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

Citation: [1991] 2 S.C.R. 329

Court: Supreme Court of India

Bench: B.C. RAY, N.M. KASLIWAL

Case summary

While the petitioners challenge the divestment of 7% ownership rights in Larsen & Toubro Ltd. The High Court of Bombay by its judgment and order dated September 29, 1989 dismissed the writ petition at the preliminary hearing.

Judgment text

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

] 339 existing shareholders and members and the employees of Larsen & Toubro Limited and praying for quashing the same as well as for a declaration that the transfer of 39 lakh shares of Larsen & Toubro Ltd. + held by Unit Trust of India, Life Insurance Corporation of India, General Insurance Company and its subsidiaries to Trishna Investment & Leasing Ltd. through the instrumentality of BOB Fiscal Services Ltd. is arbitrary, illegal, ma/a fide and a fraud on the statutory powers of the respondents and is clearly ultra vires of Article 14 and 39(b) and (C) of the Constitution on the allegations that in or around the middle of the year 1988 the respondents entered into a secret agreement by which a large chunk of the equity shares of Larsen & - ' Toubro Ltd. , the largest engineering company in India, would stand surreptitiously divested by the respondents in favour of the Ambani . Group, the third largest monopoly house in India.

This divestment was achieved not directly but, indirectly and with a motive to conceal the real nature of the deal by interpolating BOB Fiscal Services Ltd. (a wholly owned subsidiary of Bank of Baroda) as the conduit for the transfer of shares from the public financial institutions to the satellite companies of the Ambani Group. - akta on the Board of Directors of L & Twas only 4out of 20. It was wholly misleading, deliberately mischievous and erroneous to suggest on the part of the petitioners that the real value of the shares transferred/sold by financial institutions was far more than the market value. There are no guidelines, rules, regulations, directions or documents prescribing any method of sale of shares where such shares are sold individually or in chunk. No control can be said to have been transferred on the basis of 6. 42% shareholding and representation of Board of Directors after the transfer to Trishna Investments.

Reliance in support of the above contention is placed on Babula/ Chaukhani v. Western India Theatres, AIR 1957 Cal. 709 at p. 715 on the passage which reads as under: "It is in evidence that Modi has been purchasing large blocks of shares of this company, but cornering as such or purchase of large block of shares as such, so long as they are permissible by law is not unjustified. That by itself does not prove mala fides or bad faith either in fact or in law. To acquire a control which the law permits cannot be illegal. " It was further submitted in this regard that if purchase or cornering, per se and by itself, is neither illegal nor impermissible, then purchase or cornering through intermediaries or even if done surreptitiously cannot become illegal merely by the existence of such intermediaries or by the allegedly surreptitious nature of the transactions.

The aforesaid decision of the Calcutta High Court has been applied in a large number of decisions of statutory authorities dealing with allegations of chunk purchase or cornering of shares. Dr. Chitale appearing on behalf of Bob Fiscal pointed out that 370 SUPREt,IE COURT REPORTS I1991] 2 S. C. R. the members of the Bob Fiscal Services Private Limited ai an extraordinary general meeting held on 24th September, 1990 have passed a special resolution for voluntary winding up of the company in accordance with etc. 484(i)(b) of the Companies Act, 1956. By the said resolution Chartered Accountant has also been appointed as liquidator for the beneficial winding up of the Bob Fiscal Services Pvt. Ltd. It was further submitted by Dr. Chitale that essential grievance of the writ petitioners related to the transfer of 39 lac shares of L & T by the investment institutions and its subsidiaries to M/s Trishna Investments and Leasing through the alleged conduit or instrumentality of Bob Fiscal.

It has been alleged by the petitioners that a conspiracy was hatched between investment institutions and Ambani group represented by Trishna and Bob Fiscal in order to camouflage the transactions and to prove the transfer of shares to Bob Fiscal in order to avoid compliance of the alleged guidelines and policy of the financial institutions to charge at two times the market price for such sale of shares. The allegations were denied by various respondents which were upheld by Bombay High Court by its judgment dated 29th September, 1989. It was further submitted that during the course of the proceedings before this Court on 18th October, 1989 Trishna Investments made offer in open Court to sell back or retransfer the 39 lac shares in question together with accretions to the investment institutions on no loss no profit basis. On 27th October, 1989 the institutions agreed to buy back the said 39 lac shares with accretions thereon.

It was expressly submitted and clarified by Trishna Investments and the institutions that Trishna Investments was selling back the said shares and the institutions were buying back the same without in any manner admitting any of the allegations in the writ petitions, nor were they admitting the position that the original transfer of shares by investment institutions to Bob Fiscal were in any manner arbitrary or unlawful. Subsequently, it transpired that on or about 8th November, 1989 institutions had purchased the said 39 lac shares on full payment. As a sequel to the above, the main relief sought by the petitioners have become infructuous and do not survive at all. The entire challenge of the writ petitions in regard to the actions of the financial institutions for sale of shares to Trishna Investments through Bob Fiscal had become merely academic and any trial of the issue in relation thereto ...

would only be an abuse of the process of law and wholly unnecessary and waste of time of this Hon'ble Court. Bob Fiscal is not concerned with the challenge of the petitioners in regard to the order of CCI. It was thus submitted that the entire petition has become infructuous but if for any reasons this Hon'ble Court desires to continue with the case in respect of the challenge to the consent of the CCI then Bob Fiscal N. PARTHASARTHY v. CONTROLLER [KASLIWAL, J. ] 371 and iis Chairman should be dropped from the array of parties. The stand taken by the public financial institutions in this regard is that while deciding to sell those shares they acted purely on business principles and sold those shares at a very high market price and thereby earnec huge, profit.

