NARENDRA KUMAR MAHESHWARI v. UNION OF INDIA & ORS.

MAY 3, 1989 ( B

Capital Issues (Control) Act, I947/Capital Issues (Exemption) Order, 1969: Sections 2, 3 and 12-Controller of Capital Issues-Scope of power and exercise of function in according sanction-Extent of.

Companies Act, 1956: Section 8;](5)-'Compulsorily convertible debentures'-Floating charge-Debt equity ratio-What are-Whether c a Company can deal with its property without the permission of debenture holders.

Practice and Procedure: Grant of Interim Orders-Regard to be had to principles of comity of courts administering same laws through- D out the country.

Reliance Industries Ltd. (RIL) and Reliance Petrochemicals Industries Ltd. (RPL) are inter-connected and represented Companies in the large industrial house known as Reliance Group. RIL had pro- moted RPL. RPL was incorporated on 11.1.1988 and has been a cent E percent subsidiary of RIL. It was claimed that RPL would set up the largest petrochemical complex in India with foreign collaboration. RPL proposed to issue convertible debentures for raising capital for the project.

The Controller of Capital Issues (CCI), who functions under the F Capital Issues (Control) Act, 1947 had, on 15th September, 1984 by way of press release issued certain non-statutory guidelines for approval of issue of secured convertible and non-convertible deben- tures. These guidelines were subsequently amended on 8.3.1985. Guidelines were also given by the CCI for issue of convertible cumula- tive preference shares, and for employees stock option scheme. G

RPL had, on 4.5.1988, made an application to CCI for issue of debentures of the face value of Rs.200 crores fully convertible into equity shares on the following terms:

A sum of Rs. JO being 5% of the face value of each debentures by H 43

44 SUPREME COURT REPORTS [1989] 3 S.C.R.

A way of first conversion immediately into one equity share at par on allotment;

(ii) A sum of Rs.40 being the 20% of the face value of each debenture by way of second conversion after three years but before four years from the date of allotment at a premium to be fixed by the Con- 8 !roller of Capital Issues;

(iii) The balance of Rs. ISO representing 75% of the face value of each debenture as third conversion after five years1 but not later than seven years from the date of allotment at a premium to be fixed by the Controller of Capital Issues. c The CCI accorded his sanction for the issue of debentures on

4Copy pinpoint4. 7. J988. However, the sanction was amended on 19th July, 1988. The amendment put a non-transferability condition on the preferential share-holders of RPL. It was limited to the corporate sharesliolders of RIL and relaxed for individual share-holders of RIL. The amendment D also stipulated that the Company should obtain prior approval of the Reserve Bank of India, Exchange Control Department, for the allot- ment of debentures to the non-residents as required under the Foreign · Exchange Regulation Act, 1973. On 26th July 1988, there was another amendment which restricted the transfer of shares allotted to the employees of RPL and RIL. E The consent orders issued by the CCI were challenged in various High Courts, by way of writ petitions and a suit. Some High Courts issued injunctions restraining the issue of the debentures.

This Court, on 19th August, 1988, restrained the aforesaid F issuance of injunctions by the High Courts, and issued directions for the issue of debentures. The cases pending in various High Courts were transferred to this Court.

In these transferred cases the consent orders of the CCI were challenged mainly on the grounds that: G Despite the fact that RPL did not fulfil the requirements of a proper application and the necessary consent and approval, RPL's application was entertained and processed by the CCI with undue expedition and without application of mind;

H The guidelines issued by the CCI himself were deviate:! from;

NARENDRA KUMAR v. U.0.1. 45

-,, The CCI had processed the application of RPL in a hurry, within A two months;

The CCI did not take into account the fact that RIL had earlier issued debentures for manufacture of identical products; B The CCI failed to note that RPL did not have the necessary licences, consents and approvals, from the relevant departments of the Government of India; "'\.,, .....____ The CCI failed to consider the financial soundness and feasibility of the project of RPL; c --r · The CCI did not take adequate care to examine the terms of the issue and had blindly accepted the terms as proposed by RPL;

RPL in its brochures has misled the public by describing the debentures as fully secured convertible debentures; D The security for the debentures was inadequate;

RPL has been permitted to create securities which would have priority over the securities available to the present debenture holders and without their consent; E RPL has misled the public in that in its prospectus it had stated that security would be provided to the satisfaction of the trustees;

The CCI had failed to examine whether RIL had misused the "'-- funds raised on its debentures; F There has been a discrimination in favour of RIL in that RIL would be entitled to allotment of shares of the face value of Rs.57 .50 crores, whereas only 5% of the investment of the debenture-holders could be converted;

Whereas RIL 's loan of Rs.SO crores would be converted into shares G

-+ at par, the debenture holders would have to pay premium to be fixed by the CCI at the time of second conversion of 20% of the debentures; and

In the application filed by RPL, no shares were earmarked for the employees of RIL and RPL, but ultimately it was done. H

46 SUPREME COURT REPORTS [1989] 3 S.C.R.

On behalf of the petitioners, it was contended inter alia that the issne of the debentures in question was detrimental to public interest, and that public interest had been ignored.

On behalf of Respondents it was argued that the sanction issued by the CCI had been genuine and valid, and that no irregularity had been committed. It was submitted that it was a misconception that the CCI had not followed his own guidelines relating to sanction of the issue of the debentures, and it was incorrect to say that there had not been proper security.

Dismissing the writ petitions and the suit, this Court,

NARENDRA KUMAR v. U.0.1. 47

1.3. The guidelines are only a guide and nothing more. The appli- A cation of mind by the CCI before sanction must be in the perspective for which he is enjoined by the Act. He must endeavour to secure a balanced investment of the country's resources in industry, agriculture and social services. The Controller should perform the role of social control and fulfil the social purpose in conjunction with other authori- ties and functionaries. It is necessary for him in the discharge of his functions to ensure that there is not too much concentration of parti- cular industries in particular areas, and that there is a scientific development and proper investment in key and.core projects. [125C-D I

1.4. The duties of the CCI have to be construed in the context of the above, particularly when there is no clear cut delineation of their scope in the enactment. This is also reinforced by the expanding scope of the guidelines issued under the Act from time to time and the increas- ing range of financial instruments that enter the market. The res- ponsibilities of the CCI in this direction should not be widened beyond the range of expeditious implementation of the scheme of the Act and should, atleast be restricted and limited to ensuring that the issue to which he is granting consent is not, patently and to his knowledge, so manifestly impracticable or financially risky as to amount to a fraud on the public. While it is true that some procedure may have to be evolved to ensure that the CCI gets the benefit of the comments, suggestions and objections from the public before arriving at his decision whether to grant consent or not, and if so, on what terms and conditions, it will be too cumbersome to have a provision that the details of every proposed application for consent should be publicised to the maximum extent by the CCI, that objections and comments from the pYblic should be called for, that there should be public hearing by the CCI and that he should pass a reasoned order granting or withholding consent. That would delay the whole process of approvals which should be as expeditious as possible. [9JC-E; 125G-H; I26A·Bl

1.5. The CCI has also a role to play in ensuring that public interest does not suffer as a consequence of the consent granted by him. To go beyond this and require that the CCI should probe in depth into the technical feasibilities and financial soundness of the proposed pro- G jects or the sufficiency or otherwise of the security offered and such other details may be to burden him with duties for the discharge of which he is as yet ill-equipped. [9JD-F]

1.6. Being non-statutory in character, the guidelines are not judi- cially enforceable. A policy is not law. A statement of policy is not a H

48 SUPREME COURT REPORTS [1989] 3 S.C.R.

prescription of binding criterion. The competent authority might depart from these guidelines where the proper exercise of his discretion so warrants. In the instant case, the statute provided that rules can be made by the Central Government only. And according to s. 6(2) of the Act, the competent authority has the power and jurisdiction to condone any deviation from even the statutory requirements prescribed, under sections 3 and 4 of the Act. The CCI applied his mind to the facts of this case and the factors in general. The CCI did not act malafide or on extraneous consideration. I122D-F; 1248-D]

Fernandez v. State of Mysore, [1967) 3 SCR 636; R. Abdullah Rowther v. State of Tansport, etc., AIR 1959 SC 896; Dy. Asst. Iron & Steel Controller v. Manekchand Proprietor, !1972) 3 SCR I; Andhra c Industrial Work v. CCI & E, [1975) I SCR 321; K.M. Shanmugham v. S.R. V.S. Pvt. Ltd., [1964) I SCR 809; Sagnata Investments Ltd. v. Norwich Corpn., [1971) 2 QB 614; British Oxygen Co. v. Board of Trade, [197l]AC610,reliedon.

D Ramanna Dayaram Shetty v. International Airport Authority, [1979] 3 SCR 1014; Motilal Padampat Sugar Mills v. Uttar Pradesh, [!979) 2 SCR 641; Ex P. Khan, [1981] I All. E.R. 40; IRCv. National Federation, [1982] AC 617; Reqina v. Preston Supplementary, [1975) I WLR 624; Council of Civil Service Unions & Others v. Minister for the Civil Service, [1985] AC 407, referred to. E Foulkes' Administrative Law, 6th Edn. pp 181to184, referred to.

