Narendra Kumar Maheshwari Vs. Union of India & Ors [1989] INSC 175 (3 May 1989)

Mukharji, Sabyasachi (J) Mukharji, Sabyasachi (J) Rangnathan, S.

CITATION: 1989 AIR 2138 1989 SCR (3) 43 1990 SCC Supl. 440 JT 1989 (2) 338 1989 SCALE (1)1353

ACT:

Capital Issues (Control) Act, 1947/Capital Issues (Exemption) Order, 1969: Sections 2, 3 and 12--Controller of Capital Issues--Scope of power and exercise of function in according sanction--Extent of.

Companies Act, 1956: Section 81(5)--'Compulsorily convertible debentures'--Floating charge--Debt equity ratio--What are--Whether a Company can deal with its property without the permission of debenture holders.

Practice and Procedure: Grant of Interim Orders--Regard to be had to principles of comity of courts administering same laws throughout the country.

HEAD NOTE:

Reliance Industries Ltd. (RIL) and Reliance Petrochemicals Industries Ltd. (RPL) are inter-connected and represented Companies in the large industrial house known as Reliance Group. RIL had promoted RPL. RPL was incorporated on 11.1.1988 and has been a cent percent subsidiary of RIL.

It was claimed that RPL would set up the largest petrochemical complex in India with foreign collaboration. RPL proposed to issue convertible debentures for raising capital for the project.

The Controller of Capital Issues (CCI), who functions under the Capital Issues (Control) Act, 1947 had, on 15th September, 1984 by way of press release issued certain non statutory guidelines for approval of issue of secured convertible and non-convertible debentures. These guidelines were subsequently amended on 8.3.1985. Guidelines were also given by the CCI for issue of convertible cumulative preference shares, and for employees stock option scheme.

RPL had, on 4.5.1988, made an application to CCI for issue of debentures of the face value of Rs.200 crores fully convertible into equity shares on the following terms:

A sum of Rs. 10 being 5% of the face value of each debentures by 44 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 CCI accorded his sanction for the issue of debentures on 4.7.1988. However, the sanction was amended on 19th July, 1988. The amendment put a non-transferability condition on the preferential share-holders of RPL. It was limited to the corporate shareholders of RIL and relaxed for individual share-holders of RIL. The amendment also stipulated 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. On 26th July 1988, there was another amendment which restricted the transfer of shares allotted to the employees of RPL and RIL.

The consent orders issued by the CCI were challenged in various High Courts, by way of writ petitions and a suit.

Some High Courts issued injunctions restraining the issue of the debentures.

This Court, on 19th August, 1988, restrained the aforesaid issuance of injunctions by the High Courts, and issued directions for the issue of debentures. The cases pending in various High Courts were transferred to this Court.

In these transferred cases the consent orders of the CCI were challenged mainly on the grounds that:

Despite the fact that RPL did not fulfil the requirements of a proper application and the necessary consent and approval, RPL's application was. entertained and processed by the CCI with undue expedition and without application of mind;

The guidelines issued by the CCI himself were deviated from;

45 The CCI had processed the application of RPL in a hurry, within two months;

The CCI did not take into account the fact that RIL had earlier issued debentures for manufacture of identical products;

The CCI failed to note that RPL did not have the necessary licences, consents and approvals, from the relevant departments of the Government of India;

The CCI failed to consider the financial soundness and feasibility of the project of RPL;

The CCI did not take adequate care to examine the terms of the issue and had blindly accepted the terms as proposed by RPL;

RPL in its brochures has misled the public by describing the debentures as fully secured convertible debentures;

The security for the debentures was inadequate;

RPL has been permitted to create securities which would have priority over the securities available to the present debenture holders and without their consent;

RPL has misled the public in that in its prospectus it had stated that security would be provided to the satisfaction of the trustees;

The CCI had failed to examine whether RIL had misused the funds raised on its debentures;

There has been a discrimination in favour of RIL in that RIL would be entitled to allotment of shares of the face value of Rs.57.50 crores, whereas only 5% of the investment of the debenture-holders could be converted;

Whereas RIL's loan of Rs.50 crores would be converted into shares at par, the debenture holders would have to pay premium to be fixed by the CCI at the time of second conversion of 20% of the debentures; and In the application filed by RPL, no shares were earmarked for the employees of RIL and RPL, but ultimately it was done.

46 On behalf of the petitioners, it was contended inter alia that the issue of the debentures in question was detrimental to public interest, and that public interest had been ignored.