There was no basis in the allegation made by the petitioners that the investment institutions ought to have charged and recovered substantially higher price (which according to the petitioners should have been at least 200% of the market price) for the transfer of such shares had the shares been transferred directly to Trishna Investments being a company, representing a group/persons ...... other than those in the management. The investment institutions had transferred 39 lac shares to Bob Fiscal as part of a 'basket' of securities purely on commercial considerations. Investment institutions were in no way concerned with any subsequent dealings of the said shares by Bob Fiscal. The entire challenge of the writ petitioners to the actions of the financial institutions was now merely academic and any decision in this regard would be a waste of judicial time and totally unnecessary.

It was also submitted that all allegations of conspiracy between the financial institutions and any other party are denied. It is denied that investment institutions at any time were aware of the fact that 39 lac shares which were sold to Bob Fiscal were at any time intended or destined for the Ambani group as alleged. I agree with the observations made and conclusions arrived at by my learned brother B. C. Ray in respect of transfer of 39 lac sh~res. I may, further add that so far as the relief of a writ of mandamus direct- "< · ing the respondents to recover 39 lac shares ot'L & T and pay back the amounts received there for, does not survive in view of the shares having already bought back by the financial institutions from Trishna Investments.

However for future guidance it may be worthwhile to note that public financial institutions while making a deal in respect of a very large number or bulk of shard worth several crores of rupees must also make some inquiry as to who was the purchaser of such shares. Such transactions should be made with circumspection and care to see that the deal may not be to camouflage some illegal contrivance or in built conspiracy of a private monopoly house in order to usurp the management of a public company and w'iich in its opinion may not be in public interest. We cannot subscribe to the contention raised by Dr. Singhvi that there was nothing wrong or·illegal even if the action of Reliance Group was to corner or purchase all the shares of L & T, and even if done through intermediaries or surreptitiously cannot become illegal. If, that is the law laid down by Calcutta High Court in Babula/ Chaukhani v. Western India Theatres, (supra), we disapprove it.

It is no doubt correct that any person or company is lawfully entitled to purchase shares of another company in open market, but if the transaction is done surreptitiously with a mala fide intention by making use of some public financial institutions as a conduit in a clandestine manner, such deal or transactions would be contrary to public policy and illegal. If the, matter was so simple as propounded by Dr. Singhvi, why Trishna Investments did not come forward directly to purchase 39 lac shares from public financial institutions and why entered in a deal through the conduit of Bob Fiscal in a clandestine manner. That apart why Trishna Investments readily agreed to sell back these shares to public financial institutions even at a loss of Rs. 10 crores as suggested, after the filing of these petitions. This itself speaks volumes against the conduct of Trishna Investments who was a subsidiary of Relinace Group.

There is no force in the contention that the propriety of such deal cannot be considered without impleading RIL/RPL as parties to these proceedings. It may be stated that the entire transactions have been made by Bob Fiscal and Trishna Investments who are already parties. It may be noted that Bob Fiscal and Trishna Investments were made parties to the writ petition filed in the Bombay High Court and serious allegations were made against them but they did not choose to refute any allegations by filing any counter affidavit in the High Court. In any case we have derived our conclusions on the basis of admitted facts and not otherwise. It may be worth mentioning that Bob Fiscal was formed in June. 1988 and soon thereafter entered into transactions of purchase of 39 lac shares of L & Ton the strength of deposit of Rs. 30 crores by the four satellite companies of the Ambani Group and soon thereafter transferred the shares in favour of Trishna Investments.

It has now, been stated before us by Dr. Chitale appearing on behalf of Bob Fiscal that in an Extraordinary General Meeting held on 24. 9. 90 a special resolution has been passed for voluntary winding up of Bob Fiscal. This leads one to draw a legitimate inference that Bob Fiscal was brought into existence merely to act as a conduit and was merely an interloper to affect the transfer of 39 lac shares of public financial institutions in favour of Ambani Group and their satellite firms. It came into existence like a rainy insect and lived out its utility after acting as a conduit for the transfer of 39 lac shares in favour of Trishna Investments. I do not consider it necessary to further dilate on t~is point and fully agree with my learned brother that all the circumstances taken together clearly N. PARTIIASARTIIY v. CONTROLLER [KASLIWAJ•• J.

] 373 spell some doubt whether the transfer of such a huge number of 39 lac shares by the public financial institutions was for public interest and was made on purely business principles. . ,. Another important question is with regard to the consent given by CCI. L & Thad filed two applications to CCI on 26. 7. 89. One for the Rights Issue of Rs. 200 crores and another for the Public Issue of Rs. 720 crores (subsequently reduced to Rs. 620 crores). It may be noted that upto this time 39 lac shares of L & T had come to Trishna Investment and M. L. Bhakta. Mukesh Ambani and Anil Ambani had been coopted as Directors of L & T and lastly Dhirubhai Ambani had £ become the Chairman of L & T on 28. 4. 89. On 23. 6. 89 Board of Directors of L & T had resolved to invest a sum of Rs. 76 crores in the purchase of Equity Shares of RIL. On 21. 7. 89 RIL and RPL had written letters to L & T seeking suppliers credit to the el(tent of Rs.

635 crores for turnkey projects which they planned to entrust to L & T. Out of the above public issue of Rs. 820 crores it was proposed to reserve preferential allotment of Rs. 310 crores (50% of the issue after deducting Right Issue) for the shareholders of RIL and RPL treating them as group companies of L & T. On 29. 8. 89 CCI passed an order .. approving the above issue of Convertible Debentures. The Prospectus was issued on 5. 9. 89 in which it was stated that L & Twas part of the Reliance Group. CCI by a further order dated 15. 9. 89 amended the earlier consent order dated 29. 8. 89 to the effect that fund utilisation shall be monitored by Industrial Development Bank of India (IDBI). cc:i in another letter of. the same date namely 15. 9. 89 also stated that 50% to be raised in calls would be based upon the monitoring by IDBI ... , ' for utilisation. This Court on 9. 11.

