Holding

The Controller of Capital Issues acted within his statutory discretion, complied substantially with the applicable guidelines, and did not act arbitrarily or unlawfully, so the consent to the debenture issue is valid.

Summary

The Supreme Court examined the validity of the Controller of Capital Issues' (CCI) consent to Reliance Petrochemicals Ltd.'s (RPL) issue of fully convertible debentures, which petitioners alleged was granted with undue haste, without proper application of mind, and in violation of non‑statutory guidelines, security requirements, and principles of public interest. The Court held that the CCI, acting under the Capital Issues (Control) Act, 1947, had duly considered the project's feasibility, debt‑equity ratio, and security, and that the guidelines are merely advisory, not legally enforceable. It found no arbitrariness, discrimination, or breach of duty, and concluded that the consent was lawful and within the CCI's statutory discretion. Consequently, all writ petitions and the suit were dismissed.

Issues considered

The CCI's consent was granted with undue haste and without proper application of mind.
The consent deviated from the non‑statutory guidelines on debt‑equity ratio, security, and issue procedures.
The security offered for the convertible debentures was inadequate or illusory.
The terms of conversion and preferential allotment amounted to discrimination against public investors.
The CCI exceeded its statutory powers or failed to protect public interest.
The guidelines issued by the government are judicially enforceable.

Legislation cited

Capital Issues (Control) Act, 1947s. 12, s. 2, s. 3, s. 6(2)
Companies Act, 1956s. 2(12), s. 237, s. 2(e), s. 3(1), s. 81(5)
Foreign Exchange Regulation Act, 1973
Monopolies & Restrictive Trade Practices Act, 1969
MRTP Act (Industries Development & Regulation Act), 1951s. 22(3)(a), s. 22(3)(d)
Securities Contracts (Regulation) Act, 1957s. Rule 19(2)(b)

Subjects

Capital Issues ActController of Capital IssuesConvertible debenturesPublic interestGuidelinesDebt‑equity ratioFloating chargeDiscriminationJudicial reviewCorporate financeMRTP ActForeign exchange regulations

Judgment

NARENDRA KUMAR MAHESHWARI
A
v.
UNION OF INDIA & ORS.

MAY 3, 1989
( [SABYASACHI MUKHARJI ANDS. RANGANATHAN, JJ.] B

Capital Issues (Control) Act, I947/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 8;](5)-'Compulsorily convertible
debentures'-Floating charge-Debt equity ratio-What are-Whether
c
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 through- D
out the country.

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 pro-
moted RPL. RPL was incorporated on 11.1.1988 and has been a cent E
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 F
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 deben-
tures. These guidelines were subsequently amended on 8.3.1985.
Guidelines were also given by the CCI for issue of convertible cumula-
tive preference shares, and for employees stock option scheme. G

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. JO being 5% of the face value of each debentures by H
43
44 SUPREME COURT REPORTS [1989] 3 S.C.R.

A 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 Con-
8 !roller of Capital Issues;

(iii) The balance of Rs. ISO representing 75% of the face value of
each debenture as third conversion after five years1 but not later than
seven years from the date of allotment at a premium to be fixed by the
Controller of Capital Issues.
c The CCI accorded his sanction for the issue of debentures on
4. 7. J988. 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 sharesliolders of
RIL and relaxed for individual share-holders of RIL. The amendment
D also stipulated that the Company should obtain prior approval of the
Reserve Bank of India, Exchange Control Department, for the allot-
ment 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.
E
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
F 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:
G
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;

H The guidelines issued by the CCI himself were deviate:! from;
NARENDRA KUMAR v. U.0.1. 45

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

The CCI did not take into account the fact that RIL had earlier
issued debentures for manufacture of identical products;
B
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;
c
--r · 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;
D
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;
E
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;
F
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.SO crores would be converted into shares G

-+ 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.
H
46 SUPREME COURT REPORTS [1989] 3 S.C.R.

On behalf of the petitioners, it was contended inter alia that the
A issne 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
B 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,

c HELD: I. I. 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
o 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 constitu·
tional aspiration to secure justice-social and economic-and also
under Article 39(b) & (c) of the Constitution to ensure that the owner-
ship and control of the material resources of the community are so
distributed as to best subserve the common good and that the operation
E of the economic system does not result in concentration of wealth and
means of productior. to the common detriment. Yet, every instrumen-
tality 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; J24F-H; 125A]
F
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
G 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
H of a public interest lobby that can scrutinise issues carefully and advise
prospective investors may be desirable. [125A, B, F, G]
NARENDRA KUMAR v. U.0.1. 47

1.3. The guidelines are only a guide and nothing more. The appli-
A
cation 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 authori-
ties and functionaries. It is necessary for him in the discharge of his B
functions to ensure that there is not too much concentration of parti-
cular industries in particular areas, and that there is a scientific
development and proper investment in key and.core projects. [125C-D I

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 C
of the guidelines issued under the Act from time to time and the increas-
ing range of financial instruments that enter the market. The res-
ponsibilities 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 D
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 E
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 pYblic 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 F
possible. [9JC-E; 125G-H; I26A·Bl

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 pro- G
jects 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. [9JD-F]

1.6. Being non-statutory in character, the guidelines are not judi-
cially enforceable. A policy is not law. A statement of policy is not a H
48 SUPREME COURT REPORTS [1989] 3 S.C.R.

prescription of binding criterion. The competent authority might
A
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
B 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. I122D-F; 1248-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 I; Andhra
c Industrial Work v. CCI & E, [1975) I SCR 321; K.M. Shanmugham v.
S.R. V.S. Pvt. Ltd., [1964) I SCR 809; Sagnata Investments Ltd. v.
Norwich Corpn., [1971) 2 QB 614; British Oxygen Co. v. Board of
Trade, [197l]AC610,reliedon.

D Ramanna Dayaram Shetty v. International Airport Authority,
[1979] 3 SCR 1014; Motilal Padampat Sugar Mills v. Uttar Pradesh,
[!979) 2 SCR 641; Ex P. Khan, [1981] I All. E.R. 40; IRCv. National
Federation, [1982] AC 617; Reqina v. Preston Supplementary, [1975) I
WLR 624; Council of Civil Service Unions & Others v. Minister for the
Civil Service, [1985] AC 407, referred to.
E
Foulkes' Administrative Law, 6th Edn. pp 181to184, 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 appli-
cation of this type is intended to be disposed of with great expedition. In
F a project of the type proposed to be launched by the petitioner, passage
of time may prejudicially atlTect 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
G 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 dis-
posed 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
H involved is heavy. It is not possible therefore to say merely from the
NARENDRA KUMAR v. U.0.1. 49
--./
' short span of time that there was a hasty grant of consent in the present
case. [73G-H; 74A-C] A

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 manufac· B
tore 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 ll.1.1988, this was a clear indication that the
projects for which the debenture issue was being proposed were pro-
y jects which had been mooted even by the RIL as early as 1985. Again in c
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 endorse- D
ment in favour of the company of the Letter of Intent/Industrial
Licences already issued by the Central Government under the Indus- •
tries (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, E
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 F
responsible to its shareholders or to authorities in accordance with the
relevaut provisions of the Companies Act, 1956. This aspect does not
enter into sanctioning the capital issue for the new project in accord-
auce 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 G

·+ 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 H
50 SUPREME COURT REPORTS [1989] 3 S.C.R.

the projects originally envisaged. This is one of the objects for which a
A debenture issue is permissible under the guidelines. [IOIF-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
B 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 I984 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
c endorsed in favour of RPL on 12th October, 1988. Similar other con-
sents 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
D 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 wnere a transferee Company is a fully owned subsidiary ,,..\_
of the Company holding the Letter of Intent or licence, the change of
E 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 JOO% 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 _'T-
F 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 there-
after issued. [78B-E]

G 4.4. The Press Note is clekr 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
H even before the letter of consent is granted. In any event the letter of
NARENDRA KUMAR v. U.0.1.

consent is very clear. Clause (h) of the conditions attached to the con-
A
sent 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 B
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
r embarking on the project, there was no impropriety in the CCI grant- c
ing 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 bad looked into·
the financial soundness and feasibility of the project and there is mate- D
rial 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 E
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 practi-
cal appraisal of the situation and fully in order. [78F-H; 79A, B; 808-D]

5. There has been sufficient compliance with the guidelines on the
quantum of issue, debt-equity ratio, interest rate and the period of F
redemption. There was sufficient security for the debentures in the facts
and circumstances of this case. The preference in favour of shares-
holders 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 G
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 straightway to the allotment of shares of the face
value of Rs.57 .SO crores whereas only 5% of the investment by the
debenture holders can be converted into shares at par simultaneously H
52 SUPREME COURT REPORTS [1989] 3 S.C.R.

A with the issue. The second is that a loan of Rs.SO 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 fas as the first ground is concerned,
there is no justification for a comparison between these two categories
B 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 con-
e cerned, it overlooks certain disadvantages attached to RIL in regard to
the loan of Rs.SO crores advanced by RIL as compared with ihe 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.S% 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
D not have and, if the debenture holders have the disadvantage of having
to pay a premium, that cannot constitute basis for a ground of dis-
crimination. I l03E-H; 104 A, B]

6.2. RPL is a company-not the State or a State instrumenta- A
lity-that is issuing the shares and debentures. It is entirely for the
E 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 shonld 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 er to stipulate that consent can be given .'(
F 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
G of the "proprietors" of the company. [I04B-E]

7. I. In the present case, a legal mortgage has been created by
RPL in favour of the trustees in respect of its immovable and mo,,able
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
H existing loans. Therefore, the charge in favour of the debenture holders
NARENDRA KUMAR v. U.O.l. 53

is presently the first charge. No further borrowing is contemplated at
A
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 borrow- B
ings, deferred payment credits/guarantees and borrowing for financing
new projects do not, on analysis, raise any difficulty. There are suffi-
cient in-built checks and controls. The company, being an MRTP com-
pany 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. [IJ9G, H; 120A-C]
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 safe-
guard the interests of the debenture holders. [96G, HI D

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 E
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 F
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 con-
currence 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 G
before the company can raise any future borrowings and create, there-
for, the security which will have priority over the security available to
the present debenture holders. The ICICI is not only a financial institu-
tion 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 H
54 SUPREME COURT REPORTS [1989) 3 S.C.R.

A 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 .....,_
B
Act involving the consent of public financial institutions, Commercial I""
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 de-
bentures were described as "fully secured convertible debentures".
c 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
D 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 signi- ,.,.~
ficance need be attached to the different description in some places,
E particularly, in the context of the nature of security actually provided
for the debentures. [95F-H; 96A)

JO. 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 \..
F 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. [JOOD, E)
11. The CCI modified paragraph 5 of the consent by his letter of
the 19th Jnly, 1988 to say that allotment to the employees shall not
G exceed 50 debentures per individual. It does not appear that the restric-
tion of the allotments to the employees was at the instance of the Com-
pany; 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 cir- \ .•,,
cumstances, the question of discrimination does not arise. [J07C, D)
H
NARENDRA KUMAR v. U.0.1. 55

12. The consent order of the CCI clearly indicated that the con- A
sent conveyed in the letter shall lapse on the expiry of 12 months from
the date thereof. The consent order categorically stated that the ap-
proval 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 B
examined by the CCI before grant of its own consent. lll2E, Fl

13. t. As defined in the Companies Act, a debenture need not be
secured. Therefore, guideline 10 means that security should be pro-
vided as is customarily adopted in corporate practice. In the present
case, the debentures are compulsorily convertible and so no repayment
is really involved. The debenture is essentially an acknowledgement of C
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 D
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 E
issued on 14.1.1987 recognise the basic distinction between con-
vertible and non-convertible debenture. Comopulsorily 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 F
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. I ll6E, F; I 17B-G] 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 meet-
ing. The extravagant effects of this course would be collosal especially
when a shareholders meeting is also additionally called for the same H
56 SUPREME COURT REPORTS [1989] 3 S.C.R.

A body of persons. It is. therefore. incorrect to say that a floating charge
creates an illusory charge because future securities can be created rank-
ing in priority over it. [Jl8D-E]

The British India Steam Navigation Co, v. The Commissioner of
Inland Revenue, [1881] 7 QBD 165; Re. Colonial Trusts Corporation,·
B [1879] 15 Ch. 465; Speyar Brothers v. The Commissioner of Inland
Revenue, [1907] I KB 246; Lemon v. Austin Friars Investment Trust
Ltd., [1926] l Ch. 15; Florence Land & Public Works Co., [1878] IO
Ch. 530; Re. Panama, New Zealand, and Australian Royal Mail Co.,
[1870] L.R. 5 Ch. 318; Re. Standard Manufacturing Co., [1891] l Ch.
627; Re. Barak Foster v. Borax Co., [1901] 1 Ch. 326; Creatnor
Maritime Co. Ltd. v. Irish Marine Management Ltd., [1978] I WLR
c 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.
D
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
E 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 deviat1on 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
F such infraction of the norms required to be followed in granting the
sanction. [123F-H; 124A, Bl
I
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
G 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
H to the principles of comity of courts administering the same general
NARENDRA KUMAR v. U.0.1. IMUKHARJI, J.] 57

laws applicable all over the country in respect of granting interim A
orders which will have repercussion or effect beyond the jurisdiction of
the particular courts. Such an exercise will be a useful c-0ntribution in
evolving good conventions in thetederal judicial system. II26F, G; 127 A)

[Having considered the facts and circumstances of the present
~ cases, this Court directed refqnd of the sum of Rs.one lakh deposited by B
RPL as ordered by the C-0urt on 9.9.1988. The deposit amount was
meant for payment to the petitioners in case they were to spend
111&.t unduly.]
' ':;\......
ORIGINAL JURISDICTION: Transfer Case Nos. 161-165 of
1988.
c
S. Ganesh, Arnn Jaitely, Miss Bina Gupta, Miss Madho Khatri,
A.N. Haksar, Praveen Anand, Anip Sachthey, B.L. Pagaria, P.K.
Jain, Udai Holla and T. Sridharan for the petitioners.

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

..A. The Judgment of the Court was delivered by

SABYASACHI MUKHARJI, J. In these transferred writ peti- 10
tions 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 F
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 G
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 Control-
ler 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 1-1
58 SUPREME COURT REPORTS [1989] 3 S.C.R.

A person and is an existing shareholder of the Company known as Re-
liance Industries Ltd. (RIL), which was the promoter of Reliance
'r
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 busi- ',,.._.
B ness of manufacture of petrochemicals. These petitions were filed in r
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,
.
-r.
'
namely, RPL to issue share and debenture capital at an aggregate
c value of approx. Rs.600 crores. It may be mentioned that after these ]
writ petitions and suit were filed, attempts were made to obtain injunc-
tion 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
D 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 ,..l.
No. 3 had issued prospectus and at the relevant time had intended to
E 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 ir-
F convertible: Respondent No. 3 would issue one share of Rs.10 at p3r '
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
G it would convert at the second stage of conversion at such permium 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
H time again the Controller, would fix the premium for conversion. The
NARENDRA KUMAR v. U.0.1. [MUKHARJ!, J.] 59

petitioner further stated that it was thus not clear what the equity
A
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 B
manipulations. It was alleged in the petition that there was no explana-
tion 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
r of the purchase and sale operations of certain interested quarters close c
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 sup-
port from the authorities for maintaining the fictitious value of the D
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 Re-
liance group was well-known; and that RIL had issued debentures of E
'G' Series and had assured to pay interest up to 5th February, !988. 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 F
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 require-
ment of the Company in raising suC:h capital was bona fide. It was
observed that no public interest was intended to be served by respon- G
-f dent 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 crjticisms both in the press and in the public. It was H
60 SUPREME COURT REPORTS [1989] 3 S.C.R.

A pointed out that though the issue proposed was of shares of Rs.SO
crores and debentures of Rs.516 crores, the company w;s allowed to
r'
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
B was further alleged that the respondent No. 2, without considering the 'r°
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. judi-
cial 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%
c (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
0 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 Capi-
tal Issues was bad, illegal on the ground hereinafter alleged:

The consent order was hit by arbitrary and capricious exercise of
jurisdiction by respondent No. I. 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
F 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 allot-
ments on some basis of 'Private Placement'. It was further alleged that
G 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 t!Je '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
H Issues and Union of India acted mala fide in issuing the consent order
NARENDRA KUMAR v. U.0.1. IMUKHARJ!, J.] 61
-{
which was designed to benefit respondent No. 3 and prejudice the
interests of the investing public. It was further alleged that in giving A
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 B
in issuing the consent order respondent No. 2 was influenced by
extraneous considerations not germane to the public interest. The
~ Capital Mark~! in India has undergone turbulent changes in the r~cent
, - years. Small mvestors such as employees, workers and small busmess
' community were coming forward, according to the petitioner, for the
.r purpose of investment in corporate sector. It was further stated that
the small investors had no means of verifying the correctness or C
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. D

In those circumstances it was prayed that the court should exer-
cise its jurisdiction under Art. 226 and set aside the consent order which
was for the public issue on 22nd August, 1988.

The fac1* and the circumstances leading to this consent order E
· <;. have been stated in the affidavit on behalf of respondent No. 3 to the
writ application. After disputing the locus of the petitioner, who chal-
lenged 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 !aches and delays. On behalf of
respondent No. 3 it was asserted that the public issues made by the 3rd f
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 com-
prised the world's second largest investor family of over 30 lakhs
investors. It was further asserted that the 3rd respondent would have G
-f India's largest private sector Petrochemical Complex for the manufac-
ture of critically scarce raw-materials. It was stated that the 3rd
respondent would manufacture versatile raw-material which was be-
hind 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 H
62 SUPREME COURT REPORTS [1989] 3 S.C.R.

State of Gujarat and the production was planned to start in a phased
A
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
HOPE (b) B.F. Goodrich & Co. for PVC, and (c) Scientific Design
Co. for MEG.
B
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.10 being 5% of the face value of each ---(-
debentures by way of first conversion immediately into one '
equity share at par on allotment;
c
(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 pre-
mium to be fixed by the Controller of Capital issues;
D
(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."

