Arun Kumar Agrawal vs Union Of India Through Ministry Of ... on 7 September, 2009

[Cites 26, Cited by 0]

Karnataka High Court

Arun Kumar Agrawal vs Union Of India Through Ministry Of ... on 7 September, 2009

Bench: Ashok B.Hinchigeri

IN THE HIGH COURT OF KARNATAKA Arp BANGALORE
DATED THIS THE 778 Day on SEPTEMBER, 2060
BEFORE

THE HON'BLE MR. JUSTICE ASHOK 3. HINCHIGERT

WRIT PETITION No. > 494 of 2002 IGM-RES)

Ciw WRIT PETITION No. 24594 / 2002

W.P.No. 22494/2002:

BETWEEN

ARUN KUMAR AGRAWAL. --
AGED 48 YEARS,
G1S/2 VIJAYKIRAN APARTMENT,
32 VICTORIA ROAD. en,
BANGALORE - 560 047: oo

BO BO ... PETITIONER

(RY SRI ARTN KUMAR AGRAWAL ~ PARTY IN PERSON)
AND

1. UNION OF INDIA THROUGH
MINISTRY OF COMMERCE
UDYOG BHAVAN, NEW DELHI
BY ITS SECRETARY.

2 . SECURITIES AND EXCHANGE BOARD OF INDIA
MITTAL COURT, "RB WING',
224 NARIMAN POINT, MUMBAI - 400 621,

RESERVE BANK OF INDIA
_ CENTRAL OFFICE, MINT ROAD,
~. BOMBAY 1,

4. ASTRA PHARMACEUTICALS AB
~ 15185, SODERTALJE, SWEDEN.



oh

ffi} person or persons named in ans offer a
document as promoters: - ws
£2) a relative of the promoter iithin the meanin g *.

of section 6 of the Companies Act 9564 r of, ~

1956) and

fA) in erise of cornordie boely, iy fa sti bsidiary or
holding COMP of that bocky, OF

fi} any company in which the. 'Promoter' holds
O°'. or more of the ecpaity capital Or iwhich holies

10% ar more Of the so equity ongen tal Loft the Promoter,

oF

ii} any conporate } hocky im iphich a Group of
individuals: or corporate hodies or combinations
thereof toh holed 20% or more of the equity
capital in that company also hold 20% or more of

os the equity capital of the 'Promoter': and

i (8) in tetas of an individuel,

shave capital is held by the Promoter' Or a
- relative of the 'Promoter or a firm or Hindn
oundnided family in which the Promoter' or his
relative is @ partner or co-parcener or a

combination thereof



fii} any company in which a company specified Ma

in fi) above, holds 10% or more Of the share -

capital, or

fal) any HUF or firm in. which. the aggreg ate
share of the Promoter and his relatives is 5 equal

to or more than 1 ore vf the total, : :

3. (Ie) interse transfer. of shares amongst -

fi} group companies, coming within the definition
of group as defined an the Monopolies and
Restnctive "Trade. Practices Act, 1969 (25 of
1959) _

fit) reletives within the 1 meaning of Section 6 of
the Companies i Act, 1956 (1 of 1956)

- fay Indian promoters and foreign collaborators

~ awho are shareholders;

_ (b} Promoters,

Provided that the transferor(s) as well as the
oo transfereels) in sub-clauses (a) and {b} have
"been holding individually or collectively not

less than 5% shares in the target company for

a period of at least three years prior to the

Proposed acquisition,"
ABH



2. he party-in-person, Sri Arun Kumar 'Agrawat
submits that the distinction made by the. afore. extracted a
provisions between promoter sharcholder- and "ordinar y
shareholder is arbitrary and wr casonable It riolat tes Article
14 of the Constitution of India. He sibmits that neither the
Companies Act, 1956 nor the Secnrity xchange Board of
'India Act, 1992 (hereafter calied SE SB! Act provides for the
classification ints promoter : shoreholder and ordinary

shareholder. The said. classification confers largesse on large

shareholders at the expen se of the small shareholders.

3. The exemption granted to the promoters under
Regulation 340 of the 1997 Regulations for non applicability
of the Regn ation 10. 11, 12 to promoters is arbitrary and is
done « OTK. the: hasis of lobbying by the rich and the vested

" jriferests,

4. | Sri Arun Kumar submits that the some of the

~ _ respondent Companies' promoters fought against each other

ABH and took their dispute to the Company Law Board, which aso . could not resolve their dispute.

3. Minority shareholders are ne being compelled to ) sell their shares at the offer price, even rif the offer. price. is not in their opinion attractive enough, Iocase otherwise they 1 run the risk of holding an illiqn tid investment. "The madequacy of mvestor protection . throngh we "the" "prevailing exit price mechanism is a serious concern, so contended Sri Agrawal.