2. As regards the contention that the sanction of the CCI was accorded with undue haste and favouritism, in the first place, an appli- cation of this type is intended to be disposed of with great expedition. In F a project of the type proposed to be launched by the petitioner, passage of time may prejudicially atlTect the applicant and it is not only desirable but also necessary that the application should be disposed of within as short a time as possible. It is, therefore, difficult to say that the period of two months taken in granting consent in the present case is so short that an inference of haste must follow. Secondly, on behalf of the Union G of India, a list of various applications received and disposed of by the office of the CCI between September, 1987 and September, 1988 has been produced to show that, generally speaking, these applications are dis- posed of within a month or two. It is true that none of these issues is of the same colossal magnitude as the present issue. Nevertheless, the CCI could hardly keep the application pending merely because the amount H involved is heavy. It is not possible therefore to say merely from the

NARENDRA KUMAR v. U.0.1. 49 --./ ' short span of time that there was a hasty grant of consent in the present case. [73G-H; 74A-C] A

3.1. The consent of the CCI was not accorded in ignorance of the facts pertaining to the G series of RIL debentures. The application for consent makes it clear that the petitioner company is a new company --( promoted by RIL and that RIL was promoting this company to manufac· B tore High Density Polyethylene (HDPE), Poly Vinyl Chloride PVC and Mono Ethylene Glycol (MEG). The application refers to the fact that the total· cost of the project was expected to be Rs.650 crores and that this ~- cost had been approved earlier in 1985. Considering that RPL had come into existence only on ll.1.1988, this was a clear indication that the projects for which the debenture issue was being proposed were pro- y jects which had been mooted even by the RIL as early as 1985. Again in c the detailed application form submitted by the RPL it has been mentioned that the RIL had already obtained approval of the Central Government for implementation of the aforesaid projects under the MRTP Act. In part C of the application form it has been mentioned that the promoter company had made necessary applications for endorse- D ment in favour of the company of the Letter of Intent/Industrial Licences already issued by the Central Government under the Indus- • tries (Development & Regulation) Act, 1951, in the name of the holding ,).. company, viz., RIL. It is, therefore, extremely difficult to agree that the fact of issue of the earlier series of debentures by the RIL or the purposes thereof could have escaped the notice of the CCI, particularly, E when it is remembered that the issue of G series of debentures by the RIL was quite recent and had also attracted a lot of publicity. [74D-H; 75C-D]

3.2. The CCI was not performing the role of a social mentor taking into account the purpose of RIL. If RIL has misutilised any of its ~. ; funds or the funds had not been utilised for G-series, then RIL would be F responsible to its shareholders or to authorities in accordance with the relevaut provisions of the Companies Act, 1956. This aspect does not enter into sanctioning the capital issue for the new project in accord- auce with the guidelines. Even if RIL and RPL have to be treated as one for this purpose and the grant of consent for earlier debenture issues in favour of RIL are to be taken into account in judging the necessity of G

·+ the issues, there is no illegality or irregularity in the grant of consent to RPL. RIL had not been able to utilise any part of the 'G' series of debentures on the MEG project as there had been a cost overrun and it was decided to have a wholly-owned subsidiary. Hence the projects are those of the RIL to be implemented by RPL. The additional finances were needed for the extension, expansion and diversification of H

50 SUPREME COURT REPORTS [1989] 3 S.C.R.

the projects originally envisaged. This is one of the objects for which a A debenture issue is permissible under the guidelines. [IOIF-H; 102A, B]

4.1. So far as HDPE is concerned, it appears that there was a valid licence; and it may be mentioned that on 24th August, 1985 pursuant to an application made by RIL under section 22(3)(a) of the B MRTP Act, the Govt. granted approval for the establishment of a new undertaking for manufacture of HDPE. [77F]

4.2. Regarding foreign collaboration, an application was made by RIL in I984 for approval of foreign collaboration with M/s Du Pont Inc. Canada, for manufacture of HDPE. The approval was given and the validity was extended and the foreign collaboration approval was c endorsed in favour of RPL on 12th October, 1988. Similar other con- sents were there. Finally, capital goods clearance was endorsed in favour of RPL for the PVC project on 12th August, 1988. Capital goods clearance was also endorsed in favour of RPL for HDPE project on 23rd August, 1988. Thus, it will be seen that all the basic groundwork had already been done by the RIL. [77G, H; 78A] • 4.3. On 16th June, 1987 by a Press Note issued by the Deptt. of Industrial Development in the Ministry of Industry of the Govt. of India declared that wnere a transferee Company is a fully owned subsidiary ,,..\_ of the Company holding the Letter of Intent or licence, the change of the Company implementing the project would be approved. It is in the light of this that the Board of RIL on 30th December, 1987 passed a resolution to incorporate a JOO% subsidiary ·Company whose main objects were to implement the licences/Letters of Intent received by RIL and to carry on the activities relating to production and distribution. The resolution approved the name of the Company as RPL. On 11th _'T- F January, 1988 the RPL was incorporated and the Certificate of ' Incorporation was issued. Thereafter, on 12th January, 1988 letters were written by RIL for endorsement of licences/Letters of Intent in favour of RPL. The certificate of commencement of business was there- after issued. [78B-E]

G 4.4. The Press Note is clekr that the transfers from.one company to an allied company were considered unexceptionable except where -}- trafficking in licences is intended. In this situation the change of name from RIL to RPL, of the licences, letter of intent and other approvals was only a matter of course and much importance cannot be attached to the fact that CCI did not insist upon these endorsements being obtained H even before the letter of consent is granted. In any event the letter of

NARENDRA KUMAR v. U.0.1.

consent is very clear. Clause (h) of the conditions attached to the con- A sent letter makes it clear that the consent should not be construed as exempting the company from the operation of the provisions of the Monopolies & Restrictive Trade Practices Act, 1969, as amended. Clause (c) makes it clear that it is a condition of this consent that the company will be subject to any measures of control, licensing, or ~ acquisition that may be brought into operation either by the Central or B any State Government or any authority therein. Under clause (t) the approval granted is without prejudice to any other approval/permission that may be required to be obtained under any other Acts/laws in force. _.-Having regard to the above and also to the terms and conditions of the • consent letter, the grant of consent itself being conditioned on RPL obtaining the necessary approvals, consents and permissions before r embarking on the project, there was no impropriety in the CCI grant- c ing the consent without waiting for the formal endorsement of the various licences, letters and approvals in favour of RPL. Moreover, CCI is aware of the progress of the various applications made by the company. The Controller is also aware that the ICICI bad looked into· the financial soundness and feasibility of the project and there is mate- D rial to show that the comments of the ICICI were made available to him. When a project is being appraised by the institution like the ICICI and when the CCI is also aware, by reason of the participation of his ~~ representatives at the meetings of the Department of Industry and the Department of Company Affairs about the stage or outcome of the proposals made under the IDR and MRTP Acts, it is clear that the CCI E did not overlook any crucial aspect and that his grant of consent in anticipation of the necessary transfers to the RPL was based on a practi- cal appraisal of the situation and fully in order. [78F-H; 79A, B; 808-D]

5Copy pinpoint5. There has been sufficient compliance with the guidelines on the quantum of issue, debt-equity ratio, interest rate and the period of redemption. There was sufficient security for the debentures in the facts and circumstances of this case. The preference in favour of shares- holders of RIL was justified and based on intelligible differentia. Indeed, if one considers the role of the CCI, he is primarily concerned to ensure a balanced investment policy and not to guarantee the solvency or sufficiency of the security. Most of the criticisms directed against deviation from guidelines were misplaced. [94G, H; 95A, B]

6.1. The discrimination alleged is on two grounds. The first is that RIL is entitled straightway to the allotment of shares of the face value of Rs.57 .SO crores whereas only 5% of the investment by the debenture holders can be converted into shares at par simultaneously H

52 SUPREME COURT REPORTS [1989] 3 S.C.R.

A with the issue. The second is that a loan of Rs.SO crores advanced by RIL to RPL will be converted into shares at par at the end of 3 years whereas the debenture holders will have to pay a premium even for converting 20% of their debentures into shares by that time, These allegations do not bear scrutiny. So fas as the first ground is concerned, there is no justification for a comparison between these two categories B of investors. RIL is the promoter company which has conceived the projects, got them sanctioned, invested huge amounts of time and money and transferred the projects for implementation to RPL. It is, therefore, in a class by itself and there is nothing wrong if it is allotted certain shares in the company, quite independently of the debenture issue, in lieu of its investments. So far as the second ground is con- e cerned, it overlooks certain disadvantages attached to RIL in regard to the loan of Rs.SO crores advanced by RIL as compared with ihe investor in the debentures. Firstly, RIL's advance is interest free for 3 years whereas the debenture holders got interest at the rate of 12.S% during the period. Secondly, the debenture loan is secured while the RIL's are not. Thus the debenture holders have certain benefits which RIL does not have and, if the debenture holders have the disadvantage of having to pay a premium, that cannot constitute basis for a ground of dis- crimination. I l03E-H; 104 A, B]

6.2. RPL is a company-not the State or a State instrumenta- A lity-that is issuing the shares and debentures. It is entirely for the company to issue the shares and debentures on such terms as they may consider practicable from their point of view. There is no reason why they shonld not so structure the issue that it confers certain great advantages and benefits on the existing share holders or promoters than on the new subscribers. It is not permissible for the CCI to withhold consent only for this reason er to stipulate that consent can be given .'( F only if the share holders and promoters as well as prospective debenture holders are all treated alike. The subscribers to the debenture are only lenders to the company who have an option to convert their debt into equity on certain terms. It is perfectly open to the subscribers to balance the pros and cons of the issue and to desist from taking the debentures if they feel that the dice are loaded unfavourably in favour of the "proprietors" of the company. [I04B-E]

7Copy pinpoint7. I. In the present case, a legal mortgage has been created by RPL in favour of the trustees in respect of its immovable and mo,,able assets, except book debts, in respect of which financial institutions will hold a first charge on account of foreign loan. RPL does not have any existing loans. Therefore, the charge in favour of the debenture holders

p. 53 Copy page pinpoint

is presently the first charge. No further borrowing is contemplated at A this stage except the foreign currency loan to the extent of Rs.84 crores. Even if the value of the foreign currency which has been sanctioned in principle by the three financial institutions is taken into account, the assets coverage goes down at each stage and does not make any critical difference to the value of the security of the debenture holders under the Trust Deed. The purposes of borrowings, namely, term-loan borrow- B ings, deferred payment credits/guarantees and borrowing for financing new projects do not, on analysis, raise any difficulty. There are suffi- cient in-built checks and controls. The company, being an MRTP com- pany would have to obtain both MRTP permission for creating any security irrespective of its value and fresh CCI consent under the CCI Act, except in case of exempted securities. [IJ9G, H; 120A-C] c 7.2. With the escalation in the value of the fixed assets due to passage of time on the one hand and the redemption of a good portion of the debentures by the end of three years on the other, the security provided is complete and, in any event, more than adequate to safe- guard the interests of the debenture holders. [96G, HI D