E 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
F approvals being obtained in that behalf, the shareholders and the con-
vertible debenture holders of the respondent No. 3, promoter com-
pany, 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
G and thereafter entitled to dividend that might be declared after conver-
sion 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
H made by the 3rd respondent to the Bombay Stock Exchange and
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 63

Ahmedabad Stock Exchange, the 3rd respondent has proposed that all A
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
B
desire> 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 C
Y behind plastic revolution; (b) Mono Ethylne Glycol (MEG) is a critical
polyester raw-material; HOPE and PVC being vital thermo plastic
play an important role in the core ~ector 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 0
by the respondent No. 3 in support of the contention that a petro-
chemical complex proposed to be set up by the new Company-res-
pondent 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 E
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 borrow-
. ings from the public financial institutions (except to the extent of F
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 simul-
taneously 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 G
-( further stated that since th" preferential allotment of 50% of the total
issue was made to RIL shareholder~, 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 share-
holders of the 3rd respondent which would be a world market record.
H
64 SUPREME COURT REPORTS [1989] 3 S.C.R.

A
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 Pro-
jects such as Polyester Staple Fibre (P~F), 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,
B not necessary for the purpose of the issues involved in these applica-
tions 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 th.at Reliance is privy to the technology of the
world li:aders, such as Du Pont of U.S.A. and Imperial Chemical
c 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
D 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
E 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 ·-'r-.
F 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 non-
residents, RIL shareholders/employees and the issue was heavily over-
subscribed. On behalf of the RPL, it was stated that the time frame of
IO weeks commencing from !st September, 1988 and ending on 10th
G November, 1988 had to be strictly adhered to. The provisions of Sec-
tion 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.

H It was stated on behalf of the 3rd respondent that for the purpose
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.I 65

--< of finalising the means of finance of HDPE, PVC and MEG Projects,
1
A
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 B
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 respon-
dent company and ICICI also considered various alternative means of
financing project keeping in view the following criteria:
'y c
(a) That the project should be financially beneficial to the com-
pany. (b) That it should be financially attractive to the investor.
(c) That it should be operationally easy for the company and the
investor. {d) That it should meet the institutional/stock ex-
change/Ministry of Finance norms and guidelines as regards D
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.
E
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 deben-
-~ tures were all examined by the management and ICICI at length from
· -various aspects including the aforesaid aspect, it was asserted on p
behalf of respondent No. 3.

It was reiterated that the Contoller 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 G
-{ 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 H
66 SUPREME COURT REPORTS [1989] 3 S.C.R.

A 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
B subscribe to the issues. It was, however, not possible for them, con- r
tend 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 bein!l-1"'-'°
finally disposed of. ·
c 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
D 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
E 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.

F It was reiterated that the RPL had been promoted by RIL whose
shares had fluctuated in the share market so widely for which no expla-
nation 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
G 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
R shareholders of RIL and the investing public. Immediately on allot-
NARENDRA KUMAR v. U.0.I. IMUKHARJI, J.l 67

men! the conversion of percentage of investment of the rights holders A
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 B
figures is approli\. 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 C
holders is nil and that of the investing public is 95%, which in figures
comes to about Rs.563. 73 crores.

In a democratic set up in the country, it was asserted on behalf of
the petitioners, the sanction of the issue amounted to concentration of D
wealth in one hand which brought danger to the national economy and
was against the Directive Principles of State policy enshrined in the
Constitution. It was submitted that the validity of the consent order
had to be decided on the merits of the case in the background of the
aforesaid. The petitioner had every right to question the validity of the
consent order, it was stated. E

One consolidated reply to all these writ petitions on behalf of the
Union of India through the Secretariat, Ministry of Finance, Deptt.
of Economic Affairs and Controller of Capital Issues was filed by
means of an affidavit affirmed by Mr. Prabhat Chandra Rastogi who,
at the relevant time, was the Under-Secretary in the Ministry of F
Finance, and Deputy Controller of Capital Issues in the office of Con-
troller of Capital Issues. He has mentioned that the consent of Capital
Issues was granted on 4th July, 1988 and the same was amended to a
certain extent on 19th & 26th July, 1988. He has explained in his
affidavit the background of the circumstances leading to the consent
order. G

In relation to the 3 projects, namely, (i) for manufacture of
1,00,000 tonnes per annum Polyvinyl Chloride (PVC), (ii) 60,000 ton-
nes per annum of MEG (Mono Ethylene Glycol); and (iii) 50,000
tonnes per annum. of HDPE (High Density Polyethylene), RPL sub-
mitted an application for issue of capital on or about 4th May, 1988 in H
68 SUPREME COURT REPORTS [1989) 3 S.C.R.

A the prescribed form. RPL proposed raising of capital by various instru-
ments, like, equity shares, cumulative convertible preference shares
(CCP), partly convertible debentures, intended to be issued to the
public, to the shareholders of RIL, debenture-holders and deposit
holders of RIL. The original proposal for approval related to the
following instruments:
B
r
Instrument Amount in Rs. (Crores)

Equity
Reliance Industries Ltd.
Shareholders, debentureho!'lers
47.00
4.00
--{''~ -
c and deposit holders of Reliance
Industries Ltd. ~
Public 6.00

Cumulative convertible
Preference Shares (CCPS)
D
Non-resident Indians/Foreign
Collaborators/Indian Resident Public 81.00
Convertible Debentures
Sharesholders, debentureholders and 214
deposit holders of Reliance cl-.
Industries Ltd.
E
Public 241

The instrument of convertible cumulative preference
shares was proposed to be converted at a price to be fixed
F
by the 2nd respondent at premium not exceeding Rs.40 per ':f·.
share between the third and fifth year from the date of
allotment. The debentures proposed were to be of the face
value of .Rs.500 each and the conversion was to be of
Rs.200 into 10 shares as follows:

"6% of the face value (Rs.30) would be compulsorily con-
G
verted into equity at par at l year from allotment.

16% of the face value (Rs.SO) would be compulsorily
converted at 2 years from allotment into equity at a
premium to be decided at the time of conversion but
not greater than Rs.20 per share.
H
NARENDRA KUMAR v. V.0.1. (MUKHARJI, J.] 69

18% of the face value (Rs.90) would be compulsorily
A
converted into equity at 3 years from allotment at a
premium decided at the time of conversion but not
greater than Rs.30 per share.

60% of the face value (Rs.300) would be redeemed
between 8th and 10th years from allotment by draw B
of lots."

- ~-
India
It appears that the Industrial Credit and Investment Corpn. of
Ltd. (for short ICICI), was the lead financial institution and lead
manager for the issue of capital of RPL, and its merchant banking
department, having the necessary expertise, was interacting between
the 2nd respondent, namely, the Controller of Capital Issues and RPL.
C

Discussions were held with ICICI to evaluate whether the company
could proceed with the proposal by respondent No. 3 (RPL) by remov-
ing the instrument of cumulative preference shares as also the non-
convertible portion of the debentures. This would have been neces-
sitated by the sluggishness in the capital market, the market reactions D
to non-convertible debentures and the discount at which such instru-
ments were traded after they came into existence, the compleKity of
cumulative convertible preference shares and the general rea<.;tion
anticipated from the public for investment. It was stated that it was
necessary to encourage investments and draw out savings from the
home saving sector so that investments into productive and industrial E
sectors are promoted. The need to encourage growth of the Capital
--<:- Market and to provide impetus for investment in a depressed market
condition through several liberalisation steps, were factors in the con-
sideration of the Controller of Capital Issues so that on balance invest-
ment in the industrial sector in high priority industries could be
encouraged. RPL revised its proposal under which it proposed to raise F
equity shares of Rs.50 crores from RIL-its promoter. The fully con-
vertible debenture issue of Rs.516 crores from public was sought to be
subscribed to in a manner that 50% on preferential share basis to be
allotted to shareholders, debenture-holders and fixed deposit holders
of RIL. RPL made a suggestion for issue of debentures of the face
v.alue of Rs.200 each with the following terms and conditions: G

(i) 5% of the face value of the debentures at par on allotment;

(ii) 20% of the face value (inclusive <ft premium) at a pre-
mium as may be decided 'in consultation with the Controller of
Capital Issues at the end of the fourth year from the date of H
allotment.
70 SUPREME COURT REPORTS [1989) 3 S.C.R.

(iii) the residual portion (inclusive of premium) at a pre-
A
mium as may be decided in consultation with the Controller of
Capital Issues at the end of the seventh year from the date of
allotment.

In view of the revised project cost it was felt that the promoter's
B contribution of Rs.50 crores was less and RIL as promoters were told, 'r
as asserted in the affidavit, to increase the promoter's contribution to
15% of the total project cost of Rs.700 crores. RIL in view of this
requirement, agreed to bring in Rs.107 .50 crores as its contribution to ~
RPL, out of which a sum of Rs.50 crores was directed to be kept as --('-.--
interest-free unsecured loan at the time of allotment which would be
converted into equity at par at the expiry of 36 months from the date of
c allotment of convertible debentures. ]

As a practice, it is asserted, respondent No. 2 being the CCI,
observed that debenture holders/fixed deposit holders of RIL were not
eligible for preferential reservation in the capital issue of RPL, and
D thus RPL was not permitted to issue capital to these categories on
preferential basis and only the shareholders of RIL were permitted
preferential entitlement in accordance with the practice.

By a Press Release dated 15th September, 1984 the 2nd respon-
dent had issued certain non-statutory guidelines for approval of issue
E of secured convertible and non-convertible debentures. These guide-
lines had been subsequently amended by Press Release dated
8.3.1985. Guidelines were also issued by Press Release on 19.8.1985
for issue of convertible cumulative preference shares. There are
guidelines issued by Press Release dated 1.8.1985 for employees stock
option scheme. In accordance with the guidelines of 15.9.1984, as
F amended on 8.3.1985, the consent for capital issue for secured fully
convertible debentures was issued as the projects originally to be
established in RIL were permitted by the Deptt. of Company Affairs
to be transferred to RPL. The application.for industrial licences and
endorsements thereof from RIL to RPL had already been filed includ-
ing, inter alia, the endorsement of the letters of intent for the MEG
G Project. The scheme of finance for setting up of 3 projects, namely,
PVC, HDPE and MEG had already been approved by the Deptt. of
Economic Affairs in favour of RIL, promoter of respondent No. 3 and
the Dept!. of Company Affairs also approved the transfer of project to
RPL, and a revised scheme of finance was to be submitted by RPL. It
was asserted that it was on the basis of appraisal by the ICICI, a public
H financial institution which had evaluated the project cost for the 3
NARENDRA KUMAR v. U.0.1. (MUKHARJI, J.] 71

projects for the purpose of implementation of RPL. ICICI had
A
evaluated the estimated project cost at Rs.700 crores for setting up 3
undertakigs of RPL-post transfer from RIL, to RPL for implementa-
tion. Applications. for the endorsement of industrial licences and the
Letter of Intent had been filed with the Deptt. of Industrial Develop-
ment, Secretariat for industrial Approvals and these were pending
consideration. The object of the issue was setting up of a new project B
and was within the scope of the guidelines.

_ The proposal contemplated was within the debt-equity norms
~.~and ratio in accordance with para 4 of the non-statutory guidelines as
the debt in the proposal aggregated to Rs.471 crores. This is because
debentures are considered as debt only when they are unredeemed
y beyond the period of 5 years as per Explanation to Section 5(ii) of the C
Capital Issues (Exemption) Order, 1969. In the present case, 25% of
the face value of the debenture would stand redeemed by the 3rd and
4th year and before the 5th year, and it would therefore not be con-
sidered as debt for evaluating debt-equity-ratio as per the guidelines.
Similarly, the promoter's contribution of Rs.100 crores plus 25% con- D
verted debentures at the end of 5 years would be categorised as equity
representing share-capital and free-reserves converted from the total
investment of Rs.516 crores proposed by RPL. It was assumed to
_)._ aghgrehgate to Rs.229 crores andfdebt-equity-ratio thus came to 2.05: 1-
w 1c approximates the ratio o 2: 1.
E
It was further asserted that these guidelines being non-statutory
and not rigid, a relaxation in the norm of debt-equity-ratio of 2: 1 is
considered favourably for capital intensive projects like petrochemi-
cals which require large investments as would appear from the Note
annexed to the guidelines. The guidelines postulate that these
debentures should be secured. The proposal itself contemplated that F
the security would be in such form and manner as required by the
trustees for the debenture holders for conver1,ible debentures. !I was
asserted that it was not a requirement of the guidelines that the
debenture issue be compulsorily under-written. The guidelines them-
selves contemplated that the 2nd respondent could satisfy himself that
the issue need not be underwritten. An application to this effect had G
been made by RPL and was granted by the 2nd respondent after care-
fully examining this issue. The guidelines contemplated simultaneous
listing of shares and debentures. In the present case, upon allotment,
there was simultaneous compulsory conversion of 5% of the face value
of the convertible debentures. It was stated that it was not an equity
linked debenture as was asserted on behalf oi the petitioner. H
72 SUPREME COURT REPORTS [1989] 3 S.C.R.

However, it was further stated that, in view of the size of the
r
,
A
issues, there was a modification dated 19th July, 1988 of the consent
order which restricted and put a non-transferability condition on the
preferential entitlement of the shareholders of RPL. It was limited to
the corporate shareholders of RIL and relaxed for individual share-
holders of RJL. The restrictive condition on their right to sell. transfer
B and hypothecate their shareholding was thought necessary in order to
ensure that they do not disinvest soon after the issue and thus dilute
their stake in the Company.

On behalf of the Controller it was asserted that the guidelines
should not be construed in a manner which would fetter, constrict or
·F -
inhibit statutory discretion vested in the 2nd respondent for taking
C decisions in the interest of the Capital-market and for national purpose 1
of furthering the growth of industrialisation and investment in priority
sectors so as to encourage employment and demand in the national
economy. The objectives of the control, according to the deponent,
contemplated under the Capital Issues (Control) Act was to prevent
D wasteful investments and to promote sound methods of corporate
finance. It was asserted that the administrative guidelines were only
enabling in nature and could not and ought not to be construed as
preventing the statutory authority from adopting o~ modifying varying
norms in operational area of implementing the purposes of the Act A.
especially when there were no fetters under the Statute.
E
The Controller of Capital Issues had issued, it was stated, guide-
lines as a result of the war-time needs and controls, since the year 1947
and flow from the experience gained under the Defence of India Rules
1939. Hence, according to the deponent, these controls have been
progressively reduced and the Capital Issue (Exemption) Order, 1969 f
F was brought into force so as to reduce the rigours of the Act. In the
absence of any control for capital issues for securities, according to the
deponent, there would be no fetter or restriction on the part of the
Company to borrow or raise capital from the market. It is to check
raising of wasteful capital and to avoid investment being made in non-
productive, non-priority sectors and non-commensurate with the
G needs that the Act in question was brought into force. This is being
implemented with the aid of competent bodies. It is further stated that Y
the stipulation for fixation of premium at the time of conversion is not
a new practice and had been applied in the year 1986 in the case of
Standard Medical Leasing as also in ATV Projects Ltd. and the Indust-
rial Credit & Investment Corpn. of India Ltd. As regards Convertible
H Debenture Issue, it was asserted that there is no violation of the provi-
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.) 73

sions of Section 81(5) of the Companies Act, 1956 as the section
A
contemplates only an optional conversion of Government loan into
equities. In the instant case,there is a compulsory conversion of
publicly held debentures of the convertible type. In the premises,
Sec. 81(5) of the said Act has absolutely, according to the deponent,
no application to the facts and circumstances of the case.
B
All these petitions challenge only the grant of sanction by the
Controller of Capital Issues, though different aspects have been high-
lighted in the different petitions and we have heard different learned
counsel. We have, therefore, to examine what is the scope of the
powers and functions of the Controller of Capital Issues while dis-
.,.... charging his statutory functions in according sanctions to capital- C
issues. It is further necessary to examine if that role has in anyway,
changed or altered due to the present economic and social conditions
prevailing in the country. It has also to be considered whether the
guidelines or the provisions of law under which the Controller has
functioned or has purported to function in this case, were proper or
there had been deviations from these guidelines. If so, were such D
deviations possible or permissible? It is further necessary to examine
whether the Controller has acted bona fide in law. These are the broad
questions which have to be viewed in respect of the challenge to the
consent order. It is, therefore, necessary to examine the broad fea-
tures as have· emerged.
E
Counsel for the petitioners contended that the RPL's application
had been entertained even without the company fulfilling the require-
ments of a proper application and furnishing the necessary consents
and approvals, processed with undue expedition within a very short
time and sanctioned without any application of mind to the crucial
terms of the issue which were detrimental to public interest. This F
contention, when analysed, turns on a number of aspects which can be
dealt with separately.

(a) It is submitted that the application was made on 4.5.88 and
sanctioned on 4.7.88-within hardly a period of two months; this re-
flects undue haste and favouritism, particularly if one has regard to the G
magnitude of the public issue proposed to be made and the various
financial and other intricacies involved. We are unable to accept this
contention. In the first place, an application of this type is intended to
be disposed of with great expedition. In particular, in a project of the
type proposed to be launched by the petitioner, passage of time may
pre judicially affect the applicant and it is not only desirable but also H
74 SUPREME COURT REPORTS [1989] 3 S.C.R.

A necessary that the application should be disposed of within as short a
r
,
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 aplications received and disposed of by the
office of the CCI between September 1987 and September 1988 has
B been placed before us to show that, generally speaking, these applica-
tions 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 Controller of Capital Issues could hardly keep the
application pending merely because the amount involved is heavy. It is
not possible therefore to say merely from the short span of time that
C there was a hasty grant of consent in the present case.