On behalf of Respondents it was argued that the sanction issued by the CCI had been genuine and valid, and that no irregularity had been committed. It was submitted that it was a misconception that the CCI had not followed his own guidelines relating to sanction of the issue of the debentures, and it was incorrect to say that there had not been proper security.

Dismissing the writ petitions and the suit, this Court,

HELD:

1.1. The CCI functions under the Capital Issues (Control) Act, 1947, an Act to provide for control over the issue of capital. The purpose of the Act must be found from the language used. The scheme and the language used, strictly speaking, do not indicate any positive role for the CCI in discharging his functions in respect of grant of sanction. But it has to be borne in mind that he is a part of State instrumentalities committed to the endeavours of the constitutional aspiration to secure justice--social and economic--and also under Article 39(b) & {c) of the Constitution to ensure that the ownership and control of the material resources of the community are so distributed as to best subserve the common good and that the operation of the economic system does not result in concentration of wealth and means of production to the common detriment. Yet, every instrumentality and functionary of the State must fulfil its own role and should not trespass or encroach/entrench upon the field of others. Progress is ensured and development helped if each performs his role in the common endeavour. [90B; 124F-H; 125A]

1.2. In the changed socio-economic conditions of the country one who is charged to ensure capital-investment has to perform a social role in capital formation and to protect the interest of the capital market, and to oversee the growth of industrialisation and investment in such a manner as to ensure employment and demand in the national economy, to prevent wasteful investment and to promote sound methods of corporate finance. In recent years, there has been a vast increase in the number of members of public who have surplus money to invest. The size of the issues has assumed macro proportions and the type of investments are also more sophisticated. Entrepreneurs with expert legal assistance could easily trap unwary investors and the development of a public interest lobby that can scrutinise issues carefully and advise prospective investors may be desirable. [125A, B, F, G] 47

1.3. The guidelines are only a guide and nothing more.

The application of mind by the CCI before sanction must be in the perspective for which he is enjoined by the Act. He must endeavour to secure a balanced investment of the country's resources in industry, agriculture and social services. The Controller should perform the role of social control and fulfil the social purpose in conjunction with other authorities and functionaries. It is necessary for him in the discharge of his functions to ensure that there is not too much concentration of particular industries in particular areas, and that there is a scientific development and proper investment in key and core projects. [125C-D]

1.4. The duties of the CCI have to be construed in the context of the above, particularly when there is no clear cut delineation of their scope in the enactment. This 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. The responsilbilities of the CCI in this direction should not be widened beyond the range of expeditious implementation of the scheme of the Act and should, atleast 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. While it is true that some procedure may have to be evolved to ensure that the CCI gets the benefit of the comments, suggestions and objections from the public before arriving at his decision whether to grant consent or not, and if so, on what terms and conditions, it will be too cumbersome to have a provision that the details of every proposed application for consent should be publicised to the maximum extent by the CCI, that objections and comments from the public should be called for, that there should be public hearing by the CCI and that he should pass a reasoned order granting or withholding consent. That would delay the whole process of approvals which should be as expeditious as possible. [93C-E; 125G-H; 126A-B]

1.5. 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. 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. [93D-F]

1.6. Being non-statutory in character, the guidelines are not judicially enforceable. A policy is not law. A statement of policy is not a 48 prescription of binding criterion. The competent authority might depart from these guidelines where the proper exercise of his discretion so warrants. In the instant case, the statute provided that rules can be made by the Central Government only. And according to s. 6(2) of the Act, the competent authority has the power and jurisdiction to condone any deviation from even the statutory requirements prescribed, under sections 3 and 4 of the Act. The CCI applied his mind to the facts of this case and the factors in general. The CCI did not act malafide or on extraneous consideration. [122D-F; 124B-D] Fernandez v. State of Mysore, [1967] 3 SCR 636; R. Abdullah Rowther v. State of Tansport, etc., AIR 1959 SC 896; Dy. Asst. Iron & Steel Controller v. Manekchand Proprietor, [1972] 3 SCR 1; Andhra Industrial Work v. CCI & E, [1975] 1 SCR 321; K.M. Shanmugham v. S.R.V.S. Pvt. Ltd., [1964] 1 SCR 809; Sagnata Investments Ltd. v. Norwich Corpn., [1971] 2 QB 614; British Oxygen Co. v. Board of Trade, [1971] AC 610, relied on.

Ramanna Dayaram Shetty v. International Airport Authority, [1979] 3 SCR 1014; Motilal Padampat Sugar Mills v. Uttar Pradesh, [1979] 2 SCR 641; Ex P. Khan, [1981] 1 All. E.R. 40; IRC v. National Federation, [1982] AC 617; Reqina v.

