A. Foreign Exchange Regulation Act, 1973, section 29(1)(b) - Whether the Reserve Bank of India had the power or authority to give "ex-post facto" permission under section 29(1)(b) of the Act for the purchase of shares in India by a company not incorporated in India or whether such permission had necessarily to be previous permission - Words and Phrases "Permission" meaning of.
B. Corporate democracy, concept of, explained.
C. Company Law - Shares - Nature of the property in shares - Law relating to transfer of property in shares under the law and the effect of the provisions of theForeign Exchange Regulation Act explained - Companies Act, 1956, sections 2(46), 82, 84, 87, 106, 108(1), 108 (1-A) (a) and (b), 108 to 108 H, 110, 111(1) & 3, 206, 207, 397, 398, 428, 439 and 475 read with section 27 of the Securities Contracts (Regulation) Act, Sale of Goods Act, Sections 2 (7), 19, 20 to 24 and Transfer of Property Act, section 6.
D. Companies Act, 1956, sections 291-293 - Position and nature of discretionary powers of the Directors in a company.
E. Shares of a company, transfer of - Refusal to transfer the shares, extent of - Whether the refusal to transfer the shares by the company even after the permission was granted by the Reserve Bank under the FERA, proper - Companies Act, 1956 section 111(1) & (3).
F. Shares, Purchase of by the foreign investor of Indian nationality/origin - On the facts of the instance case, whether involved any contravention of Foreign Exchange Regulation of the Non-Residents' Investment Scheme.
G. Doctrine of lifting the corporate veil - Investments by company owned by non-residents of Indian nationality in accordance with the Foreign Exchange Regulations, the Non- Residents 910 External Account Rules, 1970, the Portfolio Investment Scheme, the Exchange Control Manual, Stock Exchange Control (Regulation) Act, 1956 and its bylaws - Whether the Court could pierce the veil of the transactions.
H. Shareholders' right to call extraordinary general meeting on requisition either to alter the Articles of Association of removal/change of directors - State and its instrumentalities being shareholders have the same rights of an ordinary share-holder - Companies Act, 1956, sections 169, 172, 173(3), 284, - L.I.C. Act, Section 6.
I. Constitution of India, 1950, Articles 14, 19, 32, 226 read with order XXXIX Rule 1 - Whether the Courts
can interfere with the shareholder's right to call a general body meeting and grant injunctions - Judicial Review and Article 14 explained.
J. Construct of statutes enacted in national interest, explained.
K. English cases, reference to as external aids permissibility - Forms, whether can control the Act.
L. Exchange Control Manual - Paras 24, 24 A-1 and 28 A- 1 Titled "Introduction to Foreign Investment in India - Nature of - Whether statutory direction.
M. Foreign Exchange Regulation, 1973 - Grant of permission by the Reserve Bank of India under the
N.R.P. scheme - Whether can be questioned by the company whose shares are purchased by N.R.I. in a petition under Article 226 of the Constitution.
N. Rule against retrospectivity, applicability of.
O. Portfolio Investment Scheme by companies and overseas bodies owned by non-residents of Indian nationality/origin in accordance with circulars issued from time to time by the Reserve Bank of India under section 73(3) of FERA and clarifications thereof contained in Press Release dated 17.9.83 and the circular dated 19.9.83 (both) ssued by the Reserve Bank of India and the letter dated 19.9.83 issued by the Government of India, whether valid.
P. Mala fides, whether the Union of India, the Reserve Bank of India and the Life Insurance Corporation of India be said to 911 have acted malafides, in the matter of requisiting general meeting and in the investment by purchase of shares made by the Caparo companies, respectively.
Indian economy which has to operate under the existing world economic system needs lots of foreign exchange to meet its developmental activities. For the purpose of earning,conserving and building up a reservoir, thereof, and to improve its proper utilisation Parliament and the executive government including the Reserve Bank of India have been taking several steps from time to time under the Foreign Exchange Regulation Act, 1973 and other allied Acts and Rules made thereunder. In exercise of the powers conferred by section 79 of the Foreign Exchange Regulation Act, the Central Government made Rules called the Non-Resident External Account Rules, 1970. With a view to earn foreign exchange by attracting non-resident individuals of Indian nationality or origin to invest in shares of Indian companies, the Government of India decided to provide incentives to such individuals and formulated a "Portfolio Investment Scheme". This scheme was announced by the Government on 27.2.1982 was incorporated in Circular No.9 dated 14.4.1982 of the Reserve Bank of India issued under section 73(3) of the Foreign Exchange Regulation Act. Paragraph 4(a) thereof provides that under the liberalised policy non-residents of Indian nationality or origin will be permitted to make portfolio investment in shares quoted on stock exchanges in India with full benefits of repatriation of capital invested and income earned subject to provisos therein. This was followed by further circulars No. 10 dated22.4.1982, No.15 dated 25.8.1982, No.27 dated 10.12.82, No.12 dated 16.5.1983 and No.18 dt. 19.9.83.