6. The party-li-person "submits that the erstwhile promoters, as. majorivy : _ shareholders, constitute -- the management by becoming the Chairman, Managing Directors, Directors, Ras they draw huge salaries. The Chief Executive oa Offic icer. of. Reliance ce 'Industry Ltd. draws a whopping salary of

- Rupees 44 chores every year apart from the handsome perks : and. corperate jets. Ifthe promoter Directors are asked to give the additional guarantee by the Bank, it is only because the weak promoters are unable to raise all the required money

- from a public issue. Sri Agrawal humorously, but aptly, puts 10 "industries turn sick but not industrialists". The Banks write a off thousands of crores of rupees of. many a promoters es non-performing assets. if anybody stands to lose: it is only a small-timer. World over the "statutes 'dcating with the companies, treats all the shareholders as. equals

7. He also submits that the mem bers of the Committee which recommen: ved. the" said Regulation had their own interests, which were cin contliet of 'interest with the objectives of the SEB! Some 'members vi irtnatly represented the interest of the promoters Some members were merchant bankers and some were. lawyers on the corporate matters earning crores of Pupees by advising the promoters of the companies. Some members while drafting the 1997 Regulations were earning "heavy prokerages im the stock market. One "representative of the investors' association did not attend the drafting 'committee Ineeting. The member representing the oe consumers' association gave a dissenting note, which however Os, - would not find a mention in the Committee's report. Thus, ABH.

il the Committee was dominated by the promoters and their'. advisors. When more eminent and knowledgeable persons . like the judges, professors in law colle Bes, pr ofe ssor of Midian Institute of Management, who had nO conti of interest were available, they ought to haye been appointed as the members of Regulation Making Committer . :

8, What is challenged here is the benefit being given to the large share holders as. agains! ihe small shareholders. What is being agitated for, is the equality amongst the shareholders. a 9, ie brought to. my notice Rule 294 of Rules on Committee on Ethics (in the context of Rajya Sabha).

"2904 Decteration of interests t q) Whenever a member has a personal or spectfic

- pecuniary interest (direct or indirect) in a matter 7 being considered by the Council or a Committee thereof. he shall declare the nature of such interest _ notwithstanding any registration of his interests in the Register, and Rey not participate in any debate taking place in the Council or its Comanitte before making such declaration."

10. The promoter cannot enjoy any additional benen ts as a shareholder after the shares: have been allotted. to the public through a prospectus. To uphold th that the promoters have superior beneficiary rights than ordinary shareholders or that they are promoter class of shareholders and ordimary shareholders would - amount: to --ercating an artificial classification. ~ VE. The. creation of large sum of black money by the corporates ison acconnt of the retention of the profit by the promoter ' the detriment of the ordinary shareholders. 12 - Sri Udaya Holla, the learned Senior Counsel . anpearing for the respondent No.4 and 5 has made the following submissions:

. - i) The shares are very freely tradable properties. In this regard, he brings to my notice the provisions ABH.

_ for'a period of 2 years. The promoters had to be : treated differently from the general public in the _ matter of allotment of shares. In support of his submissions, Sri Holla has relied on the judgment 13 contained in Section 82 of the Companies 'Aci, _ 1956, which reads as follows:

"Nature of shares for debentures,

82. The shares for debentures] UF other interest of any member t Pea compan y 'shall be movable property, transferabie in the manner Provided ry the article 2S ef the e company,"

The promoter S form a different and distinct class. Mey a Are P required to perform different obligations. They are. also / subjected fo certain restrictions, which are 'nor at "all imposed upon the ordinary wh shareholders, I is they who offer security, pledge _ the shares, ete. They cannot transfer the shares of the Hon'ble Supreme Court in the case of NARENDRA OMAR MAHESHWARI v. UNION H, 14 OF INDIA, reported in 1990 Supp SCC 446 | "The. extracted hereinbelow':

81. The discrimination alleged is on two grounds The first is thot RIL is: entitled straightway to the dliotment. of Shares of the face value of Rs. 57 50 crores whereas only 5 per cent of the investment by the dehenture holders car be converted into shares at par simult aneousty with the issue The second is that a foam, of Rs. oO crores advanced hy RIL to. RPL will} DE. converted into shares at par at the end of < years whereas the dehenture wh holders. wrill have to pay a premium even for converting 20 per cent of their debentures into . - shares bu that time. These allegations do not 7 hear scrutiny So far as the first ground is : concerned, there is no justification for a

- comparison between these two categories of in vestors. RIL is the promotor company which has conceived the projects, got them sanctioned, invested huge amounts of time and money and transferred the projects for AGH

(iii)

(iv) 15 implementation to RPL. It is, therefore, in a -

class by itself and there is nothing wrong if it is allotted certain shares in the: companys, - quite independently of the debenture tSSUe, in _ liew of its investments , Os Loe The recommendations: made | by Justice Hhagawati Committee on 18, Or 1997, cand the 1997 Regulations based thereon, which have come into force in Febn vary 1997, ale > being questioned after a a lone & gap OT. R 8 years, = a The issue. of ethics is being raised without any

