Any/all views expressed herein are solely of the author's and do not reflect the views of any organization.
“The nobler the intention, the bigger the promise, the harder to honour either,” said Granville Austin while discussing the gap between the promise and performance of social revolution in the first few decades of India’s independence.[1]
So far, we have seen the evolution of the regulation of secondary market up until 1970s. This blogpost takes you through the non-insignificant influence that socio-economic and political considerations of the period from Indian independence until the 1970s had on the regulation of primary market and resource mobilization by corporate sector. Regulation of primary market via the Capital Issues (Control) Act, 1947 (“CICA”) in the backdrop of India’s journey towards socialism is the broad theme hereof.
Control over capital issues
Capital issues control was first introduced under the Defence of India Rule 94A promulgated in 1943 to prevent the creation of industries not of use in production of essential war time goods.[2] Capital issues control was retained after the war and replaced by the Capital Issues (Continuance of Control) Act, 1947 enacted partly to check the inflationary trends and partly to secure a balanced investment of country’s resources in industry, agriculture and social services.[3] Though meant as temporary measure, it remained in statute book as CICA after the words ‘continuance of’ were dropped in 1956. CICA came to be used to pursue socialist ideals over the decades to come, as a poweful tool for giving effect to the prevailing economic policy.
CICA created the office of Controller of Capital Issues (“CCI”), who was an officer under the Department of Economic Affairs. CICA prohibited any company from making an issue of capital without the consent of the Central Government via the CCI, thereby vesting the discretion of which company could raise how much capital with the Government. The price at which shares could be offered to the public, the rates of dividend and premia on as well as timing of capital issues were determinations vested with the Government.[4]
CICA was amended in 1957 vesting the power to revoke the consent of recognition accorded under the provisions thereof where such consent/recognition was conditional, as also the power to change the said conditions, all with the CCI.[5] Criticisms on CCI were not absent, as an article in the EPW; noted “When the markets were buoyant, his intervention failed to curb speculation, rather he provided fuel for the speculative fire. When the markets were depressed, as they have been for some years, he could give no positive help.”[6]
The 1960s
The Planning Commission’s report ‘Distribution of Income and Wealth and Concentration of Economic Power’[7] grippingly noted in February 1964 that despite ten years of planning and fairly heavy schemes of taxation on the upper incomes, there still existed a considerable measure of inequality in the distribution of economic assets and consequent concentration of economic power in the hands of a numerically small section of the population.[8]
In around 1968, the congress working committee had adopted a resolution containing a ‘ten point programme’ calling for, inter alia, social control of banks, nationalization of general insurers, limits on urban incomes and property and removal of the princes’ privileges.[9] Nationalization of banks as discussed in passing in Part III, was followed by other efforts discussed in the following paragraphs. Noting some of them are key to understanding the manner in which the primary market was regulated during this period and the theme thereof.
At this time, the Capital Issue (Exemption) Order, 1969 was introduced to ease the rigidity of CICA. It provided the requirement of specific consent of the CCI to be limited to bonus shares and for issue of capital by companies under the Monopolistic and Restrictive Trade Practices Act, 1969. Other companies were required to file proposal statements with the CCI only if the issue exceeded Rs. 50 lakhs during twelve-month period, if such issue was of debentures or involved relaxation of certain conditions.[10] Private companies, government companies and banking/insurance companies as well as provident societies incorporated as companies were exempted from taking consent of CCI, but had to report thereto.[11]
The 1970s
The mainstream belief of this time seemed to be to the on the lines that serious social and economic inequalities in rural areas were attributable to rising tensions between different classes, forcible occupation of lands and other agitations and widespread circumvention of law by landholders. Similar thinking underlined the policy changes of this time.[12] This ideology was also reflected in the report of the Congress Parliamentary Committee Seminar held in July 1971 which emphasized the need to reduce concentration of wealth in the urban sector and monopolies in the industrial sector to establish a socialist society.[13]
As a result, and with a view to protect the rational use of strategic resources, to protect industries and workers from promoters chasing self-profits with singular focus, general insurers and some four hundred enterprises were nationalized between 1971 and 1974.[14]
Socialism was construed to be unquestionably good (both as means and end), leading to and resulting in the 24th and 25th constitutional amendments in 1971, empowering the government to acquire private property for public use, with compensation determined by the Parliament. It cleared the way for for large-scale nationalizations in industry and commerce that survived judicial scrutiny, (but that is beyond the scope of this blogpost). What is relevant to note however, is that in the months after the constitutional amendment passed, coal, coking coal and copper mines were nationalized, along with steel plants, textile mills and shipping lines.[15]
Generally, the early 1970s saw weakness in the financial and economic health of the country,[16] with rising inflation and the prices of essential commodities with the dearth thereof, food scarcity and a somewhat stunted industrial growth. Nevertheless, during FY 1976-77, 380 consents/acknowledgement of proposals were given under the CICA to non-government companies for raising capital by way of initial issues, further issues, bonus issues, debentures etc.[17] Between March and June, 1977, 137 non-government companies had been granted permission to raise capital by way of initial and further issues, bonus shares, debentures, etc.[18]
Notably one of the reasons for the (relatively and seemingly) high number of issuances consented to by the CCI had been the dilution of foreign investment in companies under the Foreign Exchange Regulation Act, 1973 (“FERA”). FERA was enacted to impose restrictions on foreign equity and on growth and expansion of foreign-owned companies. All foreign companies had to dilute their shareholding to 40% and needed the permission of the Reserve Bank of India to operate, if their shareholding was higher.[19] As a natural corollary, several companies exited India, including IBM and Coca Cola.
