NARENDRA KUMAR MAHESHWARI v. UNION OF INDIA & ORS.

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.

Shri Ganesh made a submission that under clause (5) of the Prospectus, the company could deal with its assets and properties with- H

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

A out the permission of debenture-holders or debenture trustees and . it could create future charges which would rank superior in prio- that . nty. The concept of floating charge was. invented by the Victorian Lawyers only because of its special advantages inasmuch as it leaves a company free to deal with its assets in the ordinary course of business B and does not require the permission of debenture-holders or deben- ture trustees for dealing with them or creating further charges. It has been p-ointed out that the business of a corporation would be paralysed if it could not deal with its assets and create future charges, ranking superior in priority, and if it would have to obtain the permission of the debenture holders for doing so. (See the discussion in Palmer's Company Law; page 709 and 682) (See also the observations in Re. C Florence Land & Public Works Co., [1878] 10 Ch. 530; Re. Colonial Trust Corporation, (supra). In fact, in Re. Florence Land's case (supra), the Court observed that if the companies were not allowed to resort to floating charge, they would have to call the meeting of existing charge holders/debenture holders each time they intend to create future charge. The decision in Re. Panama, New Zealand, and D Australian Royal Mail Co., as indicated in Palmer's Company Law at page 708 is a landmark because it established the validity and the utility of a floating charge. In the instant case, if the permission of the debenture holders were required or is insisted upon to create future security, 2.5 million debenture holders would have to be informed and invited for meeting. The extravagant effects of this course would be E colossal especially when a shareholders' meeting is also additionally called for the same body of persons. It is, therefore, incorrect to say that a floating charge creates an illusory charge because future securities can be created ranking in priority over it. The legal position is that a floating charge creates a present equitable right in favour of the debenture holders/trustees. It creates a present charge in the pro- F perty/undertaking of a company even before the time of payment of the debenture arrives. The fact is that a company can deal with its property without the permission of debenture holders/trustees, before crystallisation by resorting to a floating charge on the undertaking (See the observations in this connection in Re. Florence Land's case (supra); Re. Standard Manufacturing Co., [1891] !Ch. 627; Re. Borax G Foster v. Borax Co., [1901] 1 Ch. 326 and Creatnor Maritime Co. Ltd. v. Irish Marine Management Ltd., [1978] 1 WLR 966. This however y does not mean that the company can keep on creating future charges with superior ranking without any Jet or hindrance because the de- benture holders/trustees can any time move to crystallise the floating security if they felt that the security is in jeopardy. H

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.l 119

-( In the present case, there is no case to suggest or believe that A ICICI (which is one of the most important national Government finan- cial institutions), will not act effectively and promptly to ensure that the security in favour of the debenture-holders is not rendered illusory. Even Guidelines dated 14th January, 1987, has cast the responsibility of supervising, creating, monitoring and implementation of security in favour of debenture-trustees. The company cannot B normally create a general floating charge ranking in priority to or pari passu with a prior floating charge unless the prior floating charge itself permits such a course. In this connection, reference may be made to tbe observations in The Encyclopaedia of Forms and Precedents, 4th Edn., Vol. 6 para 27 at pages !102-1103.

It, therefore, follows that: c (i) A debenture is usually secured by floating charge only.

(ii) ·A company which creates floating charge has a right to create future security which may rank superior in ranking. D

(iii) However, this right of the company may be restricted by agreement.

(iv) Where no restriction is provided, any future specific charge will rank superior to the earlier floating charge (Section E 123 of the Companies Act)

(v) Again, where no specific provlSlon is made in the earlier floating charge with respect to ihe ranking of future float- ing charge then any future floating charge will be inferior to the earlier floating charge. ln this connection, reference may be made to sec. 48 of the Transfer of Property Act. The risk of floating charges can be controlled by creating legal n1ortgage in favour of debenture trustees as has been explained in "All About Debentures" bv Sen & Chandreashekhar (pp. 66-67 ).

