LlFE INSURANCE CORPORATION OF lNDlA v. ESCORTS LTD, & ORS.

909

LlFE INSURANCE CORPORATION OF lNDlA A v. ESCORTS LTD, & ORS.

DECEMBER 19, 1985

[0, CHINNAPPA REDDY, E.S. VENKATARAMIAH, V. BALAKRISHNA B ERADI, R.B. MISRA AND V, KHALID, JJ,]

A. Foreign Exchange Regulation Act, 1973, section 29(1) (b) - Whether the Reserve Bank of lndia had the power or authority to give "ex-post facto" permission under section 29(l)(b) of the Act for the purchase of shares in lndia by a company not incorporated C in India or whether such permission had necessarily to ' be previous permission - Words atui Phrases 11 Permission11 meaning of.

B. Corporate democracy, concept of, explained.

C. Company Law - Shares - Nature of the property in shares D - La" relating to transfer of property in shares under the law and the effect of the provisions of the Foreign Exchange Regula- tion Act explained - Companies Act, 1956, sections 2(46), 82, 84, 87, 106, 108(1), 108 (1-A) (a) and (b), 108 to 108 H, 110, 111(1) & 3, 206, 207, 397, 398, 428, 439 and 475 read '11th section 27 of the Securities Contracts (Regulation) Act, Sale of Goods Act, E Sections 2 (7), 19, 20 to 24 and Transfer of Property Act, section 6.

D, Companies Act, 1956, sections 291-293 - Position and nature of discretionary powers of the Directors in a company.

E. Shares of a company, transfer of - Refusal to transfer the shares, extent of - Whether the refusal to transfer the shares by the company even after the permission was granted by the Reserve Bank under the FERA, proper - Companies Act, 1956 section 111(1) & (3).

F. Shares, Purchase of by the foreign investor of lndian nationality/origin - On the facts of the instance case, whether involved any contravention of Foreign Exchange Regulation of the Non-Residents' Investment Scheme.

G. Doctrine of lifting the corporate veil - Investments by company owned by non-residents of Indian nationality in accor- dance '11th the Foreign Exchange Regulations, the Non-Residents H

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External Account Rules, 1970, the Portfolio Investment Scheme, A the Exchange Control Manual, Stock Exchange Control (Regulation) Act, 1956 and its bylaws - Whether the Court could pierce the veil of the transactions.

H. Shareholders' right to call extraordinary general meet- ing on requisition either to alter the Articles of Association of B removal/ change of directors - State and its instrume~talities being shareholders have the same rights of an ordinary share- holder - Companies Act, 1956, sections 169, 172, 173(3), 284, - L.I.C. Act, Section 6.

I. Constitution of 'India, 1950, Articles 14, 19, 32, 226 read with order XXXIX Rule l - Whether the Courts can interfere c with the shareholder's right to call a general body meeting and grant injunctions - Judicial Review and Article 14 explained.

J. Construct of statutes enacted in national interest, explained.

K. English cases, reference to as external aids permissi- D bility - Forms, whether can control the Act.

L. Exchange Control Manual - Paras 24, 24 A-1 and 28 A-1 - Titled "Introduction to Foreign Investment in India - Nature of - Whether statutory direction. E M. Foreign Exchange Regulation, 1973 - Grant of permission by the Reserve Bank of India under the N.R.P. scheme - Whether can be questioned by the company whose shares are purchased by N.R.I. in a petition under Article 226 of the Constitution.

N. Rule against retrospectivity, applicability of. F o. Portfolio Investment Scheme by companies and overseas bodies owned by non-residents of Indian nationality/origin in accordance with circulars issued from time to time by the Reserve Bank of India under section 73(3) of FEM and clarifications thereof contained in Press Release dated 17.9.83 and the circular G dated 19.9.83 (both) issued by the Reserve Bank of India and the letter dated 19. 9. 83 issued by the Government of India, whether valid.

P. Mala fides, whether the Union of India, the Reserve Bank of India and the Life Insurance Corporation of India be said to H

L.r.c. v. ESCORTS 911

have acted malafides, in the matter of requisiting general meet- A ing and in the investment by purchase of shares made by the Caparo companies, respectively.

Indian economy whi.ch has to operate under the existing world economic system needs lots of foreign exchange to meet its developmental activities. For the purpose of earning, conserving ' B and building up a reservoir, thereof, and to improve its proper utilisation Parliament and the Executive government including the Reserve Bank of India have been taking several steps from time to time under the· Foreign Exchange Regulation Act, 1973 and other allied Acts and Rules made thereunder. In exercise of the powers conferred by section 79 of the Foreign Exchange Regulation Act, c the Central Government made Rules called the Non-Resident External Account Rules, 1970. With a view to earn foreign exchange by attracting non-resident individuals of Indian nationality or origin to invest in shares of Indian companies, the C.overnment of India decided to provide incentives to such individuals and formulated a "Portfolio Inveatment Scheme". This D scheme was announced by the Government on 27.2.1982 was incorporated in Circular No.9 dated 14.4.1982 of the Reserve Bank of India issued under section 73(3) of the Foreign Exchange Regulation Act. Paragraph 4{a) thereof provides that under the liberalised policy non-residents of Indian nationality or origin will be permitted to make portfolio investment in shares quoted on stock exchanges in India with full benefits of repartriation of capital invested and income earned subject to provisos therein. This was followed by further circulars No. 10 dated 22.4,1982, No.15 dated 25.8.1982, No.27 dated 10.12.82, No.12 dated 16.5.1983 and No.18 dt. 19.9.83.

The net result of all the circulsrs was that non-resident individuals of Indian nationality/origin as well as overseas companies, partnership finmi, societies, trusts and other corporate bodies which were owned by or in which the beneficial interest vested in non-resident individuals of Indian nationality/origin to the extent of not less than 60 per cent were entitled to invest, on a repatriation basis, in the shares of Indian companies to the extent of one per cent of the paid up equity capital of such Indian company provided that the aggregate vf such portfolio investment did not exceed the ceiling of 5 per cent. It was imnaterial whether the investment was made directly or indirectly. What was essential was that 60 per cent ol' the ownership or the beneficial interest should be in the hands of non-resident individuals of Indian national! ty I origin. Though a H

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A limit of one per cent was imposed on the acquisition of shares by each investor there was no restriction on the acquisition of shares to the extent of one per cent separately by each individual member of the same family or by each individual company of the same family (group) of companies.

Ii Desiring to take advantage of the Non-Resident Portfolio Investment Scheme and to invest in the shares of Escorts Ltd., (an Indian company), thirteen overseas companies, twel¥e out of whose shares was owned 100% and the thirteenth out of whose shares was owned 98 per cent by Caparo Group Ltd., designated the Punjab National Bank as their banker (authorised dealer) and M/s. · Raja Ram Bhasin & Co. as their broker for the purpose of such c investment. Their designated bankers M/ s Punjab National Bank E.C.E. Branch informed the Reserve Bank of India through their letter dated 4.3.1983 that according to OAC & RPe forms received the Caparo group of companies were incorporated in England and that 61.6 per cent of the sharea thereof are held by the Swsraj Paul Family Trust, one hundred per cent of whose beneficiaries are one Swsraj Paul and the members of his family, all non-resi- D dent individuals of Indian origin and requested the Reserve Bank to accord their approval for opening Non-Resident External Accounts in the name of each of thirteen companies for the purpose of "conducting investment operations in India" through the agency of Raja Ram Bhasin and Co. Stock Investment Adviser and member of the Delhi Stock & Share Department Delhi. It was E mentioned in the letters to the Reserve Bank that the proposed accounts would be "effected" by remittances from abroad through noxmal banking chancels and credits and debits would be allowed only interms of the scheme contained in the scheme for investment by non-residents. Though a remittance of $1,30,000 equivalent to Rs.19,63,000 made by Mr. Swaraj Paul to the Punjab National Bank, F Parliament Street Branch on 28.1.1983 for the purpose of opening on N.R.E. account in the name of Swsraj Paul, his bankers advised the Reserve Bank that only four remittances had been received from Caparo Group Ltd. the holding company on 9.3.83, 12.4.83, 13.4.83 and 23.3.83, of amounts equivalent to Rs.l,35,36,000, Rs.2,36,59,000, Rs.76,35,000 and Rs.l,31,38,681.lJp. G Payments under the Stock Exchange Rules may be made within two weeks after the purchases contracted for. M/s. Raja Ram Bhasin & Co. had, therefore, purchased shares of Escorts Ltd. worth Rs. 33,40,865 from Mangla & Co. prior to 9.3.83, the date of the first remittance as disclosed by Punjab National Bank. H However, the statements of purchases of sha.res made by the said brokers show that even by 14.3.83, shares of Escorts Ltd. worth

L.r.c. v. ESCORTS 913

A Rs.3,85,920 had been purchased from Bharat Bhushan & Co. and shares worth Rs.45,81;677 had been purchased from Mangla & Co. The brokers had advised the designated bank that out of 75000 shares of Escorts Ltd. purchased upto 28.4.83, 35,560 shares purchased by each of the twelve companies and 35667 shares purchased by the thirteenth company were lodged by them with B Escorts Co. Ltd. in the uames of H.c. BJ:iasin and Mr. Bharat Bhushan for the purpose of transfer of the shares in the books of the company. Under byelaw 242 of the Stock Exchange Regulations which permit the brokers to lodge the shares in their own names instead& of their principals, if they are unable to complete the fonualities before the closing of the books. In the meanwhile, on C 31.5.83, Punjab National Bank wrote to Escorts Ltd. informing them that the thirteen companies liad been making investments in shares of Escorts Ltd. in terms of the scheme for Investment by overseas cor\>orate bodies predominantly owned by non-residents of Indian nationality/origin to an extent of at least 60% and that the thirteen overseas companies had designated them as their L banker and M/s Raja Ram Bhasin & Co. as their brokers for the purpose of investment.

Escorts Ltd., sought detailed information from Punjab National Bank and the brokers about the names of investors and also whether the Reserve Bank of India had accorded permission to them. As there """ no response from either of them, Escorts Ltd. constituted a cOlllllittee to look into the question of transfer of shares in their books and according to its rec011111endations the Board of Direc tors passed a resolution refusing to register the transfer of shares.

