A. Foreign Exchange Regulation Act, 1973, section 29(1)(b) Whether the Reserve Bank of India had the power or authority to give "ex-post facto" permission under section 29(1)(b) of the Act for the purchase of shares in India by a company not incorporated in India or whether such permission had necessarily to be previous permission Words and Phrases "Permission" meaning of.

B. Corporate democracy, concept of, explained.

C. Company Law Shares Nature of the property in shares Law relating to transfer of property in shares under the law and the effect of the provisions of the Foreign Exchange Regulation Act explained Companies Act, 1956, sections 2(46), 82, 84, 87, 106, 108(1), 108 (1-A) (a) and (b), 108 to 108 H, 110, 111(1) & 3, 206, 207, 397, 398, 428, 439 and 475 read with section 27 of the Securities Contracts (Regulation) Act, Sale of Goods Act, Sections 2 (7), 19, 20 to 24 and Transfer of Property Act, section 6.

D. Companies Act, 1956, sections 291-293 Position and nature of discretionary powers of the Directors in a company.

E. Shares of a company, transfer of Refusal to transfer the shares, extent of Whether the refusal to transfer the shares by the company even after the permission was granted by the Reserve Bank under the FERA, proper Companies Act, 1956 section 111(1) & (3).

F. Shares, Purchase of by the foreign investor of Indian nationality/origin On the facts of the instance case, whether involved any contravention of Foreign Exchange Regulation of the Non-Residents' Investment Scheme.

G. Doctrine of lifting the corporate veil Investments by company owned by non-residents of Indian nationality in accordance with the Foreign Exchange Regulations, the Non-Residents External Account Rules, 1970, the Portfolio Investment Scheme, the Exchange Control Manual, Stock Exchange Control (Regulation) Act, 1956 and its bylaws--Whether the Court could pierce the veil of the transactions.

H. Shareholders' right to call extraordinary general meeting on requisition either to alter the Articles of Association of removal/change of directors State and its instrumentalities being shareholders have the same rights of an ordinary share- holder Companies Act, 1956, sections 169, 172, 173(3), 284, L.I.C. Act, Section 6.

I. Constitution of India, 1950, Articles 14, 19, 32, 226 read with order XXXIX Rule 1 Whether the Courts can interfere with the shareholder's right to call a general body meeting and grant injunctions Judicial Review and Article 14 explained.

J. Construct of statutes enacted in national interest, explained.

K. English cases, reference to as external aids permissibility Forms, whether can control the Act.

L. Exchange Control Manual Paras 24, 24 A-1 and 28 A-1 Titled "Introduction to Foreign Investment in India Nature of- Whether statutory direction.

M. Foreign Exchange Regulation, 1973 Grant of permission by the Reserve Bank of India under the N.R.P. scheme Whether can be questioned by the company whose shares are purchased by N.R. I. in a petition under Article 226 of the Constitution.

N. Rule against retrospectivity, applicability of.

O. Portfolio Investment Scheme by companies and overseas bodies owned by non-residents of Indian nationality/origin in accordance with circulars issued from time to time by the Reserve Bank of India under section 73(3) of FERA and clarifications thereof contained in Press Release dated 17.9.83 and the circular dated 19.9.83 (both) issued by the Reserve Bank of India and the letter dated 19.9.83 issued by the Government of India, whether valid.

P. Mala fides, whether the Union of India, the Reserve Bank of India and the Life Insurance Corporation of India be said to have acted malafides, in the matter of requisiting general meeting and in the Investment by purchase of shares made by the Caparo companies, respectively.

Indian economy which has to operate under the existing world economic system needs lots of foreign exchange to meet its developmental activities. For the purpose of earning, conserving and building up a reservoir, thereof, and to improve its proper utilisation Parliament and the Executive government including the Reserve Bank of India have been taking several steps from time to time under the Foreign Exchange Regulation Act, 1973 and other allied Acts and Rules made thereunder. In exercise of the powers conferred by section 79 of the Foreign Exchange Regulation Act, the Central Government made Rules called the Non-Resident External Account Rules, 1970. With a view to earn foreign exchange by attracting non-resident individuals of Indian nationality or origin to invest in shares of Indian companies, the Government of India decided to provide incentives to such individuals and formulated a "Portfolio Investment Scheme". This scheme was announced by the Government on 27.2.1982 was incorporated in Circular No.9 dated 14.4.1982 of the Reserve Bank of India issued under section 73(3) of the Foreign Exchange Regulation Act. Paragraph 4(a) thereof provides that under the liberalised policy non-residents of Indian nationality or origin will be permitted to make portfolio investment in shares quoted on stock exchanges in India with full benefits of repartriation of capital invested and income earned subject to provisos therein. This was followed by further circulars No. 10 dated 22.4.1982, No.15 dated 25.8.1982, No.27 dated 10.12.82, No.12 dated 16.5.1983 and No.18 dt. 19.9.83.