In the present case, a legal mortgage has been created by RPL in favour of the trustees in respect of its immovable and movable assets. except book debts, in respect of which financial institutions will hold a first charge on account of foreign loan. In the present case, RPL does not have any existing loans. Therefore, the 'charge in favour of the debenture holders is preseqtly the first charge. No future borrowing is contemplated at this stage except the foreign currency loan to the H

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

extent of Rs. 84 crores. Therefore, the submission that the security is ) A illusory cannot be accepted and the CCI is right that the apprehension is based on factually unsound and unfounded grounds. Even if the value of the foreign currency which has been sanctioned in principle by the three financial institutions, is taken into account, the assets cover-

• age goes down at each stage and does not make any critical difference B to the value of the security of the debenture-holders under the Trust Deed. The purposes of borrowings, namely, term-loan borrowings, deferred payment credits/guarantees and borrowing for financing new projects do not, on analysis, raise any difficulty. There are sufficient in-built checks and controls. The company, being an MRTP company !"' .. would have to obtain both MRTP permission for creating any security irrespective of its value and fresh CCI consent under the CCI Act, c except in case of exempted securities. Therefore, in our opinion, this -"'{ submission is really in the nature of a red-herring. It was submitted that we should at least direct that the future security should not rank superior to the floating charge in favour of the exi~ting debentures holders. D Having regard to the factors which the investors should have taken into CQnsideration, we are of the opinion that all relevant factors were borne in mind by the CCI. There is no substance also in the ground of discrimination. It is reiterated that Article 14 of the Con- 1 stitution does not forbid reasonable classification. RIL is a promoter E company. It had conceived the projects, got them sanctioned and in· vested huge amounts of time and money in the process. It was open to RIL to undertake these projects on its own and not to make any public issue at all. The ground that there was non-application of mind be· cause the CCI did not take into consideration the issue of G-Series is also without substance. Under Guideline 2(a) of the Guidelines of 1984, capital could be raised only for setting up of new project. MEG, _.. F it was submitted, was not a new project for capital had been raised for it by RIL under G-Series. It was further submitted that the Controller did not ask RPL to get the bankers prior clearance certificate under Guideline II(v) of the Guidelines of January 14, 1987. Finally, the CCI did not take note of the fact that the application under Schedule I of G Rule III of the Capital Issues (Application for Consent) Rules did not contain the relevant information. The position of cost over-run has y been explained. So there was no substance in the submission that it was not a new project. Secondly, it cannot be accepted that the CCI did not insist the bankers prior clearance certificate. These guidelines apply to "non-convertible debentures" or "partly convertible deben- H tures". These do not apply to "compulsorily convertible debentures".

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.l 121

Even assuming that these are applied to "compulsorily convertible debentures", there was no need for the CCI to ask for the bapkers prior clearance certificate because RPL was not is~uing any new set of debentures. All requisite information had been furnished.

Shri Ganesh as well as Shri Pagaria tried to submit that in order 4( to protect the investors, a function, which they submitted, the CCI, in changed circumstances, should determine whether the project is pro- fitable. Where a project has been appraised by an institution lik ~

t ICICI, the Controller can safely assume that it is profitable and he _need not engage in separate independent exercise of his own in this regard. The scope and nature of the Controller's powers and jurisdic- L tion have to be determined in the light of the specific provisions of the r-· CCI Act, its history, the debates, to which we have referred, the c capital structure of the national economy and its over all direction, in · higher priorities, are decided by the Government and the Planning Commission by formulating Fi11e Year Plans. However, the capital structure and the direction of a particular industry-is deCided in terms of the provisions of !DR Act. That a particular industrial house may become a monopoly or otherwise have a restrictive and detrimental effect on the economy of the country, is the concern of MRTP Act. Therefore, the scope of the CCI under the Act is of a limited nature , .J... and must be kept in its proper perspective. It is true that he cannot, as was contended on behalf of the petitioner, be oblivious of the fact that small scale investors are coming into operation and there is a social obligation of the State to provide safe guidelines. Yet, each authority must circumscribe its- work in the proper light. Unless, therefore, CCI acts perversely, irrationally or with procedural impropriety, his deci- .- sions cannot and should not be faulted on the ground that other conse- .J~ quences might follow. Of course, no other consequences have been indicated before us. F

As a matter of fact, there was no allegation that the CCI acted ma/a fide or on extraneous considerations. The CCI applied its mind to the facts of this case_ and the factors in general. There was no undue haste. A statement was produced indicating that the application for grant of consent had been disposed after some time, but within the G ··Ii.(" time frame in which such applications are normally disposed of.

