Corporate Law Case Brief – LIC of India v. Escorts Ltd.

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FACTS

With an intention to earn foreign exchange by attracting non-resident individuals of Indian nationality or origin to invest in shares of Indian companies, the Government of India decided to provide incentives to such individuals with prior permission of 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, twelve out of whose shares was owned 100% and the thirteenth out of whose shares was owned 98 per cent by Caparo Group Ltd., designated the Punjab National Bank as their banker (authorised dealer) and M/s. Raja Ram Bhasin & Co. as their broker for the purpose of such investment.

Escorts Ltd. sought detailed information from Punjab National Bank and the brokers about the names of investors and also whether the Reserve Bank of India has given permission to them. And Escorts didn’t register the transfer of share.

Life Insurance Corporation of India 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 extra ordinary general meeting for the purpose of removing nine of the part-time Directors of the company and for nominating nine others in their place.

Union of India, the Reserve Bank of India and the Caparo Group Ltd. claimed that the requisition to hold the meeting was arbitrary, illegal, ultra vires etc.

ISSUE-

Whether LIC has right of issuing requisition notice to hold extra ordinary general meeting?

 HELD-

  1. New directors to continue as Managing Directors until the Board of Directors take a decision in the matter.
  2. The action of the Life Insurance Corporation of India in issuing the requisition notice to hold an extra ordinary 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 Life Insurance Corporation under section 6 of the Life Insurance Corporation of India Act.
  3. The holders of the majority of the stock of a Corporation have the power to appoint, by election, Directors of their choice and the power to regulate them by a resolution for their removal. This is the essence of corporate democracy.
  4. Every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements to call an extra ordinary general meeting in accordance with the provisions of the Companies Act, 1956. He cannot be restrained from calling a meeting and he is not bound to disclose the 918 reasons for the resolution proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review.
  5. When a requisition is made by a shareholder calling for a general meeting of the company under the provisions of the companies Act validly to remove a director and appoint another, an injunction cannot be granted by the Court to restrain the holding of a general meeting.
  6. 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 state its reasons when it seeks to change the management by a resolution of the company, like any other shareholder.
  7. The rights of a share holder 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.
  8. The Reserve Bank of India alone that has to decide whether permission may or may not be granted. The Act makes it its exclusive privilege and function. No other authority is vested with any power nor may it assume to itself the power to decide the question whether permission may or may not be granted or whether it ought or ought not to have been granted. The question may not be permitted to be raised either directly or collaterally before any Court. The Reserve Bank of India was not guilty of any malafides in granting permission to the Caparo Group of companies. Nor was it guilty of non-application of mind.
  9. There was a total and signal failure on the part of Punjab National Bank in the discharge of their duties as authorised dealers.

Court asked RBI to look into matter and gave them power to take actions against Punjab National Bank as they think are necessary.

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