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The case of Life Insurance Corporation of India versus Escorts Ltd. & Ors. deals with the following matters:
A. Section 29 (1) (b) of the Foreign Exchange Regulation Act, 1973 (hereinafter referred as ‘the Act’)- 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 prior permission?
C. Company Law – Shares – Nature of the property inshares – Law relating to the transfer of property in sharesunder the law and the effect of the provisions of theAct.
Intending to earn foreign exchange by attracting non-resident individuals of Indian nationality or origin to invest in the shares of Indian companies, the Government of India decided to provide incentives to such individuals with the prior permission of Reserve Bank of India (hereinafter referred as ‘the RBI’).
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,. The shares of the twelve companies were owned 100% and the shares of the thirteenth company were owned 98 per cent by Caparo Group Ltd., designated by the Punjab National Bank as their banker (authorised dealer) and M/s. Raja Ram Bhasin & Co. as their broker for such investment.
Escorts Ltd. sought detailed information from Punjab National Bank and the broker about the names of investors and also whether the RBI has permitted them. It is pertinent to note that Escorts Ltd. had not registered the transfer of the share.
Life Insurance Corporation of India (hereinafter referred as ‘LIC’) 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 extraordinary general meeting for the purpose of removing nine of the part-time Directors of the company and for nominating nine others to fill their vacancies.
Union of India, the RBI and the Caparo Group Ltd. claimed that the requisition to hold the meeting was arbitrary, illegal, ultra vires etc.
Whether LIC has the right to issue requisition notice to hold an extraordinary general meeting?
The Court in Life Insurance Corporation of India versus Escorts Ltd. & Ors ordered that the new directors must continue as Managing Directors until the Board of Directors decides on the matter.
The action of the LIC in issuing the requisition notice to hold an extraordinary 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 to the powers vested in the LIC under Section 6 of the Life Insurance Corporation of India Act.
The holders of the majority of the stock of a Corporation have the power to appoint, by election, directors of their choice along with the power to regulate them by a resolution for their removal. This is the essence of corporate democracy.
Every shareholder of a company has the right, subject to the statutorily prescribed procedural and numerical requirements to call an extraordinary general meeting as per the provisions of the Companies Act, 1956. He cannot be restrained from calling a meeting and is also not bound to disclose the reasons for the resolution proposed to be moved at the meeting. Moreover, the reasons for the resolutions are not subject to judicial review.
The RBI has the sole authority to decide whether the permission may or may not be granted. The Act makes it its exclusive privilege and function. No other authority is vested with this power. The question may not be permitted to be raised either directly or collaterally before any Court. The RBI was not guilty of any malafide in granting the permission to the Caparo Group of companies. Nor was it guilty of non-application of mind.
There was a total and single failure on the part of Punjab National Bank in the discharge of their duties as authorised dealers.
The Court ultimately ordered the RBI to look into the matter and also granted it the power to take actions against the Punjab National Bank as they think fit.
When a requisition is made by a shareholder calling for a general meeting of the company under the provisions of the Companies Act, 1956 validly to remove a director and appoint another, an injunction cannot be granted by the Court to restrain the holding of a general meeting.
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 give its reasons when it seeks to change the management by a resolution of the company, like any other shareholder.
The rights of a shareholder 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.