89 allowed the L & T to open the issue subject to the condition that allotment will abide by the decision of this Court. The issue was then opened and it was over subscribed and more than 11 lac applicants applied for the allotment of the debentures. On the ground that by virtue of the conditions in the consent Order, IDBI being the monitoring agency required the L & T to furnish its funds requirement before making calls and since considerable details had to be worked out by the L & T, it became necessary to postpone the first call originally due on 30th April. Accordingly the ~ Board of Directors of L & T resolved that the date ()fpayment o1 the first call money payable by the debenture holders on or before 30th April, 1990 would be postponed till such time as may be decided by the Directors.

Meanwhile the Industrial Credit Investment Corporation of India (ICICI) who are the debenture trustees in respect of Series IV debentures issued a letter dated 30th April, 1990 to L & T stating that it would not be correct for them as debenture trustees to give conver- sion of these debentures into equity shares before a reference was made to the CCI and without obtaining prior written consent of the IDBI. IDBI then considered the unaudited statement giving details of the utilisation of debenture funds upto 30th March, 1990 and were of the view that the applicants (L & T) should make the first call only after utilising substantially the surplus funds available to the extent of Rs. 226 crores in investments {after expenditure) upto June 30, 1990 and after satisfying IDBI about the need for raising further funds by way of first call. After a prolonged discussion and correspondence with all the concerned authorities L & T proposed to make a call (first & final) of Rs.

85 on or before 31st October, 1990 in place of the originally envisaged first call of Rs. 75 and the final call of Rs. 75 aggregating to Rs. 150. L & T thus proposed to affect the first equity conversion by end of November, 1990. IDBI approved the above proposal. In view of the fact that the postponement of the first call upon "the debenture holders to be made on 30th April, 1990 and the postponement of the first conversion of Part-A of the debentures into equity shares as originally scheduled to be on 23rd May, 1990 was occasioned by IDBI requiring L & T to first satisfy IDBI as to its requirement of funds and an objection raised by ICICI for giving its consent to the conversion of Part-A of the debentures, L & T submitted interim applications before this Court for directions which have been mentioned in extenso in the judgment of my learned brother. Mr. Nariman, learned Sr.

advocate appearing on behalf of L & T in the changed circumstances submitted that the impugned issue of convertible debentures was passed by a special resolution in the Extraordinary General Meeting of the shareholders of L & T dated . / 21. 8. 89 and the said special resolution had not been challenged by any of the petitioners. Only consent order of the CCI had been challenged and thus the debentures which had been issued on the authority of a special resolution remained unchallenged. It was further argued that as regards the authority of CC! 's consent order the scope and parameters of the Court's power to scrutinise the consent order have already been laid down in a recent decision of this Court in N. K. Maheshwari v. Union of India, [1989] 3 SCR 43. It was submitted that the limits as laid down in N. K. Maheshwari's case (supra) have not ~ been transgressed so as to call for any interference in the consent order. Mr.

Nariman thus justified the sanctioning of preferential allotment of shares worth Rs. 300 crores for the shareholders of Reliance Group as well as the consent order for the entire issue of Rs. 820 crores. It may be further noted that initially L & T had taken the stand to reduce the total amount of the issue to Rs. 640 crores instead of N. PARTHASARTHY v. CONTROLLER [KASLIWAL, J. ] 375 Rs. 820 crores, but finally took the stand that the issue may be proceeded to the full extent of Rs. 820 crores in view of the fact that the IDBI had itself in an affidavit in reply to their application before this Court had taken the stand that it was not IDBI's view to curtail the amount of issue and that it was L & T's own decision. The L & T thus in its affidavit dated 11th September, 1990 make it clear that the issue may be proceeded to the full extent of Rs. 820 crores and only a postponement of the dates of the first call, first equity conversion and the second call may be permitted. Mr.

Chinoy, learned counsel appearing for the petitioners vehemently submitted that the petitioners had not come forward with a grievance regarding the validity of issue of debentures only. His contention was that the petitioners had come forward raising larger issues affecting the entire economy of the country and the under hand practice adopted by the financial institutions and the big private industrialists. It was submitted that there was a limited financial capacity of the investor public in the shares and CCI as a controller ought to see that such public investment should not go in the hands of a few industrialists which would be ccintraray to the Directive Principles enshrined in Article 39 (b) & (c) of the Constitution oflndia.

It should adhere to the above State Policy enshrined in the Directive Principles that the ownership and control of the material resources of the community are so distributed as best to subserve the common good and that the operation of the economic system does not result in concentration of wealth and means of production to the common detriment. It was submitted that the facts on record clearly establish that the mega '-~ issue was conceived, proposed and implemented with the intent and object of utilising the reputation and goodwill of L & T to raise funds to the extent of Rs. 635 crores for funding projects of Reliance Group of Industries. The consent so given by CCI was vitiated on account of the non application of mind and its failure to consider the facts of the case in the light of its application to act in public interest and in consonance with the principles embodied in Article 39 (b) & (c). Dr. Singhvi, learned Sr.

advocate appearing on behalf of Trishna Investments submitted that economic and corporate issues can never be a subject matter of judicial review, as already laid down in State of Madhya Pradesh v. Nandlal Jaiswal & Ors. , [1987] 1SCR, 54 and Life Insurance Corporation of India v. Escorts Ltd. & Ors. , [1985] Supp 3 SCR, 909 at p. 1017 & 1018. It was submitted that CCI had given consent after thoroughly applying its mind in any case the impugned consent order is a single, composite indivisible order which cannot be appropriately bisected or bifurcated. Even if for arguments sake it may be considered that the consent was not proper then the whole consent must go and it cannot be selectively upheld and selectively quashed. As regards suppliers credit it has been urged that provision of suppliers credit is an extremely common and well known commercial modality and indeed, construes and alternative scheme and mechanism of finance.