Escorts Ltd., although they had already refused to register the transfer of shares, wrote to the Punjab National Bank for information on several points as they desired to make a representations to the Reserve Bank of India, intervene and aesis t in the inquiry being conducted by the Reserve Bank at the behest of the Government of India. They also wrote several letters to the Reserve Bank purporting to give information regarding various irregularides committed in the purchase of shares of their company by the thirteen foreign compsnies, suppressing the fact that they have refused to register the transfer of shares in their favour.

In accordance with the clarificatory letter dated 17 .9.83 from the Government of India, its Press Release of the same date h and its circular No. 18 dated 19,9.83, the Reserve Bank, by a telex message conveyed to the Punjab National Bank their

p. 914

A permission to release the money remitted by Caparo Group Ltd. frou abroad for making payment againat ·the shares of DCM and Escorts Ltd. Subsequent to the grant of permission by the Reserve Bank of India, . another attempt was made to have the tranafer of shares registered. The request. was turned down once again by iscorts Ltd. who by their letter dated 13.10.83 stated that apart from the que•tion of obtaining the permission of the Reserve Bank of India, the decision of the Board to refuse to register the shares was bas.A on other grounds which contained to be valid. Respondent No.19, therefore, preferred an appeal to the Central Government under section 111(3) of the Companies Act.

Escorts Ltd. alleging undue pressure from the financial inatitutiona like ICICI, IFC, LIC, IDBI and UTI for the registeration of the transfer of sl-.ares and explaining the circ1DDStances and instances c0111Dencing from the meeting held on 18.10.83 onwards upto 29.12.83, filed Writ Petition No.3068/83 on 29.12.83 under Article 226 of the Constitution challenging the validity of Circular No.18 dated 19.9.83 and the fress Release of the same date as 2.rbitrary and violative of not only Articles 14, D 19(l)(c) and 19(l)(g) of the Constitution, but also the provisions of Foreign Exchange Regulations, the provisions of Securities Contract Regulation Act etc.

Subsequent to the filing of the Writ Petition the Life Insurance Corporation of India who along with other financial institutions held as many as 52% of the total nwnber of shares in the company, issued a requisition dated 11.2.84 to the company to hold an extra ordinary general meeting for the purpose of removing nine of the part-time Directors of the company and for nominating nine others in their place. Alleging that the action of the Life Insurance Corporation of India was malaf ide and part of a concerted action by the Union of India, the Reserve Bank of India and the Caparo Group Ltd. to coerce the company to register the tranafer of shares and to withdraw the Writ Petition, the Writ Petitioners sought to suitably amend the Writ Petition and to add prayers (ia), (ib), (ic) and (id) to declare the requisition to hold the meeting arbitrary, illegal, ultra vires etc. The writ petition was amended. Paragraphs 149A(l) to (44) were added as also prayers (ia), (ib), (ic) and (id).

The High Court of Bombay allowed the writ petition and granted reliefs in the following manner:-

Ii "Section 29(l)(b) of FERA is mandatory. No Non-Resident Indian Investor is authorised to purchase share in an Indian

L.I.C. v. ESCORTS 915

Company without the prior permission of R.B.I. under section A 29(l)(b) of FERA; any purchase of shares without such prior permission is illegal: Neither the Union of India or the R.B.I. is empowered to order otherwise either by issuing a direction under section 75 or under section 73(3) of the FERA; nor are they empowered to grant permission after the shares are purchased without obtaining prior permission. The Press Release dt. B 17.9.83 (Ex.A.), the circular dt. 19.9.83 (Ex.B) and the letter dt. 19.9.83 (Ex.C) cannot operate retrospectively so as to validate the purchase of shares made by N.R.I. companies which were ineligible on the date of purchase; nor can they authorise purchase of shares without obtaining prior permission of the R.B.I. under section 29(l)(b) of .the FERA. In so far as the c impugned Press Release circular and letter permitting the respondent-companies to hold the shares purchased without obtaining prior permission of the R.B.I., they are ultra vires of section 29(l)(b) of FERA and the powers vested in the Union of India under section 75 and the R.B.I. under section 73(3) of the FERA. To that extent they are void and inoperative both prospectively and retrospectively. The impugned Press Release and the circular, however, amount to amending the Portfolio investment Scheme with full repatriation benefits introduced under Circular No. 9 dated 14th April, 1982, and such amendments operates only prospectively. The action of respondent No.18 in issuing the impugned requisition notice is contrary to the provisions of section 284 of the Companies Act and ultra vires the powers vested in the L.I.C. under section 6 of the L.I.c. Act and contrary to the intendment of the provisions of the L.I.C. Act. The impugned requisition notice offends the principles of natural justice. The action of the L.I.C. in issuing the impugned requisition notice is an arbitrary and mala fide action taken for collateral purpose; it is violative of Article 14 of the Constitution of India. The Union of India and the R.B.I., respondents Nos. l and 2, are in no way responsible for the action of the L.I.C. in this regard. The allegation of mala fides made against them and the Union Finance Minister are unsubstantiated. The requisition notice and the resolutions passed at the meeting held in pursuance of the said notice are quashed". Aggrieved by the said judgment and decree the Life Insurance Corporation of India has come in appeal, and cross-appeals have been filed by Escorts Ltd. and Mr. Nanda, the Managing Director of Escorts.

Allowing CA 4598/84 filed by the Life Insurance Corporation of India, Union of India and the Reserve Bank of India and dismissing the cross appeals No.497-499/85 filed by Escorts Ltd. and Nanda, the Court

p. 916

A llKLD : 1.1 The action of the Life Insurance Corporation of India in issuing the requisition notice dated 11.2.84 to bold an extra ordinary general meeting of the Escorts Collpany Ltd. for the purpose of removing nine of the part time Directors of tbe company and for nominating nine others in their place is neither contrary to the provisiona of section 284 of the eo.p.niea Act, B 1956 nor ultra vires the powers vested in the Life Insurance Corporation under section 6 of the Life Insurance Corporation of India Act. The notice does not offend the principle of natural justice. The said action of the L.I.c. cannot be said to be arbitrary and malafide and taken for collateral purpoae or violative of Article 14 of the Constitution of India. [1022 F]

C 1.2 A company is, in some respects, an inatitution like a State functioning under its "basic constitution" consistillg of the Compsul es Act and the Memorandum of Association. "The members in general meeting" and the directorate are the two primary organs of a company comparable with the legialative and the executive organs of a Parliamentary democracy where legislative sovereignty rests with Parliament, while administration is left to the D Executive government, subject to a measure of control by Parlia- ment thrwgh its power to force a change of Government. Like the Gover.-nt, the Directors will be answerable to the Parliament constituted by the general meeting. But in practice (again like the gover.-nt), they will exercise as much control over the parliament as that exercises over them. Although it would be constitutionally possible for the company in general meeting to exercise all the powers of the company, it clearly would not be practicable (except in the case of one or two-man compsniu) for day to day administration to be undertaken by such a clllberscne piece of machinery. So the modern practice is to confer on the Directors the right to exercise all the company 1 s powers except such as the general law expressly provides must be exercised in general meeting. Of course, powers which are strictly legis- lative are not affected by the conferment of powers on the Directors as section 31 of the CoBpaul es Act provides that an alteration of an article would require a special reaolution of the company in general meeting. Under the Company Act, in many ways the position of the Directorate vis-a-vis the company i i more powerful than that the Government via-a-vis the Parl.iaent. The strict theory of Parliamentary sovereignty 1IOUld not apply by analogy to a company since under the Companies Ac;, there are many powers exercisable by the Directors with which the members in general meeting cannot interfere. The most they can do is to dismiss the directorate and appoint others in their place or alter the articles so as to restrict the powers of the Directors for the future. The only effective way the members in general

L.I.c. v. ESCORTS 917

meeting can exercise their control over the Directorate in a A democratic manner is to alter the Articles of Association so as to restrict the pm.-ers of the Directors for the future or to dismiss the Directorate and appoint others in their place. The holders of the majority of the stock of a Corporation have the power to appoint, by election, Directors of their choice and the power to regulate them by a resolution for their removal. '11lis B is the essence of corporate democracy. (1010 G-11; 1011 A-HJ

In the instant case, the finaocial institutions which held 52% of the shares of Escorts company had a very big stake in its working and future and were aggrieved that the management did not even choose to consult them or inform them that a Writ Petition c was proposed to be filed which lillU1d launch and involve the company in difficult and expensive litigation against the Govermnent and the Reserve llaDk of India. The institutions were anxious to withdraw the writ petition and discuss the matter further. As the Management was not agreeable to this course, the Life Insurance Corporation thought that it had no option but to D seek a removal of the non-Executive Directors so as to enable the new Board to consider the question whether to reverse the decision to pursue the litigation. Evidently the finaocial institutions wanted to avoid a confrontation with the Govermnent and tile Reserve Bank and adopt a more conciliatory approach. At the same time, the resolution of the Life Insurance Corporation r did not seek removal of the Executive Directors, obviously because they did not iI\tend to disturb the management of the company Therefore, the Life Insurance Corporation of India cannot be said to have acted mala fide in seeking to remove the niI\e non-Executive Directors and to replace them by representatives of the financial institutions. No aspersion was cast against the Directors proposed to be removed. It was the only way by which the policy which had been adopted by the Board in launching into a litigation could be reconsidered and reversed, if necessary. It was a wholly democratic process. A minority of shareholders in the saddle of power could not be allowed to pursue a policy of venturing into a litigation to which the majority of the shareholders were opposed. That is not how corporate democracy may function. (1010 A-G]

1.3 Every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements to call an extra ordinary general meeting in accordance with the provisions of the Companies Act, 1956. He cannot be restrained from calling a meeting and he is not bound to disclose the h

p. 918

A reasons for the resolution proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. [1016 B-C]

1.4 It is true that under section 173(2) of the Companies Act, there shall be annexed to the ncitice of the meeting a state- B ment setting out all material facts concerning each iten of business to be transacted at the meeting, including in parti- cular, the nature of the concern or the interest, if any therein, of every director, the managing agent, if any, the secretaries and treasures, if any, and the manager if any. That is a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the c general meeting to enable the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meeting. The Ufe Insurance Corporation of India, though an instrumentality of the State, as a shareholder of Escorts Ltd. bas the same right as every shareholder to call an extraordinary general meeting of the company for the purpose of moving a resolution to remove some Directors and appoint others in their place. The Ufe Insurance Corporation of India cannot be restrained from doing so nor is boUDd to disclose its reasons for moving the resolutions. (1016 C-F]

1.5 When a requisition is made by s shareholder calling' for a general meeting of the company under the provisions of tbe companies Act validly to remove a director and appoint another, an injunction cannot be granted by the Court to restrain the holding of a general meeting. (1011 G-H]

Slllllr & Sonil (Salford) Ltd. v. Slllllr [1935] 2 KB 113; Iale of Wight llaibmy Cmpany v. Tahourdin (1883) 25 Ch. D.320; Illllenriclt F v. Saell 42 Eng. Rep.83; lleDtley-Stevens v. Joaa (1974] 2 All E.R.653; Ebrahimi v. Westbouroe Galleries Ltd. (1972] 2 All E.R, 492 referred to.