It may, however, be stated that being not statutory in character, these guidelines are not enforceable. See the observations of this Court in Fernandez v. State of Mysore, [1967] 3 SCR 636: Also see R. Abdullah Rowther v. State Transport, etc., AIR 1959 SC 896; Dy. H

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

A Asst. Iron & Steel Controller v. Manekchand Proprietor, [1972] 3 SCR ) l; Andhra Industrial Work v. CCI & E, [1975] 1 SCR 321; K.M. Shanmugham v. S.R. V.S. Pvt. Ltd., [1964] 1SCR809). A policy is not law. A statement of policy is not a prescription of binding criterion. In this connection, reference may be made to the observations of Sai;nata investments Ltd. v. Norwich Corpn., [1971] 2 QB 614 and p. 626. Also B the observations in British Oxygen Co. v. Board of Trade, [1971] AC )

610. See also Foulkes' Administrative Law, 6th Ed. at page 181-184. In Ex. P. Khan, [1981] 1 All E.R. page 40, the court held that a circular or self made rule can become enforceable on the application of persons if it was shown that it had created legitimate expectation in their minds--.;1 that the authority would abi!ie by such a policy/guideline. However, · 1 C the doctrine of legitimate expectation applies only when a person had . _J. been given reason to believe that the State will abide by the certain · ' policy or guideline on the basis of which such applicant might have been led to take certain actions. This doctrine is akin to the doctrine of promissory estoppel. See also the observations of Lord Wilberforce in /RC v. National Federation, [1982] AC 617). However, it has to be borne in mind that the guidelines on which the petitioners have relied are not statutory in character. These guidelines are not judicially enforceable. The competent authority might depart from these guidelines where the proper exercise of his discretion so warrants. In l the present case, the statute provided that rules can be made by the .· Central Government only. Furthermore, according to Section 6(2) of the Act, the competent authority has the power and jurisdiction to condone any deviation from even the statutory requirements pres- cribed under Sections 3 and 4 of the Act. In Regina v. Preston Supplementary, [1975] 1 WLR p. 624 at p. 631, it had been held that the Act should be administered with as little technicality as possible. Judicial review of these matters, though can always be made where ~- F there was arbitrariness and ma/a fide and where the purpose of an authority in exercising its statutory power and that of legislature in conferring the powers are demonstrably at variance, should be exercised cautiously and soberly.

We would also like to refer to one more asirect of the enforcea- G bility of the guidelines by persons in the position of the petitioners in these cases. Guidelines are issued by Governments and statutory ·,> authorities in various types of situations. Where such guidelines are intended to clarify or implement the conditions and requirements pre- cedent to the exercise of certain rights conferred in favour of citizens or persons and a deviation therefrom directly affects the rights so vested the persons whose rights are affected have a clear right to

NARENDRA KUMAR v. U.0.1. IMUKHARJI, J.] 123 -~ approach the court for relief. Sometimes guidelines control the choice of persons competing with one another for the grant of benefits larges- ses or favours and, if the guidelines are departed from without rhyme or reason, an arbitrary discrimination may result which may call for judicial review. In some other instances (as in the Ramanna Shetty, · • case), the guidelines may prescribe certain standards or norms for. the 'l grant of certain benefits and a relaxation of, or departure from, the norms may affect persons, not directly but indirectly, in the sense that though they did not seek the benefit or privilege as they were not

