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Director-general of Vs. Deepak Fertilizers and - Court Judgment

LegalCrystal Citation
CourtMonopolies and Restrictive Trade Practices Commission MRTPC
Decided On
Judge
Reported in(1994)81CompCas341NULL
AppellantDirector-general of
RespondentDeepak Fertilizers and
Excerpt:
1. this full bench was constituted to determine certain preliminary objections raised in each of these enquiries and the compensation application. as the preliminary objections raised are identical, we are disposing of the same by means of this order. the enquiries and the compensation application were concerned with public issues of debentures offered by the various respondents upon certain terms and promises. these issues were assailed on the ground that the respondent companies had in the prospectus for raising capital through the issue of debentures made false and misleading claims. the respondents are hence liable to be proceeded against under section 36a of the monopolies and restrictive trade practices act, they having indulged in unfair trade practices. each of the respondents.....
Judgment:
1. This Full Bench was constituted to determine certain preliminary objections raised in each of these enquiries and the compensation application. As the preliminary objections raised are identical, we are disposing of the same by means of this order. The enquiries and the compensation application were concerned with public issues of debentures offered by the various respondents upon certain terms and promises. These issues were assailed on the ground that the respondent companies had in the prospectus for raising capital through the issue of debentures made false and misleading claims. The respondents are hence liable to be proceeded against under Section 36A of the Monopolies and Restrictive Trade Practices Act, they having indulged in unfair trade practices. Each of the respondents appeared in response to the notices issued by the Commission and raised an objection questioning the jurisdiction of the Commission to deal with the subject-matter on diverse grounds which will be elaborated in the discussion that follows.

2. The Benches before which these matters came up for consideration felt that haying regard to the importance of the preliminary issue as to the jurisdiction of the Commission, it would be appropriate that the same be considered and decided by a larger Bench as a preliminary issue. It was also observed by the then chairman Mr. Justice G. R.Luthra, that while considering these issues the pronouncements of the Full Bench of this Commission in Consumer Education and Research Centre v. T. T. K. Pharma Ltd. [1990] 68 Comp Cas 89 and of the Division Bench comprising Shri D. C. Aggarwal and Shri H. C. Gupta in J. P. Shartna v.Reliance Petrochemicals Ltd. 3. From a perusal of the referring orders passed by the various Benches, particularly from the order dated February 3, 1989, passed by the learned chairman disposing of I. A. No. 6 of 1989 in UTPE No. 4 of 1989 in Deepak Fertilizers and Petrochemicals Corporation Ltd., In re and from an analysis of the preliminary objections raised by the respondents in their replies it seems to us that three issues arise for our consideration and these are: 1(a) Whether having regard to the true legal nature and characteristics of debentures, the same could be considered as "goods" within the meaning of Section 2(e) of the Monopolies and Restrictive Trade Practices Act, 1969, even before they are allotted to the debenture holder (b) Whether it makes any difference to the answer to the foregoing question, if the debentures offered by the company are compulsorily or optionally convertible into equity shares 2. Assuming the debentures are even prior to their allotment "goods", whether any trade practice is involved where the company simply invites applications for allotment of debenture for the purpose of raising capital for its trade or business 3. Whether the company provides or makes available any service to the prospective investors where it simply issues debentures and invites applications therefor within the meaning of Section 2(r) of the Monopolies and Restrictive Trade Practices Act.

4. We will first have a look at the relevant statutory provisions as they stood prior to their amendment by the Monopolies and Restrictive Trade Practices (Amendment) Act, 1991, which came into effect and was inserted on September 27, 1991, the unamended Section 2(e) provides : " 'goods' includes goods produced in India, and, in relation to any goods, supplied, distributed or controlled in India, also includes goods imported into India ;" "(s) 'trade' means any trade, business, industry, profession or occupation relating to the production, supply, distribution, or control of goods and includes the provision of any services ; " The term "trade practice" has been defined under Section 2(u) and means: "any practice relating to the carrying on of any trade, and includes- (i) anything done by any person which controls or affects the price charged by, or the method of trading of, any trader or any class of traders, (ii) a single or isolated action of any person in relation to any trade." "service which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, chit fund, real estate, transport, process, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service." "words and expressions used but not defined in this Act and defined in the Companies Act, 1956 (1 of 1956), have the meanings respectively assigned to them in that Act." 5. Clause (y) holds a clue when a question arises as to what meaning should be assigned to words and expressions used in the Monopolies and Restrictive Trade Practices Act but not defined therein. The legislative intent seems to be that where words and expressions used are not defined in the present Act, that meaning should be assigned to those words and expressions as has found acceptance in corporate law.

That seems to be the scheme of the Act in regard to the construction of words and phrases not defined in the Monopolies and Restrictive Trade Practices Act but used in the Companies Act, 1956.

6. Debentures have not been defined in the Monopolies and Restrictive Trade Practices Act. However, "goods" have been. We will, therefore, have to see whether issue of debentures fall within the ambit of the definition of the term "goods". Shri. M. H. Baig, learned senior counsel who led the arguments for the respondents on this aspect urged that till debentures are allotted and delivered to the debenture holder they are but an instrument of debt or loan whereby the company issuing it merely acknowledges its indebtedness and obligation to repay the debenture holder. In the hands of the debenture holder, however, it would be a movable property which he can deal with either by way of transfer or pledge or otherwise.