(b) Secondly, it has been submitted that the RPL was a company
which was incorporated only on 11.1.88. RIL had issued a 'G' series of
debentures as recently as 1986 for the .same projects. In granting
consent to the present issue the Controller of Capital Issues has
D completely over-looked the fact that in respect of the same projects
the RIL had been permitted to raise debentures on earlier occasions.
We do not think that the petitioners are correct in saying that the
Controller of Capital Issues has over-looked or was not aware of the
debenture issues by the RIL or the purposes for which these debenture
issues had been sanctioned. The application for consent makes it clear
E that the petitioner company is a new company promoted by RIL and
that RIL was promoting this company to manufacture HDPE, PVC
and MEG at Hazira. The application refers to the fact that the total
cost of the project was expected to be Rs.650 ciores and that this cost
had been approved earlier in 1985. Considering that RPL had come
into existence only on 11.1.1988, this was clear indication that the
r projects for which the debenture issue was being proposed were pro-
jects 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
G that the promoter company had made necessary applications for
endorsement in favour of the company of the Letter of Intent/Indust-
rial Licences already issued by the Central Government under the
Industries (Development & Regulation) Act, 1951, in the name of the
holding company, the RIL. In the context of these statements it is
extremely difficult to agree that the fact of issue of the earlier series of
H debentures by the RIL or the purposes thereof could have escaped the
75
.,
)
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.J

notice of the CCI, particularly, when it is remembered that the issue of A
G series of debentures by the RIL was quite recent and had also
a\tracted a lot of publicity. We have elsewhere discussed the conten-
-tion raised on behalf of the petitioners that the consent given has
contravened the guidelines because finances were being raised for no
new project but for the same old projects for which RIL had collected
~
B
~ funds. We have there pointed out that, MEG project, for all practical
purposes, was a new project that was to be implemented by the RPL

.._,_
.
and the funds raised by the RIL had been insufficient for even the PAT
and LAB projects launched by it. The learned Addi. Solicitor General
states that there was earlier correspondence between the RIL and the
CCI regarding the cost over-run of the PTA and LAB projects. We
have not gone into the details of this correspondence as it is not our c
r purpose to enquire into the details of the matter. We are referring to it
only for indicating that the CCI was fully aware of the earlier series of
debentures, of the stage of the various projects proposed therein, of
the actual implementation of the projects, of the cost over-run, of the
proposal to transfer to some of those from RIL to RPL and the exact
D
requirements of the present issue. It is not possible to accept th~
contention that the consent of the CCI was i'-ccorded in ignorance of

~-.
the facts pertaining to the G series of debentures.

(c) Thirdly, it is submitted that having regard to the require-
ments of the proforma prescribed under the rules, the application for
consent could not have at all been considered by the CCI until the RPL E
produced the industrial licence in its favour, the collaboration agree-
ments, the approvals of the financial institutions and the approvals
under the MRTP Act. It is submitted that the application of the
petitioner was cleared hurriedly without insisting upon these clea-
.
ranees and this was done specially to oblige the company. We must
~ first of all point out that the pro forma relied on indicates a general F
procedure and should not be understood as a rigid requirement. It is,
of course, the duty of the CCI to be· satisfied that before the
debentures are actually issued the applicant company has all the neces-
sary licences, consents, orders, approvals, etc. in its favour. We are
satisfied that in the present case there is no reason to doubt that he had
G
been so satisfied if one remembers that those projects had been
'{ initiated by the RIL which had gone through the necessary exercises
. and all that remained to be done was a formal approval of their trans-
fer for implementation to the RPL.

We shall first refer to the steps taken by the RIL in this regard. H
76 SUPREME COURT REPORTS [1989] 3 S.C.R.

A On 10th October, 1983 as RIL proposed to engage in manufac-
ture of MEG, it filed an application for grant of an Industrial Licence
under the Industries (Development & Regulation) Act, 1951. On 16th
August, 1984 RIL received a Letter of Intent No. 653(84) Regn. No.
1323(83)-IL/SCS issued by the Govt. of India for the manufacture of
40,000 TPA of MEG. Thereafter, from time to time on the applica-
B tions made by the RIL, the Govt. of India by various letters extended
the validity of the period ending up to 30th June, 1989. The last of such
extensions was made by a letter dated 2nd September, 1988. On 11th
May, 1988 pursuant to an application made, the Govt. of India permit-
ted expansion of capacity for manufacture of MEG from 40,000 TPA -(
to 60,000 TPA. From 12th January, 1988 to 22nd July, 1988 applica-
tions were made by RIL for change of Company from RIL to RPL for
C the MEG Project. It appears that on 11th August, 1988 approval/sanc-
tion was granted by the Govt. of India for change in the implementing
agency from RIL to RPL. On or about 19th January, 1985 a letter from
the Govt. of Maharashtra was issued, stating that there was no objec-
tion to the Company's proposal for change of location for the MEG
D Project from Maharashtra to Gujarat. It also appears from the various
documents which are mentioned in Vol. l V of the present Paper-
Books at different pages (from 22 to 44) that by various orders under
the MRTP Act, sanctions and modifications were approved, the latest
sanction being dated 11th October, 1988 whereby the Govt. approved J
the proposal of RPL for modified scheme of Finance. It is also signi-
E ficant to mention that on 25th January, 1988 an application was made
under Sec. 22(3)(d) of the MRTP Act with the proposal to implement
the MEG Project along with other projects of RPL. It may be
mentioned that by a letter dated 6th June, 1988 RIL had informed that
they had originally planned to utilise a sum of Rs.85 crores from 'G'
Series debentures for this project. But, however, they were. not able t\)
F utilise this money as the entire 'G' Series amount had been utilised for
PTA and Lab projects including the working capital on account of
overrun in the cost of LAB and PTA projects. Hence, it applied for
permitting a new scheme of finance. By an order dated 21st July, 1988
the Govt. accorded approval to the proposal of RIL for modified
scheme of finance to be implemented by RIL. Thereafter, RPL made
G an application for modification of the scheme of finance and the same
was approved by the Govt's order dated 11th October, 1988.

It appears that on 9th October, 1984 pursuant to an application
made by RIL for foreign collaboration with M/s Union Carbide
Corporation, USA, the Govt. of India by its order of that date
H accorded approval to the terms of the foreign collaboration for a
NARENDRA KUMAR v. U.O.I. [MUKHARJJ, J.) 77
/
··~
period of six months for this project. It further appears that on 14th
A
March, 1986 pursuant to an application made by RIL, the Govt.
accorded approval for foreign collaboration with Mis Scientific Design
Company. It may, however, be mentioned that there was a letter dated
30.4.1986 whereby approval was granted by the Reserve Bank of India
in respect of foreign collaboration agreement with Mis Scientific
Design Co. USA. B

-
-~-
The next aspect of the matter which has to be borne in mind in
view of the contentions urged was regarding the licences. It appears
that there was an application on 25th March, 1987, for licence. On 9th
August, 1988 the Industrial Licence dated 25.3.1984 granted to RIL
for manufacture of PVC was endorsed to RIL. This is important
r- because one of the contentions that Shri Pagaria during the course of
his long submissions made was that there was no valid licence.
c

It also appears that so far as the MRTP Act is concerned, an
application was made by RIL on or about 12th October, 1984 under
Sec. 22(3)(a) for manufacture of PVC. Several other steps were taken D
and on 29th June, 1988 there was an order of the Govt. of India under
Sec. 22(3)(d) of the Act, according approval to the proposal for
modified scheme of finance.
_;..,
There was a further proposal for modification and further
orders. Last of such order was dated 11th October, 1988. Similarly, E
regarding the foreign collaboration, there were approval letters and
<- the last one was· dated 12th August, 1988 for endorsement of foreign
collaboration approval in favour of RPL. So far as HOPE is con-
cerned, 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 F
approval for the establishment of a new undertaking for manufacture
of HOPE.
ii
II Regarding foreign collaboration, an application was made by
RIL in 1984 for approval of foreign collaboration with Mis Du Pont
Inc. Canada, for manufacture of HOPE. Such approval was given and G
'-{ the validity was extended and the foreign collaboration approval was
endorsed in favour of RPL on 12th October, 1988. Similar other con-
sents were there. Mention may be made of letters dated 28th April,
11th March, 6th December, 1986, 2nd January, 1987, 15th July, 25th,
" 26th .July, 19th August, 1988 which appear at various pages of Vol. IV
of the papers. Finally, capital-goods clearance was endorsed in favour H
78 SUPREME COURT REPORTS [1989] 3 S.C.R.

A of RPL for the PVC project on 12th August, 1988. Capital goods
clearance was also endorsed in favour of RPL for HOPE project on
23rd August, 1988. Thus, it will be seen that all the basic groundwork
had already been done by the RIL.

It is in above perspective that one has to examine the events that
'B have happened. The question that has to be considered is whether the
CCI could take it for granted that these approvals, consents, etc.
would stand automatically transferred to the RPL. On 16th June, 1987
by a Press Note issued by the Deptt. of Industrial Development in the
Ministry of Industry, the Govt. of India declared that where a trans-
feree Company is a fully owned subsidiary of the Company holding the
Letter of Intent or licence, the change of the Company implementing
C 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, inter a/ia, to
implement the licences/Letters of Intent received by RIL and the
objects of undertaking, processing, converting, manufacturing, for-
D mulating, using, buying, dealing, acquiring, storing, packing, selling,
transporting, distributing and importing etc. and approved the name
of the Company as RPL. On 11th January, !988 the RPL was
incorporated and the Certificate of Incorporation was issued. There-
after, on 12th January, 1988 letters were written by RIL for endorse-
ment of licences/Letters of Intent in favour of RPL. The certificate of
E commencement of business was thereafter issued.

The Press note earlier referred to makes it clear that the transfers
from one company to an allied company were considered unexception-
able except where trafficking in licences is intended. In this situation
the change of name from RIL to RPL, of the licences, letters of intent 't-
F 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 consent is very clear. Clause (h) of
the conditions attached to the consent Jetter makes it clear that the
consent should not be construed as exempting the company from the
G operation of the provisions of the Monopolies & Restrictive Trade
Practices Act, 1969, as amended. Clause (e) makes it clear that it is a -r·
condi.tion of this consent that the company will be subject to any
measures of control, licensing, or acquisition that mil\Y be brought into
operation either by the Central or any State Government or any
authority therein. Under clause (t) the approval granted is without
H prejudice to any other approval/permission that may be required to be
NARENDRA KUMAR v. U.O.L [MUKHARJI, J.[ 79

obtained under any other Acts/laws in force. Having regard to the
A
above history as well as having regard to the terms and conditions of
the consent letter, the grant of consent itself being conditioned on the
RPL obtaining the necessary appro-:.als, consents and permissions be-
fore embarking on the project, we do not think that there was any
impropriety in the CCI granting the consent without waiting for the
formal endorsement of the various licences, letters and approvals in B
favour of the RPL.

( d) It is next submitted that under para 3 of the guidelines issued
by the Government, the amount of issue of debentures for project·
financing and other objects will be considered on the basis of the
approvals of the scheme of finance by the financial institutions/banks;
Government under the provisions of the MRTP Act, etc. The criticism c
in this respect is that since no approvals of the scheme of finance by the
financial institutions/banks/Government under the provisions of the
MRTP Act etc. had been produced before the Controller of Capital
Issues he could not have been satisfied that the amount of issue of
debentures was necessary and adequate on the basis of such approvals. D
This argument proceeds on a misconception of the Government set up
for dealing with these matters. The learned Additional Solicitor
General points out that the Controller of Capital Issues does not function
in isolation, sitting at his desk and awaiting the varioius types of
clearances and consents that are necessary to be obtained from various
quarters before granting consent to an issue. He points out that the E
..;. CCI functions in close coordination with all the concerned depart-
ments of the Government. He is in close touch with the progress of
various projects. On references from the Department of Company
Affairs, the CCI (MRTP} Section furnishes comments on the scheme
of finance relating to the proposals of industrial undertakings covered
under the MRTP Act for effecting substantial expansion for setting up F
of new undertakings, merger/amalgamations; and acquisition/take-
over of other undertakings. The comments are furnished to the
Department of Company Affairs with reference to the norms relating
to equity debt ratio, promoter's contribution, . dilution of foreign
equity, listing requirements for shares on Stock Exchanges and on
analysis of balance sheets for cash generation etc. An officer attends G
'f .. regular meetings of the Advisory Committee meetings held in the
Department of Company Affairs in terms of the MRTP Act, hearing
held in Department of Company Affairs under section 29 of the MRTP
Act, inter-departmental meetings held in the Department of Company
Affairs to consider specific issues relating to applications received
under the MRTP Act, Licensing-cum-MRTP Committee meetings H
\
80 SUPREME COURT REPORTS [1989] 3 S.C.R.

A held in the Department of Industrial Development, screening com-
mittee meetings held in the Administrative Ministries to consider
applications from MRTP companies and statutory public hearings held
in the MRTP Commission. The submission of the learned Solicitor
General in short is that, in dealing with application for consent to an
issue of capital, the CCI does not act in isolation but the entire Central
B Government functions with various Departments closely monitoring "y
and coordinating the scrutiny of applications. He, therefore, submits
that the Controller of Capital Issues 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 com-
c ments 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 Com-
pany 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
D crucial aspect and that his grant of consent in anticipation of the neces-
sary transfers to the RPL was based on a practical appraisal of the
situation and fully in order.

The assumptions behind the petitioners' arguments that the
terms of the issue as proposed by the RPL were approved in toto by the
E CCI .without examination is also unfounded. The record before us
indicates that there were frequent discussions leading to alterations in
the original proposals from time to time as well as changes in the
conditions of consent both before and even after the letter of consent
dated 4. 7 .1988. Some aspects of these have been referred to elsewhere
and some are referred to below and these will show that consent was
F not granted as a matter of course. The allegation that consent was
accorded without any application of mind is, on the materials before
us, clearly untenable.

It is stated in the affidavit that in March/April, 1988 discussions
centered around the concept of cumulative convertible preference
G shares {CCP) which was mooted as an instrument for the means of
finance. The instrument offered would have been equity shares to the
extent of Rs.57 crores, cumulative convertible preference shares to the
extent of Rs.81 crores and convertible debentures to the extent of
Rs.478 crores with four conversions. In this connection, reference may
be made to Annexure 1 at page 39 of the reply affidavit filed in these
H proceedings by RPL. Thereafter, on 4th May, 1988 RPL made an
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.l 81

application to the Controller of Capital Issues seeking permission to
make an Issue of Capital on certain conditions. Specific details thereof .A
are not necessary to be set out here. It also made a proposal for issue
of 81 lakhs 10% cumulative convertible preference shares of Rs. 100
each for cash at par through prospectus to non-resident Indians/resi-
dent Indian public-81 crores. It is stated that in accordance with the
present guidelines issued by the Govt. of India, the Company intended B
to retain excess subscription amount to the extent of 15% of Rs.566
crores, i.e., a right to retain an additional amount.

It was further stated that in accordance with the Guidelines
issued by the Government of India, the Company had intended to
retain excess subscription amount to the extent of 15% of Rs.566
crores, i.e., a right to retain an additional amount of Rs.85 crores. The C
idea was that the company would in the event of over-subscription
request the CCI for allotment of such additional amount of Rs.85
crores. It was further proposed to issue a part of the cumulative
convertible preference shares to NRIS and a part to the foreign
collaborators. D

Terms of the proposed convertible debentures were:

(a) Convertible debentures upto 12.5% (interest) taxable:
Each convertible debentures of Rs.500 would be converted into
10 equity shares of Rs.10 each as per scheme envisaged. The E
residual portion of each Convertible Debenture would be redee-
mable at the end of 10th year from the date of allotment with an
option to the company to repay these amounts in one or more
instalments by drawing lots at any time after the end of 5th year
from the date of allotment.
F
(b) Cumulative Convertible Preference Shares 10%
(dividend) taxable. Each CCP would be fully converted into
equity share of Rs. 10 each at such a premium not exceeding
Rs.40 per share as might be approved by the CCI at any time
between the 3rd and/or 5th year from the date of allotment to be
decided by the company, by draw of lots, if necessary. G

Then there are other conditions regarding securities, underwrit-
ing, allotment of equity shares to RIL shareholders. In May, 1988,
several NRIS also evinced interest in equity participation in RPL. It
was stated that though the CCP shares appeared to be most appro-
priate instrument, the computation of reserved/preferential entitle- H
82 SUPREME COURT REPORTS [1989] 3 S.C.R.

A ment resulted in very low entitlement to the existing shareholders of
RIL. It was then contemplated to increase the preferential entitlement
of RIL investors on partially convertible debentures and the ratio of
convertible debentures was altered so as give equal share between RIL
investors and the members of public. A three stage conversion was
contemplated. Thereafter, in June 1988, a revised proposal to the CCI
B was made by RPL. It is not necessary to set out in detail the said
revised proposal. After several discussion, on or about !st June, 1988,
between the company, RPL, the Merchant Bankers, ICICI and the
Office of CCI, it was asserted on behalf of the respondent No. 3 that
serious reservations were .expr~ssed that the marketability of CCP
shares and the investors resistance was likely to be there. It was in this
c context and also after considering the reservations that might be there
on the part of the foreign collaborators and NR!s, that the CCI re-
quired the issue of fully convertible debentures. The institutional
proposal of the project cost emerged at Rs. 700 crores instead of
Rs.650 crores and it was then felt that RIL should increase its own
contribution to the project by way of a promotors' contribution at
D Rs.100 crores, thereby increasing its stake to 14% at the suggestion of
CCI. It was stated that this was also a requirement of the CCI
guidelines and MRTP conditions. At the end of June, 1988, there was
an amendment of the Order by the Department of Company Affairs in
favour of RPL for PVC. Similarly, on 21st July, 1988, the order for ~-.
MEG passed for RIL was amended permitting RPL to undertake
E the new projects for implementation of the MEG Project. It is not
necessary to set out in detail these proposals. On 4th July, 1988, CCI
granted the consent under the Capital Issues (Control) Act, 1947 to
the public issue. There were variations between the proposal and the
Order of consent of the CCI.

F It may be necessary at this stage to refer to the Order dated 4th
July, 1988, which is as follows:

"With reference to your letter No. BOK/DKG/505(c)
dated 8.6.1988, I am directed to say that the Central Govt.
in exercise of the powers conferred by the Capital Issues
G (Control) Act, 1947, do hereby give their consent to an
issue by M/s Reliance Petrochemicals Ltd., a company
incorporated in the State of Maharashtra, of capital of the
value of Rs.650.90 crores (inclusive of retainable excess
subscription to the extent of Rs.84.90 crores). (A)
5, 75,00,000 Equity shares of Rs.10 each for cash at par to
H M/s Reliance Industries Ltd. (inclusive of retainable excess
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.I 83

subscription to the extent of Rs.7.50 crores). (B)
A
2,96,70,000 12.5% secured, redeemable, convertible
debentures of Rs.200 each for cash at par to public by a
prospectus (inclusive of retainable excess subscription of
77.40 crores).

2. Out of (B) above, reservations for preferential allot- B
ment will be made as follows:

(i) Shareholders of M/s Reliance Industries Ltd.
50%.

(ii) Employees (including Indian working Directors)/
workers of the company and of M/s RIL. 5% Unsubscribed
c
portion, if any, of the reservations will be added to the
public offer.

The Convertible debentures will ·carry interest 12.5%
p.a. (taxable). The Debentures will be fully and com- D
pulsorily convertible in the following manner:

(a) 5% of the face value at par on allotment of the
debentures.

(b) 20% of the face value at a premium if any, as may E
be decided by this office after three years but before four
years from the date of allotment of debentures.