The net result of all the circulars was that non- resident individuals of Indian nationality/origin as well as overseas companies, partnership firms, societies, trusts and other corporate bodies which were owned by or in which the beneficial interest vested in non-resident individuals of Indian nationality/origin to the extent of not less than 60 per cent were entitled to invest, on a repatriation basis, in the shares of Indian companies to the extent of one per cent of the paid up equity capital of such Indian company provided that the aggregate of such portfolio investment did not exceed the ceiling of 5 per cent. It was immaterial whether the investment was made directly or indirectly. What was essential was that 60 per cent of the ownership or the beneficial interest should be in the hands of non-resident individuals of Indian nationality/origin. Though a 912 limit of one per cent was imposed on the acquisition of shares by each investor there was no restriction on the acquisition of shares to the extent of one per cent separately by each individual member of the same family or by each individual company of the same family (group) of companies.
Desiring to take advantage of the Non-Resident Portfolio Investment Scheme and to invest in the shares of Escorts Ltd., (an Indian company), thirteen overseas companies, twelve out of whose shares was owned 100% and the thirteenth out of whose shares was owned 98 per cent by Caparo Group Ltd., designated the Punjab National Bank as their banker (authorised dealer) and M/s. Raja Ram Bhasin & Co. as their broker for the purpose of such investment. Their designated bankers M/s Punjab National Bank E.C.E. Branch informed the Reserve Bank of India through their letter dated 4.3.1983 that according to OAC & RPC forms received the Caparo group of companies were incorporated in England and that 61.6 per cent of the shares thereof are held by the Swaraj Paul Family Trust, one hundred per cent of whose beneficiaries are one Swaraj Paul and the members of his family, all non-resident individuals of Indian origin and requested the Reserve Bank to accord their approval for opening Non-Resident External Accounts in the name of each of thirteen companies for the purpose of "conducting investment operations in India" through the agency of Raja Ram Bhasin and Co. Stock Investment Adviser and member of the Delhi Stock & Share Department Delhi. It was mentioned in the letters to the Reserve Bank that the proposed accounts would be "effected" by remittances from abroad through normal banking channels and credits and debits would be allowed only in terms of the scheme contained in the scheme for investment by non-residents. Though a remittance of $1,30,000 equivalent to Rs.19,63,000 made by Mr. Swaraj Paul to the Punjab National Bank, Parliament Street Branch on 28.1.1983 for the purpose of opening on N.R.E. account in the name of Swaraj Paul, his bankers advised the Reserve Bank that only four remittances had been received from Caparo Group Ltd. the holding company on 9.3.83, 12.4.83, 13.4.83 and 23.3.83, of amounts equivalent to Rs.1,35,36,000, Rs.2,36,59,000, Rs.76,35,000 and Rs.1,31,38,681.13p.
Payments under the Stock Exchange Rules may be made within two weeks after the purchases contracted for. M/s. Raja Ram Bhasin & Co. had, therefore, purchased shares of Escorts Ltd. worth Rs. 33,40,865 from Mangla & Co. prior to 9.3.83, the date of the first remittance as disclosed by Punjab National Bank. However, the statements of purchases of shares made by the said brokers show that even by 14.3.83, shares of Escorts Ltd. worth 913 Rs.3,85,920 had been purchased from Bharat Bhushan & Co. and shares worth Rs.45,81,677 had been purchased from Mangla & Co. The brokers had advised the designated bank that out of 75000 shares of Escorts Ltd. purchased upto 28.4.83, 35,560 shares purchased by each of the twelve companies and 35667 shares purchased by the thirteenth company were lodged by them with Escorts Co. Ltd. in the names of H.C. Bhasin and Mr. Bharat Bhushan for the purpose of transfer of the shares in the books of the company. Under byelaw 242 of the Stock Exchange Regulations which permit the brokers to lodge the shares in their own names instead of their principals, if they are unable to complete the formalities before the closing of the books. In the meanwhile, on 31.5.83, Punjab National Bank wrote to Escorts Ltd. informing them that the thirteen companies had been making investments in shares of Escorts Ltd. in terms of the scheme for Investment by overseas corporate bodies predominantly owned by non- residents of Indian nationality/origin to an extent of at least 60% and that the thirteen overseas companies had designated them as their banker and M/s Raja Ram Bhasin & Co. as their brokers for the purpose of investment.
Escorts Ltd., sought detailed information from Punjab National Bank and the brokers about the names of investors and also whether the Reserve Bank of India had accorded permission to them. As there was no response from either of them, Escorts Ltd. constituted a committee to look into the question of transfer of shares in their books and according to its recommendations the Board of Directors passed a resolution refusing to register the transfer of shares.
