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

p. 989 Copy page pinpoint

has been delivered to the company along with the certificate relating to the shares. Section 108(la) (a) provides for the presentation of the instrument of transfer, in the prescribed form, to the prescribed authority for the purpose of having duly stamped on it the date of such presentation. Section 108(1A)(b) provides for the delivery of the duly stamped instrument to the company generally within two months from the date of such presentation. Sections 108-A to 108-ti impose certain restrictions on transfer of shares in the company with which we are not concerned for the purpose of this case. Section 110 provides for application for transfer of shares. Section 111 (I) preserves the power of the company under its articles to refuse to register the transfer of any shares of the company, and sec.111(3) provides c for an appeal to the Central Government agairwc such refusal to register. Section. 206 obliges a company not to pay the divi- dend in respect of any share except to the registered holder of such share or to his order or to his bankers or where a share warrant has been issued in respect of the share to the bearer of such warrant or to his banker. Default in payment of dividend is also made punishable under sec. 207. A share-holder along with others, making a minimum of one hlUldred members of the company or one-tenth of the total number of members, has the r.ight to apply to the court under sec. 397 for relief in case of oppres- sion and under sec. 398 for relief in case ~f mismanagement. Section 428 defines 'contributory' and it includes the holder of any shares which are fully paid-up. The share-holder, as a contributory, has also the right to apply for winding up of the company under sec. 439. On winding up, sec. 475 enables the court to adjust the rights of the contributories amor.gst themselves and to distribute the surplus among the persons entitled thereto. F We have also no notice here sec. 27 of the Securities Contracts (Regulation) Act which provides that it shall be lawful for the holder of any security, whose name appears on the books of the company issuing the said security to receiVe aud retain any dividend declared by the company in respect thereof for any ·year, notwithstanding that the said security has already been G . transferred by him for consideration, unless the transferee, who claims the dividend from the transferer has lodged the security and all other documents relating to the transfer 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. H

990 SUPREME COURT REPORTS [1985] SUPP. 3 S.O,R,

A We have to further notice here that the sale of Goods Act also applies to stocks and shares. Section 2(7) of the Sale of Goods Act defines 'goods' as meaning "every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be sold before sale B or under the contract of sale."

Section 19 prescribes that where there is a contract for the sale of specific or ascertained goods the property in them i• transferred to the buyer at such time as tht! parties to the contract intend it to be transferred. Intention may be ascertained having regard to the terms of the contract the c conduct of the parties and the circumstances of the case. Unless a different intention appears, the rules contained in section 20 to 24 are to determine the intention as to the time at which the property in the goods is to pass to the buyer. Section 20 deals with specific goods in a deliverable state. Section 21 deals with specific goods to be put into a deliverable state. Section 22 deals with specific goods in a deliverable state when the seller D has to do anything thereto in order to ascertain the price. Section 23 deals with sale of unascertained goods and appropriation and section 24 deals with goods sent on approval or "on sale or return".

E We have referred at the outset and indeed we have extracted some of the important provisions of the Foreign Exchange Regula- tion' Act which have relevance to the case before us. We have seen that while sec. 19(1)(b) prescribes that no person shall, except with the general or special provision of the Reserve Bank, trans- fer any security or create or transfer any interest in a secur- F ity, to or in favour of a person resident outside India, sec. 29(l)(b) provides that no person resident outside India (whether a citizen of India or not) or a company is not incorporated under any law in force in India or in which the non-resident interest is more than 40 per cent, shall except with the general or special permission of the Reserve Bank purchase the shares in G India or any company carrying on any trade, coDlllerce or industry. The provisions of sec. 29 are stated to be without prejudice to the provisions of sec. 47 which while prohibition any person from entering into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provi- sion of the Act or rule or direction or order made thereunder H

L,l,C, v. ESCORTS [CHINNAPPA REDDY, J,] 991

also provides that the provisions of the Act requiring that any- A thing for which the permission of the Central government or the Reserve Bank is necessary shall not prevent legal proceedings being brought in India to recover any sum which, apart from the said provisions would be due as debt, damages or otherwise, sub- ject to the condition that no step shall be taken for the purpose of enforcing any judgment or order for the payment of any sum, B unless the Central Government or the Reserve Bank as the case may be, may pe~mit the sum to paid. We have also referred earlier to sec. 19(4) which stipulates that no person shall, except with the permission of the Reserve Bank, enter the transfer of securities in any register if he has any ground for suspecting that the transfer involves any contravention of the provisions of sec. 19, C Sections 48, 50, 56 and 63 prescribe the consequences of non-compliance with the provisions of the Act and the rules, orders and directions issued under the Act and provide fq_r penal- ties and prosecutions. The provisions of the Foreign Exchange Regulation Act, to which we have just now referred, do not appear to stipulate that the purchase of shares without obtaining the permission of the Reserve Bank shall be void. On the other hand, legal proceedings arising out of such transactions are contempla- ted subject to the condition that no sum may be recovered as debt, damages or otherwise, unless and until requisite permission is obtained. We have already held that the permission may be ex-post-facto. If permission may be granted ex-post-facto, quite obviously the transaction cannot be a mullity and without any effect whatsoever.

In the course of the submissions we were referred to Manekj i Pestonj i Bharucha and Anr. v. Wadilal Sarabhai and Company, 52 I.A.92, Bank of India v. Jamshetji A.H. Cldooy, A.I.R. 1950 P.C.90, In Re Fry, 1946 (2) All E,R, 106 Swiss Bank. Corporation F v. Llodys Bank. Ltd. 1982 A.C. 584, <liaranjit Lal Choudhury v. Union of India A.I.R. 1951 S.C. 41, llathalone and Ors. v. Bombay Life Assurance Company Limited A.I.R. 1953 S.C. 385 and Vasudev R....,cbandra Sbelat V• Pranlal Jayanand 'l.'hakkar, (supra) A..K. Kamiah v. Reserve Bank 1970 (1) M.L,J. l and Baliv Chopra I.A.R. 1971 (2) Delhi 637. We have read all of them and we think it is enough if we ref er to some of them.

In <liaranjit Lal Choudhury V• Union of India (supra), Mukherjee, J. summarised the rights of a shareholder in a company in the following manner : 11 The petitioner as a shareholder has undoubtedly an interest in the company. His interest is represented by the share he holds and the share is a movable

p. 992 Copy page pinpoint

property according to the Indian companies Act, with all the incidence of such property attached to it, Ordinarily, he is entitled to enjoy the income arising from the shares in the shape of dividends; the share like any other marketable commodity can be sold or transferred by way of mortgage or pledge. The holding of the share in his name gives him the right to vote at the election of Directors and thereby take a part, though indirectly in the management of the company's affairs. If the majority of share-holders sides with him, he can have a resolution passed which would be binding on the Company and lastly, he can institute proceedings for winding up of the Company which may result in a distribution of the net assets among the c share holders. 11

It is interesting to notice that Mukherjee, J, in the course of his opinion, expressed the view that a Corporation, which is engaged in the production of a commodity vitally essential to the community has a social character of its own and it must not be regarded as the concern primarily or only of these who invest their money in it.

In Mathalone and Ors. v. Bombay Life Assurance Company Ltd. (supra), the question of relationship between the transferor and transferee of shares before registration of the transfer in the books of the company came to be considered in connection with the right of the transferee to the 'right-shares' issued by the company. On the transfer of shares transferee became the owner of the beneficial interest though the legal title was with the transferor the relationship of trustee and 'cestui que trust' was • established and the transferor was bound to comply with all the reaaonable directions that the transferee might give and that he became a trustee of dividends as also a trustee of the right to ( vote. The relationship of trustee and cestui que trust arose by reason of the circumstance that till the name of the transferee was brought on the register of shareholders in order to bring about a fair dealing between the transferor and the transferee equity clothed the transferor with the status of a constructive trustee and this obliged him to transfer all the benefits of property rights annexed to the sold shares of the cestui que trust. The principle of equity could not be extended to cases where the transferee had not taken active steps to get his name registered as a member on the register of the company with due diligence and in the meantime, certain other privileges or opportunities arose for purchase of new shares in consequences of

p. 993 Copy page pinpoint

the ownership of the shares already acquired. The benefit obtained by a transferor as a constructive trustee in respect of the share sold by him cannot be retained by him and must go to the beneficiary, but that cannot compel. him to make himself liable for the obligations attaching to the new issues of shares and to make an application for the new issue by making the necessary payments, unless speci~lly instructed to do so by the beneficiary.