(c) The balance at such a premium if any, as may be
·~. decided by this office after 5 years but before the end of 7
years from the date of allotment. F

3. The consent given as aforesaid is qualified by the condi-
tions mentioned in the Annexure and the company shall
comply with the terms of the conditions so imposed.

4. I am to make it quite clear that the grant of consent to G
the issue of capital .represents no commitment of any kind
on the part of the Central Govt. to render assistance in the
matters of priorities or licences for supplies of raw mate-
rials, machinery, steel, etc., of transport facilities or any
other governmental assistance, including the provision for
foreign exchange. H
84 SUPREME COURT REPORTS [1989] 3 S.C.R.

5. This order also conveys the approval of the Central
A
Govt. under proviso to Rule 19(2)(b) of the Securities Con-
tracts (Regulation) Rules, 1957 subject to the condition
that the allotment to the employees shall not exceed 200
shares per individual.

u 6. This letter is issued in the name and under the authority
of the President of India."

There was Annexure to the said Order. In that Annexure, cer-
tain conditions were laid down and condition (a) stipulated that in any
prospectus or other document referred to in section 4 of the Capital
Issues (Control) Act, 1947, relating to this issue, the statement
c required by that section must be worded as follows:

"Consent of the Central Government has been obtained to
this issue by an order of which a complete copy is open to
public inspection at the Head Office of the Company. It
D must be distinctly understood that in giving this consent the
Central Govt. do not take any responsibility for the finan-
cial soundness of any scheme or for the correctness of any
of the statements made or opinions expressed with regard
to them." A
E It further imposed the condition (b) that the consent to lapse on
the expiry of twelve months from the date of consent. Order also
stipulated 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. The consent also ,
indicated that the company would be subject to any measures of con- _}
F trol, licensing, or acquisition that might be brought into operation
either by the Central or any State Govts. or any authority therein. It
also en joined the company to ensure that the prospectus for the issue
of securities consented to should be printed subject to certain condi-
tions. It also enjoined, inter alia, that the convertible debentures
should be allotted to the employees of the company and of Mis RIL
G and the shareholders of Mis RIL. On conversion the equity shares so
converted should not be transferredlsold/hypothecated for a minimum Y
period of three years from the date of allotment of convertible
debentures. The other special conditions contained the following:

"(v) The equity shares to be allo1ted to the promoters of
H the company shall not be sold1hypothecatedltransferred for
NARENDRA KUMAR v. U.0.1. [MUKHARJJ, J.I 85

at least three years from the date of allotment.
A
(w) It is a condition of this consent order that the proceeds
-'> from the issue of debentures should be invested in fixed
duration deposits/instruments with the cooperative/
nationalised banks, UTI, Financial Institutions, l'ublic
----,· Sector Undertakings (other than public sector bonds) and B
be used strictly for the requirements of the projects
mentioned in the application and not for any other
purpose.

(x) Mis Reliance Industries Limited will bring in addi-
tional amount of Rs.SO crores as interest free unsecured
loans, at the time of allotment of the above convertible c
debentures as additional promoters contribution which wi)J
be converted into equity at par on the expiry of 36 months
from the date of allotment of convertible debentures.

(y) (i) The company shall scrupulously adhere to the time D
limit of 10 weeks from the date of closure of the subscrip-
tion list for allotment of all securities and despatch of allot-
ment letters/certificates and refund orders.
-~-
(ii) The company shall, at the time of filing its appli-
cation for listing to the regional Stock Exchange, furnish an E
undertaking for compliance of the above condition, along
with a scheme incorporating the necessary details of the
arrangements for such compliance. This undertaking shall
-l be signed by the Chief Executive or a person authorised by
the Board of the company.
F
(iii) The company shall file, with the Executive
Director or Secretary of the regional Stock Exchange,
within five working days of the expiry of the stipulated
period as above, a statement signed by the Chief Executive
or a person authorised by the Board, certifying that the
allotment letters/securities and the refund orders have G
been despatched within the prescribed time limit as per the
'condition above. A copy of the statement shall be endorsed
to the office of the CCI quoting this consent order and
date.

(iv) Non-compliance of conditions above shall' be H
86 SUPREME COURT REPORTS [1989] 3 S.C.R.

A
punishable by the Stock Exchange, in addition to the action r
that may be taken by other competent authorities."
/;,
The other conditions mentioned therein are not very relevant.
These only enjoin certain procedural safeguards. The said consent
order was amended on the 19th July, 1988, which clarified that the
Y·
B intention for imposing condition (w) as set out above, was not to block
all the funds raised out should be invested in terms of the conditions

-
laid down aforesaid. The amendment enjoined that the approval of the
Central Government should be subject to the condition that allotment
to the employees should not exceed 50 debentures per individual. It .~-r
was further added that the company should obtain prior approval of
the Reserve Bank of India, Exchange Control Department, for the
c allotment of debentures to the non-residents as required under the ·-{
Foreign Exchange Regulation Act, 1973. There was a further amend-
ment of the Consent Order on the 26th July, 1988 which added condi-
lion (s) to the following effect:

D "(s) The convertible debentures to be allotted to the
employees of M/s RPL and Mis RIL and the corporate
shareholders of Mis RIL (other than individual share-
holders of Mis RIL) shall not be sold/transferred/hypo-
thecated till the end of 3 years from the date of allotment of ~,,..;..,
debentures. On conversion the equity shares so converted
E shall not be transferred/sold/hypothecated for a minimum
period of 3 years from the date of allotment of convertible
debentures."

It was stated that between 4th January, 1988 to 24th July, 1988, news
about the formation of RPL and to set up the projects at Hazira, · '
Jr··
F Gujarat and the consent granted by CCI for convertible debentures for
RPL-all these were widely reported in various newspapers and
magazines including national dailies such as Times of India, Indian
Express, Financial Express, Gujarat Samachar, Hindustan Times,
Bombay Samachar, Business Standards and other magazines and news
items. Thereafter, till mid August, 1988, there were detailed advertise-
G ments about the company and nearly 1600 insertions in nearly 200
newspapers and dailies were made advising the opening of the issue. y
There were from mid July, 1988 onwards till August, 1988, advertise-
ment campaigns in television and radio to attract investments in ~·I
!I
Petrochemicals advising the public about the issue of Rs.593.40 crores
of convertible debentures of RPL. It is asserted on behalf of the
H respondents that· the public issue of these shares was made known
NARENDRA KUMAR v. U.0.1. (MUKHARJI, J.l 87

since mid July, 1988. As mentioned hereinbefore since the words "till
A
conversion" were capable of wide interpretation and might have
rendered the shares/convertible debentures non-transferable for upto
7 years, the CCI modified the consent and limited this restriction to a
period of 3 years. On July 27, 1988, the prospectus of RPL was filed
with the Registrar of Companies, Gujarat and the Stock Exchanges at
Bombay and Ahmedabad. On August 22, 1988, the issue of RPL B
op;ned for subscription. A letter was addressed to the CCI on August
23, 1988, requesting for the lifting of embargo for non-transferability
for three years for the corporate shareholders of RIL also. It is
asserted that by August 31, 1988, the issue of RPL was fully/over
subscribed and closed. By October 25, 1988, the basis of allotment was
approved by Ahmedabad Stock Exchange. A resolution of the Board
of Directors of RPL was passed on October 27, 1988 to allot the
c
debentures/shares. On November 4, 1988, lease deed for land at
Hazira between RPL and GIDC was executed. There was no objection
certificate obtained from GIDC. It is asserted that the Debenture
Trust Deed between RPL and ICICI was executed at Surat and was
lodged for registration on November, 7, 1988. Certificate of Mortgage D
under Section 132 of the Companies Act, 1956 was issued by the
Registrar of Companies, Gujarat regarding the creation of charge for
the Debentures on November l l, l988itself.

In this context, on behalf of the respondents, Mr. Baig drew our
attention to certain dates indicating that the writ petitioners were E
aware of this and it was stated that on July 20, 1988, Mr. Radheyshyam
Goyal, the Writ Petitioner in Rajasthan High Court, wrote a letter to
the Editor of the Financial Express that the premia for the issue of
shares upon the second and third conversion had not been fixed and
the terms and conditions were vague. Shri Goyal also made certain
other allegations. Though, of course, no complaint was ever made to F
RIL or RPL on this aspect, on August 16, 1988, one Mr. J.P. Sharma
filed a complaint of Unfair Trade Practices under the MRTP Act
before the MRTP Commission seeking injunction against the issue
opening on 22nd August, 1988 and alleging the same breaches as
claimed by the petitioners in the Transfer cases.
G
On being moved, this Court, on August 19, 1988, passed an
order in Transfer Petitions No. 192-193 of 1988 staying the three pend-
ing Writ Petitions in the three High Courts, namely, Bangalore, Delhi
and Jaipur and further stayed the proceedings in the suit being Civil
Suit No. 1172 of 1988 filed in Baroda. It was directed that the issue of
debentures would proceed without hindrance notwithstanding any H
88 SUPREME COURT REPORTS [1989] 3 S.C.R.

proceedings instituted or orders passed and that any order or direction
A
or injunction already passed or which might be passed would remain
suspended till further orders of this Court. It was mentioned that on
August 29, 1988, the complaint filed by Shri Sharma before the MRTP
Commission was dismissed. On August 31, 1988, one Shri Arvind
Kumar Sanganeria issued notice through his Advocate advising that a
B Writ Petition was being preferred in the Bombay High Court. On
September 1, 1988, this Court granted an ex-parte stay of the proceed-
ings in Writ Petition No. 4388 of 1988 pending before the Bombay
High Court. As mentioned hereinbefore, on September 9, 1988, this
Court had transferred the four Writ Petitions in the four High Courts
and civil suit to this Court. It appears that there was a further writ
petition filed by Shri Sunil Ambani in the High Court of Allabahad on
c the basis of two articles published in the Indian Express.

Shri Ganesh made submissions in Transfer Case No. 164 of 1988.
Shri Haksar made his submissions in T.C. No. 161 of 1988. Shri
Pagaria argued T.C. 162 of 1988. Shri Udai Holla who was the counsel
D for the petitioner in Karnataka matters, appeared in T.C. 163 of 1988
and made his submissions. We heard Mr. G. Ramaswamy, Additional
Solicitor General. Shri Soli J. Sorabjee, Shri Baig and Shri Salve argued
on behalf of respondents 1and2 and Shri F.S. Nariman for respondent
No. 3 in T.C. No. 162 of 1988.

E Inasmuch as the charge is the non-evaluation by the CCI in
enforcing and applying the principles of guidelines properly, it would
be appropriate at this stage to refer to the said guidelines. It appears
>
that from time to time, ·in exercise of the powers conferred by section
12 of the Capital Issues (Control) Act, 1947, the Central Government
had issued rules and guidelines. On or about April 17, 1982, guidelines·
F were issued by the Government of India under the said Act for the
"Issue of Debentures by public Limited Companies". It is not neces-
sary to set out in detail these guidelines, but it may be necessary to
refer to clauses (4) and (6) of the said guidelines. Clause (4) reads
as follows:

G "4. Debt-equity: The debt-equity ratio shall not normally
exceed 2: 1. For this purpose: y
"Debt" will mean all term loans, debentures and
bonds with an initial maturity period of five years or more,
including interest accrued thereon. It als·o includes all
H deferred payment liabilities but it does not include short-
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.) 89

term bank borrowings and advances, unsecured deposits or
A
loans from the public, shareholders and employees. and
unsecured loans or deposits from others. It should also
include the proposed debenture issue.

"Equity" will mean paid-up share capital including
preference capital and-free reserves. B

Notes: (!) The computations under guidelines 3 and 4
mentioned above will be based on the latest available
audited balance-sheet of the company.

(2) A relaxation in the norm of debt-equity ratio of 2: 1 will
be considered favourably for capital-intensive projects such c
as fertilizers, petro-chemicals, cement, paper, shipping
etc."

Clause (6) of the said guidelines deals with the period of redemption
and is as follows: D

"6. Period of Redemption: Debentures shall not normally
be redeemable before the expiry of the period of seven
years except in the following cases:

(i) A company will have the option of redeeming the E
debentures from the 5th to the 9th year from the date of
issue in such a way that the average period of redemption
. continues to be seven years. While exercising such an
option the small investors having debentures of the face
value not exceeding Rs.5,000 will have to be paid in one
instalment only. F

(ii) In case of non-convertible debentures or non-
convertible portion of convertible debentures a company
may have the option of getting the debentures converted
into equity fully with the approval of and at such. price as
may be determined by the Controller of Capital Issues. T!)e G
debenture holders will, however, be free not to exercise
this right."

Clause (8) provides for the denomination of debentures. Clause (9)
enjoins the listing of debentures on the Stock Exchange. Clause (10)
stipulates that only secured debentures would be permitted for issue to H
90 SUPREME COURT REPORTS [1989) 3 S.C.R.

the public. Clause..(11) enjoins the underwriting of the debentures and ~ i
A clause (12) also provides for listing of the shares of the company pro-
posing debenture issue. Clause (13) permits linked issue of shares and
debentures. There were certain amendments to these guidelines which
would be noted at the relevant time.

B While considering the questioin of the application or non-
application of mind or infringement of guidelines, it is necessary to
r
bear in mind the role of the CCI in this respect. The CCI functions
under the Capital Issues (Control) Act, 1947. This is an Act to provide
for control over the issue of capital. Section 2(e) of the said Act_?
defines "securities" and states that the "securities" means any of the
following instruments issued or to be issued, or created or to be
c created, by or for the benefit of a company, namely: "--{

(i) shares, stocks and bonds;

(ii) debentures;
D
(iii) mortgage deeds, etc.; and

(iv) instruments acknowledging Joan or indebtedness.
~
Section 3( 1) of the said Act enjoins that no company incor-
E porated in the States shall, except with the consent of. the Central
Government, mak.e an issue of capital outside the States. The other
sub-sections of Section 3 deal with the modalities of.such cbnsent. >

It may be mentioned that fhe Statement of Objects and Reasons
of the Act states that \he object of this measure is to keep in existence /.--. •
F .... the control over capital issue which was imposed by Rule 94-A of / '"
the Defence of India Rules in May, 1943 and continued in force after
the expiry of the Defence of India Act by Ordinance No. XX of 1946.
The Statement further states that although there has been an appreci-
able change in the general conditions which constituted the principal
reason for the introduction of the control during war-time, it was
G thought in the light of experience gained that the control was still
necessary to secure a balanced investment of the country's resources in y
industry, agriculture and the social services. (See Gazette of India,
1947, Part V, p. 264).

In this connection, Shri G. Ramaswamy, learned Additional
H Solicitor General for the Union of India drew our attention to the
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 91

Debates of the Lok Sabha and the Rajya Sabha in February-March,
A
1956 when the question of continuance of the control of the capital
issues came up for consideration. The Minister of Finance, Shri C.D.
Deshmukh stated that the control of capital issues was first introduced
in May, 1943 under the Defence of India Rules. It was continued after
the termination of the war by an Ordinance, thereafter in 1947 by an
Act for a term of three years and it was again successively extended in B
1950 and 1952. The Act as it stood expired on the 31st March, 1956.
The main purpose which the Minister explained was to prevent the
diversion of investible resources to none-essential projects (emphasis
-~- supplied), the control had also been used for many other purposes and
the most important of these purposes which might be called ancillary
purposes were the regulation of the issue of bonus shares, regulation
of capital reorganisation plans of companies including mergers, and c
amalgamations which involved the use or re-issue of capital and the
regulation of the capital structure. Shri Ashok Mehta, then a Member
of Parliament, suggested that the purpose of the Act might be used for
evolving a national investment policy. The Minister of Finance further

• observed that many things might have been done to give a proper form
and shape to the national investment policy (emphasis supplied), but
the Minister expressed his surprise how these could have been secured
D

through a negative piece of control (emphasis supplied) like the Capital
Issue Control Act. He observed that there were other provisions like
the Industries (Development & Regulation) Act, under which licences
were given to new industries. But this, according to the Minister, was E
not the purpose of the negative control of the capital issue. Various
suggestions were made by the members of the Parliament about the
role of the Act, for instance, to encourage public companies, not too
much concentration of particular industries at particular areas, etc.
The Minister referred to the various other Acts which control the
industry and the Minister also referred that there should not be undue F
delay. Similar statements were made by Mr. M.C. Shah in Rajya
Sabha, who was then the Minister for Revenue and Civil Expenditure.
One Member in Rajya Sal.ha made it particularly clear that the con-
sent of the Government had been misleading to some investors and
thought that by a regulation, it was essential that in the prospectus it
should be clearly stated that the sanction by the Government did not G
mean any guarantee about the suitability or the successful running of
the industry. Therefore, this sanction of the Government should be
stated more clearly and the public should be clearly warned that a
sanction of the Government did not imply any sort of guarantee by the
Government.
H
92 SUPREME COURT REPORTS [1989] 3 S.C.R.

We have referred to the debates only to highlight that the
A
purpose of the Bill was to secure a balanced investment of the
country's resources in the industry and not to ensure so much the sound-
ness of the investment or give any guarantee to the investors. The
section of the Act in question in express terms does not enjoin the CCI
to discharge such obligations nor does the background of the Act so
8 encompass.

There was considerable discussion before us as to the scope of
the powers and responsibilities of the CCI while granting his consent
to an issue of shares and debentures proposed by a company. As stated
above, the learned Additional Solicitor General submitted that the
restrictions on issue of capital were introduced as part of the control
c measures found necessary during the period of the first world war and
that, after the war ended, the control was continued as it was thought
"in the light of experience gained that control is still necessary to
secure a balanced investment of the country's resources in industry,
agriculture and the social services" (vide, the statement of Objects and
D Reasons of the Act in 1947). He urged, relying also upon the speech of
the concerned Minister at the time of moving the amendment bill of
1956 in Parliament, (which placed the measure on a permanent foot-
ing) that all that the CCI is concerned with is to ensure that the investi-
ble resources of the country are properly utilised for priority purposes
and are not invested in non-essential projects or in a manner which
E runs counter to the accepted investment policies of the Government.
The CCI, he submitted, has neither the duty, nor the staff, the
facilities or the expertise to enquire about, or investigate into, the
financial soundness or acceptability of the issue proposed to be made.
He pointed out that one of the conditions on which all consent is
granted is that the Central Government does not take any responsibi-
F lity for the financial soundness of any scheme or the correctness of any
statement made or opinions expressed in the prospectus and the condi-
tion is also explicitly set out in the prospectus.

