CASE SUMMARY: LIC v. ESCORTS LTD. (1986)

1. Case Title: Life Insurance Corporation of India v. Escorts Ltd. & Others
2. Citation: (1986) 1 SCC 264; AIR 1986 SC 1370
3. Court: Supreme Court of India
4. Bench: P.N. Bhagwati (CJI), R.S. Pathak, A.N. Sen, E.S. Venkataramiah, and D.P. Madon, JJ.
5. Date of Judgment: 19 December 1985

Relevant Statutes / Key Provisions

Companies Act, 1956:

• Section 111 – Gives a company an option to decline registration of transfer of shares in case of certain circumstances, mainly to restrain illegal or unwanted transfer.
• Section 169 – Reserves to shareholders possessing not less than one-tenth of the paid up capital, a statutory right to requisition an Extraordinary General Meeting (EGM) of the company to deliberate on specific issues.
• Section 173 – The notices of company meetings should clearly mention the agenda and where applicable, an explanatory statement about special business.
• Section 284 – Gives shareholders the right to appoint a director to be removed prior to the expiration of his or her period of office, by the voting of an ordinary resolution, with the procedural protection specified in the act.
• Sections 397 & 398 – Created remedies to allegations of oppression and mismanagement within companies, authorizing the court to intervene when company matters are carried on in a manner that is adverse to the members, or the public interest.

Foreign Exchange Regulation Act (FERA), 1973:

• Section 19(1) (a) – Prevents transfer or issue of security to a person in India outside without the prior permission of the Reserve Bank of India (RBI).
• Section 29(1) (b) – Prohibits non-residents to establish, or carry on a place of business in India, without the RBI permit.

Indian constitution:

• Article 14 – Ensures equality before the law and equal protection of law.
• Article 19(1) (g) – Enshrines the right to exercise any profession or to follow any trade or occupation or business without any unreasonable restrictions being imposed on it by the government, in the interest of the general population.

Brief Facts

Escorts Ltd., an Indian Public Limited Company, dealing with the manufacturing of tractors, agricultural machinery, and engineering products is one of the subjects where the interest of foreign investors was seen in the early 1980s. Thirteen foreign firms sought the Reserve Bank of India to grant permission under Sections 19(1) (a) and 29(1) (b) of FERA in acquiring shares in Escorts Ltd. All these provisions required prior approval of the RBI to both acquisition of shares by non-residents and setting up a business presence in India.

These foreign companies were given the permission by the RBI after looking at the applications. The aggregate takeover of the thirteen foreign entities totaled to about 13 percent of Escorts Ltd. equity capital. All such acquisitions were made according to RBI approvals and share transfers were registered.

The Life Insurance Corporation of India (LIC), a statutory corporation fully owned by the Government of India, had a large stake in Escorts Ltd. LIC had called through a requisition notice under Section 169 of Companies Act an Extraordinary General Meeting (EGM) of the shareholders. The EGM was convened with an aim of removing some directors of the board of Escorts Ltd. before the expiry of their term and having new directors filled in their place under Section 284 of the Companies Act.

The management of Escorts Ltd. was against the requisition as it claimed that the process of acquiring shares by the foreign firms amounted to violation of FERA. It also argued that the requisition by LIC was politically instigated and was done under the direction of the Union Government, with the ulterior motive of changing the composition of the board of the company, to replace the board with directors who are amiable to the government policies.

The firm approached the Delhi High court in an attempt to prevent LIC taking action on its requisition and also to question the legality of the acquisitions of its foreign shares. The Delhi High Court rejected the petition on the basis that LIC’s action was not outside its statutory right. Escorts Ltd. went to the Supreme Court in appeal.

Issues Involved

• Whether the purchase of shares by the thirteen foreign companies was valid under the provisions of the FERA and otherwise and what the consequence of this would be to the rights related to those shares?
• Whether LIC, as a government owned corporation, could exercise its statutory right under Section 169 of the Companies Act to requisition an EGM and whether such action could be quashed on the ground of motive?
• Whether the court has jurisdiction to investigate and determine the reasons of requisitionists of a shareholders’ EGM when they follow the legal formalities of requisitioning an EGM?
• Whether the proposed removal of directors of Escorts Ltd. under Section 284 of the Companies Act was legal as there was allegation of political influence and ulterior purpose?