r eligible for it on the basis of the announced norms, they might also have entered the fray had the relaxed guidelines been made known. In other words, they would have been potential competitors in case any "--relaxation or departure were to be made. In a case of the present type, (' 'however, the guidelines operate in a totally different field. The c guidelines do not affect or regulate the right of any person other than the company applying for consent. The manner of application of these guidelines, whether strict or lax, does not either directly or indirectly, affect the rights or potential rights of any others or deprive them, directly or indirectly, of any advantages or benefits to which they were D or would. have been entitled. In this context, there is only a very limited scope for judicial review on the ground that the guidelines have not been followed or have been deviated from. Any member of the , ...l.,public can perhaps claim that such of the guidelines as impose controls intended to safeguard the interests of members of the public investing in such public issues should be strictly enforced and not departed from E .; · departure therefrom will take away the protection provided to them. The scope for such challenge will necessarily be very narrow and restricted and will depend to a considerable extent on the nature and . extent of the deviation. For instance, if debeniures were issued which .J provide no security at all or if the debt-equity ratio is 6000: 1 (as alleged) as against the permissible 2: 1 (or thereabouts) a Court may be F persm/ded to interfere. A Court, however, would be reluctant to interfere simply because one or more of the guidelines have not been adhered to even where there are substantial deviations, unless such deviations are, by nature and extent such as to prejudice the interests of the public which it is their avowed object to protect. Per contra, the • Court would be inclined to perhaps overlook or ignore such devia- G ··lf(tions, if the object of the statute or pul_Jlic interest warrant, justify or necessitate such deviations in a particular case. This is because guidelines, by their very nature, do not fall into the category of legisla- tion, direct, subordinate or ancillary. They have only an advisory role to play and non-adherence to or deviation from them is necessarily and ·Implicitly permissible if the circumstances of any particular fact ·or law H

124 SUPREME COURT REPORTS [1989] 3 S.C.R . .> situation warrants the same. Judicial control takes over only where the deviation either involves arbitrariness or discrimination or is so funda- mental as to undermine a basic public purpose which the guidelines and the statute under which they are issued are intended to achieve.

But in the instant case, in the view we have taken, it· is not necessary to base our decision on this aspect. We find that the CCI '5" ' has, in fact, acted in substantial compliance with the principles of these guidelines. He has acted objectively and bona fide. He has not acted in undue haste. No substantial prejudice or injury to the petitioners have been demonstrated. In the aforesaid view of the matter, we are, there fore, unable to interfere. In this connection, furthermore, a common sense view has to be adopted-See the observations in Council of Civi~ C Service Unions & Others v. Minister for the Civil Service, [1985] AC at 1

407. Public interest in this case does not require that we should in- terfere. In this case, there is no illegality in the decision of the Control- ler of Capital Issues. He has not exercised a power which he does not possess. There is also no irrationality. He has nqt acted in any manner o that no reasonable authority would have acted in the decision. There is no procedural impropriety in his decision. He has not failed in his duty to act fairly insofar as fairness was warranted by the justice of the situation.

In the aforesaid view of the matter, we are of the opinion that E there was no substance in the writ petitions and also in the civil suits covered by these transfer applications.

The main question, as mentioned hereinbefore, canvassed in these transfer petitions is whether the CCI has acted in the manner he I should act in the present atmosphere of socio-economic development,"'--. F in view of our constitutional commitments. The purpose of the Act must be found from the language used. The scheme and the language used, strictly speaking, do not indicate any positive role for the CCI in discharging his functions in respect of grant of sanction. But it has to be borne in mind that he is a part of a State instrumentalities commit- ted to the endeavours of the constitutional aspiration to secure justice, G inter alia, social and economic, and also under Article 39(b) & ( c) o{ _,. the Constitution to ensure that the ownership and control of the mate- -..,. rial resources of the community are so distributed as to best subserve the common good and that the operation of the economic system does· not result in concentration of wealth and means of production to the common detriment. Yet, every instrumentality and functionary of the H State must fulfil its own role and should not trespass or encroach/

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.) 125

' entrench upon the field of others. Progress is ensured and develop- A ment helped if each performs his role in the common endeavour.

In that light it is true that as was contended by learned counsel appearing ·on behalf of the petitioners that in the changed socio- economic conditions of the country one who is charged to ensure · • capital-investment has to perform the social role in capital formation B and to protect the interest of the capital market, and to oversee the . growth of industrialisation and investment in such a manner as to ensure employment and demand in the national economy to prevent wasteful investment and to promote sound methods of corporate inance. The guidelines are only a guide and nothing more. The appli- • cation.of mind by the CCI before sanction must be in the perspective ~for which he is en joined by the Act. He must endeavour to secure a c ' balanced investment of the country's resources in industry, agriculture and social services. The Controller should perform the role of social control and fulfil the social purpose in conjunction with other authorities and functionaries. It is necessary for him in discharge of his functions to ensure that there is not too much concentration of parti- D cular industries in particular areas, and that there is a scientific development and proper investment in key and core projects.