We are unable to agree fully with this somewhat narrow aspect of
the CCI's role. In the very speech in Parliament to which the learned
G Additional Solicitor General referred, the Minister also stated:

"Apart from this main object of the Bill which is thus to
prevent the diversion of investible resources of non-essen-
tial projects, the control has also been used for many other
purposes. The more important of these purposes which
H may be called ancillary purposes are the regulation of the
NARENDRA KUMAR v. U.0.l. [MUKHARJI, J.l 93

issue of bonus shares, regulation of capital reorganisation
A
plans of companies including mergers and amalgamations
which involved the issue or re-issue of capital, the regula-
tion of the capital structure of companies with a view to
discouraging undesirable practices, namely, issue of shares
with disproportionate voting rights and encouraging the
adoption of sound methods and techniqi;es in company floa- B
tation, regulation of the terms and conditions of additional
issues of capital etc."
(emphasis added)

That apart, whatever may have been the position at the time the
Act was passed, the present duties of the CCI have to be construed in
r--·· the context of the current situation in the country, particularly, when c
there is no clear cut delineation of their scope in the enactment. This
line of thought 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. Looking to all
this, we think that the CCI has also a role to play in ensuring that D
public interest does not suffer as a consequence of the consent granted
by him. But, as we have explained later, the responsibilities of the CCI
in this direction should not be widened beyond the range of expedi-
tious implementation of the scheme of the Act and should, at least for
the present, be restricted and limited to ensuring that the issue to
which he is granting consent is not, patently and to his knowledge. so E
manifestly impracticable or financially risky as to amount to a fraud on
the public. 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. F

Shri Ganesh submitted that the CCI is duty bound to act in
accordance with the guidelines which lay down the principles regulat-
ing the sanction of capital issues. This is especially so because the
guidelines had been published. It was submitted that the investing
public is, therefore, entitled to proceed on the basis that the CCI G
'{ would act in conformity with the guidelines and would enforce them
while sanctioning a particular capital issue. It was submitted that it is
not permissible to deviate from the guidelines. In this connection,
reliance was placed by him as well as by Shri Haksar, appearing for the
petitioner in T.C. No. 161/88, upon the observations of this Court in
Ramanna Dayaram Shetty v. International Airport Authority, [ 1979] 3 H
94 SUPREME COURT REPORTS [1989] 3 S.C.R.

A SCR 1014, where this Court observed that itmust be taken to be the
law that where the Government is dealing with the public, whether by
way of giving jobs or entering into contracts or issuing quotas or
licence or granting other forms of largess, the government could not
act arbitrarily at its sweet will and, like a private individual, deal with
any persons it please, but its action must be in conformity with standard
B or JlOrm which is not arbitrary, irrational or irrelevant. We accept the
position that the power of discretion of the government in the matter
of grant of largess including award of jobs, contracts, quotas, licences
etc. must be confirmed and structured by rational, relevant and non-
discriminatory standard or norm and if the governmen; departed from
such standard or norm in any particular case or cases, the action of the
government would be liable to be struck down, unless it could not be
c shown by the government that the departure was not arbitrary but was
based on some valid principle which in itself was not irrational, irrelev-
ant, unreasonable or discriminatory. Mr. Haksar drew our attention to
the observations of this Court in the case of Motilal Padampat Sugar
Mills v. Uttar Pradesh, (1979] 2 SCR 641, where this Court reiterated
D that claim of change of policy would not be sufficient to exonerate the
government from the liability; the government would have to show what
precisely was the changed policy and also its reason and justification so
that the Court could judge for itslef which way the public interest lay
and what the equity of the case demanded. It was contended by Shri
Haksar that there were departures from the guidelines and there was
E no indication as to why such departures had been made.

We are unable, however, to accept the criticism that there has
been deivations from the guidelines which are substantial. We have
referred to the guidelines. We do not find that there has been any
requirement of such guidelines which could be considered to be man- }
F datory which have not been complied with. We have considered this
carefully and found that there have been no deviations from paras 3, 5,
12, 13 and 14 of the guidelines. Nor has there been, as pointed out by
the respondents, any infraction of guidelines nos. 2 and 4. The fact
that debentures of the face value of Rs.200 have been approved as
against the normal face value of Rs.100 envisaged under para 8 or that
G the requirements of the service of underwriters have been dispensed
with in exercise of the discretion conferred by para 11 do not constitute y
arbitrary, substantial or unjustified deviations from those guidelines.
There has been sufficient compliance with the guidelines on the
quantum of issue, debt-equity ratio, interest rate and the period of
redemption and also guideline No. 10 about the security of the
H debenture and there was sufficient security for the debentures in the
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 95

facts and circumstances of this case. The preference in favour of share- A
holders of RIL was justified and based on intelligible differentia.
Indeed, if we consider the role of the CCI, it is primarily concerned to
ensure a balanced investment policy and not to guarantee the solvency
or sufficiency of the security. In our opinion, most of the criticism
directed against deviation from guidelines were misplaced.
B
It was submitted by Shri Ganesh that there was an obligation cast
on the CCI to ensure that the guideline regarding security for th~
"'!. _ debentures was fulfilled. Shri Ganesh iook us through the documents
~ filed before the CCI including, in particular, the draft prospectus
- which, according to him, clearly showed that there was in reality no
. security for the debentures. We are unable to accept this contention.
r-- c
P e rh aps the most important of the arguments addressed on
behalf of the petitioners was that the scrutiny by the CCI of the
prospectus was so cursory that the most glaring travesty of truth con-
tained therein has passed unnoticed by him. Sri Ganesh points out that
the guidelines were clear that a company can issue only secured D
debentures and draws atiention to the fact that the company pro-
claimed the issue to be of "fully secured convertible debentures". Yet,
the prospectus, on its very face, disclosed that the debentures were
unsecured. Shri Ganesh urges that, if only the CCI had perused care-
fully the figurues and statements made in the prospectus he could

-
never have accepted, at face value, the assertion of RPL that the E
debentures were "secured" ones within the meaning of the guidelines
·or accorded his consent to the issue. This argument is in three parts
and may be dealt with accordingly.

(i) The first criticism of the petitioners is that, in certain
brochures and pamphlets issued by RPL, the debentures are described F
as "fully secured convertible debentures" which they are not. 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.odntending
any change. It is submitted that the company's representation was that G
the debenture&- were "secured fully convertible" ones. This is also
what had been set out in the application for consent. Though the
company does claim that the debentures were also fully secured, it is
submitted that the emphasis in the issue was that the debentures were
fully convertible and secured. We think this explanation is plausible
and do not think that any importance or significance need be attached H
96 SUPREME COURT REPORTS [1989] 3 S.C.R.

A to the different description in some places, particularly, in view of our
discussion below as to the extent and nature of the security actually
provided for the debentures.

(ii) The second contention is that the security offered, on the
face of it, falls far short of the face value of the debentures. Sri Ganesh
B analysed before us some statements indicating the inadequacy of the
security. It was submitted by him that as per page 6 of the prospectus
issuing the debentures, after implementation ,of the projects only the
following assets would be available with the company:

Rs. in Crores
c Land and site development 11
Buildings 26
Plant and Machinery 305
Total 342

D The assets of Rs.51.25 crores, mentioned in the balance sheet as at
31.5,88 as per the Auditor's report, are also included in the above
because the above figures are of the total assets which would come in
existence after implementation of the project. This, according to Shri
Ganesh, clearly showed the inadequacy of the security. A
E On behalf of RPL, it is submitted that there is no justification to
exclude, from the figures of assets shown on p. 6 of the prospectus,
items such as technical know-how fees, expatriation fees and engineer·
ing fees amounting to Rs.79 crores and preliminary and pre-operative
expenses amounting to Rs.138 crores as these are capitalised in the
accounts and result in accretion to the value of the company's capital ~~
F assets. The calculation also ignores miscellaneous fixed assets of the
value of Rs. 70 crores shown on the page. If these are added, the value
of the investment in assets would work out to Rs.629 crores which far
exceeds the value of the debentures after the first conversion which
comes to Rs.563. 73 crores. This figure of Rs.629 crores takes into
account only the investment in assets made out of the borrowed funds
and not the future profits and assets acquired therefrom. But, even
taking this as the basis, it is clear that, with the escalation in the value · Y
of the fixed assets with the passge 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 adcq µate to safeguard the interests of the debenture
H holders. There is substance in this contention.
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.I 97

(iii) The third loophole, according to the petitioners, is the
A
insecurity created by the terms of ciauses 5 and 6 of the prospectus deal-
ing with 'security' and 'borrowings'. Sri Ganesh submits that clauses 5
and 6 severely qualify the rights of the debenture holders under the
present issue in several respects.

(a) There is, in their favour, only a residual charge on all or any B
of the assets of the company at Hazira and other places which shall
"rank expressly subject to subservient and subordinate" to all existing
and future mortgages, charges and securities as may be hereafter
created by the company in any manner whatsoever;

(b) The company need not obtain the consent or concurrence of
the debenture holders for creating any such mortgages etc. which will C
have priority over the present debenture issue or for disposing of any
of the assets of the company;

(c) Not only is the residential complex of the company excluded
from the purview of the security, it is also open to the company and the D
trustees of the debenture holders to agree to the exclusion of any of
the assets of the company from the purview of the security.

( d) The current assets or the bankers' goods such as stocks,
inventories, book debts, receivables, work in progress, finished and
semi-finished goods etc. stand excluded from the security. E

(e) Clause 6 again emphasises that the company shall be at
liberty to raise any further loans and secure the same in priority to the
present security and/or on such terms as to security, ranking or
otherwise as may be mutually acceptable to the. company and the
trustees of the debenture holders without being required to obtain any F
further sanction from the debenture holders.

If these clauses are closely perused, Sri Ganesh urges, it will be seen
(a) that the charge in favour of the debenture holders has a very poor
priority as it can rank subservient to any securities that may be created
by the company in future in respect of further borrowings, (b) that the G
company and debenture trustees, by mutual agreement, c<m take any
of the assets of the company outside the purview of the present secu-
rity and (c) that the company can create such future securities as have
a priority over the present issue or exclude assets from the purview of
the security ~ithout the consent or concurrence of the present
debenture holders. H
98 SUPREME COURT REPORTS [1989] 3 S.C.R.

We think, as has been urged on behalfofthe company, that these
A
arguments proceed on a mis-apprehension of the true nature and scope
of clauses 5 and 6 above as well as of the nature and legal effect of a
floating charge-what has been described in this prospectus as a
'residual charge'-that is created at the time of issue of such
debentures. In the first place, these clauses are only enabling in nature
B so as to permit the company, despite the mortgage in favour of
depenture holders, to carry on its business normally. It will be
appreciated that the company's normal busin"'5s activities would
necessarily involve, inter a!ia, alienation of some of the assets of the
company from time to time (such as, for example, the sale of the goods
manufactured by the company) as well the procurement and discharge
of loans and accommodation facilities from banks, financial institu-
c tions and others (such as, for example, entering into agreement,s for
hire purchase of plant and machinery and making payments of instal-
ments towards their price). The entire progress of the company would
come to a standstill in the absence of such an enabling provision. Such
a provision is not only usual but also essential because the basic idea is
D that the finances raised by the debentures should be employed for
running the project profitably and thereby generating more and more
funds and assets which will also be available to the debenture holders.
Secondly, we think-and indeed RPL also conceded both in argu-
ments as well in an affidavit filed on its behalf by Sri Mohan
Ramachandran dated 10th January, 1989-that what the two clauses
E provide is only that the consent and concurrence of the debenture
holders need not be obtained by the company before creating
securit:es that may have priority over the present issue and that, under
clauses 5 and 6 read harmoniously together, the trustees for the
debenture holders have to concur before the company can raise any
future borrowings and create therefor a security which will have prio-
F rity over the security available to the present debenture holders. The
Trustees here are not stooges of the company. The ICICI is not only a
financial institution in the public sector but is also one of the institu:
tions financing the project and thus having a stake in the success of the
project. It can be trusted-to adequately look after the interests of the
debenture holders. Thirdly, as has been pointed out by the company,
G the misapprehensions of the petitioners are more imaginary than real.
The company, in its affidavit, has pointed out that the Debenture
Trust Deed dated 7.11.1988, which has since been executed in the
present case, contains a provision by which, at the time of creation of
any future charge, the terms and conditions a> to rank,ing h3ve to be
agreed upon between the RPL and ICICI. Also clause 16 of the
H Debenture Trust Deed authorises the debenture trustees to intervene
NARENDRA KUMAR v. U.O.l. [MUKHARJI, J.I 99

and crystallise the charge in their favour, inter alia, in the following A
circumstances:

"If the Company sells the Mortgaged Premises or any part
thereof not in the ordinary course of business except a sale,
transfer or disposition allowed under the terms of these
presents to be made with the consent of the Trustees." B
(Sub-clause (f))

"If the Company (except as hereinafter expressly pro-
vided) creates or attempts or purports to create any charge
or mortgage of the Mortgaged Premises or any part of parts
thereof prejudicial to the interests of the Debenture-
holders." c
(Sub-Clause (i))

"If, in the opm1on of the Trustees, the security of the
Debentureholders is in jeopardy."
(Sub-clause (k)) D

Thus if at any time the company proposes to create such higher-
ranking charges, the trustees for debenture holders can stultify the
same by taking immediate action. Fourthly, the impression sought to
be created by the petitioners that the company may go on creating
encumbrances, left and right, to the detriment and prejudice of the E
present debenture-holders overlooks several restraints imposed on the
company in this respect under the Companies Act, the CCI Act, the
MRTP Act and involving the consent of public financial institutions.
commercial banks, the term lenders, the shareholders, the MRTP
Commission, the Central Government and the CCI before the creation
of such securities. Lastly, the contention of the petitioners completely F
overlooks the basic principles underlying the commercial law concept
of debentures secured by a floating charge as evolved in British
Jurisprudence over the past two hundred years. Clauses like clauses 5
and 6 are usually inserted in debenture issues and the company has
drawn our attention to two like instances in certain issues approved in
December 1988 and January, 1989. It has also been argued for the G
company that a fully convertible debenture is not.a debenture at all in
the true sense of the term and is more akin to an issue of equity and
that, therefore, there is no need that it should be covered by adequate
security at all. These aspects of the matter are dealt with by us at some
length later; it is sufficient here to say that we are unable to accept the
contention that the security in favour of the debenture holders is illu- H
100 SUPREME COURT REPORTS [1989] 3 S.C.R.

A sory and inadequate because of the wide language of clauses (5) and (6)
of the prospectus. Both these clauses have to be read together and so
read, we have no doubt, do not permit the creation of any charge
ranking in priority to the charge created under these debentures save
with the consent of the trustees of debenture holders.

B The further argument of Sri Ganesh is that the company law in its
application as well as the prospectus, carefuliy skirted round the issue
by merely stating that security will be .provided to the satisfaction of
the trustees and that this is not very helpful as the debenture holders
come into the picture only after the funds have been raised. This
argument is untenable. We have already pointed out, there was suf-
ficient security as was warranted by the issue. This was an issue of
C 12.5% fully secured convertible debentures of Rs.200 each. We have
examined the share capital, the present issue and the scheme of con-
version. In the premises, it is not possible to accept the submission of
Shri Ganesh that the Controller satisfied himself (as stated by him in
his affidavit) with the bare statement of the applicant company (RPL)
D that security would be created as per the requiremenis of the de_ben-
ture trustees. There was this statement that the debenture trustees were
well known financial instutitions and they had been entrusted with this
obligation. Learned Additional Solicitor General drew our attention
to similar debentures and submitted and, in our opinion, rightly that
this was the usual practice. It is not possible for the CCI to ensure
E more than that. ·The prospectus was not misleading to that extent. It,
therefore, cannot be accepted that the CCI failed to apply its mind
to the documents before him. Reliance was placed on the fact that the
RIL had proposed the issue of shares for G-series for more or less
identical project. It was contended that if capital issues had once been
sanctioned for a project and the issue had been converted for that
F purpose and then a fresh capital issue could not be applied for or
granted for the same purpose. It was urged by Shri Ganesh that the
project under those circumstances could not be considered to be a
'new project' within the meaning of para 2(i) of the Guidelines for
Issue of Debentures by Public Limited Companies. Secondly, it was
urged by Shri Ganesh that the basic object of the Capital Issues (Con-
G trol) Act was to ensure .sufficient and fruitful utilisation of capital
would be completely defeated if more than one capital issue is permit- y
ted for the same project. In this connection, Shri Ganesh referred to
the affidavit of the CCI which, according to him, clearly indicated that
CCI was specifically aware of the fact that the_scheme of finance for
setting up the very same project had been approved in favour of RIL.
H Our attention was drawn to the affidavit filed on behalf of the CCI,
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 101

where he had stated at p. 203 of the Paper Book of T.C. No. 164 of
A
1988, that by a Press Release dated 15th September, 1984, certain
guidelines which the said deponent described as "non-statutory
guidelines" for approval of issue of secured convertible and non-
convertible debentures. These gujpelines had been subsequently
amended by a Press Release dated Sth March, 1985 and these were
released on 19th August, 1985 for issue of convertible cumulative pre- B
ference shares and also there are guidelines issued by Press Release
dated Ist August, 1985 for employees stock option scheme. In accor-
dance with -these guidelines, according to the deponent on behalf of the
CCI, the consent of the CCI for capital issue for secured fully converti-
ble debentures was issued as the projects originally to be established in
RIL were pennitted by the Department of Company Affairs to be
~- transferred to RPL and endorsements thereof from RIL to RPL had c
J
already been filed including, inter alia, for endorsement of the letter of
intent for the MEG Project. The scheme· of finance for setting up of
three projects namely PVC, HOPE and MEG had already been ap-
proved by the Department of Economic Affairs in favour of RIL. In
that context, in our opinion, to contend that there was violation of the D
guidelines because the RPL's project was not a new project was too
narrow and legalistic view. Shri Ganesh tried to urge that the CCI
ought to have been aware of the fact that he had sanctioned a capital
issue of Rs.400 crores (subsequently enhanced to Rs.500 crores) to
RIL for the same project and that the said issue had been implemented
and capital of Rs.500 crores had been mopped up from the public by E
RIL. The CCI ought to have withheld permission for a fresh capital
issue in the name of RPL for the very same project. However, the CCI
did not appear to have applied his mind, according to Shri Ganesh.
Consent Order, therefore, according to Shri Ganesh, was bad. We are,
however, unable to accept this submission. The CCI was not perfonn-
ing the role of a social mentor taking into account the purpose of RIL. F
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
enumerated hereinbefore. That apart, even if RIL and RPL have to be G
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 impugned grant of consent to RPL. As referred to elsewhere,
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 in H
102 SUPREME COURT REPORTS [1989] 3 S.C.R.

