Delhi High Court
All India Idbi Officers ... vs Union Of India & Ors. on 17 December, 2018
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment Delivered on: 17.12.2018
+ W.P.(C) 8842/2018 & CM APPL. 33999/2018, 34000/2018,
41432/2018
ALL INDIA IDBI OFFICERS ASSOCIATION
THROUGH ITS GENERAL SECRETARY ..... Petitioner
versus
UNION OF INDIA & ORS. ..... Respondents
Advocates who appeared in this case:
For the Petitioner : Mr Prashant Bhushan, Mr Pranav
Sachdeva and Mr Jatin Bhardwaj, Advocates
For the Respondent : Mr Tushar Mehta, Solicitor General and
Ms Maninder Acharya, ASG and Mr
Kirtiman Singh, CGSC alongwith Mr Waize
Ali Noor, Mr Prateek Dhanda, Ms Shruti
Dutt, Mr Viplav Acharya, Mr Sahil Sood Mr
Sameer Malik, Mr Ravi Prakash and Mr
Farman Ali, Mr Kamal Mehta and Mr
Harshul Chowdhry, Advocates for UOI/LIC.
Mr Sandeep Sethi, Senior Advocate with Mr
Krishnendu Dutta, Mr Sidhartha Barua and
Mr A. Gupta, Advocates for R-3.
Mr H.S. Parihar and Mr K.S. Parihar,
Advocates for RBI.
Mr Rana Mukherjee, Senior Advocate with
Mr Dipak K. Nag, Mr Apurva Upmanyu and
Ms Ekta Pradhan, Advocates for R-6.
W.P.(C) 8842/2018 Page 1 of 52
Mr Neeraj Malhotra, Senior Advocate with
Mr Sahil Khanna, Mr Sanyam Saxena and
Ms Cassandra, Advocates for SEBI.
CORAM
HON'BLE MR JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J
1. The petitioner ‒ an association of certain employees of
Industrial Development Bank of India Limited (hereafter 'IDBI Ltd.')
‒ has filed the present petition, inter alia, praying that Government of
India (respondent no.1) be restrained from reducing its shareholding in
IDBI Ltd. below 51%. The petitioner also seeks directions to
respondent no.2 (Life Insurance Corporation of India - hereafter 'the
LIC') not to acquire the controlling stake of 51% in IDBI Ltd. The
petitioner also impugns the permission granted by respondent no.6
(Insurance Regulatory and Development Authority of India - hereafter
'IRDAI') to the LIC to acquire more than 15% of the equity share
capital of IDBI Ltd.
2. The petitioner has challenged the said acquisition of IDBI Ltd.
by LIC, essentionally, on three grounds. First, that the reduction of the
majority stake of the Central Government in IDBI Ltd. is ultra vires of
the Industrial Development Bank of India Act, 1964 read with
Industrial Bank (Transfer of Undertaking and Repeal) Act, 2003.
Second, that the privatisation of IDBI Ltd. will have an adverse impact
on the employment conditions of the employees of the concerned
Bank, especially the SC/ST and the OBC employees. And third, that
the said acquisition is not in consonance with public interest, as it
endangers the investments made by the public in IDBI Ltd. and further
deteriorate LIC's ability to pay back its policy holders, in view of
LIC's huge investment for acquiring the majority stake.
Factual Background
3. Industrial Development Bank of India (hereafter 'the
Development Bank') is one of the major public sector
bank/nationalised bank in India. The government currently holds
around 85% of the stake in the Development Bank (now known as
IDBI Ltd.). On the other hand, respondent no.2 (LIC) is an Indian
state-owned Insurance Group and investment company, which was
found in 1956 to provide for the nationalisation of life insurance
business in India by the enactment of the Life Insurance Corporation
Act, 1956.
4. The Development Bank was established under the Industrial
Development Bank of India Act, 1964 (hereafter 'the IDBI Act,
1964') to provide for credit and other facilities for the development of
industry. It functioned as a department of Reserve Bank of India (RBI)
till 1976. In the year 1977, the Development Bank was de-linked from
the RBI. Its shareholding was transferred to the Central Government
and, accordingly, it was transformed into a statutory body and wholly
owned by the Government of India.
5. In the year 1994, the IDBI Act, 1964 was amended which, inter
alia, allowed the Development Bank to enlarge its shareholder's base
and access the capital market for resources.
6. Thereafter LIC, by a letter dated 15.10.2001, sought permission
of IRDAI for acquisition in a Corporation Bank. IRDAI replied by a
letter dated 17.10.2001 and approved the acquisition plan of LIC. The
said approval was given by IRDAI subject to LIC not acquiring more
than 30% stake in the concerned Corporation Bank.
7. Subsequently, in the year 2002, IDBI (Transfer of Undertaking
and Repeal) Bill, 2002 was introduced in the Parliament with the
objective of facilitating the Development Bank to discharge its
mandated development finance institution role in an effective manner.
8. After thorough debates, the said Bill was passed by both the
Houses and on 10.10.2004, the Industrial Development Bank
(Transfer of Undertaking and Repeal) Act, 2003 (hereafter 'the IDBI
Repeal Act, 2003') was enacted and the Development Bank was
renamed as IDBI Ltd. By virtue of the IDBI Repeal Act, 2003, the
business and undertaking of the Development Bank stood transferred
to and vested in Industrial Development Bank of India Limited (IDBI
Ltd.), a company registered and incorporated under the Companies
Act, 1956 and a banking company within the meaning of Section 5(c)
under the Banking Regulation Act, 1949. As per Clause 4 of the
Articles of Association of IDBI Ltd., the Central Government shall
have to maintain not less than 51% of the issued capital of the
company.
9. On 15.04.2005, the RBI wrote a letter to the Chairman of IDBI
Ltd. regarding the categorization of IDBI Ltd. Accordingly, IDBI Ltd.
was categorized under a new sub-group called "Other Public Sector
Banks". Thereafter, the Department of Financial Services, by its letter
dated 17.02.2006 (Ref.F.No.7/95/2005-BOA) addressed to all
Secretaries of Ministries/Departments of Central Government
communicated that the stake of the Central Government in IDBI Ltd.
would be maintained at a minimum of 51% and the concerned Bank
will be treated on par with Nationalised Banks for all purposes.
10. Meanwhile in the year 2004, the Central Government had also
set up a special purpose vehicle and created the Stressed Assets
Stabilization Fund (SASF) to acquire and manage the Stressed Assets
of IDBI Ltd.
11. Thereafter, in September 2015, the decision to reduce the stake
of Central Government in IDBI Ltd. was announced by the Finance
Minister (at the material time) for the first time and, thereafter for the
second time during the budget speech in 2016. Pursuant to these
announcements, the staff of the IDBI Ltd. took the recourse of an
employees' strike to oppose the aforesaid decision.
12. Consequently, a few members of Lok Sabha made a
representation to the Chairman, Committee of Petitions, Lok Sabha
requesting to advise the Government to not allow the acquisition of
majority stake by LIC in IDBI Ltd. The said petition was presented
before the Lok Sabha on 16.03.2017 and thereafter, Thirty First
Report of the Committee of Petitions was prepared with reference to
the said petition.
13. In its Thirty First Report, the said Committee made
observations, inter alia, to the effect that the employees of IDBI Ltd.
had opted to work in the Bank on the assurance that they would get the
opportunity to work in a Public Sector Bank. The Committee further
observed that IDBI Ltd. had been following the reservation policy in
services (both in direct recruitment as well as in promotions) as
applicable to the Public Sector Banks.
14. On 02.05.2018, the Board of the LIC passed a resolution for
LIC to take initiatives for acquiring controlling stake in a bank and
accordingly, initiate steps in that direction by obtaining necessary
regulatory approvals. In view of the same, LIC sent a letter dated
04.05.2018 to Secretary, Department of Financial Services, Ministry
of Finance seeking clearance to go ahead with the aforesaid endeavor.
15. Thereafter, LIC sent a letter dated 05.06.2018 to IRDAI
expressing its interest in acquiring controlling stake in a bank. On
15.06.2018, LIC sent another letter to IRDAI proposing the
acquisition of majority controlling stake in IDBI Ltd. In reply, IRDAI
sent a letter dated 19.06.2018 asking LIC to submit specific details in
order to examine LIC's aforesaid proposal. LIC sent a letter dated
26.06.2018 providing specific details as sought by IRDAI.
