NARENDRA KUMAR MAHESHWARI v. UNION OF INDIA & ORS

Citation: [1989] 3 S.C.R. 43

Court: Supreme Court of India

Bench: SABYASACHI MUKHERJI, S. RANGANATHAN

Case summary

These petitions were filed in r different courts challenging the consent of the Controller of Capital Issues granted for the issue of shares (Rs. It was mentioned by the Company that it would convert at the second stage of conversion at such permium to be allowed by the...

Judgment text

A. The Judgment of the Court was delivered by SABYASACHI MUKHARJI, J. In these transferred writ peti- 10 tions and one suit, we are concerned with the powers, functions and the role of the Controller of Capital Issues. By an order dated 9th September, 1988 this Court had directed that the four writ petitions and one civil suit i. e. , W. P. No. 1791/88 pending before the Delhi High court, W. P. No. 2708/88 pending before the Jaipur Bench of the Rajasthan High Court, W. P. No. 12176/88 pending before the Karnataka High court, W. P. No. 4388/88 pending before the High Court of Bombay and Civil Suit No. 1172/88,pending before the Civil Judge, Junior Division Bench, Baroda, Gujarat, be transferred to this Court for disposal. It would be appropriate to deal with the facts of one of these, i. e. , W. P. No. 1791/88, which was filed in Delhi High Court in T. C. No. 161/88. The other writ petitions and the suit raise more or less identical problems and issues on more or less same facts.

The petitioner in that writ petition is one Narendra Kumar Maheshwari and the respondents are the Union of India, the Controller of Capital Issues, and Reliance Petro-chemicals Ltd. (RPL). The case of the petitioner is that he is an individual who is a public spirited 1-1 person and is an existing shareholder of the Company known as Re- 'r liance Industries Ltd. (RIL), which was the promoter of Reliance Petrochemicals Limited, being the respondent No. 3. The petitioner held at all relevant times 144 shares of RIL and 100 debentures of different categories. The respondent No. 3, being RPL, was a newly set up public limited company for the purpose of carrying on the busi- ',,.. _. ness of manufacture of petrochemicals. These petitions were filed in r different courts challenging the consent of the Controller of Capital Issues granted for the issue of shares (Rs. 50 crores) and debentures (Rs. 516 crores) by the RPL. It was contended in the petition that the . respondents Nos.

1& 2, being the Union of India and the Controller of -r. Capital Issues, ought not to have granted consent to respondent No. 3, ' namely, RPL to issue share and debenture capital at an aggregate value of approx. Rs. 600 crores. It may be mentioned that after these ] writ petitions and suit were filed, attempts were made to obtain injunction restraining the issue of share-capital and debentures as advertised. By an order dated 19th August, 1988 passed by this Court, this Court had restrained the issue of such injunctions and directed that the shares and debentures would be issued irrespective of any order of injunction passed by any court or authority in India. Different cases, as mentioned hereinbefore, were thereafter transferred to this Court. On the basis of the said consent, it was stated that the respondent ,.. l.. No. 3 had issued prospectus and at the relevant time had intended to open the issue from 22nd August, 1988, of about 3 crores debentures of the face value of Rs.

200 each which was the largest convertible debentures issue in India. It was alleged that the respondents had adopted very sharp methods to collect money from the public and ultimately to defraud them. It was stated that under the terms of the prospectus, each debenture of the face value of Rs. 200 would be fully irconvertible: Respondent No. 3 would issue one share of Rs. 10 at p3r ' on the date of allotment. There would, thus, be an equity capital of about Rs. 30 crores in all on allotment. Further, it was stated that the Company would convert Rs. 40 of each convertible debentures into share after 3 years and the balance of Rs. 150 into share at any time between five and seven years. It was mentioned by the Company that it would convert at the second stage of conversion at such permium to be allowed by the Controller of Capital Issues.

The petitioner alleged +that it was not clear as to whether the investors would get 2 shares or 3 shares or 4 shares for each debenture, at the second conversion of Rs. 40. Similarly, it was alleged that the last portion of Rs. 150 would be converted into shares any time between five and seven years at which time again the Controller, would fix the premium for conversion. The NARENDRA KUMAR v. U. 0. 1. [MUKHARJ! , J. ] 59 petitioner further stated that it was thus not clear what the equity capital of the Company would be, whether it would be Rs. 150 crores or Rs. 600 crores or whether the residual amount would go into reserve account or whether a separate account would be opened in respect of the premium. It was alleged that the respondent No. 3 being RPL had been promoted by RIL and the past history of RIL showed that the ·--( share prices of RIL had fluctuated widely leaving lot of scope for manipulations.

It was alleged in the petition that there was no explanation from the company or anybody from the share market as to why the share prices fluctuated so widely and it was obvious that ~~there were market operators who prop up or bring down the prices · depending on how it suited their convenience. The share value of RIL, the promoter company, was subjected to wide fluctuations on account r of the purchase and sale operations of certain interested quarters close to the management of the respondent No. 3 Company, it was alleged. On more than one occasion during the past six months, the sale of the share in the stock market was banned in some Stock-Exchanges . due to fall in price. It was alleged that it indicated the cooperation and support from the authorities for maintaining the fictitious value of the share in the market; and thus on an equity capital of Rs. 152 crores an amount of Rs.

800 crores in the premium account has been obtained, but there would be no amount in General Reserve account because the ).... __ Company had not earned anything worthwhile to put in General Reserve. It was further alleged that the\lack of bona fide of the Reliance group was well-known; and that RIL had issued debentures of 'G' Series and had assured to pay interest up to 5th February, ! 988. It was alleged that the Company did not keep up this assurance, but converted the debentures into equity shares in the month of August, 1987 thereby avoiding payment of interest. In this manner, it was _,,,· alleged, the Company saved interest of Rs. 30 crores whereas in fact it -- incurred a loss. The case of the petitioner was that the Company was obviously trying to repeat the same game through the new Company by maintaining the share price only on an equity capital converted on each debenture. The paramount duty of respondents Nos.

1& 2 before according permission was, it was asserted, to ensure that the requirement of the Company in raising suC:h capital was bona fide. It was observed that no public interest was intended to be served by respon- -f dent No. 1, as it had chosen to allow respondent No. 3 to collect such huge amounts in excess of the requirement. It is further the case of the petitioner that the operations of RIL (Promoter) subsequent to the raising of past issues made by it were subjected to severe crjticisms both in the press and in the public. It was [1989] 3 S. C. R. pointed out that though the issue proposed was of shares of Rs. SO r' crores and debentures of Rs. 516 crores, the company w;s allowed to retain over-subscription to the tune of 15% amounting to Rs. 77. 40 crores. It was alleged that the respondent No. 3 was a new Company and it should not be allowed 15% retention; and if it wanted to raise Rs. 600 crores, it should have come out with an issue of that amount.

It was further alleged that the respondent No. 2, without considering the 'r° propriety of the situation, allowed the respondent No. 3 to make issue of the capital for the interest of a few people. Hence, the sanction of the issue of convertible debentures of respondent No. 3 calls for. judicial review. It was also alleged that the sanction was approved at . ~~'"::exorbitant terms: 5% of the face value (equal to nothing) according to the petitioner, would be converted at par on allotment, another 20% (Rs. 40) at a premium to be decided by the Controller of Capital Issues ) after 3 years but before 4 years of allotment and the balance of Rs. 150 at such premium as might be permitted by the Controller of Capital Issues after 5 years but before the end of 7 years from the date of allotment. It was stated that the investors would be completely left 0 thrown at the mercy of respondents Nos. 3 & 4; and that till date no convertible debenture had been issued on such vague terms.