8Copy pinpoint8. Clauses 5 and 6 are only enabling clauses and in the nature of permitting the Company, despite the mortgage in favour of the debenture holders, to carry on his business normally. What is referred to therein as residual charge is really a floating charge. The Company's normal business activities would necessarily involve alienation of some of its assets from time to time such as goods manufactured by it as well as procurement and discharge of loan and accommodation facilities from banks, financial institutions and others. The entire progress of the company would come to a standstill in the absence of such enabling provisions. They are not only usual but essential because the basic idea is that the finances raised by the debentures should be employed for running the project profitably and thereby generate more and more funds and assets which will also be available to the debentures holders. Further what the clauses provide is only that the consent and con- currence of the debenture holders need not be obtained by the company before creating securities that may have priority over the present issue of debentures. But the trustees for the debenture holders have to concur before the company can raise any future borrowings and create, there- for, the security which will have priority over the security available to the present debenture holders. The ICICI is not only a financial institu- tion in the public sector but also one of the institutions financing the project and thus has a stake in its success and so can be trusted to safeguard the interests of the debenture holders. The debenture trust H

54 SUPREME COURT REPORTS [1989) 3 S.C.R.

A deed also contains a provision by which at the time of creation of any future charge the terms and ranking have to be agreed upon between RPL and ICICI. Clause 16 of the trust deed authorises the trustees to intervene and crystallise the charge in certain circumstances and stultify an attempt by the company to create higher ranking charges. There are also restraints on the company under the Companies Act and the MRTP .....,_ B Act involving the consent of public financial institutions, Commercial I"" Banks, the term lenders, share holders, the MRTP Commission, the Central Govt. and the CCI before the creation of such securities. [98B-H; 99A, E, F) ~

9Copy pinpoint9. In certain brochures and pamphlets issued by RPL, the de- bentures were described as "fully secured convertible debentures". c The company admitted that there was such a description but explained -..,. that this was due to an oversight; the words "fully secured convertible debentures" were printed in some brochures instead of the words "secured fully convertible debentures" without meaning or intending any change. It was stated that the company's representation was that the debentures were "secured fully convertible" ones. This is also what had been set out in the application for consent. Though the company did claim that the debentures were also fully secured, the emphasis in the issue was that the debentures were fully convertible and secured. This explanation is plausible. No importance or signi- ,.,.~ ficance need be attached to the different description in some places, particularly, in the context of the nature of security actually provided for the debentures. [95F-H; 96A)

JO. Prospectus issued by RPL is not misleading because it stated that security will be provided to the satisfaction of the trustees and the CCI accepted that statement in the application for consent. The \.. F debenture trustees are well known financial institutions and it is not "\ .• possible for the CCI to ensure more than the usual practice which was followed in the.present case. [JOOD, E)

11Copy pinpoint11. The CCI modified paragraph 5 of the consent by his letter of the 19th Jnly, 1988 to say that allotment to the employees shall not G exceed 50 debentures per individual. It does not appear that the restric- tion of the allotments to the employees was at the instance of the Com- pany; nor does it seem that any discrimination was intended in respect of the allotments to the employees. Nor has attention been invited to any legal requirements or guidelines prescribing any fixed or minimum quota of allotment to the employees of the Company. Under the cir- \ .•,, cumstances, the question of discrimination does not arise. [J07C, D) H

NARENDRA KUMAR v. U.0.1. 55

12Copy pinpoint12. The consent order of the CCI clearly indicated that the con- A sent conveyed in the letter shall lapse on the expiry of 12 months from the date thereof. The consent order categorically stated that the ap- proval was without prejudice to any other approval/permission that may be required to be obtained under any other Acts and laws in force. It necessarily follows that the obligation to obtain other permissions continued. There was no legal conditions that other approvals should be examined by the CCI before grant of its own consent. lll2E, Fl

13Copy pinpoint13. t. As defined in the Companies Act, a debenture need not be secured. Therefore, guideline 10 means that security should be pro- vided as is customarily adopted in corporate practice. In the present case, the debentures are compulsorily convertible and so no repayment is really involved. The debenture is essentially an acknowledgement of debt with a commitments to repay the principal with interest. The question of security becomes relevant for the purpose of payment of interest only in the unlikely event of winding up. The guidelines did not provide for the quantum and the nature of the security. A debenture may, therefore, be secured or unsecured. An ordinary debenture has to be distinguished from a mortgage debenture which necessarily creates mortgage on the assets of a Company. A compulsorily convertible debenture does not postulate any repayment of the principal and so does not constitute a debenture in the classic sense. Even a debenture which is only convertible at option has been recognised as a hybrid debenture. The guidelines for the protection of debenture holders issued on 14.1.1987 recognise the basic distinction between con- vertible and non-convertible debenture. Comopulsorily convertible debentures in corporate practice were adopted in India sometime after

1984. Wherever the concept of compulsorily convertible debenture is involved, various guidelines issued by the Government of India treat them as equity and not as loan or debt. Even a non-convertible debenture need not always be secured. In fact, modern tendency is to raise loan by unsecured stock which does not create any charge on the assets of a Company.' Whenever a security is created, it is invariably in the form of a floating charge. In addition they are frequently secured by a trust deed as in the present case where specific property /land etc. has been mortgaged to the trustees. I ll6E, F; I 17B-G] G

13.2. In the instant case. if the permission of the debenture holders were required or is insisted upon to create future security, 2.5 / million debenture holders have to be informed and invited for the meet- ing. The extravagant effects of this course would be collosal especially when a shareholders meeting is also additionally called for the same H

56 SUPREME COURT REPORTS [1989] 3 S.C.R.

A body of persons. It is. therefore. incorrect to say that a floating charge creates an illusory charge because future securities can be created rank- ing in priority over it. [Jl8D-E]

The British India Steam Navigation Co, v. The Commissioner of Inland Revenue, [1881] 7 QBD 165; Re. Colonial Trusts Corporation,· B [1879] 15 Ch. 465; Speyar Brothers v. The Commissioner of Inland Revenue, [1907] I KB 246; Lemon v. Austin Friars Investment Trust Ltd., [1926] l Ch. 15; Florence Land & Public Works Co., [1878] IO Ch. 530; Re. Panama, New Zealand, and Australian Royal Mail Co., [1870] L.R. 5 Ch. 318; Re. Standard Manufacturing Co., [1891] l Ch. 627; Re. Barak Foster v. Borax Co., [1901] 1 Ch. 326; Creatnor Maritime Co. Ltd. v. Irish Marine Management Ltd., [1978] I WLR c 966, referred to.

Palmer's Company Law, 24th Edn. pp. 672, 675, 676, 706; The Encyclopaedia of Forms and Precedents, 4th Edn., Vol. 6 p. 1094, 1095, 1097, 1098, referred to. D

14Copy pinpoint14. The Court, would be reluctant to interfere simply because one or more of the guidelines have not been adhered to even where there are substantial deviations unless the deviations are by nature and extent such as to prejudice the interests of the public which it is their avowed object to protect. Per Contra, the Court would be inclined to overlook or ignore such deviations, if the object of the statute and public interest warrant, justify or necessitate such deviations in a particular case. Judicial control takes over only where the deviat1on either involves arbitrariness or discrimination or is so fundamental as to undermine a basic public purpose which the guidelines and the statute under which they are issued are intended to achieve. In the instant case, there is no such infraction of the norms required to be followed in granting the sanction. [123F-H; 124A, Bl I

15Copy pinpoint15. Before the Courts grant any injunction they should have regard to the principles of comity of courts in a federal structure and have regard to self-restraint and circumspection. It may be impossible to lay down hard and fast rules of general application because of the diverse situations which give rise to problems of this nature. Each case +.:. has its own special facts and complications and it will be a disadvantage, rather than an advantage, to attempt and apply any stereo-typed formula to all cases. Perhaps in this sphere, the High Courts themselves might be able to introduce a certain amount of discipline having regard to the principles of comity of courts administering the same general

NARENDRA KUMAR v. U.0.1. IMUKHARJI, J.] 57

laws applicable all over the country in respect of granting interim orders which will have repercussion or effect beyond the jurisdiction of the particular courts. Such an exercise will be a useful c-0ntribution in evolving good conventions in thetederal judicial system. II26F, G; 127 A)

[Having considered the facts and circumstances of the present ~ cases, this Court directed refqnd of the sum of Rs.one lakh deposited by B RPL as ordered by the C-0urt on 9.9.1988. The deposit amount was meant for payment to the petitioners in case they were to spend 111&.t unduly.] ' ':;\...... ORIGINAL JURISDICTION: Transfer Case Nos. 161-165 of 1988. c S. Ganesh, Arnn Jaitely, Miss Bina Gupta, Miss Madho Khatri, A.N. Haksar, Praveen Anand, Anip Sachthey, B.L. Pagaria, P.K. Jain, Udai Holla and T. Sridharan for the petitioners.

i G. Ramaswamy, Soli, J. Sorabjee, M.H. Baig, F.S. Nariman, D ' . H.N. Salve, R. Sasiprabhu, s:s. Shroff, Mrs. P.S. Shroff and S.A. Shroff for the Respondents .

..A. The Judgment of the Court was delivered by

SABYASACHI MUKHARJI, J. In these transferred writ peti- 10 tions and one suit, we are concerned with the powers, functions and the role of the Controller of Capital Issues. By an order dated 9th September, 1988 this Court had directed that the four writ petitions and one civil suit i.e., W.P. No. 1791/88 pending before the Delhi High court, W.P. No. 2708/88 pending before the Jaipur Bench of the Rajasthan High Court, W.P. No. 12176/88 pending before the F Karnataka High court, W.P. No. 4388/88 pending before the High Court of Bombay and Civil Suit No. 1172/88,pending before the Civil Judge, Junior Division Bench, Baroda, Gujarat, be transferred to this Court for disposal. It would be appropriate to deal with the facts of one of these, i.e., W.P. No. 1791/88, which was filed in Delhi High Court in T.C. No. 161/88. The other writ petitions and the suit raise G more or less identical problems and issues on more or less same facts.