16. On 29.06.2018, IRDAI held a meeting on the subject of
acquisition of majority stake in IDBI Ltd., by LIC. Thereafter, IRDAI
sent a letter dated 04.07.2018 to LIC whereby, exercising its powers
under Regulation 14(2) of IRDAI (Investment) Regulations, 2016
(hereafter 'Investment Regulations'), IRDAI gave its approval to LIC
for acquisition of majority stake in IDBI Ltd. This approval was given
subject to reduction of shareholdings to less than 15% at a later date
and also subject to approvals from other regulators such as SEBI, RBI
and the Central Government.
17. In the meanwhile, on 03.07.2017, a Tripartite Memorandum of
Understanding (MoU) was signed by the petitioner, the Central
Government and IDBI Ltd. to improve the financial condition of IDBI
Ltd.
18. Thereafter, the Board of LIC, in its 582nd Meeting dated
16.07.2018, gave the approval for the aforesaid acquisition and
accordingly, LIC sent a letter to IDBI Ltd. communicating the same.
In the said letter, it was further stated that LIC is willing to acquire
majority controlling stake in IDBI Ltd. as a promoter through
preferential allotment of shares/open offer.
19. The Board of the IDBI Ltd., in its meeting dated 17.07.2018,
considered the aforesaid proposition and on the very same day, sent a
letter to the manager of Bombay Stock Exchange Ltd. and the
Manager (Listing) of National Stock Exchange of India Ltd. in
reference to the above proceedings. The Board further sought Central
Government's (Current Promoter) decision on the instant matter.
20. On 25.07.2018, a circular was issued by the petitioner
Association vehemently opposing the acquisition of IDBI Ltd. by LIC
on the ground that the said acquisition would result in various
hardships for the employees of IDBI Ltd.
21. Thereafter, on 01.08.2018, the Union Cabinet issued a no
objection certificate (NOC) approving the aforesaid reduction of the
Central Government' stake in IDBI Ltd. to below 50% by dilution.
The Cabinet also approved acquisition of controlling stake by LIC as
promoter in IDBI Ltd. through preferential allotment /open offer of
equity, and also relinquishment of management control by the Central
Government in the Bank. Subsequently, an NOC dated 06.08.2018
was also issued by the Central Government.
22. On 06.08.2018, IDBI Ltd. sent a letter to LIC seeking guidance
regarding the modalities of acquisition, Alterations in Articles of
Association and Pricing of Preferential Issue with control premium.
The aforesaid issues were discussed by the Board of LIC in its 583rd
Meeting dated 20.08.2018.
23. On 21.08.2018, LIC sent a letter to Ministry of Finance seeking
assistance for obtaining necessary regulatory approvals for the
aforesaid acquisition. Thereafter, the Board of LIC passed a resolution
dated 28.08.2018 approving LIC's subscription to equity capital of
IDBI Ltd. through preferential issue upto 14.90% of post issue
subscribed paid up capital.
24. Thereafter, the Investment Committee of LIC, in its 751st
meeting dated 04.09.2018, gave its recommendation to the Board of
LIC for approval of the acquisition majority stake in IDBI Ltd.
Subsequently, on 04.09.2018, the Board of LIC passed the resolution
approving the acquisition of majority stake in IDBI Bank by LIC.
Reasoning and Conclusion
25. As it is apparent from the above, there are, essentially, two
facets to the challenge laid by the petitioner to the action of the
Government divesting its majority stake in IDBI Ltd. and the LIC
acquiring the same. The first relates to the decision of the Government
of India to reduce its stake in IDBI Ltd. The petitioner contends that
the same is contrary to the assurance held out by the Government
before the Parliament at the time of considering the Industrial
Development Bank (Transfer of Undertaking and Repeal) Bill, 2002.
It is also claimed that this transaction is violative of Section 5(1) of the
Industrial Bank (Transfer of Undertaking and Repeal) Act, 2003 (the
IDBI Repeal Act, 2003). In addition, it is submitted that the
Government's disinvestment also violates the provisions of Section
25FF of the Industrial Disputes Act, 1947.
26. The second facet relates to the decision of LIC to acquire the
majority stake in IDBI Ltd. It is contended that the LIC's decision is
arbitrary, unreasonable and in breach of the fiduciary duty owed by
the Board of LIC to various policy holders. It is the petitioner's case
that the Board of Directors of LIC have failed to exercise due
diligence and have, in effect, abdicated their powers to the Sub-
committee inasmuch as the Board has approved the decision to acquire
the majority stake in IDBI Ltd. without fully examining the
ramifications of the decision to make such investment. The petitioner
claims that IDBI Ltd. is a loss making entity with approximately
₹58,000 crores of financial assets being declared as NPAs (Non-
performing Assets). And, any investment to acquire a majority stake in
IDBI Ltd. would result in a significant drain of resources of LIC at the
cost of policy holders. It is submitted that the said decision is malafide
and has been taken at the instance of the Central Government, whose
object is to access the resources of LIC for discharging its obligations
to support IDBI Ltd. It is contended that the said decision is contrary
to the provisions of the Regulation 9 of the Insurance Regulatory and
Development Authority of India (Investment) Regulations, 2016 (the
Investment Regulations). It is further contended that the decision of
IRDAI to relax the rigors of Regulation 9 of the Investment
Regulations and to permit LIC to acquire equity stake in excess of
15% of the equity capital of IDBI Ltd., is arbitrary and unreasonable
and is liable to be set aside.
Whether the Government of India is estopped form divesting its
majority stake in IDBI?
27. As noticed above, the Industrial Development Bank of India
Act, 1964 (the IDBI Act, 1964) was repealed by virtue of Section
15(1) of the Industrial Bank (Transfer of Undertaking and Repeal)
Act, 2003 (the IDBI Repeal Act, 2003). By virtue of Section 3(1) of
the aforesaid Act, the undertaking of Development Bank of India (the
Development Bank) stood vested with IDBI Ltd., a company to be
incorporated under the Companies Act, 1956. Further, by virtue of
Section 3(2) of the IDBI Repeal Act, 2003, IDBI Ltd. was deemed to
be a banking company within the meaning of Section 5(c) of the
Banking Regulation Act, 1949.
28. Plainly, there is no statutory provision which restricts the right
of the Government of India as a shareholder to transfer or deal with
the shares of IDBI Ltd. IDBI Ltd. is a company incorporated under
the Companies Act, 1956 and there is no provision under the said Act,
which prohibits or proscribes any shareholder from selling or in any
manner dealing with its interest. The Government of India being a
shareholder in IDBI Ltd. is, thus, at liberty to act as any other
shareholder (See: Life Insurance Company v. Escorts Ltd.: (1986) 1
SCC 264), which would also include the right to sell its shares as is
available to any other shareholder. The Government of India had the
obligation to ensure that it held 51% shares in the Development Bank
which was established under Section 3 of the IDBI Act, 1964. But
there was no such obligation insofar as the IDBI Ltd. is concerned. It
is also relevant to note that by virtue of Section 15(1) of the IDBI
Repeal Act, 2003, the IDBI Act, 1964 stood repealed which also
include Section 4C of the said Act. It was contended on behalf of the
petitioner that the Government of India has obligation to hold at least
51% shares in the Development Bank and the same would also extend
to IDBI Ltd. by virtue of Section 4 & 5 of the IDBI Repeal Act, 2003.
It was contended that by virtue of Sub-section (1) of Section 5 of the
IDBI Repeal Act, 2003, every officer or other employees of the
Development Bank would become an employee of IDBI Ltd. on the
same terms and conditions of the employment as applicable to his/her
employment with the Development Bank.
29. Mr Bhushan had contended that dilution of the Government's
shareholding in IDBI Ltd. would materially alter the conditions of
service of employees and officers inasmuch as they would now no
longer be employees of a Government company. Thus, they would be
deprived of attendant benefits of the policies, which were otherwise
available to them as employees of a Government company. He
submitted that employees were recruited through a common
recruitment process for all public sector enterprises and had joined
IDBI Ltd. believing that IDBI Ltd. would continue to be a
Government company.