- foundations for the same. The Justice Bhagawati Committee consisted of the eminent men from oe different apex bodies and from different walks of * life. There is nothing wrong in appointing the _ persons, whose interests are likely to be affected by the Regulations, as the members of the Recommendatory Committee. Just because the legislators may have let out their building AGH ova vit} 16 premises, if cannot be said that they. have. . deliberately come ont with a landlord friendly rent - control legislation, Neither any: bias can. be. ; attributed to the legisiators "nor can the rent legislation be struck down. on the 'ground of the legislators owning and letting ant the premises. Sri Holla submits that the petitioner has not filed any phiections to tine ecornmendations made by the Bhapawats "Committes. "Therefore he is not justified im challenging the Regulations based on the said Commitree's recommendations, 'He also submits that the petitioner has made a ~ poor and 'sinple money claim. This Court cannot "be used'as a forum for agitating the money claims. The offer made by the respondent No.5 is optional. As 4 matter of fact, 25% of the shareholders have not accepted the offer. By making the offer to buy the shares, the promoters have not put any ABH

Sri Holla has relied on the judgment of the Hon'ble Supreme Court. in" the _case of BALCO EMPLOYEES' | UNION (REED). v. UNION OF INDIA, repo ite a in 1 (2002) 2 8CC 333 to contend that the Courts have to decline to interfere in the . matter pertaining to economic policy. The relevant : " pera or aphs are extracted hereinbelow:

. '47 - Process of disinvestment is a policy ». decision involving complex economic factors.

The courts have consistently refrained from interfering with economic decisions as it has "been recognised that economic expediencies lack adjudicative disposition and unless the economic decision, hased on economic expediencies, is demonstrated to be so ABH i8 violative of constitutional or legal limits on, ee Power or so abhorrent te reason, threat the courts would decline to interfere In matrers os relating to economic issues, the. Government. has, while taking a decision. right to "trial :

and error' as long as bath trial and 'error are bona fide and. within tmits. of authority. There is no case. inace out by the petitioner that the decision to disinvest in BALCO is in any way capricious, 'arbitrary. legal or uninformed ee Even though the workers may have interest, in the manner in which the Company. is conducting ts business, inasmuch as.its policy decision may have an impact on the workers' rights, nevertheless it "isan incidence of service for an employee to | accept a decision of the employer which has been honestly taken and which is not

- contrary to law. Even a government servant, . having the protection of not only Articles 14 7 and 16 of the Constitution but also of Article 31 J, has no absolute right to remain in service. For example, apart from cases of disciplinary action, the services of government servants can be Wy ia if posts are I, 9 abolished. If such employee cannot make a - --

grievance based on Part IH of the Constituti ion. | or Article 317 then it cannot stend. to reason _ that like the petitioners, ron-governmeni os :

employees working in a company which by :

reasons of judicial pronouncement may be regarded as a State fo or the purpose of Part Hil of the Constitution, 'con claim a superior ora better rignt than a government servant and impugn its: change of status. in taking of a polic. y decision in economic matters at length, the principles of naturel justice have no role to play. While it is expected of a responsible employer to take all aspects into ; consideration "including welfare of the labour mo itself "will not entitle the employees to demand ¢ a right of hearing or consultation ms prior to the taking of the decision.

99 in a democracy, it is the prerogative of "each elected Government to follow its owm policy. Often a change in Government may result in the shift in focus or change in economic policies. Any such change may AGH 20 result m adversely affecting some rested ; a interests, Unless any illegality is committed -

in the execution of the policy or the same is nO contrary to law or male fis ide. a. decision | so bringing about change cannot pers se pe. :

interfered with by the cout |

93. Wisdom and adviscbiity of economic policies are ordinarily not amenable to judicial review uniess it can he demonstrated that the policy i is contrary to any statutory Provision. or the ¢ Constitution. . in other words, it is not for the courts" te 'omsider relative merits of different economic policies and consider whether a wiser or hetter one can be evolved.