Escorts Ltd., although they had already refused to register the transfer of shares, wrote to the Punjab National Bank for information on several points as they desired to make a representations to the Reserve Bank of India, intervene and assist in the inquiry being conducted by the Reserve Bank at the behest of the Government of India. They also wrote several letters to the Reserve Bank purporting to give information regarding various irregularities committed in the purchase of shares of their company by the thirteen foreign companies, suppressing the fact that they have refused to register the transfer of shares in their favour.
In accordance with the clarificatory letter dated 17.9.83 from the Government of India, its Press Release of the same date and its circular No. 18 dated 19.9.83, the Reserve Bank, by a telex message conveyed to the Punjab National Bank their 914 permission to release the money remitted by Caparo Group Ltd. from abroad for making payment against the shares of DCM and Escorts Ltd. Subsequent to the grant of permission by the Reserve Bank of India, another attempt was made to have the transfer of shares registered. The request was turned down once again by Escorts Ltd. who by their letter dated 13.10.83 stated that apart from the question of obtaining the permission of the Reserve Bank of India, the decision of the Board to refuse to register the shares was based on other grounds which contained to be valid. Respondent No.19, therefore, preferred an appeal to the Central Government under section 111(3) of the Companies Act.
Escorts Ltd. alleging undue pressure from the financial institutions like ICICI, IFC, LIC, IDBI and UTI for the registration of the transfer of shares and explaining the circumstances and instances commencing from the meeting held on 18.10.83 onwards upto 29.12.83, filed Writ Petition No.3068/83 on 29.12.83 under Article 226 of the Constitution challenging the validity of Circular No.18 dated 19.9.83 and the Press Release of the same date as arbitrary and violative of not only Articles 14, 19(1)(c) and 19(1)(g) of the Constitution, but also the provisions of Foreign Exchange Regulations, the provisions of Securities Contract Regulation Act etc.
Subsequent to the filing of the Writ Petition the Life Insurance Corporation of India who along with other financial institutions held as many as 52% of the total number of shares in the company, issued a requisition dated 11.2.84 to the company to hold an extra ordinary general meeting for the purpose of removing nine of the part-time Directors of the company and for nominating nine others in their place. Alleging that the action of the Life Insurance Corporation of India was malafide and part of a concerted action by the Union of India, the Reserve Bank of India and the Caparo Group Ltd. to coerce the company to register the transfer of shares and to withdraw the Writ Petition, the Writ Petitioners sought to suitably amend the Writ Petition and to add prayers (ia), (ib), (ic) and (id) to declare the requisition to hold the meeting arbitrary, illegal, ultra vires etc. The writ petition was amended. Paragraphs 149A(1) to (44) were added as also prayers (ia), (ib), (ic) and (id).
The High Court of Bombay allowed the writ petition and granted reliefs in the following manner:-
"Section 29(1)(b) of FERA is mandatory. No Non-Resident Indian Investor is authorised to purchase share in an Indian 915 Company without the prior permission of R.B.I. under section 29(1)(b) of FERA; any purchase of shares without such prior permission is illegal: Neither the Union of India or the R.B.I. is empowered to order otherwise either by issuing a direction under section 75 or under section 73(3) of the FERA; nor are they empowered to grant permission after the shares are purchased without obtaining prior permission. The Press Release dt. 17.9.83 (Ex.A.), the circular dt. 19.9.83 (Ex.B) and the letter dt. 19.9.83 (Ex.C) cannot operate retrospectively so as to validate the purchase of shares made by N.R.I. companies which were ineligible on the date of purchase; nor can they authorise purchase of shares without obtaining prior permission of the R.B.I. under section 29(1)(b) of the FERA. In so far as the impugned Press Release circular and letter permitting the respondent- companies to hold the shares purchased without obtaining prior permission of the R.B.I., they are ultra vires of section 29(1)(b) of FERA and the powers vested in the Union of India under section 75 and the R.B.I. under section 73(3) of the FERA. To that extent they are void and inoperative both prospectively and retrospectively. The impugned Press Release and the circular, however, amount to amending the Portfolio investment Scheme with full repatriation benefits introduced under Circular No. 9 dated 14th April, 1982, and such amendments operates only prospectively. The action of respondent No.18 in issuing the impugned requisition notice is contrary to the provisions of section 284 of the Companies Act and ultra vires the powers vested in the L.I.C. under section 6 of the L.I.C. Act and contrary to the intendment of the provisions of the L.I.C. Act. The impugned requisition notice offends the principles of natural justice. The action of the L.I.C. in issuing the impugned requisition notice is an arbitrary and mala fide action taken for collateral purpose; it is violative of Article 14 of the Constitution of India. The Union of India and the R.B.I., respondents Nos. 1 and 2, are in no way responsible for the action of the L.I.C. in this regard. The allegation of mala fides made against them and the Union Finance Minister are unsubstantiated. The requisition notice and the resolutions passed at the meeting held in pursuance of the said notice are quashed". Aggrieved by the said judgment and decree the Life Insurance Corporation of India has come in appeal, and cross-appeals have been filed by Escorts Ltd. and Mr. Nanda, the Managing Director of Escorts.