In deed, the concept of suppliers credit is integrally connected and inextricably intertwined with the concept of a turnkey project. In sum and substance the concept of suppliers credit simply means that the entire turnkey project is the property of L & Twho executes it and then hands it over to the purchaser (in this case RIL/RPL) and extends credit for payment to RIL/RPL with effect from the date wheIJ the project is handed over as a running unit by L & T. The suppliers/ workers contractor (L & T) gives credit in the sense that the purchaser promises to pay, inter alia by bills of exchange or other customary payment organised with the price of the project would be paid in instalment inclusive of further running interest from the date of handing over till the date of payment.

It has been submitted that all official documents and other materials in the present case specifically stipulate and specify the precise particular projects for which the moneys were sought to be raised by L & T. Thus it is uncontrovertibly ckar that the sole and only purpose for raising of funds and the sole and only requirement of funds by L & T . related to the extension of suppliers credit to RIL, inter alia in respect of its cracker project which has also been shown on pages 10 and 11 of the prospectus. Similarly, reference has been made to other trunkey projects of RIL/RPL in the prospectus. It has thus been argued that if the consent of CCI was given taking note of all these circumstances then L & T has no right to change the same and utilise the funds for other purposes. The issue was only of Rs . 820 crores for specific projects of RIL/RPL worth 635 crores and the entire issue would be subject to the fulfillment of the above contracts made with RIL/RPL.

The original consent of the Controller was given on 29. 8. 89 and the same cannot be changed by subsequent letters of the Controller dated 15. 9. 89. Those letters can only be construed harmoniously and in conjuction with the sanction of 29. 8. 89. They can only be construed as nominating IDBI to monitor the sanction of 29. 8. 89 which is based on the proposal and the special resolution of the company. It was argued that the issue was carried out according to the prospectus filed on 6th September, 1989. The two letters of 15th September, 1989 cannot be c. onstrued as authorising IDBI or L & T to redraw the consent or to override the special resolution or the prospectus for that would be completely violative of the provisions of the Companies Act. Capital Issues Control Act and the Rules made thereunder. N. PARTHASARTHY v. CONTROLLER [KASLIWAL, J. ) 377 Mr. Ashok Sen, learned Sr. advocate appearing on behalf of K. B. J.

Tilak opposed the interim applications submitted on behalf of L & T. It was contended that L & T had no right to change the .. ; conditions of the consent order as well as the terms and conditions mentioned in the prospectus. Mr. Sen also placed reliance on the principles s~t gut in De Smith's Judicial Review of Administrative Actio,1 4th Ed. page 285 which sets 0111 the principles governing the exercise of discretionary powers as under: "The relevant principles formulated by the courts may be . J.. broadly summarised as follows. The authority in which a discretion is vested can be compelled to exercise that discretion, but not to exercise it in any particular manner. In general, a discretion must be exercised only by the authority to which it is committed. That authority must genuinely address itself to the matter before it: it must not act under the dictation of another body or disable itself from exercising a discretion in each individual case.

In the purported exercise of its discretion it must not do what it has been ... , forbidden to do, nor must it do what it has not been authorised to do. It must act in good faith, must have regard to all relevant considerations and must not be swayed by irrelevant considerations, must not seek to promote purposes alien to the letter or to the spirit of the legislation that gives it power to act, and must not act arbitrarily or capriciously. Nor where a judgment must be made that certain facts exist. can a discretion be validly ' exercised on the basis of an erroneous assumption about those facts. These several principles can conveniently be grouped in two main categories: failure to exercise a discretion, and excess or abuse of discretionary power. The two classes are not, however, mutually exclusive.

Thus, discretion may be improperly fettered because irrelevant considerations have been taken into account; and where an authority hands over its discretion to another body it acts ultra vires. Nor, as will be shown, is it possible to differen- -~ tiate with precision the grounds of invalidity contained · within each category. " · When such order is Jlassed withou\ regard to relevant consideration or irrelevant grounds or for an improper purpose or in bad faith then the order becomes void. Mr. Sen also cited a passage of House of Lords in Anisminic Ltd. v. The Foreign Compensation Com- mission, [1969] 2 A. C. 147 which has been quoted by the Supreme Court in [(1971) 3 SCR p. 557] at page 570which reads as under: . ,. "It has sometimes been said that it is only where a tribunal acts without jurisdiction that its decision is a nullity.

But in such cases the word "jurisdiction" has been used in a very wide sense and I have come to the conclusion that it is better not to use the term except in the narrow and original sense of the tribunal being entitled to enter on the enquiry in question. But there are many cases where, although the tribunal had jurisdiction to enter on the enquiry, it has done or failed to do something in the course of the enquiry which is of such a nature that its decision is a nullity. It may have given its decision in bad faith. It may have made a decision which it had no power to make. It may have failed in the course of the enquiry to comply with the requirements of natural justice. It may in perfect good faith have misconstrued the provisions giving it power to act so that it failed to deal with the question remitted to it and decided some question which was not remitted to it. It may have .... refused to take into account something which it was required to take into account.