A The present petitions have perhaps brought to the fore for the first time a puolic interest aspect of the issue of shares and debentures. · In the past decades, investors in shares and equities constituted a very limited section of the public and consisted of two extreme types -either persons who could shrewdly appraise the merits of each issue and take a considered decision or persons who just wanted to invest ·t and get a return for their moneys but were indifferent to the terms and J conditions of such investment. The position has changed in recent · ·years. There has been a vast increase in the number of members of the public who have surplus money to invest; the size of the issues has assumed macro-proportions; and the types of instruments are also becoming more and more sophisticated. Enterpreneurs, with legal and expert assistance at their command, could easily trap unwary investors and the development of a public interest lobby that can scrutinise issues carefully and advise prospective investors on their comparative G ~merits and demerits may not be entirely undesirable. It is also perhaps necessary that the CCI, in considering the grant of consent to -such issues, should have these aspects brought to his notice. We think that it may be too cumbersome to have a provision that the details of every proposed application for consent should be publicised to the maximum extent by the CCI, that objections and comments from the public H

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

A should be called for, that there should be a public hearing before the ) CCI before grant of consent and that the CCI should pass a reasoned order granting or withholding consent. That would also delay the whole process of approvals which should be as expeditious as possible. But we have no hesitation in saying that some procedure has to be evolved to ensure that the CCI gets the benefit of the comments, suggestions and objections from the public before arriving at his deci- ) sion whether to grant consent or not and, if so, on. what terms and conditions. Perhaps, evolution of certain rules in this respect could be examined at this juncture of industrial growth in our country. But having regard to the facts and the circumstances of the case in view of-I" the various facts mentioned hereinbefore, we are of the opinion that there was no undue haste. There was proper application of mind that the sanction was for a new project. Sufficient security for the-~ debentures as was enjoined to be ensured before sanction has been ensured in the facts and the circumstances of this case and ~he guidance provided by means of guidelines has been substantially com- plied with. There has been no infraction as such of the norms required / D to be followed in granting the sanction. The challenge to the sanction, therefore, must fail.

Before we conclude, we must note that good deal of argument was adduced that these applications in different High Courts in civil· j suits were not genuine and properly motivated, but were ma/a fide. - E Even though these might not have been to feed fat an innocent object, it was apparent that it was to feed fat a grudge in respect of a competi- tive project by a competitor. Anyway, in the view we have taken, it is not necessary to decide the bona /ides or ma/a fides of the applicants. Shri Nariman, when he moved the application initially, had suggested that we should lay down certain norms as to how the courts in different parts of the country should grant injunction or entertain applications 1 affecting an all-India issue or having remifications all over the country. Except that before the courts grant any injunction, they should have regard to the principles of comity of courts in a federal structure and have regard to self restraint and circumspection, we do not at this stage lay down any more definite no,rms. We may also perhaps add that it may be impossible to lay down hard and fast rules of general,applica- tion because of the diverse situations which give rise to problems of 'j this nature. Each case has its own special facts and complications and it will be a disadvantage, rather than an advantage, to attempt and apply any stereo-typed formula to all cases. Perhaps in this sphere, the High Courts themselves might be able to introduce a certain amount of discipline having regard to the principles of comity of courts

NARENDRA KUMAR v. U.0.I. (MUKHARJI, J.] 127

administering the same general laws applicable all over the country in respect of granting interim orders which will have repercussion or effect beyond the jurisdiction of the pdrticular courts. Such an exercise will be useful contribution in evolving good conventions in the federal judicial systeni.

~ On the 9th September, 1988, when we transferred these matters, we directed respondent no. 3 to deposit a sum of Rs.1 lac to be held if the petitioners were made to spend unduly. Having. considered the facts and circumstances of the case, we do not think that we would be __ justified in ordering disbursement of this sum ·to the petitioners whose r"" ,~ cases have been transferred or the plaintiffs whose cases have been .-~.~~~~~erred. The sum should, therefore, be refunded to the respondent c

All the writ petitions and the suit fail, and are dismissed. In the facts and the circumstances of the case, there will be no order as to costs. D G.N. Petitions dismissed.