Allowing CA 4598/84 filed by the Life Insurance Corporation of India, Union of India and the Reserve Bank of India and dismissing the cross appeals No.497-499/85 filed by Escorts Ltd. and Nanda, the Court 916
HELD : 1.1 The action of the Life Insurance Corporation of India in issuing the requisition notice dated 11.2.84 to hold an extra ordinary general meeting of the Escorts Company Ltd. for the purpose of removing nine of the part time Directors of the company and for nominating nine others in their place is neither contrary to the provisions of section 284 of the Companies Act, 1956 nor ultra vires the powers vested in the Life Insurance Corporation under section 6 of the Life Insurance Corporation of India Act. The notice does not offend the principle of natural justice. The said action of the L.I.C. cannot be said to be arbitrary and malafide and taken for collateral purpose or violative of Article 14 of the Constitution of India. [1022 F]
1.2 A company is, in some respects, an institution like a State functioning under its "basic constitution" consisting of the Companies Act and the Memorandum of Association. "The members in general meeting" and the directorate are the two primary organs of a company comparable with the legislative and the executive organs of a Parliamentary democracy where legislative sovereignty rests with Parliament, while administration is left to the Executive government, subject to a measure of control by Parliament through its power to force a change of Government. Like the Government, the Directors will be answerable to the Parliament constituted by the general meeting. But in practice (again like the government), they will exercise as much control over the parliament as that exercises over them. Although it would be constitutionally possible for the company in general meeting to exercise all the powers of the company, it clearly would not be practicable (except in the case of one or two-man companies) for day to day administration to be undertaken by such a cumbersome piece of machinery. So the modern practice is to confer on the Directors the right to exercise all the company's powers except such as the general law expressly provides must be exercised in general meeting. Of course, powers which are strictly legislative are not affected by the conferment of powers on the Directors as section 31 of the Companies Act provides that an alteration of an article would require a special resolution of the company in general meeting. Under the Company Act, in many ways the position of the Directorate vis-a-vis the company is more powerful than that the Government vis-a-vis the Parliament. The strict theory of Parliamentary sovereignty would not apply by analogy to a company since under the Companies Act, there are many powers exercisable by the Directors with which the members in general meeting cannot interfere. The most they can do is to dismiss the directorate and appoint others in their place or alter the articles so as to restrict the powers of the Directors for the future. The only effective way the members in general 917 meeting can exercise their control over the Directorate in a democratic manner is to alter the Articles of Association so as to restrict the powers of the Directors for the future or to dismiss the Directorate and appoint others in their place. The holders of the majority of the stock of a Corporation have the power to appoint, by election, Directors of their choice and the power to regulate them by a resolution for their removal. This is the essence of corporate democracy. [1010 G-H; 1011 A-H]
In the instant case, the financial institutions which held 52% of the shares of Escorts company had a very big stake in its working and future and were aggrieved that the management did not even choose to consult them or inform them that a Writ Petition was proposed to be filed which would launch and involve the company in difficult and expensive litigation against the Government and the Reserve Bank of India. The institutions were anxious to withdraw the writ petition and discuss the matter further. As the Management was not agreeable to this course, the Life Insurance Corporation thought that it had no option but to seek a removal of the non-Executive Directors so as to enable the new Board to consider the question whether to reverse the decision to pursue the litigation. Evidently the financial institutions wanted to avoid a confrontation with the Government and the Reserve Bank and adopt a more conciliatory approach. At the same time, the resolution of the Life Insurance Corporation did not seek removal of the Executive Directors, obviously because they did not intend to disturb the management of the company Therefore, the Life Insurance Corporation of India cannot be said to have acted mala fide in seeking to remove the nine non-Executive Directors and to replace them by representatives of the financial institutions. No aspersion was cast against the Directors proposed to be removed. It was the only way by which the policy which had been adopted by the Board in launching into a litigation could be reconsidered and reversed, if necessary. It was a wholly democratic process. A minority of shareholders in the saddle of power could not be allowed to pursue a policy of venturing into a litigation to which the majority of the shareholders were opposed. That is not how corporate democracy may function. [1010 A-G]
1.3 Every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements to call an extra ordinary general meeting in accordance with the provisions of the Companies Act, 1956. He cannot be restrained from calling a meeting and he is not bound to disclose the 918 reasons for the resolution proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. [1016 B-C]
1.4 It is true that under section 173(2) of the Companies Act, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business to be transacted at the meeting, including in particular, the nature of the concern or the interest, if any therein, of every director, the managing agent, if any, the secretaries and treasures, if any, and the manager if any. That is a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meeting. The Life Insurance Corporation of India, though an instrumentality of the State, as a shareholder of Escorts Ltd. has the same right as every shareholder to call an extraordinary general meeting of the company for the purpose of moving a resolution to remove some Directors and appoint others in their place. The Life Insurance Corporation of India cannot be restrained from doing so nor is bound to disclose its reasons for moving the resolutions. [1016 C-F]
1.5 When a requisition is made by a shareholder calling for a general meeting of the company under the provisions of the companies Act validly to remove a director and appoint another, an injunction cannot be granted by the Court to restrain the holding of a general meeting. [1011 G-H]
Shaw & Sons (Salford) Ltd. v. Shaw  2 KB 113; Isle of wight Railway Company v. Tabourdin (1883) 25 Ch. D.320; Inderwick v. Snell 42 Eng. Rep.83; Bentley-Stevens v. Jones  2 All E.R.653; Ebrabimi v. Westbourne Galleries Ltd.  2 All E.R. 492 referred to.