7. The submission requires serious consideration and we shall deal with the same at some length in the discussion that follows. Under Section 2(e) of the Monopolies and Restrictive Trade Practices Act the term "goods" bears the same meaning as that laid down in Section 2(7) of the Sale of Goods Act, 1930. Section 2(7) of the Sale of Goods Act defines "goods" as under : " 'goods' means every kind of movable property other than actionable claims and money ; and includes stocks and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale." (i) Whether debentures can be regarded as actionable claims because if they are, they would go out of the purview of definition of goods ; (ii) whether debentures are included within the concept of "stocks" or "shares".

8. The first question, therefore, that arises is whether a debenture is an actionable claim. The term "actionable claims" has not been defined either in the Monopolies and Restrictive Trade Practices Act or even in the Sale of Goods Act. The Transfer of Property Act, however, defines the term under Section 3 thereof and it reads as follows : " 'actionable claim' means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent." 9. Now, we find that there is an overwhelming authority for the proposition that except where debentures are secured by mortgage of immovable property or hypothecation or pledge of movable property they constitute actionable claims and there is complete unanimity on this point among the various authors. Mulla on the Transfer of Property Act (seventh edition) has made the following comments (at page 806) : "Actionable claims.--In English law movable property was said to be either in possession and enjoyment and therefore a chose in possession ; or out of possession, but realizable by action, and therefore a chose in action. A chose in action is in English law a term used to describe "all personal rights of property which can only be claimed or enforced by action and not by physical possession. In Colonial Bank v. Whinney [1885] 2 Ch D 261, the court pointed out that the term was used in different ways to include not only the right to obtain something not in possession or enjoyment but also certain classes of incorporeal personal property. It is also used to denote a document evidencing a right or title.

Accordingly choses in action included debts, benefits of contract, damages for breach of contract or tort, also stock, shares and debentures and even such incorporeal rights as patents, copyrights and trademarks." 10. Analysing the concept and characteristics of debentures Ramaiya on Company Law and Procedures (Twelfth edition) commented at page 29 that a debenture is a chose in action and is in the nature of an actionable claim and as such is subject to equities. "Choses in action" is a term which has its origin in English law and would ordinarily include, debts, benefits of contract, damages for breach or tort, stocks, shares and debentures. This wide definition, however, presented some problems in its application and consequently the Transfer of Property Act was amended by Act 2 of 1900. After the amendment, however, the position is no longer in doubt and it is that a secured mortgage debt is an immovable property and, therefore, it goes out of the purview of actionable claims, except, therefore, where debentures have been secured by a mortgage in respect of specific property, debentures would be covered by the definition df "actionable claim".

11. Going purely by the definition of movable property debentures must be regarded as excluded from the definition of "goods" as it is simply an instrument of acknowledgment of debt by the company whereby it undertakes to repay the amount covered by it and till then it undertakes further to pay interest thereon to the debenture holder. We are fortified here by leading authorities on the subject. In fact the Company Law Committee itself had observed in its report quoted by Ramaiya at page 26 of his commentary as follows : "A debenture means a document which either creates or acknowledges a debt. Ordinarily a debenture constitutes a charge on the undertaking of the company or some part of its property, but there may be debentures without any such charge and under the law, it is not necessary that the debentures should create a charge. We have, therefore, brought the definition of debentures, in line with that contained in the English Companies Act, 1948, which defines 'debentures' as including 'debenture stock' bonds and other securities of a company, whether constituting a charge on the assets of the company or not." 12. Palmer on Company Law has made similar observations in paragraph 44.02, 24th edition. He said that in modern commercial usage, a debenture denotes an instrument issued by the company, normally but not necessarily called on the face of it a debenture, and providing for the payment of a specified sum at a fixed rate with interest thereon.

13. These comments leave no manner of doubt that except where a debenture is secured by mortgage in respect of a specific property, debentures would constitute actionable claims and would, therefore, go outside the purview of the definition of "goods".

14. The next question which falls for consideration is whether debentures would be covered by the extended meaning assigned to the term "goods" under the Monopolies and Restrictive Trade Practices Act, namely, whether they can be comprehended within the words "shares and stocks". This controversy need not detain us as there is ample authority in support of the proposition that shares, stocks and debentures are distinctly different concepts. Section 2(12) of the Companies Act defines debenture as: " 'Debenture' includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not." In Sellar v. Charles Bright and Co. Ltd. [1904] 2 KB 446, 447 (CA), it was observed as follows : "The Judgments Act, 1838 (1 and 2 Vict. c. 110), Section 14, speaks of 'any stock or shares of or in any public company in England.' Debentures are neither 'stock' nor 'shares'. A distinction is drawn between 'debenture stock' and 'shares or stock' of a company by the Companies . Clauses Act, 1863 (26 and 27 Vict. c. 118), Section 23.

The meaning of 'stock' in the section is indicated by its collocation with 'shares' as being something ejusdem generis therewith. If debenture stock would not be within the section, a fortiori debentures are not : see Palmer's Company Precedents,' Eighth edition, Part III, at page 5. Debentures are clearly not shares. They are simply speciality debts due from the company, which may or may not be secured by a charge on the company's assets. A debenture-holder as such is not a member, but a creditor of the company. He has no share in the capital of the company, and his right to payment is not dependent on its profits. He has not, as a shareholder has, a voice in the management of the company's affairs.

