NARENDRA KUMAR MAHESHWARI v. UNION OF INDIA & ORS.

The assumptions behind the petitioners' arguments that the terms of the issue as proposed by the RPL were approved in toto by the E CCI .without examination is also unfounded. The record before us indicates that there were frequent discussions leading to alterations in the original proposals from time to time as well as changes in the conditions of consent both before and even after the letter of consent dated 4. 7 .1988. Some aspects of these have been referred to elsewhere and some are referred to below and these will show that consent was not granted as a matter of course. The allegation that consent was accorded without any application of mind is, on the materials before us, clearly untenable.

It is stated in the affidavit that in March/April, 1988 discussions centered around the concept of cumulative convertible preference shares {CCP) which was mooted as an instrument for the means of finance. The instrument offered would have been equity shares to the extent of Rs.57 crores, cumulative convertible preference shares to the extent of Rs.81 crores and convertible debentures to the extent of Rs.478 crores with four conversions. In this connection, reference may be made to Annexure 1 at page 39 of the reply affidavit filed in these proceedings by RPL. Thereafter, on 4th May, 1988 RPL made an

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.l 81

application to the Controller of Capital Issues seeking permission to make an Issue of Capital on certain conditions. Specific details thereof .A are not necessary to be set out here. It also made a proposal for issue of 81 lakhs 10% cumulative convertible preference shares of Rs. 100 each for cash at par through prospectus to non-resident Indians/resi- dent Indian public-81 crores. It is stated that in accordance with the present guidelines issued by the Govt. of India, the Company intended B to retain excess subscription amount to the extent of 15% of Rs.566 crores, i.e., a right to retain an additional amount.

It was further stated that in accordance with the Guidelines issued by the Government of India, the Company had intended to retain excess subscription amount to the extent of 15% of Rs.566 crores, i.e., a right to retain an additional amount of Rs.85 crores. The C idea was that the company would in the event of over-subscription request the CCI for allotment of such additional amount of Rs.85 crores. It was further proposed to issue a part of the cumulative convertible preference shares to NRIS and a part to the foreign collaborators. D

Terms of the proposed convertible debentures were:

(a) Convertible debentures upto 12.5% (interest) taxable: Each convertible debentures of Rs.500 would be converted into 10 equity shares of Rs.10 each as per scheme envisaged. The E residual portion of each Convertible Debenture would be redee- mable at the end of 10th year from the date of allotment with an option to the company to repay these amounts in one or more instalments by drawing lots at any time after the end of 5th year from the date of allotment. F (b) Cumulative Convertible Preference Shares 10% (dividend) taxable. Each CCP would be fully converted into equity share of Rs. 10 each at such a premium not exceeding Rs.40 per share as might be approved by the CCI at any time between the 3rd and/or 5th year from the date of allotment to be decided by the company, by draw of lots, if necessary. G

Then there are other conditions regarding securities, underwrit- ing, allotment of equity shares to RIL shareholders. In May, 1988, several NRIS also evinced interest in equity participation in RPL. It was stated that though the CCP shares appeared to be most appro- priate instrument, the computation of reserved/preferential entitle- H

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

A ment resulted in very low entitlement to the existing shareholders of RIL. It was then contemplated to increase the preferential entitlement of RIL investors on partially convertible debentures and the ratio of convertible debentures was altered so as give equal share between RIL investors and the members of public. A three stage conversion was contemplated. Thereafter, in June 1988, a revised proposal to the CCI B was made by RPL. It is not necessary to set out in detail the said revised proposal. After several discussion, on or about !st June, 1988, between the company, RPL, the Merchant Bankers, ICICI and the Office of CCI, it was asserted on behalf of the respondent No. 3 that serious reservations were .expr~ssed that the marketability of CCP shares and the investors resistance was likely to be there. It was in this c context and also after considering the reservations that might be there on the part of the foreign collaborators and NR!s, that the CCI re- quired the issue of fully convertible debentures. The institutional proposal of the project cost emerged at Rs. 700 crores instead of Rs.650 crores and it was then felt that RIL should increase its own contribution to the project by way of a promotors' contribution at D Rs.100 crores, thereby increasing its stake to 14% at the suggestion of CCI. It was stated that this was also a requirement of the CCI guidelines and MRTP conditions. At the end of June, 1988, there was an amendment of the Order by the Department of Company Affairs in favour of RPL for PVC. Similarly, on 21st July, 1988, the order for ~-. MEG passed for RIL was amended permitting RPL to undertake E the new projects for implementation of the MEG Project. It is not necessary to set out in detail these proposals. On 4th July, 1988, CCI granted the consent under the Capital Issues (Control) Act, 1947 to the public issue. There were variations between the proposal and the Order of consent of the CCI.

F It may be necessary at this stage to refer to the Order dated 4th July, 1988, which is as follows:

"With reference to your letter No. BOK/DKG/505(c) dated 8.6.1988, I am directed to say that the Central Govt. in exercise of the powers conferred by the Capital Issues G (Control) Act, 1947, do hereby give their consent to an issue by M/s Reliance Petrochemicals Ltd., a company incorporated in the State of Maharashtra, of capital of the value of Rs.650.90 crores (inclusive of retainable excess subscription to the extent of Rs.84.90 crores). (A) 5, 75,00,000 Equity shares of Rs.10 each for cash at par to H M/s Reliance Industries Ltd. (inclusive of retainable excess

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.I 83

subscription to the extent of Rs.7.50 crores). (B) A 2,96,70,000 12.5% secured, redeemable, convertible debentures of Rs.200 each for cash at par to public by a prospectus (inclusive of retainable excess subscription of 77.40 crores).

2. Out of (B) above, reservations for preferential allot- B ment will be made as follows:

(i) Shareholders of M/s Reliance Industries Ltd. 50%.

(ii) Employees (including Indian working Directors)/ workers of the company and of M/s RIL. 5% Unsubscribed c portion, if any, of the reservations will be added to the public offer.

The Convertible debentures will ·carry interest 12.5% p.a. (taxable). The Debentures will be fully and com- D pulsorily convertible in the following manner:

(a) 5% of the face value at par on allotment of the debentures.

(b) 20% of the face value at a premium if any, as may E be decided by this office after three years but before four years from the date of allotment of debentures.

(c) The balance at such a premium if any, as may be ·~. decided by this office after 5 years but before the end of 7 years from the date of allotment. F

3. The consent given as aforesaid is qualified by the condi- tions mentioned in the Annexure and the company shall comply with the terms of the conditions so imposed.

4. I am to make it quite clear that the grant of consent to the issue of capital .represents no commitment of any kind on the part of the Central Govt. to render assistance in the matters of priorities or licences for supplies of raw mate- rials, machinery, steel, etc., of transport facilities or any other governmental assistance, including the provision for foreign exchange. H

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

5. This order also conveys the approval of the Central A Govt. under proviso to Rule 19(2)(b) of the Securities Con- tracts (Regulation) Rules, 1957 subject to the condition that the allotment to the employees shall not exceed 200 shares per individual.

u 6. This letter is issued in the name and under the authority of the President of India."

There was Annexure to the said Order. In that Annexure, cer- tain conditions were laid down and condition (a) stipulated that in any prospectus or other document referred to in section 4 of the Capital Issues (Control) Act, 1947, relating to this issue, the statement c required by that section must be worded as follows:

"Consent of the Central Government has been obtained to this issue by an order of which a complete copy is open to public inspection at the Head Office of the Company. It D must be distinctly understood that in giving this consent the Central Govt. do not take any responsibility for the finan- cial soundness of any scheme or for the correctness of any of the statements made or opinions expressed with regard to them." A E It further imposed the condition (b) that the consent to lapse on the expiry of twelve months from the date of consent. Order also stipulated 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. The consent also , indicated that the company would be subject to any measures of con- _} F trol, licensing, or acquisition that might be brought into operation either by the Central or any State Govts. or any authority therein. It also en joined the company to ensure that the prospectus for the issue of securities consented to should be printed subject to certain condi- tions. It also enjoined, inter alia, that the convertible debentures should be allotted to the employees of the company and of Mis RIL G and the shareholders of Mis RIL. On conversion the equity shares so converted should not be transferredlsold/hypothecated for a minimum Y period of three years from the date of allotment of convertible debentures. The other special conditions contained the following:

"(v) The equity shares to be allo1ted to the promoters of the company shall not be sold1hypothecatedltransferred for

NARENDRA KUMAR v. U.0.1. [MUKHARJJ, J.I 85

at least three years from the date of allotment. A (w) It is a condition of this consent order that the proceeds -'> from the issue of debentures should be invested in fixed duration deposits/instruments with the cooperative/ nationalised banks, UTI, Financial Institutions, l'ublic ----,· Sector Undertakings (other than public sector bonds) and B be used strictly for the requirements of the projects mentioned in the application and not for any other purpose.

(x) Mis Reliance Industries Limited will bring in addi- tional amount of Rs.SO crores as interest free unsecured loans, at the time of allotment of the above convertible c debentures as additional promoters contribution which wi)J be converted into equity at par on the expiry of 36 months from the date of allotment of convertible debentures.

(y) (i) The company shall scrupulously adhere to the time limit of 10 weeks from the date of closure of the subscrip- tion list for allotment of all securities and despatch of allot- ment letters/certificates and refund orders. -~- (ii) The company shall, at the time of filing its appli- cation for listing to the regional Stock Exchange, furnish an undertaking for compliance of the above condition, along with a scheme incorporating the necessary details of the arrangements for such compliance. This undertaking shall -l be signed by the Chief Executive or a person authorised by the Board of the company. F (iii) The company shall file, with the Executive Director or Secretary of the regional Stock Exchange, within five working days of the expiry of the stipulated period as above, a statement signed by the Chief Executive or a person authorised by the Board, certifying that the allotment letters/securities and the refund orders have G been despatched within the prescribed time limit as per the 'condition above. A copy of the statement shall be endorsed to the office of the CCI quoting this consent order and date.

