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

F The Judgment of the Court was delivered by

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

N. PARTHASARTHY v. CONTROLLER [RAY, J.] 339

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

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

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

p. 340

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

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

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

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

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

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

N. PARTHASARTHY v. CONTROLLER [RAY, J:J 341

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

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

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

p. 342

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

In the facts and circumstances the petitioners pleaded that they H are entitled to a declaration that the divestment by the respondents of

N. PARTHASARTHY v. CONTROLLER [RAY, J.] 343

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

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

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

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

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

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

p. 344

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

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

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

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

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

It has been further pleaded that Trishna Investments & Leasing H Ltd. to which the 33 lakh equity shares of Larsen & Toubro Ltd. were

N. PARTHASARTHY v. CONTROLLER [RAY, J.] 345

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

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

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

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

p. 346

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

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

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

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

N. PARTHASARTHY v. CONTROLLER [RAY, J.I 347

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

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

348 SUPREME·COURT REPORTS [1991] 2 S.C.R;

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

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

G On 28th April, 1989 Dhirubhai ·Ambani, the chairman of Reliance Group, became the Chairman of Larsen and Toubro. By this process the public Financial Institutions which held 40% of the shares of L & T company voluntarily diluted their holding to 33% and parted with approximately 7% to the house of Ambani's and made them the single largest private shareholder. This was done as submitted by the H appellants delibeately and with a design to legitimise the eventual take ,... ---

N. PARTHASARTHY v. CONTROLLER [RAY, J.] 349 . over of Larsen & Toubro by the Ambanis. It is to be noticed that on A 26.5.89 the Board of Directors of L & T decided to convence an annual ~ General Meeting on 27. 7 .89. Board also resolved to recommend that 8 crores be invested in two specified companies and that a further sum of Rs.50 crores be invested in the purchase of equity shares in any other company. On 23.6.1989 Board of Directors of L & T further resolved to invest a sum. of Rs. 76 crores in the purchase of Equity Shares of B R.I.L. On 21.7.89 R.I.L. and R.P.L. wrote letters to L & T seeking suppliers credit to the extent of Rs.635 crores for projects which they planned to' entrust to L & T. It is appropriate to note that prior to this

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

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

p. 350

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

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

N. PARTHASARTHY v. CONTROLLER (RAY, J.] 351

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

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

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

The contention regarding the maintainability of the Writ Petition as a public interest litigation cannot be taken into consideration in view of the decisions of this Court in S.A. G~pta & Ors. v. Union of H_

p. 352

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

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

N. PARTHASARTHY v. CONTROLLER [RAY, J.] 353

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

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

p. 354

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

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

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

RPL-HDPE. PVCL MEG.

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

N. PARTHASARTHY v. CONTROLLER [RAY, J.l 355

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

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

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

p. 356

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

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

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

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

N. PARTHASARTHY v. CONTROLLER !RAY, J.] 357

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

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

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

Three applications for directions being I.A. No. 1, I.A. No. 2 and I.A. No. 3 of 1990 have been filed in T.C. Nos. 61 of 1989, T.C. H

p. 358

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

H On 29th June, 1990 the Board of Directors of the Company were

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

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

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

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

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

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

(b) that in case of any debenture holder not agreeing to the modifications, in prayer (a) above and on intimation being recei- • ved by the applicant company as mentioned in prayer (c) below H:

p. 360

..... the applicants do refund to such debentureholders their/its appli- A cation and allotment money with interest thereon at such rate as may be directed by this Court; ~

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

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

(e) for costs of the applications."

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

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

N. PARTHASARTHY '· CONTROLLER [RAY, J.l 361

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

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

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

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

The L & T Board will have to take a view on the size of the debenture issue in the light of the requirements of funds indicated in your letter and other modifications suggested in the terms of the debentures. The company will no doubt obtain necessary approvals from CCI, debenture- H

p. 362

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

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

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

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

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

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

N. PARTHASARTHY v. CONTROLLER {RAY, J.I 363

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

"The Central Government may by order at any time-

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

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

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

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

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

364 SUPREME COURT REPORTS [i991] 2 S.C.R.

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

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

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

H Reference may also be made to the observations in Aaron's v.

N. PARTHASARTHY v. CONTROLLER (KASLIWAL. J.} 365 ., Twiss, [1896] A.C. 273 in which Lord Watson said: A

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

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

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

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

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

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p. 366

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

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

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

N. PARTHASARTHY v. CONTROLLER [KASLIWAL, J.] 367

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

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