1998 Supreme(SC) 680

1998(6) Supreme 98
Supreme Court of India
(From Company Law Board, New Delhi)
B.N. Kirpal and Syed Shah Mohammed Quadri, JJ.
Bajaj Auto Ltd. etc. -Appellant
versus
Company Law Board & Ors. -Respondents
Civil Appeal No. 3480 of 1986
With
Civil Appeal Nos. 3420-79 of 1986
Decided on 22-7-1998
Counsel for the Parties :
For the Appearing Parties : Harish N. Salve, Shanti Bhushan, Sudhir Chandra Aggarwal, R.F. Nariman, Sr. Advocates, Shailendra Swarup, Ms. Bindu Saxena, Ms. Leena George, K. Ram Kumar, Ms. Asha G. Nair, C. Balasubramanian, Y. Subba Rao, Ms. Shanti Narayan, Dinesh Mathur, S. Ganesh, K.J. Desai and E.M.S. Anam, Advocates.

Important Points
1. Hostility between transferee and company itself could not make transferee undesirable persons in the matter of transfer of shares.
2. Merely because transferee wanted to increase shareholding cannot by itself be a ground in law for refusing to transfer shares, even if transferee was trying to purchase shares with a view to get a control­ling interest, until it can be shown that purchaser is an undesirable person and after gaining control transferee will act against the compa­ny and the shareholders interest.
3. Inadequate return of shares cannot be a ground to brand acquisition as “not bona fide investment”.

Headnote:Companies Act, 1956-Sec­tions 111 and 108A read with Sections 2(g) and 20 of MRTP Act, 1969-Registration of transfer of shares-Appeal against refusal-Shares acquired by rival group of sharehol­ders be­longing to another company belonging to group of res­pondent company-Refusal to regis­tration on grounds registration would lead to inter connection attracting Section 20 of MRTP Act which would be undesirable in interest of company, acquisition was not for purpose of genuine investment but with ulterior motive to destabilise manage­ment of company, transferees were competitors in business and transferee were undesirable person from larger point of view of company as a whole-On facts transferee and res­pondent companies were not rivals in business-Hostilities between transferee company and respondent company by itself could make transferee undesirable persons in matter of trans­fer-Intention of transferees to increase shareholding by itself cannot be ground in law for refusing registration of transfer-Purchasing shares with a view to get controlling interest itself cannot be ground for refusing transfer-Inadequate return on shares could not be ground to brand acquisition as “not bona fide investment”-Even if transfer of shares in question were registered it would not result in danger mark of 25 as contemplated in MRTP Act so as to call to the companies as interconnected companies-Future acquisition which may or may not take place cannot be taken into consideration-Nothing on record to show purchase of shares by transferee was with ulterior/oblique motive to destabilise management of company-Refusal to register transfer not valid-Company was directed to register transfer.

       Held : The power of the Board of Directors to refuse regis­tration of transfer of shares must be in the interest of the company and the general body of share holders. No doubt in the year, 1983, Section 82 of the Companies Act provided that the shares or other interest of any member in the company shall be movable property, transferable in the manner provided by the Articles of the company. Article 52 sought to give absolute and uncontrolled discretion to the Board of Directors to decline to register or acknowledge any transfer of shares. Even then as already held in Bajaj Tempo Limited case (supra), the Board has to act bona fide, and not arbitrarily and for the benefit of the company as a whole. In the case of a public limited company which is listed with Stock Exchange, an important right of share holder is to be able to sell his shares at a favourable price. It is seldom in the interest of the general-body of share-holders that transfer of shares be refused because that will have an adverse impact on the market price of the shares. Free transferability of shares will not artificially deprive its market price. This does not mean that if there is a good reason then the Board has no power to refuse to regis­ter the transfer of shares. This Court while examining the action of the Board of Directors is not expected to exercise original appellate jurisdiction and sit in appeal on question of fact. The judicial review while hearing in appeal from the decision of the Company Law Board would be limited to see whether there was a bona fide exercise of power by the Board of Directors while refusing to register the transfer of shares. (Para 14)