Preston Supplementary, [1975] 1 WLR 624; Council of Civil Service Unions & Others v. Minister for the Civil Service, [1985] AC 407, referred to.

Foulkes' Administrative Law, 6th Edn. pp 181 to 184, referred to.

2. As regards the contention that the sanction of the CCI was accorded with undue haste and favouritism, in the first place, an application of this type is intended to be disposed of with great expedition. In a project of the type proposed to be launched by the petitioner, passage of time may prejudicially affect the applicant and it is not only desirable but also necessary that the application should be disposed of within as short a time as possible. It is, therefore, difficult to say that the period of two months taken in granting consent in the present case is so short that an inference of haste must follow. Secondly, on behalf of the Union of India, a list of various applications received and disposed of by the office of the CCI between September, 1987 and September, 1988 has been produced to show that, generally speaking, these applications are disposed of within a month or two. It is true that none of these issues is of the same colossal magnitude as the present issue. Nevertheless, the CCI could hardly keep the application pending merely because the amount involved is heavy. It is not possible therefore to say merely from the 49 short span of time that there was a hasty grant of consent in the present case. [73G-H;74A-C]

3.1. The consent of the CCI was not accorded in ignorance of the facts pertaining to the G series of RIL debentures. The application for consent makes it clear that the petitioner company is a new company promoted by RIL and that RIL was promoting this company to manufacture High Density Polyethylene (HDPE), Poly Vinyl Chloride PVC and Mono Ethylene Glycol (MEG). The application refers to the fact that the total cost of the project was expected to be Rs.650 crores and that this cost had been approved earlier in 1985.

Considering that RPL had come into existence only on 11.1.1988, this was a clear indication that the projects for which the debenture issue was being proposed were projects which had been mooted even by the RIL as early as 1985.

Again in the detailed application form submitted by the RPL it has been mentioned that the RIL had already obtained approval of the Central Government for implementation of the aforesaid projects under the MRTP Act. In part C of the application form it has been mentioned that the promoter company had made necessary applications for endorsement in favour of the company of the Letter of Intent/Industrial Licences already issued by the Central Government under the Industries (Development & Regulation) Act, 1951, in the name of the holding company, viz., RIL. It is, therefore, extremely difficult to agree that the fact of issue of the earlier series of debentures by the RIL or the purposes thereof could have escaped the notice of the CCI, particularly, when it is remembered that the issue of G series of debentures by the RIL was quite recent and had also attracted a lot of publicity. [74D-H; 75C-D]

3.2. The CCI was not performing 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. 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 grant of consent to RPL. 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 and it was decided to have a wholly-owned subsidiary. Hence the projects are those of the RIL to be implemented by RPL. The additional finances were needed for the extension, expansion and diversification of 50 the projects originally envisaged. This is one of the objects for which a debenture issue is permissible under the guidelines. [101F-H; 102A, B]

4.1. So far as HDPE is concerned, it appears that there was a valid licence; and it may be mentioned that on 24th August, 1985 pursuant to an application made by RIL under section 22(3)(a) of the MRTP Act, the Govt. granted approval for the establishment of a new undertaking for manufacture of HDPE. [77F]

4.2. Regarding foreign collaboration, an application was made by RIL in 1984 for approval of foreign collaboration with M/s Du Pont Inc. Canada, for manufacture of HDPE. The approval was given and the validity was extended and the foreign collaboration approval was endorsed in favour of RPL on 12th October, 1988. Similar other consents were there.

Finally, capital goods clearance was endorsed in favour of RPL for the PVC project on 12th August, 1988. Capital goods clearance was also endorsed in favour of RPL for HDPE project on 23rd August, 1988. Thus, it will be seen that all the basic groundwork had already been done by the RIL. [77G, H; 78A]

4.3. On 16th June, 1987 by a Press Note issued by the Deptt. of Industrial Development in the Ministry of Industry of the Govt. of India declared that where a transferee Company is a fully owned subsidiary of the Company holding the Letter of Intent or licence, the change of the Company implementing the project would be approved. It is in the light of this that the Board of RIL on 30th December, 1987 passed a resolution to incorporate a 100% subsidiary Company whose main objects were to implement the licences/Letters of Intent received by RIL and to carry on the activities relating to production and distribution. The resolution approved the name of the Company as RPL. On 11th January, 1988 the RPL was incorporated and the Certificate of Incorporation was issued. Thereafter, on 12th January, 1988 letters were written by RIL for endorsement of licences/Letters of Intent in favour of RPL. The certificate of commencement of business was thereafter issued. [78B-E]

4.4. The Press Note is clear that the transfers from one company to an allied company were considered unexceptionable except where trafficking in licences is intended. In this situation the change of name from RIL to RPL, of the licences, letter of intent and other approvals was only a matter of course and much importance cannot be attached to the fact that CCI did not insist upon these endorsements being obtained even before the letter of consent is granted.