In those circumstances, it was submitted, the consent of the Controller of Capital Issues was bad, illegal on the ground hereinafter alleged: The consent order was hit by arbitrary and capricious exercise of jurisdiction by respondent No. I. It was further alleged that the respondent No. 3's promoters i. e. RIL had been obtaining from respondent No. 1/2 such Consent Orders on the ground that it was in a position to raise such huge moneys from the public for the purpose of implementation of its projects without recourse to the Financial Institutions. According to the petitioner, for the first time, in the corporate history of India, RIL (Promoter) was allowed to raise Rs. 100 crores by way of issuance of 'F' Series debentures. On account of the campaigning through Brokers for attractive returns, the public was misled and RIL wooed the public and collected Rs. 406 crores. RIL had not made any allotment on a proper basis but made allotments on some basis of 'Private Placement'.

It was further alleged that the management of RIL through its associate companies obtained huge borrowals from nationalised banks; and several bank employees got into trouble due to advancing of loans for the purpose of subscription in t! Je 'F' Series debentures through the associated companies of respondent No. 3/RIL which had popularly come to be known as 'Reliance Loan Mela'. It was alleged that the Controller of Capital Issues and Union of India acted mala fide in issuing the consent order NARENDRA KUMAR v. U. 0. 1. IMUKHARJ! , J. ] 61 -{ which was designed to benefit respondent No. 3 and prejudice the interests of the investing public. It was further alleged that in giving the consent order the respondent No. 1 blatantly overlooked the magnitude of the sum of Rs. 600 crores, proposed to be raised from the public through the new issue of debentures. It was alleged that the act of respondent No. 1/2 was vitiated as in issuing the consent order respondent No.

2 was influenced by extraneous considerations not germane to the public interest. The ~ Capital Mark~! in India has undergone turbulent changes in the r~cent ,- years. Small mvestors such as employees, workers and small busmess ' community were coming forward, according to the petitioner, for the . r purpose of investment in corporate sector. It was further stated that the small investors had no means of verifying the correctness or otherwise of the statements and the soundness/financial viability of any company. It was further alleged that the respondents Nos. 1/2 had acted wrongly and illegally in allowing the respondent No. 3 to raise share-capital on premium for financing new projects. It was contended in the petition of the petitioner that the consent order was a fraud. In those circumstances it was prayed that the court should exercise its jurisdiction under Art. 226 and set aside the consent order which was for the public issue on 22nd August, 1988.

The fac1* and the circumstances leading to this consent order · - "(i) A sum of Rs. 10 being 5% of the face value of each ---(debentures by way of first conversion immediately into one ' equity share at par on allotment; (ii) A sum of Rs. 40 being the 20% of the face value of each debenture by way of second conversion after three years but before four years from the date of allotment at a premium to be fixed by the Controller of Capital issues; (iii) The balance of Rs. 150 representing 75% of the face value of each debenture as third conversion after five years but not later than seven years from the date of allotment at a premium to be fixed by the Controller of Capital Issues. " The premium, it was stated on behalf of respondent No.

3, that would be charged at the time of conversion into equity shares would be as fixed and decided by the prescribed statutory authority, namely, the Controller of Capital issues, and the 3rd respondent and its Board of Directors would not have any say in the matter or be entitled to fix the same on their own. It was further stated that, subject to the necessary approvals being obtained in that behalf, the shareholders and the convertible debenture holders of the respondent No. 3, promoter company, would be entitled to participate in all the future issues of the 3rd respondent. The fully convertible debentures of the 3rd respondent would thus be a growth instrument with different rights, viz. , earning a fixed rate of interest from the first day till it was converted into equity and thereafter entitled to dividend that might be declared after conversion into Equity.

It is to that extent different from a purely equity share on which investor would earn dividend only when profits are declared. Thus, the instrument proposed by the 3rd respondent, according to it, has the best features of share as well as debenture. Apart from the above, in accordance with the application for listing made by the 3rd respondent to the Bombay Stock Exchange and NARENDRA KUMAR v. U. 0. 1. [MUKHARJI, J. ] 63 Ahmedabad Stock Exchange, the 3rd respondent has proposed that all the three components or parts of the instrument, namely, Part 'A' representing an equity share on first conversion, Part 'B' being 20% of the face value of the debenture and Part 'C' being the balance 75% of the face value of the debentures, would all be listed separately and independently so that after allotment, an investor can sell if he so desire> the convertible portion of the debentures being Part 'B' and 'C', and just retain the equity share being Part 'A'.

It was intended to ensure both liquidity and appreciation in the hands of the investor. - from the issue of debentures should be invested in fixed duration deposits/instruments with the cooperative/ nationalised banks, UTI, Financial Institutions, l'ublic ----,· Sector Undertakings (other than public sector bonds) and be used strictly for the requirements of the projects mentioned in the application and not for any other purpose. (x) Mis Reliance Industries Limited will bring in additional amount of Rs. SO crores as interest free unsecured loans, at the time of allotment of the above convertible debentures as additional promoters contribution which wi)J be converted into equity at par on the expiry of 36 months from the date of allotment of convertible debentures. (y) (i) The company shall scrupulously adhere to the time limit of 10 weeks from the date of closure of the subscription list for allotment of all securities and despatch of allotment letters/certificates and refund orders.

-~- (ii) The company shall, at the time of filing its application for listing to the regional Stock Exchange, furnish an undertaking for compliance of the above condition, along with a scheme incorporating the necessary details of the arrangements for such compliance. This undertaking shall l be signed by the Chief Executive or a person authorised by the Board of the company. (iii) The company shall file, with the Executive Director or Secretary of the regional Stock Exchange, within five working days of the expiry of the stipulated period as above, a statement signed by the Chief Executive or a person authorised by the Board, certifying that the allotment letters/securities and the refund orders have been despatched within the prescribed time limit as per the 'condition above. A copy of the statement shall be endorsed to the office of the CCI quoting this consent order and date.

(iv) Non-compliance of conditions above shall' be r punishable by the Stock Exchange, in addition to the action that may be taken by other competent authorities. " /;, The other conditions mentioned therein are not very relevant. These only enjoin certain procedural safeguards. The said consent order was amended on the 19th July, 1988, which clarified that the Y· intention for imposing condition (w) as set out above, was not to block all the funds raised out should be invested in terms of the conditions laid down aforesaid. The amendment enjoined that the approval of the Central Government should be subject to the condition that allotment to the employees should not exceed 50 debentures per individual. It . ~-r was further added that the company should obtain prior approval of the Reserve Bank of India, Exchange Control Department, for the ·-{ allotment of debentures to the non-residents as required under the Foreign Exchange Regulation Act, 1973.

There was a further amendment of the Consent Order on the 26th July, 1988 which added condilion (s) to the following effect: "(s) The convertible debentures to be allotted to the employees of M/s RPL and Mis RIL and the corporate shareholders of Mis RIL (other than individual shareholders of Mis RIL) shall not be sold/transferred/hypothecated till the end of 3 years from the date of allotment of ~,,.. ;.. , debentures. On conversion the equity shares so converted shall not be transferred/sold/hypothecated for a minimum period of 3 years from the date of allotment of convertible debentures.

" It was stated that between 4th January, 1988 to 24th July, 1988, news about the formation of RPL and to set up the projects at Hazira, · ' Jr·· Gujarat and the consent granted by CCI for convertible debentures for RPL-all these were widely reported in various newspapers and magazines including national dailies such as Times of India, Indian Express, Financial Express, Gujarat Samachar, Hindustan Times, Bombay Samachar, Business Standards and other magazines and news items. Thereafter, till mid August, 1988, there were detailed advertisements about the company and nearly 1600 insertions in nearly 200 newspapers and dailies were made advising the opening of the issue. y There were from mid July, 1988 onwards till August, 1988, advertise- ~· ment campaigns in television and radio to attract investments in I ! I Petrochemicals advising the public about the issue of Rs. 593. 40 crores of convertible debentures of RPL.