30. Before addressing the aforesaid contention, it would be relevant
to refer to Section 5(1) of the Repeal Act, 2003 which reads as under:-
"5(1) Every officer or other employee of the
Development Bank (except a director of the Board or
the chairman and managing director or any whole-
time director) serving in the employment
immediately before the appointed day shall, in so far
as such officer or other employee is employed in
connection with the undertaking which has vested in
the Company by virtue of this Act, become, as from
the appointed day, an officer or, as the case may be,
other employee of the Company and shall hold his
office or service therein by the same tenure, at the
same remuneration, upon the same terms and
conditions, with the same obligations and with the
same rights and privileges as to leave, leave fare
concession, welfare scheme, medical benefit scheme,
insurance, provident fund, other funds, retirement,
voluntary retirement, gratuity and other benefits as
he would have held under the Development Bank if
its undertaking had not vested in the Company and
shall continue to do so as an officer or, as the case
may be, other employee of the Company or until the
expiry of a period of six months from the appointed
day, if such officer or other employee opts not to
continue to be the officer or other employee of the
Company within such period."
31. A plain reading of the aforesaid provision does not support the
contentions advanced on behalf of the petitioner. By virtue of Section
5(1) of the IDBI Repeal Act, 2003 all employees and officers of the
Development Bank had an option to accept the employment with IDBI
Ltd. on the same terms and conditions and with the same rights and
obligations as they would have had in respect of the employment with
the Development Bank if its undertaking had not vested with IDBI
Ltd. Plainly, the assurance held out to them is with regard to the terms
and conditions of their service and not as to the nature of the employer
- IDBI Ltd. There was no assurance that can be read with Section
5(1) of the IDBI Repeal Act, 2003 to the effect that IDBI Ltd. would
continue to be a Government Company.
32. As noticed above, Section 4(1) of the IDBI Act, 1964, which
required the Government of India to hold at least 51% of the total
share capital in the Development Bank, stood repealed by virtue of
Section 15(1) of the IDBI Repeal Act, 2003 and in any event was not
applicable to IDBI Ltd., which is a company incorporated under the
Companies Act, 1956.
33. The question whether employees have any vested right in their
employer continuing to be a Government company, is no longer res
integra. This was considered by the Supreme Court in Balco
Employees Union (Regd.) v. Union of India and Ors.: (2002) 2 SCC
333. In that case, the Supreme Court had in unequivocally terms held
that the employees had no such vested right. The relevant observations
of the court are reproduced below:
"the employees have no vested right in the employer
continuing to be a government company or 'other
authority' for purposes of Article 12 of the
Constitution of India..... So long as the State holds
the controlling interest or the whole of the
shareholding employees may take a status of
employees of a government company or other
authority under Article 12 of the Constitution. The
status so conferred on the employees does not
prevent the Government from divesting; nor does it
make the consent of the employees a necessary
precondition for disinvestment."
34. The Supreme Court had also held that disinvestment in the
shares of any government company did not result in change of the
employer or the employment. This is clear from paragraph 60 of the
said decision, which is set out below:-
"60. As a result of disinvestment of 51% of the
shares of the Company, the management and control,
no doubt, has gone into private hands. Nevertheless,
it cannot, in law, be said that the employer of the
workmen has changed. The employees continue to
be under the Company and change of management
does not in law amount to a change in employment."
35. In view of the above, this Court is unable to accept that the
disinvestment by the Government of India of the shares in IDBI Ltd.
would amount to a change in the terms and conditions of services
between IDBI Ltd. and its employees so as to fall foul of Section 5(1)
of the IDBI Repeal Act, 2003.
36. This Court is also of the view that the provisions of Section 5(1)
of the IDBI Repeal Act, 2003 cannot be read in an expansive manner
without reference to the object of the enacting the said provisions.
Section 5(1) of the Repeal Act, 2003 is a part of the set of provisions
enacted for transfer of undertaking of the Development Bank to IDBI
Ltd. The business of the Development Bank was transferred lock,
stock and barrel to IDBI Ltd. This would also include the employment
contracts with the employees serving the Development Bank. The
principal object was to ensure that the employees continue to serve
with the undertaking on the same terms and conditions as with the
previous employer (the Development Bank). There was no assurance
that the affairs of the undertaking would continue to be managed in the
same manner or that the transferee entity (IDBI Ltd.) was prohibited
or constrained in any manner to implement or evolve its own policies
for managing its affairs. The IDBI Repeal Act, 2003 did not restrict
IDBI Ltd. from conducting its business in the manner as it thought fit.
Plainly, IDBI Ltd. was also not precluded in changing its employment
policy or the terms of employment with any of its employees; of
course, subject to complying with the provisions of law and its
contractual obligations towards such employees.
37. The rights and obligations of employees viz-a-viz the employer
are determined by the contractual terms of employment. The
employees of a company constitute the human resource of an entity
which is deployed for achieving the goals and objects of the company.
The equity held by the shareholders in a company are assets of the
shareholders and they have full right to deal with the same. Their
rights to deal with the property are not subject to the employment
contract between the companies and its employees.
38. The contention that the Government of India is estopped from
selling its stake in IDBI Ltd. as it violates the assurance held out in the
Parliament during the discussions relating to the Industrial
Development Bank (Transfer of Undertaking and Repeal) Bill, 2002,
is also unmerited. The aforesaid Bill was referred to the Standing
Committee on Finance. The said Committee recommended certain
amendments which were debated in the House.
39. During the course of discussions before the Parliament, it was
proposed to include the following proviso:-
"Provided that the Central Government shall always
remain the majority shareholder of the Company and
at no point of time its shareholding shall fall below
51%"
40. The said amendment was not carried out. During the course of
the debate, the then Finance Minister had informed the members of
Rajya Sabha that the Government believed that the same could be
done through executive action. The Finance Minister also held out an
assurance that the Government would maintain IDBI Ltd. as a
Development Financial Institution. It appears that the issue of the
Government holding was considered in the aforesaid context.
41. This Court is of the view that the statements made before the
House almost 15 years earlier, in a debate relating to a legislative
activity, would not preclude the Central Government from diluting its
stake in IDBI Ltd. Indisputably, the legislation enacted by the
Parliament after the debate did not contain the amendment that was
sought to be introduced. The statements made before the House
cannot substitute or override the statue so enacted by the Parliament.
Surely, the Parliament was conscious of the import of not including
the proviso as proposed. The principles of promissory estoppel are
wholly inapplicable in the aforesaid context. It is not possible to
accept that the statements made in Parliament amounted to a
representation made to the employees and they had acted to their
prejudice based on such representation. The statements made before
the House were in the context of enacting a legislation (the IDBI
Repeal Act, 2003), and the said Act has to be interpreted in conformity
with the settled principles of statutory interpretation.
42. There is no ambiguity in the language of the IDBI Repeal Act,
2003 and there is no scope to read any provision into the said
enactment which proscribes the Government from reducing or
divesting its stake in IDBI Ltd.
43. If the Government is in breach of any of its assurance to the
Parliament, it would be for the members of the House to take up the
matter. It, certainly, does not create any right in favour of the
petitioner.
44. In Union of India v. Ganesh Rice Mills &Anr.: 1998 (9) SCC
630, the Supreme Court, while deciding on the authoritative value of
speech made by the Finance Minister in the Parliament, held as under:
"2. The only point decided by the High Court is
that the Finance Minister's statement on the floor
of the House must be held to be binding and the
Union was stopped from realising the disputed
cess from the appellants. It has been stated that
the writ petitioner had acted to his prejudice on
the basis of the promise made by the Finance
Minister. We are of the view that speech made in
Parliament by the Finance Minister cannot be
treated as a promise or representation made to the
writ petitioner and the principle of promissory
estoppel was wrongly applied by the High Court.
No case of promissory estoppel has been made
out on the facts of this case."
45. In State of Karnataka and Anr. v. K.K. Mohandas and Ors.:
(2007) 6 SCC 484, the Supreme Court held as under:
"23. That apart, this Court in Express
Newspapers Pvt. Ltd. and Ors. v. Union of India
and Ors.: AIR1986SC872 has held that the
principle of estoppel does not operate at the level
of Government policy. In Union of India and Ors.
v. Ganesh Rice Mills and Anr.: 1998 (99)
ELT199(SC) , this Court had categorically held
that a speech made in Parliament by a Minister
cannot be treated as a promise or representation
made to a person attracting the principle of
promissory estoppel. In Pine Chemicals Ltd. and
Ors. v. Assessing Authority and Ors.: 1993 (67)
ELT 25 (SC) , this Court held that a Finance
Minister's statement referring to a proposal to
continue the grant of exemption from payment of
sales tax for a period of ten years is merely a
budget proposal which could not give rise to any
right to the parties and it did not amount to a
decision, order or notification extending the
period of exemption which was required to found
a plea based on promissory estoppel. The manner
in which the courts below including the High
Court got over the principle enunciated by these
decisions leaves much to be desired.
