There are many retentions in the Competition Act which may have skipped consideration that the Unfair Trade Practices portion was not being retained. For example, the definition of goods remains unchanged in the new Act. Under a 1991 amendment to the MRTP Act, this definition had been extended beyond the Sale of Goods Act to include debentures, stocks and shares after allotment. A recent Supreme Court decision has interpreted whether convertible debentures before allotment can be considered as goods.
Under the General Clauses Act, goods mean movable property of every kind. This vague definition was extended exhaustively under the Sales of Goods Act. The traditional concept that goods meant only tangible articles also changed and the 1991 amendment recognised securities as goods on the basis of transferability and capability of possession.
The Supreme Court decision (R D Goyal Vs Reliance Industries) arises out of a complaint alleging unfair trade practice in the misleading terms and conditions contained in a public issue of debentures. The Commission dismissed the complaint on the issue of jurisdiction, since the complaint related to the pre-amendment period. In appeal, the complainants case was that the 1991 amendment was clarificatory, therefore even pre-1991 goods could include debentures. It was also contended that raising of capital by issue of debentures is an act of trade amounting to rendition of service under the Act.
What has been examined in this case, as also in the earlier Supreme Court decision in the Morgan Stanley Mutual Fund matter, is the distinction between securities before and after allotment. Can debentures be said to be goods before they are allotted Do the prospective investors have no rights in the issue of any capital What is the recourse in case of misstatements in an offer document Can the raising of capital through a public issue be regarded as a trade practice
In this context, the definition of trade practice is significant, dealing as it does with any act which controls or affects the price charged by, or method of trading of, the trader. If the contents of a prospectus are false, or the valuation is fraudulently made, can the company get away scot-free The judgment, instead of answering these issues, dwelt in detail on the definitions of goods, service, trade and trade practice under the Act. While considering whether capital market irregularities constituted an unfair trade practice under Section 36A of the Act, the Court held that unfair trade practice refers to sales promotion or defect in use of goods. Subscription referred to in the prospectus was not price as defined under the Act.
The Morgan Stanley decision had categorically addressed similar issues before it. It was held that shares do not exist until the allotment takes place. Though that was a case under the Consumer Protection Act, which has no counterpart to the 1991 inclusion under the MRTP Act, the Court clarified that raising of capital, which could refer to both equity and loan capital, is making arrangements for raising capital, which is making arrangements for carrying on trade, not a practice relating to it. A prospective investor is not a consumer. If he finds an offer unsatisfactory, he can opt not to subscribe.
True, the present judgment does acknowledge that the principles of Morgan Stanley apply squarely. Perhaps the apex court felt that at this sunset stage, with the pending cases under Section 36A being transferred to the National Commission and the appeal itself being over 15 years old, there was no point in creating an authoritative precedent, especially as the jurisdiction in such cases ought to rest with Department of Company Affairs and the Securities and Exchange Board of India. Even if this is the only Supreme Court judgment on this point under the MRTP act.
The author is a partner in Khaitan & Khaitan, a Delhi law firm