- For testing the correctness of a policy, the _ appropriate forum is Parliament and not the = .. courts Here the policy was tested and the motion defeated in the Lok Sabha on ]-3- ~~ 2001- os ° : fix}. The learned Senior Counsel has also relied on the : judgment of the Apex Court in the case of STATE OF W.B. v. AESORAM INDUSTRIES LIMITED, H. 2h reported in (2004) 10 SCC 201. Oe ee '32. The above stated _ - ae principles. The Legislations in ihe filed of ; taxation and economic activities need special consideration and are to be" mewed with larger flexibility in approceh: Observations of the Constitution Bench in PR Kx Gar, gu Union of India. are apposite, wherein this Court has emphasised a greater latitude ~ lke play in the joints - being, allowed fo the legislature because it has to deal with complex prohlems which do not admit of solution through any 7 doctrinaire or straitjacket formulas In this | : field the court should feel more inclined to os give judicial deference to legislative judgment Their Li ordships quoted with approval the following statement of Frankfurter. J in Morey vw. Doud:

"hi the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legisiature after all has the affirmative responsibility. The courts have only the power to destroy, not AGH 22 to reconstruct. When these are added to. ~ the complexity of economic Regulation, the uncertainty, the liability. to error, the a bewildering conflict of the experts, and the | number of times the judges: have been a overruled by events -- self-limitation can be seen to be the path to judicial wisdom and"

institutional prestige and stability." Ther Lordships further observed that the courts ought to adopt a prez gmatic approach m solving problems ~ rather . than. measuring the propositions ty oy abst; ract Ss] ym etry The exact wisdoin ani y nice adaptations of remedies may not be possible Even cnitiities and inequities have to be accommodated in complicated tax and economic legislations,"

| (x}. 7 Nextly 7 Ke brine! to my notice the Hon'ble Supreme _ 7 Court? ¢ judgment i in the case of JAYANT ACHYUT "SATHE v v. JOSEPH BAIN D'SOUZE AND ORS,

- reported in (2008) 13 SCC 547, wherein the __ scope of judicial review in matters of policy was "considered following the earlier judgments of the Apex Court. The relevant paragraphs are extracted hereinbelow:

AGH 23 "36. In State of MP. v Nandlal Jaiswat the a change of the policy decision taken by the | State of Madhya Pradesh io grant licence for Se construction of distilleries for manufacture .

and supply of country liquor to. exis ting :

contractors was challenged. Deating with the power of the Court m sonsidering the vatidity of policy decision relating. to economic matters, it was. ohserved at PP. 605-06 as follows: (SCC > para 34) *e 24 Rut" while considering the . applicability to) Arnde.14 in such a _ case, we must bear in mind that, . having regard to the nature of the 'trade or business, the Court would be slow to mterfere with the policy laid down by the State Government for grant of licences for manufacture and sale of liquor. The Court would, in view of the inherently pernicious nature of the commodity allow a large measure of latitude to the Stute _ Government in determining its policy _ of regulating, manufacture and trade in liquor. Moreover, the grant of licences for manufacture and sale of liquor would essentially be a matter of economic policy where the Court would hesitate to intervene and strike down what the State Government has done, unless itt appears to be plainly arbitrary, ALZH irrational or mala fide. We had. occasion to consider the scope of. inferference by the Court vnder s, Article 14 while dealing Wu lates relating in economic activities: fn Ke Garg v. Union of india. We-pointed -- out in that case that t RUS releatt ing too economic activities sinouid be viewed with greater latitude. thon lois touching civil rights such as jreedom of speech, reli gion, ete We ohserved ai the = iegisiature showid. ~ be allowed . sore ping "fen the. joints because it hes fo deai with complex prob emis. aphich > do pot admit of sciution througn ant daocitrinaywe or strag jecket formula - and this is particulariy ire UL cuse of iegislation deditng- . IH th 7 economic motters, "where, hosing regard to the nature of the problems required to be dealt with, greater play ot the joinis has to _ be allots srfocte the legislature We Guated with approval the following _ddmorition given by fronkfurter J in morey vu. Doud."

"#38 To the same effect are the 7 observations of this Court in Peerless General Finance and Investment Co. Lid. » Reserve Bank of India in which Kastival, J observed at p 375 as follows: (SCC para 31) "31. The function of the Court is to see that tawfui authority is not 25 abused but not to appropriate to. tseif the task entrusted to that authority, Ht is well settled that a. public body invested with siatutory 9 powers must take care not to-exceed or abuse tts power. It must keep within the limits of. the -- authority committed to it. It mest act a: good - faith and it. must act. reasonably. Courts are mot to wiierfere with economic policy which is the function of experts. It is not the function of the courts to sit-in judgment over matiers:.of economic policy and it must neces ssarily he left to the expert bedies.: in such matters even experts ean serously and doubilessly differ

-- Courts cannot be expected to decide them without. even the aid of experts" oe oe (xi) He submits. that the decision of the Hon'ble

- . ». Supreme Court in the case of UNION OF INDIA v.

os HINDUSTAN DEVELOPMENT CORPORATION, | reported in {1993) 3 SCC 499, is all for judicial * restraint, self-lmitation is a path of judicial wisdom, institutional prestige and stability.