1.6 Every action of the State or an instrumentality of the State must be informed by reason. In appropriate cases, actions uninformed by reason may be questioned as arbitrary in proceedings under Article 226 or Article 32 of the Constitution. But Article 14 cannot be construed as a charter for judicial review of state action, to call upon the State to account for its actions in its manifold activities by stating reasons for such actions. If the action of the State is political or sovereign in character, the Court will keep away from it. The Court will not debate academic matters or concern itself with the intricacies of 919 trade and commerce. If the action of the State is related to contractual obligations or obligations arising out of tort, the Court may not ordinarily examine it unless the action has some public law character attracted to it. Broadly speaking the Court will examine actions of State if they pertain to the public law domain and refrain from examining them if they pertain to the private law field. [1017 C-D; E- G]
When the State or an instrumentality of the State ventures into the corporate world and purchases shares of a company it assumes to itself the ordinary role of a shareholder and dons the robes of a shareholder, with all the rights available to such a shareholder. Therefore, the State as a shareholder should not be expected to state its reasons when it seeks to change the management by a resolution of the company, like any other shareholder. [1017 G-H; 1018 A-B]
O'Reilly v. Mackman  3 All E.R. 1124; Devy v. Spelthonne  3 All E.R. 278; I Congress Del Partido  2 All E.R. 1064; R. v. East Berkshire Health Authority  3 All E.R. 425; and Radha Krishna Aggarwal
JUDGMENT: 2. It cannot be said that the attitude taken by the Life Insurance Corporation of India in regard to (i) the issue of Equity linked Debentures; (ii) Repayment of loans to Indian Financial Institutions; and (iii) the proposal of the merger of Goetze with Escorts were mala fide and an attempt on its part to exert pressure on Escorts Ltd. to register the shares of Caparo Group. The result of accepting the proposal for the issue of Equity linked Debentures would be that the L.I.C.'s holdings would be reduced from 30 per cent to 18.14 per cent, while the holding of all the financial institutions would be reduced from 52% to 31.21% besides involving great financial loss to them. Similar would be the position if the proposals for the merger of Goetze with Escorts was accepted. None holding a majority of the equity capital of a company would allow himself to be hustled into becoming a minority shareholder. The object of prepayment of loans was to get rid of the directors who the financial institutions had a right to nominate. True Escorts offered to appoint Mr. Davar as a Director even if the financial institutions had no right to nominate him. But it is one thing to have the right to nominate a director and quite another thing to be a director at sufferance. [1018 D- E; 1019 A-B; 1021 C-D] 3.1 On an overall view of the several statutory provisions and judicial precedents, it is clear that a shareholder has an undoubted interest in a company, an interest which is represented by his share holding. Share is movable property with all the attributes of such property. The rights of a share holder are (i) to elect directors and thus to participate in the management through them; (ii) to vote on resolutions at meetings of the company; (iii) to enjoy the profits of the company in the shape of dividends; (iv) to apply to the court for relief in the case of oppression; (v) to apply to the court for relief in the case of mismanagement; (vi) to apply to the court for winding up of the company; and (vii) to share in the surplus on winding up. [995 G-H; 996 A] 3.2 A share is transferable but while a transfer may be effective between transferor and transferee from the date of transfer, the transfer is truly complete and the transferee becomes a shareholder in the true and full sense of the term, with all the rights of a shareholder, only when the transfer is registered in the company's register. A transfer effective between transferor and the transferee is not effective as against the company and persons without notice of the transfer until the transfer is registered in the company's register. Indeed until the transfer is registered in the books of the company, the person whose name is found in the register alone is entitled to receive the dividends, notwithstanding that he has already parted with his interest in the shares. However, on the transfer of shares, the transferee becomes the owner of the beneficial interest though the legal title continues with the transferor. The relationship of trustee and ceatui que trust is established and the transferor is bound to comply with all reasonable directions that the transferee may give. He also becomes a trustee of the dividends as also of the rights to vote. The right of the transferee "to get on the register" must be exercised with due diligence and the principle of equity which makes the transferor a constructive trustee does not extend to