1.6 Every action of the State or an instrumentality of the State must be informed by reason. In appropriate cases, actions uninformed by reason may be questioned as arbitrary in proceed- ings under Article 226 or Article 32 of the Constitution. But Article 14 cannot be construed as a charter for judicial review of state action, to call upon the State to account for its actions in its manifold activities by stating reasons for such actions. If the action of the State is political or sovereign in character, the Court will keep away from it. The Court will not debate academic matters or concern itself with the intricacies of

'

L,l.C. v. ESCORTS 919

A trade and commerce. If the action of the State is related to contractual obligations or obligations arising out of tort, the Court may not ordinarily examine it unless the action has soma public law character attracted to it. Broadly speaking the Court will examine actions of State if they pertain to the public law domain and refrain from examining them if they pertain to the B private law field. [1017 C-D; E-G]

When the State or an inatrumantality of the State ventures into the corporate world and purchases 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. Therefore, the State as a shareholder should not be c expected to state its reasons when it seeks to change the managemant by a resolution of the company, like any other shareholder. [1017 G-H; 1018 A-B]

O'Reilly V• Hackman [1982] 3All E.R. 1124; Devy V• D [1983] 3 All E.R. 278; I Coagress Del~ [1981] 2 Speltbolllll! All E.R. 1064; R. v. East Berkshire Health Authority [1984) 3 All E,R, 425; and ladba Xrislms .Aggarwal & Ors. V• State of llihllr [1977] 3 S.C.R, 249 referred to. 2, It cannot be said that the attitude taken by the Life E Insurance Corporation of India in regard to (i) the issue of Equity linked Debentures; (ii) Repaymant of loans to Indian Financial Institutions; and (iii) .the proposal of the marger of Goetze with Escorts were mals fide and an attempt on its part to exert pressure on Escorts Ltd. to register the shares of Caparo Group. The result of accepting the proposal for the issue of Equity linked Debentures would be that the L.1.c. 's holdings would be reduced from 30 per cent to 18.14 per cent, while the holding of all the financial institutions would be reduced from 52% to 31.21% besides involving great financial loss to them. Similar would be the position if the proposals for the marger of Goetze with Escorts was accepted. None holding a majority of the equity capital of a company would allow himself to be hustled into becoming a minority shareholder. The object of prepaymant of loans was to get rid of the directors who the financial institu- tions had a right to nominate. True Escorts offered to appoint Mr. Davar as a Director even if the financial institutions had no right to nominate him. But it is one thing to have the right to nominate a director and quite another thing to be a director at sufference. [1018 D-E; 1019 A-B; 1021 C-ll] H

3.1 On an overall view of the several statutory provisions and judicial precedents, it is clear thst a shareholder hss an

p. 920

undoubted interest in a company, an interest which is represented by his share holding. Share is movable property with all the attributes of such property. The rights of a share holder are (i) tQ elect directors and thus to participate in the management through them; (ii) to vote on resolutions at meetings of the company; (iii) to enjoy the profits of the company in the shape of dividends; (iv) to apply to the court for relief in the case of oppression; (v) to apply to the court for relief in the caae of mismanagement; (vi) to apply to the court for winding up of the company; and (vii) to share in the surplus on winding up. (995 G-11; 996 A]

3. 2 A share is transferable but while a transfer may be • effective between transferor and transferee from the date of c transfer, the transfer is truly complete and the transferee becomes a ehareholder in the true and full sense of the term, with all the rights of a shareholder, only when the transfer is registered in the comp.ny's register. A transfer effective between transferor and the transferee is not effective as against the company and persons without notice of the transfer until the transfer is registered in the company's register. Indeed until 0 the transfer is registered in the books of the company, the person whose name is found in the register alone is entitled to receive the dividends, notwithstanding that he has already parted with his intere•t in the shares. However, on the transfer of shares, the transferee becomes the owner of the beneficial interest though the legal title continues with the transferor. E The relationship of trustee and ceatui que trust is established and the transferor is bound to comply with all reasonable directions that the transferee may give. He also becomes a trus<ee of the dividends as also of the rights to vote. The right of the transferee "to get on the register" llllSt be exercised with due diligence and the principle of equity which F makes the transferor a constructive trustee does not extend to a case where a transferee takes no active interest "to get on the register". (996 A-ll]

3.3 Where the transfer is regulated by a statute, as in the case of transfer to a non-resident which is regulated by the G Foreign Exchange Regulation Act, the permission, if any, pres- cribeil by the statute must be obtained. In the absence of the permission, the transfer will not clothe the transferee with the "right to get on the register" unless and until the requisite permission i5 obtained. A transferee who has the right to get on the register, where no permission is required or where permission II has bean obtained, may ask the company to register the transfer and the company who is so asked to register the transfer of shares may not refuse to register the transfer, except for bona

L,I,C, v. ESCORTS 921

fide reasons, neither arbitrarily, nor for any collateral A purpose, The paramunt consideration is the interest of the company and the general interest of the shareholder. On the other hand, where, the requisite permission under FERA is not obtained, it is open to the company, and indeed, it is bound to refuse to register the transfer of shares of an Indian company if favour of a non-resident. [996 E-i!] B

But once permission is obtained, whether before or after the purchase of the shares, the company cannot, thereafter refuse to register the transfer of shares. Nor is it open to the company or any other authority or individual to take upon itself or himself, thereafter the task of decid_ing whether the c permission was rightly granted by Reserve Bank of India. The FERA makes it its exclusive privileges and function. The provisions of the Foreign Exchange Regulation Act are so structured and woven as to make it clear that it is for the Reserve Bank of India alone to consider whether the requirements of the provisions of the Foreign Exchange Regulation Act and the various rules, directions and orders issued from time to time have been fulfilled and whether permission should be granted or not. The consequences of. non-compliance with the provisions of the Act and the rules, orders and directions issued under the Act are mentioned in secs. 48, 50, 56 and 63 of the Act. There is no provision of the Act which enables an individual or authority functioning outside the Act to determine for his own or its own purpose whether the Reserve Bank was right or wrong in granting permission under section 29(1) of the Act. Under the scheme of the Act, it is the "custodian-general" of foreign exchange. The task of enforcement is left to the Directorate of Enforcement, but it is the Reserve Bank of India and the Reserve Bank of India alone that has to decide whether permission may or may not be granted under section 29(1) of the Act. The Act makes it its exclusive privilege and function. No other authority is vested with any power nor may it assume to itself the power to decide the question whether permission may or may not be granted or whether it ought or ought not to have been granted. The ques.tion may not be permitted to be raised either directly or collaterally before any Court. However, the grant of permission by the Reserve Bank may be questioned by an interested party in a proceeding under Article 226 of the Constitution on the ground that it was malafide or that there was no application of the mind or that it was opposed to national interest as contemplated by '; the Act. [996 H; 997 A-G] ' H

p. 922

3•5 It is certainly not open to a company whose shares have been purchased by a non-resident company to refuse to register the shares even after permission is obtained from the Reserve Bank of India on the ground that permission ought not to have ' ' been granted under the FERA. The permission contemplated under section 29(1) of the Foreign Exchange Regulation Act is neither intended to nor does it impinge in any manner or any legal right of the company or any of its shareholders. Conversely neither the company nor any of its shareholders is clothed with any special right to question any such permission. (997 G-i!; 998 A]

3.6 Where the articles permitted the Directors to decline to register the transfer of shares without assigning reasons, the Court would not necessarily draw adverse inference against the c Directors but will assume that they acted reasonably and bona- fide. Where the Directors gave reasons the Court would consider whether the reasons were legitimate and whether the Directors proceeded on a right or a wrong principle. If the articles permitted the Directors not to disclose the reasons, they could be interrogated and asked to disclose the reasons. If they failed to disclose that reason adverse inference could be drawn D against them. [995 C-F]

llanekji Pestonji Bbarucba and Anr. v, Wadilal Sberabhai and Co. 52 I.A. 92; Bank of India v. Jamsbetji A.R. Qrlnoy A.I.R. 1950 Pc 90; In Re Fry [1946] 2 All E.R. 106; Sw:las Bank Corporation V• Lloyds Bank Ltd. (1982] A.c. 584; Dlaranjit Lsl E C1111ncllp1ry v. IJnioD of India A.I.R. 1951 s.c. 41; Kat:balooe and Ora. V• Bombay Life Assurani:e Calpaoy Ltd. A.I.R. 1953 s.c. 385; Vasudev llamachandra Shelat v. Pnmlal Jayanaud l'baklrar [1975] l -' s.c.R. 534; A.x:. llm:iah v. Beserve Bank (1970) l M.L.J. PI referred to.