Role of CCI and the influence of socio-economic and political thought
The role of CCI is better illuminated by the Supreme Court judgment in Narendra Kumar Maheshwari v Union of India[20] in 1988 more commonly known for having laid down the ‘repayment of principal’ test to determine that compulsorily convertible debentures would be regarded as equity on account of it not postulating any repayment of debt.
In this case, the CCI had inter alia submitted its view to the effect that there would be no restriction on part of companies to borrow/raise capital from the market in absence of any control; and that it was to check wasteful capital and to avoid investments being made in non-productive non-priority sectors that the CICA was brought in.
The Supreme Court noted that despite the scheme and design of CICA not indicating any positive role for CCI in discharging functions in respect of granting sanction, it was indeed a part of a state committed to endeavours of constitutional aspirations to secure justice, including social and economic. It thus recognized that CCI has to, in discharge of its duties, perform a social role in capital formation and protect the interest of capital market and oversee the growth of industrialisation and investment in a balanced manner.
The Supreme Court observed among other things that CCI should perform the role of social control, fulfilling social purpose in conjunction with other state functionaries and ensure that there is not too much concentration of particular industries in particular areas and that there is development of and proper investment in key and core projects.
As rightly pointed out by the Supreme Court, this case was the first time when public interest aspect of the issue of shares and debentures had come forth. There had been an increase in the members of public who had surplus money to invest by 1980s, the size of issues had also assumed macro proportions and the types of instruments had been becoming more sophisticated.
Thus, it can be said that the peculiar CCI had been fastened with responsibilities to fulfil several social and economic objectives in discharge of its functions (viz. control of capital issues) such as alignment of corporate investment with planned priorities, ensuring public interest by checking soundness of companies’ capital structures etc, by somewhat micromanaged, centralized and cumbersome procedures and tight control.[21]
[1] Granville Austin, Working of Democratic Constitution – A history of the Indian Experience.
[3] Ibid.
[4] EPW: October 22, 1966 ‘Capital Issues Control Relaxed’.
[6] EPW: October 22, 1966 ‘Capital Issues Control Relaxed’.
[8] Granville Austin, Working of Democratic Constitution – A history of the Indian Experience.
[9] Ibid. Report of the General Secretaries, Feb 1966-Jan 1968, AICC New Delhi 1968, p.29.
[12] While addressing the Indian National Congress’ 73rd plenary session in Bombay in December 1969, Shri. Jagjivan Ram highlighted a 1969 report of the Home Ministry titled ‘The Causes and Nature of Current Agrarian Tensions’, which catalogued and analysed these topics.
[13] Granville Austin, Working of Democratic Constitution – A history of the Indian Experience
[14] Ibid.
[15] Ibid.
[16] “The war with China, below-par growth outcomes of the third Plan and diversion of capital to finance the war with Pakistan had also left the economy severely weakened.” - https://www.livemint.com/news/india/a-short-history-of-indian-economy-1947-2019-tryst-with-destiny-other-stories-1565801528109.html
[20] 1990 (Suppl.) SCC 440.
[21] Sabarinathan, G., Securities and Exchange Board of India and the Indian Capital Markets - A Survey of the Regulatory Provisions (July 30, 2004). IIM Bangalore Research Paper No. 228, Available at SSRN: https://ssrn.com/abstract=2152909 or http://dx.doi.org/10.2139/ssrn.2152909.
Comments