In Vasudev R8JD8chandra Shelat v. Pranlal Jayanand Thakkar (supra), the q ues ti on arose this way, The donor gifted certain shares in companies to the appellant by a registered deed. She also signed several blank transfer forms to enable the donee to c obtain transfer of shares in the register of companies. However, she died before the shares could be transferred to the appellant in the books of the companies. The respondent, a nephew of the donor, filed the suit, claiming the shares on the ground that the gift was incomplete for failure to comply with the formalities prescribed by the Indian Companies Act 1913 for transfer of shares. Noticing that in 53 Indian Appeals, 92 a distinction was made between· "the title to go on the register" and "the full property in the shares in a company",the court expressed the view that sec.6 of the Transfer of Property Act also justified such a splitting up of a right constituting "property" on shares just as it was well recognised that rights of ownership of property might be split up into a right to the "Corpus" and another to the "usufruct" of the property and then separately dealt with. On the delivery of the registered deed of gift together with the share certificate to the donee, the donation of the right to get the share certificate transfereed in the name of donee became irrevoeable by registration as well as by delivery. Either was sufficient. The actual transfer in the registers of the companies constituted more enforcement of this right to enable the donee to exercise the rights of the shareholder. The more fact that such transfers had to be recorded in accordance with the Company Law did not detract from the completeness of whet was donated. Referring to Regulation 18 of the first schedule to the Companies Act of 1913 which prescribed the mode of transfer of shares, i t G was observed by the court that there was nothing either in the Regulation or elsewhere to indicate that without strict compliance with some rigidly prescribed form, the transaction must fail to achieve its purpose. It was said, "the subservience of substances of a transaction to some rigidly prescribed from required to be meticulously observed, savours of arohsic and outmoded jurisprudence." The Court referred to the passage in H Bucl<ley on the Canpan1 es Acts XXXI Edn. Page 813

p. 994 Copy page pinpoint

"Non-registration of a transfer of shares made by a donor does not render the gift-imperfect", and the pass"f,e in Palmar's Calmon Law : 21st Edn. page 334 : A transfer is incomplete until registered. Pending registration, the transferor has only an equitable right to the shares transferred to him. He does not become the legal owner until his name is entered on the register in respect of these shares." The two statements of law were reconciled by the court and its was stated "the transferee under a gift of shares, cannot function as a shareholder recognised by Company Law until his name is formally brought upon the register of a company and he obtain a share certificate as already indi- cated above. Indeed, there may be restrictions on transfers of shares either by gift or by sale in the articles of association." It was pointed out that, "a transfer of "property" rights in c shares, recognised by the Transfer of Property Act, may be antecedent to the actual vesting of all or the full rights of ownership of shares and exercise of the rights of shareholders in accordance with the provisions of the Gompany law," and that while transfer of property in general was not the subject matter of the companies Act, it deals with "'transfers of shares only because they give certain rights to the legally recognised share- D holders and imposes some obligations upon them with regard to the companies in which they hold shares. A share certificate not merely entitles the shareholder whose name is found on it to interest on the share hold but also to participate in certain proceedings relating to the company concerned.

E In lie Fry, (supra), F, a resident of the United States· of America desiring to make a gift to his son of certain shares of an English company, executed a deed of transfer and sent i t to the company for registration. As the Lefence (Finance) Regulations prohibited any transfer of any securities or any interest in securities held by a non-resident ~ithout permission F from the Treasury, the company wrote to that certain forms had to be completed by him and the transferee and that a licence had to be obtained from the Treasury. Before F could apply and obtain the permission of the Treasury, he died. The question arose whether. F's son was entitled to require F's personal representatives to obtain for him legal and beneficial position of the shares. It was held that the permission of the Treasury not having been obtained, the company could not register the transfer and, therefore, the son acqujred no legal title to the shares in question. !\or was there a complete gift of the equitable interest in the shares to the son because F had not

L.I.C. v. ESCOR1S [QiIN1'APFA RELLY, J.] 995

obtained the consent of the Treasury and had, therefore, not done all that was necessary to divest hin£elf of his equitable A interest in favour of his son. The son was, therefore, not entitled to sue. the father's personal representatives to obtain for him legal and beneficial position of the shares.

ln Swiss Bank Corporation v. Uoyds Bank Ltd. & Ors., (supra), the question was about the Consequence of an authorised D depositary under s. 16(2) of the Exchan[;e Control Act, parting with a certificate relating to a foreign currency security without the permission of the 1reasury contrary to Bank of England Exchange Control Notice E.C.7. In the court of appeal, Buckley L.J. observed : c " •••• the Bank of England, we must assume for sufficient reasons, declined to validate the transfer of custody. It must consequently be treated as havin[; been made in contravention of section 16(2), which, as I have already mentioned, is conceded; but an act done in contravention of a statute is not necessarily L nullity. Whether it is so or not must depend upon the terms and effect of the statute, and may depend upon the policy of the statute and the nature of the act itself. By section 34 of the act effect is given to the provisions of Schedule 5 to the Act for the purposes of the enforcement of the Act. Paragraph 1(1) E of Part II of that Schedule provides that any person in or resident in the United Kingdom who contravenes any restriction or requirement imposed by or under the Act shall be guilty of an offence punishable under the part of that Schedule. 'Ihe subsequent provisions of that part of the Schedule in.pose maximum penalties by \.Jay of imprisonment or find for such of fence - F

"In ruy judgment, offences under the Act are clearly mala prohibita, not rr.ala in se; they are not acts the validity of which the· law refuses to countenance for any purpose. As such they are not devoid of any effect; they ruerely expose the culprits to the G penalti~s prescribed by the Act none of which, so far as I am aware, has been exacted or sought to be exacted in this case ••••••••••••••••••.•••••••••••••• ••••••••••• If the legislature had intended that such a

• security, if transfered from the custody· of the one authorised depositary to the custody of another R

996 SUPIJM. COUF,T REPORTS [1985] SUPP. 3 s.c.R.

A without collipliance· with all the conditions of any relevant permission, should not be treated as being in the custody of the latter depositary, one would. I think, expect to find an express provision to that effect, for otherwise the consequences of an irregular transfer of custody is left in doubt." B Earlier we mentioned that S.111 of the Companies Act preserves the power of the company under its articles to refuse to register the transfer of any shares of the company. The nature and extent of the power of the collipany to refuse to register the transfer of shares has been explained by this court in Bajaj Auto Limited v. N.K. Ferodia and Arrr. 41 Company Cases 1 = [1971] 2 s.c.R. 4C. It was said that even if the article of the company c provided that the directors might at their absolute and uncontrolied discretion decline to register any transfer of shares, "such discretion does not mean a bare affirmation or negation of a proposal. Liscretion implies just and proper consi- deration of the proposal in the facts and circumstances of the case. In the exercise of that discretion, the Directors will act for the general interest of the shareholders because the D Directors are in a fiduciary position both towards the company and towards every shareholder. The Lirectors, are, therefore, required to act bona fide and not arbitraily anci not for any collatoral motives" \Vhere the articles permitted the Directors to decline to register the transfer of shares without assigning reasons, the court would not necessarily draw adverse inference E against the Directors but will assume that the 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 wrong principle. If the articles r-ernd.tted the Directors not to disclose the reasons, they could be interrogated and asked to disclose the reasons. If F they failed to disclose that reason, adverse presumption could be drawn against them.

On a overall view of the several statutory- provisions and judicial i;recedents to which we have referred we find that a shareholder has an undoubted interest in a Company, an interest G which is represented by his share-holding. Share is movable property, with all the attributes of such property. The rights of a shareholders are (i) to 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 R

L.r.c. v. E5CORTS [C.hINNAHA F.ELuY, J.] 997

relief in the case of oppression; (v) to apply to the Court for A relief in the case of ndsmanagement; (vi) to appl} to the Court for winding up of the Company; (vii) to share in the surplus on winding up. A share is transferable but while a transfer may be effective between transferor and transferee from the date of transfer, the transfer is truly cotL.f>lete and •the transferee becomes a shareholder in the true and full sense of the tenn., E with all the ri5hts of a shareholder, onll when the transfer is registered in the company's register. A transfer effective between the 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 the transfer is register in the books of the company c the person whose na1lle is found in the register alone is entitled to receive the dividends, notwithstanding that he has already parted with his interest,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. The relationship of trustee and 'cestui que trust' is established L and the transferor is bound to comply with all the reasonable directions that the transferee may give. lie also becomes a trustee of the dividends as also of the rie,ht to vote. The right of the transferee 'to get on the register' nrust be exercised with due diligence and the principle of equity which makes the trans- feror a constructive trustee does. not extend to a case where a transferee takes no active interest 'to get on the register'. Where the transfer is regulated by a statute, as in the case of a transfer to a non-resident which is regulated by the Foreign Exchange Regulation Act,. the permission, if any, prescribed 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 F is obtained. A transferee who has the right to get on the register, where no permission is required or where permission has been 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 a bona fide reason, neither arbitrarily nor for any collateral purpose. The G paramount consideration is the interest of the company and .the general interest of the shareholder. On the other hand, where, for instance, the requisite permission under the FERA is not obtained, it is open to the company and, indeed, it is bound to refuse to re5ister the transfer of shares of an Indian company in favour of a non-resident. but once permission is obtained, whether before or after the purchase of the shares, the company h cannot, thereafter, refuse to register the transfer of shares.