(iv) Non-compliance of conditions above shall' be H

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

A punishable by the Stock Exchange, in addition to the action r that may be taken by other competent authorities." /;, The other conditions mentioned therein are not very relevant. These only enjoin certain procedural safeguards. The said consent order was amended on the 19th July, 1988, which clarified that the Y· B intention for imposing condition (w) as set out above, was not to block all the funds raised out should be invested in terms of the conditions

- laid down aforesaid. The amendment enjoined that the approval of the Central Government should be subject to the condition that allotment to the employees should not exceed 50 debentures per individual. It .~-r was further added that the company should obtain prior approval of the Reserve Bank of India, Exchange Control Department, for the c allotment of debentures to the non-residents as required under the ·-{ Foreign Exchange Regulation Act, 1973. There was a further amend- ment of the Consent Order on the 26th July, 1988 which added condi- lion (s) to the following effect:

D "(s) The convertible debentures to be allotted to the employees of M/s RPL and Mis RIL and the corporate shareholders of Mis RIL (other than individual share- holders of Mis RIL) shall not be sold/transferred/hypo- thecated till the end of 3 years from the date of allotment of ~,,..;.., debentures. On conversion the equity shares so converted E shall not be transferred/sold/hypothecated for a minimum period of 3 years from the date of allotment of convertible debentures."

It was stated that between 4th January, 1988 to 24th July, 1988, news about the formation of RPL and to set up the projects at Hazira, · ' Jr·· F Gujarat and the consent granted by CCI for convertible debentures for RPL-all these were widely reported in various newspapers and magazines including national dailies such as Times of India, Indian Express, Financial Express, Gujarat Samachar, Hindustan Times, Bombay Samachar, Business Standards and other magazines and news items. Thereafter, till mid August, 1988, there were detailed advertise- G ments about the company and nearly 1600 insertions in nearly 200 newspapers and dailies were made advising the opening of the issue. y There were from mid July, 1988 onwards till August, 1988, advertise- ment campaigns in television and radio to attract investments in ~·I !I Petrochemicals advising the public about the issue of Rs.593.40 crores of convertible debentures of RPL. It is asserted on behalf of the respondents that· the public issue of these shares was made known

NARENDRA KUMAR v. U.0.1. (MUKHARJI, J.l 87

since mid July, 1988. As mentioned hereinbefore since the words "till conversion" were capable of wide interpretation and might have rendered the shares/convertible debentures non-transferable for upto 7 years, the CCI modified the consent and limited this restriction to a period of 3 years. On July 27, 1988, the prospectus of RPL was filed with the Registrar of Companies, Gujarat and the Stock Exchanges at Bombay and Ahmedabad. On August 22, 1988, the issue of RPL B op;ned for subscription. A letter was addressed to the CCI on August 23, 1988, requesting for the lifting of embargo for non-transferability for three years for the corporate shareholders of RIL also. It is asserted that by August 31, 1988, the issue of RPL was fully/over subscribed and closed. By October 25, 1988, the basis of allotment was approved by Ahmedabad Stock Exchange. A resolution of the Board of Directors of RPL was passed on October 27, 1988 to allot the c debentures/shares. On November 4, 1988, lease deed for land at Hazira between RPL and GIDC was executed. There was no objection certificate obtained from GIDC. It is asserted that the Debenture Trust Deed between RPL and ICICI was executed at Surat and was lodged for registration on November, 7, 1988. Certificate of Mortgage D under Section 132 of the Companies Act, 1956 was issued by the Registrar of Companies, Gujarat regarding the creation of charge for the Debentures on November l l, l988itself.

In this context, on behalf of the respondents, Mr. Baig drew our attention to certain dates indicating that the writ petitioners were E aware of this and it was stated that on July 20, 1988, Mr. Radheyshyam Goyal, the Writ Petitioner in Rajasthan High Court, wrote a letter to the Editor of the Financial Express that the premia for the issue of shares upon the second and third conversion had not been fixed and the terms and conditions were vague. Shri Goyal also made certain other allegations. Though, of course, no complaint was ever made to F RIL or RPL on this aspect, on August 16, 1988, one Mr. J.P. Sharma filed a complaint of Unfair Trade Practices under the MRTP Act before the MRTP Commission seeking injunction against the issue opening on 22nd August, 1988 and alleging the same breaches as claimed by the petitioners in the Transfer cases. G On being moved, this Court, on August 19, 1988, passed an order in Transfer Petitions No. 192-193 of 1988 staying the three pend- ing Writ Petitions in the three High Courts, namely, Bangalore, Delhi and Jaipur and further stayed the proceedings in the suit being Civil Suit No. 1172 of 1988 filed in Baroda. It was directed that the issue of debentures would proceed without hindrance notwithstanding any H

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

proceedings instituted or orders passed and that any order or direction A or injunction already passed or which might be passed would remain suspended till further orders of this Court. It was mentioned that on August 29, 1988, the complaint filed by Shri Sharma before the MRTP Commission was dismissed. On August 31, 1988, one Shri Arvind Kumar Sanganeria issued notice through his Advocate advising that a B Writ Petition was being preferred in the Bombay High Court. On September 1, 1988, this Court granted an ex-parte stay of the proceed- ings in Writ Petition No. 4388 of 1988 pending before the Bombay High Court. As mentioned hereinbefore, on September 9, 1988, this Court had transferred the four Writ Petitions in the four High Courts and civil suit to this Court. It appears that there was a further writ petition filed by Shri Sunil Ambani in the High Court of Allabahad on c the basis of two articles published in the Indian Express.

Shri Ganesh made submissions in Transfer Case No. 164 of 1988. Shri Haksar made his submissions in T.C. No. 161 of 1988. Shri Pagaria argued T.C. 162 of 1988. Shri Udai Holla who was the counsel D for the petitioner in Karnataka matters, appeared in T.C. 163 of 1988 and made his submissions. We heard Mr. G. Ramaswamy, Additional Solicitor General. Shri Soli J. Sorabjee, Shri Baig and Shri Salve argued on behalf of respondents 1and2 and Shri F.S. Nariman for respondent No. 3 in T.C. No. 162 of 1988.

E Inasmuch as the charge is the non-evaluation by the CCI in enforcing and applying the principles of guidelines properly, it would be appropriate at this stage to refer to the said guidelines. It appears > that from time to time, ·in exercise of the powers conferred by section 12 of the Capital Issues (Control) Act, 1947, the Central Government had issued rules and guidelines. On or about April 17, 1982, guidelines· F were issued by the Government of India under the said Act for the "Issue of Debentures by public Limited Companies". It is not neces- sary to set out in detail these guidelines, but it may be necessary to refer to clauses (4) and (6) of the said guidelines. Clause (4) reads as follows:

G "4. Debt-equity: The debt-equity ratio shall not normally exceed 2: 1. For this purpose: y "Debt" will mean all term loans, debentures and bonds with an initial maturity period of five years or more, including interest accrued thereon. It als·o includes all deferred payment liabilities but it does not include short-

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.) 89

term bank borrowings and advances, unsecured deposits or loans from the public, shareholders and employees. and unsecured loans or deposits from others. It should also include the proposed debenture issue.

"Equity" will mean paid-up share capital including preference capital and-free reserves. B

Notes: (!) The computations under guidelines 3 and 4 mentioned above will be based on the latest available audited balance-sheet of the company.

(2) A relaxation in the norm of debt-equity ratio of 2: 1 will be considered favourably for capital-intensive projects such c as fertilizers, petro-chemicals, cement, paper, shipping etc."

Clause (6) of the said guidelines deals with the period of redemption and is as follows: D

"6. Period of Redemption: Debentures shall not normally be redeemable before the expiry of the period of seven years except in the following cases:

(i) A company will have the option of redeeming the E debentures from the 5th to the 9th year from the date of issue in such a way that the average period of redemption . continues to be seven years. While exercising such an option the small investors having debentures of the face value not exceeding Rs.5,000 will have to be paid in one instalment only. F

(ii) In case of non-convertible debentures or non- convertible portion of convertible debentures a company may have the option of getting the debentures converted into equity fully with the approval of and at such. price as may be determined by the Controller of Capital Issues. T!)e G debenture holders will, however, be free not to exercise this right."

Clause (8) provides for the denomination of debentures. Clause (9) enjoins the listing of debentures on the Stock Exchange. Clause (10) stipulates that only secured debentures would be permitted for issue to H

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

the public. Clause..(11) enjoins the underwriting of the debentures and ~ i A clause (12) also provides for listing of the shares of the company pro- posing debenture issue. Clause (13) permits linked issue of shares and debentures. There were certain amendments to these guidelines which would be noted at the relevant time.