The petitioner in that writ petition is one Narendra Kumar Maheshwari and the respondents are the Union of India, the Control- ler of Capital Issues, and Reliance Petro-chemicals Ltd. (RPL). The case of the petitioner is that he is an individual who is a public spirited 1-1

58 SUPREME COURT REPORTS [1989] 3 S.C.R.

A person and is an existing shareholder of the Company known as Re- liance Industries Ltd. (RIL), which was the promoter of Reliance 'r Petrochemicals Limited, being the respondent No. 3. The petitioner held at all relevant times 144 shares of RIL and 100 debentures of different categories. The respondent No. 3, being RPL, was a newly set up public limited company for the purpose of carrying on the busi- ',,.._. B ness of manufacture of petrochemicals. These petitions were filed in r different courts challenging the consent of the Controller of Capital Issues granted for the issue of shares (Rs. 50 crores) and debentures (Rs.516 crores) by the RPL. It was contended in the petition that the respondents Nos. 1 & 2, being the Union of India and the Controller of Capital Issues, ought not to have granted consent to respondent No. 3, . -r. ' namely, RPL to issue share and debenture capital at an aggregate c value of approx. Rs.600 crores. It may be mentioned that after these ] writ petitions and suit were filed, attempts were made to obtain injunc- tion restraining the issue of share-capital and debentures as advertised. By an order dated 19th August, 1988 passed by this Court, this Court had restrained the issue of such injunctions and directed that the shares and debentures would be issued irrespective of any order of injunction passed by any court or authority in India. Different cases, as mentioned hereinbefore, were thereafter transferred to this Court.

On the basis of the said consent, it was stated that the respondent ,..l. No. 3 had issued prospectus and at the relevant time had intended to open the issue from 22nd August, 1988, of about 3 crores debentures of the face value of Rs.200 each which was the largest convertible debentures issue in India. It was alleged that the respondents had adopted very sharp methods to collect money from the public and ultimately to defraud them. It was stated that under the terms of the prospectus, each debenture of the face value of Rs.200 would be fully ir- F convertible: Respondent No. 3 would issue one share of Rs.10 at p3r ' on the date of allotment. There would, thus, be an equity capital of about Rs.30 crores in all on allotment. Further, it was stated that the Company would convert Rs.40 of each convertible debentures into share after 3 years and the balance of Rs.150 into share at any time between five and seven years. It was mentioned by the Company that it would convert at the second stage of conversion at such permium to be allowed by the Controller of Capital Issues. The petitioner alleged that it was not clear as to whether the investors would get 2 shares or 3 +- shares or 4 shares for each debenture, at the second conversion of Rs.40. Similarly, it was alleged that the last portion of Rs.150 would be converted into shares any time between five and seven years at which time again the Controller, would fix the premium for conversion. The

NARENDRA KUMAR v. U.0.1. [MUKHARJ!, J.] 59

petitioner further stated that it was thus not clear what the equity capital of the Company would be, whether it would be Rs.150 crores or Rs.600 crores or whether the residual amount would go into reserve account or whether a separate account would be opened in respect of the premium. It was alleged that the respondent No. 3 being RPL had been promoted by RIL and the past history of RIL showed that the ·--( share prices of RIL had fluctuated widely leaving lot of scope for manipulations. It was alleged in the petition that there was no explana- tion from the company or anybody from the share market as to why the share prices fluctuated so widely and it was obvious that ~~there were market operators who prop up or bring down the prices · depending on how it suited their convenience. The share value of RIL, the promoter company, was subjected to wide fluctuations on account r of the purchase and sale operations of certain interested quarters close c to the management of the respondent No. 3 Company, it was alleged. On more than one occasion during the past six months, the sale of the share in the stock market was banned in some Stock-Exchanges .due to fall in price. It was alleged that it indicated the cooperation and sup- port from the authorities for maintaining the fictitious value of the D share in the market; and thus on an equity capital of Rs.152 crores an amount of Rs.800 crores in the premium account has been obtained, but there would be no amount in General Reserve account because the )....__ Company had not earned anything worthwhile to put in General Reserve. It was further alleged that the\lack of bona fide of the Re- liance group was well-known; and that RIL had issued debentures of E 'G' Series and had assured to pay interest up to 5th February, !988. It was alleged that the Company did not keep up this assurance, but converted the debentures into equity shares in the month of August, 1987 thereby avoiding payment of interest. In this manner, it was _,,,· alleged, the Company saved interest of Rs.30 crores whereas in fact it -- incurred a loss. The case of the petitioner was that the Company was F obviously trying to repeat the same game through the new Company by maintaining the share price only on an equity capital converted on each debenture. The paramount duty of respondents Nos. 1 & 2 before according permission was, it was asserted, to ensure that the require- ment of the Company in raising suC:h capital was bona fide. It was observed that no public interest was intended to be served by respon- G -f dent No. 1, as it had chosen to allow respondent No. 3 to collect such huge amounts in excess of the requirement.

It is further the case of the petitioner that the operations of RIL (Promoter) subsequent to the raising of past issues made by it were subjected to severe crjticisms both in the press and in the public. It was H

60 SUPREME COURT REPORTS [1989] 3 S.C.R.

A pointed out that though the issue proposed was of shares of Rs.SO crores and debentures of Rs.516 crores, the company w;s allowed to r' retain over-subscription to the tune of 15% amounting to Rs.77.40 crores. It was alleged that the respondent No. 3 was a new Company and it should not be allowed 15 % retention; and if it wanted to raise Rs.600 crores, it should have come out with an issue of that amount. It B was further alleged that the respondent No. 2, without considering the 'r° propriety of the situation, allowed the respondent No. 3 to make issue of the capital for the interest of a few people. Hence, the sanction of the issue of convertible debentures of respondent No. 3 calls for. judi- cial review. It was also alleged that the sanction was approved at .~~'"::-­ exorbitant terms: 5% of the face value (equal to nothing) according to the petitioner, would be converted at par on allotment, another 20% c (Rs.40) at a premium to be decided by the Controller of Capital Issues ) after 3 years but before 4 years of allotment and the balance of Rs.150 at such premium as might be permitted by the Controller of Capital Issues after 5 years but before the end of 7 years from the date of allotment. It was stated that the investors would be completely left 0 thrown at the mercy of respondents Nos. 3 & 4; and that till date no convertible debenture had been issued on such vague terms. In those circumstances, it was submitted, the consent of the Controller of Capi- tal Issues was bad, illegal on the ground hereinafter alleged:

The consent order was hit by arbitrary and capricious exercise of jurisdiction by respondent No. I. It was further alleged that the respondent No. 3's promoters i.e. RIL had been obtaining from respondent No. 1/2 such Consent Orders on the ground that it was in a position to raise such huge moneys from the public for the purpose of implementation of its projects without recourse to the Financial Institutions. According to the petitioner, for the first time, in the corporate history of India, RIL (Promoter) was allowed to raise Rs.100 crores by way of issuance of 'F' Series debentures. On account of the campaigning through Brokers for attractive returns, the public was misled and RIL wooed the public and collected Rs. 406 crores. RIL had not made any allotment on a proper basis but made allot- ments on some basis of 'Private Placement'. It was further alleged that the management of RIL through its associate companies obtained huge borrowals from nationalised banks; and several bank employees got into trouble due to advancing of loans for the purpose of subscription in t!Je 'F' Series debentures through the associated companies of respondent No. 3/RIL which had popularly come to be known as 'Reliance Loan Mela'. It was alleged that the Controller of Capital H Issues and Union of India acted mala fide in issuing the consent order

NARENDRA KUMAR v. U.0.1. IMUKHARJ!, J.] 61 -{ which was designed to benefit respondent No. 3 and prejudice the interests of the investing public. It was further alleged that in giving the consent order the respondent No. 1 blatantly overlooked the magnitude of the sum of Rs.600 crores, proposed to be raised from the public through the new issue of debentures.

It was alleged that the act of respondent No. 1/2 was vitiated as in issuing the consent order respondent No. 2 was influenced by extraneous considerations not germane to the public interest. The ~ Capital Mark~! in India has undergone turbulent changes in the r~cent , - years. Small mvestors such as employees, workers and small busmess ' community were coming forward, according to the petitioner, for the .r purpose of investment in corporate sector. It was further stated that the small investors had no means of verifying the correctness or otherwise of the statements and the soundness/financial viability of any company. It was further alleged that the respondents Nos. 1/2 had acted wrongly and illegally in allowing the respondent No. 3 to raise share-capital on premium for financing new projects. It was contended in the petition of the petitioner that the consent order was a fraud. D

In those circumstances it was prayed that the court should exer- cise its jurisdiction under Art. 226 and set aside the consent order which was for the public issue on 22nd August, 1988.