In the case of Bodman, In re [1891] 3 Ch 135, it was held by Chitty J. that a bequest of all the testator's shares in a gas company would not pass debenture stock of that company. He said in giving judgment : 'Debenture stock therefore stands in a materially different position from that occupied by proprietary or capital stock of the company: in other words, debenture stock is borrowed money capitalized for purposes of convenience. The words used by this testator aptly and correctly describe his shares in this gas company, and I should be improperly extending the meaning of the word 'shares', if I were to hold that it included debenture stock, which, as I have already explained, is property of a different kind altogether from the ordinary or proprietary stock of a company'." 15. In All About Debentures by Shri T. M. Sen and Shri C. Chandrasekhar the distinction between shares and debentures has been very aptly summarised as follows : (a) Shares--Although shares and debentures belong to the same genre yet they have distinct and different characteristics. The Companies Act, 1956, deals with the issue of debentures in the same manner as it deals with the issue of shares, but the similarity ends with the mode and manner of issue, their allotment, their transferability and in the applicability of forefeiture provisions. The corpus of the two issues forms two different segments of capital--shares representing the share capital and the debentures representing the loan capital. Shareholders are the owners of the company till the company folds up fully while debenture holders are only creditors of the company--sometimes secured and sometimes unsecured and that too for a defined period. The rights of the shareholders and debenture holders are different as also their remedies. To the extent the comparison could bear between the two, the procedures are by and large the same for both in the matter of issue, allotment and transfers and forfeiture. Shares, therefore, are distinct from debentures, although in the usual parlance they are both grouped together in many legislations and referred to sometimes by the generic term of 'scrip'. It is on account of their free transferability and marketability, they are referred together. The stamp duty on share certificates and debenture certificates and on their transfers is totally different and bears no comparison. The incidents of debenture certificates as seen from our discussion above are different from the incidents of share certificates and hence bear no comparison. Therefore, there is no equation between shares and debentures except as referred to above." 16. These comments are in line with the provisions of the Companies Act, 1956, and the commentaries thereon. Section 2(46) states that a share means a share in the share capital of the company. It represents the contribution of a shareholder towards the share capital of the company. A debenture is, on the other hand, an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is only one of the methods of raising capital but basically it is part of the loan capital of the company. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital, it will, therefore, be wrong to equate the two concepts--shares and debentures.

17. Even if it is assumed that debentures are not excluded from the definition of goods, the same cannot be regarded as having come into existence before allotment. We are fortified here by a decision of this Commission in the case of J. P. Sharma v. Reliance Petrochemicals Ltd. [1991] 70 Comp Cas 378. One of the issues which came up for consideration in this case was whether debentures come into existence even prior to their allotment. Relying on the dictum laid down by a Full Bench of this Commission in T. T. K. Pharma Ltd.'s case [1990] 68 Comp Cas 89 (MRTPC) which had ruled that shares are not goods within the meaning of Section 2(e) (as it then stood) of the Monopolies and Restrictive Trade Practices Act as they do not come into existence until allotment, the learned members held that the same principle applied to debentures. This is how the learned members summed up the legal position, at page 387, with regard to debentures : "It may also be mentioned that in the definition of 'goods', as given in Section 2(e), shares and stocks are included as goods but debentures have not been so included, although shares and debentures are the two modes of exploiting the capital market by a company.

Even in the definition of 'goods', as given in Section 2(vii) of the Sale of Goods Act, debentures as such are not included though stocks and shares have been included. Furthermore, Section 36A is to be invoked only in the matter of promoting the sale, use or supply of any goods. In Consumer Education and Research Centre v. T. T. K. Pharma Ltd. [1990] 68 Comp Cas 89 (MRTPC), it has been held by the Full Bench of this Commission that shares before allotment are not goods and that the allotment of shares does not mean distribution, sale and control of goods. In Sri Gopal Jalan and Co. v. Calcutta Stock Exchange Association Ltd. [1963] 33 Comp Cas 862 (SC); AIR 1964 SC 250, it has been held that in company law, 'allotment' means the appropriation out of the previously unappropriated capital of a company, of a certain number of shares to a person. Till such allotment, the shares do not exist as such ; the same has to be the position with respect to debentures too which come into existence only on allotment and, therefore, Section 36A on unfair trade practices, and even the provisions relating to restrictive trade practices cannot be brought into play with respect to the 'allotment' of shares or debentures." 18. The provisions of the Companies Act also support the same view. A debenture is issued to a debenture holder in accordance with Sections 72 and 73 of the Companies Act and thereafter under Section 113 of the Companies Act, 1956, a certificate of debenture is issued. Before a certificate of debenture is issued a charge has to be created and the certificate of registration endorsed on the debenture certificate in accordance with Section 133 of the Companies Act. A debenture certificate in its deliverable state comes into existence only then. It must be remembered that up to the stage of allotment, the money received by the company from the subscribers is merely subscription money and has to be kept in a separate account in accordance with the provisions of the Companies Act. At this stage, the question of selling or trading in the debentures cannot possibly arise. Till the debentures are, therefore, actually allotted, the question of the company having issued debentures as transferable property does not arise as the debentureholder does not have any domain over the debentures. The learned Members were, therefore, perfectly right in holding that debentures before allotment do not come into existence and, therefore, cannot be regarded as "goods".

19. The next question that falls for consideration is whether debentures are included within the concept of "stock". In our opinion, the answer must be emphatically in the negative. "Stock" is the aggregate of fully paid shares, legally consolidated portions of which aggregate may be transferred or split up into fractions of any amount, without regard to the original nominal amount of the shares. This is the true position with regard to the concept of "stock" in relation to shares. Debentures are, however, neither "stock" nor "shares" as held in Sellar v. Charles Bright [1904] 2 KB 446 (CA). A clear distinction has been recognised between "debenture stock" and "share" or "stock" of a company. It was further ruled in Sellar's case [1904] 2 KB 446 (CA) that the meaning of the term "stock" must be gathered from its collocation with shares or debentures as being something ejusdem generis therewith. That means "stock" when used in collocation with the term "shares" must be deemed to refer to "share stock" and when used in association with debentures it has to be understood as referring to "debenture stock". Section 2(e)(ii) merely refers to "shares and stock" and not to "debentures". On the principle of ejusdem generis, therefore, "stock" must necessarily be held to include only "share stock" and not "debenture stock" and there is good authority for the proposition that in circumstances similar to those existing in the present case, the principle of ejusdem generis must apply (see the judgment of the Court of Appeal in the case of Sellar v. Charles Bright [1904] 2 KB 446).