24. Thus, it would seen that the plaintiffs are not
entitled to found any case of promissory estoppel
merely on the basis of the speech made by the
Minister in the Assembly of a proposal to ban
sale of toddy in the State."
46. In view of the above, the question whether the Government of
India is estopped form divesting its majority stake in IDBI Ltd. is
answered in the negative.
Whether the decision of LIC to invest in IDBI Ltd. is arbitrary or
unreasonable?
47. The next question to be examined is whether the decision of
LIC to invest in IDBI Ltd. is arbitrary or unreasonable warranting
interference under Article 226 of the Constitution of India. Before
proceeding to address the controversy with regard to the decision of
LIC to acquire majority stake in IDBI Ltd., it is necessary to bear in
mind the scope of judicial review of such decisions.
48. The decision of LIC to invest in IDBI Ltd. is a commercial
decision and no interference in these proceedings would be warranted
unless it is established that the said decision is illegal or fails the
Wednesbury test, that is, it is so unreasonable and arbitrary that no
sensible person could possibly take such decision. The Courts would
also interfere in cases where a decision making process itself is
otherwise vitiated.
49. In Tata Cellular v. Union of India &Ors.: (1994) 6 SCC 651,
the Supreme Court had laid down the scope of judicial review in the
following words:
"76. In R v. Penal on Take overs and Mergers, ex p
Guinness plc [1990] 1 QB 146 Lord Donaldson
MR. referred to the Judicial review jurisdiction as
being supervisory or 'longstop' jurisdiction. Unless
that restriction on the power of the courts is
observed, the court will, under the guise of
preventing the abuse of power, be itself guilty of
usurping power.
77. The duty of the court is to confine itself to the
question of legality. Its concern should be:
1. Whether a decision-making authority exceeded
its powers?
2. committed an error of law
3. committed a breach of the rules of natural justice
4. reached a decision which no reasonable tribunal
would have reached or
5. abused its powers.
50. In Census Commissioner & Ors. v. R. Krishnamurthy: (2015)
2 SCC 796, the Supreme Court held as under:
"33. From the aforesaid pronouncement of law, it is
clear as noon day that it is not within the domain of
the courts to embark upon an enquiry as to whether a
particular public policy is wise and acceptable or
whether a better policy could be evolved. The court
can only interfere if the policy framed is absolutely
capricious or not informed by reasons or totally
arbitrary and founded ipse dixit offending the basic
requirement of Article 14 of the Constitution. In
certain matters, as often said, there can be opinions
and opinions but the court is not expected to sit as an
appellate authority on an opinion."
51. In the case of Villianur Iyarkkai Padukappu Maiyam v. Union
of India: (2009) 7 SCC 561, the Supreme Court observed as under:
"169. It is neither within the domain of the courts
nor the scope of judicial review to embark upon an
enquiry as to whether a particular public policy is
wise or whether better public policy can be evolved.
Nor are the courts inclined to strike down a policy at
the behest of a Petitioner merely because it has been
urged that a different policy would have been fairer
or wiser or more scientific or more logical. Wisdom
and advisability of economic policy are ordinarily
not amenable to judicial review. In matters relating
to economic issues the Government has, while
taking a decision, right to "trial and error" as long as
both trial and error are bona fide and within the
limits of the authority. For testing the correctness of
a policy, the appropriate forum is Parliament and not
the courts."
52. In Peerless General Finance and Investment Co. Ltd. v.
Reserve Bank of India: (1992) 2 SCC 343, wherein it was observed
as under:
"Courts are not to interfere with economic policy
which is the function of experts. It is not the function
of the Courts to sit in judgment over matters of
economic policy and it must necessarily be left to
the expert bodies. In such matters even experts can
seriously and doubtlessly differ. Courts cannot be
expected to decide them without even the aid of
experts."
53. In the case of Arun Kumar Agrawal v. Union of India: (2013)
7 SCC 1, the Supreme Court observed as under:
"This Court sitting in the jurisdiction cannot sit in
judgment over the commercial or business decision
taken by parties to the agreement, after evaluating
and Assessing its monetary and financial
implications, unless the decision is in clear
violation of any statutory provisions or perverse or
for extraneous considerations or improper motives.
States and its instrumentalities can enter into
various contracts which may involve complex
economical factors. State or the State undertaking
being a party to a contract, have to make various
decisions which they deem just and proper. There
is always an element of risk in such decisions,
ultimately it may turn out to be a correct decision
or a wrong one. But if the decision is taken bona
fide and in public interest, the mere fact that
decision has ultimately proved to be a wrong, that
itself is not a ground to hold that the decision was
mala fide or done with ulterior motives."
54. Mr Bhushan submitted that the financial condition of IDBI bank
was dismal; its non-performing assets were to the extent of ₹58,000
crores and the bank required extensive financing to stay afloat. He
submitted that the investment decision of LIC would entail LIC to
divert approximately ₹30,000 crores of the funds collected from policy
holders to fund IDBI Ltd. He submitted that a decision of LIC to make
such investment amounts to breach of trust, as the policy holders have
invested their hard earned money on the belief that LIC would invest
the same in a prudent manner and for maximising their return. He also
contended that the decision of the Board of LIC was without
application of mind and the decision making process was flawed.
55. Mr Mehta had countered the aforesaid submissions and he
submitted that LIC was on the lookout for acquiring a controlling
stake in a bank for bancassurance and the LIC's first attempt to
acquire a controlling stake was made much earlier when LIC acquired
27% shares of the Corporation Bank. He submitted that LIC had also
made another attempt in the year 2013 to set up its own bank.
However, the said proposal did not materialise as at the material time,
the Reserve Bank of India did not grant the necessary permission.
56. He further submitted that the Board of LIC had deliberated on
the decision to acquire controlling stake in IDBI Ltd. and had decided
to do so in the interest of LIC and its stakeholders.
57. Plainly, this Court cannot reappraise the decision of the LIC
Board to invest in IDBI Ltd. on merits. This Court does not have the
wherewithal or the competence to examine the merits of a commercial
decision made by LIC. Given the limited scope of judicial review, the
examination by this Court must be confined to the decision making
process. The first time that the Board of LIC was moved to consider
the aforesaid proposal was by a circulation of an agenda note dated
02.05.2018. The said note was captioned "Re: Diversification in the
Area of Banking" and had sought the approval of the Board to take
initiatives for taking a controlling stake in or taking over a bank. The
said note did not mention IDBI Limited, but merely sought approval
of the Board to take controlling stake in 'a bank'. On 03.05.2018, the
LIC's Board approved the following resolutions:-
"RESOLVED THAT the Board accords in-
principle approval for LIC of India to take
initiatives for taking controlling stake in/taking
over a Bank.
RESOLVED FURTHER THAT the Chairman,
LIC of India is authorized to initiate steps in the
matter including obtaining necessary
Government/Regulatory approvals."
58. Immediately on the next day - that is, on 04.05.2018 - the
Chairman of LIC addressed a letter to the Secretary Department of
Financial Services, Government of India seeking clearance to go
ahead in the matter. The said letter did not specifically mention
acquiring any stake in IDBI Ltd. but alluded to the speech of the
Finance Minister for transformation of IDBI Limited. A plain reading
of the said letter also indicates that there had been certain informal
discussions between the Chairman and Officials of the Government of
India. Thereafter, LIC sent communications to IRDAI seeking the
approval to acquire 51% shares of IDBI Ltd. and also took the further
steps in the said direction. It is in the aforesaid context that Mr
Bhushan had submitted that LIC Board had not applied its mind to
acquire IDBI Ltd. while granting its approval. The aforesaid
contention would have merit if the LIC Board had not examined the
matter on subsequent stages as well.
59. On 04.05.2018, the LIC's Board had only considered a proposal
for acquiring majority stake in a bank. It is also clear that the proposal
for acquiring majority stake in IDBI Ltd was on the anvil but was not
specifically placed before the LIC's Board. However, this Court finds
no infirmity with such procedure, as it is common for the executives
of a company to complete the ground work and finalise the details of a
transaction before seeking the final approval in the Board of Directors.