B While considering the questioin of the application or non- application of mind or infringement of guidelines, it is necessary to r bear in mind the role of the CCI in this respect. The CCI functions under the Capital Issues (Control) Act, 1947. This is an Act to provide for control over the issue of capital. Section 2(e) of the said Act_? defines "securities" and states that the "securities" means any of the following instruments issued or to be issued, or created or to be c created, by or for the benefit of a company, namely: "--{

(i) shares, stocks and bonds;

(ii) debentures; D (iii) mortgage deeds, etc.; and

(iv) instruments acknowledging Joan or indebtedness. ~ Section 3( 1) of the said Act enjoins that no company incor- E porated in the States shall, except with the consent of. the Central Government, mak.e an issue of capital outside the States. The other sub-sections of Section 3 deal with the modalities of.such cbnsent. >

It may be mentioned that fhe Statement of Objects and Reasons of the Act states that \he object of this measure is to keep in existence /.--. • F .... the control over capital issue which was imposed by Rule 94-A of / '" the Defence of India Rules in May, 1943 and continued in force after the expiry of the Defence of India Act by Ordinance No. XX of 1946. The Statement further states that although there has been an appreci- able change in the general conditions which constituted the principal reason for the introduction of the control during war-time, it was G thought in the light of experience gained that the control was still necessary to secure a balanced investment of the country's resources in y industry, agriculture and the social services. (See Gazette of India, 1947, Part V, p. 264).

In this connection, Shri G. Ramaswamy, learned Additional H Solicitor General for the Union of India drew our attention to the

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 91

Debates of the Lok Sabha and the Rajya Sabha in February-March, A 1956 when the question of continuance of the control of the capital issues came up for consideration. The Minister of Finance, Shri C.D. Deshmukh stated that the control of capital issues was first introduced in May, 1943 under the Defence of India Rules. It was continued after the termination of the war by an Ordinance, thereafter in 1947 by an Act for a term of three years and it was again successively extended in B 1950 and 1952. The Act as it stood expired on the 31st March, 1956. The main purpose which the Minister explained was to prevent the diversion of investible resources to none-essential projects (emphasis -~- supplied), the control had also been used for many other purposes and the most important of these purposes which might be called ancillary purposes were the regulation of the issue of bonus shares, regulation of capital reorganisation plans of companies including mergers, and c amalgamations which involved the use or re-issue of capital and the regulation of the capital structure. Shri Ashok Mehta, then a Member of Parliament, suggested that the purpose of the Act might be used for evolving a national investment policy. The Minister of Finance further

• observed that many things might have been done to give a proper form and shape to the national investment policy (emphasis supplied), but the Minister expressed his surprise how these could have been secured D

through a negative piece of control (emphasis supplied) like the Capital Issue Control Act. He observed that there were other provisions like the Industries (Development & Regulation) Act, under which licences were given to new industries. But this, according to the Minister, was not the purpose of the negative control of the capital issue. Various suggestions were made by the members of the Parliament about the role of the Act, for instance, to encourage public companies, not too much concentration of particular industries at particular areas, etc. The Minister referred to the various other Acts which control the industry and the Minister also referred that there should not be undue delay. Similar statements were made by Mr. M.C. Shah in Rajya Sabha, who was then the Minister for Revenue and Civil Expenditure. One Member in Rajya Sal.ha made it particularly clear that the con- sent of the Government had been misleading to some investors and thought that by a regulation, it was essential that in the prospectus it should be clearly stated that the sanction by the Government did not mean any guarantee about the suitability or the successful running of the industry. Therefore, this sanction of the Government should be stated more clearly and the public should be clearly warned that a sanction of the Government did not imply any sort of guarantee by the Government. H

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

We have referred to the debates only to highlight that the A purpose of the Bill was to secure a balanced investment of the country's resources in the industry and not to ensure so much the sound- ness of the investment or give any guarantee to the investors. The section of the Act in question in express terms does not enjoin the CCI to discharge such obligations nor does the background of the Act so 8 encompass.

There was considerable discussion before us as to the scope of the powers and responsibilities of the CCI while granting his consent to an issue of shares and debentures proposed by a company. As stated above, the learned Additional Solicitor General submitted that the restrictions on issue of capital were introduced as part of the control c measures found necessary during the period of the first world war and that, after the war ended, the control was continued as it was thought "in the light of experience gained that control is still necessary to secure a balanced investment of the country's resources in industry, agriculture and the social services" (vide, the statement of Objects and D Reasons of the Act in 1947). He urged, relying also upon the speech of the concerned Minister at the time of moving the amendment bill of 1956 in Parliament, (which placed the measure on a permanent foot- ing) that all that the CCI is concerned with is to ensure that the investi- ble resources of the country are properly utilised for priority purposes and are not invested in non-essential projects or in a manner which E runs counter to the accepted investment policies of the Government. The CCI, he submitted, has neither the duty, nor the staff, the facilities or the expertise to enquire about, or investigate into, the financial soundness or acceptability of the issue proposed to be made. He pointed out that one of the conditions on which all consent is granted is that the Central Government does not take any responsibi- F lity for the financial soundness of any scheme or the correctness of any statement made or opinions expressed in the prospectus and the condi- tion is also explicitly set out in the prospectus.

We are unable to agree fully with this somewhat narrow aspect of the CCI's role. In the very speech in Parliament to which the learned G Additional Solicitor General referred, the Minister also stated:

"Apart from this main object of the Bill which is thus to prevent the diversion of investible resources of non-essen- tial projects, the control has also been used for many other purposes. The more important of these purposes which may be called ancillary purposes are the regulation of the

NARENDRA KUMAR v. U.0.l. [MUKHARJI, J.l 93

issue of bonus shares, regulation of capital reorganisation plans of companies including mergers and amalgamations which involved the issue or re-issue of capital, the regula- tion of the capital structure of companies with a view to discouraging undesirable practices, namely, issue of shares with disproportionate voting rights and encouraging the adoption of sound methods and techniqi;es in company floa- B tation, regulation of the terms and conditions of additional issues of capital etc." (emphasis added)

That apart, whatever may have been the position at the time the Act was passed, the present duties of the CCI have to be construed in r--·· the context of the current situation in the country, particularly, when c there is no clear cut delineation of their scope in the enactment. This line of thought is also reinforced by the expanding scope of the guidelines issued under the Act from time to time and the increasing range of financial instruments that enter the market. Looking to all this, we think that the CCI has also a role to play in ensuring that public interest does not suffer as a consequence of the consent granted by him. But, as we have explained later, the responsibilities of the CCI in this direction should not be widened beyond the range of expedi- tious implementation of the scheme of the Act and should, at least for the present, be restricted and limited to ensuring that the issue to which he is granting consent is not, patently and to his knowledge. so manifestly impracticable or financially risky as to amount to a fraud on the public. To go beyond this and require that the CCI should probe in depth into the technical feasibilities and financial soundness of the proposed projects 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. F

Shri Ganesh submitted that the CCI is duty bound to act in accordance with the guidelines which lay down the principles regulat- ing the sanction of capital issues. This is especially so because the guidelines had been published. It was submitted that the investing public is, therefore, entitled to proceed on the basis that the CCI G '{ would act in conformity with the guidelines and would enforce them while sanctioning a particular capital issue. It was submitted that it is not permissible to deviate from the guidelines. In this connection, reliance was placed by him as well as by Shri Haksar, appearing for the petitioner in T.C. No. 161/88, upon the observations of this Court in Ramanna Dayaram Shetty v. International Airport Authority, [ 1979] 3 H

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

A SCR 1014, where this Court observed that itmust be taken to be the law that where the Government is dealing with the public, whether by way of giving jobs or entering into contracts or issuing quotas or licence or granting other forms of largess, the government could not act arbitrarily at its sweet will and, like a private individual, deal with any persons it please, but its action must be in conformity with standard B or JlOrm which is not arbitrary, irrational or irrelevant. We accept the position that the power of discretion of the government in the matter of grant of largess including award of jobs, contracts, quotas, licences etc. must be confirmed and structured by rational, relevant and non- discriminatory standard or norm and if the governmen; departed from such standard or norm in any particular case or cases, the action of the government would be liable to be struck down, unless it could not be c shown by the government that the departure was not arbitrary but was based on some valid principle which in itself was not irrational, irrelev- ant, unreasonable or discriminatory. Mr. Haksar drew our attention to the observations of this Court in the case of Motilal Padampat Sugar Mills v. Uttar Pradesh, (1979] 2 SCR 641, where this Court reiterated that claim of change of policy would not be sufficient to exonerate the government from the liability; the government would have to show what precisely was the changed policy and also its reason and justification so that the Court could judge for itslef which way the public interest lay and what the equity of the case demanded. It was contended by Shri Haksar that there were departures from the guidelines and there was no indication as to why such departures had been made.

We are unable, however, to accept the criticism that there has been deivations from the guidelines which are substantial. We have referred to the guidelines. We do not find that there has been any requirement of such guidelines which could be considered to be man- } F datory which have not been complied with. We have considered this carefully and found that there have been no deviations from paras 3, 5, 12, 13 and 14 of the guidelines. Nor has there been, as pointed out by the respondents, any infraction of guidelines nos. 2 and 4. The fact that debentures of the face value of Rs.200 have been approved as against the normal face value of Rs.100 envisaged under para 8 or that the requirements of the service of underwriters have been dispensed with in exercise of the discretion conferred by para 11 do not constitute y arbitrary, substantial or unjustified deviations from those guidelines. There has been sufficient compliance with the guidelines on the quantum of issue, debt-equity ratio, interest rate and the period of redemption and also guideline No. 10 about the security of the debenture and there was sufficient security for the debentures in the

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 95

facts and circumstances of this case. The preference in favour of share- A holders of RIL was justified and based on intelligible differentia. Indeed, if we consider the role of the CCI, it is primarily concerned to ensure a balanced investment policy and not to guarantee the solvency or sufficiency of the security. In our opinion, most of the criticism directed against deviation from guidelines were misplaced. B It was submitted by Shri Ganesh that there was an obligation cast on the CCI to ensure that the guideline regarding security for th~ "'!. _ debentures was fulfilled. Shri Ganesh iook us through the documents ~ filed before the CCI including, in particular, the draft prospectus - which, according to him, clearly showed that there was in reality no . security for the debentures. We are unable to accept this contention. r-- c P e rh aps the most important of the arguments addressed on behalf of the petitioners was that the scrutiny by the CCI of the prospectus was so cursory that the most glaring travesty of truth con- tained therein has passed unnoticed by him. Sri Ganesh points out that the guidelines were clear that a company can issue only secured debentures and draws atiention to the fact that the company pro- claimed the issue to be of "fully secured convertible debentures". Yet, the prospectus, on its very face, disclosed that the debentures were unsecured. Shri Ganesh urges that, if only the CCI had perused care- fully the figurues and statements made in the prospectus he could

- never have accepted, at face value, the assertion of RPL that the debentures were "secured" ones within the meaning of the guidelines ·or accorded his consent to the issue. This argument is in three parts and may be dealt with accordingly.