It is asserted on behalf of the respondents that· the public issue of these shares was made known NARENDRA KUMAR v. U. 0. 1. (MUKHARJI, J. l 87 since mid July, 1988. As mentioned hereinbefore since the words "till conversion" were capable of wide interpretation and might have rendered the shares/convertible debentures non-transferable for upto 7 years, the CCI modified the consent and limited this restriction to a period of 3 years. On July 27, 1988, the prospectus of RPL was filed with the Registrar of Companies, Gujarat and the Stock Exchanges at Bombay and Ahmedabad. On August 22, 1988, the issue of RPL op;ned for subscription. A letter was addressed to the CCI on August 23, 1988, requesting for the lifting of embargo for non-transferability for three years for the corporate shareholders of RIL also. It is asserted that by August 31, 1988, the issue of RPL was fully/over subscribed and closed. By October 25, 1988, the basis of allotment was approved by Ahmedabad Stock Exchange.

A resolution of the Board of Directors of RPL was passed on October 27, 1988 to allot the debentures/shares. On November 4, 1988, lease deed for land at Hazira between RPL and GIDC was executed. There was no objection certificate obtained from GIDC. It is asserted that the Debenture Trust Deed between RPL and ICICI was executed at Surat and was lodged for registration on November, 7, 1988. Certificate of Mortgage under Section 132 of the Companies Act, 1956 was issued by the Registrar of Companies, Gujarat regarding the creation of charge for the Debentures on November l l, l988itself. In this context, on behalf of the respondents, Mr. Baig drew our attention to certain dates indicating that the writ petitioners were aware of this and it was stated that on July 20, 1988, Mr.

Radheyshyam Goyal, the Writ Petitioner in Rajasthan High Court, wrote a letter to the Editor of the Financial Express that the premia for the issue of shares upon the second and third conversion had not been fixed and the terms and conditions were vague. Shri Goyal also made certain other allegations. Though, of course, no complaint was ever made to RIL or RPL on this aspect, on August 16, 1988, one Mr. J. P. Sharma filed a complaint of Unfair Trade Practices under the MRTP Act before the MRTP Commission seeking injunction against the issue opening on 22nd August, 1988 and alleging the same breaches as claimed by the petitioners in the Transfer cases. On being moved, this Court, on August 19, 1988, passed an order in Transfer Petitions No. 192-193 of 1988 staying the three pending Writ Petitions in the three High Courts, namely, Bangalore, Delhi and Jaipur and further stayed the proceedings in the suit being Civil Suit No. 1172 of 1988 filed in Baroda.

It was directed that the issue of debentures would proceed without hindrance notwithstanding any proceedings instituted or orders passed and that any order or direction or injunction already passed or which might be passed would remain suspended till further orders of this Court. It was mentioned that on August 29, 1988, the complaint filed by Shri Sharma before the MRTP Commission was dismissed. On August 31, 1988, one Shri Arvind Kumar Sanganeria issued notice through his Advocate advising that a Writ Petition was being preferred in the Bombay High Court. On September 1, 1988, this Court granted an ex-parte stay of the proceedings in Writ Petition No. 4388 of 1988 pending before the Bombay High Court. As mentioned hereinbefore, on September 9, 1988, this Court had transferred the four Writ Petitions in the four High Courts and civil suit to this Court.

It appears that there was a further writ petition filed by Shri Sunil Ambani in the High Court of Allabahad on the basis of two articles published in the Indian Express. Shri Ganesh made submissions in Transfer Case No. 164 of 1988. Shri Haksar made his submissions in T. C. No. 161 of 1988. Shri Pagaria argued T. C. 162 of 1988. Shri Udai Holla who was the counsel for the petitioner in Karnataka matters, appeared in T. C. 163 of 1988 and made his submissions. We heard Mr. G. Ramaswamy, Additional Solicitor General. Shri Soli J. Sorabjee, Shri Baig and Shri Salve argued on behalf of respondents 1and2 and Shri F. S. Nariman for respondent No. 3 in T. C. No. 162 of 1988. Inasmuch as the charge is the non-evaluation by the CCI in enforcing and applying the principles of guidelines properly, it would > be appropriate at this stage to refer to the said guidelines.

It appears that from time to time, ·in exercise of the powers conferred by section 12 of the Capital Issues (Control) Act, 1947, the Central Government had issued rules and guidelines. On or about April 17, 1982, guidelines· were issued by the Government of India under the said Act for the "Issue of Debentures by public Limited Companies". It is not necessary to set out in detail these guidelines, but it may be necessary to refer to clauses (4) and (6) of the said guidelines. Clause (4) reads as follows: "4. Debt-equity: The debt-equity ratio shall not normally exceed 2: 1. For this purpose: y "Debt" will mean all term loans, debentures and bonds with an initial maturity period of five years or more, including interest accrued thereon. It als·o includes all deferred payment liabilities but it does not include short- NARENDRA KUMAR v. U. 0. 1. [MUKHARJI, J. ) 89 term bank borrowings and advances, unsecured deposits or loans from the public, shareholders and employees.

and unsecured loans or deposits from others. It should also include the proposed debenture issue. "Equity" will mean paid-up share capital including preference capital and-free reserves. Notes: (! ) The computations under guidelines 3 and 4 mentioned above will be based on the latest available audited balance-sheet of the company. (2) A relaxation in the norm of debt-equity ratio of 2: 1will be considered favourably for capital-intensive projects such as fertilizers, petro-chemicals, cement, paper, shipping etc. " Clause (6) of the said guidelines deals with the period of redemption and is as follows: "6. Period of Redemption: Debentures shall not normally be redeemable before the expiry of the period of seven years except in the following cases: (i) A company will have the option of redeeming the debentures from the 5th to the 9th year from the date of issue in such a way that the average period of redemption . continues to be seven years.

While exercising such an option the small investors having debentures of the face value not exceeding Rs. 5,000 will have to be paid in one instalment only. (ii) In case of non-convertible debentures or nonconvertible portion of convertible debentures a company may have the option of getting the debentures converted into equity fully with the approval of and at such. price as may be determined by the Controller of Capital Issues. T! )e debenture holders will, however, be free not to exercise this right. " Clause (8) provides for the denomination of debentures. Clause (9) enjoins the listing of debentures on the Stock Exchange. Clause (10) stipulates that only secured debentures would be permitted for issue to the public. Clause.. (11) enjoins the underwriting of the debentures and ~ i clause (12) also provides for listing of the shares of the company proposing debenture issue. Clause (13) permits linked issue of shares and debentures.

There were certain amendments to these guidelines which would be noted at the relevant time. While considering the questioin of the application or non- r application of mind or infringement of guidelines, it is necessary to bear in mind the role of the CCI in this respect. The CCI functions under the Capital Issues (Control) Act, 1947. This is an Act to provide for control over the issue of capital. Section 2(e) of the said Act_? defines "securities" and states that the "securities" means any of the following instruments issued or to be issued, or created or to be created, by or for the benefit of a company, namely: "--{ (i) shares, stocks and bonds; (ii) debentures; (iii) mortgage deeds, etc. ; and (iv) instruments acknowledging Joan or indebtedness. ~ Section 3( 1) of the said Act enjoins that no company incorporated in the States shall, except with the consent of. the Central Government, mak. e an issue of capital outside the States.

The other sub-sections of Section 3 deal with the modalities of. such cbnsent. > It may be mentioned that fhe Statement of Objects and Reasons of the Act states that \he object of this measure is to keep in existence /. --. • .... the control over capital issue which was imposed by Rule 94-A of / '" the Defence of India Rules in May, 1943 and continued in force after the expiry of the Defence of India Act by Ordinance No. XX of 1946. The Statement further states that although there has been an appreciable change in the general conditions which constituted the principal reason for the introduction of the control during war-time, it was thought in the light of experience gained that the control was still necessary to secure a balanced investment of the country's resources in y industry, agriculture and the social services. (See Gazette of India, 1947, Part V, p. 264). In this connection, Shri G.

Ramaswamy, learned Additional Solicitor General for the Union of India drew our attention to the NARENDRA KUMAR v. U. 0. 1. [MUKHARJI, J. ] 91 Debates of the Lok Sabha and the Rajya Sabha in February-March, 1956 when the question of continuance of the control of the capital issues came up for consideration. The Minister of Finance, Shri C. D. Deshmukh stated that the control of capital issues was first introduced in May, 1943 under the Defence of India Rules. It was continued after the termination of the war by an Ordinance, thereafter in 1947 by an Act for a term of three years and it was again successively extended in 1950 and 1952. The Act as it stood expired on the 31st March, 1956.