a case where a transferee takes no active interest "to get on the register". [996 A-D] 3.3 Where the transfer is regulated by a statute, as in the case of transfer to a non-resident which is regulated by the Foreign Exchange Regulation Act, the permission, if any, prescribed by the statute must be obtained. In the absence of the permission, the transfer will not clothe the transferee with the "right to get on the register" unless and until the requisite permission is obtained. A transferee who has the right to get on the register, where no permission is required or where permission has been obtained, may ask the company to register the transfer and the company who is so asked to register the transfer of shares may not refuse to register the transfer, except for bona fide reasons, neither arbitrarily, nor for any collateral purpose. The paramount consideration is the interest of the company and the general interest of the shareholder. On the other hand, where, the requisite permission under FERA is not obtained, it is open to the company, and indeed, it is bound to refuse to register the transfer of shares of an Indian company if favour of a non-resident. [996 E-H] But once permission is obtained, whether before or after the purchase of the shares, the company cannot, thereafter refuse to register the transfer of shares. Nor is it open to the company or any other authority or individual to take upon itself or himself, thereafter the task of deciding whether the permission was rigthtly granted by Reserve Bank of India. The FERA makes it its exclusive privileges and function. The provisions of the Foreign Exchange Regulation Act are so structured and woven as to make it clear that it is for the Reserve Bank of India alone to consider whether the requirements of the provisions of the Foreign Exchange Regulation Act and the various rules, directions and orders issued from time to time have been fulfilled and whether permission should be granted or not. The consequences of non-compliance with the provisions of the Act and the rules, orders and directions issued under the Act are mentioned in secs. 48, 50, 56 and 63 of the Act. There is no provision of the Act which enables an individual or authority functioning outside the Act to determine for his own or its own purpose whether the Reserve Bank was right or wrong in granting permission under section 29(1) of the Act. Under the scheme of the Act, it is the "custodian- general" of foreign exchange. The task of enforcement is left to the Directorate of Enforcement, but it is the Reserve Bank of India and the Reserve Bank of India alone that has to decide whether permission may or may not be granted under section 29(1) of the Act. The Actmakes it its exclusive privilege and function. No other authority is vested with any power nor may it assume to itself the power to decide the question whether permission may or may not be granted or whether it ought or ought not to have been granted. The question may not be permitted to be raised either directly or collaterally before any Court. However, the grant of permission by the Reserve Bank may be questioned by an interested party in a proceeding underArticle 226 of the Constitution on the ground that it was malafide or that there was no application of the mind or that it was opposed to national interest as contemplated by the Act. [996 H; 997 A-G] 3.5 It is certainly not open to a company whose shares have been purchased by a non-resident company to refuse to register the shares even after permission is obtained from the Reserve Bank of India on the ground that permission ought not to have been granted under the FERA. The permission contemplated under section 29(1) of the Foreign Exchange Regulation Act is neither intended to nor does it impinge in any manner or any legal right of the company or any of its shareholders. Conversely neither the company nor any of its shareholders is clothed with any special right to question any such permission. [997 G-H; 998 A] 3.6 Where the articles permitted the Directors to decline to register the transfer of shares without assigning reasons, the Court would not necessarily draw adverse inference against the Directors but will assume that they acted reasonably and bonafide. Where the Directors gave reasons the Court would consider whether the reasons were legitimate and whether the Directors proceeded on a right or a wrong principle. If the articles permitted the Directors not to disclose the reasons, they could be interrogated and asked to disclose the reasons. If they failed to disclose that reason adverse inference could be drawn against them. [995 C-F] Manekji Pestonji Bharucha and Anr. v. Wadilal Sherabhai and Co. 52 I.A. 92; Bank of India v. Jamshetji A.R. Chinoy A.I.R. 1950 Pc 90; In Re Fry  2 All E.R. 106; Swiss Bank Corporation v. Lioyds Bank Ltd.  A.C. 584; Charanjit Lal Chaudhury v. Union of India A.I.R. 1951 S.C. 41; Mathalone and Ors. v. Bombay Life Assurance Company Ltd. A.I.R. 1953 S.C. 385; Vasudev Ramachandra Shelat v. Pranlal Jayanand Thakkar  1 S.C.R. 534; A.K. Ramiah v. Reserve Bank (1970) 1 M.L.J. PI referred to.