(i) The first criticism of the petitioners is that, in certain brochures and pamphlets issued by RPL, the debentures are described as "fully secured convertible debentures" which they are not. 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.odntending any change. It is submitted that the company's representation was that the debenture&- were "secured fully convertible" ones. This is also what had been set out in the application for consent. Though the company does claim that the debentures were also fully secured, it is submitted that the emphasis in the issue was that the debentures were fully convertible and secured. We think this explanation is plausible and do not think that any importance or significance need be attached H

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

A to the different description in some places, particularly, in view of our discussion below as to the extent and nature of the security actually provided for the debentures.

(ii) The second contention is that the security offered, on the face of it, falls far short of the face value of the debentures. Sri Ganesh B analysed before us some statements indicating the inadequacy of the security. It was submitted by him that as per page 6 of the prospectus issuing the debentures, after implementation ,of the projects only the following assets would be available with the company:

D The assets of Rs.51.25 crores, mentioned in the balance sheet as at 31.5,88 as per the Auditor's report, are also included in the above because the above figures are of the total assets which would come in existence after implementation of the project. This, according to Shri Ganesh, clearly showed the inadequacy of the security. A E On behalf of RPL, it is submitted that there is no justification to exclude, from the figures of assets shown on p. 6 of the prospectus, items such as technical know-how fees, expatriation fees and engineer· ing fees amounting to Rs.79 crores and preliminary and pre-operative expenses amounting to Rs.138 crores as these are capitalised in the accounts and result in accretion to the value of the company's capital ~~ F assets. The calculation also ignores miscellaneous fixed assets of the value of Rs. 70 crores shown on the page. If these are added, the value of the investment in assets would work out to Rs.629 crores which far exceeds the value of the debentures after the first conversion which comes to Rs.563. 73 crores. This figure of Rs.629 crores takes into account only the investment in assets made out of the borrowed funds and not the future profits and assets acquired therefrom. But, even taking this as the basis, it is clear that, with the escalation in the value · Y of the fixed assets with the passge 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 adcq µate to safeguard the interests of the debenture holders. There is substance in this contention.

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.I 97

(iii) The third loophole, according to the petitioners, is the insecurity created by the terms of ciauses 5 and 6 of the prospectus deal- ing with 'security' and 'borrowings'. Sri Ganesh submits that clauses 5 and 6 severely qualify the rights of the debenture holders under the present issue in several respects.

(a) There is, in their favour, only a residual charge on all or any of the assets of the company at Hazira and other places which shall "rank expressly subject to subservient and subordinate" to all existing and future mortgages, charges and securities as may be hereafter created by the company in any manner whatsoever;

(b) The company need not obtain the consent or concurrence of the debenture holders for creating any such mortgages etc. which will have priority over the present debenture issue or for disposing of any of the assets of the company;

(c) Not only is the residential complex of the company excluded from the purview of the security, it is also open to the company and the trustees of the debenture holders to agree to the exclusion of any of the assets of the company from the purview of the security.

( d) The current assets or the bankers' goods such as stocks, inventories, book debts, receivables, work in progress, finished and semi-finished goods etc. stand excluded from the security. E

(e) Clause 6 again emphasises that the company shall be at liberty to raise any further loans and secure the same in priority to the present security and/or on such terms as to security, ranking or otherwise as may be mutually acceptable to the. company and the trustees of the debenture holders without being required to obtain any further sanction from the debenture holders.

If these clauses are closely perused, Sri Ganesh urges, it will be seen (a) that the charge in favour of the debenture holders has a very poor priority as it can rank subservient to any securities that may be created by the company in future in respect of further borrowings, (b) that the company and debenture trustees, by mutual agreement, c<m take any of the assets of the company outside the purview of the present secu- rity and (c) that the company can create such future securities as have a priority over the present issue or exclude assets from the purview of the security ~ithout the consent or concurrence of the present debenture holders. H

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

We think, as has been urged on behalfofthe company, that these arguments proceed on a mis-apprehension of the true nature and scope of clauses 5 and 6 above as well as of the nature and legal effect of a floating charge-what has been described in this prospectus as a 'residual charge'-that is created at the time of issue of such debentures. In the first place, these clauses are only enabling in nature so as to permit the company, despite the mortgage in favour of depenture holders, to carry on its business normally. It will be appreciated that the company's normal busin"'5s activities would necessarily involve, inter a!ia, alienation of some of the assets of the company from time to time (such as, for example, the sale of the goods manufactured by the company) as well the procurement and discharge of loans and accommodation facilities from banks, financial institu- c tions and others (such as, for example, entering into agreement,s for hire purchase of plant and machinery and making payments of instal- ments towards their price). The entire progress of the company would come to a standstill in the absence of such an enabling provision. Such a provision is not only usual but also essential because the basic idea is that the finances raised by the debentures should be employed for running the project profitably and thereby generating more and more funds and assets which will also be available to the debenture holders. Secondly, we think-and indeed RPL also conceded both in argu- ments as well in an affidavit filed on its behalf by Sri Mohan Ramachandran dated 10th January, 1989-that what the two clauses provide is only that the consent and concurrence of the debenture holders need not be obtained by the company before creating securit:es that may have priority over the present issue and that, under clauses 5 and 6 read harmoniously together, the trustees for the debenture holders have to concur before the company can raise any future borrowings and create therefor a security which will have prio- F rity over the security available to the present debenture holders. The Trustees here are not stooges of the company. The ICICI is not only a financial institution in the public sector but is also one of the institu: tions financing the project and thus having a stake in the success of the project. It can be trusted-to adequately look after the interests of the debenture holders. Thirdly, as has been pointed out by the company, G the misapprehensions of the petitioners are more imaginary than real. The company, in its affidavit, has pointed out that the Debenture Trust Deed dated 7.¹¹.1988, which has since been executed in the present case, contains a provision by which, at the time of creation of any future charge, the terms and conditions a> to rank,ing h3ve to be agreed upon between the RPL and ICICI. Also clause 16 of the H Debenture Trust Deed authorises the debenture trustees to intervene

NARENDRA KUMAR v. U.O.l. [MUKHARJI, J.I 99

and crystallise the charge in their favour, inter alia, in the following A circumstances:

"If the Company sells the Mortgaged Premises or any part thereof not in the ordinary course of business except a sale, transfer or disposition allowed under the terms of these presents to be made with the consent of the Trustees." B (Sub-clause (f))

"If the Company (except as hereinafter expressly pro- vided) creates or attempts or purports to create any charge or mortgage of the Mortgaged Premises or any part of parts thereof prejudicial to the interests of the Debenture- holders." c (Sub-Clause (i))

"If, in the opm1on of the Trustees, the security of the Debentureholders is in jeopardy." (Sub-clause (k)) D

Thus if at any time the company proposes to create such higher- ranking charges, the trustees for debenture holders can stultify the same by taking immediate action. Fourthly, the impression sought to be created by the petitioners that the company may go on creating encumbrances, left and right, to the detriment and prejudice of the present debenture-holders overlooks several restraints imposed on the company in this respect under the Companies Act, the CCI Act, the MRTP Act and involving the consent of public financial institutions. commercial banks, the term lenders, the shareholders, the MRTP Commission, the Central Government and the CCI before the creation of such securities. Lastly, the contention of the petitioners completely overlooks the basic principles underlying the commercial law concept of debentures secured by a floating charge as evolved in British Jurisprudence over the past two hundred years. Clauses like clauses 5 and 6 are usually inserted in debenture issues and the company has drawn our attention to two like instances in certain issues approved in December 1988 and January, 1989. It has also been argued for the company that a fully convertible debenture is not.a debenture at all in the true sense of the term and is more akin to an issue of equity and that, therefore, there is no need that it should be covered by adequate security at all. These aspects of the matter are dealt with by us at some length later; it is sufficient here to say that we are unable to accept the contention that the security in favour of the debenture holders is illu- H

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

A sory and inadequate because of the wide language of clauses (5) and (6) of the prospectus. Both these clauses have to be read together and so read, we have no doubt, do not permit the creation of any charge ranking in priority to the charge created under these debentures save with the consent of the trustees of debenture holders.