In any event the letter of 51 consent is very clear. Clause (h) of the conditions attached to the consent letter makes it clear that the consent should not be construed as exempting the company from the operation of the provisions of the Monopolies & Restrictive Trade Practices Act, 1969, as amended. Clause (c) makes it clear that it is a condition of this consent that the company will be subject to any measures of control, licensing, or acquisition that may be brought into operation either by the Central or any State Government or any authority therein.

Under clause (t) the approval granted is without prejudice to any other approval/permission that may be required to be obtained under any other Acts/laws in force. Having regard to the above and also to the terms and conditions of the consent letter, the grant of consent itself being conditioned on RPL obtaining the necessary approvals, consents and permissions before embarking on the project, there was no impropriety in the CCI granting the consent without waiting for the formal endorsement of the various licences, letters and approvals in favour of RPL. Moreover, CCI is aware of the progress of the various applications made by the company. The Controller is also aware that the ICICI had looked into the financial soundness and feasibility of the project and there is material to show that the comments of the ICICI were made available to him. When a project is being appraised by the institution like the ICICI and when the CCI is also aware, by reason of the participation of his representatives at the meetings of the Department of Industry and the Department of Company Affairs about the stage or outcome of the proposals made under the IDR and MRTP Acts, it is clear that the CCI did not overlook any crucial aspect and that his grant of consent in anticipation of the necessary transfers to the RPL was based on a practical appraisal of the situation and fully in order. [78F-H; 79A, B; 80B-D]

5. There has been sufficient compliance with the guidelines on the quantum of issue, debt-equity ratio, interest rate and the period of redemption. There was sufficient security for the debentures in the facts and circumstances of this case. The preference in favour of shareholders of RIL was justified and based on intelligible differentia.

Indeed, if one considers the role of the CCI, he is primarily concerned to ensure a balanced investment policy and not to guarantee the solvency or sufficiency of the security.

Most of the criticisms directed against deviation from guidelines were misplaced. [94G, H; 95A, B] 6.1. 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 52 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 3 years whereas the debenture holders got 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 constitute basis for a ground of discrimination. [103E-H; 104 A, B]

6.2. RPL 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 great advantages and benefits on the existing share holders or promoters than on the new subscribers. It is not permissible for the CCI to withhold consent only for this reason or to stipulate that consent can be given only if the share holders and promoters as well as prospective debenture holders are all treated alike. The subscribers to the debenture 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. [104B-E]

7.1. 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. RPL does not have any existing loans. Therefore, the charge in favour of the debenture holders 53 iS presently the first charge. No further borrowing is contemplated at this stage except the foreign currency loan to the extent of Rs.84 crores. 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. [119G, H; 120A-C]

7.2. With the escalation in the value of the fixed assets due to passage 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 adequate to safeguard the interests of the debenture holders. [96G, H]

8. Clauses 5 and 6 are only enabling clauses and in the nature of permitting the Company, despite the mortgage in favour of the debenture holders, to carry on his business normally. What is referred to therein as residual charge is really a floating charge. The Company's normal business activities would necessarily involve alienation of some of its assets from time to time such as goods manufactured by it as well as procurement and discharge of loan and accommodation facilities from banks, financial institutions and others. The entire progress of the company would come to a standstill in the absence of such enabling provisions. They are not only usual but essential because the basic idea is that the finances raised by the debentures should be employed for running the project profitably and thereby generate more and more funds and assets which will also be available to the debentures holders. Further what the clauses provide is only that the consent and concurrence of the debenture holders need not be obtained by the company before creating securities that may have priority over the present issue of debentures. But the trustees for the debenture holders have to concur before the company can raise any future borrowings and create, therefor, the security which will have priority over the security available to the present debenture holders. The ICICI is not only a financial institution in the public sector but also one of the institutions financing the project and thus has a stake in its success and so can be trusted to safeguard the interests of the debenture holders. The debenture trust 54 deed also contains a provision by which at the time of creation of any future charge the terms and ranking have to be agreed upon between RPL and ICICI. Clause 16 of the trust deed authorises the trustees to intervene and crystallise the charge in certain circumstances and stultify an attempt by the company to create higher ranking charges. There are also restraints on the company under the Companies Act and the MRTP Act involving the consent of public financial institutions, Commercial Banks, the term lenders, share holders, the MRTP Commission, the Central Govt. and the CCI before the creation of such securities. [98B-H; 99A, E, F]

9. In certain brochures and pamphlets issued by RPL, the debentures were described as "fully secured convertible debentures". 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 or intending any change. It was stated that the company's representation was that the debentures were "secured fully convertible" ones.