4. The purchase of shares made by and or on behalf of the Caparo Group Ltd. cannot be said to be in violation of the Portfolio Scheme in as much as: (i) the permission of the Reserve Bank contemplated by section 29(1)(b) of the Foreign Exchange Regulation Act, 1973 need not be "prior" or "previous" but the permission should be obtained at some stage for the purchase of shares. It could be ex post facto, subsequent and conditional; (ii) Payments under the Stock Exchange Rules may be made within two weeks after the first purchase and there would have been no difficulty in making payments out of foreign remittances; (iii) the provisions of sections 19(4), 29(1)(b), 47, 48, 50, 56 and 63 of the Foreign Exchange Regulation Act do not stipulate that the purchase of shares without obtaining the permission of the Reserve Bank shall be void. On the other hand, legal proceedings arising out of such transactions are contemplated subject to the condition that no sum may be recovered as debt, damage or otherwise, unless and until requisite permission is obtained. If permission may be granted ex post facto, the transaction cannot be a nullity and without effect whatsoever; (iv) under section 27 of the Securities Contracts (Regulation) Act, it shall be lawful for the holder of the company issuing the said security to receive and retain any dividend declared by the company in respect thereof for any year, notwithstanding that the security has already been transferred by him for consideration, unless the transferee who claims the dividend from the transferor has lodged the security and all other documents relating to the transfer which may be required by the company with the company for being registered in his name within fifteen days of the date on which the dividend became due; (v) Even under the Bye-law 242 of the Stock Exchange Regulations the brokers are permitted to lodge the shares purchased on behalf of their principals in their own names, if they are unable to complete the formalities before the closing of the books; and (vi) under the scheme, any foreign company whose shares were owned to the extent of more than 60% by persons of Indian nationality or origin could avail the facility given by the scheme irrespective of the fact whether the same group of shareholders figured in the different companies. Where any of the purchases were made subsequent to 2.5.83, they were subject to the ceiling of 5% in the aggregate. Merely because more than 60% of the shares of the several foreign companies who have applied for permission are held by a Trust of which Mr. Swaraj Paul and the members of his family are beneficiaries, the companies cannot be denied the facilities of investing in Indian companies. In fact, if such of the six beneficiaries of the Trust had separately applied for permission to purchase shares of Indian companies, they could not have been denied such permission. Therefore, merely on this account it cannot be said that there has been any violation of the Portfolio Investment Scheme or that the permission granted is illegal. [1022 B-C; 988 F-H; 989 A-B; 1004 A-H; 1005 A-B]
5. Generally and broadly speaking, the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the corporate veil is permissible, since that must necessarily depend on the relevant statutory or other provisions the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, and the effect on the parties who may be affected etc. In the instant case "lifting the veil" is neither necessary nor permissible beyond the essential requirement of the Foreign Exchange Regulation Act and the Portfolio Investment Scheme. The object of the Act is to conserve and regulate the flow of foreign exchange and the object of the scheme is to attract non-resident investors of Indian nationality or origin to invest in shares of Indian companies. In the case of individuals, there can be no difficulty in identifying their nationality or origin. In the case of companies and other legal personalities, there can be no question of nationality or ethnicity of such company or legal personality. Who of such non-resident companies or legal personalities may then be permitted to invest in shares of Indian companies. The answer is furnished by the scheme itself which provides for "lifting the corporate veil" to find out if at least 60 per cent of the shares are held by non-residents of Indian nationality or origin. Lifting the veil is necessary to discover the nationality or origin of the shareholders and not to find out the individual identity of each of the shareholders. The corporate veil may be lifted to that extent only and no more. Further it would be beyond the scope of the writ petition in the High Court. [1006 F-H; 1007 A-D] Wallersteiner v. Moir,  3 All E.R. 217; Tata Engineering and Locomotive Company Ltd. v. State of Bihar,  6 S.C.R. 885; The Commissioner of Income Tax v. Meenakshi Mills, A.I.R. 1967 S.C. 819; Workmen v. Associated Rubber Ltd.,  2 Scale 321; and Salomon v. A. Saloman & Co. Ltd.,  A.C. 22 referred to.