(xii) Relying on the Hon'ble Supreme Court's decision in the case of SHRI SO ND LALSI v. STATE OF T3H oe ae £0 RAJASTHAN AND OTHERS, reporied . in Ain 19623 SC 14638, he submits, ; that ; 'ig two] constructions of a legislative provision "are, possible, fhe constriction which cuptionts its validity has to be adopted The relevant portion of the said judgment is extracted herembelow:

"AQ 7 if the impugned provisions of the stotute are ~reasonnbly. capable of a . construction. which - does not impolve the ' infringenveni of amy fundamental rights, that construction. must he referred though if mey reasonabliy he" possible fo adopt another "construction which leads to the infringement of the seid Findamental rights. If the impugned provisions are reasonably not capable of the construction which would have its validity, that of curse 1s nother matter, but fF two constructions cre reasonably possible, then it is necessary that the Courts should adopt that construction which upholds the validity of the Act rather than the one which affects its validity... ° AIH {xii} Sri Holla contends that the preference giver. te -- consumers co-operative societies OVeT the retail | - dealers in the matter of running the fair price. ; shops is held to be not violative of Art ile 14 aud 19 Constitution of India. in support of this submission, he has rehed ona _jidement of the Hon'ble Supreme : Co o in : the case of MP, RATION VIERETA SANGH "SOCIETY AND OTHERS. ETC, v, STATE OF MADHYA PRADESH AND OTHERS, reported in AIR 1981 SC 2001.

: ; {xiv} "He submits ~ that before making the Bes recommendations for the take-over regulations, _Bhagawati Committee has made conrparative study and assessment of the prevailing pattern in as many as 14 countries. Noticing the same, the Hon'ble Supreme Court has this is say in its judgment im the case of TECHNIP ARH.

SA v. SMS HOLDING (P) LTD. AND OTHERS, reported in {2005) 5 SCC 465:

"32. The Bhagwati Committee Report on | Takeovers (1997) which was. prepared. after. examining the principles. and practices and the regulatory fromework governing takeovers in as many as fourteen countries noted that while the vractice- and proce dures vary from country Sa country, 'the princt inles and the concems.. cardinal among which are equality of opportunity io all shareholders, protection of minority interests, - transparency and faimess, heve 'remained more or less | common, The aim of French law like Indian my law is to ensure that all parties to a public

-- tender offer respect to the principles of . shar renoider equality, market transparency : 7 and | integrity, far trading and fair | competition. All this is culled from the ;

opinions of the experts relied upon by all the 'parties. Under Section 45 of the Evidence Act, 1872, the Court can take the admitted position into consideration in order to form an opinion as to the text of the relevant French ABH, 29 law. /See De Beeche v. South Americar. 5tores. _ (Garth and Chaves) Ltd. and Chiliare Stores: (Garth and Chaves) Ltd ] . | :

The impugned Regulations care made . only 'to protect the interests ~ of . the - shareholders, particularly the small shai rehoiders, They place an obligation on a tthe girer of the controlling interest toe off fer. a fair price 'for the shares, which the shat eolders 'may. 'pat with in compliance with the stanitory obligations To buttress ¢his subinissions, he cited the judgment in the case of GL, SULTANIA AND ANOTHER V. SECURITIES AND. EXCHANGE BOARD OF INDIA AND

- OTHERS, reported in (2007) 3 SCC 133. The oy elevant paragraph of the said judgment is

- extracted hereinbelow:

"25, # cannot be denied that the Board under the Act is a_ regulatory authority charged with the duty to protect the interest of investors in securities and to promote the development of, and to regulate the securities 7 market, by such measures as it thinks fit.

The Takeover Regulations have heen Framed --

with a view to provide - transparency i transfers arising out of substantial acquisition : of shares and takeovers. | The object is to bring about fairness in such trensactions as also to protect the interests of the. in vestors in securities, In fhe Tokeover Code there are provisions. whieh are inter ded to protect the mierests of small shareholders so that in any substantial acquisition of shares they get a fair price for the shares transferred hy them. The. entire scheme designed for this purpose, : including the making of a public offer as also a counter-offer, ts to protect the interests of the: investors, particularly the smaller ones whe rune the risk of getting an unfair deal in such transactions Ultimately, the entire exercise is undertaken under the regulatory eye of the Board with a view to ensure fairness to the shareholders of the company, Therefore, when a public offer made under the Takeover Code is challenged on the ground that the shares | 4 not been properly 3h valued and the price offered in the public offer - - document does not represent the four price 'of 6 the share in question, the court must examine : - whether the provisions of the 7 rokeover c Tole _ have been scrupulously observed, and : whether the Board as the regu latory cuthority has exercised its authority and discretion ina proper manner so as. toe ensu? re ferirne SS to the shareholiiers At the: SAME. timer one cannot lose sight of the fact thata public offer made by a person intending to acquire substantial shares in a company isa commercial venture of acquisition of shares, but the law steps in obliging him. to offer a fair price for the shares J which the shareholders may part with in ; response to the statutory public offer."