It is apparent that the Chairman of LIC had engaged in informal talks
with the officials of the Government for acquiring stake in IDBI Ltd.
It is also possible that the first overtures for LIC to acquire such stake
may have been made by the Central Government (although there is no
material to establish the same). However, the LIC's decision to
acquire 51% stake in IDBI Ltd. cannot be faulted as the approval of
LIC's Board had been obtained on various occasions as the transaction
had progressed.
60. It is relevant to note that IRDAI had, by a letter dated
19.06.2018, also enquired whether LIC's Board had approved the
proposal to acquire controlling stake in IDBI Ltd. In response to the
same, LIC had explained that its Board had already approved
initiations of steps for acquiring a controlling stake in a bank and a
specific proposal regarding the acquisition of controlling stake in IDBI
Ltd. would be placed before LIC's Board after approval from the
Government of India.
61. After obtaining the approval of IRDAI, a specific approval was
sought by LIC's Board. On 05.07.2018, the LIC's Board granted its
approval to undertaking the due diligence based on data available in
public domain for acquiring the stake of 51% in IDBI Ltd. It also
granted approval to appoint two Merchant bankers, one external audit
firm and one rating agency for apprising the acquisition of 51% stake
in IDBI Ltd. It is apparent from the above that even at that stage LIC's
Board had not granted its final approval for acquiring 51% shares in
IDBI Ltd.
62. LIC's Board once again considered the transaction on
16.07.2018. The minutes of the meeting indicate that detailed
discussions were held in the Board Meeting held on 16.07.2018.
Several issues were discussed including the huge NPAs of IDBI Ltd.
and the strategy for LIC to manage the same. After considering the
same, the LIC's Board passed the following resolutions:-
"RESOLVED THAT LIC of India may acquire
controlling stake upto 51% stake in IDBI Bank.
RESOLVED THAT LIC of India to have proper
structured mechanism to ensure that IDBI bank is
professionally managed under the supervision of a
professional Board and to have an effective oversight
of the performance of the investment in the Bank as
stipulated by IRDAI and also suggested by
consultants.
RESOLVED FURTHER THAT the Chairman,
LIC of India is authorised to initiate process of taking
approvals from GOI, RBI, SEBI, other related
agencies and to initiate further process with IDBI
Bank and decide related matter."
63. Undisputedly, there are serious issues with regard to the affairs
of IDBI Ltd. LIC's Board had also raised several questions as to the
strategy to turn around IDBI Ltd. Mr Bhushan had contended that in
view of the questions raised by LIC, its resolution to grant approval
was clearly without application of mind and amounted to abdication to
its obligation to safeguard the interests of its stake holders. This
contention is not persuasive. Undoubtedly, LIC's Board had raised
questions with regard to the affairs of IDBI Ltd. and had directed
preparation of an action plan to turn around IDBI Ltd. With regard to
the IRDAI's decision to reduce LIC's stake over the years, LIC's
Board had also directed that LIC bring out a strategy paper. However,
these issues related to how LIC would proceed further after the
acquisition; it does not establish that LIC's Board had any reservation
as to the investment in IDBI Ltd. On the contrary, it clearly establishes
that LIC's Board was conscious of the state of affairs of the IDBI Ltd.
and despite the issues had resolved that LIC acquires a controlling
stake in IDBI Ltd. The minutes of the meetings of the Board of LIC
held on 16.07.2018 clearly indicates that the LIC's Board decision to
grant approval was after deliberation and after the LIC's Board was
fully apprised of the affairs of IDBI Ltd.
64. The decision of LIC's Board is a commercial decision and,
therefore, it is not open for this Court to examine the merits of the said
decision. Mr Bhushan has, undoubtedly, made a compelling case to
establish that LIC's decision was erroneous. He had also contended
that the said decision had been thrusted upon LIC by the Government
of India. Mr Bhushan may be correct is his submissions; investment in
IDBI Ltd. may or may not be beneficial for LIC and its stakeholders;
but that is not a controversy that this Court is required to enter into.
Even if Mr Bhushan's contention in this regard is accepted, this Court
cannot supplant its opinion over that of the Board of LIC. This Court
is also unable to accept that the decision to invest in IDBI Ltd. is so
perverse and unreasonable that no sensible person would take the
same. LIC believes that acquiring a bank would be of strategic
importance and this Court has no reason to question the same.
65. Once it is established that the Board of LIC was aware of the
state of affairs of the IDBI Ltd. and yet had approved the investment
in their commercial wisdom, no further examination is necessary. It is
also relevant to note that LIC's Board had once again discussed the
matter at a meeting held on 20.08.2018 and had taken decisions to take
further steps to implement the decision to make investment in IDBI.
This also establishes that the LIC's Board has been apprised from time
to time as to the progress of the transaction and has consciously
approved the same.
66. In view of the above, this Court finds no ground to interfere
with the decision of LIC's Board to acquire controlling interest in
IDBI Limited.
Whether the decision of IRDAI to relax the provisions of Regulation
9 of the Insurance Regulatory and Development Authority of India
(Investment) Regulations, 2016 is arbitrary and unreasonable?
67. The Insurance Act, 1938 (Insurance Act) contains extensive
provisions relating to investments to be made by an insurance
company. In terms of Section 27 of the said Act, every insurer is
required to invest and at all times, keep invested assets equivalent to
his liabilities to holders of insurance policies on account of matured
claims and the amounts required to meet liability, in specified
securities.
68. Section 27(1) of the Insurance Act is relevant and is set out
below:-
"27. (1) Every insurer shall invest and at all times keep
invested assets equivalent to not less than the sum of-
(a) the amount of his liabilities to holders of life
insurance policies in India on account of
matured claims, and
(b) the amount required to meet the liability on
policies of life insurance maturing for payment
in India,
less-
(i) the amount of premiums which have fallen
due to the insurer on such policies but have
not been paid and the days of grace for
payment of which have not expired, and
(ii) any amount due to the insurer for loans
granted on and within the surrender values of
policies of life insurance maturing for
payment in India issued by him or by an
insurer whose business he has acquired and in
respect of which he has assumed liability,
in the manner following, namely, twenty-five per cent of
the said sum in Government securities, a further sum
equal to not less than twenty-five per cent of the said sum
in Government securities or other approved securities and
the balance in any of the approved investments specified
in sub-section (1) of section 27A or, subject to the
limitations, conditions and restrictions specified in sub-
section (2) of that section, in any over investment."