998 SUPREME COURT REPOR1S [1985] SUPP. 3 s.c.R.

Nor is it Open to the company or any other authority or indivi- A dual to take upon itself or himself, thereafter, the task of deciding whether the permission was rightly granted by the Reserve Bank of India. 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 B orders from time to time have been fulfilled and whether permission should be ~ranted 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 lndividual or authority functioning outsirie the Act to c determine for his own or its own purpose whether the Reserve Bank was right or wrong in granting permission under sec. 29(1) of the Act. As we said earlier, under the scheme of the Act, it is the Reserve Bank of India that is constituted and entrusted with the task of regulating and conserving foreign exchange. If one may use such an expression, it is the 'custodian-general' of foreign exchange. The task of enforcement is left to the Lirectorate of D 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 sec. 29(1) of the Act. 1he 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 question may not be permitted to be raised either directly or collaterally. We do not, however, rule out the limited class of cases where the grant of permission by the Reserve Bank of India may be questioned, by an interested party in a proceeding under Art. 226 of the Constitution, on the ground that it was mala fide or that there was no application of the lilind or that it was opposed to the national interest as conten.plated by the Act, being in contravention of the provisions of the Act and the rules, orders and directions issued under the Act. Once permis- sion is granted by the Reserve Bank of India, ordinarily it is not open to anyone to go behind the permission and seek to question.it. 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 FEfu'. It is necessary to remind ourselves that the permission contemplated by sec. 29(1) of the H Foreign Exchange Regulation Act is neither intended to nor does

L.I.C. v. ESCOB1S [C!UliNAFPA F.E.LLY, J.] 999

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.

Much was said before us about the ruala f ides of the Govern- ment of India and the Reserve Bank of India and the non-applica- tion of mind by the Reserve Bank of lndia which was said to amount to legal mala fides. Thou5h Shri Nariman, learned counsel for the company, now and then, in the course of his argument mentioned that Shri Swraj Paul had been issuing press statements which were generally followed up, according to him, by some action or the other by the Government or the Reserve Bank, he properly refrained from reading to us the press statements said to have been made by Shri Swraj Paul. however, the gist of some of the press statements and releases .of Shri Swraj Paul has been included in the pleadings which were read out to us. It may be that Shri Swraj Paul was ever ready and anxious to issue press releases for his own ends either because he had an inkling or made a guess of what course of action the GoverllIL.ent or the t Reserve Bank lYas likely to pursue or because he, like every interested party, was interested in niaking statements which may find some respective ears some where. There is nothing whatever to indicate that Shri Swraj Paul had any access to anyone who was in a position to take a decision in the matter or influence a decision in the matter. We do not think we can attach any importance to the vainglorious and grandiloquent press statements and releases ruade by Shri Swraj Paul. They deserve to be ignored as the over-rated staten.ents of a person, who rated himself very high. The most in..portant circumstance on which reliance was placed on behalf of the company in support of the argument relating to mala fides was the 'turn-about of the attitude of the Reserve Bank of India in the matter. It was said that in the beginning, the Reserve Bank of 'India had serious reservations on the question whether indirect purchase of shares by non-residents of Indian nationality/origin was permissible under the original scheme. Later after the Governor of the Reserve Bank had discus- sions with the Finance SecretarY, Finance 1.'"i.inister and the Personal &ecretary to the Prim.e }dnister the Reserve Bank of G India changed its attitude and issued the impugned circular and the permission. Our attention ;,as particularly invited to: (i) the letter dated June 1, 1903 from the Reserve Bank of India to the Governrr.ent of India in which the Reserve hank appeared to take the view that the scheme did not contemplate indirect

1000 SUPREME COURT REPORTS [1985] SUPP. 3 s.c,R.

A investment by non-resident individuals of Indian nationality origin and proposed to reject the application of all the 13 over- seas companies, but sought the confirmation of the Government of India, (ii) the reply dated September 17, 1983 of the Government of Indi.a to the Reserve Bank of India and (iii) the endorsement made on the letter dated 17.9.83 by the Governor or the Reserve B Bank of India. We have already referred to the contents of (i) and (ii), the two letters in the proceeding paragraphs. We have also extracted the endorsement of Dr. Man 1-bhan Singh in full. The inference sought to be drawn from (i), (ii) and (iii) is that though the Reserve Bank of India had expressed itself strongly in (i), it was under the pressure of the Finance Secretary, Finance Minister and the Personal Secretary to the Prime Minister that the Governor of the Reserve Bank of India finally agreed to adopt the line suggested by the Government in its letter dated 17.9.83 and that the decision of the Reserve Bank of India was not that of a free agent. The Circular issued by the Reserve Bank of India and the permission granted by it, it was suggested, were so issued and granted under the pressure of the Government of India. We do not think that we will be justified in drawing any such inference. It would be wholly unfair and uncharitable to Dr. Man 1-bhan Singh. An enormous amount of foreign exchange vital to the economy of the country was involved. Though the Reserve Bank of India appeared to have taken, in the beginning, a certal.n position in the matter, it thought it necessary to consult and seek the advice of trui Government of India in the matter. There E were high level discuasions obviously becauae of the amount of foreign exchange and the question of policy involved and the matter had also attracted considerable attention from the Press as the public. If after high level discussions the Reserve Bank of India changed its views, it would be unreasonable and impermissible to hold that it was done under pressure. Every F question of this nature is bound to have different facets which present themselves in different lights when viewed from different angles. If after full discussion with those in the 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 economy of the country, one fails to see how its decision can be said to be the result of any pressure.

It was argued that, from time to time, the company had addressed several colll!lllni~tions to the Reserve Bank of India drawing the latter's attention to several irregularities and illegalities, which it claimed, had been coomitted by Mr. Swraj

L.I.c. v. ESCCRTS [CllINNAI'PA REDDY, J.] 1001

Paul and the Caparo Group of Companies, but to no avail, as the Reserve Bank failed to respond and make any enquiry into the matter. It was said that the Reserve Bank of India was guilty of total non-application of the mind and, therefore, n.ala fides in law could be attributed to it. We are unable to agree with this submission. Merely because the Reserve Bank of India did not choose to send a reply to the communications received frOlll the company, it did not follow that the Reserve Bank of India was not acting bonafide. While we may say that the Reserve Bank would have done well to acknowledge the conmnmications received from the company and to reply ·to them, we are unable to infer malafide from their failure to do so. It was not as if the Reserve Bank ignored the complaints of the company. They did enquire into the matter in their own way. As already mentioned by us during the c course of the narration of events, the Reserve Bank pursued its enquiry by seeking information from the Punjab National Bank, who was an authorised dealer appointed under the provisions of the Foreign Exchange Rei,,ulation Act and who, therefore, could be expected to supply the Reserve Bank with full and accurate information. At that stage, there was nothing to doubt the bona fides and the ineptitude of the Punjab National Bank. The company also in its several communications to the Reserve Bank did not make any allegations against the Punjab National Bank. In those circumstances, if the Reserve Bank thought fit to seek informa- tion from the Punjab National Bank and proceeded to act on the information obtained from the Punjab National Bank, the Reserve Bank cannot be accused to non-application of mind. The Reserve Bank was entitled to rely on the Punjab National Bank and the information supplied by that bank as the bank held a statutory position under the Foreign Exchange Regulation Act. It may be that the Punjab National Bank did not act with that degree of ·competence and diligence as should be expected from it, but at that stage, there was nothing to provoke any suspicion in the iiiind of the Reserve Bank. We will revert to the part played by the Punjab National Bank presently, but there is no reason to change the Reserve Bank with want of bona fides and non-applica- tion of mind merely because H placed reliance upon the Punjab National tank and the informatio11 supplied by it although with the aid of some of the material now ~rought out during the G hearing, we perceive that the Reserve Bank could have acted with greater wisdom than to rely on the Punjab National Bank. But that would really be speaking with 'hind-..ight'.

Earlier we referred to the failure of the Punjab National Bank to iilform the Reserve Bank, as it.was bound to do, about the remittance of L 1,30,000 received from M.r. Swraj Paul by their Ii

1002 SUPl\fil'£ COURT REPORTS [1985] SUPP. 3 s.c.R. 1 A Parliament Street Branch. It was a sorry confession to hear from the Punjab National Bank that their ECL House Branch which was monitoring the NRE Accounts and the purchase of shares by the Caparo Group of Companies was not aware of the remittance received by the Parliament Street Branch. Ive are now told that this amount of L 1,30,000 was also utilised for purchasing shares B for the Caparo Group of Companies. If that was so, the ECE House Branch should have _known about it. Otherwise, one wonders what was the monitoring that was done by the E.CE House Branch, if i t was not even aware that a large remittance of L 1,30,000 received by their Parliament House Branch had been utilised for purchase of shares for the Caparo Group of Companies. If the amount was not utilised for the purchase of shares for the Caparo Group of c Companies, i t must necessarily follow that locally available funds and not foreign remittances must have been utilised for purchasing some of the shares. The fact that this large sum had been remitted by Shri Swraj Paul and received by the Punjab National Bank was never brought to the notice of the Reserve Bank of India who was apparently kept in the dark about it. We consider this a serious matter which requires further probe by the Reserve Bank. We find that the entire conduct of the Punjab National Bank in this affair has been most irresponsible. They had been appointed as authorised dealers under the Foreign Exchange Regulation Act and by virtue of such appointment great confidence had been reposed in them for the purpose of regulating the flow and conserving the foreign exchange and protecting the national interest. The FortfOlio Investment Schellie ~rovided that the banks which were designated as authorised dealers could purchase shares on behalf of their non-resident customers of Indian nationality/origin through a stock exchange. The applications of the foreign investors for permission to invest in shares of Indian companies were in fact to be made through the designated banks. By paragraph 11 of Circular No.9 dated April 14, 1982 the designated banks were required to maintain separately a proper record of the investment made in shares, with and without repatriation benefits, on account of the investor, showing all relevant particulars including the nUllibers of share certificates and distinctive numbers of shares. They were required to keep a systematic and upto-date record of the shares purchased by them for each investor through the stock exchange so that they would be able to ensure that the purchase of shares in any one con;pany by a single investor would not exceed Rs. One lakh in face value of the company. Again by circular No. 10 of April 22, 1982, the authorised dealer (designated bank) was required to obtain from the investing overseas companies a certificate fron; an auditor/chartered accountant/certified public