The fac1* and the circumstances leading to this consent order E · <;. have been stated in the affidavit on behalf of respondent No. 3 to the writ application. After disputing the locus of the petitioner, who chal- lenged the consent order for making the public issue of 12.5 Secured . Convertible Debentures by 3rd respondent, the respondent No. 3 -.,-'_ stated that the petition suffers from !aches and delays. On behalf of respondent No. 3 it was asserted that the public issues made by the 3rd f respondent .had been promoted by RIL. The RIL and RPL are inter connected and represented companies in the large industrial house known as 'Reliance Group'. According to respondent No. 3, they represented India's fastest growing private sector companies and com- prised the world's second largest investor family of over 30 lakhs investors. It was further asserted that the 3rd respondent would have G -f India's largest private sector Petrochemical Complex for the manufac- ture of critically scarce raw-materials. It was stated that the 3rd respondent would manufacture versatile raw-material which was be- hind the plastic revolution, particulars whereof have been mentioned in the Annexure. It was further stated that the petrochemical complex of the 3rd respondent would come up at Hazira, District Surat in the H

62 SUPREME COURT REPORTS [1989] 3 S.C.R.

State of Gujarat and the production was planned to start in a phased A manner between the next 18-24 months. The 3rd respondent would be setting up a state-of-art world class plant in collaboration with the world leaders in the respective fields, i.e. (a) Du Pont, Canada for HOPE (b) B.F. Goodrich & Co. for PVC, and (c) Scientific Design Co. for MEG. B The terms of the issue of debentures of the face value of Rs.200 being fully converted into equity shares were the following: >- "(i) A sum of Rs.10 being 5% of the face value of each ---(- debentures by way of first conversion immediately into one ' equity share at par on allotment; c (ii) A sum of Rs.40 being the 20% of the face value of each debenture by way of second conversion after three years but before four years from the date of allotment at a pre- mium to be fixed by the Controller of Capital issues; D (iii) The balance of Rs.150 representing 75% of the face value of each debenture as third conversion after five years but not later than seven years from the date of allotment at a premium to be fixed by the Controller of Capital Issues."

E The premium, it was stated on behalf of respondent No. 3, that would be charged at the time of conversion into equity shares would be as fixed and decided by the prescribed statutory authority, namely, the Controller of Capital issues, and the 3rd respondent and its Board of Directors would not have any say in the matter or be entitled to fix the same on their own. It was further stated that, subject to the necessary approvals being obtained in that behalf, the shareholders and the con- vertible debenture holders of the respondent No. 3, promoter com- pany, would be entitled to participate in all the future issues of the 3rd respondent. The fully convertible debentures of the 3rd respondent would thus be a growth instrument with different rights, viz., earning a fixed rate of interest from the first day till it was converted into equity and thereafter entitled to dividend that might be declared after conver- sion into Equity. It is to that extent different from a purely equity share on which investor would earn dividend only when profits are declared. Thus, the instrument proposed by the 3rd respondent, according to it, has the best features of share as well as debenture. Apart from the above, in accordance with the application for listing made by the 3rd respondent to the Bombay Stock Exchange and

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 63

Ahmedabad Stock Exchange, the 3rd respondent has proposed that all the three components or parts of the instrument, namely, Part 'A' representing an equity share on first conversion, Part 'B' being 20% of the face value of the debenture and Part 'C' being the balance 75% of the face value of the debentures, would all be listed separately and independently so that after allotment, an investor can sell if he so desire> the convertible portion of the debentures being Part 'B' and 'C', and just retain the equity share being Part 'A'. It was intended to ensure both liquidity and appreciation in the hands of the investor. -< ~ The products which were intended to be manufactured by .the 3rd respondent were many, namely, (a) High Density Polyethylene (HDPE) and Poly Vinyl Chloride (PVC) which are raw-materials C Y behind plastic revolution; (b) Mono Ethylne Glycol (MEG) is a critical polyester raw-material; HOPE and PVC being vital thermo plastic play an important role in the core ~ector and are used for manufacture of everything from films to pipes, auto parts to cable coatings, and containers to furnishings. It is not necessary for the issues involved in these applications to set out in detail the very many particulars given 0 by the respondent No. 3 in support of the contention that a petro- chemical complex proposed to be set up by the new Company-res- pondent No. 3-would be beneficial socially and economically for the )-, country as well as for the investors.

The advantages of convertible debentures proposed to be issued at that time by the respondent No. 3 were also highlighted. It is stated that debentures are treated as equity. The 3rd.respondent's borrowing capacity remains unutilised and this would help it in implementing the future projects expeditiously. The first phase of the project is financed -·~~ by the proposed issue of debentures and not by large capital borrow- . ings from the public financial institutions (except to the extent of foreign currency loans of Rs.85 crores from them). The interest which would, therefore, have been payable to the financial institutions will be paid to the debenture holders ensuring them a return and simul- taneously the convertible clause which would have been applicable to term-loans obtained from the financial institutions would be available to the investors thereby ensuring them growth in equity value. It was G -( further stated that since th" preferential allotment of 50% of the total issue was made to RIL shareholder~, the shareholding pattern of the 3rd respondent will be the most widely held people's shareholding in the country and it was pleaded that there will be at least 20 lacs share- holders of the 3rd respondent which would be a world market record. H

64 SUPREME COURT REPORTS [1989] 3 S.C.R.

A It was further stated that RIL, who are the promoters of the project, have one of the best track records for setting up of the Pro- jects such as Polyester Staple Fibre (P~F), Polyester Filament Yarn (PFY), Linear Alkyl Benzene (LAB) and Purified Terphthalic Acid (PTA) plants at Patalganga in record time. Business records of Reliance's 'Vimal' and 'Recorn' were also emphasised. It is, however, B not necessary for the purpose of the issues involved in these applica- tions either to dilate upon these or to consider the correctness or otherwise of these assertions. Reliance's plant at Patalganga complex in the State of Maharashtra and its beneficial effects to the community and the State, as asserted on behalf of respondent No. 3, are also not relevant. It was stated th.at Reliance is privy to the technology of the world li:aders, such as Du Pont of U.S.A. and Imperial Chemical c Industries of UK. Mr. Pageria, learned counsel appearing for one of the petitioners, Radhey Shyam Goyal tried to impress upon us that among the world leaders of technology, Du Pont of USA and Imperial Chemical Industries of UK cannot claim such high position. Neither is it necessary nor is it possible for us to consider these assertions and denials.

The industrial licences have been applied for and it was stated that pending the formation and incorporation of RPL on 4.1.1988 under the Companies Act, 1956, RIL had undertaken and performed ..~. various acts and deeds, particulars whereof have been mentioned in the Statement of Facts. In the Statement of facts filed on behalf of respondent No. 3, a list of consents and approvals obtained by the 3rd respondent, has also been indicated.

It was further stated that pursuant to the order of this Court, dated 19th August, 1988 the public issue was made under the ·-'r-. F prospectus dated 27th July, 1988 which opened on 22nd August, 1988 and closed on. 31st August, 1988. There had been an overwhelming response to the issue from all categories of investors including non- residents, RIL shareholders/employees and the issue was heavily over- subscribed. On behalf of the RPL, it was stated that the time frame of IO weeks commencing from !st September, 1988 and ending on 10th G November, 1988 had to be strictly adhered to. The provisions of Sec- tion 73 and other applicable provisions of the Companies Act, 1956, )- the provisions of the Securities (Contract and Regulation) Act, 1956 and the listing requirements of the Stock Exchanges were also complied with.

H It was stated on behalf of the 3rd respondent that for the purpose

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.I 65

--< 1 of finalising the means of finance of HDPE, PVC and MEG Projects, A RIL as the promoters of the 3rd respondent had engaged the services of the Merchant Banking Division of ICICI which is a public financial institution and one of the foremost consultants in the field. During the discussions which were initiated in the second half of 1987 with ICICI, the idea of implementing these projects through a new independent -"'( Company instead of RIL had taken shape duly taking into account the B financial aspects, management aspects, issues related to management and operation control of setting up the projects within the existing

- company vis-a-vis the setting up of the projects in the new company, '-'.,,,.__namely the 3rd respondent company, was taken up. The 3rd respon- dent company and ICICI also considered various alternative means of financing project keeping in view the following criteria: 'y c (a) That the project should be financially beneficial to the com- pany. (b) That it should be financially attractive to the investor. (c) That it should be operationally easy for the company and the investor. {d) That it should meet the institutional/stock ex- change/Ministry of Finance norms and guidelines as regards D financing of projects. (e) That it should be sustainable and attractive enough in terms of the profitability/servicing capability of the project. (f) That it should reduce the dependence of the company on institutional finance. (g) That it should encourage the capital market activity in India. E The various alternative means of issue of security such as equity -<; share and/or convertible cumulative preference shares (CCP) and/or partially convertible debentures and/or non-convertible debentures and/or equity linked debenture issue and/or fully convertible deben- -~ tures were all examined by the management and ICICI at length from · -various aspects including the aforesaid aspect, it was asserted on p behalf of respondent No. 3.

It was reiterated that the Contoller of Capital Issues had applied his mind and considered all relevant, pertinent and proximate matters and the Controller bona fide bestowed painstaking consideration by examining the entire gamut of means of finance, the volume of finance G -{ needed and types of securities, marketability of securities, conditions of the capital market and other relevant considerations as are normally and properly to be evaluated by him as an expert authority. A specialised expert statutory authority or agency under a valid and legal enactment has been set up for the purpose of examining on what basis securities such as share and/or convertible debenture should be issued H

66 SUPREME COURT REPORTS [1989] 3 S.C.R.

A and the merits of his conclusions are not open to judicial review.

It has to be borne in mind that the writ petitioners were only potential investors in the shares and debentures proposed to be issued at the time when a large part of the averments had been made. It was open to them, if they felt that the scheme was not attractive not to B subscribe to the issues. It was, however, not possible for them, con- r tend the respondents, to prohibit the issue. or prevent the taking of other steps in pursuance thereof. Respondents 3 and 4 have set out various reasons why an interim injunction should not be granted. ... These are unnecessary to be dealt with now when the matter is bein!l-1"'-'° finally disposed of. · c Two other affidavits are necessary to be referred to. One is the ) rejoinder affidavit on behalf of the petitioner in writ petition No. 1791 of 1988 before the Delhi High Court, and the other is on behalf of the Government. So far as the petition of Narendra Kumar Maheshwari is concerned, it is necessary to note that he has stated that the capital D market had undergone changes in raising issues and the investors had no means of verifying the correctness and soundness of the financial viability of the scheme. It was stated that the Central Govt. did not take the responsibility for financial soundness of the scheme. It was asserted that a new share of a new company could not be raised at a ~, premium but the Govt. had improperly permitted the issue of shares of E a new company at a premium in the instant case. It was stated that the consent order of the Controller of Capital Issues stated that premium would be payable on the shares to be allotted on conversion which, according to the deponent, amounted to fraud on the investing public and the subterfuge to boost up the market value of shares of RIL.

