after F
application of mind insisted on an undertaking to be given by Reliance
that on extension of suppliers credit they would be precluded to raise
this amount from the market. It was further submitted that L & T
themselves had applied for sanction in order to compete for these
lucrative contracts with foreign business rivals who were extending
.....
suppliers credit as a matter of routine and Indian companies were G
loosing business to them because of their superior financial strength
though without superior special skills or experience. According to Mr.
Garg construction of Hajira project sponsored by RIL would have
gone to foreign business rivals who were required to be paid in foreign
exchange with considerable detriment to national economy and as such
RIL did a good turn to the national economy by giving contract of H

:;\
··\
382 SUPREME COURT REPORTS [1991] 2 S.C.R.

turnkey projects to L & T. It was further submitted that after the
A
allotment of debentures a concluded contract between the debenture
holders and L & T has come into existence and the rights and liabilities
as contained in the prospectus cannot be varied by this Hon'ble Court. \-
The CCI has no power to defeat, destroy or vary the contracts made
between the investor and the company concerned.
B
On the other hand, Mr. Harish Salve, learned counsel appearing
on behalf of petitioners in transferred case No. 61/89 submitted that
the order granting permission by the CCI is alleged to be illegal as the
CCI overlooked the implications of the MRTP Act vis a vis the sup-
pliers credit. The dominant and real object underlying the issue was to ,..
make available funds for application to the Reliance Group projects
c and also to provide a tool by which Ambanis and Reliance Group
shareholders could increase their control over L & T and dilute the
control of the financial institutions. The issue was brought about
directly as a result of the illegal takeover of L & T by the Ambanis.
Thus the entire issue is tainted by fraud and void ab initio.
D
It has been further submitted that in reality and substance, the
entire issue is tainted since the issue was an attempt of the Ambanis
who had by means fair and foul garnered the control of L & T to raise
...
moneys using the fair name of L & T for their own purposes. The
money raised admittedly was not even required except for projects of
E Reliance Group. '
Mr. B.R.L. Iyengar, learned Sr. advocate appearing on behalf of '.':'.
petitioners S.R. Nayak and Ors. in the writ petition filed in the ,.- /

Karnataka High Court and transferred to this Court, supported the
contentions of the petitioners in the writ petitions filed in the Bombay
F High Court. Mr. Iyengar further submitted that the capital available
for investment at any given time has to be sized and allocated accord-
ing to national priorities by laying down an investment policy which
should inform and govern the action of the different departments of
the Govt. including the Controller of Capital Issues, who is a functio-
nary in the Finance Ministry. At the given time that is in 1988-89 the
G capital market had according to available economic reports, about
Rs .5000 crores public investment funds, limited as it was by poor
savings and high inflation. There were so called mega issues f"'1r or
five in number who had the resources to exploit the media including
the electronic media. None of these mega issues had anything like
suppliers credit from their associates, companies or otherwise. The
H Reliance Petro Chemicals had already appropriated Rs.560 crores thus
N. PARTHASARTHY v. CONTROLLER (KASLIWAL, J.) 383

nearly 3000 crores of rupees had been appropriated by larie issues
A
when the impugned issue was presented. After that the capital available
for wage goods industries, other labour intensive industries critical
industries, sought to be set up by hundreds. of professionals who had
-I
neither political influence nor the means to exploit the media would
have been left with a very meagre amount available for allocation.
Thus Articles 38 and 39 (b) & (c} of the Constitution were not kept in B
mind by the authorities in making capital allocation. They addressed
themselves to the so called requirement of L & T in isolation and
admittedly did not have material priorities on the investment policy in
mind.