This is also what had been set out in the application for consent. Though the company did claim that the debentures were also fully secured, the emphasis in the issue was that the debentures were fully convertible and secured. This explanation is plausible. No importance or significance need be attached to the different description in some places. particularly. in the context of the nature of security actually provided for the debentures. [95F-H; 96A]

10. Prospectus issued by RPL is not misleading because it stated that security will be provided to the satisfaction of the trustees and the CCI accepted that statement in the application for consent. The debenture trustees are well known financial institutions and it is not possible for the CCI to ensure more than the usual practice which was followed in the present case. [100D, E]

11. The CCI modified paragraph 5 of the consent by his letter of the 19th July, 1988 to say that allotment to the employees shall not exceed 50 debentures per individual. It does not appear that the restriction of the allotments to the employees was at the instance of the Company; nor does it seem that any discrimination was intended in respect of the allotments to the employees. Nor has attention been invited to any legal requirements or guidelines prescribing any fixed or minimum quota of allotment to the employees of the Company. Under the circumstances, the question of discrimination does not arise. [107C, D] 55

12. The consent order of the CCI clearly indicated that the consent conveyed in the letter shall lapse on the expiry of 12 months from the date thereof. The consent order categorically stated that the approval was without prejudice to any other aPproval/permission that may be required to be obtained under any other Acts and laws in force. It necessarily follows that the obligation to obtain other permissions continued. There was no legal conditions that other approvals should be examined by the CCI before grant of its own consent. 1112E, F]

13.1. As defined in the Companies Act, a debenture need not be secured. Therefore, guideline 10 means that security should be provided as is customarily adopted in corporate practice. In the present case, the debentures are compulsorlly convertible and so no repayment is really involved.

The debenture is essentially an acknowledgement of debt with a commitments to repay the principal with interest. The question of security becomes relevant for the purpose of payment of interest only in the unlikely event of winding up. The guidelines did not provide for the quantum and the nature of the security. A debenture may, therefore, be secured or unsecured. An ordinary debenture has to be distinguished from a mortgage debenture which necessarily creates mortgage on the assets of a Company. A compulsorily convertible debenture does not postulate any repayment of the principal and so does not constitute a debenture in the classic sense. Even a debenture which is only convertible at option has been recognised as a hybrid debenture. The guidelines for the protection of debenture holders issued on 14.1.1987 recognise the basic distinction between convertible and non-convertible debenture. Compulsorily convertible debentures in corporate practice were adopted in India sometime after 1984. Wherever the concept of compulsorily convertible debenture is involved, various guidelines issued by the Government of India treat them as equity and not as loan or debt. Even a non-convertible debenture need not always be secured. In fact, modern tendency is to raise loan by unsecured stock which does not create any charge on the assets of a Company. Whenever a security is created, it is invariably in the form of a floating charge. In addition they are frequently secured by a trust deed as in the present case where specific property/land etc. has been mortgaged to the trustees. [116E, F; 117B-G]

13.2. 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 have to be informed and invited for the meeting. The extravagant effects of this course would be collosal especially when a shareholders meeting is also additionally called for the same 56 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.

[118D-E] The British India Steam Navigation Co: v. The Commissioner of Inland Revenue, [1881] 7 QBD 165; Re. Colonial Dusts Corporation, [1879] 15 Ch. 465; Speyar Brothers v. The Commissioner of Inland Revenue, [1907] 1 KB 246; Lemon v. Austin Friars Investment Trust Ltd., [1926] 1 Ch. 15; Florence Land & Public Works Co., [1878] 10 Ch. 530; Re. Panama, New Zealand, and Australian Royal Mail Co., [1870] L.R. 5 Ch. 318; Re. Standard Manufacturing Co., [1891] 1 Ch. 627; Re. Borak Foster v. Borax Co., [1901] 1 Ch. 326; Creatnor Maritime Co. Ltd. v. Irish Marine Management Ltd., [1978] 1 WLR 966. referred to.