B The further argument of Sri Ganesh is that the company law in its application as well as the prospectus, carefuliy skirted round the issue by merely stating that security will be .provided to the satisfaction of the trustees and that this is not very helpful as the debenture holders come into the picture only after the funds have been raised. This argument is untenable. We have already pointed out, there was suf- ficient security as was warranted by the issue. This was an issue of C 12.5% fully secured convertible debentures of Rs.200 each. We have examined the share capital, the present issue and the scheme of con- version. In the premises, it is not possible to accept the submission of Shri Ganesh that the Controller satisfied himself (as stated by him in his affidavit) with the bare statement of the applicant company (RPL) D that security would be created as per the requiremenis of the de_ben- ture trustees. There was this statement that the debenture trustees were well known financial instutitions and they had been entrusted with this obligation. Learned Additional Solicitor General drew our attention to similar debentures and submitted and, in our opinion, rightly that this was the usual practice. It is not possible for the CCI to ensure more than that. ·The prospectus was not misleading to that extent. It, therefore, cannot be accepted that the CCI failed to apply its mind to the documents before him. Reliance was placed on the fact that the RIL had proposed the issue of shares for G-series for more or less identical project. It was contended that if capital issues had once been sanctioned for a project and the issue had been converted for that purpose and then a fresh capital issue could not be applied for or granted for the same purpose. It was urged by Shri Ganesh that the project under those circumstances could not be considered to be a 'new project' within the meaning of para 2(i) of the Guidelines for Issue of Debentures by Public Limited Companies. Secondly, it was urged by Shri Ganesh that the basic object of the Capital Issues (Con- G trol) Act was to ensure .sufficient and fruitful utilisation of capital would be completely defeated if more than one capital issue is permit- y ted for the same project. In this connection, Shri Ganesh referred to the affidavit of the CCI which, according to him, clearly indicated that CCI was specifically aware of the fact that the_scheme of finance for setting up the very same project had been approved in favour of RIL. H Our attention was drawn to the affidavit filed on behalf of the CCI,

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 101

where he had stated at p. 203 of the Paper Book of T.C. No. 164 of A 1988, that by a Press Release dated 15th September, 1984, certain guidelines which the said deponent described as "non-statutory guidelines" for approval of issue of secured convertible and non- convertible debentures. These gujpelines had been subsequently amended by a Press Release dated Sth March, 1985 and these were released on 19th August, 1985 for issue of convertible cumulative pre- B ference shares and also there are guidelines issued by Press Release dated Ist August, 1985 for employees stock option scheme. In accor- dance with -these guidelines, according to the deponent on behalf of the CCI, the consent of the CCI for capital issue for secured fully converti- ble debentures was issued as the projects originally to be established in RIL were pennitted by the Department of Company Affairs to be ~- transferred to RPL and endorsements thereof from RIL to RPL had c J already been filed including, inter alia, for endorsement of the letter of intent for the MEG Project. The scheme· of finance for setting up of three projects namely PVC, HOPE and MEG had already been ap- proved by the Department of Economic Affairs in favour of RIL. In that context, in our opinion, to contend that there was violation of the D guidelines because the RPL's project was not a new project was too narrow and legalistic view. Shri Ganesh tried to urge that the CCI ought to have been aware of the fact that he had sanctioned a capital issue of Rs.400 crores (subsequently enhanced to Rs.500 crores) to RIL for the same project and that the said issue had been implemented and capital of Rs.500 crores had been mopped up from the public by E RIL. The CCI ought to have withheld permission for a fresh capital issue in the name of RPL for the very same project. However, the CCI did not appear to have applied his mind, according to Shri Ganesh. Consent Order, therefore, according to Shri Ganesh, was bad. We are, however, unable to accept this submission. The CCI was not perfonn- ing the role of a social mentor taking into account the purpose of RIL. F If RIL has misutilised any of its funds or the funds had not been utilised for G-series, then RIL would be responsible to its shareholders or to authorities in accordance· with the relevant provisions of the Companies Act, 1956. This aspect does not enter into sanctioning the capital issue for the new project in accordance with the guidelines enumerated hereinbefore. That apart, even if RIL and RPL have to be G 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 the issues, there is no illegality or irregularity in the impugned grant of consent to RPL. As referred to elsewhere, 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 in H

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

A the PTA & LAB projects. Eventually, for reasons adverted to earlier, it was decided to have the MEG, PVC and HDPE projects undertaken by floating RPL, a wholly-owned subsidiary. In the result, even if we look at the projects not as new ones but only as those of the RIL to be implemented by RPL, the additional finances were needed for the extention, expansion and diversification of the projects originally B envisaged. This is one of the objects for which a debenture issue is permissible under the guidelines.

Shri Ganesh then submitted that Guideline No. 3 for the Issue of Debentures by Public Limited Companies laid down that the CCI would consider an application for capital-issue only after the approval of the financial institutions, banks and Government are received. The C statutory application form prescribed by the Capital Issues (Applica- tion for Consent) Rules, 1966 requires, according to Shri Ganesh, that the consent and clearances of the various authorities and institutions should be annexed to the application. Shri Ganesh submitted that in the present case, many of the relevant applications had not even been D filed by RIL and RPL as on 4th July, 1988 when the CCI passed the Consent Order. It was submitted by Shri Ganesh, also by Shri Haksar and especially by Shri Pagaria, that RPL's application had been pro- cessed in unseemly haste and without due and proper application of mind. It is true that things moved speedily in the case.

E This has caused us certain amount of anxiety. Speed is good; haste is bad, and it is always desirable to bear in mind that one should hasten slowly. However, whether in a particular case, there was haste or speed depends upon the objective situation or on overall appraise- ment of the situation. Here, as discussed earlier, the material shows that the details of the proposals have been examined and discussed and F that an examination of the merits has not been a casualty due to the speed with which the application was processed; and especially in view of the fact that no in jury has been caused to the investors and no substantial loss to their securities have been occasioned, we are of the opinion that much cannot be made of this criticism. Learned Addi- tional Solicitor General placed before us other instances where appli- G cations had been sanctioned within shorter times.

Shri Ganesh tried to urge that RIL had declared itself as a promoter of RPL and the prospectus stated that no benefit was being provided to RIL as promotor. But, the entire amount spent by RIL was being reimbursed to it by RPL. In these circumstances, RIL could not be treated differently from the general public in the matter of

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.) 103

allotments of the shares of RPL. However, the scheme of allotment was such that gross discrimination resulted against the general invest- ing public and in favour of RIL. The long-term implications, it was urged by Shri Ganesh, of the said discrimination were highly anomal- ous and unjust for the investing public who had subscribed to the debentures of RPL. However, there had been no application of mind by the CCI, according to Shri Ganesh, to the matter of quantification of the extent of benefits conferred on RIL and consideration of whether the same are justified or not. The CCI, however, had merc1y mentioned in his affidavit that RIL was a promotor and had given an interest free advance of Rs.50 crores to RPL for a period of three years. In our opinion, these factors were sufficient to justify the treat- ment of RIL differently from other investing public and thus the treat- C men! does not amount to any discriminatory benefit to RIL in respect of the debentures of RPL. As a matter of fact, this was a known fact and the shareholders or the subscribing debenture holders would be aware of the same. Shri Ganesh sought to urge that the CCI had not made any attempt to appreciate or quantify the extent of the said benefits and advantages and go into the question whether the same D are fair, reasonable and just. Consequently, for this reason also, there had not been, according to Shri Ganesh, due application of mind by the CCI before the Consent Order was issued. We are unable to accept this criticism.

The discrimination alleged is on two grounds. The first is that E RIL is entitled straightaway to the allotment of shares of the face value of Rs.57.50 crores whereas only 5% of the investment by the debenture-holders can be converted into shares at par simultaneously with the issue. The second is that a loan of Rs.50 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 F converting 20% of their debentures into shares by that time. These allegations do not bear scrutiny. So far as the first ground is concerned, there is no justification for a comparison between these two categories 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 G 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 concerned, it overlooks certain disadvantages attached to RIL in regard to the loan of Rs.50 crores advanced by RIL as compared with the investor in the debentures. Firstly, RIL's advance is interest free H

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

for '.l years whereas the debenture holders get interest at the rate of A 12.5% 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 consitute

B basis for a ground of discrimination. ..,.. I These considerations apart, we would like to observe that we are unable to appreciate how any question of discrimination is at all rele- vant in the present context. It is a company-not the State or a State instrumentality-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 c is no reason why they should not so structure the issue that it confers certain greater advantages and benefits on the existing shareholders or promoters than on the new subscribers to the debentures. We do not think that it is permissible for the CCI to withhold consent only for this reason or to stipulate that consent can be given only if the shareholders D and promoters as well as prospective debenture holders are all treated alike. The subscribers to the debentures 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 "pro- E prietors" of the company.

Shri Pagaria, who appeared in T.C. No. 162/88 in the matter of Shri Radheyshyam Goyal v. Union of India & Ors., where the petitioner was a Chartered Accountant, prefaced his submission by submitting that ours is a sovereign, socialist, secular democratic F republic governed by the Constitution of India. Shri Pagaria drew our attention to Article 19(1)(g) of the Constitution. He submitted that the Capital Issues (Control) Act, 1947 is a pre-constitutional law and the Act was enacted as being expedient to provide for control of issue of capital. Under Article 14 read with Article 38, it was obligatory to ensure that there was no disproportionate wealth. He drew our atten- G tion to MRTP Act and other Acts and also to a large number of decisions to highlight that the directive principles should be imported y for ensuring that the CCI performs his functions for the welfare of the community and to bring about an egalitarian society. That was his first submission and he further submitted that the petitioner was really in a position to come under the Public Interest Litigation propounding the cause of the public. Secondly, he submitted that the concept of com-

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.l 105 •--\ pany being the property of the Board of Directors had undergone a radical change. He submitted that company in a new socio-economic set-up is a social institution having duties and responsibilities towards community for which it functions. According to him, maximisation of

- social welfare should be the legitimate goal of the companies and the shareholders. He, therefore, stated that the CCI should take upon himself a social role and ensure that Capital issues are satisfactorily implemented.