F 4. The purchase of shares made by and or on behalf of the Caparo Group Ltd. cannot be said to be in violation of the Port- folio Scheme in as much as: (i) the permission of the Reserve Bank contemplated by section 29(l)(b) of the Foreign Exchange Regulation Act, 1973 need not be "prior" or "previous" but the permission should be obtained at some stage for the purchase of shares. It could be ex post facto, subsequent and conditional; (ii) Payments under the Stock Exchange Rules may be made within two weeks after the first purchase and there would have been no difficulty in making payments out of foreign remittances; (iii) the provisions of sections 19(4), 29(l)(b), 47, 48, 50, 56 and 63. of the Foreign Exchange Regulation Act do not stipulate that the purchase of shares without obtaining the permission of the

L.I.C. v. ESCORTS 923

Reserve Bank shall be void. On the other hsnd, legal proceedings arising out of such transactions are contemplated subject to the condition thst no sum may be recovered as debt, damage or other- wise, unless and until requisite permission is obtained. If permission may be granted ex post facto, the transaction cannot be a nullity and without effect whatsoever; (iv) under section 27 of the Securities Contracts (Regulation) Act, it shsll be lawful for the holder of the company issuing the said security to receive and retain any dividend declared by the company in respect thereof for any year, notwithstanding thst the security has already been transferred by him for consideration, unless the transferee who claims the dividend from the transferor hss lodged the security and all other documents relating to the transfer C· which may be required by the company with the company for being registered in his name within fifteen days of the date on which the dividend became due; ( v) Even under the Bye-law 242 of the Stock Exchange l!egulations the brokers are permitted to lodge the shares purchased on behalf of their principals in their own names, if they are unable to complete the formalities before the t closing of the books; and (vi) under the scheme, any foreign company whose shares were owned to the extent of more than 60% by persons of Indian nationslity or origin could avail the facility given by the scheme irrespective of the fact whether the same group of shareholders figured in the different companies. Where any of the purchases were made subsequent to 2.5.83, they were E subject to the ceiling of 5% in the aggregate. Merely because more than 60% of the shares of the several foreign companies who have applied for permission are held by a Trust of which Mr. swaraj Paul and the members of his family are beneficiaries, the companies cannot be denied the facilities of investing in Indian companies. In fact, if such of the six beneficiaries of the Trust had separately applied for permission to purchase shares of F Indian companies, they could not have been denied such permission. Therefore, merely on this account it cannot be said that there has been any violation of the Portfolio Investment Scheme or that th~ permission granted is illegal. [ 1022 B-C; 988 F-H; 989 A-B; 1004 A-H; 1005 A-BJ G

5. Generally and broadly speaking, the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented or a taxing statute or a beneficient statute is sought to be evaded or where associated companies are inextricably connected as to be in reality, part of one concern. It is neither necessary nor desir- able to enumerate the classes of cases where lifting the R corporate veil is permissible, since that must necessarily depend

p. 924

A on the relevant statutory or other provisions the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, and the effect on the parties who may be affected etc. In the instant csse "lifting the veil" is neither necessary nor permissible beyond the essential require- ment of the Foreign Exchange Regulstion Act and the Portfolio B Investment Scheme. The object of the Act is to conserve and regulste the flow of foreign exchange and the object of the scheme is to attract non-resident investors of Indian nationality or origin to invest in shares of Indian companies. In the case of individuals, there can be no difficulty in identifying their nationality or origin. In the case of companies and other legal personalities, there can be no question of nationality or c ethnicity of such company or legal personality. Who of such oon-resident companies or legal personalities may then be permit- ted to invest in shares of Indian cOllpanies, The answer is furnished by the scheme itself which provides for "lifting the corporate veil" to find out if at least 60 per cent of the shares are held by non-residents of Indian 'nationality or origin. Ufting the veil is necessary to discover the nationality or D origin of the shareholders and not to find out the individual identity of each of the shareholders. The corporate veil may be lifted to that extent only and oo more. Further it would be beyond the scope of the writ petition in the High Court. (1006 F-H; 1007 A-DJ

E llall.erateiner v. Moir, [1974J 3 All E.R, 217; Tata l!Dg1mer1ng and U..:.-tive Campany Ltd. v. State of Bihar, [1964J 6 s.c.R. 885; 'l'be Ca-1 ..imer of Income Tax v. Ke wkshi Kills, A.I.R, 1967 S,C, 819; Vorben v. Associated Rubber Ltd·• (1985J 2 Scsle 321; and Sa!CW!Q v. A. Sal"""' & Co, Ltd., [l897J A.C. 22 referred to. F 6.1 The permission of the Reserve Bank contemplated by the Foreign Exchange Regulstion Act, 1973 need not be "prior" or "previous" and it could be ex post fac{o subsequent and conditional. (1021 HJ

G 6.2 The expression used in section 29(1) of the Foreign Exchange Act, 1973 is "general or special permission of the Reserve Bank of India". It is not qualified by the word "prior" or "previous", While the word "prior" or "previous" may be implied if the contextual situation or the object and design of the legislation demands if, there l.s no such compelling H circlllll8tances justifying reading any such implication into section 29(1). Though the Parliament has not been umnindful of the need to clearly express its intention by uaing the expressior

L.I.C. v. ESCORTS 925

"previous permission". Whenever if thought previous permission A wss necessary, as for example, sections 8(1), 8(2), 27(1), 30 and 31 of the Act, it deliberately avoided the qualifying word "previous" in section 29(1) so as to invest the Reserve Bank of India with a certain degree of elasticity in the matter of granting permission to non-resident companies to purchase shares Jn Indian canpanies. Therefore, the word permission 111USt be interpreted to mean "permission previous or subsequent" - and that it is necessary that · the permission of the Reserve Bank of India should be obtained at some stage for the purchase of shares by non-resident companies. [979 F-H; 980 A-CJ

6.3 The achene of the Foreign Exchange Regulation Act does c not make previous permission impertive under section 29(l)(b), though failure to obtain prior permission may expose the foreign investor to proaecution penalty, conviction, confiscation, if permission is ultimately refused. Even if permission is granted, it may be made conditional. The expression "special permission" is wide enough to take with in its stride a "conditional permission", the condition being relevant to the purpose of the statute, in this case, the conservation and regulation of foreign exchange. [981 F-H)

6.4 Nor is the Reserve Bank of India bound to give ex post facto permission whenever it is found that business has been started or shares have been purchased without its previous permission. In such cases, wherever the Reserve Bank of India suspects an oblique motive, it will not only refuse permission but will further resort to action under section 50, 61 and 63 not merely to punish the offender but also confiscate the property involved. [981 E-F) F 6.5 Parliament did not intend to lay dOilll in absolute terms that the permission contemplated by section 29(1) had necessarily to be preVious permission. The principal object of section 29 is to regulate and not altogether to ban the carrying on in India of the activity contemplated by clause (a) and the acquisition of an undertaking or shares in India of the character G mentioned in clause (b). Hence, Parliament left to the Reserve Bank of India as the saftest authority to grant permission previous or ex post facto, conditional or U11Coodit1onal. And the Reserve Bank could be expected to use the discretion wisely and in the best interests of the country and in furtherance of declared Government fiscal policy in the matter of foreign exchange. [982 F; G-il) B

p. 926

6.6 Reading together sections 13 and 67 of the Foreign A Exchange Regulation Act .:ind section 11 of the Customs Act, it is seen that an order u.~der section 13 FERA operates as a prohibition and there, can therefore, be no question of the Reserve Bank of India granting subsequent permission to validate the importation of the prohibited goods and avoid the consequences prescribed by the Customs Act. To accept the analogr, B of section 13 to interpret sections 19 and 29, therefore, is not possible. [933 I>-£]

6. 7 It is true that the consequences of not obtaining the permission of the Reserve Bank or not to follow the procedure prescribed are serious and even severe. It is also true that the burden of proof is on the person proceeded against and that c mensrea may consequently be interpreted as ruled out. But that cannot lead to the inevitable conclusion that the permission contemplated by section 29 is necessarily previous permission. [983 G-H; 984 A]

6.8 If it was the intention of Parliament to comprehend both previous and subsequent permission, the word "confirmation" as in D section 19(5) would not do at all. While it may be permissible to construe the word "permission" widely, the word "confirmation" could never be used to convey the meaning "previous permission"• The word "confirmation" is totally misplaced in section 29. [984 E-FJ E 6.9 The rule against retrospectivity cannot be imported into the situation presented here. The rule against retrospectivity is a rule of interpretation aimed at preventing with rights unless expressly provided or necessarily implied. To invoke the rule against retrospectivity in a situation where no vested rights are involved is to give statutory status to a rule of interpretation F forgetting the reason for the rule. [984 G-tl; 985 A-B]

6.10 Paragraph 24A, l of the Exchange Control Manual is neither a statutory direction nor is it a mandatory instruction issued under section 73(3) of the Foreign Exchange Regulation Act, but is in the nature of a comment on section 29(l)(b). The G paragraph is an explanatory statement of guideline for the benefit of the authorised dealers. It reads as if it is in the nature of and, indeed it is, advice given to the authorised dealers that they should obtain prior permission of the Reserve Bank of India, so that there may be no later complications. It is a helpful suggestion rather than a mandate. The Manual itself is a sort of gnide book for authorised dealers, money changers, etc. and is a compendium or collection of various statutory

L.I.C. v. ESCORTS 927

directions, administrative instructio~, advisory opinions, comnents, notes, explanations, suggestions etc. The expression "prior permission" used in paragraph 24.A(l) is not meant to restrict the range of the expression "general and special permission" found in sections 29(l)(b) and 19(l)(b). It is meant to indicate the ordinary procedure which may be followed. [986 B-E) B

6.11 The forms cannot control the Act, the Rules or the dir,ections. None of the prescribed forms, no doubt, provided for the application and grant of subsequent permission, but that is so because ordinarily one would expect permission to be sought and given before the act. [986 E-F) c 6.12 The Portfolio investment Scheme does not talk of any prior or previous permission. Further a power possessed by the Reserve Bank under a Parliamentary legislation cannot be so cut down as to prevent its exercise altogether. It may be open to subordinate legislating body to make appropriate rules and D regulatiOilil to regulate the exercise of a power which the Parliament has vested in it so as to carry out the purposes of the legislation, but it cannot divest itself of the power. Therefore, the Reeerve Bank, i f J.t has the power under the FERA to grant ex post facto permission cannot divest itself of that power under the scheme· [987 A-fl) E

Shakir l111ssafn v. CaDdoo Lal & Ors., AIR 1931 All. 567, Vaaudev Rgmnclymc!ra Sbelat V• Pranlsl Jayanand Tbakur, [1975] 1 s.c.rr 534 referred to. '