Palmer's Company Law, 24th Edn. pp. 672, 675, 676, 706;

The Encyclopaedia of Forms and Precedents, 4th Edn., Vol. 6 p. 1094, 1095, 1097, 1098, referred to.

14. The Court, would be reluctant to interfere simply because one or more of the guidelines have not been adhered to even where there are substantial deviations unless the deviations are by nature and extent such as to prejudice the interests of the public which it is their avowed object to protect. Per Contra, the Court would be inclined to overlook or ignore such deviations, if the object of the statute and public interest warrant, justify or necessitate such deviations in a particular case. Judicial control takes over only where the deviation either involves arbitrariness or discrimination or is so fundamental as to undermine a basic public purpose which the guidelines and the statute under which they are issued are intended to achieve. In the instant case, there is no such infraction of the norms required to be followed in granting the sanction. [123F-H; 124A, B]

15. Before the Courts grant any injunction they should have regard to the principles of comity of courts in a federal structure and have regard to self-restraint and circumspection. It may be impossible to lay down hard and fast rules of general application because of the diverse situations which give rise to problems of this nature. Each case has its own special facts and complications and it will be a disadvantage, rather than an advantage, to attempt and apply any stereo-typed formula to all cases. Perhaps in this sphere, the High Courts themselves might be able to introduce a certain amount of discipline having regard to the principles of comity of courts administering the same general 57 laws applicable all over the country in respect of granting interim orders which will have repercussion or effect beyond the jurisdiction of the particular courts. Such an exercise will be a useful contribution in evolving good conventions in the federal judicial system. [126F, G; 127A] [Having considered the facts and circumstances of the present cases, this Court directed refund of the sum of Rs.one lakh deposited RPL as ordered by the Court on 9.9.1988. The deposit amount was meant for payment to the petitioners in case they were to spend unduly.]

ORIGINAL JURISDICTION: Transfer Case Nos. 161-165 of 1988.

S. Ganesh, Arun Jaitely, Miss Bina Gupta, Miss Madhu Khatri, A.N. Haksar, Praveen Anand, Anip Sachthey, B.L. Pagaria, P.K. Jain, Udai Holla and T. Sridharan for the petitioners.

G. Ramaswamy, Soli, J. Sorabjee, M.H. Baig, F.S. Nariman, H.N. Salve, R. Sasiprabhu, S.S. Shroff, Mrs. P.S. Shroff and S.A. Shroff for the Respondents.

The Judgment of the Court was delivered by SABYASACHI MUKHARJI, J. In these transferred writ petitions 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 58 person and is an existing shareholder of the Company known as Reliance 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 business of manufacture of petrochemicals. These petitions were filed in 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 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 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 convertible: Respondent No. 3 would issue one share of Rs. 10 at par 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 premium 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 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 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 wellknown; and that RIL had issued debentures of 'G' Series and had assured to pay interest up to 5th February, 1988. 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 such capital was bona .fide. It was observed that no public interest was intended to be served by respondent 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 criticisms both in the press and in the public. It was 60 pointed out that though the issue proposed was of shares of Rs.50 crores and debentures of Rs.516 crores, the company was allowed to retain over-subscription to the tune of 15% amounting to Rs.77.40 crores. 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 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 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. 1. 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 the '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 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 Market in India has undergone turbulent changes in the recent years. Small investors such as employees, workers and small business community were coming forward, according to the petitioner, for the 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 facts and the circumstances leading to this consent order have been stated in the affidavit on behalf of respondent No. 3 to the writ application. After disputing the locus of the petitioner, who challenged the consent order for making the public issue of 12.5 Secured Convertible Debentures by 3rd respondent, the respondent No. 3 stated that the petition suffers from laches and delays. On behalf of respondent No. 3 it was asserted that the public issues made by the 3rd respondent had been promoted by RIL. The RIL and RPL are inter connected and represented companies in the large industrial house known as 'Reliance Group'. According to respondent No. 3, they represented India's fastest growing private sector companies and comprised the world's second largest investor family of over 30 lakhs investors.

It was further asserted that the 3rd respondent would have India's largest private sector Petrochemical Complex for the manufacture of critically scarce raw-materials. It was stated that the 3rd respondent would manufacture versatile raw-material which was behind the plastic revolution, particulars whereof have been mentioned in the Annexure. It was further stated that the petrochemical complex of the 3rd respondent would come up at Hazira, District Surat in the 62 State of Gujarat and the production was planned to start in a phased manner between the next 18-24 months. The 3rd respondent would be setting up a state-of-art world class plant in collaboration with the world leaders in the respective fields, i.e.