(xvi) Sri. Holla submits that the word 'Promoter' as defined in 2(h) of 1997 Regulations offend none.

"This definition does not put anybody to any prejudice. If the petitioner's contentions are accepted, it leads to the tinkering of the 1997 AGH, 32 Regulations, meaning there would -be oniy be.

restrictions but no exemptions.

13. Sri Prashanth Kumar, the. learned counsel.

appearing for the second respondent SEBI submits as follows:

6G) Relying on Section 62(6) of the Companies Act, Section 11 of the SEBI Act, he submitted that the Promoter = Directors have to perform different obligations,

(ii) He contended that a promoter holds a fiduciary | position: "He has reed on a judgment of the . Andhra Pradesh High Court in the case of VALI

- _ PATTABHIRAMA RAO AND ANOTHER vy. SRI

- 7 | RAMANUJA GINNING AND RICE FACTORY P. iTp., AND OTHERS reported in COMPANY "CASES VOL.60 1986 PAGE 568. 'The relevant portion of the said judgment is extracted hereinbelow:

ABH.

The word 'promoter' is not defined hy the Oe Companies Act, 1956 (1 of 195 56) or by | its predecessor Act VI of 1973. tis seid © that it is not a term of 'law but of. business The eurliest definition given m ; Phosphate Sewage &. | -Harimouni {1876} 5 Ch D 394, as. a person who as principal procures oF cids in procuring the incorparation of a company, was genercilly "accepted as the correct definition which - was subsequently : approved by. the House of Lords in Official Receiver and Liquidator of Jubilee Cotton Mills itd v Lewis [1924] AC ssatetL). .

, - A person although is not a director may bes 6 @ promoter of a company. The

- promoter stands in a fiduciary position , . towards the company and his position was defined so in Emile Erlanger v. New Sombrero Phosphate Co. [1877-78] 3 AC 1218 {HL} by the House of Lords.

Hatsbury's Laws of England, fourth edition, paragraph 38, states:

AGH

(iii) "A promoter stands in a fiducia ia ary ve pesition with respect to the company | which he promotes from the time. wien . a he first becomes until he ceases to be an promoter thereof! hut his relation fo the :

company is not 'that of trustee 'na beneficiary: or agent and principai*. He has also relied pon the judgment of the Hon'ble ~ Suipren reme | © Court in the case of GOPI CHAND 1 vw DELHI ADMINISTRATION, reported in AIR 1989 SUPREME COURT 609 to canvass the point that 'the intelligible differentia and the _Teasonable. classification based thereon is not : violative of Article 14 of the Constitution of India.

: Para 19. of the said judgment is extracted oe her einbe slow:

"10. The point about the construction of Art. 14 has come before this Court on numerous occasions, and it has been consistently held that Art.14 does not forbid reasonable classifications for the 35 purpose of legislation. In order that any oo classification made by the Legislature can | he held to he permissible or legitimate hwo Qo tests have to be satisfied -- ~The so | classification must" be hased on. an ; intelligible differentia which distinguishes Persons or things grouped together in one class from others left out of. it, and the differentia must have a reasonable or rationat NEXUS. with the oh bject sought to be ae chieved hy tf the said impugned provision. His true that, in the application of these ~ tests uniform. approach might not always have heen adopted or, in dealing with the relevant 'consideration emphasis might

- ~ have shifted: but the validity of the two tests , that have to he applied in | determining the vires of the impugned statute under Art. 14 cannot be doubted."

- a : (vj. Sri Prashanth Kumar submits that the laws : relating to economic activities should be viewed with greater latitude than the Jaws touching the freedom of speech, religion, etc. In support of his AGH submissions, he has relied on the indent of the :

Hon'ble Supreme Court in the cas ve of R. K. ARG v. UNION OF INDIA, reported m 'AIR 1984 sc 2138. The relevant por tion of the said 1 judgment ; | is extracted hereinbelow: _

8. Another rule of equal: importance is that leonws relating to economic: actiuities should be viewed with _ greater. latitude than laws touching civit rights such as freedom of | | speech, religion. ete, Tt has heen said by no * less a person" than Holmes J, that the legistature shouid be allowed some play in the joints, because it has to deal with complex | ; "problems _ which do not admit of solution

-- ; through any doctrinire or straight jacket formula and this is particularly true in case of

- legislation dealing with economic matters, where having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The Court should feel more inclined to give judicial deference to legislature judgment in the field of economic QIBH 37 Regulation than in other areas' where... fundamental human rights are invoived om Nowhere has this admonition been more , felicitousty expressed than. ite Morey v Dowd, a (1957) 354 US 45707 {v) The learned wnat ten that it is not advisable to exercise the power of Judicial review in matters of economic policy, asically because the cont de not have, the experience e, equipment and. expertise in 'the an ater. For canvassing this proposition, he relied om the judgment of the Hort' ble Supreme 'Court in the case SHRI | & SITARAM SUGAR CO, LTD. v. UNION OF INDIA, ma - reported in (1990) 3 SCC 223. In the said case, it 4g held that the judicial decisions are made . according to law, while administrative decisions "emanate from administrative policy.

