NARENDRA KUMAR MAHESHWARI v. UNION OF INDIA & ORS.

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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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, 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 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 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 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 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 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, 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.