The net result of all the circulars was that non-resident individuals of Indian nationality/origin as well as overseas companies, partnership firms, societies, crusts and other corporate bodies which were owned by or in which the beneficial interest vested in non-resident individuals of Indian nationality/origin to the extent of not less than 60 per cent were entitled to invest, on a repatriation basis, in the shares of Indian companies to the extent of one per cent of the paid up equity capital of such Indian company provided that the aggregate of such portfolio investment did not exceed the ceiling of 5 per cent. It was immaterial whether the investment was made directly or indirectly. What was essential was that 60 percent of the ownership or the beneficial interest should be in the hands of non-resident individuals of Indian nationality/origin. Though a limit of one per cent was imposed on the acquisition of shares by each investor there was no restriction on the acquisition of shares to the extent of one per cent separately by each individual member of the same family or by each individual company of the same family (group) of companies.

Desiring to take advantage of the Non-Resident Portfolio Investment Scheme and to invest in the shares of Escorts Ltd., (an Indian company), thirteen overseas companies, twelve out of whose shares was owned 100% and the thirteenth out of whose shares was owned 98 per cent by Caparo Group Ltd., designated the Punjab National Bank as their banker (authorised dealer) and M/s. Raja Ram Bhasin & Co. as their broker for the purpose of such investment. Their designated bankers M/s Punjab National Bank E.C.E. Branch informed the Reserve Bank of India through their letter dated 4.3.1983 that according to QAC & RPC forms received the Caparo group of companies were incorporated in England and that 61.6 per cent of the shares thereof are held by the Swaraj Paul Family Trust, one hundred per cent of whose beneficiaries are one Swaraj Paul and the members of his family, all non-resident individuals of Indian origin and requested the Reserve Bank to accord their approval for opening Non-Resident External Accounts in the name of each of thirteen companies for the purpose of "conducting investment operations in India" through the agency of Raja Ram Bhasin and Co. Stock Investment Adviser and member of the Delhi Stock & Share Department Delhi. It was mentioned in the letters to the Reserve Bank that the proposed accounts would be "effected" by remittances from abroad through normal banking channels and credits and debits would be allowed only in terms of the scheme contained in the scheme for investment by non-residents. Though a remittance of $1,30,000 equivalent to Rs.19,63,000 made by Mr. Swaraj Paul to the Punjab National Bank, Parliament Street Branch on 28.1.1983 for the purpose of opening on N.R.E. account in the name of Swaraj Paul, his bankers advised the Reserve Bank that only four remittances had been received from Caparo Group Ltd. the holding company on 9.3.83, 12.4.83, 13.4.83 and 23.3.83, of amounts equivalent to Rs.1,35,36,000, Rs.2,36,59,000, Rs.76,35,000 and Rs.1,31,38,681.13p.

Payments under the Stock Exchange Rules may be made within two weeks after the purchases contracted for. H/s. Raja Ram Bhasin & Co. had, therefore, purchased shares of Escorts Ltd. worth Rs. 33,40,865 from Mangla & Co. prior to 9.3.83, the date of the first remittance as disclosed by Punjab National Bank. However, the statements of purchases of shares made by the said brokers show that even by 14.3.83, shares of Escorts Ltd. worth Rs.3,85,920 had been purchased from Bharat Bhushan & Co. and shares worth Rs.45,81,677 had been purchased from Mangla & Co. The brokers had advised the designated bank that out of 75000 shares of Escorts Ltd. purchased upto 28.4.83, 35,560 shares purchased by each of the twelve companies and 35667 shares purchased by the thirteenth company were lodged by them with Escorts Co. Ltd. in the names of H.C. Bhasin and Mr. Bharat Bhushan for the purpose of transfer of the shares in the books of the company. Under bye-law 242 of the Stock Exchange Regulations which permit the brokers to lodge the shares in their own names instead of their principals, if they are unable to complete the formalities before the closing of the books. In the meanwhile, on 31.5.83, Punjab National Bank wrote to Escorts Ltd. informing them that the thirteen companies had been making investments in shares of Escorts Ltd. in terms of the scheme for Investment by overseas corporate bodies predominantly owned by non-residents of Indian nationality/origin to an extent of at least 60% and that the thirteen overseas companies had designated them as their banker and M/s Raja Ram Bhasin & Co. as their brokers for the purpose of investment.

Escorts Ltd., sought detailed information from Punjab National Bank and the brokers about the names of investors and also whether the Reserve Bank of India had accorded permission to them. As there was no response from either of them, Escorts Ltd. constituted a committee to look into the question of transfer of shares in their books and according to its recommendations the Board of Directors passed a resolution refusing to register the transfer of shares.

Escorts Ltd., although they had already refused to register the transfer of shares, wrote to the Punjab National Bank for information on several points as they desired to make a representations to the Reserve Bank of India, intervene and assist in the inquiry being conducted by the Reserve Bank at the behest of the Government of India. They also wrote several letters to the Reserve Bank purporting to give information regarding various irregularities committed in the purchase of shares of their company by the thirteen foreign companies, suppressing the fact that they have refused to register the transfer of shares in their favour.