A the PTA & LAB projects. Eventually, for reasons adverted to earlier,
it was decided to have the MEG, PVC and HDPE projects undertaken
by floating RPL, a wholly-owned subsidiary. In the result, even if we
look at the projects not as new ones but only as those of the RIL to be
implemented by RPL, the additional finances were needed for the
extention, expansion and diversification of the projects originally
B envisaged. This is one of the objects for which a debenture issue is
permissible under the guidelines.

Shri Ganesh then submitted that Guideline No. 3 for the Issue of
Debentures by Public Limited Companies laid down that the CCI
would consider an application for capital-issue only after the approval
of the financial institutions, banks and Government are received. The
C statutory application form prescribed by the Capital Issues (Applica-
tion for Consent) Rules, 1966 requires, according to Shri Ganesh, that
the consent and clearances of the various authorities and institutions
should be annexed to the application. Shri Ganesh submitted that in
the present case, many of the relevant applications had not even been
D filed by RIL and RPL as on 4th July, 1988 when the CCI passed the
Consent Order. It was submitted by Shri Ganesh, also by Shri Haksar
and especially by Shri Pagaria, that RPL's application had been pro-
cessed in unseemly haste and without due and proper application of
mind. It is true that things moved speedily in the case.

E This has caused us certain amount of anxiety. Speed is good;
haste is bad, and it is always desirable to bear in mind that one should
hasten slowly. However, whether in a particular case, there was haste
or speed depends upon the objective situation or on overall appraise-
ment of the situation. Here, as discussed earlier, the material shows
that the details of the proposals have been examined and discussed and
F that an examination of the merits has not been a casualty due to the
speed with which the application was processed; and especially in view
of the fact that no in jury has been caused to the investors and no
substantial loss to their securities have been occasioned, we are of the
opinion that much cannot be made of this criticism. Learned Addi-
tional Solicitor General placed before us other instances where appli-
G cations had been sanctioned within shorter times.

Shri Ganesh tried to urge that RIL had declared itself as a
promoter of RPL and the prospectus stated that no benefit was being
provided to RIL as promotor. But, the entire amount spent by RIL
was being reimbursed to it by RPL. In these circumstances, RIL could
H not be treated differently from the general public in the matter of
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.) 103

allotments of the shares of RPL. However, the scheme of allotment
A
was such that gross discrimination resulted against the general invest-
ing public and in favour of RIL. The long-term implications, it was
urged by Shri Ganesh, of the said discrimination were highly anomal-
ous and unjust for the investing public who had subscribed to the
debentures of RPL. However, there had been no application of mind
by the CCI, according to Shri Ganesh, to the matter of quantification B
of the extent of benefits conferred on RIL and consideration of
whether the same are justified or not. The CCI, however, had merc1y
mentioned in his affidavit that RIL was a promotor and had given an
interest free advance of Rs.50 crores to RPL for a period of three
years. In our opinion, these factors were sufficient to justify the treat-
ment of RIL differently from other investing public and thus the treat- C
men! does not amount to any discriminatory benefit to RIL in respect
of the debentures of RPL. As a matter of fact, this was a known fact
and the shareholders or the subscribing debenture holders would be
aware of the same. Shri Ganesh sought to urge that the CCI had not
made any attempt to appreciate or quantify the extent of the said
benefits and advantages and go into the question whether the same D
are fair, reasonable and just. Consequently, for this reason also, there
had not been, according to Shri Ganesh, due application of mind by
the CCI before the Consent Order was issued. We are unable to accept
this criticism.

The discrimination alleged is on two grounds. The first is that E
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
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 F
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 G
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 H
104 SUPREME COURT REPORTS [1989] 3 S.C.R.

for '.l years whereas the debenture holders get interest at the rate of
A
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 consitute

B
basis for a ground of discrimination.
..,..
I
These considerations apart, we would like to observe that we are
unable to appreciate how any question of discrimination is at all rele-
vant in the present context. It 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
c is no reason why they should not so structure the issue that it confers
certain greater advantages and benefits on the existing shareholders or
promoters than on the new subscribers to the debentures. We do not
think that it is permissible for the CCI to withhold consent only for this
reason or to stipulate that consent can be given only if the shareholders
D and promoters as well as prospective debenture holders are all treated
alike. The subscribers to the debentures 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 "pro-
E prietors" of the company.

Shri Pagaria, who appeared in T.C. No. 162/88 in the matter of
Shri Radheyshyam Goyal v. Union of India & Ors., where the
petitioner was a Chartered Accountant, prefaced his submission by
submitting that ours is a sovereign, socialist, secular democratic
F republic governed by the Constitution of India. Shri Pagaria drew our
attention to Article 19(1)(g) of the Constitution. He submitted that the
Capital Issues (Control) Act, 1947 is a pre-constitutional law and the
Act was enacted as being expedient to provide for control of issue of
capital. Under Article 14 read with Article 38, it was obligatory to
ensure that there was no disproportionate wealth. He drew our atten-
G tion to MRTP Act and other Acts and also to a large number of
decisions to highlight that the directive principles should be imported y
for ensuring that the CCI performs his functions for the welfare of the
community and to bring about an egalitarian society. That was his first
submission and he further submitted that the petitioner was really in a
position to come under the Public Interest Litigation propounding the
H cause of the public. Secondly, he submitted that the concept of com-
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.l 105
•--\ pany being the property of the Board of Directors had undergone a
radical change. He submitted that company in a new socio-economic A
set-up is a social institution having duties and responsibilities towards
community for which it functions. According to him, maximisation of

-
social welfare should be the legitimate goal of the companies and the
shareholders. He, therefore, stated that the CCI should take upon
himself a social role and ensure that Capital issues are satisfactorily B
implemented.

One may perhaps concede that, with the vast expansion in recent
~""l"\. years of the corporate sector and its constant tendency to have
recourse to public funds for securing finances for its projects (either by
way of share capital or borrowed capital), the scope of the responsibili-
}-- ties of the CCI can no longer be as limited as before. It may no longer c
be restricted merely to the task of preventing an imbalance of invest-
ment in various sectors or the diversion of investment to non-essential
projects. The petitioners may perhaps have a point in suggesting that
the CCI should be burdened with a duty also to safeguard the interests
of the public who are invited to participate in such financing on large D
scale and at least to satisfy himself that the project for which funds are
needed is not in the nature of a "South-sea bubble" and that the
volume, terms and conditions of the issue proposed by the company
are not such as to constitute a fraud on the public. But we think that
~' the time is not yet ripe for placing on the office of the CCI, as at
present constituted, more than a skeltal outline of responsibility in this E
direction; his shoulders are, as yet, not strong enough to bear such
~ burden. He does not have the time, the staff, the powers of enquiry,
-1 the benefit of public hearing, the requisite background, or the
economic commercial or financial skill or expertise to so assess the
technical, commercial and financial aspects of the projects as to be
~ able to give the public investor a guarantee that he is not being led up F
the garden path. All that one can say at present is that the parameters
of his action have to be found within the four corners of the Act and
the guidelines. May be, he can legitimately withhold his consent to a
project that is ex facie impracticable (for instance, as was put to the
parties in the course of hearing, a project to convert base metal into
gold) or a project, which in the present state of finances and scientific G
1
"I' knowledge and progress of our country, is an impossibility-(for
example, to have a transport service to the moon). May be, he also can
< in a proper case, refuse his consent to a scheme of finance if, ex facie,
<'\
.~~- '
.. and without any detailed investigation, he is satisfied, that it is too big
for the applicant company to handle, or too risky and onerous to be
permitted in public interest. But this is a decision which he will have to H
106 SUPREME COURT REPORTS [1989] 3 S.C.R.

venture upon, on his own responsibility, in patent cases where the
A
nature of the project or the scheme of financing is, on its face, startl-
ingly non-feasible, impracticable or risky. He cannot, however, be
compelled to withhold consent, or found fault with for having granted
consent, in a case such as this, where the proposed project is in a core
industrial sector, where there is considerable scope for foreign currency
B savings and the scheme of financing proposed has been developed in
consultation with and scrutinised and approved by, a leading public
sector financial institution (which has also agreed to be the trustee for
the Debenture-holders). It is too much to suggest that the CCI should
be held to have failed in his duty by accepting the opinion of such
institutions and not investigating for himself from various angles and in
particular, the adequacy of the security offered to the debenture-
c holders under the scheme.

While we do appreciate that in the changed atmosphere, the
corporate sector, when seeking to attract public moneys while raising
new capital must perform both responsible and responsive roles, it is
D difficult to enjoin that the CCI while considering the question of
consent/sanction of the capital issues can fulfil any role beyond the
policies prescribed under which, as noticed before, it was enjoined to
function. There are other various Acts like the Income-Tax Act, Com-
panies Act, MRTP Act to subserve other social objectives which are
conducive or ancillary to the directive principles. Nelson, it is reported
E to have said before the battle of Waterloo, that England expected
every man to do his duty. It is well to remember that every authority in
a vast developmental society must perform his role keeping in view the
part he is expected to play in the background of the whole perspective
and should not encroah upon others taking the onus upon himself to
do everything. That would lead to chaos and confusion.
F
Shri Pagaria drew our attention to Section 237 of the Companies
Act, 1956. If there was any violation of some of the rights of the
parties, they are at liberty to proceed in accordance with law. It was
contended that it was an admitted position that RPL is a newly
established company though initially financed by RIL. No ceiling had
·a been put on the allotment of the shares to the business associates of
Directors whereas at item 5 page 2 of the Consent Order dated 4th
July, 1988, the limit of the shares for the employees of the RPL had
been reduced from 200 to only 50, thereby, according to Shri Pagaria,
depriving the employees having large shareholding in the company
which discriminated them vis-a-vis the business associates, for whom
H no such ceiling had been kept.
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 107

We find the factual position to be this. The application for con-
A
sent to the issue had not specifically earmarked any portion of the
issue to the employees of RPL and RIL. In the course of the discussion
with the CCI, it was suggested that 12,90,000 debentures should be
offered by way of preferential allotment to the employees of the RIL
and RPL. Para 5 of the consent order by the CCI conveyed the
approval by the Central Government under proviso to rule 19(2)(6) of B
the Securities Contracts (Regulation) Rules, 1957 "subject to the con-
dition that the allotment to the employees shall not exceed 200 shares
per individual". The Company by its letter of 7th July pointed out that
"shares" in the above para was a mistake for "debentures" and also
suggested that a maximum of 200 debentures-which on first con-
version would become 200 shares-be allotted to each of the
employees of RPL as well as RIL. The CCI, however, modified Para 5 C
by his letter of the 19th July, 1988 to say that allotment to the
employees shall not exceed 50 debentures per individual. In this con-
text, it does not appear that the restriction of the allotment 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 D
employees. Nor has our attention been invited to any legal require-
ment or guidelines prescribing any fixed or minimum quota of allot-
ment to the employees of the company. We are, therefore, unable to
,,J-... see any discrimination. In any case, the petitioner in this case has no
cause for grievance on that score.
E
It was submitted that the Consent Order suffered from arbitra-
riness, ma/a fides, unprecedented hurry and with extraneous consi-
derations. We are unable to see any such discrimination. It was
submitted that the Consent Order hacj been passed without. satisfying
j that the pre-requisite condition of the various clearances and no objec-
'- tion certificates and licences under MRTP Act, FERA Act and F
Petroleum Act and the Essential Commodities Act, Securities Con-
tract (Regulation) Act, Companies Act, and other allied laws had been
fulfilled. The CCI has given consent for 12.5% secured redeemable
convertible debentures of Rs.200 each for cash at par to the public.
This nomenclautre has not been changed, but in the prospectus, fully
convertible debentures have been shown. According to Shri Pagaria, G
the most important is the concentration of wealth in the hands of
Ambani family and this aspect has not been considered in granting the
consent, which according to him, resulted in violation of Article 39(b)
& ( c) of the Constitution oflndia and section 22(1) of the MRTP Act.
It was submitted that the consent could not be given in favour of any
applicant or company, who had no valid industrial licence nor it pas- H
'
108 SUPREME COURT REPORTS [1989] 3 S.C.R. ti

A
sessed the letter of intent under the provisions of Industries (Develop- 'r
ment and Regulation) Act, 1951. It was submitted that the CCI did not
give judicial consideration to the application as in this connection
reliance was placed on the decision of the Gujarat High Court in
Navjivan Mills Co. Ltd. Kaloi, v. In re. Kohinoor Mills Co. Ltd.
Bombay, [1972] 42 Co. Cases 265. Some passages of Halsbury's
B Statutes of England, 4th edn., vol. 8, were referred. It was submitted ''f"
that the Directors who had received money without disclosing full facts
were bound to refund the same and were constructive trustees of the
company. This proposition, in our opinion, is irrelevant in the present ~
context. Shri Pagaria sought to urge that RIL management had passed ._r·
an ultra vires resolution in transferring the industrial licence and letter \
of intent to RPL and for that act, the office bearers were personally )
c liable and he referred to certain decisions. Shri Pagaria also submitted ~
that by advertisement on Television, radio and print media under the
caption "Your Family Khazana", without first creating a solid and
viable security for the fully paid convertible debentures under the I
D
impugned invalid consent order, the application money had been
raised to the tune of more than Rs.1,200 crores. According to him. the
advertisement given was not only violative of section 5RA of the ('0111-
I
panies Act but also contrary to provisions of Security Contract (Regu-
lation) Act, 1956 and Rules made thereunder. Shri Pagaria then sub-
mitted that in view of what he described as improper or insufficient . .-l.
i
security, no consent could have been granted and even if the issue was
E over-subscribed, the money was repayable to the persons who had
subscribed to the issue on the basis of the promises and they were
entitled not only to the refund of the money but to all benefits by way
of interest, etc. He drew our attention to certain decisions, which in
our opinion, are irrelevant. H~ submitted that the people have a right
to know and this right had been violated by n<>t telling the people the _}.-
F full facts. It was submitted that RPL did not place any material before
the Central Government to justify the consent. We are unable to accept
this submission. It was next submitted that the guidelines were man-
datory. It was next contended by Shri Pagaria that there was non-
disclosure of true and correct facts not only in respect of the interest of
Directors of RIL in the RPL properties but also the security and with
G regard to the approval of the financial scheme under MRTP Act, the
licence under the Petroleum Act, Explosive Act, etc., Shri Pagaria has y
referred to the requirements under a large number of enactments and
contended that, until requisite consents, approvals, licences etc. are I
obtained under the said enactments, the Company cannot be permit-
ted to raise public finances for the projects on hand. In this context, he
H referred, in addition to the provisions of the Companies Act, the

1
NARENDRA KUMAR v. U.0.1. !MUKHARJI, J.! 109
, -~
MRTP Act, CCI Act, rules and guidelines, and the Industries A
(Development & Regulation) Act which have been considered by us,
to certain provisions of the Petroleum Act, 1934 (and rules and orders
made thereunder); Explosives Act (and rules made thereunder);
Essential Commodities Act, Atomic Energy Act; Insecticide Act; Air
(Prevention and Control of) Pollution Act, 1981; Indian Standards
~
Institution Certification (Marks) Act, 1952 (and rules and regulations B
thereunder); Foreign Exchange Regulation Act, 1973; Interest Act,
1978; Securities Regulation Act and Dowry Prohibition Act, 1961. We
"(.
·? have gone through these provisions. They relate to various types of
controls and regulations which have to be observed in the actual run-
ning of various types of business. We are satisfied that neither these
\..... statutes nor those regulating the grant of consent to the issue of shares C
r- and debentures intend that clearances thereunder should all be
obtained before filing an application for consent. In our considered
view, such requirement is neither practical nor feasible and is not
envisaged by the statutes referred to. Some of the contentions of Sri
Pagaria alleging misleading statements made by the Company to
attract investments, such as the one based on the Dowry Prohibition D
Act and the description of the issue as the "Family Khazana'', are
far-fetched and unrealistic besides being irrelevant to the issue to be
considered at the stage of consent for the issue by the CCI.

Sri Pagaria then submitted that the grant of consent was without
lawful authority and on extraneous considerations. He referred to cer- E
.: tain decisions in support of that broad proposition. If the basis of his
submission was correct, undoubtely, the consent was bad but we do
not find any merit in the submission. The next submission by Shri
; Pagaria was that the issue had been made public subject to the injunc-
_,,). tive relief granted by this Court on 19th August, 1988 without entering
'- into the merits of the case and it was submitted that RPL did not F
possess any industrial licence or letter of indent and whatever licence it
had, had expired. This position is not factually correct as noted before.
It was submitted that there had been violation of several laws. No
particular violation had been indicated. Furthermore, it was submitted
that the Industries (Development & Regulation) Act, 1951, Com-
panies Act, 1956, Capital Issues (Control) Act, 1947, MRTP Act, G
'<- 1969, FERA, 1973 have to be read in conjunction and as such tile
corporate sector should not be permitted to accumulate wealth on
account of favour from the Government. The factual position being as
indicated before, it is not possible to entertain these bald submissions.

On behalf of the CCI, it was submitted that the contention that H
'
110 SUPREME COURT REPORTS [1989) 3 S.C.R.

the CCI had not followed his own guidelines relating to the sanction of
A
the issue is misconceived. It was further submitted that the security for
debentures had been properly there. It was submitted that the follow-
ing facts would establish that there had been no breach of duty or
obligation cast on the CCI either under the Act or under the
Guidelines or under Capital Issues (Application for Consent) Rules.
B The relevant guidelines for consideration of this question are as
follows:

(a) Guidelines for Issue of Debentures by Public Limited
Companies-Press Release 1984.

4. DEBT-EQUITY RATIO: The debt-equity ratio shall not
c normally exceed 2: I. For this purpose 'debt' will mean all term loans,
debentures and bonds with an initial maturity period of five years or
more including interest accrued thereon. It also includes all deferred
payment liabilities but it does not include short-term bank borrowings
and advances, unsecured deposit or loans for the public, sharesholders
D and employees, and unsecured loans or deposits from others. 'Equity'
would mean paid up share capital including preference capital and free
reserves.

