CASE SUMMARY – LIFE INSURANCE CORPORATION OF INDIA vs ESCORT LTD. & ORS – 1986 AIR 1370, 1985 SCR Supl. (3) 909

Edited By – Honey Verma

This Case Summary is written by Ankita Sen, a law student at Amity University, Kolkata.


Life Insurance Corporation of India vs Escorts Ltd. & Ors on 19 December, 1985

Equivalent citations: 1986 AIR 1370, 1985 SCR Supl. (3) 909


Facts

In order to meet the developmental activities and exist under the world economic system, Indian economy needed a lot of foreign exchange. Hence, with the prior permission of RBI and with a purpose to earn foreign exchange, the government of India decided to provide incentives to the non-resident individuals of the Indian Nationality or origin who would invest in the shares of Indian company and composed a “Portfolio Investment Scheme”[1].

All circulars related to this scheme under RBI stated that the non-resident individuals of Indian Nationality should at least have 60% of beneficial interest in any of the partnership firms, societies, trusts and other corporate bodies which may or may not be owned by them but are permitted to invest in the shares of Indian Companies to an extent of 1% provided the aggregate of such shares should not exceed 5%.

Although there was restriction of shares on each investor but there was no restriction of share of 1% separately for each individual member of same family or by each individual of the company who belonged to the same family or group of companies.

With an intention to take advantage of the Non-Resident Portfolio investment Scheme and invest in the shares of Escorts limited which is an Indian Company, thirteen oversea companies twelve out of whose shares was owned 100% and rest whose share was owned 98% by Caparo Group Ltd through M/s. Raja Ram Bhasin & Co. who was their broker designated Punjab National Bank as their banker for the purpose of investment.

Punjab National bank through a letter dated 4.3.1983 informed RBI about Caparo Group of companies which was established in England that, 61.6% of the shares were held by Swaraj Family Trust and Swaraj Paul and members of his family who are all non-residential individuals of Indian origin are one hundred percent beneficiaries and requested RBI for the approval of opening Non-Residential External Account in the name of each thirteen companies.

It was also mentioned in the letter that through normal banking channels the payment from abroad in the proposed account would be affected but the debit and credit would only be allowed in terms of the scheme contained according the scheme for investment by non-residents.  

It is appropriate to note that Escorts Ltd. had not registered the transfer of share since they demanded the detailed information from Punjab National Bank and the broker M/s. Raja Ram Bhasin & Co. about the name of investors and also whether Reserve Bank of India has permitted them.

Life Insurance Corporation of India (LIC) being one of the shareholders of Escorts Limited along with other financial institutions held as many as 52% of the total number of shares in the company issued an order to hold extraordinary general meeting for the purpose of removing nine of the part time directors of the company and for nominating nine others to fulfil their vacancies.

Reserve Bank of India and Caparo group limited claimed in court that the order to hold extraordinary meeting by LIC was illegal, ultra vires and arbitrary.


Issues

Does Life Insurance Corporation have the right to order to hold an extraordinary general meeting?


Judgment

Court ordered the new directors to continue as managing directors until the board of directors decide on the matter and stated Life Insurance Corporation issuing requisition notice to hold an extraordinary general meeting of Escorts Company limited for the purpose of removing nine directors from the company and nominating nine others in their place was neither contrary to the provisions of section 284 of companies act, 1956 nor ultra vires to the powers vested in the Life Insurance Company under section 6 of LIC Act[2].

According to the corporate democracy, the shareholder having majority of stock in a corporation have the power to appoint directors of their choice by election and also have the power to regulate them by a resolution for their removal.

As per the Companies Act, 1956 under statutorily prescribed procedural and numerical requirements every shareholder has the right to call an extraordinary general meeting and they are not bound to disclose the reasons for resolution proposed to be issued in the meeting[3] and hence, the reason for resolution are not subjected to judicial review. Moreover, the court cannot grant an injunction for restraining the company to hold a general meeting and can’t impose restrictions upon the shareholders while appointment or removal of directors.

Reserve Bank of India was not found guilty of any malafide in granting the permission to Caparo Group of companies nor it was found guilty of non-application of mind by the court. Moreover, the court stated the act makes it its exclusive privilege and function and no other authority is granted with this power other than RBI which has the sole authority to decide whether the permission may or may not be granted to Caparo group of companies.

Punjab National Bank was found guilty before the court due to the total failure in the discharge of their duties as authorised dealers. The court ordered Reserve Bank of India to perform detailed enquiry into the purchase of shares of Escorts Limited by Caparo group and vested RBI with the power to take action against Punjab National Bank.

The court also ordered three fifth of the taxed costs in each case would be paid by Mr. Har Prasad Nanda who launched the litigation, one fourth to be paid by Swaraj Paul for unnecessarily complicating the case by failing to appear in the court and one fifth to be paid by Punjab National Bank[4].


[1] indiankanoon.org/doc/730804/  (02.07.2020, 10:00 am).

[2] Life Insurance Corporation Act 1956

legislative.gov.in/sites/default/files/A1956-31.pdf (03.07.2020, 11:00 am).

[3] Companies Act 1956

mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf (03.07.2020, 05:00 pm).

[4] indiankanoon.org/doc/730804/ (04.07.2020, 09:00 am).


Written By:

Author Name: Ankita Sen

Published on: 14th July 2020