20. Dr. S. R. Khanna, as well as other learned counsel representing the Director-General (Investigation and Registration) and other complainants in this group of cases, however, vehemently contended that the term "stock" should be given a wider meaning than assigned to it under the corporate law. It was urged that we are dealing with the competition law concerned with trade practices both in goods as well as services and, consequently, words and phrases used in the Monopolies and Restrictive Trade Practices Act and not defined therein must be given the meaning as understood in commercial transactions relating to securities of all types including debentures. He also invited our attention to Butterworth 's Dictionary of Economic Terms, fourth edition, as well as some other dictionaries on the subject.

21. We regret our inability to accept the contention in view of a clear indication in the Monopolies and Restrictive Trade Practices Act itself as regards the meanings to be assigned to words and expressions not defined in the Monopolies and Restrictive Trade Practices Act. Section 2(y) of the Act states : ". . . words and expressions used but not defined in this Act and defined in the Companies Act, 1956 (1 of 1956), have the meanings respectively assigned to them in that Act." 22. In relation to words and expressions used in the Companies Act, 1956, therefore, we must go by the meanings and the concepts as have been spelt out by various authorities on corporate law, rather than look to other sources for ascertaining the true meaning of such terms.

The legislative intent seems to be that words not used in the Monopolies and Restrictive Trade Practices Act should receive the meanings assigned to them under the corporate law. That being so, we are entitled to consider the decisions rendered in the context of the Companies Act while ascertaining the implications of the terms such as "stock", "shares" and "debentures", etc.

23. The upshot of the foregoing discussion is that debentures are not "goods" within the meaning of Section 2(e) of the Monopolies and Restrictive Trade Practices Act, as they are, firstly, actionable claims (save when secured by specific mortgage in respect of a particular debenture or debenture holder in which case they will be immovable property), and, therefore, excluded from the meaning of "goods" as defined and, secondly, they are neither "shares" nor "stocks". Basically debentures are, in the hands of the company offering them, an instrument of debt, acknowledging the obligation and liability of the company to repay the debt to the debenture holder.

Therefore, when a company issues capital through debentures, it does not sell any property but merely acknowledges an obligation. After the debentures are allotted and debenture certificates are delivered to the debenture holder, they become "goods" in the hands of the debenture holder who will then have full domain over the same.

24. In this connection, Shri B. B. Ahuja, the learned senior advocate for the Director-General, and some other learned counsel representing the complainants/Director-General submitted that a distinction must be drawn between ordinary debentures in the classic sense and convertible debentures. The latter category, it was urged, must be held to be covered by Section 2(e) inasmuch as they are in substance, effect and incident equity, only the conversion is deferred to a later date. They are hence in truth and substance equity.

25. The first comment we wish to make is that the entire bunch of cases placed before us relate to public issues of a period prior to the amendment of Clause (ii) of Section 2(e) in the year 1991. These cases shall, therefore, be governed by the ratio of the Full Bench in T. T.K. Pharma Ltd.'s case [1990] 68 Comp Cas 89. The legal position with regard to shares before allotment prior to the 1991 amendment would continue to be the same as perceived by the Full Bench with the decision of which we respectfully and entirely agree. What was true of shares before allotment would apply a fortiori to debentures before allotment.

26. Even under the amended law the position of debentures before allotment shall remain the same so far as the issue whether they constitute goods is concerned. We have already seen that ordinary debentures in its classic sense are only an instrument of debt in the hands of the companies till they are allotted and certificates delivered to the debenture holders. Being actionable claims such debentures would stand automatically excluded from the definition "goods" upon the plain terms of Section 2(7) of the Sale of Goods Act.

27. There is then the other class of debentures which are convertible, either at the option of the debenture holder or compulsorily according to the terms and conditions of offer. In either case, there would invariably be a hiatus between the issue of debentures and their conversion. In the case of optionally convertible debentures they would continue to retain their essential characteristics as ordinary debentures till they exercise their option. Compulsorily convertible debentures shall also retain the basic elements of ordinary debentures until they are converted in accordance with the terms and conditions laid down in the prospectus in which case they will stand converted on the happening of the events mentioned in the prospectus. Upon conversion they would, of course, partake of the character of equity.

28. The question is whether convertible debentures are to be treated as equity straightaway, that is, ipso facto on the issue of debentures and even before allotment. The answer must, in our humble view, be in the negative. Indisputably, in the event of the company being wound up before the allotment, the debenture holder shall be entitled to the payment of principal together with interest thereon as ruled by the Supreme Court in the case noted below. It may not, therefore, be correct to assume that issue of convertible debentures means the same thing as issue of shares. In Narendra Kumar Maheshwari v. Union of India, AIR 1989 SC 2138, at page 2178, the Supreme Court did recognise that in the event of a company being wound up, the debenture holder becomes entitled to the payment of the principal.