The main purpose which the Minister explained was to prevent the diversion of investible resources to none-essential projects (emphasis supplied), the control had also been used for many other purposes and -~the most important of these purposes which might be called ancillary purposes were the regulation of the issue of bonus shares, regulation of capital reorganisation plans of companies including mergers, and amalgamations which involved the use or re-issue of capital and the regulation of the capital structure. Shri Ashok Mehta, then a Member of Parliament, suggested that the purpose of the Act might be used for evolving a national investment policy. The Minister of Finance further observed that many things might have been done to give a proper form • and shape to the national investment policy (emphasis supplied), but the Minister expressed his surprise how these could have been secured through a negative piece ofcontrol (emphasis supplied) like the Capital Issue Control Act.

He observed that there were other provisions like the Industries (Development & Regulation) Act, under which licences were given to new industries. But this, according to the Minister, was not the purpose of the negative control of the capital issue. Various suggestions were made by the members of the Parliament about the role of the Act, for instance, to encourage public companies, not too much concentration of particular industries at particular areas, etc. The Minister referred to the various other Acts which control the industry and the Minister also referred that there should not be undue delay. Similar statements were made by Mr. M. C. Shah in Rajya Sabha, who was then the Minister for Revenue and Civil Expenditure. One Member in Rajya Sal.

ha made it particularly clear that the consent of the Government had been misleading to some investors and thought that by a regulation, it was essential that in the prospectus it should be clearly stated that the sanction by the Government did not mean any guarantee about the suitability or the successful running of the industry. Therefore, this sanction of the Government should be stated more clearly and the public should be clearly warned that a sanction of the Government did not imply any sort of guarantee by the Government. We have referred to the debates only to highlight that the purpose of the Bill was to secure a balanced investment of the country's resources in the industry and not to ensure so much the soundness of the investment or give any guarantee to the investors. The section of the Act in question in express terms does not enjoin the CCI to discharge such obligations nor does the background of the Act so 8 encompass.

There was considerable discussion before us as to the scope of the powers and responsibilities of the CCI while granting his consent to an issue of shares and debentures proposed by a company. As stated above, the learned Additional Solicitor General submitted that the restrictions on issue of capital were introduced as part of the control measures found necessary during the period of the first world war and that, after the war ended, the control was continued as it was thought "in the light of experience gained that control is still necessary to secure a balanced investment of the country's resources in industry, agriculture and the social services" (vide, the statement of Objects and Reasons of the Act in 1947).

He urged, relying also upon the speech of the concerned Minister at the time of moving the amendment bill of 1956 in Parliament, (which placed the measure on a permanent footing) that all that the CCI is concerned with is to ensure that the investible resources of the country are properly utilised for priority purposes and are not invested in non-essential projects or in a manner which runs counter to the accepted investment policies of the Government. The CCI, he submitted, has neither the duty, nor the staff, the facilities or the expertise to enquire about, or investigate into, the financial soundness or acceptability of the issue proposed to be made. He pointed out that one of the conditions on which all consent is granted is that the Central Government does not take any responsibility for the financial soundness of any scheme or the correctness of any statement made or opinions expressed in the prospectus and the condition is also explicitly set out in the prospectus.

We are unable to agree fully with this somewhat narrow aspect of the CCI's role. In the very speech in Parliament to which the learned Additional Solicitor General referred, the Minister also stated: "Apart from this main object of the Bill which is thus to prevent the diversion of investible resources of non-essential projects, the control has also been used for many other purposes. The more important of these purposes which may be called ancillary purposes are the regulation of the NARENDRA KUMAR v. U. 0. l. [MUKHARJI, J.

l 93 issue of bonus shares, regulation of capital reorganisation plans of companies including mergers and amalgamations which involved the issue or re-issue of capital, the regulation of the capital structure of companies with a view to discouraging undesirable practices, namely, issue of shares with disproportionate voting rights and encouraging the adoption ofsound methods and techniqi;es in company floatation, regulation of the terms and conditions of additional issues of capital etc. " (emphasis added) 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 r--·· the context of the current situation in the country, particularly, when there is no clear cut delineation of their scope in the enactment. This line of thought is also reinforced by the expanding scope of the 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 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 or 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.

Shri Ganesh submitted that the CCI is duty bound to act in accordance with the guidelines which lay down the principles regulating the sanction of capital issues. This is especially so because the guidelines had been published. It was submitted that the investing public is, therefore, entitled to proceed on the basis that the CCI '{ would act in conformity with the guidelines and would enforce them while sanctioning a particular capital issue. It was submitted that it is not permissible to deviate from the guidelines. In this connection, reliance was placed by him as well as by Shri Haksar, appearing for the petitioner in T. C. No. 161/88, upon the observations of this Court in Ramanna Dayaram Shetty v.

International Airport Authority, [1979] 3 SCR 1014, where this Court observed that itmust be taken to be the law that where the Government is dealing with the public, whether by way of giving jobs or entering into contracts or issuing quotas or licence or granting other forms of largess, the government could not act arbitrarily at its sweet will and, like a private individual, deal with any persons it please, but its action must be in conformity with standard or JlOrm which is not arbitrary, irrational or irrelevant. We accept the position that the power of discretion of the government in the matter of grant of largess including award of jobs, contracts, quotas, licences etc.

must be confirmed and structured by rational, relevant and nondiscriminatory standard or norm and if the governmen; departed from such standard or norm in any particular case or cases, the action of the government would be liable to be struck down, unless it could not be shown by the government that the departure was not arbitrary but was based on some valid principle which in itself was not irrational, irrelevant, unreasonable or discriminatory. Mr. Haksar drew our attention to the observations of this Court in the case of Motilal Padampat Sugar Mills v. Uttar Pradesh, (1979] 2 SCR 641, where this Court reiterated that claim of change of policy would not be sufficient to exonerate the government from the liability; the government would have to show what precisely was the changed policy and also its reason and justification so that the Court could judge for itslef which way the public interest lay and what the equity of the case demanded.

It was contended by Shri Haksar that there were departures from the guidelines and there was no indication as to why such departures had been made. We are unable, however, to accept the criticism that there has been deivations from the guidelines which are substantial. We have referred to the guidelines. We do not find that there has been any requirement of such guidelines which could be considered to be man- } datory which have not been complied with. We have considered this carefully and found that there have been no deviations from paras 3, 5, 12, 13 and 14 of the guidelines. Nor has there been, as pointed out by the respondents, any infraction of guidelines nos. 2 and 4. The fact that debentures of the face value of Rs. 200 have been approved as against the normal face value of Rs.

100 envisaged under para 8 or that the requirements of the service of underwriters have been dispensed with in exercise of the discretion conferred by para 11 do not constitute y arbitrary, substantial or unjustified deviations from those guidelines. There has been sufficient compliance with the guidelines on the quantum of issue, debt-equity ratio, interest rate and the period of redemption and also guideline No. 10 about the security of the debenture and there was sufficient security for the debentures in the NARENDRA KUMAR v. U. 0. 1. [MUKHARJI, J. ] 95 facts and circumstances of this case. The preference in favour of shareholders of RIL was justified and based on intelligible differentia. Indeed, if we consider the role of the CCI, it is primarily concerned to ensure a balanced investment policy and not to guarantee the solvency or sufficiency of the security. In our opinion, most of the criticism directed against deviation from guidelines were misplaced.