Or ii may have based its decision on some matter which, under the provisions setting it up, it had not right to take into account. I do not intend this list to be exhaustive. But if it decides a question remitted to it for decision without committing any of these errors it is as much entitled to decide that question wrongly as it is to decide it rightly. " It was also submitted that the consent order of the Controller is an integrated and composite order and it cannot be vivisected either by the IDBI or by the High Court. It is a statutory order which has been made by a statutory authority in accordance with the Capital Issues (Control) Act and Rules, approved by the Controller and the issue was subscribed on the basis of such consent order and prospectus and on other functionaries can change fliis order.

It was submitted that the prospectus did not specify any contract apart from the turnkey contract of RIL and also did not mention anything except the supply credit necessary for financing these turnkey projects which would require Rs. 635 crores out of 820 crores. In other words, the principal purpose of the issue was the financing of the turnkey projects of the value of Rs. 635 crores. It is fallacious to argue that the issue was for Rs. 1425 crores as is sought to be argued on behalf of L & T. The propectus N. PARTIIASARTHY v. CONTROLLER [KASLIWAL, J. ] 379 mentions at page 45 of the interim application under the head 'business plans' that for the period 1st October, 1989 to 31st March, 1992 funds requirement was estimated at Rs. 1425 crores. It was further specifically stated that the supplieis credit, inter a/ia included Rs. 510 crores to be extended to RIL in respect of its Naptha Cracker project.

It was further specifically stated that the funds requirement was intended to be met out of the present issue of the debentures to the extent of Rs. 820 crores and the balance would be met from internal accruals, in other words. from the internal resources of the company and not borrowin$ or debenture proceeds. Mr. Parasarn, learned Sr. advocate appearing on behalf of the petitioners in writ petitions Nos. 11112-11113 of 1990 filed in the High Court of Madras and subject matter of Transfer Petitions in this Court argued that each compulsorily convertible debenture holder has rights accrued in his favour pursuant to the allotment. Each debenture holder has his own perception of the rights accrued in his favour which he may seek to enforce. Such enforcement of right accrued in his favour will Ilecessarily result in his taking up a legal position which may agree with the stand taken by one or other of the parties. It has "' .

been submitted that the consent order passed by CCI is either valid or invalid. There is no third position possible. It was further submitted that prospectus is an invitation for offer from the public for the subscription or purchase of any shares or-debentures. The invitation is accepted and the offer is made when an application is made for allotment of debentures. Once the debentures are allotted, the contract is concluded. It was further contended that each and every allottee of the debenture is entitled to specifically enforce the contract for specific performance. The Court will enforce specific performance in favour of the allottee debenture holder and maintain consent as a whole and bind other allottees on grounds of equity as all have acted on the basis of the consent. It was contended that with regard io the shares, specific performance is the rule. Reliance in support of this contention is placed on Jai Narian v. Surajmul/, AIR 1949 F. C. , 211.

It was pointed out by the Federal Court that shares of a company are limited in number and are not ordinarily available in the market, it is quite proper to grant a decree for specific performance of a contract for sale of such shares. The IDBI can only monitor the utilisation of funds by L & T as they are collected in terms of the clause as specified in tlie prospectus to ensure that the funds are actually utilised for the specific predetermined projects for which they are raised and this condition cannot be so interpreted to confer right on IDBI to decide as to the mode and manner and collection of funds itself. Mr. S. S. Ray, learned Sr. advocate contended that consent order dated 29. 8. 89 was perfectly lawful and valid and the judgment of the Bombay High Court in this regard was correct. It was not possible for ... the Court to bisect or vivisect the consent order or to apply the 'blue pencil theory' thereto and also to hold that a part of it is valid while the rest is invalid.

The consent order was an integral part of a single scheme having a single purpose and had to be considered in total conjunction of a series of documents and happenings. Mr. Ray drew attention of the Court to the correspondence which took place from 26. 7. 89 to 25. 9. 89 between the L & Tand the CCI. _.. I Mr. Ray also brought to the notice of the Court two events • happened thereafter namely order of this Court dated 9. 11. 89 by which allotment of the debentures was allowed without claiming any equity by the allottee and allotment of the debentures to the plaintiff on ·23. 11. 89. Mr Ray also brought to the notice of this Hon'ble Court further events relevant for the purpose of this case. Notice given by LIC to L & Ton 2. 4. 90 to call an Extraordinary General Meeting to remove Ambanis from the board but no meeting was held. On 19. 4. 90 Mr. Dhirubhai Ambani stepped down as Chairman of L & T. Various correspondence between L & T and IDBI vide two letters dated ... 22. 6.

90 and one dated 28. 6. 90. IDBI also sent a reply on 28. 6. 90 to both the letters dated 22. 6. 90 and 28. 6. 90 sent by L & T. In this reply letter IDBI stated as under: "From a quick review of the status of the new proposal mentioned in your letter dated 22. 6. 90 we feel that the net requirement of funds to be met out of debenture funds / y' would be in the region of Rs. 600 to Rs. 650 crores as indicated by you . . . . . . .... The L & T Board will have to take a view on the size of the debenture issue in the light of the requirement of funds indicated in your letter and other modifications suggested in the series of the debentures. The company will no doubt obtain necessary approvals from CCI, debenture holders/shareholders, etc. in consultation with its legal advisors. " .. It is clear that IDBI also realised that further approvals from CCI was necessary and also of the debenture holders, but this was never done. A meeting by the Board of Directors of L & T was held on 26. 9.