7 .1 When construing statutes enacted in the national interest, the Courts muat necessarily take the broad factual F situationB contemplated by the Act and interpret its provisions so as to advance and not to thwart the particular national interest whose advancement is proposed by the legislation. Traditional norms of statutory interpretation must yield to broader notions of the national interest. [980 G-H; 981 A) G The object of the Foreign Exchange Regulation Act, is to ..,.rn, conserve, regulate and store foreign exchange. The entire Bcheme and design of the Act is directed towards that end. 5-!ction 76 emphasises that every permission or licence granted by th" Central Government or the Reserve Bank of India should be animated by a desire to conserve the foreign exchange resources of a country. The Foreign Exchange Regulation Act, is Ii therefore, clearly a statute enacted in the national interest. [980 C-G] ,

p. 928

7.2 The proper way to interpret statutes iB to ~give due wight to the use as well as the omission to use the qualifying words in different provisions of the Act. The significance of the use of the qualifying word in one provision and its non-use in another provision may not be disregarded. (980 B-C]

7,3 Every word has different shades of meaning and different words may have the SOiie meaning, It all depends upon the context in which the word is used. ( 984 E]

8. l'he Press Release (Ex.A) dated 17.9.83, the circular (El<.B) dated 19.9.83 and the letter (El<.C) dated 19.9.83 are all valid, (1022 AJ c 9, The Reserve Bank of India was not guilty of any malafides in granting permission to the Caparo Group of companies. Nor was it guilty of non-application of mind. Every question involving investments by oon-resident canpanies and foreign exchange is bound to have different facets which present themselves in different lighta when viewed fran different angles. If after full discussion with those in higher rungs of the Government who are concerned with policy-making, the Reserve Bank of India changed its former negative attitude to a more positive attitude in the interests of the econany of the country, its decision cannot be eaid to be the result of any pressure or non-applica- tion of the mind. And merely because, the Reserve Bank of lndis did not choose to send a reply to the cOlllllllDications received fran the c:cnpany it did not follow that the Reserve Bank of India was ~t acting bonafide. (999 E; G-il; 1000 BJ

10. No malafides could be attributed to the Union of India either. [1022 DJ F 11. There was a total and signal failure on the part of Punjab National Bank in the discharge of their duties as autho- rised dealers, under the Foreign Exchange Regulation Act and the Portfolio Investment Scheme with the result there was no monitor- ing of the purchases of shares made on behalf of the Caparo Group of companies. ( 1022 D-E] G

12. The question that would involve the adduction of evidence or as in the instant case a probe into individual purchase& of shares - Whether they were purchased with foreign exchange or locally available funds would be beyond the scope of the writ petition in the High Court under Article 226 of the H Constitution. {1004 G)

L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 929

CIVIL APPELLATE JURISDICTION Civil Appeal No. 4598 of A 1984.

From the Judgment and Order dated 9.11.1984 of the Bombay High Court in Civil Writ No. 3063 of 1983.

K. Parasaran, Attorney General, M.K. Banerjee, Additional 1 Solicitor General, V.C. Kotwal, F.S. Nariman, K.K. Venugopal, Soli J, Sorabjee, A.B. Divan, Q,p, Malhotra, T.R. Andhyarujina, Hahendra H. Shah, s.c. Maheshwari, Shardul s. Shroff, Mrs. Pallavi s. Shroff, Cyril s. Shroff, Amit Desai, Sasi Prabhu, Ms. Prema Baxi, Suresh A. Shroff, M/s. J.B. Dadachanji, B.H. Antia, Aapi Chonay, Ravinder Narain, o.c. Mathur, Rajive Sawhney; R.F.' c Nariman, Mrs. A.K. Verma, Joel Peres, Miss Ratna Kapoor, D.N. Misra, Talyarkhan, A.K. Ganguli, H.S. Parihar, A. Subba Rao, A°K 0

Chakravarty, R.N. Poddar and R.D. Aggarwala for the appearing parties.

The Judgment of the Court was delivered by L

ClilNNAPPA REDDY, J, Problems of high finance and broad fiscal policy which truly are not and cannot be the province of the court for the very simple reason that we lack the necessary expertise and, which, in any case, are none of our business 'are sought to be transformed into questions involving broad legal principles in order to make them the concern of the court. Similarly what may be called the 'political' processes of 'corporate democracy' are sought to be subject to investigation by us by invoking the principle of the Rule of Law, with emphasis on the rule against arbitrary State action. An expose of the facts of the present case will reveal how much legal ingenuity may achieve by way· of persuading courts, ingenuously, to treat the variegated problems of the world of finance, as litigable public-right-questions. Courts of justice are well-tuned to distress signals against arbitrary action. So corporate giants do not hesitate to rush to us with cries for justice. The court room becomes their battle ground and corporate battles are fought under the attractive banners of justice, fair-play and the public interest. We do not deny the right of corporate giants to seek our aid as well as any Lilliputian farm labourer or pavement dweller though we certainly would prefer to devote more of our time and attention to the latter. We recognise that out of the dust of the battles of giants occasionally emerge some new principles, worth the while. That is how the law has been progressing until recently. But not so now~ Public interest liti- Ii gation and public assisted litigation are today taking over many unexplored fields and the dlDD.b are finding their voice.

930 SUPREME COURT REPORTS [1985] SUPP.3 S.C.R,

A In the case before us, as if to befit the might of the financial giants involved, innumerable documents were filed in the High Court, a truly mountainous record was built up running to several thousa~d pages and more have been added in this court4 Indeed, and ther.e was no way out, WP. also had the advantage of listening to learned and long drawn-out, intelligent and often B ingenious arguments, advanced and dutifully heard by us. In the narae of justice, we paid due homage to the causes of the high and mighty by devoting precious time to them, reduced, as we were, at times to the position of helpless spectators. Such is the nature of our judicial process that we do this with the knowledge that more worthy causes of lesser men who have been long waiting in the queue have blocked thereby and the queue has consequently c lengthened. Perhaps the time is ri.pe for imposing a tiwe-limit on the length of suhmissions and page-limit on the length of judgments. The time is probably ripe for insistence on brief written submissions backed by short and time-bound oral submissions. The time is certainly ripe for brief and modest arguments and concise and chaste judgments. In this very case we heard arguments for 28 days and our judgment runs to 181 pages and both could have been much shortend. We hope that we are not hoping in vain that the vicious circle will soon break and that this will be the last of such mammoth cases. We are doing our best to disentangle the system from a situation into which it has been forced over the years by the existing procedures. 'There is now a public realisation of the growing weight of the judicial burden. The cooperation of the bar too is forthcoming though in slow measure. Drastic solutions are necessary. We will find them and we do hope to achieve results sooner than expected. So much for sanctimonious sermonising and now back to our case.

We do not for a moment doubt that this is a case which require our scrutiny, more particularly so because of a most singular and rernarkable feature of the case namely the absence of the principle dramatis personnae from the stage. Mr. Swraj Paul, the hero of the drama, did not appear before the High Court and did not appear before us; nor did his broker and his power of attorney holder, Raj a Ram Bhasin & Co, Though the investments madeand in question run into several crores of rupees, they have acted as if they care a tuppence for them. Obviously, Mr. Swraj Paul, a Foreign National, does not want to submit himself to the jurisdiction of Indian Courts and his broker Raja Ram Bhasin & Co. has nothing to lose by keeping away from the court and perhaps everything to gain by stanaing by the side of his princi- H pal. These may be excellent reasons for them for not choosing to appear before us, but their non-appearance and abstemious

L. I. C. v. ESCORTS [ CHINNAPPA REDDY, J. J 931

silence in court have certainly complicated the case and A embarrassed the Government of India, the Reserve Bank of India and the Life Insurance Corporation of India to whose lot i t fell to defend the case since it was their policies, decisions and actions that were assailed. We must however expi:'ess Our strong condemnation of the conduct and tactics employed by Swraj Paul and Raja Ram Bbasin which we consider deplorable. The Pubjab F, National Bank, the designated bank of Mr. Swraj Paul's companies did appear before us but their appearance was of no assistance to the court. They had put themselves in such a hapless situation. It was apparent to us from the beginning that if there was much front-line battle strategy, there was considerably more back stage 'diplomatic' manouvering, as may be expected when financial giants clash, though we are afraid neither giant was greatly concerned for justice or the public interest. For both of them the court room was just another arena for their war, except that one of the giants carefully kept himself at the back behind a screen as it were. One was reminded of the Mahabharta War where Arjuna kept Shikhandi in front of him while fighting Bhishma, not that neither of the warriors in this case can be compared with Bhishma or Arjuna nor can the Government of India and Reserve Bank of India be downgraded as Sikhandies. But the case does raise some questions which do concern the pUblic interest and we are greatly concerned for the public interest and administration of administrative justice in the public interest. It is from that angle alone that we propose · to examine the several questions arising in the Case.

The present stat.e of India economy which has to operate under the existing World Economic· System is such that India needs foreign exchange and, lots of it, to meet the demands of its develoIXIJ.ental activities. It has become necessary to earn, conserve and build-up a reservoir of foreign exchange. So the Parliament and the Executive Government have been taking steps, from time to time, to regulate, to conserve and improve the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country. The Foreign Exchange Regulation Act, 1973 was enacted for .that purpose.

'Foreign Exchange' is defined by sec. 2(h) of the Act to mean foreign currency and includes -

"(i) all deposits, credits and balances payable in any foreign cUrrency and any drafts, traveller's cheques, h letters of cred~t and bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency;

p. 932

A (ii) any instrument payable, at the option of the drawee or holder thereof or any other party thereto, either in Indian currency or in foreign currency or partly in one and partly in the other."

'Authorised dealer' is defined to mean a person for the time B being authorised under sec. 6 to deal with foreign exchange.·

'Owner' is defined by sec. 2(c), in relation to any security, as including -

"any person who has power to sell or transfer the security, or who has the custody thereof or who c receives, whether on his own behalf or on behalf of any other person, dividends or interest thereon, and who has any interest therein, and in a case where any security is held on any trust or dividends or interest thereon are paid into a trust fund, also includes any trus~ee or any person entitled to enforce the performance of the trust or to revoke or vary, with or without the consent of any other person, the trust or any terms thereof, .or to control the investment of the trust money.••

Section 3 provides for the establislunent of a Directorate of Enforcement consisting of a Director of Enforcement and other officers.