L.r.c. v. ESCORTS [ClilNNAPPA REDLY, J.] 1003

accountant in form OAC. The certificate was to be obtained by the authorised dealer every year. when by circular No. 12 of May 16, 1983, an overall ceiling of 5 per cent of the total paid-up equity capital of the company was imposed, it was prescribed, for the purpose of monitoring the ceiling of 5 per cent, that authorised dealers who were permitted to purchase shares under the Portfolio Investment Scheme on behalf of the eligible non-resident investors should nominate a link office in Bombay for the purpose of coordinating the purchases and sales of equity shares made by their designated branches on a daily basis and notify the same to the Controller, Control Exchange Department, Reserve Bank of India. The link officers were required to submit a consolidated statement of the total purchases and sales of c equity shares made by the designated branches in the prescribed form. The daily statements were to be submitted to the Controller positively on the succeeding day. We may straight away say that the Punjab National Bank, apart from receiving the remittances from the Caparo Group Limited and passsing on the amounts to the stock brokers, Raja Ram Bhasin & Co. did nothing whatsoever to D discharge their prescribed duties as authorised dealers. It is now admitted that they did not give any instructions to Rajaram Bhasin & Co. regarding the purchase of shares, that they never maintained any systematic, uptodate and proper record of the investments made in shares and that they did not submit daily statements of purchases and sales of shares to the Controller. Of E course, in the beginning, they submitted the applications of the Caparo Group of Comi>anies to the Reserve Bank for permission to purchase shares in Indian Companies. 1hat was on the 4th and the 12th of tiarch, 1983. Thereafter, they wrote to the Reserve Bank on April 23, 1983 reminding the latter about the applications of their customers for permission e.nd informing them about the receipt of four remittances on 9.3.1983, 12.4.1983, 13.4.1983 and F 23.3 .1983. They also mentioned that investruent operations were being conducted through Raja Ram Bhasin & Co. What shares, how many, and for what amount, these details were not mentioned, not even the total number of ~hares purchased and the amount expended till then. T~erefore, in answer to a letter from the Reserve Bank, they wrote on Nay 6, 1983 that they had been advised that G Mr. Swraj Paul and famJ,ly members hold 61.6 per cent of share capital of Caparo Group Limited and that Caparo Group hold 100 per cent of share capital of the remaining companies except Caparo Properties in which the holding was 98 per cent. In this letter, it was expressly stated "As regards details of shares of Indian Co~panies purchased by or on behalf of said non-resident clients, they have advised us that the same would be supplied H when the purchases were complete." This statement appears to us

1004 SUFF.EME COURT REPORTS [1985] SUPP. 3 s.c.R.

A to be in complete breach of the duties of the authorised dealer under the Portfolio Investment Scheme. The letter shows that not only the sales were not put through by the authorised dealers, the authorised dealers were not even aware of the transactions that had taken place till then, though we are now told that all the shares had been purchased by April 28, 1983. It was only on B 31.5 .1983 that the Punjab National Bank sent a telegram to the Reserve Bank of India that they had been advised by the brokers that up to 28.4.83, 75,000 equity share& of Escorts Limited had been purchased on behalf of and for the benefit of each of the thirteen overseas companies. The Reserve Bank sought information by their letter dated 11.6.1983 of the purchases of shares made for the benefit of the overseas companies, (i) upto December, c 1982; (ii) from 1.1.83 to 28.2.83; (iii) from 1.3.83 to 2.5.83; and (iv) after 2.5.o3. Letails of purchases including the total number and face value of the shares were required to be given. The Punjab National Bank replied on 23 .6 .83 to the effect that their brokers had informed then. by their letter dated 22.6.83 that 75,000 shares of Escorts Limited had been purchased for each of the thirteen companies during the period fro!Ii 1.3.83 to D 2 .5 .83, but none were purchased before or after. It was also stated that the brokers had confirmed that no other purchases had been made besides these shares. This letter again discloses how casual they were in the discharbe of their duties as authorised dealers. !.ot only did they not maintain upto date and proper record of the purchases made on behalf of each of the companies, not only did they not submit daily statements to the Controller, they were not even aware of the transactions which had taken place but were solely dependant on the information supplied to them once in a way by Raja Ram Bhasin & Co. Though the Reserve Bank did make some enquiries from the Punjab ~ational Bank, the Reserve Bank did not pursue the matter as vigorously as they might have done but, apparently, preferred to rely upon the Punjab National Bank probably for the reason that they were auth- orised dealers under the Foreign E.xchange Regulation Act and could be expected to have been doing everything properly and in a manner authorised and contemplated by the Act and the scheme. It has to be remembered that Escorts Limited also had made no com- G plaint regarding the Punjab National Bank. It is only now it has come to light that the Punjab National Bank acted no better than a mere dumb, dunmy and signally failed to discharge the functions entrusted to then. under the Act and the scheme.

L.I.C. v. ESCORTS [CRINNAPPA REDDY, J.] 1005

The result of the dereliction of duty on the part of the A Punjab National Bank is that there had been no proper monitoring of the purchase of shares by the thirteen Caparo Group of Companies. while we are unable to hold that the Reserve Bank of India did not act bona fide or apply its mind to the relevant facts and circumstances which were required to be considered by it before &rantillf; permission, because, it did bona fide apply its mind to whatever material was then available to it and supplied to it by the Punjab National Bank, we must hold on the material now available to us that their implicit reliance on the Punjab National bank was entirely misplaced. what further action must be taken on that finding is a question which we have to consider. •e will do so later after considerating the other questions argued before us.

Shri ~ariman contended that there were several circum- stances in the record which established that a large number of shares were purchased with funds which were made available locally and not funds remitted from abroad and also that the shares were purchased subsequent to 2.5.83. lhe circumstances were : (i) the purchase of shares commenced before the remittan- ces started; (ii) the price at which the shares were available in the market showed that funds in excess of what was remitted must have been utilised for purchasing the shares and this could only have been with rupee funds; (iii) the company was able to obtain two brokers' notes from two of the sellers' brokers which showed that the sales were made lone, subsequent to 2.5.83 and (iv) out of the total number of shares purchased on behalf of the thirteen companies, 4,62,000 shares only were lodged with the company on 14.5.83 for re&istering the transfers. 3,68,463 shares were lodged on 19.8.83, that is 3-1/2 months after 2.5.83, which was the cut-off date fixed for the imposition of the ceiling of 5 per cent. 1,44,200 shares were not lodged at all with the company. The failure to lodge the shares within a reasonable period at 28.4.83 which was supposed to be the date by which all the pur- chases had been made indicated that the purchases nrust have been made long afterwards. Everyone of these circumstances is capable of some explanation, adequate or not, we do not have the neces- G sary material to say on the record now before us .. 'lhe question will involve a probe into individual purchases and the adduction of evidence. That would be beyond the scope of the writ petition in the Hi&h Court. It is to be remembered that the High Court refused to issue a rule nisi in regard to prayer(d), obviously as it was thought that the court exercising jurisdiction under Article 226 of the Constitution should not explore the evidence li

1006 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

to determine the dates of the various transactions of purchase of A shares and whether they were purchased with foreign exchange or locally available funds. We consider that it is really a matter for the consideration of the final monitoring authority, namely, the Reserve Bank of India. We will later indicate what we propose to do about this aspect of the matter.

B It was submitted that the thirteen Caparo Companies were thirteen companies in name only; they were but one and that one was an individual, Mr. Swraj Paul. One had only to pierce the corporate veil to discover Mr. Swraj Paul lurking behind. It was submitted that thirteen applications were made on behalf of thirteen companies in order to circumvent the scheme which prescribed a ceiling of one per cent on behalf of each c non-resident of Indian nationality or origin of each company 60 per cent of whose shares were owned by non-residents of Indian nationality/origin. Our attention was drawn to the picturesque pronouncement of Lord Denning M.R. in Wallersteiner v. lbir 1974 3 All E.R. 217, and the decisions of this court in Tata F.ogineer- ing snd Locomotive Company Ltd. v. State of Bihar 1964 6 s.c.R. 885, The ec-J.ssioner of Ince.! Tax v. Meenakshi Mills A. I. R. D 1967 S.C. 819, and Workmen v. Associated Rubber Ltd. 1985 2 Scale

321. While it is firmly established ever since SalOllKln v. A. SslOllllll & Co. Limited 1897 A.G. 22, was decided that a company has an independent and legal personality distinct from the individuals who are its members, it has since been held that the corporate veil may be lifted, the corporate personality may be ignored and the individual members recognised for who they are in certain exceptional circumstances. Pennington in his Company Law (Fourth Edition) states :

"Four inroads have been made by the law on the principle of the separate legal personality of companies. By far the most extensive of these has been made by legislation imposing taxation. The Government, naturally enough, does not willingly suffer schemes for the avoidance of taxation which depend for their success on the employment of the principle of separate legal personality, and in fact legislation has gone so far that in certain circumstances taxation can be heavier if companies are employed by the tax-payer in an attempt to minimise his tax liability than if he uses other means to give effect to his wishes. Taxation of Companies is a complex subject, and is outside the scope of this book. The reader who wishes H

L.I.C. v. ESCORTS [CllINNAPPA REDDY, J.] 1007

to pursue the subject is referred to the many standard text books on Corporation Tax, Income Tax, Capital A Gains Tax and Capital Transfer Tax.