       Company Law Board held that the appellants and Bajaj Tempo were not rivals in business and even though there was hostility between the managements of the companies but that by itself could not mean that the appellants were undesirable persons in the matter of transfer of shares. The only two reasons of the Directors which found favour with the Company Law Board were that the appellants were not bona fide investors and, secondly there was a genuine apprehension about inter-connection of respondent company with the appellants. The Company Law Board observed that the return on the shares of respondent company did not appear to be ade­quate enough warranting successive purchases of its shares and ap­peared to be lacking in bona fide. In our opinion, this was not a correct approach. Merely because the appellants wanted to increase the share-holding cannot by itself be a ground in law for refusing to transfer the shares. Realising this in the resolution of the Board of Directors it was alleged that the purchase was not by way of genuine investment but was made with ulterior/oblique motives and with a view to destabilise the management of the company. There is nothing placed on the record which can possibly persuade anyone to come to the con­clusion that the intention of the purchase of shares by the appellants was with a view to destabilize the management of the company or with an ulterior/oblique motive. Prima facie it appears to us that even if it is assuming that the appellants were trying to purchase shares with a view to get a controlling interest in the company that itself cannot be a ground for refusing to transfer the shares unless and until it can be shown that the purchasers were undesirable persons and after gaining control of the company they will act against the company and the share-holders interest. In the instant case the appellants would not even have 25 shares of the company even if the transfer of share was registered and, therefore, the threat to the management, assuming that could be a valid reason, could not be regarded as genuine. (Paras 15 & 16)

       Price appreciation, which may in future lead to issuance of bonus shares or right shares, in the event of increase in capital, is a very valid and good reason for purchasing shares of reputable companies by an investor. Therefore, the reason, which is given for refusing to transfer the share namely inadequate return on shares, cannot be regarded as being bona fide. (Para 17)

       It is an admitted fact that even if the purchase of the shares was registered, the total percentage of the holding of the appellants group would be short of 25 . The existing share holding, at that time, was 23.232 had the transfer of shares been registered then, the appellants group would have risen to only 23.408 . If the number of shares which were purchased had been such that the total mark of 25 could be reached then the action of the Board of Directors could not have been faulted. But with the registration of the transfer of shares in question that danger mark would not have been reached. We are unable to accept as correct the appellants contention that because the total holding of the appellants group would then become “dangerously close” to 25 it was a good enough reason to refuse transfer. There may not have been anything to prevent the company if, after the shares in question had been registered, any further purchase of shares was made which would have the effect to push the holding of the appellants to 25 mark, to reject those subsequent transfers. As the transfers in question would not have resulted in reaching the 25 mark that cannot be regarded as a valid reason or consideration for refusing the regis­tration of transfer of shares. (Para 19)

       Of the four reasons given by the Board, two of them were rejected by the Company Law Board, namely that the appel­lants were competitors of Bajaj Tempo Limited and that the transfer­ees were not desirable persons from the larger point of view of inter­est of Bajaj Tempo Limited. There is also nothing on record to show that the purchase of shares by the appellants was with ulterior/oblique motives and purposes and with a view to destabilize the management of the company. Lastly, we find that the acquisition in question would not have led to the inter-connection between the compa­nies and it was not a bona fide exercise of power by the Directors to take into account “further acquisition of shares” of Bajaj Tempo Limited which may take place in future which may then lead to inter-connection. It is the extent of share-holding at that point of time which had to be taken into consideration and not future acquisition which may or may not take place. It was submitted by the appellants counsel that because of the provisions of Section 108A of the Compa­nies Act as it stood at that time, further acquisitions could not take place so as to bring up the share-holding to 25 without first getting Central Govern­ment approval. We, however, need not examine this aspect because, in our opinion, on the facts which existed on the record, we are satisfied that the exercise of discretion by the Board of Directors in refusing to register the shares in the name of the appellants was not bona fide or in the interest of the company or general-body of share-holders. Accordingly, its decision not to regis­ter the transfer of shares was not correct. Thereof, direction is given to respondent No. 2 to register the shares in question within four weeks from the date of this judgment. (Paras 21 & 22)