90 in which the mega issue was reduced from Rs. 820 crores to Rs. 640 crores. The date of conversion of debentures were varied and the suppliers credit for Rs. 545 crores in respect of turnkey projects of RIL were cancelled. It was pointed out by Sh. Ray that taking note of N. PARTHASAR1HY v. CONTROLLER [KASLIWAL, J. I 381 the above documents and the happenings even if a part of the consent order dated 29. 8. 89 is found to be bad or unlawful, nothing can remain of the consent order and it has to go in its entirety . .. , Mr. Hegde, learned Additional Solicitor General appearing on behalf of the Financial Institutions submitted that it was wrong that the Ambani holding in L & T has increased from 12% to 35. 3%. it is based on a completely erroneous hypothesis that the shareholdings in RILi RPL are only of Ambanis. 35 lac shareholders comprised of 50 per cent of the investing public of India are in fact the public at large.

200 crores worth of debentures were under the rights issue and it was ~ mandatory under the guidelines for subscribing any issue. Out of remaining 620 crores, approximately 320 crores debentures were reserved for preferential entitlement to equity shareholders of RILi f _RPL. The pros{lectus itself mention that any unsubscribed portion in the public offered by prospectus would go to the category of public. ·~)'. The claim of any loss as suggested in the statement given by the petitioners is completely wrong and baseless. The allegation that an illegal benefit is made by the Ambanis from the 7% transfer of shares does not survive as the entire shares with accretions have been handed .. , . over back to the public financial Institutions. Mr. R. K. Garg, learned Sr. advocate appearing on behalf of • ~·~ "·'1 respondent Nos. 1 and 5 in Transfer Petitions Nos.

458-467/90 contended that the sole question involved in all the cases is whether the Controller of Capital Issues was acting illegally or constitutionally in giving consent to L & T for coming out with mega issue of Rs. 820 ~-~ crores, primarily and substantially for execution of turnkey contracts for. Reliance projects, with a stipulation in the contract that thecost of construction. would be Rs. 510 crores and suppliers credit will be extended on mutually agreed terms and conditions. The CCI after application of mind insisted on an undertaking to be given by Reliance that on extension of suppliers credit they would be precluded to raise this amount from the market. It was further submitted that L & T themselves had applied for sanction in order to compete for these lucrative contracts with foreign business rivals who were extending .....

suppliers credit as a matter of routine and Indian companies were loosing business to them because of their superior financial strength though without superior special skills or experience. According to Mr. Garg construction of Hajira project sponsored by RIL would have gone to foreign business rivals who were required to be paid in foreign exchange with considerable detriment to national economy and as such RIL did a good turn to the national economy by giving contract of ;\ ·\ turnkey projects to L & T. It was further submitted that after the allotment of debentures a concluded contract between the debenture holders and L & T has come into existence and the rights and liabilities as contained in the prospectus cannot be varied by this Hon'ble Court. \- The CCI has no power to defeat, destroy or vary the contracts made between the investor and the company concerned. On the other hand, Mr. Harish Salve, learned counsel appearing on behalf of petitioners in transferred case No.

61/89 submitted that the order granting permission by the CCI is alleged to be illegal as the CCI overlooked the implications of the MRTP Act vis a vis the sup- ,.. pliers credit. The dominant and real object underlying the issue was to make available funds for application to the Reliance Group projects and also to provide a tool by which Ambanis and Reliance Group shareholders could increase their control over L & T and dilute the control of the financial institutions. The issue was brought about directly as a result of the illegal takeover of L & T by the Ambanis. Thus the entire issue is tainted by fraud and void ab initio. It has been further submitted that in reality and substance, the entire issue is tainted since the issue was an attempt of the Ambanis ... who had by means fair and foul garnered the control of L & T to raise moneys using the fair name of L & T for their own purposes. The money raised admittedly was not even required except for projects of Reliance Group. ' Mr.

B. R. L. Iyengar, learned Sr. advocate appearing on behalf of '. ':'. petitioners S. R. Nayak and Ors. in the writ petition filed in the / ,. - Karnataka High Court and transferred to this Court, supported the contentions of the petitioners in the writ petitions filed in the Bombay High Court. Mr. Iyengar further submitted that the capital available for investment at any given time has to be sized and allocated according to national priorities by laying down an investment policy which should inform and govern the action of the different departments of the Govt. including the Controller of Capital Issues, who is a functionary in the Finance Ministry. At the given time that is in 1988-89 the capital market had according to available economic reports, about Rs . 5000 crores public investment funds, limited as it was by poor savings and high inflation. There were so called mega issues f"'1r or five in number who had the resources to exploit the media including the electronic media.

None of these mega issues had anything like suppliers credit from their associates, companies or otherwise. The Reliance Petro Chemicals had already appropriated Rs. 560 crores thus N. PARTHASARTHY v. CONTROLLER (KASLIWAL, J. ) 383 nearly 3000 crores of rupees had been appropriated by larie issues A when the impugned issue was presented. After that the capital available for wage goods industries, other labour intensive industries critical industries, sought to be set up by hundreds. of professionals who had -I neither political influence nor the means to exploit the media would have been left with a very meagre amount available for allocation. Thus Articles 38 and 39 (b) & (c} of the Constitution were not kept in B mind by the authorities in making capital allocation. They addressed themselves to the so called requirement of L & T in isolation and admittedly did not have material priorities on the investment policy in mind.