"The other inroads on the principle of separate corporate personality have been made by two section of the Companies Act, 1948, by judicial disregard of the principle where the protection of public interests is B of paramount importance, or where the company has been formed to evade obligations imposed by the law, and by the courts. implying in certain cases that a company is an agent or trustee for its members." c; In Palmer·1 s Company Law (Twenty-third Edition), the present position in England is stated and the occasions when the corporate veil may be lifted have been enUIIlerated and classified . into fourteen categories. Similarly in Gower's Company Law (Fourth Edition), a chapter is devoted to 'lifting the veil' and the various occasions when that may be done are discussed. In Tata EogineeriDg and Locanotives r.o.Ltd. (supra), the company D wanted the corporate veil to be lifted so as to sustain the maintainability of the petition, filed by the company under Art.32 of the Constitution, by treating it as one filed by the shareholders of the company. The request of the company was turned down on the ground that it was not possible to treat the company as a citizen for the purposes of Art.19. In Camn1118iODer E of lDcme Tax v. Meenakshi Mills (supra), the corporate veil was lifted and evasion of income tax prevented by paying regard to the economic realities behind .the legal facade. In Workmen v. Association Rubber Industry (supra), resort was had to the principle of lifting the veil to prevent devices to avoid welfare legislation. It was emphasised that regard must be had to substance and not the form of a transaction. Generally and broadly speaking, we may say that 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 beneficent 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 desirable to enUIIlerate the classes of cases where lifting the veil is permissible, since that must necessarily depend 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, the effect on parties who may be affected etc. Ii

1008 SUPREME. COURT REPORTS [198S] SUPP. 3 S.C.R.

In the present case, we do not think 'lifting the veil' is necessary or permissible beyond the essential requirement of the Foreign Exchange Regulation Act and the Portfolio Investment Scheme. we have noticed that the object of the Act is to conserve and regulate 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 athnicity of such company or legal personality. V.ho of such non-resident companies or legal personalities may then be permitted to invest in shares of Indian companies? !he answer is furnished by the scheme its elf which provides for 'lifting the c corporate veil' to find out if at least 60 per cent of the shares are held by non-residents of Indian nationality or origin. Lifting the veil is necessary to discover the nationality or 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 no more.

D !he particulars of the scheme have already been extracted by us. First, a ceiling of one per cent of the equity capital of the Indian company was imposed on the purchase of its shares by any single foreign investor. The obvious object of the imposition of the ceiling was the prevention of destabilisation of the Indian company by foreign investors purchasing large blocks of shares and attempting to take over the Indian company. we have already explained the futility of the imposition of the one per cent ceiling since that would not effectively prevent a group of foreign investors of Indian origin from investing in shares of the Indian company by each of them purchasing one per cent of the shares. we also pointed out that different Foreign companies in which several different groups of resident Indians with one individual common to all together held more than 60 per cent of the shares could not be denied the facility of investing in shares of Indian companies merely because the Foreign companies were dominated by the single common non-resident individual. !hat would be unfair to the other non-resident Indian shareholders of the Foreif;n companies who would otherwise be entitled to the benefit of investment in Indian companies, via the Foreign companies in which they held shares. Clearly, it was the realisation of the futility of the one per cent limit that led to the imposition of the five per cent aggregate limit. The five per cent aggregate limit would effectively prevent any single foreign Ii

L.I.c. v. ESCORTS [CliINNAFFA RELDY, J.] 1009

investor or a combination of foreign investors from attempting .to destabilise Indian companies by purchasing large blocks of A shares. If this is borne in mind it will be clear that the lifting of the corporate veil is necessary and permissible in the present case, only to find out the nationality or origin of the shareholders of the Foreign companies seeking to invest in shares of Indian companies and not to explore the individual identity. of the shareholders. We do not think that n.erely because more than B 60 per cent of the shares of the several Foreign companies who have applied for permission are held by a trust of which lir. Swraj Paul and the members of his family are the beneficiaries, the companies can be denied the facility of investing in Indian companies. In fact, if each of the six beneficiaries of the trust had separately applied for permission to purchase shares of C Indian companies, they could not have been denied such permission. It cannot, therefore, be said that there has been any violation of the Portfolio Investment Scheme. merely on that account or that the pern.ission granted is illegal.

We now turn to the case of Escorts Limited against the Life D Insurance Corporation of India, while narrating the sequence of events, we referred to the impleading of the Life Insurance Corporation of India as a respondent to the Writ Petition a few months after it was originally filed. lhe primary allegation which led to the impleading of the Life Insurance Corporation of India was that there was confabulation between ·the Government of E India, Reserve Bank of India and the Life Insurance Corporation to pressurise the Escorts Limited to register the transfer of shares in favour of the Caparo Group of Companies. lhe inference of collusion and conapiracy was sought to be drawn from the sequ- ence of certain events which we will mention iiillllediately. A few days before the filing of the writ petition there was the report of a speech of the Finance Minister, to which we have earlier F made a reference, to the effect that he has in his possession an ~ effective weapon to end the uncertainty. After the writ petition ' ' was filed and before it was admitted, there was a meeting of the Board of Directors of Escorts Limitecl on 6th January, 1984 at which Mr. L.N. Davar, claiming to speak for the financial insti- tutions holding 52 per cent of the shares of Escorts Limited, G circulated three notes and moved resolutions the purport of which was that the writ petition should be withdrawn as it had been filed without consulting the financial institutions and that the matter should be placed before the Board for careful considera- · tion of all aspects of the case and that the cheques sent in part payment of certain institutions loans should be recalled as the h

.. 1010 SUPF.Eliil COURT REFOR1S [1985] SUFP. 3 s.c.R. , ..

question was still under consideration. 1he resolutions proposed by Mr. Davar were rejected. On 9th January, 1984 Mr. handa wrote to Mr. Punja inforndng him about the events that took place at the Board meeting on 6.1.1984 and pointing out that in the last 20 years, there had not been a single occasion on which the financial institutions had even a single word to say against any decision taken or proposed by the ~iana£eruent. Complete confidence was reposed in each other in the past by the mansgement of Escorts Limited and .the Financial Institutions. Mr. Nanda explained the position of the ~ianageruent ot Escorts Limited in regard to pre-paYffient of loans of financial institutions and the filing of the writ petition. Mr. Nanda pointed out that though the Reserve Bank had granted peruission to the Caparo Group of Companies to purchase shares, it had not conaoned any of the c illegalities that had already been committed arn:l it was slrange that the financial institutions should continue to press 'the company to register the shares. It was also state.d by ?!Ir- r;anda that he had repeatedly drawn the attention of Mr. Punja and others to the fact that funds far in excess of those remitted by the Caparo Group of Companies had been invested in the purchase of shares and, therefore, repatriation benefits in foreign D exchange could not be allowed to such shares by registering their transfer. Mr. Nanda complained that he was forced to believe that the institutions were adopting this attitude against the company because of external pressures brought upon the institutions as a result of the non-registration of the shares purchased by Mr. E Swraj Paul's companies. There was no reply to this letter by Mr. Punja. But on 13.1.1984, Mr. Funja informed Escorts that the financial institutions had decided to accept the proposal of Escorts Limited for pre-payment of the outstanding loan. At this stage, that is on 7 .1.1984, a meeting of the Board of the Life Insurance Corporation was held and it was resolved that a requi- sition should be served on Escorts LiuJ.ted to convene an extra- F ordinary general meeting to pass resolutions for the removal of 1- the nine non-Executive Directors and for the appointn.ent as new Directors, officers and nominees of the financial institi~tions, in their place. This subject was not one of the matters listed in the agenda for the Tueeting of the Board of Life Insurance Corpo- ration. The resolution was considered after all the officers of the Corporation, except one, left the meeting. The minutes of the meeting did not record any discussion. But the ndnutes do show that Hr. Funja of the I.D.B.I. was present in his capacity as a Director of the Life Insurance Corporation. It was thereafter that the Life Insurance Corporation served a requisition on Escorts Limited to call an extraordinary general meeting of the company.