(vi) When an economic matter does not suffer from the vice of perversity or gross error, this Court's AGH, interference may not he warranted. In this repard, (vii} The learned counsel subroits that the petitioner had also filed a cenplaint with the second respondent Board and thar the issues he has raised therein are negatived by it.

(wiht) The petitiones jas challenged some provisions of 1997 Regulations, » The said Regulations are "replared_ by | the new Regulations of 2002 and : _thereatter- of 2006. As 1997 Regulations are no more on the statute, the question of examining their validity does not arise at all.

"fi "He has also relied on a judgment of the Hon'ble Supreme Court in the case of PRAG ICE & OIL MILLS v. UNION OF INDIA, reported in AIR 1978 ABH 39 SC 1296. The relevant paragraph 'of the said | judgment is extracted hereinhelow:

"93. We have listened to iong arguments _ directed at showing WS that producers and : sellers of ot in various parts of the country unl suffer so" that they. would give up producing or dealing in musterd oil was urged. that this would, quite naturally, hee its repercussions on 'consumers for whom snusten rd oil will hecome even more . | scarce than ever ultimately. We do not think thet it is the function of this Court or ofa any Court 10 sit in Judgment over such matters: of economic policy as must 7 - necessarily be lef? to the Gout of the day to . decide. Many of them, as a measure of | price: "fixation must necessanly he are matters of prediction of ultimate results on . "which even experts can seriously err and doubtless differ Courts can certainly not be expected to decide them without even the aid of experts."

AEH.

14 fi} Sri GS Bhat, the learned counsia "for the respondent Nos.6 and & takes exception to the petitioner addressing the arguments, as if it is. 4 pubke interest litigation or a representative snit, As the petitioner has no stakes whatsoever, as none of his. Sights are infringed, he cannot maintain these petitions, He contends that the formulation and eet the policy are to be left to the Governmeni. So long as the. policy decisions do not infringe the. fundamental rights, the Courts carmot interfere and substitute their wisdom for the wisdom of Government.

(i) r Relying on the Home Supreme Court's judgment | in the case of M/S. SIEL AND OTHERS v. UNION ; ~ OF INDIA AND OTHERS reported in AIR 1998 SC BS 3078, he contended that the State should have niore latitude in formulating the economic policy "as well as appropriate legislation in comparison to legislation relating to the fundamental rights. ABH, (447) 4] He relied on para 12 of the Apex Court' S <jgment i in the case of FEDERATION OF RAILWAY OFFICERS ASSOCIATION AND 'OTHERS: ow, UNION OF INDIA, reported (2008; 4 sec 289, | which reads as follows: -

'12 In examining a question of this nature where ep eltey is enolved by the. Crovernment Judicial » revi) thereof i is lim ited, When policy according fe which. or the purpose for which discretion as. te pe exercised is clearly expressed m the statute, it cannot be seid to he an. unrestricted: discretion, On matters 7 Secting policy and requiring technical

- oe pert @ the court would leave the matter for 7 decision of those who are qualified to address = | 'the issues Unless the policy or action is : inconsistent with the Constitution and the laws or arbitrary or irrational or abuse of _ power, the court will not interfere with such matters.

The learned counsel also brought to my notice the Hon'ble Supreme Court's decision in the case of 42 STATE OF ORISSA AND OTHERS v. GOPINATH! DASH AND OTHERS, reported in AIR 2006 sc

651. The relevant paragr aph of ihe sai 1 judgment is extracted her Finbelow:

"7 The policy-decision mist be left to the Government as it. alone | con cedor pt which policy should he: adopted after cone sidering all the points | from. at erent angles In matter of policy-decisions + or exercise of discretion by the Gove Trment sO tong as the infringement of fundameniat right ts not shown Courts will have no ocrasion to 'interfere and the Court unl not. and should not substitute its own 7 : jucigment for tre Judgment of the executive in

-- such matters, In assessing the propriety of a oO decision of the Government the Court cannot interfere even if a second view is possible from that of the Government."

os "ty Sri Bhat has also relied upon the Apex Court's judgment in the case of STATE OF UTTAR PRADESH AND OTHERS v. CHAUDHARY RAN BEER SINGH AND ANOTHER, reported in (2008) EH ad 43 5 SCC 550, and the Division Bench jnidgment of this Court in the case of KSRTC AND ort _ THE WORKMEN AND ANOTHER reporied .