It was further contended that the Reliance Group of Industries C
had in about one year established access to about 1500 crores of
rupees, including suppliers credit of Rs.635 crores and had thereby
become India's largest conglomerate, with three different kinds of
industries and that by its very nature a 'conglomerate unlike a linear
monopoly defies control and regulation was a glaring factor quite apart
from the technicalities of the Monopolies Act. Sec. 22(3)(b) and (d) of D
the Monopolies Act required indepth policy examination at the high-
.,. . est pplicy levels and consultation with the Monopolies Commission
and the Planning Commission. The record does not disclose any such
comideration or oonsultation, on the other hand the so called con-
sid<;:ration can be seen to be casual, perfunctory and biased. Even in
ti);e case of transfer of shares of an ordinary company, the directors E
. have discretion to refuse the transfer if they feel that the person is
~ undesirable or his shareholding is not in the best in. terests of the com-
,.. pany and repeatedly the Courts have upheld such bona fide refusal to
'.., transfer. Such being the case, it was notorious in the present cases that
the Ambanis' high ambitions were out to takeover L & T. It was thus
contended that the nominees of the financial institutions were at the F
very outset put on inquiry, when without any shareholding the first
two Ambanis sat on the Board of Directors and, thereafter Dhirubhai
Ambani usurped the Chairman's seat. The CCI failed to perform its
duties in a proper manner and such action of granting consent in the
prevailing circumstances was not done in good faith. The sale of shares
.,,. by the financial institutions itself was a grave breach of trust. For G
Reliance Group of industires it was not possible to further increase
their capital base by releasing any mega issues and they have tried to
succeed in doing indirectly what they could not have done directly.
The first step in the execution of this nefarious plan was to transfer of
39 lac shares from the financial institutions to Bob Fiscal. The second
step was the transfer of these shares by Bob Fiscal to Trishna Invest- H
384 SUPREME COURT REPORTS [1991] 2 S.C.R.

ments a subsidiary of Ambanis. The third step was the induction of
A
Ambanis into the board of management of L & T and fourth step was
of convening an Extraordinary General Meeting of the shareholders
and to get a resolution passed in such meeting for execution of certain ,_
projects of RIL and RPL cornering more than 3/4th amount out of of
the entire mega issue of Rs.820 crores. This could not have been done
B without the active connivance and support of CCI and other financial
institntions. The question raised in this case is not one of legality but of
propriety and reasonableness and bona fides of the action of the finan-
cial institutions in the course of execution of this plan which has virtu-
ally resulted in not merely transfer of professionalised managed com-
pany with a reputation built over the years into the hands of a private
group but also the said company being used by the said private group
- .
c to raise enormous capital in the capital market for the execution of its
projects. It was further submitted by Mr. Iyengar that the whole con-
sent is liable to be quashed and the same cannot be bifurcated.

The petitioners and the group of lawyers supporting them have
D argued that the consent given by CCI is bad and should be struck down
on the ground that it was given in undue haste, without proper applica-
tion of mind, in violation of the provisions of the MRTP Act and mala . .,..
fide in order to benefit Reliance Group. In the alternative it has been
contended that no preferential reservation could have been made hf
Rs.310 crores of Convertible Debentures for the shareholders of
E Reliance Group of Companies. In this regard it has been contended
that in case this Hon'ble Court does not hold the entire consent as
invalid, then the part giving preferential reservation of Rs.310 crores
_of Convertible Debentures for-the shareholders of the Reliance group
of comp,anies may be declared invalid but the remaining part of the
issue of Rs.5.10 crores be declared valid, as the consent can be legally
F bifurcated in valid and invalid portions.

The other group of lawyers have contended that the consent
given by CCI did not suffer from any infirmity and in any case it cannot
be bisected or bifurcated in valid and invalid portions. The consent
order was an integral part of a single scheme and shall be valid or
G invalid as a whole and it does not lie within the judicial review oHhe
Courts to declare one part of the consent order as valid and the other
part as invalid.

As already mentioned above this is a mega issue amounting to
Rs.820 crores, out of which Rs.200 crores is the Rights Issue for the
H shareholders and employees of L & T itself. Issue of Rs.310 crores
N. PARTilASARTifY v. CONTROLLER [KASLIWAL, J.] 385

being reserved as preferential issue for the shareholders of Reliance A
group of companies being an associate/group of L & T itself. The
balance issue of Rs.510 crores is meant for the general public. So far as