In accordance with the clarificatory letter dated 17.9.83 from the Government of India, its Press Release of the same date and its circular No. 18 dated 19.9.83, the Reserve Bank, by a telex message conveyed to the Punjab National Bank their permission to release the money remitted by Caparo Group Ltd. frou abroad for making payment against the shares of DCM and Escorts Ltd. Subsequent to the grant of permission by the Reserve Bank of India, another attempt was made to have the transfer of shares registered. The request was turned down once again by Escorts Ltd. who by their letter dated 13.10.83 stated that apart from the question of obtaining the permission of the Reserve Bank of India, the decision of the Board to refuse to register the shares was based on other grounds which contained to be valid. Respondent No.19, therefore, preferred an appeal to the Central Government under section 111(3) of the Companies Act.

Escorts Ltd. alleging undue pressure from the financial institutions like ICICI, IFC, LIC, IDBI and UTI for the registeration of the transfer of shares and explaining the circumstances and instances commencing from the meeting held on 18.10.83 onwards upto 29.12.83, filed Writ Petition No.3068/83 on 29.12.83 under Article 226 of the Constitution challenging the validity of Circular No.18 dated 19.9.83 and the Press Release of the same date as arbitrary and violative of not only Articles 14, 19(1)(c) and 19(1)(g) of the Constitution, but also the provisions of Foreign Exchange Regulations, the provisions of Securities Contract Regulation Act etc.

Subsequent to the filing of the Writ Petition the Life Insurance Corporation of India who along with other financial institutions held as many as 52% of the total number of shares in the company, issued a requisition dated 11.2.84 to the company to hold an extra ordinary general meeting for the purpose of removing nine of the part-time Directors of the company and for nominating nine others in their place. Alleging that the action of the Life Insurance Corporation of India was malafide and part of a concerted action by the Union of India, the Reserve Bank of India and the Caparo Group Ltd. to coerce the company to register the transfer of shares and to withdraw the Writ Petition, the Writ Petitioners sought to suitably amend the Writ Petition and to add prayers (ia), (ib), (ic) and (id) to declare the requisition to hold the meeting arbitrary, illegal, ultra vires etc. The writ petition was amended. Paragraphs 149A(1) to (44) were added as also prayers (ia), (1b), (ic) and (id).

The High Court of Bombay allowed the writ petition and granted reliefs in the following manner:-

"Section 29(1)(b) of FERA is mandatory. No Non-Resident Indian Investor is authorised to purchase share in an Indian Company without the prior permission of R.B.I. under section 29(1)(b) of FERA; any purchase of shares without such prior permission is illegal: Neither the Union of India or the R.B.I. is empowered to order otherwise either by issuing a direction under section 75 or under section 73(3) of the FERA; nor are they empowered to grant permission after the shares are purchased without obtaining prior permission. The Press Release dt. 17.9.83 (ΕΧ.Α.), the circular dt. 19.9.83 (Ex.B) and the letter dt. 19.9.83 (Ex.C) cannot operate retrospectively so as to validate the purchase of shares made by N.R.I. companies which were ineligible on the date of purchase; nor can they authorise purchase of shares without obtaining prior permission of the R.B.I. under section 29(1)(b) of the FERA. In so far as the impugned Press Release circular and letter permitting the respondent-companies to hold the shares purchased without obtaining prior permission of the R.B.I., they are ultra vires of section 29(1)(b) of FERA and the powers vested in the Union of India under section 75 and the R.B.I. under section 73(3) of the FERA. To that extent they are void and inoperative both prospectively and retrospectively. The impugned Press Release and the circular, however, amount to amending the Portfolio investment Scheme with full repatriation benefits introduced under Circular No. 9 dated 14th April, 1982, and such amendments operates only prospectively. The action of respondent No.18 in issuing the impugned requisition notice is contrary to the provisions of section 284 of the Companies Act and ultra vires the powers vested in the L.I.C. under section 6 of the L.I.C. Act and contrary to the intendment of the provisions of the L.I.C. Act. The impugned requisition notice offends the principles of natural justice. The action of the L.I.C. in issuing the impugned requisition notice is an arbitrary and mala fide action taken for collateral purpose; it is violative of Article 14 of the Constitution of India. The Union of India and the R.B.I., respondents Nos. 1 and 2, are in no way responsible for the action of the L.1.C. in this regard. The allegation of mala fides made against them and the Union Finance Minister are unsubstantiated. The requisition notice and the resolutions passed at the meeting held in pursuance of the said notice are quashed". Aggrieved by the said judgment and decree the Life Insurance Corporation of India has come in appeal, and cross-appeals have been filed by Escorts Ltd. and Mr. Nanda, the Managing Director of Escorts.

Allowing CA 4598/84 filed by the Life Insurance Corporation of India, Union of India and the Reserve Bank of India and dismissing the cross appeals No.497-499/85 filed by Escorts Ltd. and Nanda, the Court.