F It was reiterated that the RPL had been promoted by RIL whose shares had fluctuated in the share market so widely for which no expla- nation came forth from the company. These fluctuations in the share market were, according to the petitioner, on account of purchases/ sales made by certain interested quarters close to the management. On many occasions the sale of the share of RIL in the stock market was G banned in some stock exchanges due to fall in prices which, according to the deponent, was a clear indication of cooperation and support from the authorities.

It was further alleged that there was discrimination in respect of time period of conversion of loan/investment into equity between the R shareholders of RIL and the investing public. Immediately on allot-

NARENDRA KUMAR v. U.0.I. IMUKHARJI, J.l 67

men! the conversion of percentage of investment of the rights holders is 53.49% whereas that of the investing public is only 5%. At the end of 3 years from the debenture allotment date, percentage debenture conversion of investment of the rights holders is 46.51 % and that of the investing public is nil. Hence, after the end of 3 years time the percentage of conversion in investment of rights holders is 100% -~ whereas that of the investment of right holders at the end of 3 years in figures is approli\. Rs.107 .50 crores and the investing public is only 29.67 crores. Between 3 and 4 years of debenture allotment the - percentage of conversion of allotment of rights holders is nil and that •. ,_"""-- of the investing public is 20%. Between 5 and 7 years of the debenture allotment date the percentage of conversion of investment of the rights holders was nil and that of the investing public is 75%. Thus the )·- conversion of the debenture allotment between 3 and 7 years of rights holders is nil and that of the investing public is 95%, which in figures comes to about Rs.563. 73 crores.

In a democratic set up in the country, it was asserted on behalf of the petitioners, the sanction of the issue amounted to concentration of wealth in one hand which brought danger to the national economy and was against the Directive Principles of State policy enshrined in the Constitution. It was submitted that the validity of the consent order had to be decided on the merits of the case in the background of the aforesaid. The petitioner had every right to question the validity of the consent order, it was stated. E

One consolidated reply to all these writ petitions on behalf of the Union of India through the Secretariat, Ministry of Finance, Deptt. of Economic Affairs and Controller of Capital Issues was filed by means of an affidavit affirmed by Mr. Prabhat Chandra Rastogi who, at the relevant time, was the Under-Secretary in the Ministry of F Finance, and Deputy Controller of Capital Issues in the office of Con- troller of Capital Issues. He has mentioned that the consent of Capital Issues was granted on 4th July, 1988 and the same was amended to a certain extent on 19th & 26th July, 1988. He has explained in his affidavit the background of the circumstances leading to the consent order. G

In relation to the 3 projects, namely, (i) for manufacture of 1,00,000 tonnes per annum Polyvinyl Chloride (PVC), (ii) 60,000 ton- nes per annum of MEG (Mono Ethylene Glycol); and (iii) 50,000 tonnes per annum. of HDPE (High Density Polyethylene), RPL sub- mitted an application for issue of capital on or about 4th May, 1988 in H

68 SUPREME COURT REPORTS [1989) 3 S.C.R.

A the prescribed form. RPL proposed raising of capital by various instru- ments, like, equity shares, cumulative convertible preference shares (CCP), partly convertible debentures, intended to be issued to the public, to the shareholders of RIL, debenture-holders and deposit holders of RIL. The original proposal for approval related to the following instruments: B r Instrument Amount in Rs. (Crores)

Equity Reliance Industries Ltd. Shareholders, debentureho!'lers 47.00 4.00 --{''~ - c and deposit holders of Reliance Industries Ltd. ~ Public 6.00

Cumulative convertible Preference Shares (CCPS) D Non-resident Indians/Foreign Collaborators/Indian Resident Public 81.00 Convertible Debentures Sharesholders, debentureholders and 214 deposit holders of Reliance cl-. Industries Ltd. E Public 241

The instrument of convertible cumulative preference shares was proposed to be converted at a price to be fixed F by the 2nd respondent at premium not exceeding Rs.40 per ':f·. share between the third and fifth year from the date of allotment. The debentures proposed were to be of the face value of .Rs.500 each and the conversion was to be of Rs.200 into 10 shares as follows:

"6% of the face value (Rs.30) would be compulsorily con- G verted into equity at par at l year from allotment.

16% of the face value (Rs.SO) would be compulsorily converted at 2 years from allotment into equity at a premium to be decided at the time of conversion but not greater than Rs.20 per share. H

NARENDRA KUMAR v. V.0.1. (MUKHARJI, J.] 69

18% of the face value (Rs.90) would be compulsorily converted into equity at 3 years from allotment at a premium decided at the time of conversion but not greater than Rs.30 per share.

60% of the face value (Rs.300) would be redeemed between 8th and 10th years from allotment by draw of lots."

- ~- India It appears that the Industrial Credit and Investment Corpn. of Ltd. (for short ICICI), was the lead financial institution and lead manager for the issue of capital of RPL, and its merchant banking department, having the necessary expertise, was interacting between the 2nd respondent, namely, the Controller of Capital Issues and RPL. C

Discussions were held with ICICI to evaluate whether the company could proceed with the proposal by respondent No. 3 (RPL) by remov- ing the instrument of cumulative preference shares as also the non- convertible portion of the debentures. This would have been neces- sitated by the sluggishness in the capital market, the market reactions to non-convertible debentures and the discount at which such instru- ments were traded after they came into existence, the compleKity of cumulative convertible preference shares and the general rea<.;tion anticipated from the public for investment. It was stated that it was necessary to encourage investments and draw out savings from the home saving sector so that investments into productive and industrial sectors are promoted. The need to encourage growth of the Capital --<:- Market and to provide impetus for investment in a depressed market condition through several liberalisation steps, were factors in the con- sideration of the Controller of Capital Issues so that on balance invest- ment in the industrial sector in high priority industries could be encouraged. RPL revised its proposal under which it proposed to raise equity shares of Rs.50 crores from RIL-its promoter. The fully con- vertible debenture issue of Rs.516 crores from public was sought to be subscribed to in a manner that 50% on preferential share basis to be allotted to shareholders, debenture-holders and fixed deposit holders of RIL. RPL made a suggestion for issue of debentures of the face v.alue of Rs.200 each with the following terms and conditions: G

(i) 5% of the face value of the debentures at par on allotment;

(ii) 20% of the face value (inclusive <ft premium) at a pre- mium as may be decided 'in consultation with the Controller of Capital Issues at the end of the fourth year from the date of H allotment.

70 SUPREME COURT REPORTS [1989) 3 S.C.R.

(iii) the residual portion (inclusive of premium) at a pre- A mium as may be decided in consultation with the Controller of Capital Issues at the end of the seventh year from the date of allotment.

In view of the revised project cost it was felt that the promoter's B contribution of Rs.50 crores was less and RIL as promoters were told, 'r as asserted in the affidavit, to increase the promoter's contribution to 15% of the total project cost of Rs.700 crores. RIL in view of this requirement, agreed to bring in Rs.107 .50 crores as its contribution to ~ RPL, out of which a sum of Rs.50 crores was directed to be kept as --('-.-- interest-free unsecured loan at the time of allotment which would be converted into equity at par at the expiry of 36 months from the date of c allotment of convertible debentures. ]

As a practice, it is asserted, respondent No. 2 being the CCI, observed that debenture holders/fixed deposit holders of RIL were not eligible for preferential reservation in the capital issue of RPL, and thus RPL was not permitted to issue capital to these categories on preferential basis and only the shareholders of RIL were permitted preferential entitlement in accordance with the practice.

By a Press Release dated 15th September, 1984 the 2nd respon- dent had issued certain non-statutory guidelines for approval of issue of secured convertible and non-convertible debentures. These guide- lines had been subsequently amended by Press Release dated 8.3.1985. Guidelines were also issued by Press Release on 19.8.1985 for issue of convertible cumulative preference shares. There are guidelines issued by Press Release dated 1.8.1985 for employees stock option scheme. In accordance with the guidelines of 15.9.1984, as amended on 8.3.1985, the consent for capital issue for secured fully convertible debentures was issued as the projects originally to be established in RIL were permitted by the Deptt. of Company Affairs to be transferred to RPL. The application.for industrial licences and endorsements thereof from RIL to RPL had already been filed includ- ing, inter alia, the endorsement of the letters of intent for the MEG G Project. The scheme of finance for setting up of 3 projects, namely, PVC, HDPE and MEG had already been approved by the Deptt. of Economic Affairs in favour of RIL, promoter of respondent No. 3 and the Dept!. of Company Affairs also approved the transfer of project to RPL, and a revised scheme of finance was to be submitted by RPL. It was asserted that it was on the basis of appraisal by the ICICI, a public financial institution which had evaluated the project cost for the 3

NARENDRA KUMAR v. U.0.1. (MUKHARJI, J.] 71

projects for the purpose of implementation of RPL. ICICI had evaluated the estimated project cost at Rs.700 crores for setting up 3 undertakigs of RPL-post transfer from RIL, to RPL for implementa- tion. Applications. for the endorsement of industrial licences and the Letter of Intent had been filed with the Deptt. of Industrial Develop- ment, Secretariat for industrial Approvals and these were pending consideration. The object of the issue was setting up of a new project and was within the scope of the guidelines.