(a) Du Pont, Canada for HDPE

(b) B.F. Goodrich & Co. for PVC, and

The terms of the issue of debentures of the face value of Rs.200 being fully converted into equity shares were the following:

"(i) A sum of Rs. I0 being 5% of the face value of each debentures by way of first conversion immediately into one equity share at par on allotment;

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 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 desires 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.

The products which were intended to be manufactured by the 3rd respondent were many, namely, (a) High Density Polyethylene (HDPE) and Poly Vinyl Chloride (PVC) which are raw-materials behind plastic revolution; (b) Mono Ethylne Glycol (MEG) is a critical polyester raw-material; HDPE and PVC being vital thermo plastic play an important role in the core sector and are used for manufacture of everything from films to pipes, auto parts to cable coatings, and containers to furnishings. It is not necessary for the issues involved in these applications to set out in detail the very many particulars given by the respondent No. 3 in support of the contention that a petrochemical complex proposed to be set up by the new Company--respondent No. 3--would be beneficial socially and economically for the country as well as for the investors.

The advantages of convertible debentures proposed to be issued at that time by the respondent No. 3 were also highlighted. It is stated that debentures are treated as equity.

The 3rd respondent's borrowing capacity remains unutilised and this would help it in implementing the future projects expeditiously. The first phase of the project is financed by the proposed issue of debentures and not by large capital borrowings from the public financial institutions (except to the extent of foreign currency loans of Rs.85 crores from them). The interest which would, therefore, have been payable to the financial institutions will be paid to the debenture holders ensuring them a return and simultaneously the convertible clause which would have been applicable to term-loans obtained from the financial institutions would be available to the investors thereby ensuring them growth in equity value. It was further stated that since the preferential allotment of 50% of the total issue was made to RIL shareholders, the shareholding pattern of the 3rd respondent will be the most widely held people's shareholding in the country and it was pleaded that there will be at least 20 lacs shareholders of the 3rd respondent which would be a world market record.

64 It was further stated that RIL, who are the promoters of the project, have one of the best track records for setting up of the Projects such as Polyester Staple Fibre (PSF), Polyester Filament Yarn (PFY), Linear Alkyl Benzene (LAB) and Purified Terphthalic Acid (PTA) plants at Patalganga in record time. Business records of Reliance's 'Vimal' and 'Recorn' were also emphasised. It is, however, not necessary for the purpose of the issues involved in these applications either to dilate upon these or to consider the correctness or otherwise of these assertions. Reliance's plant at Patalganga complex in the State of Maharashtra and its beneficial effects to the community and the State, as asserted on behalf of respondent No. 3, are also not relevant. It was stated that Reliance is privy to the technology of the world leaders, such as Du Pont of U.S.A. and Imperial Chemical Industries of UK. Mr. Pageria, learned counsel appearing for one of the petitioners, Radhey Shyam Goyal tried to impress upon us that among the world leaders of technology, Du Pont of USA and Imperial Chemical Industries of UK cannot claim such high position. Neither is it necessary nor is it possible for us to consider these assertions and denials.

The industrial licences have been applied for and it was stated that pending the formation and incorporation of RPL on 4.1. 1988 under the Companies Act, 1956, RIL had undertaken and performed various acts and deeds, particulars whereof have been mentioned in the Statement of Facts. In the Statement of facts filed on behalf of respondent No. 3, a list of consents and approvals obtained by the 3rd respondent, has also been indicated.

It was further stated that pursuant to the order of this Court, dated 19th August, 1988 the public issue was made under the prospectus dated 27th July, 1988 which opened on 22nd August, 1988 and closed on 31st August, 1988. There had been an overwhelming response to the issue from all categories of investors including nonresidents, RIL shareholders/employees and the issue was heavily oversubscribed. On behalf of the RPL, it was stated that the time frame of 10 weeks commencing from 1st September, 1988 and ending on th November, 1988 had to be strictly adhered to.

The provisions of Section 73 and other applicable provisions of the Companies Act, 1956, the provisions of the Securities (Contract and Regulation) Act, 1956 and the listing requirements of the Stock Exchanges were also complied with.

