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TMI Blog1995 (4) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... it Petition No. 684 of 1991. On that basis, the Bench passed the following order: "Rule returnable on 8th June, 1992. Respondents waive service of rule nisi Since similar issues are raised in this petition as raised in writ petition No. 684 of 1991, it is desirable that this petition is heard along with writ petition No. 684 of 1991. We accordingly do so. Mr. Dwarkadas, appearing for respondent Nos. 3 to 13, applies for time to put in an affidavit opposing interim relief. Application granted. Writ petition adjourned for consideration of interim reliefs to 20th April, 1992. Pending admission ad interim order in terms of prayer ( c )." Writ Petition No. 684 of 1991 was disposed of by the judgment of this Court dated 29-8-1994. This writ petition was not tagged with Writ Petition No. 684 of 1991 for disposal as directed by the Motion Bench for reasons not apparent on record. It is how this writ petition is now placed before us for disposal. 3. The relevant facts, so far as these are necessary for the decision of the writ petition, are as under: 1st petitioner is a public limited company incorporated under the provisions of the (Indian) Companies Act, 1913. About 50 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer is likely to change the composition of Board of Directors and ( b ) such change would be prejudicial to the interests of the company or to the public interest. Sub-section(4) prescribes that in case the company decides to refuse to register transfer, then reference to the Company Law Board shall be made and then the question as regards transfer would depend upon the decision of the Company Law Board. In other words, the decision of the Board of Directors is not final but is subject to the approval of the Company Law Board. Shri Shah submitted that the provision of sub-section 3( c ) is violative of Article 14 of the Constitution because the powers have been conferred upon the Board of Directors without prescribing the guidelines as to how the powers should be exercised. The submission is devoid of any merit. The plain reading of section 22A(3)( c ) makes it clear that there is in-built guideline prescribed by Parliament. The Board of Directors is required to examine whether the transfer is likely to result in change in composition of the Board and even if so, the transfer cannot be refused unless such change would be prejudicial to the interest of the company or to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to be given to the company and also to the transferor and the transferee concerned and giving them a reasonable opportunity to make their representations, if any, in writing, by order, direct either that the transfer shall be registered by the company or that it need not be registered by it. Hence, the procedure as provided in section 111 of the Companies Act, 1956, has been altered under section 22 A of the Securities Contracts Act in respect of the companies whose securities are listed on any recognised stock exchange. 9. The shares of the 1st petitioner-company are listed on the stock exchanges at Bombay and Pune. The shares of the 1st petitioner-company are fully paid-up. Hence, the 1st petitioner is a company as defined under clause ( a ) and the said 38,600 shares are the securities as defined under clause ( b ) of sub-section(1) of section 22 A of the Securities Contracts Act. 10. We have considered the vires of section 22A(3)( c ) in our judgment delivered on 26 August, 1994 in Writ Petition No. 847 of 1992 [since reported as Alaknanda Manufacturing Finance (P.) Ltd. v. Company Law Board [1995] 3 Comp. LJ 95 (Bom.)] and have upheld the same. Where a compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court has held in that case that in exercise of discretion vested under section 112(2) of the Companies Act, 1956, the Board of Directors will act for the paramount interest of the company and for the general interest of the shareholders and that the directors are required to act bona fide and not arbitrarily and not for any collateral motive. In case of companies whose securities are listed at a stock exchange, the legal position has changed with enactment of section 22A of the Securities Contracts Act." The judgment rendered in Writ Petition No. 684 of 1991 was challenged in petition for Special Leave to Appeal (Civil) No. 17915 of 1994 in the Apex Court. The same was dismissed by order dated 28-10-1994, observing thus: "We have heard learned counsel for the parties. We see no ground to interfere with the impugned judgment of the Division Bench of the High Court. We agree with the reasoning and the conclusions reached therein. Special leave petition is dismissed." 6. The learned counsel for the petitioners raised the following propositions: "1. The Company Law Board has acted in excess of its jurisdiction by purporting to substitute its own opinion, for the opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Board. ( c )On this misapprehension as to the import of section 22A(3)( c ) the Company Law Board has excluded from consideration relevant material indicating that the registration of the transfers were likely to result in a change in the composition of the Board of directors. 3. The Company Law Board's decision is vitiated by a failure to consider relevant material, including the admitted intent and object of the acquisition of shares lodged for transfer." In substance, in this case, what arises for adjudication is the scope and ambit of section 22A. 7. The object and purpose of the Act is to provide for the regulation of stock exchanges and of transactions in securities dealt in on them with a view to preventing undesirable speculation in them and also seeks to regulate the buying and selling of securities outside the limits of stock exchanges, through the licensing of security dealers. 8. Sections 82 and 111 of the Companies Act, 1956, permitted Board of Directors of companies to assume power under the articles of association to refuse registration of shares or securities without assigning any reason. Though there is provision for appeal against such a refus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any requirement under law has not been complied with, it has to notify the transferor and the transferee of the same within two months from the lodgment of the instrument of transfer. In other cases, the company will have to make a reference to the Company Law Board and act according to the directions of the Board." The statement of objects and reasons can be used for the purpose of understanding the background and antecedent state of affairs leading to the legislation. Section 22A reads as under: " Free transferability and registration of transfers of listed securities of companies. (1) In this section, unless the context otherwise requires, ( a )'company' means a company whose securities are listed on a recognised stock exchange; ( b )'security' means security of a company, being a security listed on a recognised stock exchange, but not being a security which is not fully paid up or on which the company has a lien; and ( c )all other words and expressions used in this section and not defined in this Act but defined in the Companies Act, 1956 (1 of 1956), shall have the same meanings as are assigned to them in that Act. (2) Subject to the provisions of this section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the