It was submitted by Shri Ganesh that there was an obligation cast on the CCI to ensure that the guideline regarding security for th~ "'!. _ debentures was fulfilled. Shri Ganesh iook us through the documents ~ filed before the CCI including, in particular, the draft prospectus - which, according to him, clearly showed that there was in reality no . security for the debentures. We are unable to accept this contention. r-- Perhaps the most important of the arguments addressed on behalf of the petitioners was that the scrutiny by the CCI of the prospectus was so cursory that the most glaring travesty of truth contained therein has passed unnoticed by him. Sri Ganesh points out that the guidelines were clear that a company can issue only secured debentures and draws atiention to the fact that the company proclaimed the issue to be of "fully secured convertible debentures". Yet, the prospectus, on its very face, disclosed that the debentures were unsecured.

Shri Ganesh urges that, if only the CCI had perused carefully the figurues and statements made in the prospectus he could never have accepted, at face value, the assertion of RPL that the debentures were "secured" ones within the meaning of the guidelines ·or accorded his consent to the issue. This argument is in three parts and may be dealt with accordingly. (i) The first criticism of the petitioners is that, in certain brochures and pamphlets issued by RPL, the debentures are described as "fully secured convertible debentures" which they are not. The company admitted that there was. such a description but explained that this was due to an oversight; the words "fully secured convertible debentures" were printed in some· brochures instead of the. words "secured fully convertible debentures" without meaning. odntending any change. It is submitted that the company's representation was that the debenture&- were "secured fully convertible" ones.

This is also what had been set out in the application for consent. Though the company does claim that the debentures were also fully secured, it is submitted that the emphasis in the issue was that the debentures were fully convertible and secured. We think this explanation is plausible and do not think that any importance or significance need be attached to the different description in some places, particularly, in view of our discussion below as to the extent and nature of the security actually provided for the debentures. (ii) The second contention is that the security offered, on the face of it, falls far short of the face value of the debentures. Sri Ganesh analysed before us some statements indicating the inadequacy of the security. It was submitted by him that as per page 6 of the prospectus issuing the debentures, after implementation ,of the projects only the following assets would be available with the company: Rs.

in Crores Land and site development 11 Buildings 26 Plant and Machinery 305 Total 342 The assets of Rs. 51. 25 crores, mentioned in the balance sheet as at 31. 5,88 as per the Auditor's report, are also included in the above because the above figures are of the total assets which would come in existence after implementation of the project. This, according to Shri Ganesh, clearly showed the inadequacy of the security. A On behalf of RPL, it is submitted that there is no justification to exclude, from the figures of assets shown on p. 6 of the prospectus, items such as technical know-how fees, expatriation fees and engineer· ing fees amounting to Rs. 79 crores and preliminary and pre-operative expenses amounting to Rs. 138 crores as these are capitalised in the accounts and result in accretion to the value of the company's capital ~~ assets. The calculation also ignores miscellaneous fixed assets of the value of Rs. 70 crores shown on the page.

If these are added, the value of the investment in assets would work out to Rs. 629 crores which far exceeds the value of the debentures after the first conversion which comes to Rs. 563. 73 crores. This figure of Rs. 629 crores takes into account only the investment in assets made out of the borrowed funds and not the future profits and assets acquired therefrom. But, even taking this as the basis, it is clear that, with the escalation in the value ·Y of the fixed assets with the passge of time on the one hand and the redemption of a good portion of the debentures by the end of three years on the other, the security provided is complete and, in any event, more than adcq μate to safeguard the interests of the debenture holders. There is substance in this contention. NARENDRA KUMAR v. U. 0. 1. [MUKHARJI, J. I 97 (iii) The third loophole, according to the petitioners, is the insecurity created by the terms of ciauses 5 and 6 of the prospectus dealing with 'security' and 'borrowings'.

Sri Ganesh submits that clauses 5 and 6 severely qualify the rights of the debenture holders under the present issue in several respects. (a) There is, in their favour, only a residual charge on all or any of the assets of the company at Hazira and other places which shall "rank expressly subject to subservient and subordinate" to all existing and future mortgages, charges and securities as may be hereafter created by the company in any manner whatsoever; (b) The company need not obtain the consent or concurrence of the debenture holders for creating any such mortgages etc. which will have priority over the present debenture issue or for disposing of any of the assets of the company; (c) Not only is the residential complex of the company excluded from the purview of the security, it is also open to the company and the trustees of the debenture holders to agree to the exclusion of any of the assets of the company from the purview of the security.

(d) The current assets or the bankers' goods such as stocks, inventories, book debts, receivables, work in progress, finished and semi-finished goods etc. stand excluded from the security. (e) Clause 6 again emphasises that the company shall be at liberty to raise any further loans and secure the same in priority to the present security and/or on such terms as to security, ranking or otherwise as may be mutually acceptable to the. company and the trustees of the debenture holders without being required to obtain any further sanction from the debenture holders. If these clauses are closely perused, Sri Ganesh urges, it will be seen (a) that the charge in favour of the debenture holders has a very poor priority as it can rank subservient to any securities that may be created by the company in future in respect of further borrowings, (b) that the company and debenture trustees, by mutual agreement, c to rank,ing h3ve to be agreed upon between the RPL and ICICI.

Also clause 16 of the Debenture Trust Deed authorises the debenture trustees to intervene NARENDRA KUMAR v. U. O. l. [MUKHARJI, J. I 99 and crystallise the charge in their favour, inter alia, in the following circumstances: "If the Company sells the Mortgaged Premises or any part thereof not in the ordinary course of business except a sale, transfer or disposition allowed under the terms of these presents to be made with the consent of the Trustees. " (Sub-clause (f)) "If the Company (except as hereinafter expressly provided) creates or attempts or purports to create any charge or mortgage of the Mortgaged Premises or any part of parts thereof prejudicial to the interests of the Debentureholders. " (Sub-Clause (i)) "If, in the opm1on of the Trustees, the security of the Debentureholders is in jeopardy. " (Sub-clause (k)) Thus if at any time the company proposes to create such higherranking charges, the trustees for debenture holders can stultify the same by taking immediate action.

Fourthly, the impression sought to be created by the petitioners that the company may go on creating encumbrances, left and right, to the detriment and prejudice of the present debenture-holders overlooks several restraints imposed on the company in this respect under the Companies Act, the CCI Act, the MRTP Act and involving the consent of public financial institutions. commercial banks, the term lenders, the shareholders, the MRTP Commission, the Central Government and the CCI before the creation of such securities. Lastly, the contention of the petitioners completely overlooks the basic principles underlying the commercial law concept of debentures secured by a floating charge as evolved in British Jurisprudence over the past two hundred years. Clauses like clauses 5 and 6 are usually inserted in debenture issues and the company has drawn our attention to two like instances in certain issues approved in December 1988 and January, 1989.

It has also been argued for the company that a fully convertible debenture is not. a debenture at all in the true sense of the term and is more akin to an issue of equity and that, therefore, there is no need that it should be covered by adequate security at all. These aspects of the matter are dealt with by us at some length later; it is sufficient here to say that we are unable to accept the contention that the security in favour of the debenture holders is illu- sory and inadequate because of the wide language of clauses (5) and (6) of the prospectus. Both these clauses have to be read together and so read, we have no doubt, do not permit the creation of any charge ranking in priority to the charge created under these debentures save with the consent of the trustees of debenture holders. The further argument of Sri Ganesh is that the company law in its application as well as the prospectus, carefuliy skirted round the issue by merely stating that security will be .

provided to the satisfaction of the trustees and that this is not very helpful as the debenture holders come into the picture only after the funds have been raised. This argument is untenable. We have already pointed out, there was sufficient security as was warranted by the issue. This was an issue of 12. 5% fully secured convertible debentures of Rs. 200 each. We have examined the share capital, the present issue and the scheme of conversion. In the premises, it is not possible to accept the submission of Shri Ganesh that the Controller satisfied himself (as stated by him in his affidavit) with the bare statement of the applicant company (RPL) that security would be created as per the requiremenis of the de_benture trustees. There was this statement that the debenture trustees were well known financial instutitions and they had been entrusted with this obligation.