69. The term "approved securities" is defined under Section 2(3) of
the Insurance Act, which is set out below:-
"(3) "approved securities," means-
(i) Government securities and other securities
charged on the revenue of the Central Government or of
the Government of a State or guaranteed fully as regards
principal and interest by the Central Government or the
Government of any State;
(ii) debentures or other securities for money issued
under the authority of any Central Act or Act of a State
Legislature by or on behalf of a port trust or municipal
corporation or city improvement trust in any Presidency-
town;
(iii) shares of a corporation established by law and
guaranteed fully by the Central Government or the
Government of a State as to the repayment of the
principal and the payment of the divided;
(iv) securities issued or guaranteed fully as regards
principal and interest by the Government of any Part B
State and specified as approved securities for the
purposes of this Act by the Central Government by
notification in the Official Gazette; and"
70. Section 27A(1) of the Insurance Act further provides that no
insurer carrying on life insurance business shall invest, or keep
invested, any part of the Controlled Fund otherwise than in approved
investments as may be specified by Regulations subject to limitations,
conditions and restrictions therein. Further, Section 27A(3) of the said
Act prohibits any insurer from investing in shares of any one banking
company or in shares and debentures of any one company in excess of
the limits as specified in the Regulations. Section 27A of the said Act
is set out below:-
"27A. (1) No insurer shall invest or keep invested any part
of his controlled fund otherwise than in any of the
following approved investments, namely:
(a) approved securities;
(b) securities of, or guaranteed as to principal and interest
by, the Government of the United Kingdom;
(c) debentures or other securities for money issued with
the permission of the State Government by any
municipality in a State;
(d) debentures or other securities for money issued by any
authority constituted under any housing or building
scheme approved by the Central or a State Government, or
by any authority or body constituted by any Central Act or
Act of a State Legislature;
(e) first mortgages on immoveable property situated in
India under any housing or building scheme of the insurer
approved by the Authority or a State Government;
(f) debentures secured by a first charge on any immoveable
property plant or equipment of any company which has
paid interest in full for the five years immediately
preceding or for at least five out of the six or seven years
immediately preceding on such or similar debentures
issued by it;
(g) debentures secured by a first charge on any immovable
property, plant or equipment of any company where either
the book value or the market value, whichever is less, of
such property, plant or equipment is more than three times
the value of such debentures;
(h) first debentures secured by a floating charge on all its
assets of any company which has paid dividends on its
ordinary shares for the five years immediately preceding
or for at least five out of the six or seven years
immediately preceding;
(i) preference shares of any company which has paid
dividends on its ordinary shares for the five years
immediately preceding or for at least five out of the six or
seven years immediately preceding;
(j) preference shares of any company on which dividends
have been paid for the five years immediately preceding
or for at least five out of the six or seven years
immediately preceding and which have priority in
payment over all the ordinary shares of the company in
winding up;
(k) shares of any company which have been guaranteed by
another company, such other company having paid
dividends on its ordinary shares for the five years
immediately preceding or for at least five out of the six or
seven years immediately preceding:
Provided that the total amount of shares of all the
companies under guarantee by the guaranteeing company
is not in excess of fifty per cent of the paid up amount of
preference and ordinary shares of the guaranteeing
company;
(l) shares of any company on which dividends of not less than
four per cent including bonus have been paid for the seven
years immediately preceding or for at least seven out of
the eight or nine years immediately preceding;
(m) first mortgages on immovable property situated in India
or in any other country where the insurer is carrying on
insurance business
Provided that the property mortgaged is not leasehold
property with an outstanding term of less than thirty years
and the value of the property exceeding by one-third, or if
it consists of buildings, exceeds by one-half, the mortgage
money;
(n) immovable property situated in India or in any other
country where the insurer is carrying on insurance
business:
Provided that the property is free of all encumbrances;
(o) loans on life interests, or on policies of life insurance
within their surrender values issued by him or by an
insurer whose business he has acquired and in respect of
which business he has assumed liability;
(p) life interests;
(q) fixed deposits with banks included for the time being in
the Second Schedule to the Reserve Bank of India Act,
1934 (2 of 1934) or with co-operative societies registered
under the Indian Co-operative Societies Act, 1912 (6 of
1912), or under any other law for the time being in force,
the primary object of which is to finance other co-
operative societies similarly registered;
(r) debentures of, or shares in co-operative societies registered
under the Indian Co-operative Societies Act, 1912 (2 of
1912), or under any other law for the time being in force;
(s) such other investments as the Authority may, by
notification in the Official Gazette, declare to be approved
investments for the purposes of this section.
(2) Notwithstanding anything contained in sub-section (1), an
insurer being a company or a co-operative life insurance
society as defined in clause (b) of sub-section (1) of section
95, may, subject to the provisions contained in the next
succeeding sub-sections, invest or keep invested any part of
his controlled fund otherwise than in an approved investment,
if-
(i) after such investment, the total amounts of all such
investments of the insurer do not exceed fifteen per cent
of the sum referred to in sub-section (1) of section 27,
(ii) the investment is made, or, in the case of any investment
already made, the continuance of such investment is with
the consent of all the directors present at a meeting and
eligible to vote, special notice of which has been given to
all the directors then in India, and all such investments,
including investments in which any director is interested,
are reported without delay to the Authority with full
details of the investments and the extent of the director's
interest in any such investment.
(3) An insurer shall not out of his controlled fund invest or
keep invested in the shares of any one banking company or
investment company more than--
(a) two and a quarter per cent of the sum referred to in sub-
section (1) of section 27, or
(b) two per cent of the subscribed share capital and debentures
of the banking company or investment company
concerned,
whichever is less."
71. It is also relevant to refer to Section 27D of the Insurance Act,
which enables IRDAI (referred to as "Authority") to specify by
Regulations the manner and conditions of investments of assets to be
held by the insurer. Section 27D of the Act is set out below:-
"27D. (1) Without prejudice to anything contained in
this section, the Authority may, in the interests of the
policyholders, specify by the regulations, the time,
manner and other conditions of investment of assets
to be held by an insurer for the purposes of this Act.
(2) The Authority may give specific directions for
the time, manner and other conditions subject to
which the funds of policyholders shall be invested in
the infrastructure and social sector as may be
specified by the regulations and such regulations
shall apply uniformly to all the insurers carrying on
the business of life insurance, general insurance, or
health insurance or re-insurance in India on or after
the commencement of the Insurance Regulatory and
Development Authority Act, 1999.
(3) The Authority may, after taking into account the
nature of business and to protect the interests of the
policyholders, issue to an insurer the directions
relating to the time, manner and other conditions of
investment of assets to be held by him:
Provided that no direction under this sub-section
shall be issued unless the insurer concerned has been
given a reasonable opportunity of being heard."
72. Section 114A(1) of the Insurance Act empowers IRDAI to
make Regulations to carry out the purposes of the said Act. Clause (i)
of Sub-section 2 of Section 114A of the Insurance Act expressly
provides that IRDAI may make Regulations in respect of "investment
of assets and further provisions regarding investments by an insurer
and investment by insurers in certain cases under sections 27, 27A,
27B, 27C and time, manner and other conditions of investment of
assets under section 27D".
73. In exercise of the aforesaid powers, IRDAI has made the
Investment Regulations [the Insurance Regulatory and Development
Authority of India (Investment) Regulations, 2016]. Regulation 9 of
the Investment Regulations provides for the exposure/prudential
norms. This includes the amount that can be invested by an insurer in
equities and debt of any company (referred to as "investee company").
The relevant extract of the said norms are set out below:-
"
Investment Limit for 'Investee' company
Assets Equity Debt
Rs.250000 15% of outstanding 15% of paid up share capital,
Crores or more equity shares (face free reserves (excluding
value) revaluation reserve) &
debentures/bonds
Rs.50000 12% of outstanding 12% of paid up share capital,
Crores but less equity shares (face free reserves (excluding
than Rs.250000 value) revaluation reserve) &
Crores debentures/bonds
Less than 10% of outstanding 10% of paid up share capital,
Rs.50000 equity shares (face free reserves (excluding
Crores value) revaluation reserve) &
debentures/bonds
"
74. Admittedly, in terms of the aforesaid norms, LIC was precluded
from increasing its equity stake in any company beyond 15% of the
outstanding equity shares of the said company. Thus, in terms of
Regulation 9 of the Investment Regulations, LIC could not acquire
more than 15% of the equity shares of IDBI Ltd. It is in this context,
IDBI had applied to IRDAI for relaxing exposure/ prudential norms as
stipulated in Regulation 9 of the Investment Regulations. Regulation
14(2) of the Investment Regulations empowers IRDAI to issue any
general or special order for modifying or changing the application of
certain Regulations to any insurer. Regulation 14(2) of the Investment
Regulations reads as under:-
"14(2). The Board of the Authority may, by any
general or special order, modify or change the
application of regulations (4), (5), (6), (7),(8),
(9) and (10) to any insurer either on its own or
on an application made to it"
75. At this stage, it would also be relevant to briefly examine the
specified Regulations. Regulation 4 of the said Regulations requires
that a life insurer will invest specified funds as per Regulation 5,6 and
7. All funds of the Life Insurance Business are required to be invested
as per Regulation 5; all funds of pension, annuity and group business
are required to be as per Regulation 6; and all funds of Unit Reserve
Portion of all categories of Unit Link Funds are required to be invested
as per Regulation 7. Regulation 4 is set out below:-
"4. Regulation of Investments - Life Insurer
A life insurer, for the purpose of these
Regulations, shall invest and at all times keep
invested, the Investment Assets forming part of
the Controlled Fund as under:
a. all funds (excluding Shareholders' funds held
beyond solvency margin, held in a separate
custody account) of Life insurance business and
One Year Renewable pure Group Term
Assurance Business (OYRGTA), and non-unit
reserves of all categories of Unit linked life
insurance business, as per Regulation. 5.
b. all funds of Pension, Annuity and Group
Business [as defined under Regulation 2 (1)(e) of
RIRDAI (Actuarial Report and Abstract for life
insurance business) Regulations] as per
Regulation 6; and
c. the unit reserves portion of all categories of
Unit linked funds, as per Regulation 7. "
76. Regulation 5 stipulates that 25% of all funds as mentioned in
Regulation 4(a) be invested in Central Government Securities. It
further stipulates that not less than 50% of such funds be invested in
Central Government Securities, State Government Securities or other
approved securities. It is further stipulated that other investments, as
specified in Section 27(A)(2) of the Insurance Act, not exceed 15% of
the funds as specified in Regulation 4(a) of the Investment
Regulations.