L.I.C. v. ESCORTS [CHitiNAPFA REDDY, J.] 1011

What does the sequence of events go to show? It shows that the financial institutions which held 52% of the shares of the company and, therefore, had a very big stake in its working and

I future were aggrieved that the management did not even choose to consult them or inforffi them that a writ petition was proposed to be filed which would launch and involve the company in difficult and expensive litigation against the Government and Reserve Bank of India. The financial institutions n;ust have been struck by the duplicity of Nr. Nanda who was holding discu~sions with them while he was simultaneously launching the company .of which they were the majority shareholders into a possibly trouble some litigation without even informing them. The financial institutions were instrumentalities of the State and so was the Reserve Bank and it must have been thought unwise to launch into c such a litigation. The institutions were, therefore, 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 seek a removal of the non-Executive Lirectors so as to enable the new Board to consider the question whether to reverse the decision to pursue the litigation. Evidently the financial institutions wanted to avoid a confrontation with the Goverillltent and the Reserve Bank and adopt a more conciliatory approach. At the same time, the resolution of the Life Insurance Corporation did not seek rem.oval of the Executive Directors, obviously because they did uot intend E to disturb the management of the company. It is, therefore, difficult to accuse the Life Insurance Corporation of India of having. acted mala fide in seeking to remove the nine non-Executive Directors and to replac~ 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 bad been adopted by the Board in launching into a litigation could· be reconsidered and reversed, if necessary. It F 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 share-holders were opposed. That is not how corporate democracy may function. G A Company is, in some respects, an institution like a State functioning under its 'basis Constitution' consisting of the Companies Act and the ~.emorandum of Association. Carrying the analogy of constitutional law a little further, Gower describes "the members in general meeting"' and the directorate as the two primary organs of a company and compares them -with the legis- H

1012 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

A lative and the executive organs of a Parliamentary democracy where legislative sovereignty rests with Parliament, while administration is left to the Executive Government, subject to a measure of control by Parliament through its power to force a change of Government. Like the Government, the Directors will be answerable to the 'Parliament' constituted by the general meeting. But in practice (again like the Government), 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 - companies) for day-co-day admini•Lration to be undertaken by such a cumbersome piece of machinery, So the modern practice is to confer on the Directors the right to exercise all the com¥;ny's po•ers ei<cept such as gen ral law expressly provides must be exercised in general meeting. Gower's Principles of Modern Company Law. Of course, powers which are strictly legislative are not affected by the conferment of powers on the Directors as section 31 of the. Companies Act provides that an alteration of an article would require a special resolution of the company in general meeting. But a perusal of the provisions of the Companies Act itself makes it clear that in many ways the position of the directorate vis-a-vis the company is more powerful than that of the Government vis-a-vis the Parliament. The strict theory of Parliamentary sovereignty would not apply by analogy to a company since under the Companies Act, there are many powers exerciseable 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. Gower himself recognises that the analogy of the legislature and the executive in relation to the members in general meeting and the Directors of a Company is an over-simpli- fication and states "to some extent a more exact analogy would be the division of powers between the Federal and the State Legis- lature under a Federal Constitution." As already noticed, the only effective way the members in general meeting can exercise their control over the Directorate in a democratic manner is to alter the articles so as to restrict the powers 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. And, an injunction cannot be granted to restrain the holding of a general meeting to remove a director and appoint another.

L.I.c. v. ESCORTS [CBINNAPFA REDDY, J.] 1013

In Shaw & Sons (Salford) Ltd. v. Shaw 1935 2 K,Jl, 113, Greer, L.J. expressed A

I "1he only way in which the general body of the shareholders can control the exercise of powers vested by the articles in the Directors is by altering the articles or, if opportunity arises under the articles, by refusing to re-elect the Directors on whose action they disapproved."

In Isle of Wight l!ailway Canpany v. Tahourdin ( 1883) 25 Chancery Division 320, Cotton L.J, said :

"Then there is a sec~nd object, "lo remove (if deemed necessary or expedient) any of the present directors, and to elect directors to fill any vacancy in the board." The learned Judge below thought that too indefinite, but in my opinion a notice to remove "any of the present directors" would justify a resolution for removing all who are directors at the present time; "any" would involve "all", I think that a notice in that form is quite sufficient for all practical purpose.

Fry, L .J. said, E "lhe second objection was, that a requisition to call a meeting ''to remove (if deemed necessary or expedient) any of the present directors" is too vague. I think that it is not. It appears to me that there is a reasonably sufficient particularity in that statement. It is said that each director does not know whether he is attacked or not. The answer is, all the directors know that they are laid open to attack. I think that any other fo= of requisition would have been embarrassing, because it is obvious that the meeting might think fit to remove a director or allow him to remain, according to his behaviour and demeanour at the meeting· with regard to the proposals made at it.••

In the same case considering the question whether an injunction should be granted to restrain the holding of general meeting, one of the purposes of the meeting being the appointment of a committee to reorganise the management of the company, Cotton L.J. Said : R

1014 SUPJlE.ME OlURT REPORTS [1985] SUPP. 3 s.c.R.

"It is a very strong thing indeed to prevent A shareholders from holding a n.eeting of the company, when such a meeting is the only way in which they can interfere if the majority of them think that the ~ course taken by the Director, in a matter intra vires of the Directors, is not for the benefit of the company." B In Indeniick v. Snell, 42 English Reports 63, the deed of settlement of a company provided for the removal of any director "for negligence, misconduct in office or any other reasonable cause". Some directors were removed and others were appointed. The directors who were removed sued for the injunction to prevent the new directors from acting on the ground that there was no c reasonable cause for their removal. The Court negatived the claim for judicial review of the reasons for removal and made the following interesting observations:-

"lhe argument for the Plaintiffs rested on the allegation that the general cause of removal referred to in the clause being expressed to be 'reasonable' D prevents the power ref erred to from being a power to remove at pleasure arbitrarily or capriciously, and made it requisite that the proceeding for exercising the power should be in its nature judicial, and that the .reasonable cause should be such as a Court of Justice would consider good and sufficient. If this argument could be sustained, all proceedings at such meetings would be subject to the review of the Courts of Justice, which would have to inquire whether the cause of removal which was charged was in their reasonable, whether the charges were bona fide brought forward, whether they were substantiated by such evidence as the nature of the case required, and whether the conclusion was come to upon a due consideration of the charge and evidence. But the deed is silent as to these matters, and the question is whether any such power of control in the Courts of Justice is to be inferred from the words "reasonable cause" contained in the 27th clause; whether the expression "reasonable clause" contained in such a deed of a trading partnership can be held to be such a cause, as upon investigation in a Court of Justice nrust be held to be bona fide founded on sufficient evidence and just; or whether it ought not to be held to mean such cause as in the opinion of the

L.I.C. v. ESCORTS [CHINKAPPA REDDY, J.] 1015

share-holders duly assembled shall be deemed reasonable. We think the latter is the true construction aGd effect of the deed.

In a moral point of view, no doubt every charge of a cause of removal ought to be made bona fide substantiated by sufficient evidence, and determined on a due considerat~on of the charge and evidence; and those who act on other principles may be guilty of a moral offence; they may be very unjust, and those who (being misled by the statements made to them, have no doubt a just right to complain that they have been led to concur in an unjust act. But the question is, c whether by this deed the sharesholders duly assembled at a general meeting might not, or had not a right to, remove a director for a cause which they thought reasonable, without its being incumbent upon them to prove to this. or any other Court of justice that the charge was true and the decision just, or that the case was substantiated after a due consideration of the evidence and charge. We cannot take upon ourselves to say that in the case of a trading partnership like this, this Court has upon such a clause in the deed of partnership jurisdiction or authority to determine whether, by the unfounded speech of any supporter of the charge, the shareholders present may not have been misled or unduly influenced.

All such meetings are liable to be misled by false or erroneous statements, and the amount of error or injustice thereby occasioned can rarely, if ever, be appreciated. This Court might inquire whether the meeting was regularly held, and in cases of fraud clearly proved, might perhaps interfere with the acts done; but supposing the meeting to be regularly convened and held the shareholders assembled at such meeting may exercise the powers given them by the deed. The effect of speeches and representations cannot be estimated, and for those who think themselves aggrieved by such representations, or think the conclusion unreasonable, it would seem that the only remedy is present defence by stating the truth and demanding time for investigation and proof, or the calling of another meeting, at which the whole matter may be re-considered. The Plaintiff, objecting to this H

1016 SUPW£ COURT REPORTS [L85] S<JPP. 3 s.c.R.

meeting and considering it illegal, protested against A it, but abstained from attending and, therefore, made no answer or defenct to, and required no proof of, the charges made against them. The adoption of this course was unfortunate, but does not afford any grounds for the interference of this Court." B Again in Bentley-Stevens v. Jooea, 1971 (2) All E.R. 653, it was held that a share holder had a statutory right to move a resolution to remove a Director and that the court was not entitled to grant an injunction restraining him horr, calling a meeting to consider such a resolution. A proper re,.,,dy of the Director was to apply for a winding-up order on the ground that it was 'just and equitable' for the court to make such 8.n order. c The case of Ebrahimi v. liestboume Galleries Ltd., 1972 (2) All E.R. 492, was explained as a case where a winding-up of order was sought. In the case of Kbrclibd V• 'Westboume Galleries Ltd. (supra), th~ absolute right of the general meeting to remove the director• was recognised and it was pointed out that it would be open to the Director sought to be removed to ask th" Company Court for an order for winding-up on the ground that it would be D 'just and equitable' to do so. The House of Lords said,