Section 6(1) enables the Reserve Bank on an application made to it, to authorise any person to deal in foreign exchange. Sec. 6(2) prescribes what may be authorised and sec. 6(4) and sec. 6(5) prescribe the duties of the authorised dealer. F Section 8(1) provides that, except with the previous general or special pennission of the Reserve Bank. no person other than the authorised dealer shall deal in foreign exchange. Sec.8(2) provides that except with the previous general or special pennission of the Reserve Bank, no person shall enter into any transaction which provides for the conversion of Indian currency into foreign currency or foreign currency into Indian currency at rates of exchange other than those authorised by the Reserve Bank.

Section 13(1) prescribes that subject to such exemption as may be specified, no person shall, except with the general or

~.1.c. v. ESCORTS [CHINNAPPA REDDY, J.] 933

special pennission of the Reserve Bank, bring or send into India A any gold or silver or any foreign exchange or any Indian currency. Sec. 13(2) provides that no person shall, except with the general or special pennission of the Reserve Bank or with the written pennission of a person authorised by the Reserve Bank take or send out of India any gold, jewellery or precious stones or Indian currency or foreign exchange other than foreign exchange obtained by him from an authorised dealer or from a money-:changer.

Section 19(l)(b) provides that no person shall, except with the general or special pennission of the Reserve Bank of India, transfer any security or credit or transfer any interest in the security to or in favour of a person resident outside India. c

Section 19(4) and (5) which are relevant for our purpose are as follows :-

"(4) Notwithstanding anything contained in any other L law, no person shall, except with the pennission of the Reserve Bank-

(a) enter any transfer of securities in any register or book in which securi~ies are registered or inscribed if he has any ground for suspecting' that the tr_ansfer involves any contravention of the .provisions of this section, or

(b) enter in any such register or book, in respect of any security, whether in connection with the issue or transfer of the security or oth,erwise, an address outside India except by way of substitution for any such address in the same country or for .the-purpqse of any transaction for which pennission has been granted under this section with knowledge that it involves entry of the said address, or

(c) transfer any share from a register outside India G to a register in India.

(5) Notwithstanding anything contained in any other law, no transfer of any share of a company registered in India made by a person resident outside India or by a national of a foreign State to another_ person whether resident in India or outside India shall be Ii

934 SUPREME COURT REPORTS [1985] .SUPP.3 S.C.R.

valid unless such transfer is confirmed by the Reserve A Bank on an application made to it in this behalf by the trans.Eeror or the transferee."

Section 29(1) which is also relevant for the purposes of this case is as follows:

B "29(1) Without prejudice to the provisions of s.28 and s.47 and notwithstanding anything contained in any other provision of this Act or the provisions of the Companies Act, 1956, a person resident outside India (whether a citizen of India or not) or a person who is not a citizen of India but is resident in India, or a company (other than a banking company) which is not incorporated under any law in force in India or in which the non-resident interest is more than forty per cent, or any branch of such company, shall not except with the general or special permission of the Reserve !lank-

(a) carry on in India, or establish in India a branch, office or other place of business for carrying on any activity of a trading, commercial or industrial nature, other than an activity for the carrying on of which permission of the Reserve !lank has been obtained under sec. 28; or

E (b) acquire the whole or any part of any undertaking in India or any person or company carrying on any trade, commerce or industry or purchase the shares in India in any such company. "

Section 29(2) makes provision for applying for permission to continue after the commencement of the Act any activity of the nature mentioned in clause (a) of sec. 29(1) which was being carried on at the coIDnencement of the Act, while sec. 29(4) makes similar provision for applying for permission to continue to hold after the commencement of the Act shares of a company referred to in sec. 29(1) (b) which were held by a person at the conunencement of the Act.

Section 30 prescribes that no national of a foreign State shall, without the previous permission of the Reserve Bank-

(i) take up any employment in India, or H

L.r.c. v. ESCORTS [CHINNAPPA REDDY, J.] 935

(ii) practise any profession or carry on any A occupation, trade or business in India.

Section 31 prohibits any person, who is not a citizen of India or ·a company not incorporated in India or in which the non-resident interest is more than 40 per cent, from acquiring or holding or transferring or disposing of by sale, ~ortgage, lease, 1 gift, settlement or otherwise any innnovable property situate in India, except with the previous general or special permission df the Reserve Bank.

Section 47 deals with contracts in evasion of the Act. Sec. 47(1) prohibits any person from entering into a contract or C agreement which would directly or indirectly. evade or avoid in any way the operation of any provision of the Act or of any rule, direction or order made thereunder. Section 47(2) provides that any provision of the Act requiring that a thing shall not be done without the permission of the Central Government or Reserve Bank of India, shall not render invalid any agreement to do that L thing if it is a term of the agreement that that thing shall not be done unless permission is granted. Where such a term is not explicit, it is to be implied in every contract. Section 47(3) further provtdes that, subject to certain specified conditions, legal proceedings may be instituted to recover any sum which would be due, apart from and despite the provisions of the Act or E any term of the contract requiring the permission of the Central Government or the Reserve Bank of India for the doing of a thing.

Section 50 prescribes the levy of a penalty if any person contravenes any of the provisions of the Act except certain enumerated provisions, the adjudication is to be made by the Director of Enforcement or an Officer not below the rank of an F Assistant Director of Enforcement, specially empowered in that behalf. Section 51 provides for the enquiry and the power to adjudicate. Section 52 provides for an appeal to the Appellate Board and sec. 54 for a further appeal to the High Court on questions of law. Section 56 provides for prosecutions, for contraventions of the provisions of the Act and the rules, ~ directions or orders made thereunder. Section 57 makes the failure to pay the penalty imposed by the adjudicating officer or the Appellate Board or the High Court or the failure to comply with any directions issued by those authorities, an offence punishable with imprisonment. Section 59 prescribes a presumption of mens-rea in prosecutions under the Act and throws upon the accused the burden of . proving that he had no culpable mental H

936 SUPREME COURT REPORTS tl985J supp,3 s.c.R.

A state with respect to the act charged in the prosecution. Section 61 _provides for congnlzance of offences. Section 6l(l)(ii) obliges the court not to take cognizance of any offence punish- able under section 56 or 57 except on a complaint made in writing by - (a) the Director of Enforcement; or (b) any officer authorised in writing in thl.s behalf by the Director of Enforce- B went or the Central Government; or (c) any officer of the Reserve !lank authurised by the Reserve !lank by a general or special order. The proviso to this provision enjoins that no complaint shall be made for the contravention of any of the provisions of the Act, rule, airection or order made thereunder which prohibits the doing of the Act without permission, unless the person accused of the offence has been given an opportunity of showing C that he had such permission. Section 63 empowers the adjudicating office adjudi;.iOg any contravention under sec. 51 and any court tryin;: a contravention under sec. 56, if he or it thinks fit to direct the confiscation of any currency, security or any other money or property in respect of which the contravention has taken place.

D Section 67 treats the restrictions imposed by secs. 13, 18(l)(a) and 19(l)(a) as restrictions under s.11 of the Customs Act and makes all the provisions of the Customs Act applicable accordingly.

Section 71(1) lays the burden of proving that he had the requisite permission on the prosecuted or proceeded against for contraventing any of the provisions of the Act or rule or direction or order made thereunder which prohibits him from being an Act without permission.

Section 73(3) enables the Reserve Bank of India to "give directions in regard to the makin;: of payments and the doing of other acts by bankers authorised dealers, money-changers, stock brokers, persons referred to in sub-sec.(1) of s~.c. 32 or other persons, who are authorised by the Reserve lia.nk to do anything in pursuance of this Act in the course of their business, as appear to it to be necessary or expedient for the purpose of securing compliance with the provisions of this Act and of any rules, directions or orders made thereunder."

Section 75 enables the Central Goverrnnent to give and the lieserve Bank to comply with general or special directions as the former may think fit. H

L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 937

Section 76 requires the Central Government or the Reserve A Bank, while giving or granting any permission or licence under the Act, to have regard to all or any of the following factors, namely,

(i) conservation of the foreign exchange resources of the country; B

(ii) all foreign exchsnge accruing to the country is properly accounted for;

(iii) the foreign exchange resources of the country are utilised as best subserve the common good; and C

(i~) such other relevant factors as the circumstances of the case may require.

Section 79 invests the Central Government with the power generally to make rules and in particular for various .specified D purposes.

In exercise of the powers conferred by sec. 79 of the FERA, rules called 'the Non-Resident (External) Account Rules, 1970's have been made, Rule 3 enables, subject to the provisions of the rules, any person resident outside India to open and maintain in E India an account with an authorised dealer, to be called, a Non-Resident (External) Account. Rule 4(1) prescribes that no amount other than the amounts mentioned therein shall be credited to a Non-Resident (External) Account. One such is 'any amount remitted by the account holder from outside India through normal banking channels as an amount which may be credited to a Non-Resident (External) Account'. Rule 4(4) provides that amounts accruing by way of a dividend or interest on aha.res, securities or deposits held in India, shall not be credited on Non-Resident External Account unless certain conditions are fulfilled. One of the conaitions is that the account-holder is the registered holder of such shares, securities or deposits. Another condition is that the account-holder has deposited the certificates relating to the shares with an authorised dealer along with an undertaking in writing to the effect that he will not dispose of any of the shares except with ·the previous approval of the Reserve Bank. kule 5 further prescribes that no such amount as is referred to in rule 4(1) shall be credited to a Non-Resident (External) Account unless the Reserve Bank having regard to the desirability of permitting remittance of funds held in India by Ii Non-Residents, either by general or special order, gives

938 SUPKEME COURT REPORTS [1985] SUPP.3 s.c.R.

A permission in this behalf. Rule b provides that a person resident outside India who wishes to open Non-Resident (External) Account, shall make an application in this behalf to an authorised dealer. The authorised dealer, unless there is a general or special order of the Reserve Bank so directing, shall refer every such application to the Reserve Bank together with the particulars. B The Exchange Control Manual published by the Reserve Bank of India incorporates various statutory and administrative instructions, advisory opinions, comments, notes, explanations etc. issued from time to time. Paragraph 24.l(i) states,

"Investment in India by non-residents of Indian c nationality or origin is subject to a different set of rules in order to give them wider investment opportunities. Ordinarily investment is allowed freely if the investment proposed to be made is not of an undesirable nature, but subject to the condition that no repatriation of capital invested and income earned thereon will be allowed. The non-resident investor is D also required to give an undertaking agreeing to forgo the benefits of repatriation. Investment with repatriation benefits is allowed only in restricted fields subject to certain conditions. The schemes under which such investments are permitted are explained in this Chapter", E Paragraph 24.l(ii), however, states