Guideline No. 11 is also instructive. The Press Release also was )._
referred to. The trustees to the debenture holders were enjoined to
E supervise the implementation of the conditions regarding creation of
the security of the debentures.

It was, therefore, submitted that the trustees of the debenture issue
who were to supervise the implementation of the conditions regarding \
the creation of security, were vested with the requisite powers for )-.
F protecting the interest of debenture holders. Before formulating the
guidelines for protection of the interest of debenture holders consider-
able deliberations took place between the concerned departments in
the Ministry and between the Public financial institutions, investment
institutions, Department of Banking and CCI and Reserve Bank of
India as a large quantum of debentures were coming to the period of
G maturity in 1989 onwards and redemption and a need was felt to pro-
tect the interest of debenture holders so that no defaults endanger )-'
their interests. Consequently, the question of debenture redemption
reserve and the security creation was examined by the financial institu-
tions and the scheme with debenture trustees was formulated with
sufficient degree of precision and urgency. The debenture trustees are
H normallv public financial institutions and nationalised banks. Public
NARENDRA KUMAR v. U.0.1. (MUKHARJI, J.] 111

financial institutions have the necessary expertise and infrastructure
to examine the aspects of security creation and the quality of the A
security offered for protecting the interest of debenture holders. The
original guidelines of 14th January, 1987 were continuously being
monitored by the CCI and on 25th June, 1987, a further clarificatory
guideline was published on the concept of security to be offered for the
debentures. In the present case, the application <lated 4th May, 1988 B
as filed by the RPL with the CCI categorically mentioned that "the
security will be in such form and manner as required by the trustees for
debenture holders". These requireO\ents are contained in Part V(E):
Particulars of Issues-Particulars of Preference Shares and Deben-
tures-( e) indicate the security to be offered in the case of debentures.
It is in these circumstances that it was not necessary for the CCI to
evaluate the security or the adequacy thereof at the stage of grant of
consent. The CCI did examine the proposal with reference to the
debenture residual value beyond the fifth year of its allotment and in
relation to the asset creation and take on record prior to grant of
consent the project estimations and cash flows statements of the ICICI
for the years 1989 to 1996 which had looked into the projects and also D
examined the question of creation of security and asset creation for
RPL in relation to the issue for three projec.ts. It was further submitted
that as per this statement, the debt service coverage ratio was 1.89 in
1991 and going upto 2.55 in 1995. It was therefore inaccurate to say
that the CCI had not satisfied himself on the matter of security or had

- failed to apply his mind to documents before him. It is further stated
on behalf of the CCI that the CCI consented to the proposal of RIL for
'G' series for projects including PTA, LAB, MEG and HOPE and also
for working capital requirement in November, 1986 and not merely for
MEG and HOPE as alleged by the petitioner. During the implementa-
E

~'- tion of projects, there was cost overrun for PTA and LAB which was
taken due note of by ICICI in December, 1987 and CCI was informed F
of this cost overrun in 1987 itself by ICICI. Major part of 'G' Series
was utilised for PTA and LAB, CCI was also aware of this cost over-
run through the proposal of the company to MRTP Commission much
prior to granting consent to RPL as CCI is represented in the process
of approval for MRTP. CCI's office was informed by ICICI of likely
deployment of 'G' Series funds for projects other than MEG and G
HDPE much prior to the grant of consent to RPL. It was submitted
that RIL had received approval to its modified scheme on 17th May,
1988 for its LAB project and on 13th July, 1988 for its PTA Project.
However, these formal communications were preceded by the aware-
ness of the CCI in regard to cost overruns in PTA and LAB projects
and consequently the non-implementation of MEG and HDPE. H
112 SUPREME COURT REPORTS [1989] 3 S.C.R.
~··
Learned Additional Solicitor General, therefore, submitted that it was
A
incorrect to state that the CCI granted consent for issue of debentures
for financing the projects of RPL which were already given financing
facilities earlier against the 'G' Series debentures. It was submitted
that since the projects of MEG and HDPE were not implemented in
RIL and were now being implemented in RPL, for the first time these
B were 'new projects' within the meaning of paragraph 2(aJ of the
guidelines dated 15th September, 1984. Therefore, it is incorrect to say
that more than one capital issue was permitted by the CCI to finance
the same project. It is clear, acqirding to learned Additional Solicitor
General, that CCI satisfied himself before granting the consent on 4th
July, 1988 to RPL, that the capital raised by RIL was not used for
HD PE and MEG and the scheme of finance for the G-Series of RIL,
C as modified, and for the present issue of RPL were different. It was
denied that the CCI ought to have withheld permission for a fresh issue
of capital in RPL for HDPE and MEG, especially since these two
projects were not permitted. It was submitted on behalf of the CCI
that there was no bar for receiving finance for either a cost overrun, or
D for an unimplemented portion of a project. It is a fact that the MEG
and HDPE projects had not been implemented in RIL and they were
now being implemented only in RPL It is further submitted on behalf
of the CCI that the public financial institution, namely, ICICI looked
into the project and reported to the CCI, in their letter dated 15th
June, 1988 that the estimated cost of projects for which the consent
E was being sought was Rs.650 crores. 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
further categorically stated that the approval was without prejudice to
any other approval/permission that might be required to be obtained
under any other Acts and laws in force. It necessarily therefore
F followed that the obligation to obtain other permissions continued.
There was no legal condition that other approvals should be examined
by the CCI before grant of its own consent. This was submitted on
behalf of the CCI and there is substance in the submission. In the
application form prescribed in Schedule A of the Capital Issues
(Applications for Consent) Rules, 1956-other than the Bonus shares,
G the indications are only directory and not mandatory requirements.
The words used are "normally insisted". Therefore, it does not pre-
clude the CCI from granting its consent before the grant of other
approvals. Through a chart, it was highlighted before us that there was
no undue haste and it is the normal time taken in respect of others
also. It is further stated that the statutory information clearly indicated
H that no amount had been paid or given to the companies promotors or
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 113
-~ officers or offered to them. The prospectus and the terms and condi-
tions were not approved by the CCI at the time of granting of consent. A
No discrimination had been practised against the existing shareholders
of RIL, while according consent to RPL. The proposal of the 8th June,
1988, as submitted by RPL to the CCI, sought approval for equity
participation to the extent of Rs.50 crores only. This Rs.50 crores was
"""I( by way of unsecured interest-free deposit to be converted at the end of B
the 36 months into equity shares at par. This substantial addition to the
promoter's contribution was to ensure an enhanced participation in
the project and to ensure its stake. The Petrochemical Industry has a

, long gestation period for yielding high profits. The convertible
debentures have a fixed return as contrasted to equity participation
which might earn a flexible dividend. In the initial period, no dividend
might be earned. The CCI therefore applied its mind while evaluating
this aspect since a sum of Rs.50 crores was to be non-interest bearing
and unsecured whilst computing the position on the debt-equity-ratio.
c

The enhanced contribution sought from the promoter was a condition
imposed on them. The long term implications and the balance capital
structure of the company were placed for consideration of the CCI D
through the cash flow analysis of ICICI and the CCI applied its mind to
the scheme of financing and correctly granted the consent order on
relevant considerations. So far as the grievance of alleged discrimina-
A tion is concerned, it arises from the petitioner's assumption of the
possible capital appreciation of equity shares of RIL at the second
conversion which might be at a premium, if any, at the time of such E
conversion. It was submitted on behalf of the CCI that CCI had im-
posed a condition that any conversion would be at a premium, if any,
as might be decided by the CCI's office, at the time of such conversion.
It was further submitted that the computation of premium depends on
several factors, such as the net worth of the company, the performance
.J., of the company, the profit earning capacity value of the company, etc. F
Since RPL was in the Petrochemical sector, which had ordinarily the
gestation period, at the time of grant of the consent, it was not possible
for the CCI to forecast or estimate the rate of conversion on the second
and the third stage and advisedly the CCI reserved to itself the right to
determine this premium on factual data available at the time of
conversion. Therefore, this cannot be said to be bad. The convertible G
""{
- debentures would receive interest @ 12.5% on the sum of Rs.190
f3 ! .5% interest would accrue on this amount). It was, therefore, not
necessary for the CCI to quantify the extent of benefits and advantages
before grant of consent and had to enter into computation for evaluat-
ing this. Naturally, the RIL, as a promoter, stood on a different foot-
ing and there were rational intelligible critera distinguishing general H
] 14 SUPREME COURT REPORTS [1989] 3 S.C.R.

members of the public from a promoter proposing the capital issue and
)
A
the establishment of new projects. It was further relevant to notice, it
was submitted, that RPL was a 100 per cent subsidiary company of
RIL at the time of its conversion and even presently a proposal for a
capital issue would have sought that the entire issue of capital be
allotted to itself. The CCI had the option to grant the consent in terms
B of the application or to impose such conditions as were necessary for
the balanced capital structure of the company. The consent, it was
submitted, could not be evaluated in hindsight, after the issue was
closed and subscribed.

It was asserted that today RIL is the third largest industrial house
in India. It was stated that the present portfolio of RIL spreads over
c 2.5 million sharesholders/debenture holders/deposit holders. Till date,
it has made 7 debentures issues besides making three equity share
capital issues (rights) and 2 bonus shares issue. All the debentures
issues were at a premium and over-subscribed. E-Series partly-con-
vertible debentures of Rs.80 crores were issued in 1984-85. F-series
D non-convertible debentures of Rs.270 crores were issued in 1985-86.
G-Series fully-convertible debentures for Rs.500 crores were issued in
1986-87. According to the respondent, the investment in RIL, during
this period has proved to be consistently and remarkably profitable to
investors. The RIL commenced business in the year 1966 for the
manufacture of synthetic cloth made from synthetic yarn and fibre.
E Their factory was commenced and installed m the vicinity of
Ahmedabad at Naroda. In order to manufacture synthetic fabric, the
company was importing polyester filament yarn and polyester staple
fibre and re-exporting fabrics produced from the same. It was one of
the recognised export houses doing business in textiles. In the year
1977, Reliance Textile Industries merged with a company, Minylon
F Ltd. and, after the merger, changed its name back to Reliance Textile
Industries Ltd. Its traditional line of business was manufacturing of
synthetic fabrics. However since 1977, through several capital issues,
(both of debentures and of equity) it has diversified and backward-
integrated. In the first instance, the company decided to instal a plant
for the manufacture of polyester staple fibre and polyester staple yarn
G which item it was previously importing for manufacturing synthetic
fabrics. These plants were established at Patalganga in the State of
Maharashtra. Thereafter, the company decided to further backward
integrate and to manufacture PTA (Purified Teriphthalic Acid) which
is one of the raw materials used in the manufacture of polyester fila-
ment yarn/polyester staple fibre. Simultaneously, it also diversified
H horizontally into the manufacture of Linear Aklyl Benzene {LAB)
NARENDRA KUMAR v. U.0.1. [MUKHARJ!, J.J 115

used in the manufacture of detergents, as this product could also be
manufactured from the petrochemical downstream products in which A
the company was engaged.

RIL's 3rd stage of backward-integration involved, it was asser-
ted, in the manufacture of Mono Ethylene Glycol (MEG), used in the
ll(
manufacture of polyester staple fibre and polyester staple yarn. It also B
'
decided to diversify into the manufacture of critically scarce plastic raw
materials like High Density Polyethylene (HDPE), Poly Vinyl
Chloride (PVC) and Mono Ethylene Glycol (MEG) a polyester raw
material used in the manufacture of polyester fibre, etc. The company
had also applied for Gas Cracker Project, which is said to have been
cleared recently, whereby (natural) gas oil would be cracked to pro-
duce ethylene and other petrochemicals. Thus right from the Naphtha c
stage to the yarn fibre and fabric stage, the company has attempted the
complete range of products necessary for the manufacture of fabrics
from the raw material namely, natural gas.

Hazira has been selected with special reference to the availability D
of natural gas oil from South Sea Basin and it is country's first ethylene
handling port and has economies of transportation and terminal faci-
lity at Hazira etc. It is not necessary to set out however how the
company developed in different stages. The application for consent
was filed on 4th May, 1988 as mentioned hereinbefore. The licence
and letter of intent were endorsed in favour of the RIL and the scheme E
for finance in favour of the RPL.

Both Shri Baig and Shri Salve, appearing for the respondents 3
and 4, gave us the factual background of the business of the RPL. It is
not necessary to set out these in greater detail than what has been
mentioned hereinbefore. It is further submitted by both that the CCI F
had examined the nature and quantum of security in cases of the
debentures. It was submitted that the·submission of Shri Ganesh that
the security was inadequate was wrong. It was submitted that clauses
( 5) and (6) of the Prospectus read together indicate how the power has
been exercised. These clauses visualise the creation of a residual or
floating charge on all or any of the movable or immovable assets and G
''{ properties of RPL at Hazira and/or at any other location. These
further postulate future charge, superior in priority, might be created
by RPL. Future charges might be created without. the consent or con-
currence of the debenture holders. Nor was their consent required for
purposes of dealing with the assets and properties of the company. It
was submitted that the following properties are excluded from charge, H
namely,
116 SUPREME COURT REPORTS [1989) 3 S.C.R.

(a) Residential complex at Hazira or at any other location.
A
(b) Current assets or Banker's goods.

(c) Any other property that might be specifically excluded by
agreement with the trustees.
B
Future charges might be created on such tenns regarding rank-
ing, etc. as might be agreed to by the trustees. It was submitted that
whereas clause (5) essentially visualised creation of a floating charge in
favour of debenture-holders, without any restrictions or limitation.
clause (6) incorporated a limitation and a safeguard that controls the
normal characteristics of floating charge.
c
It has to be borne in mind that convertible debenture is a new
type of instrument introduced in this case and these appear to have
caught the imagination of the investors. It has been asserted before us
that subsequent to RPL issue, others have also gone for this type of
D project. Our attention was drawn to rule 2(b)(x) of the Companies
(Acceptance of deposits) Rules, 1975 which provided clearly that a
convertible debenture was not to be included in the definition of
debenture. It was further asserted that the security visualised in
clauses (5) and (6) of the Prospectus was one which was prevalent and ~. •
customary in corporate practice and was regarded as valid and
E adequate. Nothing contrary to this was indicated before us.

Our attention was drawn to Sec. 2(12) of the Companies Act
under which a debenture need not be secured at all. In that light the
guidelines should be interpreted. Therefore, it was submitted,
Guideline 10, reasonably interpreted, means that such security should ,i.
F be provided as is customarily adopted in corporate practice in the
matter of issuing debentures. It has to be borne in mind that the
debentures issued in the present case are compulsorily convertible.
Therefore, no repayment of principal is really involved. The question
of security becomes relevant for the purpose of payment of interest on
these debentures and the payment of principal only in the unlikely
G event of winding up. The debentures need not necessarily be secured.
Guidelines do not provide for quantum and nature of the security. A 'y
debenture has been defined to mean essentially as an acknowledgement
of debt, with a commitment to repay the principal with interest
(Palmer's Company Law; p. 672; 24th Edition). Reference, in this
connection, may be made to The British India Steam Navigation Co. v.
H The Commissioner of Inland Revenue, [1881] 7 QBD 165; at pages 172
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.] 117

and 173. A debenture may contain charge only on a part of the assets
of the company R~. Colonial Trusts Corporation, [1879] (15) Ch. 465 A
or it may not contain any charge on any of its assets (See Speyer
Brothers v. The Commissioner of Inland Revenue, [1907] 1KB246 and
Lemon v. Austin Friars Investment Trust Ltd., [1926] (1) Ch. 15. A
debenture may, therefore, be secured or unsecured (Palmer's Com-
pany Law; p. 675; 24th Edition). An ordinary debenture has to be B
distinguished from a 'mortgage debenture' which necessarily creates a
mortgage on the assets of a company (See Palmer's Company Law p.
706). A compulsorily convertible debenture does not postulate any
repayment of the principal. Therefore, it does not constitute a
'debenture' in its classic sense. Even a debenture, which is only con-
vertible at option has been regarded a 'hybrid' debenture by
>--
\
Palmer's Company Law (Para 44.07 at page 676). In this connection, C
reference may be made to the guidelines for the "Protection of
Debenture Holders" issued on the 14th January, 1987 which have
recognised the basic distinction between a convertible and a non-
convertible debenture. It is apparent that these were issued for the
purpose of ensuring the serviceability and repayment of debentures on D
time. It has been asserted before us that the compulsorily convertible
debentures in corporate practice was adopted in India some time after
the year 1984. Wherever the concept of compulsorily convertible
debentures is involved, the guidelines treat these as "equity". This is
clear from Guideline IV(i) read with IV (iii) of the Guidelines for
Issue of Cumulative Convertible Preference Shares and Guidelines E
No. 8 and 11 of the Employees Stock Option Guidelines. These two
sets of Guidelines clearly indicate that any instrument which is com-
pulsorily convertible into shares, is regarded as an "equity" and not as a
loan or debt. Even a non-convertible debenture need not be always
secured. In fact, modern tendency is to raise loan by unsecured stock,
which does not create any charge on the assets of the Company (The F
Encyclopaedia of Forms and Precedents; 4th Edn. Vol. 6 para 17 at
pages 1094, 1095 and para 22 at pages 1097-98). Whenever, however, a
security is created, it is invariably in the form of a floating charge (See·
The Encyclopaedia of Forms and Precedents, 4th Edn., Vol. 6 Para 25
at page 1099). It follows, therefore, that the secured debenture almost
invariably c:mtains a floating charge. In addition to the floating G
charge, debentures are frequently secured by trust deed also as had
happened in the present case where specific property, land, etc. has
been mortgaged to trustees.

Shri Ganesh made a submission that under clause (5) of the
Prospectus, the company could deal with its assets and properties with- H
118 SUPREME COURT REPORTS [1989] 3 S.C.R.