One may perhaps concede that, with the vast expansion in recent ~""l"\. years of the corporate sector and its constant tendency to have recourse to public funds for securing finances for its projects (either by way of share capital or borrowed capital), the scope of the responsibili- }-- ties of the CCI can no longer be as limited as before. It may no longer c be restricted merely to the task of preventing an imbalance of invest- ment in various sectors or the diversion of investment to non-essential projects. The petitioners may perhaps have a point in suggesting that the CCI should be burdened with a duty also to safeguard the interests of the public who are invited to participate in such financing on large scale and at least to satisfy himself that the project for which funds are needed is not in the nature of a "South-sea bubble" and that the volume, terms and conditions of the issue proposed by the company are not such as to constitute a fraud on the public. But we think that ~' the time is not yet ripe for placing on the office of the CCI, as at present constituted, more than a skeltal outline of responsibility in this direction; his shoulders are, as yet, not strong enough to bear such ~ burden. He does not have the time, the staff, the powers of enquiry, -1 the benefit of public hearing, the requisite background, or the economic commercial or financial skill or expertise to so assess the technical, commercial and financial aspects of the projects as to be ~ able to give the public investor a guarantee that he is not being led up the garden path. All that one can say at present is that the parameters of his action have to be found within the four corners of the Act and the guidelines. May be, he can legitimately withhold his consent to a project that is ex facie impracticable (for instance, as was put to the parties in the course of hearing, a project to convert base metal into gold) or a project, which in the present state of finances and scientific G 1 "I' knowledge and progress of our country, is an impossibility-(for example, to have a transport service to the moon). May be, he also can < in a proper case, refuse his consent to a scheme of finance if, ex facie, <'\ .~~- ' .. and without any detailed investigation, he is satisfied, that it is too big for the applicant company to handle, or too risky and onerous to be permitted in public interest. But this is a decision which he will have to H

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

venture upon, on his own responsibility, in patent cases where the nature of the project or the scheme of financing is, on its face, startl- ingly non-feasible, impracticable or risky. He cannot, however, be compelled to withhold consent, or found fault with for having granted consent, in a case such as this, where the proposed project is in a core industrial sector, where there is considerable scope for foreign currency savings and the scheme of financing proposed has been developed in consultation with and scrutinised and approved by, a leading public sector financial institution (which has also agreed to be the trustee for the Debenture-holders). It is too much to suggest that the CCI should be held to have failed in his duty by accepting the opinion of such institutions and not investigating for himself from various angles and in particular, the adequacy of the security offered to the debenture- c holders under the scheme.

While we do appreciate that in the changed atmosphere, the corporate sector, when seeking to attract public moneys while raising new capital must perform both responsible and responsive roles, it is difficult to enjoin that the CCI while considering the question of consent/sanction of the capital issues can fulfil any role beyond the policies prescribed under which, as noticed before, it was enjoined to function. There are other various Acts like the Income-Tax Act, Com- panies Act, MRTP Act to subserve other social objectives which are conducive or ancillary to the directive principles. Nelson, it is reported to have said before the battle of Waterloo, that England expected every man to do his duty. It is well to remember that every authority in a vast developmental society must perform his role keeping in view the part he is expected to play in the background of the whole perspective and should not encroah upon others taking the onus upon himself to do everything. That would lead to chaos and confusion. F Shri Pagaria drew our attention to Section 237 of the Companies Act, 1956. If there was any violation of some of the rights of the parties, they are at liberty to proceed in accordance with law. It was contended that it was an admitted position that RPL is a newly established company though initially financed by RIL. No ceiling had ·a been put on the allotment of the shares to the business associates of Directors whereas at item 5 page 2 of the Consent Order dated 4th July, 1988, the limit of the shares for the employees of the RPL had been reduced from 200 to only 50, thereby, according to Shri Pagaria, depriving the employees having large shareholding in the company which discriminated them vis-a-vis the business associates, for whom H no such ceiling had been kept.

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 107

We find the factual position to be this. The application for con- A sent to the issue had not specifically earmarked any portion of the issue to the employees of RPL and RIL. In the course of the discussion with the CCI, it was suggested that 12,90,000 debentures should be offered by way of preferential allotment to the employees of the RIL and RPL. Para 5 of the consent order by the CCI conveyed the approval by the Central Government under proviso to rule 19(2)(6) of B the Securities Contracts (Regulation) Rules, 1957 "subject to the con- dition that the allotment to the employees shall not exceed 200 shares per individual". The Company by its letter of 7th July pointed out that "shares" in the above para was a mistake for "debentures" and also suggested that a maximum of 200 debentures-which on first con- version would become 200 shares-be allotted to each of the employees of RPL as well as RIL. The CCI, however, modified Para 5 C by his letter of the 19th July, 1988 to say that allotment to the employees shall not exceed 50 debentures per individual. In this con- text, it does not appear that the restriction of the allotment to the employees was at the instance of the company nor does it seem that any discrimination was intended in respect of the allotments to the employees. Nor has our attention been invited to any legal require- ment or guidelines prescribing any fixed or minimum quota of allot- ment to the employees of the company. We are, therefore, unable to ,,J-... see any discrimination. In any case, the petitioner in this case has no cause for grievance on that score. E It was submitted that the Consent Order suffered from arbitra- riness, ma/a fides, unprecedented hurry and with extraneous consi- derations. We are unable to see any such discrimination. It was submitted that the Consent Order hacj been passed without. satisfying j that the pre-requisite condition of the various clearances and no objec- '- tion certificates and licences under MRTP Act, FERA Act and F Petroleum Act and the Essential Commodities Act, Securities Con- tract (Regulation) Act, Companies Act, and other allied laws had been fulfilled. The CCI has given consent for 12.5% secured redeemable convertible debentures of Rs.200 each for cash at par to the public. This nomenclautre has not been changed, but in the prospectus, fully convertible debentures have been shown. According to Shri Pagaria, G the most important is the concentration of wealth in the hands of Ambani family and this aspect has not been considered in granting the consent, which according to him, resulted in violation of Article 39(b) & ( c) of the Constitution oflndia and section 22(1) of the MRTP Act. It was submitted that the consent could not be given in favour of any applicant or company, who had no valid industrial licence nor it pas- H

' 108 SUPREME COURT REPORTS [1989] 3 S.C.R. ti

A sessed the letter of intent under the provisions of Industries (Develop- 'r ment and Regulation) Act, 1951. It was submitted that the CCI did not give judicial consideration to the application as in this connection reliance was placed on the decision of the Gujarat High Court in Navjivan Mills Co. Ltd. Kaloi, v. In re. Kohinoor Mills Co. Ltd. Bombay, [1972] 42 Co. Cases 265. Some passages of Halsbury's B Statutes of England, 4th edn., vol. 8, were referred. It was submitted ''f" that the Directors who had received money without disclosing full facts were bound to refund the same and were constructive trustees of the company. This proposition, in our opinion, is irrelevant in the present ~ context. Shri Pagaria sought to urge that RIL management had passed ._r· an ultra vires resolution in transferring the industrial licence and letter \ of intent to RPL and for that act, the office bearers were personally ) c liable and he referred to certain decisions. Shri Pagaria also submitted ~ that by advertisement on Television, radio and print media under the caption "Your Family Khazana", without first creating a solid and viable security for the fully paid convertible debentures under the I D impugned invalid consent order, the application money had been raised to the tune of more than Rs.1,200 crores. According to him. the advertisement given was not only violative of section 5RA of the ('0111- I panies Act but also contrary to provisions of Security Contract (Regu- lation) Act, 1956 and Rules made thereunder. Shri Pagaria then sub- mitted that in view of what he described as improper or insufficient . .-l. i security, no consent could have been granted and even if the issue was over-subscribed, the money was repayable to the persons who had subscribed to the issue on the basis of the promises and they were entitled not only to the refund of the money but to all benefits by way of interest, etc. He drew our attention to certain decisions, which in our opinion, are irrelevant. H~ submitted that the people have a right to know and this right had been violated by n<>t telling the people the _}.- F full facts. It was submitted that RPL did not place any material before the Central Government to justify the consent. We are unable to accept this submission. It was next submitted that the guidelines were man- datory. It was next contended by Shri Pagaria that there was non- disclosure of true and correct facts not only in respect of the interest of Directors of RIL in the RPL properties but also the security and with regard to the approval of the financial scheme under MRTP Act, the licence under the Petroleum Act, Explosive Act, etc., Shri Pagaria has y referred to the requirements under a large number of enactments and contended that, until requisite consents, approvals, licences etc. are I obtained under the said enactments, the Company cannot be permit- ted to raise public finances for the projects on hand. In this context, he referred, in addition to the provisions of the Companies Act, the

NARENDRA KUMAR v. U.0.1. !MUKHARJI, J.! 109 , -~ MRTP Act, CCI Act, rules and guidelines, and the Industries A (Development & Regulation) Act which have been considered by us, to certain provisions of the Petroleum Act, 1934 (and rules and orders made thereunder); Explosives Act (and rules made thereunder); Essential Commodities Act, Atomic Energy Act; Insecticide Act; Air (Prevention and Control of) Pollution Act, 1981; Indian Standards ~ Institution Certification (Marks) Act, 1952 (and rules and regulations B thereunder); Foreign Exchange Regulation Act, 1973; Interest Act, 1978; Securities Regulation Act and Dowry Prohibition Act, 1961. We "(. ·? have gone through these provisions. They relate to various types of controls and regulations which have to be observed in the actual run- ning of various types of business. We are satisfied that neither these \..... statutes nor those regulating the grant of consent to the issue of shares C r- and debentures intend that clearances thereunder should all be obtained before filing an application for consent. In our considered view, such requirement is neither practical nor feasible and is not envisaged by the statutes referred to. Some of the contentions of Sri Pagaria alleging misleading statements made by the Company to attract investments, such as the one based on the Dowry Prohibition D Act and the description of the issue as the "Family Khazana'', are far-fetched and unrealistic besides being irrelevant to the issue to be considered at the stage of consent for the issue by the CCI.