''My Lords, this is an expulsion case, and I must briefly juc tify the application in such case. of the just and equitable clause ••••••••••••••••••••••••••• The law of c0.:..panies recognises the right, in many E · way, tc remove a director from the board. Section 184 of the CompanitB Act 1948 confers this right on the company in gePf "al meeting whatever the arti .. ,es may say. Some art1 .les may prescribed other methods, for example, a governing director may have the power to remove (~'Re Wondoflex Textiles Pvt. Ltd.). And quite F apart from removal powers, there are normally provisions for retirement of directors by rotation so the.t their re-election c.an be opposed and defeated by a majority, or even by a casting vote. In all these ways a particular director- member may find himself no longer a director, · through ren:oval, or non-re- G election: this situation he must normally accept, unless he n':1.de.rtakes the burden cf providing fraud or mala fides. The just and eq·LUable pr.ovisic; neve1theJ<?.ss .::Qlll.es to his assistance if he can poir;: to, and provi, some spec1.al underlying obligation f h.!.f :ff'liow ~,Gll.Lb-?:·r(s) !'u. good fe1 t "1, or confiCen ~-. H that f long av t;~. '.· ~ J.Siness cor:.l.lol~·!f:i he s1i.all be er.•. i'.Jc.d to n..,,i.iatet-u... ; t i-articipation~ an obligation so

L.I.C. v. ESCORTS [ChINMFFA RELLY, J.] 1017

basic that if broken, the conclusion must be that the association must be dissolved". A

Thus, we see that every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extraordinary general meeting in accordance with the provisions of the Companies A~t. he cannot be restrained from calling a meetinb and he is not bound to disclose b the reasons for the resolutions proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. It is true that under s. 173(2) of the Companies Act, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business to be transacted at the meeting including, in C particular, the nature of the concern or the interest, if any, therein, of every director, the managing agent i f any, the secretaries and treasurers, if any, and the manager, if any. This is a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a D judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meeting. The Life Insurance Corporation of India, as a shareholder of Escorts Limited, has the same right as every shareholder to call an extraordinary general meeting of the company for the purpose of E moving a resolution to remove some Directors and appoint others in their place. 1he Life Insurance Corporation of India cannot be restrained from doing so nor is it bound to disclose its reasons for moving the resolutions.

It was, however, urged by the learned counsel for the company that the Life Insurance Corporation was an instrumental- F· ity of the State and was, therefore, debarred by Art. 14 from acting arbitrarily. It was, therefore, under an obligati.on to state to the court its reasons for the resolution once a rule nisi was issued to it. If it failed to disclose its reasons to the court, the court would presume that it had no valid reasons to give and its action was, therefore, arbitrary. The learned G counsel relied on the decisions of this court in Sukhdev Singh, Maneka Gandhi, International Airport Authority and Ajay Hasia. The learned Attorney General, on the other hand, contended that actiona of the State or an instrumentality of the State which do not properly belong to the field of public law but belong to the field of private law are not liable to be subjected to judicial <eview. He relied on O'Reilly v. hacbnan [1982] 3 All E.R. 1124, Ii

1018 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

A Davy V• Spelthonne (1983] 3 All E.R. 278, I Congress del Partido 1981 2 All E.R. 1064, R. v. East Berkshire Health Authority [1984]3 All E.R. 425, and Radha Krishna Aggarwal and Ors. v. State of Bihar [1977] 3 S.C.R. 249. While we do find considerable force in the contention of the learned Attorney General it may not be necessary for us to enter into any lengthy discussion of the topic, as we shall presently see. We also desire to warn 4 •

ourselves against readily ref erring to English cases on questions of Constitutional law, Administrative Law ·and Public Law as the law in India in these branches has forged ahead of the law in England, guided as we are by our Constitution and uninhibited as we are by the technical rules which have hampered the development of the English law. While we do not for a moment doubt that every c action of the State or an instrumentality of the State must be informed by reaso~ and that, in appropriate cases, actions uninfonned by reason may be questioned as arbitrary in proceed- ings under Art. 226 or Art. 32 of the Constitution, we do not construe Art.14 as a charter for judicial review of State actions and to call upon the State to account for its actions in its manifold activities by stating reasons for such actions. D For example, 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 trade and commerce. If the action of the State is related to contractual obligations or obligations arising out of the tort, the court may not ordinarily examine it unless the action has some public law character attached 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 private law field. The difficulty will lie in demarcating the frontier between the public law domain and the private law field. It is impossible to draw the line with precision and we do not want to attempt it. The question must be decided in each case with reference to the particular action, the activity in which the State or the instrumentality of the State is engaged when perfonning the action, the public law or private law character of the action and a host of other relevant circum- G stances. When the State or an instrumentality of the State ventures into the corporate world and purchases the shares of a company, it assumes to itself the ordinary role of a shareholde.r, and dons the robes of a shareholder, with all the rights avail- able to such a shareholder. There is no reason why the State as a shareholder should be expected to state its reasona when it seeks H to change the management, by a resolution of the Company like any other shareholder.

L,I,C, v. ESCORTS [CHINNAPPA REDDY, J,] 1019

A In the instant case the reason for the resolution stares one in the face. The financial institutions who held t~e majority of the stock were not only not told by the management about the filing of the Writ Petition in the High Court but were deliberately kept in the dark about it. The matter was not even discussed at a meeting of the directors before the Writ Petition B was filed. It was filed in a furtive manner even as Mr. Nanda was purporting to hold disc.ussions with Mr. Punja and others. And that was not all. Mr. Nanda was also unduly exerting himself in certain matters to the detriment of the majority shareholders. We will immediately refer to those matters.

One of the circumstances relied upon to establish the mala c fides of the Life Insurance Corporation of India, a consideration of which leads us to the conclusion that the boot was on the other leg, was the attitude taken by the Life Insurance Corporation of India in regard to (i) the issue of Equity-Linked- Debentures; (ii) Repayment of loans to Indian Financial Insti- D tutions; and (iii) the proposal for the merger of Goetze with Escorts, It was argued that the facts clearly disclosed an attempt on the part of the Life Insurance Corporation of India to exert pressure on Escorts Limited. It is impossible to agree with the submission. E In regard to the proposal for the issue of Equity-Linked- Debentures, the facts are as follows : Escorts .obtained the approval of the Government under the M.R.T.P. Act to establish a new undertaking to manufacture motor cycles/ scooters. According to Escorts, the proposal for the issue of Equity-linked- Debentures was conceived to meet the cost of the new project. According to the Life Insurance Corporation, the issue was solely motivated by an anxiety to reduce the percentage of the holdings of the Life Insurance Corporation and. other financial institutions in the equity capital of the company. The barest scrutiny of the proposal as it finally emerged from Escorts Limited is sufficient to expose the game of Escorts Limited. The proposal, as it finally emerged from Escorts Limited, was to issue debentures 17,50,000 Secured Redeemable Debentures of Rs.100 each and equity shares of the value of Rs,17.50 crores divided into 87,50,000 equity shares of Rs.10 each for cash at a premium of Rs.10 per share. It was proposed trui:t 20 per cent of the new issue would be offered on preferential basis to existing resident equity share holders of Escorts Limited and Goetze Limited (in accordance with amalgamation proposal) subject to H max1JDIQ! allotment of 100 debentures and 500 equity shares to any single shareholder. The Promotors, Directors and their friends and relatives, business associates and employees were to be

1020 SUPRE.1'£ COURT REPORTS [1985] SUPP. 3 s.c.R.

offered 15 per cent of the new issue on a preferential basis, but in their case there was to be no ceiling on the number of shares which might be allotted to any one of them. 30 per cent of the new issue was to be offered to the public. Raving regard to the ceiling of 500 shares proposed to be imposed in the case of allotment to existing equity shareholders, the Life Insurance Corporation, notwithstanding the fact that it 0"111ed 30 per cent of the shares of E.scorts Limited would be entitled to a meagre 500 shares in the new issue. The result would be that its holding would be reduced from 30 per cent to 18.14 per cent. 1he holding of all the financial institutions would be reduced from 51.62 to 31.21 per cent. Not merely would it result in the reduction of the percentage of the holding of the financial institutions in the capital stock cf the company, but it would also result in c great financial loss to the institutions in the following manner: , if the existing shareholders were to be given preferential allotment in the new issue on the basis of their existing holdings, without any ceiling, the Life Insurance Corporation and other financial institutions would be entitled not to the meagre 500 shares each, but to some tons of thousands of shares in the new issue. Taking the market value of the shares into account at D Rs.SO per share, the loss to the financial institutions would be in the neighbourhood of about Rs. 10 crores. we do not think that any financial institution with the slightest business acumen could possibly accept the proposal as it finally emerged from Escorts Limited. No man of ordinary prudence would have accepted the proposal. To expect the financial institutions to agree to E the proposal, we must say, was sheer audacity on the part of these that made the proposal. That was evidently the reason why at all the initial stages, the details of the proposal were never put to the financial institutions or before the Board of Directors. It was urged by Shri Nariman that hr. Lavar, who represented the financial institutions in the Board of Directors F also voted in favour of the proposal at earlier stages, and, therefore, it must be inferred that the later change of attitude on the part of the financial institutions was not bonafide. We are afraid we cannot agree with Mr. tiariman. The resolution of the Board of Directors merely accepted in principle the issue of convertible debentures to raise finances required by the company, subject to the approval of financial institutions. At that stage no details of the proposal were placed before the Board and even then there was the reservation that it was subject to the approval of the financial institutions. We think that it was too much for ~o:. Nanda and his associates to expect the financial institutions or for that matter any other shareholder having large holdings in the company to af,ree to the proposal as it finally emerged. We reach the limit when we hear the complaint of

L.I.C. v. ESCORTS [ChINNAPPA REDDY, J.] 1021

Mr. Nanda and his associates that the refusal of the financial institutions to accept their proposal was mala fide. It is a A clear case of an attempt on the part of Mr. ~anda and his associates to over reach themselves. We do not think it is necessary for us to go into any further details in regard to the t Equity-Linked-Debenture issue.