It was further contended that the Reliance Group of Industries C had in about one year established access to about 1500 crores of rupees, including suppliers credit of Rs. 635 crores and had thereby become India's largest conglomerate, with three different kinds of industries and that by its very nature a 'conglomerate unlike a linear monopoly defies control and regulation was a glaring factor quite apart from the technicalities of the Monopolies Act. Sec. 22(3)(b) and (d) of D the Monopolies Act required indepth policy examination at the high- . ,. . est pplicy levels and consultation with the Monopolies Commission and the Planning Commission. The record does not disclose any such comideration or oonsultation, on the other hand the so called consid<;:ration can be seen to be casual, perfunctory and biased. Even in ti);e case of transfer of shares of an ordinary company, the directors E .

have discretion to refuse the transfer if they feel that the person is ~ undesirable or his shareholding is not in the best in. terests of the com- .. pany and repeatedly the Courts have upheld such bona fide refusal to '.. , transfer. Such being the case, it was notorious in the present cases that the Ambanis' high ambitions were out to takeover L & T. It was thus contended that the nominees of the financial institutions were at the F very outset put on inquiry, when without any shareholding the first two Ambanis sat on the Board of Directors and, thereafter Dhirubhai Ambani usurped the Chairman's seat. The CCI failed to perform its duties in a proper manner and such action of granting consent in the prevailing circumstances was not done in good faith. The sale of shares . ,,. by the financial institutions itself was a grave breach of trust.

For G Reliance Group of industires it was not possible to further increase their capital base by releasing any mega issues and they have tried to succeed in doing indirectly what they could not have done directly. The first step in the execution of this nefarious plan was to transfer of 39 lac shares from the financial institutions to Bob Fiscal. The second step was the transfer of these shares by Bob Fiscal to Trishna Invest- H ments a subsidiary of Ambanis. The third step was the induction of Ambanis into the board of management of L & T and fourth step was of convening an Extraordinary General Meeting of the shareholders and to get a resolution passed in such meeting for execution of certain ,_ projects of RIL and RPL cornering more than 3/4th amount out of of the entire mega issue of Rs. 820 crores. This could not have been done without the active connivance and support of CCI and other financial institntions.

The question raised in this case is not one of legality but of propriety and reasonableness and bona fides of the action of the financial institutions in the course of execution of this plan which has virtually resulted in not merely transfer of professionalised managed company with a reputation built over the years into the hands of a private - .. group but also the said company being used by the said private group to raise enormous capital in the capital market for the execution of its projects. It was further submitted by Mr. Iyengar that the whole consent is liable to be quashed and the same cannot be bifurcated. The petitioners and the group of lawyers supporting them have argued that the consent given by CCI is bad and should be struck down on the ground that it was given in undue haste, without proper application of mind, in violation of the provisions of the MRTP Act and mala . . ,.. fide in order to benefit Reliance Group.

In the alternative it has been contended that no preferential reservation could have been made hf Rs. 310 crores of Convertible Debentures for the shareholders of Reliance Group of Companies. In this regard it has been contended that in case this Hon'ble Court does not hold the entire consent as invalid, then the part giving preferential reservation of Rs. 310 crores _of Convertible Debentures for-the shareholders of the Reliance group of comp,anies may be declared invalid but the remaining part of the issue of Rs. 5. 10 crores be declared valid, as the consent can be legally bifurcated in valid and invalid portions. The other group of lawyers have contended that the consent given by CCI did not suffer from any infirmity and in any case it cannot be bisected or bifurcated in valid and invalid portions.

The consent order was an integral part of a single scheme and shall be valid or invalid as a whole and it does not lie within the judicial review oHhe Courts to declare one part of the consent order as valid and the other part as invalid. As already mentioned above this is a mega issue amounting to Rs. 820 crores, out of which Rs. 200 crores is the Rights Issue for the shareholders and employees of L & T itself. Issue of Rs. 310 crores N. PARTilASARTifY v. CONTROLLER [KASLIWAL, J. ] 385 being reserved as preferential issue for the shareholders of Reliance group of companies being an associate/group of L & T itself. The balance issue of Rs. 510 crores is meant for the general public. So far as the Rights Issue of Rs. 200 crores is concerned, the same is perfectly valid and nobody has come forward to challenge the same. As regards the preferential issue of Rs.

310 crores in favour of shareholders of the Reliance group of companies is concerned, L & T and Reliance group of companies were interconnected within the meaning of Sec. 2(g) of the MRTP Act and it is permissible according to law. The size of the issue was so large that it was considered necessary to reserve a substantial portion of it in favour of the shareholders of Reliance group of companies, in order to ensure the successful absorption of the entire issue. It may also be noted that the shareholders of the Reliance group of companies are numbering about 35 lacs and they represent the investor base of the entire shareholding communtiy of the country. My learned brother B. C. Ray has dealt with this matter in detail and has found that preferential issue per se is not a novel idea.

CCI has been permitting reservations for various categories out of public issue based on the request made by companies after passing a special resolution in the general body meeting and there is-no restriction on the shareholders of a company to offer shares of their company to anybody after passing a special resolution as required under Sec. 81 (I-A) (a) of the Companies Act. I am fully in agreement with the above view taken by my learned brot. her B. C. Ray, J. After the aforesaid view taken by us, the question of bifurcating or vivisecting the consent order given by CCI does not survive. The. legal controversy thus raised that the consent given by CCI under the Capital Issues (Control) Act can be held valid or invalid as a whole but not some part of it as valid and the rest invalid does not require to be decided in this case and the same is left open. The next question which calls for consideration is whether the consent order for the mega issue of Rs.

820 crores as a whole given by the CCI can be declared ifle-gal or not on the grounds raised by the petitioners. This _Court in N. K. Maheshwari's case (supra) while considering the duties of the CCI under the Control of Capital Issues Act while giving consent has observed as under: "That apart, whatever may have been the position at the time the Act was passed, the present duties of the CCI have to be construed in the context of the current situation in the country, particularly, when there is fio clear cut delineation of their scope in the enactment. This line of thought is also reinforced by the expanding scope of the guidelines issued under the Act from time to time and the increasing range of financial instruments that enter the market. Looking to all this, we think that the CCI has also a role to play in ensuring that public interest does not suffer as a consequence of the consent granted by him. But as we have .