29. Dr. S. R. Khanna, however, placed considerable reliance on another passage of the same decision appearing at page 2179 : "An ordinary debenture has to be distinguished from a 'mortgage debenture' which necessarily creates a mortgage on the assets of a company: see Palmer's Company Law, page 706). A compulsorily convertible debenture does not postulate any repayment of the principal. Therefore, it does not constitute a 'debenture' in its classic sense. Even a debenture, which is only convertible at option has been regarded as a 'hybrid' debenture by Palmer's Company Law (para 44.07 at page 676). In this connection, reference may be made to the guidelines for the 'Protection of Debenture Holders' issued on January 14, 1987, which have recognised the basic distinction between a convertible and non-convertible debenture. It is apparent that these were issued for the purpose of ensuring the serviceability and repayment of debentures on time. It has been asserted before us that the compulsorily convertible debentures in corporate practice was adopted in India some time after the year 1984. Wherever the concept of compulsorily convertible debentures is involved, the guidelines treat these as 'equity'. This is clear from guideline IV(i) read with IV(iii) of the guidelines for issue of cumulative convertible preference shares and guidelines Nos. 8 and 11 of the employees' stock option guidelines. These two sets of guidelines clearly indicate that any instrument which is compulsorily convertible into shares is regarded as an 'equity' and not as a loan or debt." 30. These observations were made by their Lordships of the Supreme Court wholly in a different context while considering a challenge to a public issue on the ground that the company issuing the debentures had not complied with the guidelines framed by the Controller of Capital Issues. On an analysis of the guidelines, it was ruled by the Supreme Court, vide its observations at page 2179 that "wherever the concept of compulsorily convertible debentures is involved, the guidelines treat these as equity. This is clear from guidelines IV(i) and IV(iii) of the guidelines for issue of cumulative preference shares and guidelines Nos. 8 and 11 ..." The question involved was whether the impugned debentures offered by the company had violated these guidelines for not being backed by any security. The Supreme Court answered the question in the negative holding that the debenture could be both secured as well as unsecured and hence there was no breach of any guidelines. The transparency or the validity of the public issues were upheld by the Supreme Court.

31. Our answer to the issue posed as (1)(b), therefore, is that it would make no difference to our answer to issue No. l(a) even if the debentures offered are compulsorily or optionally convertible into equity shares.

32. Shri O. P. Dua, learned counsel representing the Director-General in Deepak Fertilizers (I. A. No. 6 of 1989 in UTPE No. 4 of 1989, decided on December 3, 1989), submitted that the issue whether debentures are goods within the meaning of Section 2(e) already stands concluded by the decision of the Full Bench of this Commission in the case of T. T. K. Pharma Ltd, [1990] 68 Comp Cas 89. We are unable to agree. The Full Bench was dealing with a public issue of equity shares, which were linked to secured redeemable non-convertible debentures. The question which fell for determination was whether the linkage of the shares with the debentures is not tied up sale within the meaning of Section 33(1)(b) of the Monopolies and Restrictive Trade Practices Act which prohibits such sales. The objection raised by the respondents was that "shares" before allotment are not "goods" within the meaning of Section 2(e) of the Monopolies and Restrictive Trade Practices Act and, consequently, Section 33(1)(b) would not apply. The other objection raised was that when a company offers capital issues and invites the public to subscribe to them it does not engage in any trade practice thereby so as to attract the provisions of the Monopolies and Restrictive Trade Practices Act. The question whether the debentures were goods, hence, did not and could not at all arise in T. T, K.Pharma Ltd. 's case [1990] 68 Comp Cas 89. Any observations made by the Full Bench on the nature and content of debentures must hence be regarded as obiter and cannot operate as a binding precedent.

33. Further, the Full Bench having found, following the decision of the Supreme Court in Shree Gopal Paper Mills Ltd.'s case [1970] 77 ITR 543, that shares before allotment do not come into existence and are hence not covered within the definition of "goods" under the Act, it was entirely unnecessary to go into the further question whether or not debentures were goods within the meaning of Section 2(e) of the Monopolies and Restrictive Trade Practices Act.

34. It is unnecessary to dilate on this point further in view of a recent pronouncement of the Supreme Court in the case of Morgan Stanley Mutual Fund [1994] 2 Consumer Protection and Trade Practices Journal 385 ; [1994] 81 Comp Cas 318. Their Lordships have ruled that shares before allotment are not goods. On a parity of reasoning the ratio will apply with greater validity to debentures as these are issued primarily to raise loan.

35. In the premise our answer to issue No. 1(a) is in the negative and we hold that debentures are not goods within the meaning of Section 2(e) of the Monopolies and Restrictive Trade Practices Act, 1969, before they are allotted to the debenture holder. Issue No. 1(b) is also answered in the negative, i.e., till they are allotted, debentures are not "goods" even if they are convertible, whether compulsorily or optionally, whether partly or fully.

36. That brings us to the second and the all important issue whether the company issuing the debentures carries on any trade practice with respect thereto. The Full Bench of this Commission in the case of T.T.K. Pharma Ltd, [1990] 68 Comp Cas 89 was directly concerned with this question and it has dealt with it in considerable depth. After analysing the definition of the term "trade" and "trade practice", the learned chairman (Mr. Justice G. R. Luthra) observed at page 102 as follows : "Now, we have to see if the impugned act or the act assailed falls within the definition of 'trade' or not. What is impugned or assailed in the present case is the allotment of shares tied up with debentures. It is common ground between the parties that none of the respondents in these cases is dealing in shares. Therefore, they are not carrying on 'trade' in shares whether with or without linking with debentures.

