How Supreme Court protected rights of NRI investor in landmark 2024 verdict

This article has been co-authored with Palak Sharma, a law student and intern at the Hawaii Supreme Court. 

The question that forever begs an answer is: How exactly is the NRI Investor who invested in an Indian company protected both in relation to the capital he invested and also his promised directorial rights?

The Supreme Court of India had in a landmark 2024 decision has set a benchmark for corporate honesty, which ensured protection for non-resident Indian Investors in India. It was the case of Dale and Carrington Investment (P) Ltd & Anr. Vs. P.K. Prathapan & Ors.  (2004). 

The case related to the investments made by one NRI (Non-Resident Indian), PK Prathapan in a hotel business. Prathapan invested in the purchase of a hotel in Kerala.  At that point in time Foreign Exchange Regulation Act (FERA) was in force. Prathapan had to route the money through his mother, who was an Indian resident.

A Company by the name Dale and Carrington Investment (P) Ltd was formed by him for running the Hotel business. The share capital, consisting of 5000 equity shares, was held by Prathapan’s mother. 

These shares were subsequently transferred to Prathapan and his wife, subject to obtaining permission from the Reserve Bank of India under the Foreign Exchange Regulation Act (FERA).

The hotel business was managed by one Ramanujam, who was shown as a Promoter.  There was no financial contribution by Ramanujam or his wife. It was Prathapan who, over a period of 10 years, invested large sums of money to meet the liabilities of the company as well as its working capital. 

In the year 1998, Prathapan returned to India. To his shock, he found that without his knowledge, Ramanujam had the authorised capital of the company increased from Rs. 15 to 25 lakhs and thereafter to Rs. 35 lakhs.  He also found that, without his knowledge, a Board meeting had been held, chaired by Ramanujam.

He informed the Board of Directors that a sum of Rs. 6,86,500/- was standing to his credit in the books of the company. 

He proposed for allotment of shares in lieu of the said amount allegedly due in his favour. The Board accordingly allotted 6865 equity shares.  By virtue of this act, Ramanujam became the majority shareholder. And Prathapan was reduced to the status of a minority shareholder with only 5000 shares. 

Prathapan challenged the illegal act of Ramanujam of allotment of shares in his favour to obtain controlling interest before the Company Law Board under sections 397 and 398 of the Companies Act, 1956. 

Sections 397 and 398 enabled the Company Law Board to protect shareholders from oppression and mismanagement. (The new Companies Act 2013 has similar provisions, which are sections 240 and 241).

The Company Law Board, despite concluding that Ramanujam had committed an act of oppression, only ordered the return of his investments with 12% interest and the liberty to sell their shareholding at par with 12% interest. This was of no solace to Prathapan, who had invested his time, energy and finances over the years. 

Prathapan appealed to the Kerala High Court. It was held in the appeal that the act of Ramanujam of allotting 6865 equity shares to himself was an act of fraud. The High Court set aside his allotment of shares to himself. The share register was ordered to be rectified accordingly.

The decision was challenged by Ramanujam in the Supreme Court of India. The Supreme Court of India ruled in favour of PK Prathapan. It held that the directors ought to act bona fide.

It was found that Ramanujam could not justify the further issue of share capital being for the interest of the company. It was found that the issue of additional share capital was mala fide, and Ramanujam’s only motive to gain illegal control of the company.

The decision of the Supreme Court of India is in line with the decisions of Courts in Commonwealth countries where the jurisprudence of oppression and mismanagement has been long entrenched.

The Supreme Court of India had adopted the well settled law in England in “Regal (Hastings) Ltd V. Gulliver and others (1942), Alexander V. Automatic Telephone Co.(1900); Hogg V. Cramphorn Ltd (1967);  Rolled Steel Products (Hustings) Limited V. Briish Steel Corporations (1986); Bishopsgate Investment Management Ltd (in liquidation) v. Maxwell (1994); Whitehouse V. Cartlon Hotel Pty. Ltd (1987); of the (High Court of Australia)

The decision of the Supreme Court of India is consistent with its own landmark judgment in Needle Industries (India) Ltd and others Vs. Needle Industries Newey (India) Holding Ltd and others (1982); wherein they have categorically held as follows:

“What is objectionable is the use of such power simply or solely for the benefit of directors or merely for an extraneous purpose like maintenance and acquisition of control over the affairs of the company”  

The objection that Prathapan and his family could not file the Petition as they had not obtained permission from the Reserve Bank of India under the Foreign Exchange Regulation Act was rejected by the Supreme Court. The Court held that the permission of the Reserve Bank under FERA could be obtained post-facto. 

This view of the Court has great significance for NRI investors, as in many cases the permission of the Reserve Bank for transfer of shares are pending and undecided. 

Thus, the acts of Ramanujam in allotting equity shares of the company in his own favour were held as an act of fraud.  The said allotment was set aside. In sum and substance, Prathapan, by virtue of judgment, gained control of the company which he had formed with his money.

This decision, which has stood the test of time for over two decades and is a beacon of hope for justice for NRIs who have invested in Indian companies on being promised controlling interest.

This decision of the Supreme Court would go a long way not only in protecting the controlling interest of NRI investors in India and but also help sustain the continued flow of NRI investments into India.

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