'
I
the Rights Issue of Rs.200 crores is concerned, the same is perfectly
valid and nobody has come forward to challenge the same. As regards
the preferential issue of Rs.310 crores in favour of shareholders of the
Reliance group of companies is concerned, L & T and Reliance group B
of companies were interconnected within the meaning of Sec. 2(g) of
the MRTP Act and it is permissible according to law. The size of the
issue was so large that it was considered necessary to reserve a substan-
tial portion of it in favour of the shareholders of Reliance group of
companies, in order to ensure the successful absorption of the entire
issue. It may also be noted that the shareholders of the Reliance group C
of companies are numbering about 35 lacs and they represent the
investor base of the entire shareholding communtiy of the country. My
learned brother B.C. Ray has dealt with this matter in detail and has
found that preferential issue per se is not a novel idea. CCI has been
permitting reservations for various categories out of public issue based
on the request made by companies after passing a special resolution in D
the general body meeting and there is -no restriction on the share-
holders of a company to offer shares of their company to anybody after
passing a special resolution as required under Sec. 81 (I-A) (a) of the
Companies Act. I am fully in agreement with the above view taken by
my learned brot.her B. C. Ray, J. After the aforesaid view taken by us,
the question of bifurcating or vivisecting the consent order given by E
CCI does not survive. The. legal controversy thus raised that the con-
sent given by CCI under the Capital Issues (Control) Act can be held
valid or invalid as a whole but not some part of it as valid and the rest
invalid does not require to be decided in this case and the same is left
open.
F
The next question which calls for consideration is whether the
consent order for the mega issue of Rs.820 crores as a whole given by
the CCI can be declared ifle-gal or not on the grounds raised by the
petitioners. This _Court in N.K. Maheshwari's case (supra) while con-
sidering the duties of the CCI under the Control of Capital Issues Act
while giving consent has observed as under: G

"That apart, whatever may have been the position at the
time the Act was passed, the present duties of the CCI have
to be construed in the context of the current situation in the
country, particularly, when there is fio clear cut delineation
of their scope in the enactment. This line of thought is also H
386 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

reinforced by the expanding scope of the guidelines issued
A
under the Act from time to time and the increasing range
of financial instruments that enter the market. Looking to
all this, we think that the CCI has also a role to play in
ensuring that public interest does not suffer as a conse-
quence of the consent granted by him. But as we have
.B explained later, the responsibilities of the CCI in this direc-
tion should not be widened beyond the range of expediti-
ous implementation of the scheme of the Act and should, at
least for the present, be restricted and limited to ensuring
that the issue to which he is granting consent is not patently
and to his knowledge, so manifestly impracticable or finan-
cially risky as to amount to a fraud on the public. To go
c beyond this and require that the CCI should probe in-depth
into the technical feasibilities and financial soundness of
the proposed projects of the sufficiency or otherwise of the
security offered and such other details may be to burden
him with duties for the discharge of which he is as yet
D ill-equipped."

In the above paragraph this Court has clearly laid down that the
CCI has also a role to play in ensuring that public interest does not
suffer as a consequence of the consent granted by him. The CCI can-
not be permitted to take an alibi and a pvlicy of hands off on the
E ground that this Court had said in the above case that it may be "to
burden him with duties for the discharge of which he is as yet ill-
equipped". It was never the intention in the above case to lay down that
the ·ccI was not even required to see whether any public interest
suffers or not as a consequence of the consent granted by him. It is the
bounden duty of the CCI before giving an order of consent for the
F issuance of any mega issue to keep in mind and to carry out the Direc-
tive Principles of State Policy as enshrined in Article 39 (b) & ( c) of the
Constitution which provide as under:

39 (b):
"That the ownership and control of the material resources
G of the community are so distributed as best to subserve the
common good:

39 (c):
That the operation of the economic system does not result
H in the concentration of wealth and means of production to
the common detriment."
I
r
N. PARTiiASARTHY v. CONTROLLER [KASLIWAL, J.I 387

It is no doubt correct that the CCI is not required to probe in-depth A
into the technical feasibilities and financial soundness of the proposed
projects or the sufficiency or otherwise of the security off:red, but at
the same time it has to see that the capital available for investment at
any given time has to be sized and allocated according to the national
priorities, and in the changed socio-economic conditions ·of the
country to secure a balanced investment of the country's resources in B
industry, agriculture and social services.