"Foreign investment in India is also subject to regulation through the various provisions in the Foreign Exchange Regulation Act, 1973, viz, Sec. 19 F governing issue and transfer of securities in favour of non-residents, sec. 29 governing establishment of a place of business by non-residents for carrying on trading, commercial or industrial activities or acquiring such an undertaking or shares in such companies in India and sec. 31 governing acquisition, G disposal, etc. of immovable property in India. But once foreign investment is permitted by Government under its foreign investment and industrial policy, requisite permissioos Wider the relative sectioos of Foreign ED:hange Regulation Act, 1973, are more or less automatically issued." H Section 24A.l provides

L.r.c. v. ESCORTS [CHINNAPPA REDDY, J.] 939

"In terms of Section 29(l)(b) of Foreign Exchange A Regulation Act, 1973, no person resident outside India whether an individual, firm or company (not being a banking company) incorporated outside India can acquire shares of any company carrying on trading, commercial, or industrial activity in India without prior permission of Reserve Bank. Also, under sec. B 19(l)(b) and 19(l)(d) of the Act, the transfer and issue of any security (which includes shares) in favour of or to a person resident outside India require prior permission of Reserve Bank. When permission has been granted for transfer or issue of shares to non-resident investor under sec. 19(l)(b) or C sec. 19(l)(d), it· is automatically deemed to be permission under sec. 29(l)(b) for purchase of shares by him. Non-resident Indians are however permitted to invest freely in securities of Central and State Governments, Units of Unit Trust of India and National Savings/Plan Certificates of Government of India (see L paragraph 24B.2). All other investments requires specific permission of Reserve Bank."

Paragraph 28A.4 states, -

"Authorised dealers may freely open a• Non-Resident E (External) Account in the names of individuals of Indian nationality or origin, resident of outside India, provided funds for the purpose are transferred to India in an approved manner from country of residents of the prospective account-holder or in other foreign country if the foreign country of residence of the account holder and the country from E which remittance is received are both in external group."

Paragraph 28A.4(iii) however, prescribes that firms, companies and other corporate bodies as well as institutions and organisations resident abroad are not eligible to open G Non-Resident (External) Accounts in India. Paragraph 28.A8(ii) states that under sec. 29(l)(b) of the Foreign Exchange Regulation Act, 1973, persons resident outside India require prior permission of Reserve Bank for purchase of shares in Indian companies. Investment of Non-Resident (External) Account funds in shares of Indian companies is not therefore permitted without prior approval of the Reserve Bank. li

p. 940

A With a view to earn foreign exchange by attracting non- resident individuals of Indian nationality or origin to invest in shares of Indian companies, the Government of India decided to provide incentives to such individuals and formulated a 'portfolio investment scheme' for investment by non-residents of Indian nationality or origin. This scheme, announced by the B Government on February 27, 1982, was incorporated in circular No.9 dated April 14, 1982 of the Reserve Bank of India issued under sec.73(3) of the Foreign Exchange Regulation Act. Paragraph 2 of the Circular explains that in order to provide further incentives and facilitate investment by non-residents of Indian nationality or origin in shares of Indian companies existing facilities had been liberalised and procedural formalities had c been simplified as explained in the subsequent paragraphs of the circular. Paragraph 3 deals with investment without repatriation benefits while paragraph 4 deals with investment with repatriation benefits. Paragraph 4 (a) provides that under the liberalised policy, non-residence of Indian nationality or origin will be permitted to make portfolio investment in shares quoted on stock exchanges in India with full benefits of repatriation of capital invested and income earned thereon provided that (a) the shares are purchased through a stock exchange, (b) the purchase of shares in any one company be each non-resident investor does not exceed Rs. one lakh in face value or one per cent of the paid up equity capital of the company, whichever is lower, and ( c) payment for such investments is made either by fresh remittances from abroad or out of the funds held in the investor's non- resident (external) account/FCNR account with a bank in India. It further provides that the Reserve Bank will grant permission to designated banks authorised to deal with any foreign exchange for purchasing shares through a stock exchange on behalf of their non-resident customers of Indian nationality/origin, subject, inter-alia, to the limits and conditions mentioned. Paragraph 5 deals with another significant relaxation in the existing policy and provides "the entire gamut of the facilities of direct and portfolio investments as outlined in paragraphs 3 and 4 above will now be extended to overseas companies, partnership firms, trusts, societies and other corporate bodies owned predominently by non-residents individuals of Indfan nationality/origin. The criterion for determining such predominent ownership is that at least 60% of the ownership of these entities should be with non-residents of Indian nationality/origin. It would be necessary for such entities to submit a certificate in this regard in the prescribed form OAC from Overseas Auditor/Chartered Accountant/ Ii Certified Public Accountant, along with their applications for investment in shares, to the Reserve Bank of India either through the designated banks authorised to deal in foreign exchange or the Indian companies offering new issues, as the case may be."

L.I.C. v. ESCORTS (GHINNAPPA REDDY, J.] 941

Applications from those entities for permission to designated banks for investments with repatriation benefits are required to subnit form RPG to the Controller, Exchange Control Department, Reserve Bank of India, Central Office (Foreign Investment Division), Bombay. Paragraph 7 stresses the importance of encouraging investments in India by non-residents of Indian nationality/origin and overseas companies, etc. predominently owned by them and requires authorised dealers to render prompt and efficient service by centralising their work in a few selected branches in places where stock exchange facilities are readily available. Paragraph 8 enables non-resident investors to appoint residents in India (other than the authorised dealers) to be their agents with appropriate power of attorney to arrange purchase/ sale of shares/securities. Such agents would include recognised stock exchange brokers. It is however made clear that 'permission for investment in shares on behalf of such investors will, however be granted to the designated banks authorised to deal in foreign exchange since these banks would be responsible for compliance with the relevant exchange control requirements. D Proper coordination and understanding between the designated bank and the investor's agents would be necessary for handling the investment procedures efficiently'. Paragraph 11 prescribes among other matters, the duty of designated banks

"to maintain separately a proper record of the investments made in shares with repatriation benefits and without repatriation benefits on account of each investor, showing the relevant particulars including the numbers of share certificates and distinctive numbers of shares. Likewise, the designated branches of authorised dealers should keep a systematic and up-to-date investor-wise record of the shares purchased by them through stock exchange on repatriation basis on behalf of their overseas customers of Indian nationality/origin so that they are able to ensure that the purchase of shares in any one company by each non-resident investor does not exceed Rs. 1 lakh in face value or 1 per cent of the paid up equity capital of the company, whichever is lower."

Circular No. 9 was followed by Circular No .10 dated April 22, 1982 from the Reserve Bank to all authorised dealers in foreign exchange. The purpose of the circular was to ensure that the overseas companies, partnership firms, societies, other h

p. 942

A corporate bodies and overseas trusts to whom the benefits of the investment scheme formulated by circular No. 9 were extended are owned to the extent of at least 60 per cent by non-residents of Indian nationality/ori~in or in which at least 60 per cent of the beneficial interest (in the case of trusts) is irrevocably held B by such persons. 'In order to ensure that the ow~ership interest in the overseas company/firm/society or the irrevocable beneficial interest in the trust held by persons of Indian nationality/origin is not less than 60 per cent, authorised dealers are required to obtain, along with the account opening form, a certificate from an overseas Auditor/Chartered Accountant/Certified Public Accountant in Form OAC enclosed with c A.D. (M.A. Series) Circular No. 9 of 1982.' 'The account holder is further required to submit such a certificate to the authorised dealer on an annual basis so as to ensure that the ownership/ beneficial interest of the above persons continues to be at or above the level of 60 per cent.'

By Circular No. 15 dated August 28, 1982, the Reserve Bank D partially relaxed Circular No. 9 dated April 14, 1982 by removing the monetary limit of Rs. One lakh on portfolio investment in shares on repatriation basis. However, the limit of one per cent of the paid-up capital of the company was retained.

By Circular No. 27 dated December 10, 1982, it was prescribed,

''Where permission is granted by the Reserve Bank for purchase/sale of shares/debentures on stock exchange in India by non-residents of Indian nationality/ origin, the transactions should be effected at the ruling market price as may be determined on the floor of the stock exchange by normal bid and offer method only. 11

On May 16, 1983 the Reserve Bank clarified and modified the 'Non-residents of Indian nationality/origin Portfolio Investment G Scheme 1 in the following manner: Referring to Circular No. 9 which extended portfolio scheme to overseas companies, partner- ship firms, societies and other corporate bodies which were owned to the extent of at least 60 per cent by non-residents of Indian nationality/origin and to overseas trusts in which at least 60 per cent of the beneficial interest was irrevocably held by such persons, Circular No. 12 dated May 16, 1983 imposed an overall ceiling of (i) 5 per cent of the total paid-up capital of the

L.I.C. v. ESCORTS [ClllNNAPPA REDDY, J.] 943

company concerned and (ii) 5 per cent of the total paid-up value of each series of the convertible debentures issue, as the case may be. For the purpose of determining and monitoring the 5 per cent ceiling the cut-off date was prescribed as. May 2, 1983, the date on which the policy was announced in Parliament. It was made clear that purchase of equity shares and convertible debentures in excess of 5 per cent would require prior and specific approval of the Reserve Bank. The procedure for making applications for permission was prescribed and it was further provided thac where investment in excess of the 5 per cent ceiling is to be made on behalf of the non-resident investor who has not submitted any application to the Reserve Bank earlier in the prescribed form, the initial application for such investments should be made in the appropriate form giving details of the equity shares/ convertible debentures to be purchased. Paragraph 3 of Circular No. 12 prescribed procedure for monitoring the ceiling of 5 per cent. Authorised dealers through their link offices were required to submit to the Reserve !lank a consolidated statement of the total purchases and sales (company wise) of equity shares/ D convertible debentures made by their designated branches. The daily statements were to be serially numbered and submitted to the 'Controller posit!vely on the following working day. It was further provided "all purchases and sale tr-ansactions £.or which a firm connnitment has been made to acquire or transfer equity shares/convertible debentures in the form of the broker's E contract notes issued by recognised stock exchange brokers should be included in the daily statement irrespective of whether the actual deliveries have been effected or not." It was further provided that with ~ view to effectively monitor the 5 per cent ceiling, the Reserve Bank would, as soon as the aggregate reached the limit of 4 per cent, notify the fact to the link offices of the authorised dealers in Bombay. Thereafter the link offices were required to give the total number and value of equity shares/convertible debentures proposed to be purchased through the stock exchange during the next 15 days. Clearance for the purchase of equity shares/convertible debentures would be granted by the Reserve Bank after taking into account the purchases proposed to be made under the Portfolio Investment Scheme by all the authorised dealers from whom intimations have been received. ·

On September 19, 1983, another circular (18) was issued by the Reserve Bank of India advising all authorised dealers in foreign exchange that the facilities made available to the overseas companies, etc. by Circular No.9 d~ted April 14, 1982 were also available where such overseas bodies were owned even indirectly to the extent of at least 60 per cent by such

p. 944

non-residents of Indian nationality/ origin. What was necessary, was that the ultimate ownership of beneficial interest in the overseas bodies to the extent of at least 60 per cent must be in the hands of one or more non-resident individuals of Indian nationality/origin.