Learned Additional Solicitor General drew our attention to similar debentures and submitted and, in our opinion, rightly that this was the usual practice. It is not possible for the CCI to ensure more than that. ·The prospectus was not misleading to that extent. It, therefore, cannot be accepted that the CCI failed to apply its mind to the documents before him. Reliance was placed on the fact that the RIL had proposed the issue of shares for G-series for more or less identical project. It was contended that if capital issues had once been sanctioned for a project and the issue had been converted for that purpose and then a fresh capital issue could not be applied for or granted for the same purpose. It was urged by Shri Ganesh that the project under those circumstances could not be considered to be a 'new project' within the meaning of para 2(i) of the Guidelines for Issue of Debentures by Public Limited Companies.

Secondly, it was urged by Shri Ganesh that the basic object of the Capital Issues (Control) Act was to ensure . sufficient and fruitful utilisation of capital y would be completely defeated if more than one capital issue is permitted for the same project. In this connection, Shri Ganesh referred to the affidavit of the CCI which, according to him, clearly indicated that CCI was specifically aware of the fact that the_scheme of finance for setting up the very same project had been approved in favour of RIL. Our attention was drawn to the affidavit filed on behalf of the CCI, NARENDRA KUMAR v. U. 0. 1. [MUKHARJI, J. ] 101 where he had stated at p. 203 of the Paper Book of T. C. No. 164 of 1988, that by a Press Release dated 15th September, 1984, certain guidelines which the said deponent described as "non-statutory guidelines" for approval of issue of secured convertible and nonconvertible debentures.

These gujpelines had been subsequently amended by a Press Release dated Sth March, 1985 and these were released on 19th August, 1985 for issue of convertible cumulative preference shares and also there are guidelines issued by Press Release dated Ist August, 1985 for employees stock option scheme. In accordance with -these guidelines, according to the deponent on behalf of the CCI, the consent of the CCI for capital issue for secured fully convertible debentures was issued as the projects originally to be established in RIL were pennitted by the Department of Company Affairs to be ~- transferred to RPL and endorsements thereof from RIL to RPL had J already been filed including, inter alia, for endorsement of the letter of intent for the MEG Project. The scheme· of finance for setting up of three projects namely PVC, HOPE and MEG had already been approved by the Department of Economic Affairs in favour of RIL.

In that context, in our opinion, to contend that there was violation of the guidelines because the RPL's project was not a new project was too narrow and legalistic view. Shri Ganesh tried to urge that the CCI ought to have been aware of the fact that he had sanctioned a capital issue of Rs. 400 crores (subsequently enhanced to Rs. 500 crores) to RIL for the same project and that the said issue had been implemented and capital of Rs. 500 crores had been mopped up from the public by RIL. The CCI ought to have withheld permission for a fresh capital issue in the name of RPL for the very same project. However, the CCI did not appear to have applied his mind, according to Shri Ganesh. Consent Order, therefore, according to Shri Ganesh, was bad. We are, however, unable to accept this submission. The CCI was not perfonning the role of a social mentor taking into account the purpose of RIL.

If RIL has misutilised any of its funds or the funds had not been utilised for G-series, then RIL would be responsible to its shareholders or to authorities in accordance· with the relevant provisions of the Companies Act, 1956. This aspect does not enter into sanctioning the capital issue for the new project in accordance with the guidelines enumerated hereinbefore. That apart, even if RIL and RPL have to be treated as one for this purpose and the grant of consent for earlier debenture issues in favour of RIL are to be taken into account in judging the necessity of the issues, there is no illegality or irregularity in the impugned grant of consent to RPL. As referred to elsewhere, RIL had not been able to utilise any part of the 'G' series of debentures on the MEG project as there had been a cost overrun in the PTA & LAB projects. Eventually, for reasons adverted to earlier, it was decided to have the MEG, PVC and HDPE projects undertaken by floating RPL, a wholly-owned subsidiary.

In the result, even if we look at the projects not as new ones but only as those of the RIL to be implemented by RPL, the additional finances were needed for the extention, expansion and diversification of the projects originally envisaged. This is one of the objects for which a debenture issue is permissible under the guidelines. Shri Ganesh then submitted that Guideline No. 3 for the Issue of Debentures by Public Limited Companies laid down that the CCI would consider an application for capital-issue only after the approval of the financial institutions, banks and Government are received. The statutory application form prescribed by the Capital Issues (Application for Consent) Rules, 1966 requires, according to Shri Ganesh, that the consent and clearances of the various authorities and institutions should be annexed to the application.

Shri Ganesh submitted that in the present case, many of the relevant applications had not even been filed by RIL and RPL as on 4th July, 1988 when the CCI passed the Consent Order. It was submitted by Shri Ganesh, also by Shri Haksar and especially by Shri Pagaria, that RPL's application had been processed in unseemly haste and without due and proper application of mind. It is true that things moved speedily in the case. This has caused us certain amount of anxiety. Speed is good; haste is bad, and it is always desirable to bear in mind that one should hasten slowly. However, whether in a particular case, there was haste or speed depends upon the objective situation or on overall appraisement of the situation.

Here, as discussed earlier, the material shows that the details of the proposals have been examined and discussed and that an examination of the merits has not been a casualty due to the speed with which the application was processed; and especially in view of the fact that no injury has been caused to the investors and no substantial loss to their securities have been occasioned, we are of the opinion that much cannot be made of this criticism. Learned Additional Solicitor General placed before us other instances where applications had been sanctioned within shorter times. Shri Ganesh tried to urge that RIL had declared itself as a promoter of RPL and the prospectus stated that no benefit was being provided to RIL as promotor. But, the entire amount spent by RIL was being reimbursed to it by RPL. In these circumstances, RIL could not be treated differently from the general public in the matter of NARENDRA KUMAR v. U. 0. 1. [MUKHARJI, J. ) 103 allotments of the shares of RPL.

However, the scheme of allotment was such that gross discrimination resulted against the general investing public and in favour of RIL. The long-term implications, it was urged by Shri Ganesh, of the said discrimination were highly anomalous and unjust for the investing public who had subscribed to the debentures of RPL. However, there had been no application of mind by the CCI, according to Shri Ganesh, to the matter of quantification of the extent of benefits conferred on RIL and consideration of whether the same are justified or not. The CCI, however, had merc1y mentioned in his affidavit that RIL was a promotor and had given an interest free advance of Rs. 50 crores to RPL for a period of three years. In our opinion, these factors were sufficient to justify the treatment of RIL differently from other investing public and thus the treatmen! does not amount to any discriminatory benefit to RIL in respect of the debentures of RPL.

As a matter of fact, this was a known fact and the shareholders or the subscribing debenture holders would be aware of the same. Shri Ganesh sought to urge that the CCI had not made any attempt to appreciate or quantify the extent of the said benefits and advantages and go into the question whether the same are fair, reasonable and just. Consequently, for this reason also, there had not been, according to Shri Ganesh, due application of mind by the CCI before the Consent Order was issued. We are unable to accept this criticism. The discrimination alleged is on two grounds. The first is that RIL is entitled straightaway to the allotment of shares of the face value of Rs. 57. 50 crores whereas only 5% of the investment by the debenture-holders can be converted into shares at par simultaneously with the issue. The second is that a loan of Rs.

50 crores advanced by RIL to RPL will be converted into shares at par at the end of 3 years whereas the debenture-holders will have to pay a premium even for converting 20% of their debentures into shares by that time. These allegations do not bear scrutiny. So far as the first ground is concerned, there is no justification for a comparison between these two categories of investors. RIL is the promoter company which has conceived the projects, got them sanctioned, invested huge amounts of time and money and transferred the projects for implementation to RPL. It is, therefore, in a class by itself and there is nothing wrong if it is allotted certain shares in the company, quite independently of the debenture issue, in lieu of its investments. So far as the second ground is concerned, it overlooks certain disadvantages attached to RIL in regard to the loan of Rs. 50 crores advanced by RIL as compared with the investor in the debentures. Firstly, RIL's advance is interest free for '.

l years whereas the debenture holders get interest at the rate of 12. 5% during the period. Secondly, the debenture loan is secured while the RIL's are not. Thus the debenture-holders have certain benefits which RIL does not have and, if the debenture-holders have the disadvantage of having to pay a premium, that cannot consitute basis for a ground of discrimination. .. ,.. I These considerations apart, we would like to observe that we are unable to appreciate how any question of discrimination is at all relevant in the present context. It is a company-not the State or a State instrumentality-that is issuing the shares and debentures. It is entirely for the company to issue the shares and debentures on such terms as they may consider practicable from their point of view. There is no reason why they should not so structure the issue that it confers certain greater advantages and benefits on the existing shareholders or promoters than on the new subscribers to the debentures.