It has been agrued by Mr. Iyengar that in 1988-89 the capital
,. . market, according to available ecomomic reports, had about Rs.5000
crores pubic investment funds, limited as it was by poor savings and
high inflation. There were so called mega issues 4 or 5 in number who
had the resources to exploit the media including the electronic media.
c
None of these mega issues had anything like suppliers credit from their
associates, companies or otherwise. The Reliance Petro Chemicals
had already appropriated Rs.560 crores and nearly 3000 crores of
rupees had been appropr.iated by large issues when the impugned issue
was presented. After that the capital available for wage goods D
industries, other labour intensive industries critical industries sought
to be set up by hundreds of professionals who had neither political
influence nor the ~eans to exploit the media would have been left with
a very meagre amount· available for allocation. It has been further
contended that the Reliance Group of companies had in about one
year established access to about 1500 crores of rupees, including sup- E
pliers credit of Rs.635 crores and had thereby become India's largest
conglomerate with three different kinds of industries and that by its
very nature a conglomerate unlike a linear monopoly defies control
and regulation was a glaring factor quite apart from the technicalities
of the Monopolies Act, which ought to have been conside,red by the
CCI. ·:;:.·., F

In N.K. Maheshwari's case challenge was made to an order of
consent of the CCI granted for the issue of shares (Rs.50 crores) and
debentures (Rs.516 crores) by the RPL. It was pointed out that though
the issue proposed was of shares of Rs.50 crores and Debentures of
Rs.516 crores, the company was allowed to retain over subscription to G
the tune of 15% amounting to Rs.77.40 crores. RIL was the promo-
ter of RPL. Though mega issues had already been issued by RIL/RPL
and a substantial amount of about Rs.1060 crores had already been
mopped up from the public for the projects of Reliance group of
companies and they were not entitled to raise any further public issue
in this regard, a devise of suppliers credit and turnkey projects to the H
388 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

A extent of Rs.635 crores was made for funding the projects of Reliance
Group of industries by L & T. It was proposed from the side of L & T
at the time when Dhirubhai Ambani was the Chairman and his two
sons and M.L. Bhakta their Solicitor were on the Board of Directors of
L & T. Thus the intention was to syphon an amount of Rs.635 crores
out of the issue of Rs.820 crores in utilising and funding for the turn-
B
key projects of the Reliance group. These facts were known to the CCI
and were certainly relevant at the time of granting consent of the
impugned issue of Rs.820 crores. Though this point has lost its force
now in the changed circumstances but certainly it was worth noticing
by the CCI at the time of granting consent. This Court on 9.11.89 had
allowed the allotment of the debentures and thereafter approximately
C' 11 lac debenture holders have bought the debentures. It would not be
in the interest of general investor public to cancel the entire mega
issue. Many transactions must have already taken place on the floor of
the stock exchange regarding the sale and purchase of the debentures
during this intervening period. Under the order of this Court dated
9. 11. 89, no restrictions were placed on L & T in the matter of utilisa-
D tion of funds. According to L & T against Rs.410 crores due on appli-
cation and allotment, the L & T has so far received Rs.396 crores out
of which approximately Rs.300 crores have been utilised towards issue
expenses, capital expenditure, repayment of loans and working capital
in terms of the objects of the issue. The balance available with the
company is approximately Rs.96 crores only. There is already a safe-
E guard provided in the order of the CCI dated 15.9.89 that the fund
utilisation shall be with the approval of the IDBI. In any case, the
consent order given by CCI cannot be held invalid on any of the
grounds of challenge raised by the petitioners. In these proceedings
this Court is neither called upon nor is entitled to decide as to how and
in what manner the amount mopped up from the public by this mega
F issue could be utilised or spent. Thus, I agree with my learned brother
B.C. Ray, J. that the consent given by CCI is valid.

All the above cases including the interim applications stand dis-
posed of by the above order. The judgment of the Bombay High Court
dated 29.9.89 also stands modified in accordance with the findings and
G observations recorded by us as mentioned above. The Contempt appli-
cations are dismissed. The parties are left to bear their own costs.

G.N. Applications dismissed.