instrument of transfer of the securities to which it relates, the documentary evidence, if any, furnished to the company along with the instrument of transfer, and evidence of such other nature and such fees as may be prescribed. (6) On receipt of a reference under sub-section(4), the Company Law Board shall, after causing reasonable notice to be given to the company and also to the transferor and transferee concerned and giving them as reasonable opportunity to make their representations, if any, in writing by order, direct either that the transfer shall be registered by the company or that it need not be registered by it. (7) Where on a reference under sub-section(4), the Company Law Board directs that the transfer of the securities to which it relates ( a )shall be registered by the company, the company shall give effect to the direction within ten days of the receipt of the order as if it were an order made on appeal by the Company Law Board in exercise of the powers under section 111 of the Companies Act, 1956 (1 of 1956); and ( b )need not be registered by the company, the company shall, within ten days from the date of such direction, intimate the transferor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les or on any other ground whatsoever, and, even though they do so, that would be ineffective. Sub-section(3) opens with the non obstante clause and, therefore, seeks to override the provisions of sections 82 and 111 of the Companies Act, 1956, as well as that of the articles of association of a company in regard to the power of the company to refuse to register a transfer of its securities. The sub-section lays down that a company may refuse to register the transfer of its shares on any one or more of the grounds mentioned in clauses ( a ) to ( d ) . The words 'and no other ground' used in this sub-section seem to emphasise and fortify the legislative intent that registration of any transfer of a security of the listed companies can be refused only on any one or more of the four grounds mentioned therein and the refusal on any other ground shall be invalid and ineffective. The registration of a transfer may be refused if the instrument of transfer is not proper, it has not been duly stamped or executed or certificate has not been deposited or any other requirement of law has not been complied with. In these cases, the defect has to be intimated to the transferor and the transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if so, whether it would be prejudicial to the interests of the company and public. The main apprehension of the Board of Directors is based on account of acquisition of 10% shares by these two groups and their public offer of acquisition of further 20% shares, if offered. It is clear from the objective enumerated at the time of introduc-tion of section 22A in the SCR Act that the provision is not for prohibiting all take-overs; it aims to prohibit only 'undesirable' take-overs. The proposed acquisition is through a public offer and it was made in terms of the listing agreement which the company has signed with the stock exchange. No mala fide could be attributed in such a public offer as there is no surreptitious attempt of taking over the company. We have also noted that the holding of the Government of Gujarat and financial institutions is about 50% and, therefore, the acquisition by the respondents of impugned shares cannot result in change in the composition of the Board of Directors. Any change in the composition of Board of Directors of the company is possible only if it is supported or have the blessings of the Government of Gujarat and financial institutions. They have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Collector for Land Acquisition AIR 1965 SC 1017, Ahmed G.K Ariff v . CWT AIR 1971 SC 1691, Sakal Deep Sahai Srivastava v. Union of India AIR 1974 SC 338, Luxmi Tea Co. Ltd v. Pradip Kumar Sarkar [1989] 3 Comp. LJ 235 (SC), Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp. Cas. 1 (SC), Life Insurance Corpn. of India Ltd. v. Escorts Ltd. [1986] 1 Comp. LJ 91 (SC), Moffat v . Farquhar [1878] 7 Ch. D. 591 and section 22 A of the Act, arrived at the following conclusions: "Now the non obstante clause appearing in the said sub-section(3) clearly shows that the Legislature intended a departure from the provision of section 82 and section 111 and the position there under and wanted to provide that the refusal to transfer could only be on the ground stated under section 22A(3)( b ), ( c ) and ( d ) . There is also a departure from the earlier position that the decision of the Board was being converted into an opinion of the Board and these were the major changes made with a view to give power to the CLB to see the correctness of the opinion given by the Board of Directors. Now it is only when the CLB confirms the opinion, that the decision of refusal is final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree transferability and registration of transfers in respect of listed securities of companies and this change definitely also would be required to be kept in mind while considering as to whether the CLB can go into any other question than that of bona fides or mala fides of the company while forming an opinion. It is clear even from the earlier decisions that there could be unrestricted powers to the Board of Directors of the company to refuse transfer, that if the refusal was on the basis of the articles of association, then the refusal if it was not in accordance with the articles of association, it could be challenged in the court of law. Shri Kapadia has relied upon the decision of In re Bede Steam Shipping Co. Ltd [1917] 1 Ch. D. 123, and (has) pointed out that in the said case, the court went into the ground of refusal to transfer and concluded that the transfer on the ground was not within the articles and consequently, the refusal was not dropped. The view expressed in the said decision is that the court could go into the grounds on which the transfer was refused. In view of this submission made by Shri Kapadia that where uncontrolled discretion is given to the Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. This section overrides the provisions of the company's AOP and those in sections82and 111 of the Companies Act, 1956,so far as it relates to refusal to register transfer of listed securities of public limited companies. These conclusions find full support from the judgments rendered by this Court in Alaknanda Mfg. Finance (P.) Ltd's case ( supra ) and in Writ Petition No. 684 of 1991 which was upheld by the Supreme Court in Special Leave Appeal (Civil) No. 17915 of 1994. In the instant case, the Board of Directors has refused to register transfers only on the assumed ground that the transfer of the shares is likely to result in such a change in the composition of the Board of Directors as would be prejudicial to the interests of the company or to the public interest. The burden of proof was on the company to establish that the transfer will result in bringing about a change in the composition of the Board of Directors. No material was placed before the CLB or before us from which it can be inferred that the transfer will result in bringing about a change in the composition of the Board of Directors and the change will be prejudicial to the interests of the company. The C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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