'lbe proposal to merge Goetze with Escorts Limited was also B agreed ·to in principle in the first instance. However, the share exchange ratio had apparently not been agreed to by the f insncial institutions even at that time. 'Ibis is evident from the letter dated 30.12.1983 of ~.r. handa to Mr. Nadharna ICICI in which he stated : c "'lbe proposals together with the report of the Chartered Accou.~tants and the Resolution of the Board of Directors are with ICICI and IFCI and we understand that the matter has been discussed in the lnter-lnsti- tutionsl meeting of the Financial Institutions. We have been eagerly waiting and have made several D requests to all the financial institutions to expedite their approval so that the other processes of the merger including the permission of the High Court followed by the Extraordinary Shareholders meeting of both the Companies may proceed. Yesterday's meeting with the Chairman and Senior Executive of the Finan- E cial Institutions, I was informed, for the first time, that the financial Institutions were still examining our request for approval they were primarily concerned about the 53% holding of all the investing financial institutions (LIC, GIC, UT!) post merger coming down close to 49 per cent." F It is seen from the letter that Mr. Nanda was not proceeding on the basis that the financial institutions had already agreed to the proposal for merger, but was in fact awaiting their approval. When he learnt the reason for the hesitation of the financial inatitution to agree to the proposal, he wrote a letter on 30.12.1983 explainin& his views and requesting the financial institutions to expedite the approval of the proposal. It is, therefore, futile for Mr. Nanda to centend that the proposal for merger of Goetze with Escorts Limited was a lever which the Financial Institutions were using to exert pressure on him to agree to register the transfer of shares in favour of the Caparo Group of Companies. It is difficult to understand why anyone holding a majority of the equity capital of a company should allow himself to be hustled into becoming a minority shareholder.

1022 SUPREME COURT REPORTS [1985] SUPP. 3 s.c.R.

A The proposal for pre-payment of institutional loans, though finally agreed to by the institutiona, was not quite as straight as claimed by Escorts. In the first place, Escorts asked for pre-payment of loans by Indian financial institutiona, but not the foreign currency loan. In the second place, the cost of

B pr<;-payment of institutional loana was to be met by part of the debenture issue which would entail payment of interest at the rate of 14 per cent whereas the institutional loans carried t interest at the rate of 10 per cent only. It certainly could not be said to be in the interests of the company to pay interest at a higher rate than that payable to Indian financial institutions. Obviously the object of pre-payment was to get rid of the directors who the financial institutiona had a right to nominate. c 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 the director on sufferance.

We do not think that it is necessary to discuss these proposals at greater length than we have done. The correspondence which passed between the parties and which has been read to us shows that Mr. Nanda was certainly trying to hustle the financial institutions into accepting the proposals.

We have discussed the submissions made to us in broad pe~spective. We have not referred to the myriad minutiae which were presented to us, as we consider it unnecessary to do so and ~e do not wish to further lengthen an already long judgment. This does not mean that we have not taken into account all the little aubmissicns and trifling details which were brought to our notice.

F We may now state our conclusions as follows :

1Copy pinpoint1. The permission of the Reserve Bank contemplated by the FERA could be ex-post-facto and conditional.

2Copy pinpoint2. The press· release (Ex.A) dated 17.9.83, the circular G (Ex.B) dated 19.9.83 and the letter (Ex.C) dated 19.9.83 are all valid.

3Copy pinpoint3. Under the scheme, any foreign company whose shares ~ere owne.d to the extent of more than 60 per cent by persons of Indian nationality or origin could avail the facility given by the H scheme irrespective of the fact whether the same group of share- holders figured in the different companies.

L.I.C. v. ESCORTS [CHINNAPPA REDDY, J.] 1023

4Copy pinpoint4. Where any of the purchases were made subsequent to 2.5.83, they were subject to the 5 per cent ceiling in the aggregate.

5Copy pinpoint5. The Reserve Bank of India was not guilty of any mala fides in i;.rauting permission to the Caparo Group of Companies. Nor was it guilty of non-application of mind. B

6Copy pinpoint6. No mala fides could be attributed to the Union of India either.

7Copy pinpoint7. There was a total and Sicinal failure on the part of the Punjab National bsnk in the discharge of their duties as authorised dealers under the FERA and the schen.e with the result c that cbere was no lliOnitoring of the purchases of shares made on behalf of the Caparo Group of Companies.

8Copy pinpoint8. The allegation of mala fides against the Life Insurance Corporation of India was bsseless. Ii

9Copy pinpoint9. The notice requisitioning a meeting of the Company the Life Insurance Corporation of India was not liable to be questioned of any of the grounds on which it was sought to be questioned in the writ petition. E On our finding that there was no monitoring whatsoev€r of the purchase of shares ILBde on behalf of the Caparo Group of Companies by the Punjab liational Bank and on our further finding that though the Reserve Bank of India was not actuated by malice and was not guilty of non-application of mind, the reliance placed by the Reserv" Bank of lndia on the Punjab National Bartl< was misplaced in the event, the Punjab l'ational Bank having totally aband0ned its duties as authorised dealer, it follows that the permission granted by the Reserve Bank must be reconsi- dered by the Reserve Ba1il< in the light of the failure of the Punjab National Bank to discharge its duties. 1herefore, while allowing the appeals of the Union of India, the Reserve Bank of India and the Life Insurance Corporation of India and dismissing the appeal of Escorts Limited and settilll', aside the judgment of the High C0urt, we dicect the Reserve Eank of India to make a full and detailed enqu'!'.ry into the purchase of ohares of Escorts Limited by the Caparo Group of Companies and consider afresh the question lNhether permission ought or ou.ght not to have been granted. If the Reserve hank of India is satisfied that permis- sion ought not to have been granted, it may cancel the permission li already granted and take such further action as may be necessary under the FERA if it considers that there has been any infraction

1024 SUFREJ.JE COURT REPORTS [1985] SUPP. 3 s.c.R.

A of the FERA or the scheme: if the Reserve Bank of India is of the view that the permission may be granted subject to restrictions, it may impose such restrictions and conditions as it may think fit, in addition to the condition that either the capital or the profits or both cannot be repatriated. We further direct Respondents 3 to 17, 20 and 21 (in the Writ Petition), that is B the Punjab National Bank, the thirteen Caparo Group of Companies, Mr. Swraj Paul, M/s Raja Ram Bhasin and Co. and M/s Bharat Bhushan and Co., to make available to the Reserve Bank of India each and every document in their possession pertaining to the remittances made for the purchase of shares on behalf of thirteen Caparo Group of Companies and the purchase of shares made on their behalf. They are also directed to produce every document c which the Reserve Bank of India may require them to produce. The enquiry by the Reserve Bank should be concluded within three months from today.

We also direct the Reserve Bank of India to enquire into the conduct of Punjab National Bank and take such action as may be necessary including cancellation of the authorisation granted D under sec. 6 of the Foreign Exchange Regulation Act. In regard to costs, the Union of India, the Reserve Bank of India and the Life Insurance Corporation of India are certainly entitled to their costs. We do not see any reason why the company Escorts Limited should be mulcted with costs. The litigation was launched by Mr. Nanda and he should be personally made liable for the costs. We E also think that the litigation has been unnecessarily complicated by the failure of Mr, Swraj Paul and Raja Ram bhasin & Co. to cooperate by appearing before the court. We think that they should also be liable for a portion of the costs. So also the Punjab National Bank. The appeals filed by the Union of India, the Life Insurance Corporation of India and the Reserve Bank of F India are allowed with costs payable as follows : Three-fifths of the taxed costs in each case will be payable by har Prasad Nanda, one-fifth by Swraj Paul and one-fifth by the Punjab National Bank. The cross appeal filed by Escorts Limited and Nanda is dismissed with the costs of the Union of India, the Reserve Bank of India and the Life Insurance Corporation of India. The Union G of India, the Reserve Bank of India and the Life Insurance Corporation of India are entitled to their costs in the High Court, three-fifths payable by Nanda, one-fifth by Swraj Paul and one-fifth by Punjab National Bank. In modification of our order dt. 4.4.85 in C.M.P. No. 12832/85, we direct Shri H.P. Nanda and Rajan Nanda to continue as Managing Directors until the Board of H Direcotrs takes a decision in the matter.