A out the permission of debenture-holders or debenture trustees and
. it could create future charges which would rank superior in prio-
that .
nty. The concept of floating charge was. invented by the Victorian
Lawyers only because of its special advantages inasmuch as it leaves a
company free to deal with its assets in the ordinary course of business
B and does not require the permission of debenture-holders or deben-
ture trustees for dealing with them or creating further charges. It has
been p-ointed out that the business of a corporation would be paralysed
if it could not deal with its assets and create future charges, ranking
superior in priority, and if it would have to obtain the permission of
the debenture holders for doing so. (See the discussion in Palmer's
Company Law; page 709 and 682) (See also the observations in Re.
C Florence Land & Public Works Co., [1878] 10 Ch. 530; Re. Colonial
Trust Corporation, (supra). In fact, in Re. Florence Land's case
(supra), the Court observed that if the companies were not allowed
to resort to floating charge, they would have to call the meeting of
existing charge holders/debenture holders each time they intend to
create future charge. The decision in Re. Panama, New Zealand, and
D Australian Royal Mail Co., as indicated in Palmer's Company Law at
page 708 is a landmark because it established the validity and the
utility of a floating charge. 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 would have to be informed and
invited for meeting. The extravagant effects of this course would be
E colossal especially when a shareholders' meeting is also additionally
called for the same 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. The legal position
is that a floating charge creates a present equitable right in favour of
the debenture holders/trustees. It creates a present charge in the pro-
F perty/undertaking of a company even before the time of payment of
the debenture arrives. The fact is that a company can deal with its
property without the permission of debenture holders/trustees, before
crystallisation by resorting to a floating charge on the undertaking (See
the observations in this connection in Re. Florence Land's case
(supra); Re. Standard Manufacturing Co., [1891] !Ch. 627; Re. Borax
G Foster v. Borax Co., [1901] 1 Ch. 326 and Creatnor Maritime Co. Ltd.
v. Irish Marine Management Ltd., [1978] 1 WLR 966. This however y
does not mean that the company can keep on creating future charges
with superior ranking without any Jet or hindrance because the de-
benture holders/trustees can any time move to crystallise the floating
security if they felt that the security is in jeopardy.
H
••

NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.l 119

-( In the present case, there is no case to suggest or believe that A
ICICI (which is one of the most important national Government finan-
cial institutions), will not act effectively and promptly to ensure that
the security in favour of the debenture-holders is not rendered
illusory. Even Guidelines dated 14th January, 1987, has cast the
responsibility of supervising, creating, monitoring and implementation
of security in favour of debenture-trustees. The company cannot B
normally create a general floating charge ranking in priority to or pari
passu with a prior floating charge unless the prior floating charge itself
permits such a course. In this connection, reference may be made to
tbe observations in The Encyclopaedia of Forms and Precedents, 4th
Edn., Vol. 6 para 27 at pages !102-1103.

It, therefore, follows that: c
(i) A debenture is usually secured by floating charge only.

(ii) ·A company which creates floating charge has a right to
create future security which may rank superior in ranking. D

(iii) However, this right of the company may be restricted
by agreement.

(iv) Where no restriction is provided, any future specific
charge will rank superior to the earlier floating charge (Section E
123 of the Companies Act)

(v) Again, where no specific provlSlon is made in the
earlier floating charge with respect to ihe ranking of future float-
ing charge then any future floating charge will be inferior to the
earlier floating charge. ln this connection, reference may be F
made to sec. 48 of the Transfer of Property Act. The risk of
floating charges can be controlled by creating legal n1ortgage in
favour of debenture trustees as has been explained in "All About
Debentures" bv Sen & Chandreashekhar (pp. 66-67 ).

In the present case, a legal mortgage has been created by RPL in G
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. In the present case, RPL does
not have any existing loans. Therefore, the 'charge in favour of the
debenture holders is preseqtly the first charge. No future borrowing
is contemplated at this stage except the foreign currency loan to the H
120 SUPREME COURT REPORTS [1989] 3 S.C.R.

extent of Rs. 84 crores. Therefore, the submission that the security is
)
A
illusory cannot be accepted and the CCI is right that the apprehension
is based on factually unsound and unfounded grounds. 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 cover-

•
age goes down at each stage and does not make any critical difference
B 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,
c except in case of exempted securities. Therefore, in our opinion, this -"'{
submission is really in the nature of a red-herring. It was submitted
that we should at least direct that the future security should not rank
superior to the floating charge in favour of the exi~ting debentures
holders.
D
Having regard to the factors which the investors should have
taken into CQnsideration, we are of the opinion that all relevant factors
were borne in mind by the CCI. There is no substance also in the
ground of discrimination. It is reiterated that Article 14 of the Con- 1
stitution does not forbid reasonable classification. RIL is a promoter
E company. It had conceived the projects, got them sanctioned and in·
vested huge amounts of time and money in the process. It was open to
RIL to undertake these projects on its own and not to make any public
issue at all. The ground that there was non-application of mind be·
cause the CCI did not take into consideration the issue of G-Series is
also without substance. Under Guideline 2(a) of the Guidelines of
1984, capital could be raised only for setting up of new project. MEG,
_..
F
it was submitted, was not a new project for capital had been raised for
it by RIL under G-Series. It was further submitted that the Controller
did not ask RPL to get the bankers prior clearance certificate under
Guideline II(v) of the Guidelines of January 14, 1987. Finally, the CCI
did not take note of the fact that the application under Schedule I of
G Rule III of the Capital Issues (Application for Consent) Rules did not
contain the relevant information. The position of cost over-run has y
been explained. So there was no substance in the submission that it
was not a new project. Secondly, it cannot be accepted that the CCI
did not insist the bankers prior clearance certificate. These guidelines
apply to "non-convertible debentures" or "partly convertible deben-
H tures". These do not apply to "compulsorily convertible debentures".
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.l 121

Even assuming that these are applied to "compulsorily convertible A
debentures", there was no need for the CCI to ask for the bapkers
prior clearance certificate because RPL was not is~uing any new set of
debentures. All requisite information had been furnished.

Shri Ganesh as well as Shri Pagaria tried to submit that in order
4( to protect the investors, a function, which they submitted, the CCI, in B
changed circumstances, should determine whether the project is pro-
fitable. Where a project has been appraised by an institution lik ~

t
ICICI, the Controller can safely assume that it is profitable and he
_need not engage in separate independent exercise of his own in this
regard. The scope and nature of the Controller's powers and jurisdic-
L tion have to be determined in the light of the specific provisions of the
r-· CCI Act, its history, the debates, to which we have referred, the c
capital structure of the national economy and its over all direction, in ·
higher priorities, are decided by the Government and the Planning
Commission by formulating Fi11e Year Plans. However, the capital
structure and the direction of a particular industry-is deCided in terms
of the provisions of !DR Act. That a particular industrial house may D
become a monopoly or otherwise have a restrictive and detrimental
effect on the economy of the country, is the concern of MRTP Act.
Therefore, the scope of the CCI under the Act is of a limited nature
, .J... and must be kept in its proper perspective. It is true that he cannot, as
was contended on behalf of the petitioner, be oblivious of the fact that
small scale investors are coming into operation and there is a social E
obligation of the State to provide safe guidelines. Yet, each authority
must circumscribe its- work in the proper light. Unless, therefore, CCI
acts perversely, irrationally or with procedural impropriety, his deci-
.- sions cannot and should not be faulted on the ground that other conse-
.J~ quences might follow. Of course, no other consequences have been
indicated before us. F

As a matter of fact, there was no allegation that the CCI acted
ma/a fide or on extraneous considerations. The CCI applied its mind to
the facts of this case_ and the factors in general. There was no undue
haste. A statement was produced indicating that the application for
grant of consent had been disposed after some time, but within the G
··Ii.(" time frame in which such applications are normally disposed of.

It may, however, be stated that being not statutory in character,
these guidelines are not enforceable. See the observations of this
Court in Fernandez v. State of Mysore, [1967] 3 SCR 636: Also see R.
Abdullah Rowther v. State Transport, etc., AIR 1959 SC 896; Dy. H
122 SUPREME COURT REPORTS [1989] 3 S.C.R.

A Asst. Iron & Steel Controller v. Manekchand Proprietor, [1972] 3 SCR )
l; Andhra Industrial Work v. CCI & E, [1975] 1 SCR 321; K.M.
Shanmugham v. S.R. V.S. Pvt. Ltd., [1964] 1SCR809). A policy is not
law. A statement of policy is not a prescription of binding criterion. In
this connection, reference may be made to the observations of Sai;nata
investments Ltd. v. Norwich Corpn., [1971] 2 QB 614 and p. 626. Also
B the observations in British Oxygen Co. v. Board of Trade, [1971] AC )
610. See also Foulkes' Administrative Law, 6th Ed. at page 181-184. In
Ex. P. Khan, [1981] 1 All E.R. page 40, the court held that a circular
or self made rule can become enforceable on the application of persons
if it was shown that it had created legitimate expectation in their minds--.;1
that the authority would abi!ie by such a policy/guideline. However, · 1
C the doctrine of legitimate expectation applies only when a person had . _J.
been given reason to believe that the State will abide by the certain · '
policy or guideline on the basis of which such applicant might have
been led to take certain actions. This doctrine is akin to the doctrine of
promissory estoppel. See also the observations of Lord Wilberforce in
/RC v. National Federation, [1982] AC 617). However, it has to be
D borne in mind that the guidelines on which the petitioners have relied
are not statutory in character. These guidelines are not judicially
enforceable. The competent authority might depart from these
guidelines where the proper exercise of his discretion so warrants. In l
the present case, the statute provided that rules can be made by the .·
Central Government only. Furthermore, according to Section 6(2) of
E the Act, the competent authority has the power and jurisdiction to
condone any deviation from even the statutory requirements pres-
cribed under Sections 3 and 4 of the Act. In Regina v. Preston
Supplementary, [1975] 1 WLR p. 624 at p. 631, it had been held that
the Act should be administered with as little technicality as possible.
Judicial review of these matters, though can always be made where ~-
F there was arbitrariness and ma/a fide and where the purpose of an
authority in exercising its statutory power and that of legislature in
conferring the powers are demonstrably at variance, should be
exercised cautiously and soberly.

We would also like to refer to one more asirect of the enforcea-
G bility of the guidelines by persons in the position of the petitioners in
these cases. Guidelines are issued by Governments and statutory ·,>
authorities in various types of situations. Where such guidelines are
intended to clarify or implement the conditions and requirements pre-
cedent to the exercise of certain rights conferred in favour of citizens
or persons and a deviation therefrom directly affects the rights so
H vested the persons whose rights are affected have a clear right to
NARENDRA KUMAR v. U.0.1. IMUKHARJI, J.] 123
-~
approach the court for relief. Sometimes guidelines control the choice A
of persons competing with one another for the grant of benefits larges-
ses or favours and, if the guidelines are departed from without rhyme
or reason, an arbitrary discrimination may result which may call for
judicial review. In some other instances (as in the Ramanna Shetty,
· • case), the guidelines may prescribe certain standards or norms for. the
'l grant of certain benefits and a relaxation of, or departure from, the B
norms may affect persons, not directly but indirectly, in the sense that
though they did not seek the benefit or privilege as they were not

r
eligible for it on the basis of the announced norms, they might also
have entered the fray had the relaxed guidelines been made known. In
other words, they would have been potential competitors in case any
"--relaxation or departure were to be made. In a case of the present type,
(' 'however, the guidelines operate in a totally different field. The c
guidelines do not affect or regulate the right of any person other than
the company applying for consent. The manner of application of these
guidelines, whether strict or lax, does not either directly or indirectly,
affect the rights or potential rights of any others or deprive them,
directly or indirectly, of any advantages or benefits to which they were D
or would. have been entitled. In this context, there is only a very
limited scope for judicial review on the ground that the guidelines have
not been followed or have been deviated from. Any member of the
, ...l.,public can perhaps claim that such of the guidelines as impose controls
intended to safeguard the interests of members of the public investing
in such public issues should be strictly enforced and not departed from E
.; · departure therefrom will take away the protection provided to them.
The scope for such challenge will necessarily be very narrow and
restricted and will depend to a considerable extent on the nature and
. extent of the deviation. For instance, if debeniures were issued which
.J provide no security at all or if the debt-equity ratio is 6000: 1 (as
alleged) as against the permissible 2: 1 (or thereabouts) a Court may be F
persm/ded to interfere. A Court, however, 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 such
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 perhaps overlook or ignore such devia- G
··lf(tions, if the object of the statute or pul_Jlic interest warrant, justify or
necessitate such deviations in a particular case. This is because
guidelines, by their very nature, do not fall into the category of legisla-
tion, direct, subordinate or ancillary. They have only an advisory role
to play and non-adherence to or deviation from them is necessarily and
·Implicitly permissible if the circumstances of any particular fact ·or law H
124 SUPREME COURT REPORTS [1989] 3 S.C.R . .>
situation warrants the same. Judicial control takes over only where the
A deviation either involves arbitrariness or discrimination or is so funda-
mental as to undermine a basic public purpose which the guidelines
and the statute under which they are issued are intended to achieve.

But in the instant case, in the view we have taken, it· is not
B necessary to base our decision on this aspect. We find that the CCI '5"
'
has, in fact, acted in substantial compliance with the principles of these
guidelines. He has acted objectively and bona fide. He has not acted in
undue haste. No substantial prejudice or injury to the petitioners have
been demonstrated. In the aforesaid view of the matter, we are, there
fore, unable to interfere. In this connection, furthermore, a common
sense view has to be adopted-See the observations in Council of Civi~
C Service Unions & Others v. Minister for the Civil Service, [1985] AC at
1
407. Public interest in this case does not require that we should in-
terfere. In this case, there is no illegality in the decision of the Control-
ler of Capital Issues. He has not exercised a power which he does not
possess. There is also no irrationality. He has nqt acted in any manner
o that no reasonable authority would have acted in the decision. There is
no procedural impropriety in his decision. He has not failed in his duty
to act fairly insofar as fairness was warranted by the justice of the
situation.

In the aforesaid view of the matter, we are of the opinion that
E there was no substance in the writ petitions and also in the civil suits
covered by these transfer applications.

The main question, as mentioned hereinbefore, canvassed in
these transfer petitions is whether the CCI has acted in the manner he I
should act in the present atmosphere of socio-economic development,"'--.
F in view of our constitutional commitments. 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 a State instrumentalities commit-
ted to the endeavours of the constitutional aspiration to secure justice,
G inter alia, social and economic, and also under Article 39(b) & ( c) o{ _,.
the Constitution to ensure that the ownership and control of the mate- -..,.
rial 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
H State must fulfil its own role and should not trespass or encroach/
NARENDRA KUMAR v. U.0.1. [MUKHARJI, J.) 125

' entrench upon the field of others. Progress is ensured and develop-
A
ment helped if each performs his role in the common endeavour.

In that light it is true that as was contended by learned counsel
appearing ·on behalf of the petitioners that in the changed socio-
economic conditions of the country one who is charged to ensure
· • capital-investment has to perform the social role in capital formation B
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
inance. The guidelines are only a guide and nothing more. The appli-
• cation.of mind by the CCI before sanction must be in the perspective
~for which he is en joined by the Act. He must endeavour to secure a
c
' 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 discharge of his
functions to ensure that there is not too much concentration of parti- D
cular industries in particular areas, and that there is a scientific
development and proper investment in key and core projects.

A The present petitions have perhaps brought to the fore for the
first time a puolic interest aspect of the issue of shares and debentures.
· In the past decades, investors in shares and equities constituted a very E
limited section of the public and consisted of two extreme types
-either persons who could shrewdly appraise the merits of each issue
and take a considered decision or persons who just wanted to invest
·t and get a return for their moneys but were indifferent to the terms and
J conditions of such investment. The position has changed in recent
· ·years. There has been a vast increase in the number of members of the F
public who have surplus money to invest; the size of the issues has
assumed macro-proportions; and the types of instruments are also
becoming more and more sophisticated. Enterpreneurs, with legal and
expert assistance at their command, could easily trap unwary investors
and the development of a public interest lobby that can scrutinise
issues carefully and advise prospective investors on their comparative G
~merits and demerits may not be entirely undesirable. It is also perhaps
necessary that the CCI, in considering the grant of consent to -such
issues, should have these aspects brought to his notice. We think that it
may 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 H
126 SUPREME COURT REPORTS [1989] 3 S.C.R.

A should be called for, that there should be a public hearing before the )
CCI before grant of consent and that the CCI should pass a reasoned
order granting or withholding consent. That would also delay the
whole process of approvals which should be as expeditious as possible.
But we have no hesitation in saying that some procedure has to be
evolved to ensure that the CCI gets the benefit of the comments,
B suggestions and objections from the public before arriving at his deci- )
sion whether to grant consent or not and, if so, on. what terms and
conditions. Perhaps, evolution of certain rules in this respect could be
examined at this juncture of industrial growth in our country. But
having regard to the facts and the circumstances of the case in view of-I"
the various facts mentioned hereinbefore, we are of the opinion that
C there was no undue haste. There was proper application of mind that
the sanction was for a new project. Sufficient security for the-~
debentures as was enjoined to be ensured before sanction has been
ensured in the facts and the circumstances of this case and ~he
guidance provided by means of guidelines has been substantially com-
plied with. There has been no infraction as such of the norms required
/ D to be followed in granting the sanction. The challenge to the sanction,
therefore, must fail.

Before we conclude, we must note that good deal of argument
was adduced that these applications in different High Courts in civil· j
suits were not genuine and properly motivated, but were ma/a fide. -
E Even though these might not have been to feed fat an innocent object,
it was apparent that it was to feed fat a grudge in respect of a competi-
tive project by a competitor. Anyway, in the view we have taken, it is
not necessary to decide the bona /ides or ma/a fides of the applicants.
Shri Nariman, when he moved the application initially, had suggested
that we should lay down certain norms as to how the courts in different
F parts of the country should grant injunction or entertain applications 1
affecting an all-India issue or having remifications all over the country.
Except that 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, we do not at this stage
lay down any more definite no,rms. We may also perhaps add that it
G may be impossible to lay down hard and fast rules of general,applica-
tion because of the diverse situations which give rise to problems of 'j
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
H discipline having regard to the principles of comity of courts
NARENDRA KUMAR v. U.0.I. (MUKHARJI, J.] 127

administering the same general laws applicable all over the country in A
respect of granting interim orders which will have repercussion or
effect beyond the jurisdiction of the pdrticular courts. Such an exercise
will be useful contribution in evolving good conventions in the federal
judicial systeni.

~ On the 9th September, 1988, when we transferred these matters,
B
we directed respondent no. 3 to deposit a sum of Rs.1 lac to be held if
the petitioners were made to spend unduly. Having. considered the
facts and circumstances of the case, we do not think that we would be
__ justified in ordering disbursement of this sum ·to the petitioners whose
r"" ,~ cases have been transferred or the plaintiffs whose cases have been
.-~.~~~~~erred. The sum should, therefore, be refunded to the respondent c

All the writ petitions and the suit fail, and are dismissed. In the
facts and the circumstances of the case, there will be no order as to
costs.
D
G.N. Petitions dismissed.