_ The proposal contemplated was within the debt-equity norms ~.~and ratio in accordance with para 4 of the non-statutory guidelines as the debt in the proposal aggregated to Rs.471 crores. This is because debentures are considered as debt only when they are unredeemed y beyond the period of 5 years as per Explanation to Section 5(ii) of the C Capital Issues (Exemption) Order, 1969. In the present case, 25% of the face value of the debenture would stand redeemed by the 3rd and 4th year and before the 5th year, and it would therefore not be con- sidered as debt for evaluating debt-equity-ratio as per the guidelines. Similarly, the promoter's contribution of Rs.100 crores plus 25% con- D verted debentures at the end of 5 years would be categorised as equity representing share-capital and free-reserves converted from the total investment of Rs.516 crores proposed by RPL. It was assumed to _)._ aghgrehgate to Rs.229 crores andfdebt-equity-ratio thus came to 2.05: 1- w 1c approximates the ratio o 2: 1. E It was further asserted that these guidelines being non-statutory and not rigid, a relaxation in the norm of debt-equity-ratio of 2: 1 is considered favourably for capital intensive projects like petrochemi- cals which require large investments as would appear from the Note annexed to the guidelines. The guidelines postulate that these debentures should be secured. The proposal itself contemplated that the security would be in such form and manner as required by the trustees for the debenture holders for conver1,ible debentures. !I was asserted that it was not a requirement of the guidelines that the debenture issue be compulsorily under-written. The guidelines them- selves contemplated that the 2nd respondent could satisfy himself that the issue need not be underwritten. An application to this effect had been made by RPL and was granted by the 2nd respondent after care- fully examining this issue. The guidelines contemplated simultaneous listing of shares and debentures. In the present case, upon allotment, there was simultaneous compulsory conversion of 5% of the face value of the convertible debentures. It was stated that it was not an equity linked debenture as was asserted on behalf oi the petitioner. H

72 SUPREME COURT REPORTS [1989] 3 S.C.R.

However, it was further stated that, in view of the size of the r , A issues, there was a modification dated 19th July, 1988 of the consent order which restricted and put a non-transferability condition on the preferential entitlement of the shareholders of RPL. It was limited to the corporate shareholders of RIL and relaxed for individual share- holders of RJL. The restrictive condition on their right to sell. transfer and hypothecate their shareholding was thought necessary in order to ensure that they do not disinvest soon after the issue and thus dilute their stake in the Company.

On behalf of the Controller it was asserted that the guidelines should not be construed in a manner which would fetter, constrict or ·F - inhibit statutory discretion vested in the 2nd respondent for taking decisions in the interest of the Capital-market and for national purpose 1 of furthering the growth of industrialisation and investment in priority sectors so as to encourage employment and demand in the national economy. The objectives of the control, according to the deponent, contemplated under the Capital Issues (Control) Act was to prevent wasteful investments and to promote sound methods of corporate finance. It was asserted that the administrative guidelines were only enabling in nature and could not and ought not to be construed as preventing the statutory authority from adopting o~ modifying varying norms in operational area of implementing the purposes of the Act A. especially when there were no fetters under the Statute. E The Controller of Capital Issues had issued, it was stated, guide- lines as a result of the war-time needs and controls, since the year 1947 and flow from the experience gained under the Defence of India Rules

1939. Hence, according to the deponent, these controls have been progressively reduced and the Capital Issue (Exemption) Order, 1969 f F was brought into force so as to reduce the rigours of the Act. In the absence of any control for capital issues for securities, according to the deponent, there would be no fetter or restriction on the part of the Company to borrow or raise capital from the market. It is to check raising of wasteful capital and to avoid investment being made in non- productive, non-priority sectors and non-commensurate with the G needs that the Act in question was brought into force. This is being implemented with the aid of competent bodies. It is further stated that Y the stipulation for fixation of premium at the time of conversion is not a new practice and had been applied in the year 1986 in the case of Standard Medical Leasing as also in ATV Projects Ltd. and the Indust- rial Credit & Investment Corpn. of India Ltd. As regards Convertible H Debenture Issue, it was asserted that there is no violation of the provi-

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.) 73

sions of Section 81(5) of the Companies Act, 1956 as the section A contemplates only an optional conversion of Government loan into equities. In the instant case,there is a compulsory conversion of publicly held debentures of the convertible type. In the premises, Sec. 81(5) of the said Act has absolutely, according to the deponent, no application to the facts and circumstances of the case. B All these petitions challenge only the grant of sanction by the Controller of Capital Issues, though different aspects have been high- lighted in the different petitions and we have heard different learned counsel. We have, therefore, to examine what is the scope of the powers and functions of the Controller of Capital Issues while dis- .,.... charging his statutory functions in according sanctions to capital- C issues. It is further necessary to examine if that role has in anyway, changed or altered due to the present economic and social conditions prevailing in the country. It has also to be considered whether the guidelines or the provisions of law under which the Controller has functioned or has purported to function in this case, were proper or there had been deviations from these guidelines. If so, were such D deviations possible or permissible? It is further necessary to examine whether the Controller has acted bona fide in law. These are the broad questions which have to be viewed in respect of the challenge to the consent order. It is, therefore, necessary to examine the broad fea- tures as have· emerged. E Counsel for the petitioners contended that the RPL's application had been entertained even without the company fulfilling the require- ments of a proper application and furnishing the necessary consents and approvals, processed with undue expedition within a very short time and sanctioned without any application of mind to the crucial terms of the issue which were detrimental to public interest. This F contention, when analysed, turns on a number of aspects which can be dealt with separately.

(a) It is submitted that the application was made on 4.5.88 and sanctioned on 4.7.88-within hardly a period of two months; this re- flects undue haste and favouritism, particularly if one has regard to the G magnitude of the public issue proposed to be made and the various financial and other intricacies involved. We are unable to accept this contention. In the first place, an application of this type is intended to be disposed of with great expedition. In particular, in a project of the type proposed to be launched by the petitioner, passage of time may pre judicially affect the applicant and it is not only desirable but also H

74 SUPREME COURT REPORTS [1989] 3 S.C.R.

A necessary that the application should be disposed of within as short a r , time as possible. It is, therefore, ·difficult to say that the period of two months taken in granting consent in the present case is so short that an inference of haste must follow. Secondly, on behalf of the Union of India a list of various aplications received and disposed of by the office of the CCI between September 1987 and September 1988 has been placed before us to show that, generally speaking, these applica- tions are disposed of within a month or two. It is true that none of these issues is of the same colossal magnitude as the present issue. Nevertheless, the Controller of Capital Issues could hardly keep the application pending merely because the amount involved is heavy. It is not possible therefore to say merely from the short span of time that there was a hasty grant of consent in the present case.

(b) Secondly, it has been submitted that the RPL was a company which was incorporated only on 11.1.88. RIL had issued a 'G' series of debentures as recently as 1986 for the .same projects. In granting consent to the present issue the Controller of Capital Issues has completely over-looked the fact that in respect of the same projects the RIL had been permitted to raise debentures on earlier occasions. We do not think that the petitioners are correct in saying that the Controller of Capital Issues has over-looked or was not aware of the debenture issues by the RIL or the purposes for which these debenture issues had been sanctioned. The application for consent makes it clear that the petitioner company is a new company promoted by RIL and that RIL was promoting this company to manufacture HDPE, PVC and MEG at Hazira. The application refers to the fact that the total cost of the project was expected to be Rs.650 ciores and that this cost had been approved earlier in 1985. Considering that RPL had come into existence only on 11.1.1988, this was clear indication that the r projects for which the debenture issue was being proposed were pro- jects which had been mooted even by the RIL as early as 1985. Again in the detailed application form submitted by the RPL it has been mentioned that the RIL had already obtained approval of the Central Government for implementation of the aforesaid projects under the MRTP Act. In part C of the application form it has been mentioned that the promoter company had made necessary applications for endorsement in favour of the company of the Letter of Intent/Indust- rial Licences already issued by the Central Government under the Industries (Development & Regulation) Act, 1951, in the name of the holding company, the RIL. In the context of these statements it is extremely difficult to agree that the fact of issue of the earlier series of debentures by the RIL or the purposes thereof could have escaped the

75 ., ) NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.J

notice of the CCI, particularly, when it is remembered that the issue of A G series of debentures by the RIL was quite recent and had also a\tracted a lot of publicity. We have elsewhere discussed the conten- -tion raised on behalf of the petitioners that the consent given has contravened the guidelines because finances were being raised for no new project but for the same old projects for which RIL had collected ~ B ~ funds. We have there pointed out that, MEG project, for all practical purposes, was a new project that was to be implemented by the RPL

.._,_ . and the funds raised by the RIL had been insufficient for even the PAT and LAB projects launched by it. The learned Addi. Solicitor General states that there was earlier correspondence between the RIL and the CCI regarding the cost over-run of the PTA and LAB projects. We have not gone into the details of this correspondence as it is not our c r purpose to enquire into the details of the matter. We are referring to it only for indicating that the CCI was fully aware of the earlier series of debentures, of the stage of the various projects proposed therein, of the actual implementation of the projects, of the cost over-run, of the proposal to transfer to some of those from RIL to RPL and the exact D requirements of the present issue. It is not possible to accept th~ contention that the consent of the CCI was i'-ccorded in ignorance of

~-. the facts pertaining to the G series of debentures.

(c) Thirdly, it is submitted that having regard to the require- ments of the proforma prescribed under the rules, the application for consent could not have at all been considered by the CCI until the RPL E produced the industrial licence in its favour, the collaboration agree- ments, the approvals of the financial institutions and the approvals under the MRTP Act. It is submitted that the application of the petitioner was cleared hurriedly without insisting upon these clea- . ranees and this was done specially to oblige the company. We must ~ first of all point out that the pro forma relied on indicates a general procedure and should not be understood as a rigid requirement. It is, of course, the duty of the CCI to be· satisfied that before the debentures are actually issued the applicant company has all the neces- sary licences, consents, orders, approvals, etc. in its favour. We are satisfied that in the present case there is no reason to doubt that he had been so satisfied if one remembers that those projects had been '{ initiated by the RIL which had gone through the necessary exercises . and all that remained to be done was a formal approval of their trans- fer for implementation to the RPL.