77. Regulation 3 proscribes an insurer to invest any part of its
'Controlled Funds' otherwise than in approved securities and
approved investments.
78. Whereas IRDAI has the power to modify or change the
application of Regulations 4 to 10 of the said Regulations, it has no
power to relax the rigours of Regulation 3. Thus, an insurer is required
to ensure that no part of its investments is made in any asset other than
in approved securities as defined under Section 2(3) of the Insurance
Act or approved investments as set out in Regulation 3 of the said
Regulations.
79. LIC has, undisputedly, complied with investment restrictions
and has not invested any part of the controlled funds other than any
approved securities/investments. It has also adhered to the limits as
specified in Regulations 5,6 and 7 of the Investment Regulations.
Regulation 9 specifies the limits and extent of investment that could
be made in any one company.
80. The limited question that requires to be addressed is whether the
decision of the IRDAI to relax the rigours of Regulation 9 and permit
LIC to acquire shareholding in excess of 15% in IDBI Ltd. is arbitrary,
unreasonable or without application of mind.
81. It is clear from plain language of Regulation 14 of the
Investment Regulations that the Board of IRDAI is duly empowered to
relax the rigours of Regulation 9 of the Investment Regulations either
by a general or a special order. The petitioner also does not dispute
that IRDAI is vested with such powers. However, the petitioner claims
that such exercise is arbitrary, unreasonable and without application of
mind. Thus, essentially, the petitioner challenges the manner in which
the IRDAI has exercised such powers.
82. It is settled law that every power is coupled with a duty to
exercise the same for the purposes for which such power is vested.
Thus, undoubtedly, IRDAI is required to modify or relax the
applications of the specified provisions of the Investment Regulations,
if the same is warranted.
83. The Investment Regulations are silent as to the factors to be
considered by IRDAI while exercising its powers under Regulation 14
(2) or the grounds on which such power is required to be exercised.
However, it's apparent that where an insurer presents a bona fide
reason, which in view of IRDAI warrants departure from the
Investment Regulations, it would be incumbent for IRDAI to grant the
same.
84. Plainly, the IRDAI is also required to bear in mind the object
for regulating the investment of an insurer while considering whether
to relax any restrictions as specified in the Investment Regulations.
The principal object in framing the Investment Regulations is to
insulate the policyholders from unwarranted risks and to ensure that
the insurers do not default in their commitment to the policyholders.
85. In the present case, the proposed investment for acquisition of
majority shares in IDBI Ltd. is ₹10,000 cr. which, the LIC states, is
2.5% of yearly incremental investment and 0.4% of total investment
assets. Thus, evidently, there is no reason to believe that the said
investment would expose the policy holders to any unwarranted risk.
As stated earlier, the LIC has not been exempted to invest the
specified percentage of its controlled funds in Government Securities
(which is perceived as involving minimal risk). The proposed
investment is within the limit set for investment in other than
approved investment, as specified in Section 27A(2) of the Insurance
Act; that is, it is 15% of the funds as specified in Section 27(1) of the
Insurance Act.
86. Thus, the safeguards put in the Investment Regulations for
ensuring that LIC does not default in its commitments and the
investments made are within the parameters stipulated for protecting
the interests of the policy holders, are duly complied with.
87. The restrictions stipulated for making investment in any one
company are two-fold. The first is the extent of 'controlled funds' that
can be invested in one company (the investee company); and the
second is the extent of the capital of the investee company that can be
acquired. The object of the first type of restriction is to avoid
excessive exposure in an investee company to minimise the risk.
Admittedly, this restriction has been complied with.
88. The object and rationale of imposing the second restriction -
that is, to ensure that an insurer does not acquire more than 15%
equity stake in any one investee company - is to ensure that LIC
remains a plain investor and not a promoter and the insurer does not
use the funds to acquire managerial control of companies. A miniscule
and relatively insignificant percentage of the controlled funds of LIC
may be sufficient to acquire controlling stakes companies having a
low Market Capitalisation. Although, this acquisition may have little
risk for the policy holders, it does have the propensity to dilute the role
of LIC as a plain investor. Permitting such acquisition could also mean
use of public funds for take-over of companies (hostile or otherwise).
Such investments may result in LIC to taking up a role where its
interest as an investor conflict with its interest to further the business
of an investee company.
89. The decision of IRDAI to relax the application of Regulation 9
of the Investment Regulations by a special order must be viewed in the
above perspective - it is not a relaxation of the risk profile of
investments but a permission to LIC to take up controlling stake in the
investee company.
90. This Court may now proceed to examine the relevant factual
context in which IRDAI's permission was sought and granted.
91. LIC had sent a letter dated 05.06.2018 to DGM, IRDAI
indicating its intention to acquire a controlling stake in a bank. It had
explained that the decision to do so was strategic in nature. Thereafter,
LIC sent a letter dated 15.06.2018 setting out its proposal to acquire
controlling stake in IDBI Ltd. A perusal of the said proposal indicates
that the LIC had set out the reasons for acquiring a controlling stake in
a bank and how the same would benefit LIC. LIC had also explained
that the policyholders fund would be duly safeguarded. The relevant
extract of the said proposal indicating the case canvassed by LIC in
regard to safeguarding policyholders' fund is set out below:-
"(iv) Safeguard of the Policyholders' Fund:"
A study of the bank gives an ample
indication that there is minimum downside in the
investment.
(a) Brand LIC itself will give stability and
upside;
(b) LIC's retail transaction to customers on an
average is more than one and a half crore to about
50 lac customers. Even if a part of business is
shifted to the Bank due to synergy of operations for
efficiency and profitability, it can give a huge
upside to the Bank;
(c) synergy in investment for LIC's investment
in corporate world will be substantial by way of
banks' capability of credit appraisal and project
finance processes;
(d) subsidiaries of the banks shall be utilised for
providing business by LIC which will again
improve the efficiency and profitability;
The following measures shall further help in
safeguarding the policy holders fund -
(a) the amount of investment is less than
Rs.10,000 cr. which in terms of the LIC's
investment is 2.5% of yearly incremental
investment and 0.4% of total investment assets;
(b) bank has put in place a turnaround strategy
which has started yielding results and is reflected in
significant improvement in key parameters such as
operating profit, provision coverage ratio, recovery
performance, cost to income ratio and share of low
cost deposits;
(c) the bank's image of modern private retail
bank will be further strengthened by showcasing it
with strength of brand LIC;
(d) the volume of banking related business of
LIC is so high that even 20% shift to this bank shall
give them major business and income;
(e) LIC is having about 24 crore policyholders
and about 50 lac pension policyholders. It gives a
huge opportunity to the bank to improve their
CASA and retail customer base.
The systemic dilution of stake as per the
glide path prescribed by the RBI & IRDAI shall
also safeguard the policyholder's fund. RBI
guidelines for 'on tap' licensing of universal banks
provides for such glide path."
92. In response thereto, IRDAI had sent a letter dated 19.06.2018
seeking certain clarifications including LIC's appraisal of acquiring
stake in IDBI Ltd. and the total outlay involved. LIC had responded by
a letter dated 26.06.2018 indicating that it had already acquired 7.98%
of the shareholding of IDBI Ltd. and would further require to invest
₹10500 crores to acquire the balance 43.02% shares to increase its
holding to 51%.
93. Thereafter, by a letter dated 04.07.2018, IRDAI communicated
its decision to permit LIC to acquire 51% of equity shares in IDBI Ltd.
as a special case subject to following restrictions. The said letter is set
out below:-
"REF:INV/LIC/LR/002/2018-19 Date: 4th July,
The Chairman
Life Insurance Corporation of India
Central Office, "Yogakshema", Heevab Vuna
Narg
Mumbai - 400021
Sir,
Sub: Acquisition of Stake in IDBI Bank - Reg.