It was stated on behalf of the 3rd respondent that for the purpose 65 of finalising the means of finance of HDPE, PVC and MEG Projects, RIL as the promoters of the 3rd respondent had engaged the services of the Merchant Banking Division of ICICI which is a public financial institution and one of the foremost consultants in the field. During the discussions which were initiated in the second half of 1987 with ICICI, the idea of implementing these projects through a new independent Company instead of RIL had taken shape duly taking into account the financial aspects, management aspects, issues related to management and operation control of setting up the projects within the existing company vis-a-vis the setting up of the projects in the new company, namely the 3rd respondent company, was taken up. The 3rd respondent company and ICICI also considered various alternative means of financing project keeping in view the following criteria:

(a) That the project should be financially beneficial to the company.

(b) That it should be financially attractive to the investor.

(d) That it should meet the institutional/stock exchange/Ministry of Finance norms and guidelines as regards financing of projects.

(e) That it should be sustainable and attractive enough in terms of the profitability/servicing capability of the project.

(f) That it should reduce the dependence of the company on institutional finance.

(g) That it should encourage the capital market activity in India.

The various alternative means of issue of security such as equity share and/or convertible cumulative preference shares (CCP) and/or partially convertible debentures and/or non-convertible debentures and/or equity linked debenture issue and/or fully convertible debentures were all examined by the management and ICICI at length from various aspects including the aforesaid aspect, it was asserted on behalf of respondent No. 3.

It was reiterated that the Controller of Capital Issues had applied his mind and considered all relevant, pertinent and proximate matters and the Controller bona fide bestowed painstaking consideration by examining the entire gamut of means of finance, the volume of finance needed and types of securities, marketability of securities, conditions of the capital market and other relevant considerations as are normally and properly to be evaluated by him as an expert authority. A specialised expert statutory authority or agency under a valid and legal enactment has been set up for the purpose of examining on what basis securities such as share and/or convertible debenture should be issued 66 and the merits of his conclusions are not open to judicial review.

It has to be borne in mind that the writ petitioners were only potential investors in the shares and debentures proposed to be issued at the time when a large part of the averments had been made. It was open to them, if they felt that the scheme was not attractive not to subscribe to the issues. It was, however, not possible for them, contend the respondents, to prohibit the issue. or prevent the taking of other steps in pursuance thereof. Respondents 3 and 4 have set out various reasons why an interim injunction should not be granted. These are unnecessary to be dealt with now when the matter is being finally disposed of.

Two other affidavits are necessary to be referred to.

One is the rejoinder affidavit on behalf of the petitioner in writ petition No. 1791 of 1988 before the Delhi High Court, and the other is on behalf of the Government. So far as the petition of Narendra Kumar Maheshwari is concerned, it is necessary to note that he has stated that the capital market had undergone changes in raising issues and the investors had no means of verifying the correctness and soundness of the financial viability of the scheme. It was stated that the Central Govt. did not take the responsibility for financial soundness of the scheme. It was asserted that a new share of a new company could not be raised at a premium but the Govt. had improperly permitted the issue of shares of a new company at a premium in the instant case. It was stated that the consent order of the Controller of Capital Issues stated that premium would be payable on the shares to be allotted on conversion which, according to the deponent, amounted to fraud on the investing public and the subterfuge to boost up the market value of shares of RIL.

It was reiterated that the RPL had been promoted by RIL whose shares had fluctuated in the share market so widely for which no explanation came forth from the company. These fluctuations in the share market were, according to the petitioner, on account of purchases/ sales made by certain interested quarters close to the management. On many occasions the sale of the share of RIL in the stock market was banned in some stock exchanges due to fall in prices which, according to the deponent, was a clear indication of cooperation and support from the authorities.

It was further alleged that there was discrimination in respect of time period of conversion of loan/investment into equity between the shareholders of RIL and the investing public. Immediately on allot67 ment the conversion of percentage of investment of the rights holders is 53.49% whereas that of the investing public is only 5%. At the end of 3 years from the debenture allotment date, percentage debenture conversion of investment of the rights holders is 46.51% and that of the investing public is nil. Hence, after the end of 3 years time the percentage of conversion in investment of rights holders is 100% whereas that of the investment of right holders at the end of 3 years in figures is approx Rs. 107.50 crores and the investing public is only 29.67 crores. Between 3 and 4 years of debenture allotment the percentage of conversion of allotment of rights holders is nil and that of the investing public is 20%. Between 5 and 7 years of the debenture allotment date the percentage of conversion of investment of the rights holders was nil and that of the investing public is 75%. Thus the conversion of the debenture allotment between 3 and 7 years of rights holders is nil and that of the investing public is 95%, which in figures comes to about Rs.563.73 cror