We shall first refer to the steps taken by the RIL in this regard. H

76 SUPREME COURT REPORTS [1989] 3 S.C.R.

A On 10th October, 1983 as RIL proposed to engage in manufac- ture of MEG, it filed an application for grant of an Industrial Licence under the Industries (Development & Regulation) Act, 1951. On 16th August, 1984 RIL received a Letter of Intent No. 653(84) Regn. No. 1323(83)-IL/SCS issued by the Govt. of India for the manufacture of 40,000 TPA of MEG. Thereafter, from time to time on the applica- B tions made by the RIL, the Govt. of India by various letters extended the validity of the period ending up to 30th June, 1989. The last of such extensions was made by a letter dated 2nd September, 1988. On 11th May, 1988 pursuant to an application made, the Govt. of India permit- ted expansion of capacity for manufacture of MEG from 40,000 TPA -( to 60,000 TPA. From 12th January, 1988 to 22nd July, 1988 applica- tions were made by RIL for change of Company from RIL to RPL for C the MEG Project. It appears that on 11th August, 1988 approval/sanc- tion was granted by the Govt. of India for change in the implementing agency from RIL to RPL. On or about 19th January, 1985 a letter from the Govt. of Maharashtra was issued, stating that there was no objec- tion to the Company's proposal for change of location for the MEG D Project from Maharashtra to Gujarat. It also appears from the various documents which are mentioned in Vol. l V of the present Paper- Books at different pages (from 22 to 44) that by various orders under the MRTP Act, sanctions and modifications were approved, the latest sanction being dated 11th October, 1988 whereby the Govt. approved J the proposal of RPL for modified scheme of Finance. It is also signi- E ficant to mention that on 25th January, 1988 an application was made under Sec. 22(3)(d) of the MRTP Act with the proposal to implement the MEG Project along with other projects of RPL. It may be mentioned that by a letter dated 6th June, 1988 RIL had informed that they had originally planned to utilise a sum of Rs.85 crores from 'G' Series debentures for this project. But, however, they were. not able t\) F utilise this money as the entire 'G' Series amount had been utilised for PTA and Lab projects including the working capital on account of overrun in the cost of LAB and PTA projects. Hence, it applied for permitting a new scheme of finance. By an order dated 21st July, 1988 the Govt. accorded approval to the proposal of RIL for modified scheme of finance to be implemented by RIL. Thereafter, RPL made an application for modification of the scheme of finance and the same was approved by the Govt's order dated 11th October, 1988.

It appears that on 9th October, 1984 pursuant to an application made by RIL for foreign collaboration with M/s Union Carbide Corporation, USA, the Govt. of India by its order of that date accorded approval to the terms of the foreign collaboration for a

NARENDRA KUMAR v. U.O.I. [MUKHARJJ, J.) 77 / ··~ period of six months for this project. It further appears that on 14th A March, 1986 pursuant to an application made by RIL, the Govt. accorded approval for foreign collaboration with Mis Scientific Design Company. It may, however, be mentioned that there was a letter dated 30.4.1986 whereby approval was granted by the Reserve Bank of India in respect of foreign collaboration agreement with Mis Scientific Design Co. USA. B

- -~- The next aspect of the matter which has to be borne in mind in view of the contentions urged was regarding the licences. It appears that there was an application on 25th March, 1987, for licence. On 9th August, 1988 the Industrial Licence dated 25.3.1984 granted to RIL for manufacture of PVC was endorsed to RIL. This is important r- because one of the contentions that Shri Pagaria during the course of his long submissions made was that there was no valid licence. c

It also appears that so far as the MRTP Act is concerned, an application was made by RIL on or about 12th October, 1984 under Sec. 22(3)(a) for manufacture of PVC. Several other steps were taken D and on 29th June, 1988 there was an order of the Govt. of India under Sec. 22(3)(d) of the Act, according approval to the proposal for modified scheme of finance. _;.., There was a further proposal for modification and further orders. Last of such order was dated 11th October, 1988. Similarly, E regarding the foreign collaboration, there were approval letters and <- the last one was· dated 12th August, 1988 for endorsement of foreign collaboration approval in favour of RPL. So far as HOPE is con- cerned, it appears that there was a valid licence; and it may be --~'. mentioned that on 24th August, 1985 pursuant to an application made by RIL under section 22(3)(a) of the MRTP Act, the Govt. granted F approval for the establishment of a new undertaking for manufacture of HOPE. ii II Regarding foreign collaboration, an application was made by RIL in 1984 for approval of foreign collaboration with Mis Du Pont Inc. Canada, for manufacture of HOPE. Such approval was given and G '-{ the validity was extended and the foreign collaboration approval was endorsed in favour of RPL on 12th October, 1988. Similar other con- sents were there. Mention may be made of letters dated 28th April, 11th March, 6th December, 1986, 2nd January, 1987, 15th July, 25th, " 26th .July, 19th August, 1988 which appear at various pages of Vol. IV of the papers. Finally, capital-goods clearance was endorsed in favour H

78 SUPREME COURT REPORTS [1989] 3 S.C.R.

A of RPL for the PVC project on 12th August, 1988. Capital goods clearance was also endorsed in favour of RPL for HOPE project on 23rd August, 1988. Thus, it will be seen that all the basic groundwork had already been done by the RIL.

It is in above perspective that one has to examine the events that 'B have happened. The question that has to be considered is whether the CCI could take it for granted that these approvals, consents, etc. would stand automatically transferred to the RPL. On 16th June, 1987 by a Press Note issued by the Deptt. of Industrial Development in the Ministry of Industry, the Govt. of India declared that where a trans- feree Company is a fully owned subsidiary of the Company holding the Letter of Intent or licence, the change of the Company implementing C the project would be approved. It is in the light of this that the Board of RIL on 30th December, 1987 passed a resolution to incorporate a 100% subsidiary Company whose main objects were, inter a/ia, to implement the licences/Letters of Intent received by RIL and the objects of undertaking, processing, converting, manufacturing, for- D mulating, using, buying, dealing, acquiring, storing, packing, selling, transporting, distributing and importing etc. and approved the name of the Company as RPL. On 11th January, !988 the RPL was incorporated and the Certificate of Incorporation was issued. There- after, on 12th January, 1988 letters were written by RIL for endorse- ment of licences/Letters of Intent in favour of RPL. The certificate of E commencement of business was thereafter issued.

The Press note earlier referred to makes it clear that the transfers from one company to an allied company were considered unexception- able except where trafficking in licences is intended. In this situation the change of name from RIL to RPL, of the licences, letters of intent 't- F and other approvals was only a matter of course and much importance cannot be attached to the fact that CCI did not insist upon these endorsements being obtained even before the letter of consent is granted. In any event the letter of consent is very clear. Clause (h) of the conditions attached to the consent Jetter makes it clear that the consent should not be construed as exempting the company from the operation of the provisions of the Monopolies & Restrictive Trade Practices Act, 1969, as amended. Clause (e) makes it clear that it is a -r· condi.tion of this consent that the company will be subject to any measures of control, licensing, or acquisition that mil\Y be brought into operation either by the Central or any State Government or any authority therein. Under clause (t) the approval granted is without prejudice to any other approval/permission that may be required to be

NARENDRA KUMAR v. U.O.L [MUKHARJI, J.[ 79

obtained under any other Acts/laws in force. Having regard to the above history as well as having regard to the terms and conditions of the consent letter, the grant of consent itself being conditioned on the RPL obtaining the necessary appro-:.als, consents and permissions be- fore embarking on the project, we do not think that there was any impropriety in the CCI granting the consent without waiting for the formal endorsement of the various licences, letters and approvals in favour of the RPL.

( d) It is next submitted that under para 3 of the guidelines issued by the Government, the amount of issue of debentures for project· financing and other objects will be considered on the basis of the approvals of the scheme of finance by the financial institutions/banks; Government under the provisions of the MRTP Act, etc. The criticism c in this respect is that since no approvals of the scheme of finance by the financial institutions/banks/Government under the provisions of the MRTP Act etc. had been produced before the Controller of Capital Issues he could not have been satisfied that the amount of issue of debentures was necessary and adequate on the basis of such approvals. D This argument proceeds on a misconception of the Government set up for dealing with these matters. The learned Additional Solicitor General points out that the Controller of Capital Issues does not function in isolation, sitting at his desk and awaiting the varioius types of clearances and consents that are necessary to be obtained from various quarters before granting consent to an issue. He points out that the E ..;. CCI functions in close coordination with all the concerned depart- ments of the Government. He is in close touch with the progress of various projects. On references from the Department of Company Affairs, the CCI (MRTP} Section furnishes comments on the scheme of finance relating to the proposals of industrial undertakings covered under the MRTP Act for effecting substantial expansion for setting up F of new undertakings, merger/amalgamations; and acquisition/take- over of other undertakings. The comments are furnished to the Department of Company Affairs with reference to the norms relating to equity debt ratio, promoter's contribution, . dilution of foreign equity, listing requirements for shares on Stock Exchanges and on analysis of balance sheets for cash generation etc. An officer attends G 'f .. regular meetings of the Advisory Committee meetings held in the Department of Company Affairs in terms of the MRTP Act, hearing held in Department of Company Affairs under section 29 of the MRTP Act, inter-departmental meetings held in the Department of Company Affairs to consider specific issues relating to applications received under the MRTP Act, Licensing-cum-MRTP Committee meetings H \

80 SUPREME COURT REPORTS [1989] 3 S.C.R.

A held in the Department of Industrial Development, screening com- mittee meetings held in the Administrative Ministries to consider applications from MRTP companies and statutory public hearings held in the MRTP Commission. The submission of the learned Solicitor General in short is that, in dealing with application for consent to an issue of capital, the CCI does not act in isolation but the entire Central B Government functions with various Departments closely monitoring "y and coordinating the scrutiny of applications. He, therefore, submits that the Controller of Capital Issues is aware of the progress of the various applications made by the company. The Controller is also aware that the ICICI had looked into the financial soundness and feasibility of the project and there is material to show that the com- c ments of the ICICI were made available to him. When a project is being appraised by the institution like the ICICI and when the CCI is also aware, by reason of the participation of his representatives at the meetings of the Department of ,Industry and the Department of Com- pany Affairs about the stage or outcome of the proposals made under the IDR and MRTP Acts, it is clear that the CCI did not overlook any D crucial aspect and that his grant of consent in anticipation of the neces- sary transfers to the RPL was based on a practical appraisal of the situation and fully in order.