Sri Pagaria then submitted that the grant of consent was without lawful authority and on extraneous considerations. He referred to cer- E .: tain decisions in support of that broad proposition. If the basis of his submission was correct, undoubtely, the consent was bad but we do not find any merit in the submission. The next submission by Shri ; Pagaria was that the issue had been made public subject to the injunc- _,,). tive relief granted by this Court on 19th August, 1988 without entering '- into the merits of the case and it was submitted that RPL did not F possess any industrial licence or letter of indent and whatever licence it had, had expired. This position is not factually correct as noted before. It was submitted that there had been violation of several laws. No particular violation had been indicated. Furthermore, it was submitted that the Industries (Development & Regulation) Act, 1951, Com- panies Act, 1956, Capital Issues (Control) Act, 1947, MRTP Act, G '<- 1969, FERA, 1973 have to be read in conjunction and as such tile corporate sector should not be permitted to accumulate wealth on account of favour from the Government. The factual position being as indicated before, it is not possible to entertain these bald submissions.

On behalf of the CCI, it was submitted that the contention that H

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

the CCI had not followed his own guidelines relating to the sanction of A the issue is misconceived. It was further submitted that the security for debentures had been properly there. It was submitted that the follow- ing facts would establish that there had been no breach of duty or obligation cast on the CCI either under the Act or under the Guidelines or under Capital Issues (Application for Consent) Rules. B The relevant guidelines for consideration of this question are as follows:

(a) Guidelines for Issue of Debentures by Public Limited Companies-Press Release 1984.

4. DEBT-EQUITY RATIO: The debt-equity ratio shall not c normally exceed 2: I. For this purpose 'debt' will mean all term loans, debentures and bonds with an initial maturity period of five years or more including interest accrued thereon. It also includes all deferred payment liabilities but it does not include short-term bank borrowings and advances, unsecured deposit or loans for the public, sharesholders and employees, and unsecured loans or deposits from others. 'Equity' would mean paid up share capital including preference capital and free reserves.

Guideline No. 11 is also instructive. The Press Release also was )._ referred to. The trustees to the debenture holders were enjoined to supervise the implementation of the conditions regarding creation of the security of the debentures.

It was, therefore, submitted that the trustees of the debenture issue who were to supervise the implementation of the conditions regarding \ the creation of security, were vested with the requisite powers for )-. F protecting the interest of debenture holders. Before formulating the guidelines for protection of the interest of debenture holders consider- able deliberations took place between the concerned departments in the Ministry and between the Public financial institutions, investment institutions, Department of Banking and CCI and Reserve Bank of India as a large quantum of debentures were coming to the period of maturity in 1989 onwards and redemption and a need was felt to pro- tect the interest of debenture holders so that no defaults endanger )-' their interests. Consequently, the question of debenture redemption reserve and the security creation was examined by the financial institu- tions and the scheme with debenture trustees was formulated with sufficient degree of precision and urgency. The debenture trustees are normallv public financial institutions and nationalised banks. Public

NARENDRA KUMAR v. U.0.1. (MUKHARJI, J.] 111

financial institutions have the necessary expertise and infrastructure to examine the aspects of security creation and the quality of the security offered for protecting the interest of debenture holders. The original guidelines of 14th January, 1987 were continuously being monitored by the CCI and on 25th June, 1987, a further clarificatory guideline was published on the concept of security to be offered for the debentures. In the present case, the application <lated 4th May, 1988 B as filed by the RPL with the CCI categorically mentioned that "the security will be in such form and manner as required by the trustees for debenture holders". These requireO\ents are contained in Part V(E): Particulars of Issues-Particulars of Preference Shares and Deben- tures-( e) indicate the security to be offered in the case of debentures. It is in these circumstances that it was not necessary for the CCI to evaluate the security or the adequacy thereof at the stage of grant of consent. The CCI did examine the proposal with reference to the debenture residual value beyond the fifth year of its allotment and in relation to the asset creation and take on record prior to grant of consent the project estimations and cash flows statements of the ICICI for the years 1989 to 1996 which had looked into the projects and also D examined the question of creation of security and asset creation for RPL in relation to the issue for three projec.ts. It was further submitted that as per this statement, the debt service coverage ratio was 1.89 in 1991 and going upto 2.55 in 1995. It was therefore inaccurate to say that the CCI had not satisfied himself on the matter of security or had

- failed to apply his mind to documents before him. It is further stated on behalf of the CCI that the CCI consented to the proposal of RIL for 'G' series for projects including PTA, LAB, MEG and HOPE and also for working capital requirement in November, 1986 and not merely for MEG and HOPE as alleged by the petitioner. During the implementa- E

~'- tion of projects, there was cost overrun for PTA and LAB which was taken due note of by ICICI in December, 1987 and CCI was informed F of this cost overrun in 1987 itself by ICICI. Major part of 'G' Series was utilised for PTA and LAB, CCI was also aware of this cost over- run through the proposal of the company to MRTP Commission much prior to granting consent to RPL as CCI is represented in the process of approval for MRTP. CCI's office was informed by ICICI of likely deployment of 'G' Series funds for projects other than MEG and G HDPE much prior to the grant of consent to RPL. It was submitted that RIL had received approval to its modified scheme on 17th May, 1988 for its LAB project and on 13th July, 1988 for its PTA Project. However, these formal communications were preceded by the aware- ness of the CCI in regard to cost overruns in PTA and LAB projects and consequently the non-implementation of MEG and HDPE. H

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

~·· Learned Additional Solicitor General, therefore, submitted that it was incorrect to state that the CCI granted consent for issue of debentures for financing the projects of RPL which were already given financing facilities earlier against the 'G' Series debentures. It was submitted that since the projects of MEG and HDPE were not implemented in RIL and were now being implemented in RPL, for the first time these were 'new projects' within the meaning of paragraph 2(aJ of the guidelines dated 15th September, 1984. Therefore, it is incorrect to say that more than one capital issue was permitted by the CCI to finance the same project. It is clear, acqirding to learned Additional Solicitor General, that CCI satisfied himself before granting the consent on 4th July, 1988 to RPL, that the capital raised by RIL was not used for HD PE and MEG and the scheme of finance for the G-Series of RIL, C as modified, and for the present issue of RPL were different. It was denied that the CCI ought to have withheld permission for a fresh issue of capital in RPL for HDPE and MEG, especially since these two projects were not permitted. It was submitted on behalf of the CCI that there was no bar for receiving finance for either a cost overrun, or for an unimplemented portion of a project. It is a fact that the MEG and HDPE projects had not been implemented in RIL and they were now being implemented only in RPL It is further submitted on behalf of the CCI that the public financial institution, namely, ICICI looked into the project and reported to the CCI, in their letter dated 15th June, 1988 that the estimated cost of projects for which the consent was being sought was Rs.650 crores. The consent order of the CCI clearly indicated that the consent conveyed in the letter shall lapse on ;; the expiry of 12 months from the date thereof. The consent order further categorically stated that the approval was without prejudice to any other approval/permission that might be required to be obtained under any other Acts and laws in force. It necessarily therefore followed that the obligation to obtain other permissions continued. There was no legal condition that other approvals should be examined by the CCI before grant of its own consent. This was submitted on behalf of the CCI and there is substance in the submission. In the application form prescribed in Schedule A of the Capital Issues (Applications for Consent) Rules, 1956-other than the Bonus shares, the indications are only directory and not mandatory requirements. The words used are "normally insisted". Therefore, it does not pre- clude the CCI from granting its consent before the grant of other approvals. Through a chart, it was highlighted before us that there was no undue haste and it is the normal time taken in respect of others also. It is further stated that the statutory information clearly indicated that no amount had been paid or given to the companies promotors or

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 113 -~ officers or offered to them. The prospectus and the terms and condi- tions were not approved by the CCI at the time of granting of consent. A No discrimination had been practised against the existing shareholders of RIL, while according consent to RPL. The proposal of the 8th June, 1988, as submitted by RPL to the CCI, sought approval for equity participation to the extent of Rs.50 crores only. This Rs.50 crores was """I( by way of unsecured interest-free deposit to be converted at the end of B the 36 months into equity shares at par. This substantial addition to the promoter's contribution was to ensure an enhanced participation in the project and to ensure its stake. The Petrochemical Industry has a

, long gestation period for yielding high profits. The convertible debentures have a fixed return as contrasted to equity participation which might earn a flexible dividend. In the initial period, no dividend might be earned. The CCI therefore applied its mind while evaluating this aspect since a sum of Rs.50 crores was to be non-interest bearing and unsecured whilst computing the position on the debt-equity-ratio. c

The enhanced contribution sought from the promoter was a condition imposed on them. The long term implications and the balance capital structure of the company were placed for consideration of the CCI D through the cash flow analysis of ICICI and the CCI applied its mind to the scheme of financing and correctly granted the consent order on relevant considerations. So far as the grievance of alleged discrimina- A tion is concerned, it arises from the petitioner's assumption of the possible capital appreciation of equity shares of RIL at the second conversion which might be at a premium, if any, at the time of such E conversion. It was submitted on behalf of the CCI that CCI had im- posed a condition that any conversion would be at a premium, if any, as might be decided by the CCI's office, at the time of such conversion. It was further submitted that the computation of premium depends on several factors, such as the net worth of the company, the performance .J., of the company, the profit earning capacity value of the company, etc. F Since RPL was in the Petrochemical sector, which had ordinarily the gestation period, at the time of grant of the consent, it was not possible for the CCI to forecast or estimate the rate of conversion on the second and the third stage and advisedly the CCI reserved to itself the right to determine this premium on factual data available at the time of conversion. Therefore, this cannot be said to be bad. The convertible G ""{ - debentures would receive interest @ 12.5% on the sum of Rs.190 f3 ! .5% interest would accrue on this amount). It was, therefore, not necessary for the CCI to quantify the extent of benefits and advantages before grant of consent and had to enter into computation for evaluat- ing this. Naturally, the RIL, as a promoter, stood on a different foot- ing and there were rational intelligible critera distinguishing general H

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

members of the public from a promoter proposing the capital issue and ) A the establishment of new projects. It was further relevant to notice, it was submitted, that RPL was a 100 per cent subsidiary company of RIL at the time of its conversion and even presently a proposal for a capital issue would have sought that the entire issue of capital be allotted to itself. The CCI had the option to grant the consent in terms B of the application or to impose such conditions as were necessary for the balanced capital structure of the company. The consent, it was submitted, could not be evaluated in hindsight, after the issue was closed and subscribed.

