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TMI Blog1982 (12) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. for a total price of Rs. 3,10,000. Out of these shares, 125 ordinary shares and 520 redeemable cumulative preference shares belonged to one Mrs. Khambatta, who was a non-resident. It was, therefore, agreed between the parties that if there was any difficulty in the sale of the shares belonging to Mrs. Khambatta, defendants Nos. 1 to 4 would purchase in any event 875 ordinary shares and 1,780 redeemable cumulative preference shares of the company from the plaintiffs for a price of Rs. 2,77,500. Out of this purchase price, Rs. 10,000 were to be paid on the signing of the agreement and the balance of Rs. 2,67,500 was to be paid by 10 equal annual instalments of Rs. 26,750. The first of such instalments was to be paid on or before December 31, 1967, and the subsequent instalments were to be paid on or before 31st December of each succeeding year. The fifth defendant guaranteed the above payments to the plaintiffs. The plaintiffs accordingly sold and delivered to defendants Nos. 1 to 4, 875 ordinary shares and 1,780 redeemable cumulative preference shares of A. Mac Rae Co. Pvt. Ltd. and a sum of Rs. 10,000 was paid by the defendants to the plaintiffs on the signing of the agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be possible for them to rely on their claim for damages in diminution or extinction of the plaintiffs' claim for price. The learned judge thus held that a mere mention in the written statement that the defendants had suffered damages cannot be availed of by the defendants to claim extinction of price. The learned judge decided against the defendants issues Nos. 1 to 4 which dealt with the question of alleged misrepresentations made by the plaintiffs to the defendants. The main issue which fell for consideration before the learned judge was issue No, 6, namely, "Whether the said agreement is illegal and void as claimed in para. 3 of the written statement?" The agreement was alleged to be void as being in contravention of the provisions of section 13 of the Regulation Act and the defendants' further case was that the contract in question was not a "spot delivery contract" as defined in section 2( i ) of the Regulation Act and was, therefore, not exempt from the operation of section 13 of the Regulation Act. The learned judge, on a careful scrutiny and analysis of the provisions of the Regulation Act, held that the shares of a private limited company were not marketable securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by Mr. Mody on behalf of the appellants was that the transaction in question must be held to be illegal having regard to the provisions of section 13 of the Regulation Act. Since a similar question was also involved in Appeal No. 136 of 1979 ( Dossabhai Gangjee Co. Pvt. Ltd. v. Surat Textile Mills Ltd. ) , we have permitted the counsel appearing for the appellants and the respondents in that appeal to intervene because any decision in this appeal was likely to affect the decision in that appeal. Mr. M. H. Shah, appeared for the appellants, in Appeal No. 136 of 1979. Mr. B. R. Zaiwala, who appeared for the respondents in that appeal, wholly supported and adopted the arguments of the counsel for the respondents in the present appeal. Now, before we refer to the arguments of Mr. Mody and Mr. Shah, which turned on the provisions of the Regulation Act, it is necessary to refer to certain provisions of that Act. The preamble of the Regulation Act states that it is "An Act to prevent undesirable transactions in securities by regulating the business of dealing therein, by prohibiting options and by providing for certain other matters connected therewith". As the Statement of Obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision which must now be reproduced is section 13 which reads as follows : "If the Central Government is satisfied, having regard to the nature or the volume of transactions in securities in any State or area, that it is necessary so to do, it may, by notification in the Official Gazette, declare this section to apply to such State or area, and thereupon every contract in such State or area which is entered into after the date of the notification otherwise than between members of a recognised stock exchange in such State or area or through or with such member shall be illegal". There is no doubt that the provisions of section 13 have been made applicable by the Central Government to Greater Bombay. Mr. Mody appearing on behalf of the appellants has contended, as was contended before the learned single judge, that all shares which can be sold, whether by a private treaty or through the stock exchange or in any other manner, should be considered as marketable securities and the word "marketable" in the definition of "securities" should be construed as meaning only "saleable". According to the learned counsel, the Act was enacted to regulate contracts in respect of securities an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. Mr. Parekh appearing on behalf of the respondents has supported the view taken by the learned single judge and, according to him, shares of a private company cannot be said to be marketable because marketability must mean that the shares are saleable by any one to any one at a normalised market, while the shares of a private limited company are not freely transferable and reference was made to the restrictions which were sometimes placed on a transfer of shares of a private limited company such as rights of pre-emption and reference was made to The Encyclopaedia of Forms and Precedents, fourth edition, volume 5, pages 342 and 370, which contain specimen articles of association of a private limited company. Mr. Parekh dealt extensively with the provisions of the Act and pointed out that the rules made under the Act and the provisions in the bye-laws of the Bombay Stock Exchange clearly show that the shares of a private limited company could not be bought and sold as a matter of right in the market provided by the stock exchange. Some reference was also made to the definition of "marketable security" (section 2(16A)) in the Indian Stamp Act, 1899, which defines "marketable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange; and no claim shall be allowed in any civil court for the recovery of any commission, brokerage, fee or reward in respect of any such contract. This is a provision which is very similar to section 13 of the Regulation Act. It was, however, found that the impact of this Act on the regulation of trading in securities was not significant. Huge losses suffered by the investing public during 1928 to 1938 brought forth public criticism and the Government of Bombay appointed a committee called Morrison Committee in 1936. Recommendations made by this committee were not found to be useful. The Government of India had appointed a committee in May, 1948, headed by Dr. P. J. Thomas, Economic adviser to the Ministry of Finance, to submit a report or a suitable law to regulate the stock exchanges in India. Later on in 1951, a draft Bill on stock exchange regulation was prepared by the Government and this Bill was referred to an expert committee under the chairmanship of Mr. A. D. Gorwalla. The present Act is a result of the recommendations of the Gorwalla Committee which were formulated in the form of Securities Contracts (Regulation) Bill, 1954. One of the terms of reference of the comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in a few hands. The provisions relating to the recognition of stock exchange and the rules made under the Regulation Act along with the nature of the bye-laws that are contemplated by the Regulation Act clearly indicate that a stock exchange provides for a market for buying and selling of securities. As observed in Palmer's Company Law, volume II, 22nd edition, Part C, at page 4005 : "The stock exchange provides a market for the purchase and sale of securities. The efficient operation of such a market depends primarily upon adequacy of information, a quantity of securities whose distribution is sufficiently wide to provide marketability and certainty of procedures for the settlement of business". Thus, if stock exchange is the market where securities are bought and sold and the transactions in securities are intended to be controlled by regulating the business of dealing in these securities, the provisions of the Regulation Act must be read in the light of these facts. It can hardly be disputed that the object of section 13 is to make illegal a transaction in securities in an area to which section 13 has been made applicable if such a transaction is entered into thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n section 13. The contention of Mr. Parakh is that having regard to the use of the words "other marketable securities of a like nature", marketability must be a requirement which must be applicable to all the categories enumerated earlier and that so far as the Regulation Act is concerned, it deals only with marketable securities and having regard to the absence of free transferability in the case of shares of a private company, those shares cannot be said to be marketable securities as defined under the Act and, consequently, there was no question of a transaction becoming bad by virtue of section 13 of the Regulation Act. Now, it is difficult for us to accept the argument of the appellants that the definition of "securities" must be so read that the words "other marketable securities of a like nature" were not intended to indicate an element of marketability in so far as the preceding categories were concerned. A reading of the inclusive part of the definition shows that the Legislature has enumerated different kinds of securities and by way of a residuary clause used the words "or other marketable securities of a like nature". The use of these words was clearly intended to mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, is contemplated as a market even under the Act. We may, however, make a reference to the decision of the House of Lords in Rye v. Rye [1962] AC 496. The relevant provision, which fell for consideration in that case, was section 205(1) of the Law of Property Act, 1925. The relevant part of the provision read as follows : "205(1). In this Act, unless the context otherwise requires, the following expressions have the meanings hereby assigned to them....... ( ii )'Conveyance' includes a mortgage, charge, lease, assent, vesting declaration, vesting instrument, disclaimer, release and every other assurance of property or of an interest therein by any instrument.....". The question which fell for decision in that case was whether an oral lease amounted to a conveyance as defined in the Act. It was held in that case that an oral tenancy is not a lease within the definition of section 205(1) and, therefore, the alleged oral letting, in that case, was not a conveyance for the purposes of section 72 of the Law of Property Act and was without legal effect/ Lord Mac Dermott, after referring to the definition of "conveyance", observed as follows (p. 507) : "Though Buckl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her words, the transfer of a share in a company must vest title in the purchaser and this vesting of title in the purchaser should not be made to depend on any other circumstance except the circumstance of sale and purchase. A market, therefore, contemplates a free transaction where shares can be sold and purchased without any restriction as to title. The shares which are sold in a market must, therefore, have a high degree of liquidity by virtue of their character of free transfer ability. Such character of free transferability is to be found only in the shares of a public company. The definition of a "private company" in section 3 of the Companies Act, 1956, speaks of the restrictions for which the articles of the private company must provide. The articles of a private company must: "3(1)( iii )( a ) restricts the right to transfer its shares, if any; ( b ) limits the number of its members to 50 not including ( i )persons who are in the employment of the company, and ( ii )persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and ( c ) prohi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l a 'close corporation'; this means that its members are connected by bonds of kinship, friendship or similar close ties and that the intrusion of a stranger as shareholder would be felt to be undesirable unless his admission is accepted by those for the time being interested in the company. Some private companies are in fact so constructed as to amount in economic terms to incorporated partnership with the attendant close connection between the members". The learned author has also pointed out that "Where a discretion as to registering transfers is given by the articles to the directors, the court will not control the exercise of this discretion, unless it is proved that the directors are not exercising it bona fide; in other words, that they are acting oppressively, capriciously or corruptly or in some way mala fide ". (page 396). The learned author at page 398 has observed : "Restrictions on the right of transfer may restrict a mortgagee's power of sale over the shares since he can have no right of transfer that is forbidden to members. Registration by the secretary without the authority of the directors can be repudiated by them". Dealing with transferability of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such, the beneficiary has a right to control the exercise by the trustee of the right to vote. It is pointed out that the relationship of trustee and cestui que trust arises by reason of the circumstance that till the name of the transferee is brought on the register of shareholders in order to bring about a fair dealing between the transferor and the transferee, equity clothes the transferor with the status of a constructive trustee and this obliges him to transfer all the benefits of property rights annexed to the sold shares of the cestui que trust. It is thus clear to us that the definition of "securities" will only take in shares of a public limited company notwithstanding the use of the words "any incorporated company or other body corporate" in the definition. The reference to public companies in section 21 of the Regulation Act cannot be of any assistance to the appellants. Acceptance of the argument advanced by the learned counsel for the appellants that the definition of securities should be held to include shares of a private limited company because Government has expressly taken the power to compel listing of "securities" by public companies would mean that w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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