1995 (4) TMI 240 - HC - Companies Law

Issues Involved:
1. Jurisdiction of the Company Law Board (CLB) in substituting its own opinion for that of the Board of Directors.
2. Interpretation of the phrase "likely to result in a change in the composition of the Board of Directors" under section 22A(3)(c) of the Securities Contracts (Regulation) Act, 1956.
3. Consideration of relevant material by the CLB in its decision-making process.
4. Scope and ambit of section 22A of the Securities Contracts (Regulation) Act, 1956.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Company Law Board (CLB):
The petitioners argued that the CLB exceeded its jurisdiction by substituting its own opinion for that of the Board of Directors. Under section 22A of the Securities Contracts (Regulation) Act, 1956, the Board of Directors must form an opinion in good faith that the transfer should not be registered on any of the grounds mentioned in section 22A(3). The CLB's role is to ascertain whether the directors formed this opinion in good faith. The CLB can overrule the Board of Directors only if it concludes that the Board acted arbitrarily, capriciously, mala fide, or without any relevant material. The judgment clarified that the CLB has the power to consider whether the refusal of transfer is legitimate and to see whether the grounds on which the refusal was made were valid.

2. Interpretation of "likely to result in a change in the composition of the Board of Directors":
The petitioners contended that the CLB misinterpreted the phrase "likely to result in a change in the composition of the Board of Directors" as "will change the composition of the Board of Directors." The judgment clarified that section 22A(3)(c) requires the company to substantiate its refusal by concrete and relevant evidence that the transfer would result in a change in the composition of the Board of Directors and that the change would be prejudicial to the interests of the company or the public interest. The CLB correctly interpreted that the transfer of shares in this case would not result in such a change.

3. Consideration of Relevant Material by the CLB:
The petitioners argued that the CLB failed to consider relevant material, including the intent and object of the acquisition of shares. The judgment noted that the CLB, after considering the relevant material, concluded that the acquisition of shares by the respondents would not result in a change in the composition of the Board of Directors. The holding of the Government of Gujarat and financial institutions (50% of equity share capital) indicated their support for the current Board, making it unlikely that the acquisition by the respondents (30% of equity share capital) would change the Board's composition.

4. Scope and Ambit of Section 22A:
The judgment discussed the object and purpose of the Securities Contracts (Regulation) Act, 1956, which aims to regulate stock exchanges and transactions in securities to prevent undesirable speculation. Section 22A was introduced to ensure free transferability of securities of public limited companies listed on stock exchanges, with safeguards against undesirable take-over bids or destabilization of management. The judgment affirmed that section 22A overrides the provisions of the company's Articles of Association and sections 82 and 111 of the Companies Act, 1956, regarding the refusal to register the transfer of listed securities.

Conclusion:
The judgment concluded that the Board of Directors' refusal to register the transfer of shares based on the assumed ground that it would result in a change in the composition of the Board of Directors was unwarranted. The CLB's decision to direct the registration of the shares was upheld. The writ petition was dismissed, and the interim stay was vacated. An oral prayer for staying the operation of the judgment and for a certificate for appeal to the Supreme Court was declined, as the Supreme Court had already decided the principal question in a similar case.

Order:
The writ petition is dismissed, the rule is discharged, and no order as to costs. The issuance of the certified copy is expedited.

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