It is apparent that for a practice to amount to 'trade practice', it must be one relating to the carrying on of any trade. In the present case, as already found, allotment of shares is not a trade.

Therefore, the practice of linking the said allotment of shares with debentures is not related to any trade. The practice of linking debentures is only a mode to raise capital with the aid of which a company is to carry on its trade and that practice has no connection with the method of trade which is carried on by that company." 37. Again, at page 104, the learned chairman summed up the legal position as follows : "The definition of 'trade practice' shows that it must be a practice relating to the carrying on of any trade even though it need not be a number of actions taken together but may be confined to a single or isolated action.

The words 'carrying on of the trade' clearly show anything done towards the process of trading itself. It can relate to manufacture, business or industry, etc. Here, the complaint is about linking of debentures with shares. As already mentioned, the practice of linking of debentures is only a mode to raise capital with the aid of which a company has to carry on its trade and thus that practice has no relation with the mode or method or process of carrying on the trade. Even the issue of shares is a mode to raise capital, because, as defined in Section 2(46) of the Companies Act, which definition is applicable to the provisions of the Monopolies and Restrictive Trade Practices Act, in view of Section 2(y) of the said Act, a share is a share in the capital and thus issuing of the same is for building of capital. Raising capital is making arrangements for the carrying on of trade and is not a practice relating to the carrying on of any trade. It is just like purchasing furniture or appointing employees which are necessary arrangements for trade but has no connection with the mode or method of carrying on a trade." 38. With respect, we entirely agree with the opinion expressed by the learned chairman on this aspect and hold that the mere act of issuing shares or debentures by a company does not constitute trade practice within the meaning of the Monopolies and Restrictive Trade Practices Act. We also agree that issue of debentures is but a mode to raise capital with the aid of which the company proposes to carry on the projects indicated in the prospectus. It is, however, unnecessary to delve deeper into this aspect in view of the recent pronouncement of the Supreme Court in the case of Morgan Stanley Mutual Fund [1994] 2 Consumer Protection and Trade Practices Journal (briefly CTJ) 385 ; [1994] 81 Comp Cas 318.

39. In the above case, their Lordships were considering an identical controversy. Morgan Stanley Mutual Fund managed by the Morgan Stanley Asset Management India Pvt. Ltd, had come out with a public issue after obtaining the requisite approval from the Securities and Exchange Board of India and other statutory authorities. A prospective investor of that issue chose to challenge the issue before the Calcutta District Consumer Disputes Redressal Forum under the Consumer Protection Act, 1986, on diverse grounds and also succeeded in obtaining an interim injunction. The injunction was assailed by Morgan Stanley by way of a special leave petition directly before the Supreme Court, inter alia, on the ground that the very cause which was submitted before the Redressal Forum was beyond the purview of that Forum inasmuch as in the first place the public issue of shares were not "goods" within the meaning of the Consumer Protection Act and, secondly, that a mere issue of capital did not constitute any "trade" or "trade practice".

40. The Supreme Court granted the special leave and held that until shares are alloted they do not exist- and hence cannot constitute any "goods". Their Lordships observed at page 394 as follows (at page 333 of 81 Comp Cas) : "Therefore, at the stage of application it will not be goods. After allotment, different considerations may prevail.

A fortiori, an application for allotment of shares cannot constitute goods. In other words, before allotment of shares whether the applicant for such shares could be called a consumer In CIT v. Standard Vaccum Oil Co. [1966] 59 ITR 685, 691 (SC); AIR 1966 SC 1393, 1397, while defining shares, this court observed : 'A share is not a sum of money ; it represents an interest measured by a sum of money and made up of diverse rights contained in the contract evidenced by the articles of association of the company.' Therefore, it is after allotment, rights may arise as per the contract (articles of association of company). But certainly not before allotment. At that stage, he is only a prospective investor of future goods. The issue was yet to open on April 27, 1993. There is no purchase of goods for a consideration, nor again could he be called the hirer of the services of the company for a consideration." (emphasis added) 41. The court also ruled that when a company issues capital it is merely making arrangements for carrying on its trade and consequently the activity involved in raising capital by means of a public issue of shares inviting investors to participate in the share capital of the company does not partake of the character of any "trade" or "trade practice" where it was not the business of the company to sell or purchase shares. This is how their Lordships summed up the law on the subject in paragraph 16 of the judgment (at page 335 of 81 Comp Cas) : "The expression 'unfair trade practice' as per rules shall have the same meaning as defined under Section 36A of the Monopolies and Restrictive Trade Practices Act of 1969. That again cannot apply because the company is not trading in shares. The share means a share in the capital. The object of issuing the same is for building up capital. To raise capital means making arrangements for carrying on the trade. It is not a practice relating to the carrying of any trade. Creation of share capital without allotment of shares does not bring shares into existence. Therefore, our answer is that a prospective investor like the respondent or the association is not a consumer under the Act." 42. It will be seen that their Lordships were directly concerned with the precise issue which is involved in the present case, namely, whether a company is indulging in any trade or trade practice when it offers a public issue of shares with a view to building up capital for the purpose of carrying on its main trade or business. The definitions of "trade" "trade practices" and "goods" in the Consumer Protection Act are the same as those in the Monopolies and Restrictive Trade Practices Act, except that after the 1991 amendment shares even before allotment are included in the definition of Section 2(e). As noted above, the present group of cases before us relate to a period prior to the 1991 amendment. However, the pronouncements, both of the Supreme Court and of the Full Bench of this Commission in T. T. K. Pharma Ltd.'s case [1990] 68 Comp Cas 89, have reached the above conclusion de hors the question whether shares before allotment are "goods". An independent conclusion has been arrived at in both the instances on the ratio that a company, not engaged in the business of sale or purchase of shares cannot be said to be indulging in any trade or trade practice where the public issue is offered merely as a means of making arrangements for carrying on the trade. The ratio laid down both by their Lordships of the Supreme Court and the Full Bench of this Commission in the two decisions cited above would apply to the present case with equal, if not, greater validity.