It was asserted that today RIL is the third largest industrial house in India. It was stated that the present portfolio of RIL spreads over c 2.5 million sharesholders/debenture holders/deposit holders. Till date, it has made 7 debentures issues besides making three equity share capital issues (rights) and 2 bonus shares issue. All the debentures issues were at a premium and over-subscribed. E-Series partly-con- vertible debentures of Rs.80 crores were issued in 1984-85. F-series D non-convertible debentures of Rs.270 crores were issued in 1985-86. G-Series fully-convertible debentures for Rs.500 crores were issued in 1986-87. According to the respondent, the investment in RIL, during this period has proved to be consistently and remarkably profitable to investors. The RIL commenced business in the year 1966 for the manufacture of synthetic cloth made from synthetic yarn and fibre. E Their factory was commenced and installed m the vicinity of Ahmedabad at Naroda. In order to manufacture synthetic fabric, the company was importing polyester filament yarn and polyester staple fibre and re-exporting fabrics produced from the same. It was one of the recognised export houses doing business in textiles. In the year 1977, Reliance Textile Industries merged with a company, Minylon F Ltd. and, after the merger, changed its name back to Reliance Textile Industries Ltd. Its traditional line of business was manufacturing of synthetic fabrics. However since 1977, through several capital issues, (both of debentures and of equity) it has diversified and backward- integrated. In the first instance, the company decided to instal a plant for the manufacture of polyester staple fibre and polyester staple yarn which item it was previously importing for manufacturing synthetic fabrics. These plants were established at Patalganga in the State of Maharashtra. Thereafter, the company decided to further backward integrate and to manufacture PTA (Purified Teriphthalic Acid) which is one of the raw materials used in the manufacture of polyester fila- ment yarn/polyester staple fibre. Simultaneously, it also diversified horizontally into the manufacture of Linear Aklyl Benzene {LAB)

NARENDRA KUMAR v. U.0.1. [MUKHARJ!, J.J 115

used in the manufacture of detergents, as this product could also be manufactured from the petrochemical downstream products in which the company was engaged.

RIL's 3rd stage of backward-integration involved, it was asser- ted, in the manufacture of Mono Ethylene Glycol (MEG), used in the ll( manufacture of polyester staple fibre and polyester staple yarn. It also B ' decided to diversify into the manufacture of critically scarce plastic raw materials like High Density Polyethylene (HDPE), Poly Vinyl Chloride (PVC) and Mono Ethylene Glycol (MEG) a polyester raw material used in the manufacture of polyester fibre, etc. The company had also applied for Gas Cracker Project, which is said to have been cleared recently, whereby (natural) gas oil would be cracked to pro- duce ethylene and other petrochemicals. Thus right from the Naphtha c stage to the yarn fibre and fabric stage, the company has attempted the complete range of products necessary for the manufacture of fabrics from the raw material namely, natural gas.

Hazira has been selected with special reference to the availability of natural gas oil from South Sea Basin and it is country's first ethylene handling port and has economies of transportation and terminal faci- lity at Hazira etc. It is not necessary to set out however how the company developed in different stages. The application for consent was filed on 4th May, 1988 as mentioned hereinbefore. The licence and letter of intent were endorsed in favour of the RIL and the scheme for finance in favour of the RPL.

Both Shri Baig and Shri Salve, appearing for the respondents 3 and 4, gave us the factual background of the business of the RPL. It is not necessary to set out these in greater detail than what has been mentioned hereinbefore. It is further submitted by both that the CCI F had examined the nature and quantum of security in cases of the debentures. It was submitted that the·submission of Shri Ganesh that the security was inadequate was wrong. It was submitted that clauses ( 5) and (6) of the Prospectus read together indicate how the power has been exercised. These clauses visualise the creation of a residual or floating charge on all or any of the movable or immovable assets and G ''{ properties of RPL at Hazira and/or at any other location. These further postulate future charge, superior in priority, might be created by RPL. Future charges might be created without. the consent or con- currence of the debenture holders. Nor was their consent required for purposes of dealing with the assets and properties of the company. It was submitted that the following properties are excluded from charge, H namely,

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

(a) Residential complex at Hazira or at any other location. A (b) Current assets or Banker's goods.

(c) Any other property that might be specifically excluded by agreement with the trustees. B Future charges might be created on such tenns regarding rank- ing, etc. as might be agreed to by the trustees. It was submitted that whereas clause (5) essentially visualised creation of a floating charge in favour of debenture-holders, without any restrictions or limitation. clause (6) incorporated a limitation and a safeguard that controls the normal characteristics of floating charge. c It has to be borne in mind that convertible debenture is a new type of instrument introduced in this case and these appear to have caught the imagination of the investors. It has been asserted before us that subsequent to RPL issue, others have also gone for this type of project. Our attention was drawn to rule 2(b)(x) of the Companies (Acceptance of deposits) Rules, 1975 which provided clearly that a convertible debenture was not to be included in the definition of debenture. It was further asserted that the security visualised in clauses (5) and (6) of the Prospectus was one which was prevalent and ~. • customary in corporate practice and was regarded as valid and adequate. Nothing contrary to this was indicated before us.

Our attention was drawn to Sec. 2(12) of the Companies Act under which a debenture need not be secured at all. In that light the guidelines should be interpreted. Therefore, it was submitted, Guideline 10, reasonably interpreted, means that such security should ,i. F be provided as is customarily adopted in corporate practice in the matter of issuing debentures. It has to be borne in mind that the debentures issued in the present case are compulsorily convertible. Therefore, no repayment of principal is really involved. The question of security becomes relevant for the purpose of payment of interest on these debentures and the payment of principal only in the unlikely G event of winding up. The debentures need not necessarily be secured. Guidelines do not provide for quantum and nature of the security. A 'y debenture has been defined to mean essentially as an acknowledgement of debt, with a commitment to repay the principal with interest (Palmer's Company Law; p. 672; 24th Edition). Reference, in this connection, may be made to The British India Steam Navigation Co. v. H The Commissioner of Inland Revenue, [1881] 7 QBD 165; at pages 172

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 117

and 173. A debenture may contain charge only on a part of the assets of the company R~. Colonial Trusts Corporation, [1879] (15) Ch. 465 A or it may not contain any charge on any of its assets (See Speyer Brothers v. The Commissioner of Inland Revenue, [1907] 1KB246 and Lemon v. Austin Friars Investment Trust Ltd., [1926] (1) Ch. 15. A debenture may, therefore, be secured or unsecured (Palmer's Com- pany Law; p. 675; 24th Edition). An ordinary debenture has to be distinguished from a 'mortgage debenture' which necessarily creates a mortgage on the assets of a company (See Palmer's Company Law p. 706). A compulsorily convertible debenture does not postulate any repayment of the principal. Therefore, it does not constitute a 'debenture' in its classic sense. Even a debenture, which is only con- vertible at option has been regarded a 'hybrid' debenture by >-- \ Palmer's Company Law (Para 44.07 at page 676). In this connection, reference may be made to the guidelines for the "Protection of Debenture Holders" issued on the 14th January, 1987 which have recognised the basic distinction between a convertible and a non- convertible debenture. It is apparent that these were issued for the purpose of ensuring the serviceability and repayment of debentures on time. It has been asserted before us that the compulsorily convertible debentures in corporate practice was adopted in India some time after the year 1984. Wherever the concept of compulsorily convertible debentures is involved, the guidelines treat these as "equity". This is clear from Guideline IV(i) read with IV (iii) of the Guidelines for Issue of Cumulative Convertible Preference Shares and Guidelines E No. 8 and 11 of the Employees Stock Option Guidelines. These two sets of Guidelines clearly indicate that any instrument which is com- pulsorily convertible into shares, is regarded as an "equity" and not as a loan or debt. Even a non-convertible debenture need not be always secured. In fact, modern tendency is to raise loan by unsecured stock, which does not create any charge on the assets of the Company (The F Encyclopaedia of Forms and Precedents; 4th Edn. Vol. 6 para 17 at pages 1094, 1095 and para 22 at pages 1097-98). Whenever, however, a security is created, it is invariably in the form of a floating charge (See· The Encyclopaedia of Forms and Precedents, 4th Edn., Vol. 6 Para 25 at page 1099). It follows, therefore, that the secured debenture almost invariably c:mtains a floating charge. In addition to the floating G charge, debentures are frequently secured by trust deed also as had happened in the present case where specific property, land, etc. has been mortgaged to trustees.