B explained later, the responsibilities of the CCI in this direction should not be widened beyond the range of expeditious implementation of the scheme of the Act and should, at least for the present, be restricted and limited to ensuring that the issue to which he is granting consent is not patently and to his knowledge, so manifestly impracticable or financially risky as to amount to a fraud on the public. To go beyond this and require that the CCI should probe in-depth into the technical feasibilities and financial soundness of the proposed projects of the sufficiency or otherwise of the security offered and such other details may be to burden him with duties for the discharge of which he is as yet ill-equipped. " In the above paragraph this Court has clearly laid down that the CCI has also a role to play in ensuring that public interest does not suffer as a consequence of the consent granted by him.

The CCI cannot be permitted to take an alibi and a pvlicy of hands off on the ground that this Court had said in the above case that it may be "to burden him with duties for the discharge of which he is as yet illequipped". It was never the intention in the above case to lay down that the ·ccI was not even required to see whether any public interest suffers or not as a consequence of the consent granted by him. It is the bounden duty of the CCI before giving an order of consent for the issuance of any mega issue to keep in mind and to carry out the Directive Principles of State Policy as enshrined in Article 39 (b) & (c) of the Constitution which provide as under: 39 (b): "That the ownership and control of the material resources of the community are so distributed as best to subserve the common good: 39 (c): That the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment. " N. PARTiiASARTHY v.

CONTROLLER [KASLIWAL, J. I 387 It is no doubt correct that the CCI is not required to probe in-depth into the technical feasibilities and financial soundness of the proposed projects or the sufficiency or otherwise of the security off:red, but at the same time it has to see that the capital available for investment at any given time has to be sized and allocated according to the national priorities, and in the changed socio-economic conditions ·of the country to secure a balanced investment of the country's resources in industry, agriculture and social services. It has been agrued by Mr. Iyengar that in 1988-89 the capital ,. . market, according to available ecomomic reports, had about Rs. 5000 crores pubic investment funds, limited as it was by poor savings and high inflation. There were so called mega issues 4 or 5 in number who had the resources to exploit the media including the electronic media.

None of these mega issues had anything like suppliers credit from their associates, companies or otherwise. The Reliance Petro Chemicals had already appropriated Rs. 560 crores and nearly 3000 crores of rupees had been appropr. iated by large issues when the impugned issue was presented. After that the capital available for wage goods industries, other labour intensive industries critical industries sought to be set up by hundreds of professionals who had neither political influence nor the ~eans to exploit the media would have been left with a very meagre amount· available for allocation. It has been further contended that the Reliance Group of companies had in about one year established access to about 1500 crores of rupees, including suppliers credit of Rs.

635 crores and had thereby become India's largest conglomerate with three different kinds of industries and that by its very nature a conglomerate unlike a linear monopoly defies control and regulation was a glaring factor quite apart from the technicalities of the Monopolies Act, which ought to have been conside,red by the CCI. ·:;:. ·. , In N. K. Maheshwari's case challenge was made to an order of consent of the CCI granted for the issue of shares (Rs. 50 crores) and debentures (Rs. 516 crores) by the RPL. It was pointed out that though the issue proposed was of shares of Rs. 50 crores and Debentures of Rs. 516 crores, the company was allowed to retain over subscription to the tune of 15% amounting to Rs. 77. 40 crores. RIL was the promoter of RPL. Though mega issues had already been issued by RIL/RPL and a substantial amount of about Rs.

1060 crores had already been mopped up from the public for the projects of Reliance group of companies and they were not entitled to raise any further public issue in this regard, a devise of suppliers credit and turnkey projects to the [1991] 2 S. C. R. extent of Rs. 635 crores was made for funding the projects of Reliance Group of industries by L & T. It was proposed from the side of L & T at the time when Dhirubhai Ambani was the Chairman and his two sons and M. L. Bhakta their Solicitor were on the Board of Directors of L & T. Thus the intention was to syphon an amount of Rs. 635 crores out of the issue of Rs. 820 crores in utilising and funding for the turnkey projects of the Reliance group. These facts were known to the CCI and were certainly relevant at the time of granting consent of the impugned issue of Rs. 820 crores. Though this point has lost its force now in the changed circumstances but certainly it was worth noticing by the CCI at the time of granting consent.

This Court on 9. 11. 89 had allowed the allotment of the debentures and thereafter approximately C' 11 lac debenture holders have bought the debentures. It would not be in the interest of general investor public to cancel the entire mega issue. Many transactions must have already taken place on the floor of the stock exchange regarding the sale and purchase of the debentures during this intervening period. Under the order of this Court dated 9. 11. 89, no restrictions were placed on L & T in the matter of utilisation of funds. According to L & T against Rs. 410 crores due on application and allotment, the L & T has so far received Rs. 396 crores out of which approximately Rs. 300 crores have been utilised towards issue expenses, capital expenditure, repayment of loans and working capital in terms of the objects of the issue. The balance available with the company is approximately Rs. 96 crores only. There is already a safeguard provided in the order of the CCI dated 15. 9.

89 that the fund utilisation shall be with the approval of the IDBI. In any case, the consent order given by CCI cannot be held invalid on any of the grounds of challenge raised by the petitioners. In these proceedings this Court is neither called upon nor is entitled to decide as to how and in what manner the amount mopped up from the public by this mega issue could be utilised or spent. Thus, I agree with my learned brother B. C. Ray, J. that the consent given by CCI is valid. All the above cases including the interim applications stand disposed of by the above order. The judgment of the Bombay High Court dated 29. 9. 89 also stands modified in accordance with the findings and observations recorded by us as mentioned above. The Contempt applications are dismissed. The parties are left to bear their own costs. G. N. Applications dismissed.