Arguments

Arguments of Petitioner (Escorts Ltd.):

• The purchase of shares by the thirteen foreign companies violated Section 19(1)1(a) and 29(1)1(b) of FERA because the approvals of RBI had apparently been granted inappropriately and without adhering to statutory safeguards in a whole hearted manner.
• The foreign shareholders were not allowed to exercise their rights in shareholding such as voting rights because the acquisitions had been made illegally.
• The required nature of the EGM that is sought by LIC is not an independent corporate decision but a move that has come up under direct instructions of the Union Government and amounts to undue political interference to the internal affairs of the company.
• The purpose of the requisition was to oust the current directors who had been close to the current management and bring up those who would behave in conformity to government policies.
• These interferences in the running of a company which belonged to the private sector breached the fundamental rights of the company and its management under Articles 14 and 19(1) (g) of the Constitution.

Arguments of Respondents (LIC and Union of India):

• The acquisition of shares by the foreign companies were done through valid RBI permission in strict adherence to the provisions of the sections 19(1) (a) and 29(1) (b) of FERA. The approvals had no allegation to indicate a form of illegality.
• Under Section 169 of Companies Act there is an unconditional statutory right to requisition of an EGM by shareholders who collectively hold not less than one-tenth of the paid-up share capital. The shareholder has this right regardless of the motives.
• Even in case LIC had obeyed the directions of the Union Government, it would not have any bearing on its entitlement as a shareholder to requisition a meeting.
• Section 284 of the Companies Act gives shareholders a right to oust directors through an ordinary resolution prior to the expiry of the director’s term as long as the procedure is adhered to in the act. This is fundamental in shareholder supremacy/corporate democracy in governance issues.
• Motive is altogether immaterial in the exercise of statutory rights unless the act done is contrary to some legal enactment.

Judgment

In its appeal, the Supreme Court dismissed the case, leaving LIC requisition intact and the legitimacy of the foreign investments. It ruled:

• The approval granted by the RBI under Section 19(1)(a) and 29(1) (b) of FERA was within the bounds of law and once a statutory approval is granted, it cannot be questioned on vague allegations of illegality or ultra vires and without any concrete evidence.
• The right to requisition an EGM under section 169 of the Companies Act is a statutory right of any shareholder having the appropriate stipulated threshold. The law does not demand the shareholder to provide reasons or motives nor does the law allow the reasons or motives to be scrutinized by the court as long as the law is met.
• The fact that LIC is a government-owned corporation does not impair a shareholder status; it is at the same position as any other member of the company when it comes to exercising statutory powers under the Companies Act.
• In Section 284, shareholders are granted with the power to remove directors at any time prior to the end of their term of office through a simple majority resolution. The shareholders may not exercise this right on the basis of their motives but only when the statutory procedure has been complied with.
• The corporate democracy principle obligates shareholders to have a final say in determining who sits in the board, and directors to serve on a basis of subject to the will of a majority of the shareholders expressed through regular legal methods.

Ratio Decidendi

The rights of shareholders granted under Sections 169 and 284 of the Companies Act, are vested irrespective of the motives of the holder: within the limits set by the statute, they cannot be diminished by the inquisition of a court of law. RBI approval under FERA to foreign share is conclusive and not reviewable unless it proves to be unlawful or contrary to its powers.

Obiter Dicta

Political misuse of the shareholder power is not a desirable aspect in corporate governance but the exercise of the statutory rights under the Companies Act cannot be denied or restricted by the court on the basis of suspicion, or on the basis of perceived motives. The judiciary is not there to determine the wisdom or intention of actions taken under a statute, but to determine whether it was done in compliance with the statute.

Final Decision

The case in Escorts Ltd. was rejected. The extraordinary general meeting requisition organized by LIC was found to be valid and the acquisition of foreign shares was stated to be legal.