The net result of all the circulars was that non-resident individuals of Indian nationality/origin as well as overseas companies, partnership . firms, societies, trusts and other corporate bodies which were owned by or in which the beneficial interest vested in non-resident individuals of Indian nationality/origin to the extent of not less than 60 per cent were entitled to invest, on a repatriation basis, in the shares of Indian companies to the extent of one per cent of the paid-up c equity capital of such Indian company provided that the aggregate of such portfolio investment did not exceed the ceiling of 5 ·per cent. It was immaterial whether the investment was made directly or indirectly. What was essential was that 60 per cent of the ownership or the beneficial interest should be in the hands of non-resident individuals of Indian natonality/origin. Curiously enough though a limit of one per cent was imposed on the acquisi- D tion of shares by each investor there was no restriction on the acquisition of shares to the extent of one per cent separately by each individual member of the same family or by each individual company of the same family (group) of companies. In the absence of any such restriction, any non-resident determined to destabilise an Indian Company could do so by forming a E combination of different individuals and companies each of whom could separately obtain permission to purchase one per cent of the shares of an Indian company. The authority authorised to grant permission could not, for example, refuse to grant permission to B who has applied for permission in his own right on the mere ground that permission has been granted to his father F A. Similarly permission could not be refused to Company C in which D a non-resident Indian owns 20 per cent of the share and E another non-resident Indian owns 40 per cent of the Shares on the ground that Company L in which owns 60 per cent of the shares has already been granted permission. Would it make any difference if D owns 60 per cent of the shares in both Companies C and L ? G One can well imagine half a dozen overseas companies in which a dozen non resident individuals of Indian origin hold shares in varying proportions but holding in the aggregate more than 60 per cent of the shares of the overseas companies applying for permission to purchase shares in an Indian Company. Could permission be refused to them 1 la the Reserve Bank to concern H

L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 945

itself with the individual identity of the share holders of the overseas companies or the nationality or origin of the share- holders? Is the Reserve Bank to concern itself only with the c.olour of the skin, as it 'were, and not with the personality. of the share holder of overseas company? We will revert to this question later. Obviously, the one per cent rule was introduced to prevent largescale acquisition of shares of Indian companies by non-residents and their possible destabilisation. Also, obviously the rule was a futile exercise as it was incapable of yielding the desired result. Quite obviously therefore a better solution had to be found and it was found by the 'aggregate of _5 per cent' rule. This would automatically limit the total outside holdings and effectively prevent destabilisation. Of course, it C woµld still be necessary to satisfy the requirements of the Foreign Exchange Regulation Act, more particularly the requirement of sec. 29 of the Act providing for the general of special permission of the Reserve Bank to purchase the shares in India of the company. Though the ultimate authority under the scheme is the Reserve Bank, an important feature of the scheme is that the monitoring of the remittances and the investments has to be done by the designated Bank, which is the authorised dealer.

Two of the principal questions argued before us were whether the permission contemplated by sec.29 was previous permission or whether the permission cou~d be granted ex-post-facto and whether the purchase of the shares by the foreign investor of Indian nationality/origin in this case involved any contravention of the FERA or the Non-Residents' Investment Scheme. To appreciate how the questions arise it is necessary to state here a few facts.

Desiring to tnke advantage of the Non-resident Portfolio Investment Scheme and to invest in the shares of·Escorts. Limited, F an Indian company, thirteen overseas companies, twelve out of whose shares was owned 100 per cent .and fue thirteenth out of whose shares was owned 98 per cent by Caparo Group Limited, designated the Punjab National Bank as their banker(authorised dealer) and M/s. Raja Ram Bhasin & Co. as their brokers for the purpose of such investment. It must be mentioned here that 61.6 G per cent of shares of Caparo Group Limited are held by the Swraj Paul Family Trust, one hundred per Cent of whose beneficiaries are one Swraj Paul and the members of his family, all non- resident• individuals of Indian origin. Their designated banker, the Punjab National Bank, E.c.E. House Branch by their letter dated 4th March, 1983, but despatched on 9th March, 1983 and by another letter dated 12th flarch, 83, addressed the Controller, H Reserve Bank of India, Exchange Control Department and requested

p. 946

A the Reserve Bank to accord their approval for opening Non- resident External accounts in the name of each thirteen companies, three named in the First letter and ten named in the second letter, for the purpose of 'conducting investment opera- tions in India' through the agency of Raja Ram Bhasin & Co. , Stock Investment Adviser, Member of Delhi Stock & Share B Department, Delhi. These letters were received by the addressee on 14th and 18th March. It was mentioned in the letters that the proposed accounts would be 'effected' by remittances from abroad through normal banking channels and debits and credits would be allowed only in terms of the scheme contained in the scheme for investment by non-residents. The first letter was in respect of (1) Caparo Tea Company Limited, UK, (2) Empire Plantation and c Investment Limited, UK and (3) Assam.Frontier Tea Holding PLC, UK, while the second letter was in regard to (1) Caparo Invest- ments Limited, (2) Caparo Properties Limited, (3) Steel Sales Limited, (4) Atlantic Merchants Limited, (5) Buchanan Limited, (6) Seymour Shipping Limited, (7) Caparo Group Liml.ted, (8) Natural Gas Tube Limited, (9) Single Holdings Limited and (10) Deborne Hotel Torkey Limited. Forms RPC signed by each of the D companies and forms OAC signed by the auditors of the companies accompanied the two letters. Each form RPC mentioned that the company was incorporated in England and that 61.6% of the company was owned by non-residents of Indian nationality/origin. In each form OAC the auditor certified that the percentage of holding of the company by persons of Indian nationality/and/or origin was E 61.6% and that the name of the share-holder \<as 'Swraj Paul Family Trust through their interest in the holding company.' The auditors certified that the ownership. interest• of persons of Indian origin in the company was 61.6% Of the total ownership of interest as on the . date of certificate and that the entire beneficial interest in the family trust was held irrevocably by persons of Indian origin. On 23rd April, 83, Punjab National Bank addressed the Controller, Reserve Bank of India, Exchange Control Department, inviting their attention to their former letters dated 4th and 12th March, 1983, which were accompanied by the RPC and OAC forms relating to the l3 companies and advising the Reserve Bank that the investment operations were being conducted through the company Raja ~ Bhasin & Co., Share & Stock Invest- ment Advisers, Member of Delhi Stock Exchange Association Ltd. The Reserve Bank was also advised that four remittances had been received from Caparo Group Limited, the holding Company on 9.3.83,12.4.83, 13.4.83 and 23.3.83 of amounts equivalent to Rs.1,35,36,000, Rs.2,36,59,000, Rs.76,35,000 and Rs.1,31,38,681. H 13p. The Punjab National Bank also 'mentioned in the letter that

L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 947

although all necessary formalities prescribed by the Reserve A Bank's Circular dt. 22.4.82 had been complied with, approval had not yet been accorded to their clients. It was requested that the approval might be communicated to their client by cable.

We would like to mention at this juncture that the letters dated 4th March, 12th March and 23rd April, 1983 as well as all B other subsequent letters written by the Punjab National Bank, E.C.E. House Branch to the Reserve Bank are totally silent about a remittance of L 1,30,000 equivalent to Rs. 19,63,000 made by Mr. Swraj Paul to the Punjab National Bank, Parliament Street Branch on 28.1.1983 for the purpose of opening an NRE account in the name of Mr. Swraj Paul. The remittance was said to have been made pursuant to the discussion of Mr. Swraj Paul with the c Chairman of Punjab National Bank. We have no information as to what those instructions were. We are told that the cable and the letter relating to the remittance were handed over to the judges across the bar when the writ petition was being argued in the High Court. We may further mention here that on 26th January, 83, D three of the Caparo Companies, namely, Assam Frontier Tea Holding Public Limited Company, Caparo Tea Company Limited and Empire Plantations and Investment Limited addressed three icentical letters to Raja Ram Bhasin & Co. instructing the broker to purchase equity shares of Delhi Cloth Mills Limite.d at the best market price on a repatriation basis. Each letter mentioned that E a letter addressed to the Punjab National Bank, Parliament Street authorising payment of an advance of Rs. 20 lakhs was enclosed. Delivery of shares could be given as and when they were received from the market. It was also mentioned that the Bank would pay the full purchase value of the shares delivered and the advance of Rs.20 lakhs would be adjusted on the final delivery of the shares. Curiously enough, these letters were tendered by the F company Escorts Limited. Letters to the Punjab National Bank said to accompany the letters were nc:it placed before us and the counsel for the Punjab National Bank denies that any such 1etter was ever received by the Punjab National Bank. Be that as it may, we have the circumstance that a remittance of L 1,30,000 was undoubtedly made. to the Parliament Street Branch of the Punjab G National Bank, unbeknown or at any rate said to be unknown to the ECE House Branch of the Punjab National Branch. The record produced before us does not indicate what was done with the aioount of L 1,30,000 nor does it indicate that the Reserve Bank of India was ever informed of this remittance by the Punjab National Bank. The money appears to have come in and disappeared like a will-o'-the-wisp. The learned counsel for the Punjab H