We do not think that it is permissible for the CCI to withhold consent only for this reason or to stipulate that consent can be given only if the shareholders and promoters as well as prospective debenture holders are all treated alike. The subscribers to the debentures are only lenders to the company who have an option to convert their debt into equity on certain terms. It is perfectly open to the subscribers to balance the pros and cons of the issue and to desist from taking the debentures if they feel that the dice are loaded unfavourably in favour of the "proprietors" of the company. Shri Pagaria, who appeared in T. C. No. 162/88 in the matter of Shri Radheyshyam Goyal v. Union of India & Ors. , where the petitioner was a Chartered Accountant, prefaced his submission by submitting that ours is a sovereign, socialist, secular democratic republic governed by the Constitution of India. Shri Pagaria drew our attention to Article 19(1)(g) of the Constitution.

He submitted that the Capital Issues (Control) Act, 1947 is a pre-constitutional law and the Act was enacted as being expedient to provide for control of issue of capital. Under Article 14 read with Article 38, it was obligatory to ensure that there was no disproportionate wealth. He drew our attention to MRTP Act and other Acts and also to a large number of decisions to highlight that the directive principles should be imported y for ensuring that the CCI performs his functions for the welfare of the community and to bring about an egalitarian society. That was his first submission and he further submitted that the petitioner was really in a position to come under the Public Interest Litigation propounding the cause of the public. Secondly, he submitted that the concept of com- NARENDRA KUMAR v. U. 0. 1. [MUKHARJI, J. l 105 •--\ pany being the property of the Board of Directors had undergone a radical change.

He submitted that company in a new socio-economic set-up is a social institution having duties and responsibilities towards community for which it functions. According to him, maximisation of social welfare should be the legitimate goal of the companies and the shareholders. He, therefore, stated that the CCI should take upon himself a social role and ensure that Capital issues are satisfactorily implemented. - One may perhaps concede that, with the vast expansion in recent years of the corporate sector and its constant tendency to have ~""l"\. recourse to public funds for securing finances for its projects (either by way of share capital or borrowed capital), the scope of the responsibili- }-- ties of the CCI can no longer be as limited as before. It may no longer be restricted merely to the task of preventing an imbalance of investment in various sectors or the diversion of investment to non-essential projects.

The petitioners may perhaps have a point in suggesting that the CCI should be burdened with a duty also to safeguard the interests of the public who are invited to participate in such financing on large scale and at least to satisfy himself that the project for which funds are needed is not in the nature of a "South-sea bubble" and that the volume, terms and conditions of the issue proposed by the company are not such as to constitute a fraud on the public. But we think that ~' the time is not yet ripe for placing on the office of the CCI, as at present constituted, more than a skeltal outline of responsibility in this direction; his shoulders are, as yet, not strong enough to bear such ~ burden.

He does not have the time, the staff, the powers of enquiry, -1 the benefit of public hearing, the requisite background, or the economic commercial or financial skill or expertise to so assess the technical, commercial and financial aspects of the projects as to be ~ able to give the public investor a guarantee that he is not being led up the garden path. All that one can say at present is that the parameters of his action have to be found within the four corners of the Act and the guidelines. May be, he can legitimately withhold his consent to a project that is ex facie impracticable (for instance, as was put to the parties in the course of hearing, a project to convert base metal into gold) or a project, which in the present state of finances and scientific 1 knowledge and progress of our country, is an impossibility-(for "I' example, to have a transport service to the moon). May be, he also can t telling the people the _}. full facts.

It was submitted that RPL did not place any material before the Central Government to justify the consent. We are unable to accept this submission. It was next submitted that the guidelines were mandatory. It was next contended by Shri Pagaria that there was nondisclosure of true and correct facts not only in respect of the interest of Directors of RIL in the RPL properties but also the security and with regard to the approval of the financial scheme under MRTP Act, the licence under the Petroleum Act, Explosive Act, etc. , Shri Pagaria has y referred to the requirements under a large number of enactments and contended that, until requisite consents, approvals, licences etc. are obtained under the said enactments, the Company cannot be permitted to raise public finances for the projects on hand. In this context, he referred, in addition to the provisions of the Companies Act, the NARENDRA KUMAR v. U. 0. 1. ! MUKHARJI, J.!

109 , -~ MRTP Act, CCI Act, rules and guidelines, and the Industries (Development & Regulation) Act which have been considered by us, to certain provisions of the Petroleum Act, 1934 (and rules and orders made thereunder); Explosives Act (and rules made thereunder); Essential Commodities Act, Atomic Energy Act; Insecticide Act; Air (Prevention and Control of) Pollution Act, 1981; Indian Standards ~ Institution Certification (Marks) Act, 1952 (and rules and regulations thereunder); Foreign Exchange Regulation Act, 1973; Interest Act, 1978; Securities Regulation Act and Dowry Prohibition Act, 1961. We "(. have gone through these provisions. They relate to various types of ·? controls and regulations which have to be observed in the actual running of various types of business. We are satisfied that neither these \.....

statutes nor those regulating the grant of consent to the issue of shares r- and debentures intend that clearances thereunder should all be obtained before filing an application for consent. In our considered view, such requirement is neither practical nor feasible and is not envisaged by the statutes referred to. Some of the contentions of Sri Pagaria alleging misleading statements made by the Company to attract investments, such as the one based on the Dowry Prohibition Act and the description of the issue as the "Family Khazana'', are far-fetched and unrealistic besides being irrelevant to the issue to be considered at the stage of consent for the issue by the CCI. Sri Pagaria then submitted that the grant of consent was without lawful authority and on extraneous considerations. He referred to cer- . : tain decisions in support of that broad proposition. If the basis of his submission was correct, undoubtely, the consent was bad but we do not find any merit in the submission.

The next submission by Shri ; Pagaria was that the issue had been made public subject to the injunc- _,,). tive relief granted by this Court on 19th August, 1988 without entering '- into the merits of the case and it was submitted that RPL did not possess any industrial licence or letter of indent and whatever licence it had, had expired. This position is not factually correct as noted before. It was submitted that there had been violation of several laws. No particular violation had been indicated. Furthermore, it was submitted that the Industries (Development & Regulation) Act, 1951, Companies Act, 1956, Capital Issues (Control) Act, 1947, MRTP Act, ' -- Palmer's Company Law (Para 44. 07 at page 676). In this connection, \ reference may be made to the guidelines for the "Protection of Debenture Holders" issued on the 14th January, 1987 which have recognised the basic distinction between a convertible and a nonconvertible debenture.

It is apparent that these were issued for the purpose of ensuring the serviceability and repayment of debentures on time. It has been asserted before us that the compulsorily convertible debentures in corporate practice was adopted in India some time after the year 1984. Wherever the concept of compulsorily convertible debentures is involved, the guidelines treat these as "equity". This is clear from Guideline IV(i) read with IV (iii) of the Guidelines for Issue of Cumulative Convertible Preference Shares and Guidelines No. 8 and 11 of the Employees Stock Option Guidelines. These two sets of Guidelines clearly indicate that any instrument which is compulsorily convertible into shares, is regarded as an "equity" and not as loan or debt. Even a non-convertible debenture need not be always secured. In fact, modern tendency is to raise loan by unsecured stock, which does not create any charge on the assets of the Company (The Encyclopaedia of Forms and Precedents; 4th Edn. Vol.