2904(4) KCCR SN 506 (DB) for conte ding it Courts have to refrain: from inferféting in policy decisions unless, "sneh policy decisions are either arbitrary, unreasonable. ov - violative of other rights guaranteed. by. the Gonstinstion or conferred by ther stanite oT ae activated by malafides. In assessing. the propriety of a decision of the Government the Court cannot interfere even ifa second . view is possible from that of the " Gevernment, , Sri 'Phat also relied wpon the Horvble Supreme | . Court decision in the case of BASIC EDUCATION

- : BOARD, U.P. v. UPENDRA RAI AND OTHERS reported in 2008 (3) scc 432, wherein it is held that the policy decision cannot be interfered with ABH.

44 by the Court unless if violates constitutional or ™ statutory provisions.

15. Sri Pradeep Naik, the learned counsel appearing for the respondent No.7 submits that the respondent Ne 7 has great reputation in the society. As he is neither a proper nor a necessary party for the adjudication. of the points: invalved in these petitions, he prays far the. deletion of the said respondent from.these proceedings.

16. In the course of tis: rejoinder, Sri Agrawal submits that the impugned nrovision encourages the manipulative practices, ©

17. Sri Argawal submits that the judgments relied upon by. the respondents are in different context. In the instant case, there is no challenge to economic policy as such. The e ~. issue raised here is neither complex nor technical. It is an issue: of simple violation of the fundamental rights. The jinpugned provisions giving benefit to the promoter directors deserve to be quashed in the interest of small shareholders. AS consideration of the impugned 1997 Regulations. But | do not propose to dismiss these petitions as having become unnecessary or infructuous, because long arguments are addressed; and they require reasoned carisideration.

19. Jtis also not ienown as to why the petitioner did not choose to file the objections to tine recommendations made by the Bhagawafti Committee. H owever the petitioner cannot be estopped - feom challenging the said recommendations, if the tenable grounds otherwise exist.

20. .As held by the Hon'ble Supreme Court in Baleo "ease (supra) it is not for the Courts to embark on evaluative comparison of diferent regimes and policies prevailing in OR different countries. The Bhagawati Committee itself is said to " "have made comparative study and assessment of regimes ABH.

prevailing in as many as 14 countries. The reference to the same can be found in the case of Technip Sa (supra). . a

21. The Court's interference is not. warranted: on the grommd that a better policy could have | been - evolved. Similarly, in State of W.B. cese (supraj, the Five Judges Bench of the Hon'bie_ Supreme Cont has held that the Court should feel more inclined to give judicial deference to legislative judgment a the | Geld of taxation and economic activities, 'inthe "case: of State of M.P. (supra) it is observed that the legislature should be allowed some play m. the joints; it is fot the function of the Court to sit in judgments _ over matters of economic policies; and they : must necessarily be left to the expert bodies. When the ~ experts : seriously differ amongst themselves on a "conventions issue, the question of the Courts substituting their views for the views of the legislature or of expert ~. . bodies does not arise at all.

ALBH.

27. There are no statutory provisions, regulations. or rules prescribing the pre-requirements that an individual, who is tipped to be the member of the Com: mittee. appointed - fo make the recommendations for SERPs Regnlations shoul d not have ary personal or pecuniary interest i m the n mattor Or that if he has any such interest, he shou: id disclose his interest before accepting its coin ership. It % certainly desirahle that the legis slatire enacts the law or SER frames the regy Hations i in this regs yard,

28. The scope: for the interfer rence of this Court under Article 29 of Constitution of India is rather limited, but it does . not mean that, the Regulations based on Bhagawati Committoe !seomnetatons are perfect. There could always be 'Se ope for further improvement. However it is not for the Courts: bat it is for the legislature or for the expert beady ws 'ce nstituted vmnder the legislation to evolve and frame better * Regia lations. Whether something more and better has to be ARH done to safeguard the interests of small shareholders 1 has, to. be decided by the concerned forums.

29. No violation of any particular provision. of law is. pointed out to show that the composition. ¢ of the C ommmitter:

was bad or that the proceedings. of the Committee were bad. That the Committee should have. been better based by exchidine some and inchiding. some individuals is again for the decision-makers to take note of. .

30, For ani a ye _abresaid reasons, I decline to strike down the impugned 1997 Regulations, notwithstanding the brilliant exguments advanced by the party-m-person, Sri Arm » Kumar Agrawal As a shareholder, he is a stakeholder . too in the system. He seems to be having valuable ideas and vision for evolving an ideal regime. It is desirable that he subinits to the SEBI the list of amendments to the _ Regulations. If he does so, it is for the SEBI to take note of ~. the same in accordance with law. It is made clear that this is only an observation and not a direction as such. Judiciary ABH.

will not issne a mandamus to the SERI in this re regulation-making is only an extens flinction,

31. These writ petitions are | dispesed of accordingly, No order as to costs. te

-- Sd/s bvr

Unlock Advanced Research with PRISMAI

Karnataka High Court