Reference is invited to your letter INVO/Equity/2
dt. 15th June, 2018 and INVO/Equity/ED dt.
26th June, 2018 on the above subject. In this
connection, the Authority, in terms of powers
vested under Regulation 14(2) of IRDAI
(Investment) Regulations 2016 is agreeable to
permit LIC to acquire upto 51% of Equity Shares
in IDBI Bank as a special case, subject to the
following conditions:
1. The deal should be commercially viable
and should be arrived at after due-diligence and
approval of LIC Board.
2. LIC shall ensure that provisions of Life
Insurance Corporation Act 1956. Insurance Act,
1938. IRDA Act 1999. Rules and Regulations of
IRDAI and any other relevant law in force are
strictly followed.
3. The permission to acquire upto 51% stake
in IDBI Bank is subject to all necessary
regulatory approvals from RBI, SEBi and any
other relevant Agency.
4. LIC shall ensure that acquiring additional
stake in IDBI Bank is done in a prudent manner
such that the interests of the policyholders are
safeguarded. LIC shall make all efforts to
maximise returns from the deal so that the returns
are commensurate with the average returns from
overall investments of LIC.
5. LIC shall progressively bring down the
stake in IDBI Bank within the Regulatory limits
as mandated by IRDAI (Investment) Regulations,
2016 over a period of time as may be stipulated
by IRDAI.
6. LIC shall ensure that IDBI Bank is
professionally managed under the supervision of
a professional Board and LIC shall have an
effective oversight of the performance of the
investment in the Bank through appropriate
mechanism including Quarterly Performance
review by LIC Board.
Yours faithfully
SN Jayasriman
HoD (Investments)"
94. Mr Bhushan had contended that the said letter clearly indicates
that IRDAI had not evaluated the merits of the investments. He
submitted that although IRDAI had raised certain queries, it had not
received definite answers to the same; in particular, IRDAI was not
informed as to the capital required to be infused in IDBI Ltd and,
therefore, the IRDAI's decision is liable to be set aside.
95. This Court is not persuaded to accept the aforesaid contention,
essentially, for two reasons: first, it does not appear that IRDAI was
required to examine the merits of the decision to invest in IDBI Ltd.
The LIC's decision to invest in IDBI Ltd. was a strategic decision and
the said decision rested with the Board of LIC. IRDAI was required to
ensure that (i) such decision would not place policyholders' funds at
risk (which is the principal object of placing restrictions on the assets
in which insurers can invest the Controlled Funds); and (ii) that there
was a reason for LIC to make a strategic investment for acquiring
controlling interest in a bank.
96. The LIC had provided sufficient material and justification for
making an investment in a bank. It had also specified that amount of
investment for acquisition of the controlling interest in IDBI Ltd.
would be 25% of LIC's incremental early investment and 0.4% of the
total investment. In view of the above, IRDAI had sufficient material
to take an informed decision whether the proposed investment would
subject the policyholders to unwarranted risk.
97. LIC had explained that Bancassurance Channel (use of banking
channels to market insurance services) was the reason for acquiring a
strategic stake in IDBI Ltd. The relevant extract of LIC's proposal
indicating the above is set out below:-
"The main reason for considering controlling
stake in a bank is not merely of the seamless
flow of the banking services for the Life
Insurance Corporation of India, but to use it as a
strategic tool for improving efficiency of service
delivery reducing cost and having an in house
Bancassurance channel. The major factor of
significance is reduction in cost of distribution.
The cost is sought to be reduced by building
synergies among the various lines of analogous
business. It is in this light that most of the
financial institutions are building such business
models which provide for easy flow of
customers from one service to another with
much lower cost in customer acquisition and
retention."
98. Plainly, once LIC had presented its rationale for seeking
controlling interest in IDBI Ltd., IRDAI was required to examine the
same (and not the merits of the investment decision). It is doubtful
whether, as a regulator, IRDAI could examine the merits of the
investment decision.
99. IRDAI had examined the proposal and there was sufficient
material for IRDAI to take the decision that it did. This Court is not
called upon to supplant its view over that of IRDAI or examine
IRDAI's decision on merits. The scope of judicial review in these
proceedings is limited. This Court does not sit in appeal on the merits
of the decision taken by IRDAI. It is apparent that there was sufficient
material for IRDAI to accept that the policyholders' funds were duly
protected and that LIC had a sufficient reason to make a strategic
investment in IDBI Ltd. Thus, IRDAI's decision cannot be called into
question in these proceedings.
100. It was next contended that since IRDAI had granted the
permission subject to certain conditions, including that the commercial
viability should be arrived at after due diligence and approval of the
LIC Board, IRDAI had abdicated its duty to examine the same. This
contention is also unmerited. IRDAI is not required to examine the
commercial viability of the LIC's decision. The said decision rested
solely on the Board of LIC. IRDAI would merely require to examine
whether (a) there were bona fide reasons for LIC to seek relaxation of
the exposure norms; (b) whether such exposure would pose an
unwarranted risk to the policyholders; (c) whether it would amount to
LIC compromising its business as an insurer; and (d) any other factor
that may be considered necessary. It is apparent that IRDAI had
examined the same and, therefore, granted the approval subject to
certain conditions. As stated above, the said decision cannot be
questioned on merits. Plainly, the said decision also does not fall foul
of the Wednesbury Test; it is not possible for this Court to accept that
the decision is so arbitrary or unreasonable that no sensible person
would accept the same.
101. It was also contended that IRDAI has expressly stipulated that
LIC would reduce its stake progressively over a period of time and
this was contrary to LIC's objective of maintaining a controlling
interest in a bank. It was contended that this stipulation also indicated
that IRDAI had failed to apply its mind to the proposal submitted by
LIC. This contention is also unmerited. LIC's proposal is to acquire a
Controlling Interest in IDBI Ltd. for securing Bancassurance Channels
(that is, banking channels for selling insurance). Even though, it is
stipulated that the LIC would reduce its shareholding stake in IDBI
Ltd., it does not necessarily follow that LIC would cede controlling
interest in IDBI Ltd. or lose access to Bancassurance Channels.
Controlling Interest is not synonymous to holding majority of the
outstanding equity capital. The extent of shareholding required to
maintain a Controlling Interest is also dependent on how widely the
shares of the company are disbursed. There are a large number of
companies where promoter holding is less than 15%. LIC's object of
holding Controlling Interest in IDBI Ltd. is not necessarily
compromised by IRDAI's condition to reduce the stake below 15%
progressively. The LICs Board had considered the same at the meeting
held on 16.07.2018 and had directed LIC to bring out a strategy paper.
Whether LIC's acquisition of a majority equity stake in IDBI Ltd.
fall foul of section 25FF of the Industrial Disputes Act, 1947?
102. Section 25 FF of the Industrial Disputes Act, 1947 reads as
under:
"25FF. Compensation to workmen in case of
transfer of undertakings
Where the ownership or management of an undertaking
is transferred, whether by agreement or by operation of
law, from the employer in relation to that undertaking
to a new employer, every workman who has been in
continuous service for not less than one year in that
undertaking immediately before such transfer shall be
entitled to notice and compensation in accordance with
the provisions of section 25F, as if the workman had
been retrenched:
PROVIDED that nothing in this section shall apply to
a workman in any case where there has been a change
of employers by reason of the transfer, if-
(a) the service of the workman has not been interrupted
by such transfer;
(b) the terms and conditions of service applicable to the
workman after such transfer are not in any way less
favorable to the workman than those applicable to him
immediately before the transfer; and
(c) the new employer is under the terms of such transfer
or otherwise, legally liable to pay to the workman, in
the event of his retrenchment, compensation on the
basis that his service has been continuous and has not
been interrupted by the transfer."
103. In the present case, there is no transfer of undertaking. The
integrity of IDBI Ltd. as a company is not disturbed. LIC is not
acquiring any undertaking of IDBI Ltd. There is no change in the
employer and the members of the petitioner association continue to be
employed by IDBI Ltd. Further, neither the service of employees nor
the terms of such service are altered by the impugned transaction.
Thus, the contention that the transaction of acquisition of shares falls
foul of Section 25FF of the Industrial Disputes Act, 1947 is unmerited.
104. In view of the above, the petition is dismissed. All pending
applications stand disposed of. The parties are left to bear their own
costs.
VIBHU BAKHRU, J
DECEMBER 17, 2018
pkv/RK