6 para 17 at pages 1094, 1095 and para 22 at pages 1097-98). Whenever, however, a security is created, it is invariably in the form of a floating charge (See· The Encyclopaedia of Forms and Precedents, 4th Edn. , Vol. 6 Para 25 at page 1099). It follows, therefore, that the secured debenture almost invariably c:mtains a floating charge. In addition to the floating charge, debentures are frequently secured by trust deed also as had happened in the present case where specific property, land, etc. has been mortgaged to trustees. Shri Ganesh made a submission that under clause (5) of the Prospectus, the company could deal with its assets and properties with- out the permission of debenture-holders or debenture trustees and that it could create future charges which would rank superior in prio- . . nty. The concept of floating charge was.

invented by the Victorian Lawyers only because of its special advantages inasmuch as it leaves a company free to deal with its assets in the ordinary course of business and does not require the permission of debenture-holders or debenture trustees for dealing with them or creating further charges. It has been p-ointed out that the business of a corporation would be paralysed if it could not deal with its assets and create future charges, ranking superior in priority, and if it would have to obtain the permission of the debenture holders for doing so. (See the discussion in Palmer's Company Law; page 709 and 682) (See also the observations in Re. Florence Land & Public Works Co. , [1878] 10 Ch. 530; Re. Colonial Trust Corporation, (supra). In fact, in Re.

Florence Land's case (supra), the Court observed that if the companies were not allowed to resort to floating charge, they would have to call the meeting of existing charge holders/debenture holders each time they intend to create future charge. The decision in Re. Panama, New Zealand, and Australian Royal Mail Co. , as indicated in Palmer's Company Law at page 708 is a landmark because it established the validity and the utility of a floating charge. In the instant case, if the permission of the debenture holders were required or is insisted upon to create future security, 2. 5 million debenture holders would have to be informed and invited for meeting. The extravagant effects of this course would be colossal especially when a shareholders' meeting is also additionally called for the same body of persons. It is, therefore, incorrect to say that a floating charge creates an illusory charge because future securities can be created ranking in priority over it.

The legal position is that a floating charge creates a present equitable right in favour of the debenture holders/trustees. It creates a present charge in the property/undertaking of a company even before the time of payment of the debenture arrives. The fact is that a company can deal with its property without the permission of debenture holders/trustees, before crystallisation by resorting to a floating charge on the undertaking (See the observations in this connection in Re. Florence Land's case (supra); Re. Standard Manufacturing Co. , [1891] ! Ch. 627; Re. Borax Foster v. Borax Co. , [1901] 1 Ch. 326 and Creatnor Maritime Co. Ltd. v. Irish Marine Management Ltd. , [1978] 1 WLR 966. This however y does not mean that the company can keep on creating future charges with superior ranking without any Jet or hindrance because the debenture holders/trustees can any time move to crystallise the floating security if they felt that the security is in jeopardy. • NARENDRA KUMAR v. U. 0. 1.

[MUKHARJI, J. l 119 -( In the present case, there is no case to suggest or believe that ICICI (which is one of the most important national Government financial institutions), will not act effectively and promptly to ensure that the security in favour of the debenture-holders is not rendered illusory. Even Guidelines dated 14th January, 1987, has cast the responsibility of supervising, creating, monitoring and implementation of security in favour of debenture-trustees. The company cannot normally create a general floating charge ranking in priority to or pari passu with a prior floating charge unless the prior floating charge itself permits such a course. In this connection, reference may be made to tbe observations in The Encyclopaedia of Forms and Precedents, 4th Edn. , Vol. 6 para 27 at pages ! 102-1103. It, therefore, follows that: (i) A debenture is usually secured by floating charge only.

(ii) ·A company which creates floating charge has a right to create future security which may rank superior in ranking. (iii) However, this right of the company may be restricted by agreement. (iv) Where no restriction is provided, any future specific charge will rank superior to the earlier floating charge (Section 123 of the Companies Act) (v) Again, where no specific provlSlon is made in the earlier floating charge with respect to ihe ranking of future floating charge then any future floating charge will be inferior to the earlier floating charge. ln this connection, reference may be made to sec. 48 of the Transfer of Property Act. The risk of floating charges can be controlled by creating legal n1ortgage in favour of debenture trustees as has been explained in "All About Debentures" bv Sen & Chandreashekhar (pp. 66-67). In the present case, a legal mortgage has been created by RPL in favour of the trustees in respect of its immovable and movable assets.

except book debts, in respect of which financial institutions will hold a first charge on account of foreign loan. In the present case, RPL does not have any existing loans. Therefore, the 'charge in favour of the debenture holders is preseqtly the first charge. No future borrowing is contemplated at this stage except the foreign currency loan to the ) extent of Rs. 84 crores. Therefore, the submission that the security is illusory cannot be accepted and the CCI is right that the apprehension is based on factually unsound and unfounded grounds. Even if the value of the foreign currency which has been sanctioned in principle by the three financial institutions, is taken into account, the assets coverage goes down at each stage and does not make any critical difference to the value of the security of the debenture-holders under the Trust Deed.

The purposes of borrowings, namely, term-loan borrowings, • deferred payment credits/guarantees and borrowing for financing new projects do not, on analysis, raise any difficulty. There are sufficient .. in-built checks and controls. The company, being an MRTP company ! "' would have to obtain both MRTP permission for creating any security irrespective of its value and fresh CCI consent under the CCI Act, except in case of exempted securities. Therefore, in our opinion, this -"'{ submission is really in the nature of a red-herring. It was submitted that we should at least direct that the future security should not rank superior to the floating charge in favour of the exi~ting debentures holders. Having regard to the factors which the investors should have taken into CQnsideration, we are of the opinion that all relevant factors were borne in mind by the CCI. There is no substance also in the ground of discrimination.

It is reiterated that Article 14 of the Con- 1 stitution does not forbid reasonable classification. RIL is a promoter company. It had conceived the projects, got them sanctioned and in· vested huge amounts of time and money in the process. It was open to RIL to undertake these projects on its own and not to make any public issue at all. The ground that there was non-application of mind be· cause the CCI did not take into consideration the issue of G-Series is _.. also without substance. Under Guideline 2(a) of the Guidelines of 1984, capital could be raised only for setting up of new project. MEG, it was submitted, was not a new project for capital had been raised for it by RIL under G-Series. It was further submitted that the Controller did not ask RPL to get the bankers prior clearance certificate under Guideline II(v) of the Guidelines of January 14, 1987.

Finally, the CCI did not take note of the fact that the application under Schedule I of Rule III of the Capital Issues (Application for Consent) Rules did not contain the relevant information. The position of cost over-run has y been explained. So there was no substance in the submission that it was not a new project. Secondly, it cannot be accepted that the CCI did not insist the bankers prior clearance certificate. These guidelines apply to "non-convertible debentures" or "partly convertible debentures". These do not apply to "compulsorily convertible debentures". NARENDRA KUMAR v. U. 0. 1. [MUKHARJI, J. l 121 Even assuming that these are applied to "compulsorily convertible debentures", there was no need for the CCI to ask for the bapkers prior clearance certificate because RPL was not is~uing any new set of debentures. All requisite information had been furnished.

Shri Ganesh as well as Shri Pagaria tried to submit that in order 4( to protect the investors, a function, which they submitted, the CCI, in changed circumstances, should determine whether the project is profitable. Where a project has been appraised by an institution lik ~ ICICI, the Controller can safely assume that it is profitable and he _need not engage in separate independent exercise of his own in this regard. The scope and nature of the Controller's powers and jurisdic- L tion have to be determined in the light of the specific provisions of the r-· CCI Act, its history, the debates, to which we have referred, the capital structure of the national economy and its over all direction, in · higher priorities, are decided by the Government and the Planning Commission by formulating Fi11e Year Plans. However, the capital structure and the direction of a particular industry-is deCided in terms of the provisions of ! DR Act.

That a particular industrial house may become a monopoly or otherwise have a restrictive and detrimental effect on the economy of the country, is the concern of MRTP