43. While on this issue we may briefly comment on a line of argument advanced both by Dr. S. R. Khanna and Shri O. P. Dua respectively for the complainant/petitioner and the Director-General referring to the main objects set out in the memorandum of association of the respondent-company (Reliance Industries Limited). It was urged that financing of trading and manufacturing activity being among the main objects of the respondent-company, the act of issuing debentures must also be regarded as the "trade" or "business" of the company. Similar arguments were advanced by Shri O. P. Dua also.

44. We are unable to agree. The objects clause generally lists a whole range of diverse businesses and activities. It is, however, not necessary that all those businesses must be carried on at the same time. The basic question is : which is the particular trade or business for which capital is being raised in the present case. Indisputably in the present set of cases capital has been issued or raised not as part of any venture concerning banking, financing or insurance etc., but for some other projects mentioned in the prospectus. In any case in Morgan Stanley Mutual Fund's case [1994] 81 Comp Cas 318, the Supreme Court has clearly ruled that where the public issue is simply to raise capital of the company, not engaged in the business of purchase or sale of shares or debentures, it cannot be said to be indulging in any trade practice merely because of the issue.

45. That takes us to the third and last question formulated by us at the beginning of this judgment. In order to appreciate the various contentions, it will be necessary to have the relevant provisions before us. Section 2(r), as it stood at the relevant time, reads as follows :-- "'Service' means service of any description which is made available to potential users and includes the provision of facilities in connection with [banking, financing, insurance, transport, processing], supply of electrical or other energy, board or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service." 46. In our opinion, the impugned action does not fall within the purview of this provision either. The activity of inviting the public to participate in the share capital or to subscribe to debentures offered by a company by making an application for allotment thereof does not involve the provision of any facility, in the context of the present case, of the nature contemplated under Section 2(r), as we will presently demonstrate.

47. In fact, this point also stands concluded by the decision of the Supreme Court in Morgan Stanley Mutual Fund's case [1994] 81 Comp Cas 318 which specifically ruled that the prospective investor who makes an application for allotment of shares neither purchases any "goods" nor does he hire the services of the company. Challenging the jurisdiction of the authorities constituted under the Consumer Protection Act to deal with public issues, Shri Ashok Desai representing Morgan Stanley Mutual Fund advanced several contentions which have been reproduced in paragraph 6 of the judgment. One of the objections raised was (at page 324): "In law, a prospective investor does not become a consumer as defined under the Act. Even assuming that shares could be goods before allotment, the so called consumer has neither purchased the goods for a consideration nor hired the services of the company for consideration. Hence, he is not entitled to make any complaint." (emphasis added) 48. The contention directly involved the question whether a prospective investor hires the services of the company for consideration. The first issue formulated by the Supreme Court for its consideration was whether the prospective investor can be treated as a consumer within the meaning of the Consumer Protection Act, 1986. The issue involved consideration of: (a) Whether the prospective investor buys any goods for consideration when he applies for allotment of shares in response to a public issue ; and 49. Both these issues were answered in the negative. Their Lordships held that shares before allotment are not goods and consequently, a prospective investor who applies for shares does not buy any goods merely because he makes an application for allotment. Their Lordships further held that a prospective investor could not be regarded as a hirer of the services of the company for a consideration. In paragraphs 15 and 16 of the judgment of the Supreme Court (at page 534) the above question was considered and it was observed that Clause (iii), which relates to hiring of services, of Section 2(c) of the Consumer Protection Act cannot apply to prospective investors and consequently the question of any deficiency in service does not arise. The Supreme Court also observed in paragraph 15 that (at page 334) : "There is no purchase of goods for consideration nor again could he (prospective investor) be called the hirer of the services of the company for consideration." (emphasis added) 50. The situation in the present case is materially the same- The only distinction is that instead of shares we have debentures. Following the ratio of the Supreme Court we hold that at the stage of the application for allotment the prospective investor neither purchases any "goods" nor hires "the services" of the company for a consideration.

51. Even otherwise we are of the opinion that where, as here, the company offering a public issue is not engaged in the trade or business of buying and selling shares or debentures and it is simply inviting the public to subscribe to its share capital enabling it to carry on its trade or business it does not thereby do any business or trade as the statute stands at present. The mere act of inviting applications for allotment of debentures would not by itself involve the rendering of any service for consideration within the meaning of Section 2(r). Be that as it may, on the limited issue whether the prospective investor hires any service of the company in circumstances similar to those obtaining in the present case, the pronouncement of the Supreme Court must be regarded as conclusive on the subject.

52. While on this issue we may deal with an argument advanced by Shri B. B. Ahuja representing the Director-General on the interpretation of Section 2(r) of the Monopolies and Restrictive Trade Practices Act. It was urged that Section 2(r) does not refer to the terms "trade" or "trade practice". It is simply confined to the service sector of our economy and consequently Section 2(r) should be construed de hors the issue whether a public issue by a company not dealing in shares, etc., amounts to "trade" or "trade practice", when the company simply invites applications.

