Life Insurance Corporation of India v. Escorts Ltd.
Supreme Court of India · 19 December 1985 · 5 judges · 1986 AIR 1370; 1985 SCR Supl. (3) 909; 1986 SCC (1) 264
The Court held that Reserve Bank permission under Section 29(1)(b) FERA could be ex post facto, and that LIC, as a shareholder, could requisition a general meeting to change directors without giving reasons or facing Article 14 review.
Facts
Thirteen companies of the Caparo Group, controlled by Swraj Paul, bought shares of Escorts Limited through brokers under the Reserve Bank's portfolio investment scheme for non-residents of Indian origin, with the Punjab National Bank as designated bank. Escorts' Board refused to register the transfers. Escorts and H.P. Nanda filed a writ petition in the Bombay High Court challenging the Reserve Bank's circular of 19.9.1983, the permission granted to the Caparo companies and the purchases. LIC, which with other financial institutions held about 52 per cent of the shares, then requisitioned an extraordinary general meeting to remove nine directors, and the petition was amended to challenge this. The High Court held that Section 29(1)(b) required prior permission and quashed the requisition as arbitrary and mala fide. LIC, the Union of India and the Reserve Bank appealed; Escorts and Nanda cross-appealed.
Questions before the Court
- Could the Reserve Bank grant ex post facto permission under Section 29(1)(b) of the Foreign Exchange Regulation Act, 1973 for purchase of shares by a non-resident company?
- Can a shareholder, including LIC as an instrumentality of the State, be restrained from requisitioning an extraordinary general meeting, or be required to give reasons for its resolutions?
- Does Article 14 require the State or its instrumentalities to state reasons for actions taken in the private law field, such as acting as a shareholder?
- Were the Reserve Bank, the Union of India or LIC guilty of mala fides?
What the Court held
- Section 29(1) speaks of 'general or special permission' without the word 'previous', which Parliament used elsewhere in the Act. The permission of the Reserve Bank under Section 29(1)(b) can therefore be ex post facto and conditional. The press release of 17.9.1983, the Reserve Bank's circular of 19.9.1983 and its letter of permission of 19.9.1983 were valid.
- Every shareholder may, subject to the statutory requirements, call an extraordinary general meeting; it cannot be restrained and need not disclose reasons for its resolutions, which are not subject to judicial review. LIC as a shareholder has the same right.
- Every State action must be informed by reason, but Article 14 is not a charter for judicial review requiring reasons for all State action. Courts will ordinarily examine State action in the public law domain and refrain in the private law field; when the State buys shares it acts as an ordinary shareholder.
- No mala fides were proved against the Reserve Bank, the Union of India or LIC, but the Punjab National Bank had wholly failed to monitor the purchases as authorised dealer.
- The High Court's judgment was set aside. The Reserve Bank was directed to enquire fully into the purchases within three months and reconsider whether permission should stand, and to enquire into the Punjab National Bank's conduct.
Why it matters
The judgment settles that 'permission' under Section 29(1)(b) FERA may be granted after the event, reading the Act's contrasting use of 'previous permission'. It also limits judicial review of State instrumentalities under Article 14: actions in the private law field, such as a State-owned shareholder exercising its rights under company law to change management, are not ordinarily open to review or to a demand for reasons. The Court also declines to decide questions of economic and fiscal policy.
In the Court's words
Copied from the official judgment; each passage links to its page.
“In our view, the Parliament deliberately avoided the qualifying word 'previous ' in sec.29(1) so as to invest the Reserve Bank of India with a certain degree of elasticity in the matter of granting permission to non-resident companies to purchase shares in Indian companies.”
“Thus, we see that every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling-a meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved at the meeting.”
“While we do not for a moment doubt that every action of the State or an instrumentality of the State must be informed by reason and that, in appropriate cases, actions uninformed by reason may be questioned as arbitrary in proceedings under Art. 226 or Art. 32 of the Constitution, we do not construe Art. 14 as a charter for judicial review of State actions and to call upon the State to account for its actions in its manifold activities by stating reasons for such actions.”
“When the State or an instrumentality of the State ventures into the corporate world and purchases the shares of a company, it assumes to itself the ordinary role of a shareholder, and dons the robes of a shareholder, with all the rights available to such a shareholder. There is no reason why the State as a shareholder should be expected to state its reasons when it seeks to change the management, by a resolution of the Company like any other shareholder.”
Provisions interpreted
- Section 29(1)(b), Foreign Exchange Regulation Act, 1973
- Sections 173(2) and 284, Companies Act, 1956
- Article 14, Constitution
- Article 226, Constitution
Related judgments
- Followed in Balwant Rai Saluja v. Air India Ltd. (2014)
Case and bench
- Parties
- Life Insurance Corporation of India v. Escorts Ltd. & Ors.
- Case
- Civil Appeal No. 4598 of 1984
- Decided
- 19 December 1985
- Bench
- Reddy, O. Chinnappa (J), Venkataramiah, E.S. (J), Eradi, V. Balakrishna (J), Misra, R.B. (J), Khalid, V. (J)
- Opinions
- Unanimous. The Judgment of the Court was delivered by Chinnappa Reddy, J.