PETITIONER:
NARENDRA KUMAR MAHESHWARIVs.
RESPONDENT:
UNION OF INDIA & ORS.DATE OF JUDGMENT03/05/1989
BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
RANGNATHAN, S.CITATION:
1989 AIR 2138 1989 SCR (3) 43
1990 SCC Supl. 440 JT 1989 (2) 338
1989 SCALE (1)1353ACT:
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 con-
vertible debentures'--Floating charge--Debt equity
ratio--What are--Whether a Company can deal with its proper-
ty 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.HEADNOTE:
Reliance Industries Ltd. (RIL) and Reliance Petrochemi-
cals Industries Ltd. (RPL) are inter-connected and repre-
sented 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 petrochemi-
cal complex in India with foreign collaboration. RPL pro-
posed 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 con-
vertible 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 prefer-
ence 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 deben-
tures 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 premi-
um 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 allot-
ment at a premium to be fixed by the Controller of Capital
Issues.
The CCI accorded his sanction for the issue of deben-
tures on 4.7.1988. However, the sanction was amended on 19th
July, 1988. The amendment put a non-transferability condi-
tion on the preferential share-holders of RPL. It was limit-
ed to the corporate shareholders of RIL and relaxed for
individual share-holders of RIL. The amendment also stipu-
lated 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 afore-
said 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 require-
ments 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 neces-
sary 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 satisfac-
tion 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 conver-
sion of 20% of the debentures; and
In the application filed by RPL, no shares were ear-
marked 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 detri-
mental 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 deben-
tures, 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, strict-
ly speaking, do not indicate any positive role for the CCI
in discharging his functions in respect of grant of sanc-
tion. 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)
Narendra Kumar Maheshwari vs Union Of India & Ors on 3 May, 1989
Supreme Court of India
Narendra Kumar Maheshwari vs Union Of India & Ors on 3 May, 1989
Equivalent citations: 1989 AIR 2138, 1989 SCR (3) 43
Bench: Mukharji, Sabyasachi (J)