53. We are unable to agree. The Monopolies and Restrictive Trade Practices Act is primarily concerned with trade practices relating to both "goods" and "services". The notions of what constitutes "trade practice" thus assume importance as unless it is found that the undertaking is indulging in some trade practice, the provisions of the Monopolies and Restrictive Tra.de Practices Act cannot be attracted.

When construing the provisions of Section 2(r), the concept and connotation of the terms "trade practice", therefore, cannot be altogether ignored. It will have to be seen whether the provision of financing or banking is part of the trade or business of the company charged.

54. We also get statutory support on this aspect. Section 2(s) of the Monopolies and Restrictive Trade Practices Act which defines "trade practice" means any practice relating to the carrying on of any trade.

"Trade", on the other hand, means any trade, business, industry, etc., etc., of goods and includes the provision of any services. Reading the definition of these two terms in conjunction with Section 2(r), therefore, it must follow that the services referred to in Section 2(r) must relate to the trade or business, etc., of the industry or individual being proceeded against under the provisions of the Monopolies and Restrictive Trade Practices Act.

55. Before closing the discussion on the third question formulated by us we may briefly comment on a few decisions cited by Shri O. P. Dua and Dr. Khanna. Shri Dua invited our attention to an order dated June 3, 1988, passed by the Commission in Sahara India Saving and Investment Corporation Ltd., In re (I.A. No. 108 of 1987 in UTPE No. 497 of 1987).

The learned members observed that the term "service" in Section 2(r) is couched in the widest amplitude because of the words "service of any description" following it and consequently it should receive a broad interpretation.

56. This decision lends no support to Shri Dua for the simple reason that in that case the respondents' business itself was to mobilise deposits. Put in different words, the respondent was a financing company and the trade practice challenged was part of its main business. The object clause of the company stated : "The main object to be pursued by the company on its incorporation is : To establish, promote, conduct, manage, maintain, improve, regulate, run, work and control the different types of schemes for encouraging the habit of savings and wise economy amongst the public on scientific, practical lines and also help men, women and children for their economical, social and educational welfare through its scheme ..." 57. It was in furtherance of this object that the respondent had invited people to make deposits in accordance with the terms of the scheme floated by the company and the complaint was that the company had breached the terms and conditions thereof. In that background there could possibly be no scope for any doubt that the respondent was providing service to the investors in the course of its business.

58. Dr. Khanna, on the other hand, cited the decision of the National Consumer Disputes Redressal Commission dated August 26, 1993 (Nila Vasant Raje v. Amogh Industries). This case again is distinguishable inasmuch as the respondent's business was to collect deposits from the public on promise of attractive rates of interest as security of investment and prompt payment of the principal after the stipulated time. In the instant group of cases the prospective investors had merely applied for allotment of debentures by means of an application.

The allotment was yet to take place and the payment in respect thereof was still to be made. At the stage of applications, therefore, there was no question of any sale of goods nor of hiring of service for consideration. The dictum of the Supreme Court in Morgan Stanley Mutual Fund's case [1994] 81 Comp Cas 318 was thus the closest decision in point.

59. Shri S. S. Kumar, the learned President of the Monopolies and Restrictive Trade Practices Commission Bar Association, who appeared as amicus curiae very fairly stated that in the entire transaction such as that involved in the present cases, there is no question of any service being rendered either by the company or to the prospective investor for any consideration and consequently Section 2(r) cannot have any possible application. He, however, submitted that Section 2(s) which defines trade also refers to "control of goods". That being so, as soon as the board of directors passes a resolution approving creation of a capital and deciding to invite the public to subscribe to the same, shares must be deemed to have been created and in that sense the exercise of offering the issue to the public for subscription would be directly covered by the definition of trade. We are afraid the submission is not available to the learned counsel in view of the above pronouncement of the Supreme Court that shares before allotment do not exist and that there is no trade practice involved at the stage of making application for allotment. Nor is there any question of hiring service at that stage. We are hence making no further comments on this aspect. That disposes of the contentions urged by learned counsel/attorneys representing the various parties in these bunch of cases.

60. In the premises of the foregoing discussion, we answer all the questions formulated by us at the beginning of this order as follows : 1. Debentures before allotment are not "goods" within the meaning of Section 2(e) of the Monopolies and Restrictive Trade Practices Act, 1969, and it makes no difference whether the debentures are convertible or ordinary.

2. Assuming that debentures are "goods" even prior to their allotment, no "trade" or "trade practice" is involved where the company merely offers the issue for subscription to the public by way of raising capital for its trade or business.

61. No "service" within the meaning of Section 2(r) of the Monopolies and Restrictive Trade Practices Act is provided or made available to the prospective investors for consideration where the company simply issues the debentures for subscription. The Full Bench of this Commission in T. T. K. Pharma Ltd.'s case [1990] 68 Comp Cas 89 was, therefore, right in holding that raising of capital by way of equity does not amount to carrying on of a trade.

62. In view of our answers, we hold that none of the enquiries or the compensation applications is maintainable in law as the Commission does not have jurisdiction to deal with the subject-matter thereof. The preliminary issues are answered accordingly in favour of the respondent. The enquiry proceedings and the compensation applications are consequently closed/dismissed. There will, however, be no order as to costs.

63. The Commission places on record its deep appreciation of the valuable assistance which it received in these matters from Shri Ashok Desai, Shri M. H. Baig, Shri A. N. Haksar, learned senior counsel for the respondents, and Shri B. B. Ahuja and Shri O. P. Dua for the Director-General as well as Dr. S. R. Khanna, for the complainant and Shri S. S. Kumar, the then President of the Monopolies and Restrictive Trade Practices Commission Bar Association who appeared as amicus curiae and assisted the Commission.


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