6.1 The permission of the Reserve Bank contemplated by the Foreign Exchange Regulation Act, 1973 need not be "prior" or "previous" and it could be ex post facto subsequent and conditional. [1021 H] 6.2 The expression used in section 29(1) of the Foreign Exchange Act, 1973 is "general or special permission of the Reserve Bank of India". It is not qualified by the word "prior" or "previous". While the word "prior" or "previous" may be implied if the contextual situation or the object and design of the legislation demands if, there is no such compelling circumstances justifying reading any such implication into section 29(1). Though the Parliament has not been unmindful of the need to clearly express its intention by using the expression "previous permission". Whenever if thought previous permission was necessary, as for example, sections 8(1), 8(2), 27(1), 30 and 31 of the Act, it deliberately avoided the qualifying word "previous" in section 29(1) so as to invest the Reserve Bank of India with a certain degree of elasticity in the matter of granting permission to non- resident companies to purchase shares in Indian companies. Therefore, the word permission must be interpreted to mean "permission previous or subsequent" - and that it is necessary that the permission of the Reserve Bank of India should be obtained at some stage for the purchase of shares by non-resident companies. [979 F-H; 980 A-C] 6.3 The scheme of the Foreign Exchange Regulation Act does not make previous permission imperative under section 29(1)(b), though failure to obtain prior permission may expose the foreign investor to prosecution penalty, conviction, confiscation, if permission is ultimately refused. Even if permission is granted, it may be made conditional. The expression "special permission" is wide enough to take with in its stride a "conditional permission", the condition being relevant to the purpose of the statute, in this case, the conservation and regulation of foreign exchange. [981 F-H] 6.4 Nor is the Reserve Bank of India bound to give ex post facto permission whenever it is found that business has been started or shares have been purchased without its previous permission. In such cases, wherever the Reserve Bank of India suspects an oblique motive, it will not only refuse permission but will further resort to action under section 50, 61 and 63 not merely to punish the offender but also confiscate the property involved. [981 E-F] 6.5 Parliament did not intend to lay down in absolute terms that the permission contemplated by section 29(1) had necessarily to be previous permission. The principal object of section 29 is to regulate and not altogether to ban the carrying on in India of the activity contemplated by clause
(a) and the acquisition of an undertaking or shares in India of the character mentioned in clause (b). Hence, Parliament left to the Reserve Bank of India as the saftest authority to grant permission previous or ex post facto, conditional or unconditional. And the Reserve Bank could be expected to use the discretion wisely and in the best interests of the country and in furtherance of declared Government fiscal policy in the matter of foreign exchange. 1982 F; G-H] 6.6 Reading together sections 13 and 67 of the Foreign Exchange Regulation Act and section 11 of the Customs Act, it is seen that an order under section 13 FERA operates as a prohibition and there, can therefore, be no question of the Reserve Bank of India granting subsequent permission to validate the importation of the prohibited goods and avoid the consequences prescribed by the Customs Act. To accept the analogy of section 13 to interpret sections 19 and 29, therefore, is not possible. [983 D-E] 6.7 It is true that the consequences of not obtaining the permission of the Reserve Bank or not to follow the procedure prescribed are serious and even severe. It is also true that the burden of proof is on the person proceeded against and that mensrea may consequently be interpreted as ruled out. But that cannot lead to the inevitable conclusion that the permission contemplated by section 29 is necessarily previous permission. [983 G-H; 984 A] 6.8 If it was the intention of Parliament to comprehend both previous and subsequent permission, the word "confirmation" as in section 19(5) would not do at all. While it may be permissible to construe the word "permission" widely, the word "confirmation" could never be used to convey the meaning "previous permission". The word "confirmation" is totally misplaced in section 29. [984 E-F] 6.9 The rule against retrospectivity cannot be imported into the situation presented here. The rule against retrospectivity is a rule of interpretation aimed at preventing with rights unless expressly provided or necessarily implied. To invoke the rule against retrospectivity in a situation where no vested rights are involved is to give statutory status to a rule of interpretation forgetting the reason for the rule. [984 G-H; 985 A-B] 6.10 Paragraph 24A.1 of the Exchange Control Manual is neither a statutory direction nor is it a mandatory instruction issued under section 73(3) of the Foreign Exchange Regulation Act, but is in the nature of a comment on section 29(1)(b). The paragraph is an explanatory statement of guideline for the benefit of the authorised dealers. It reads as if it is in the nature of and, indeed it is, advice given to the authorised dealers that they should obtain prior permission of the Reserve Bank of India, so that there may be no later complications. It is a helpful suggestion rather than a mandate. The Manual itself is a sort of guide book for authorised dealers, money changers, etc. and is a compendium or collection of various statutory directions, administrative instructions, advisory opinions, comments, notes, explanations, suggestions etc. The expression "prior permission" used in paragraph 24.A(1) is not meant to restrict the range of the expression "general and special permission" found in sections 29(1)(b) and 19(1)(b). It is meant to indicate the ordinary procedure which may be followed. [986 B-E] 6.11 The forms cannot control the Act, the Rules or the directions. None of the prescribed forms, no doubt, provided for the application and grant of subsequent permission, but that is so because ordinarily one would expect permission to be sought and given before the act. [986 E-F] 6.12 The Portfolio investment Scheme does not talk of any prior or previous permission. Further a power possessed by the Reserve Bank under a Parliamentary legislation cannot be so cut down as to prevent its exercise altogether. It may be open to subordinate legislating body to make appropriate rules and regulations to regulate the exercise of a power which the Parliament has vested in it so as to carry out the purposes of the legislation, but it cannot divest itself of the power. Therefore, the Reserve Bank, if it has the power under the FERA to grant ex post facto permission cannot divest itself of that power under the scheme. [987 A-D] Shakir Hussain v. Candoo Lal & Ors., AIR 1931 All. 567, Vasudev Ramachandra Shelat v. Pranlal Jayanand Thakur,  1 S.C.R. 534 referred to.