1995 Supreme(Bom) 244

IN THE HIGH COURT OF BOMBAY
G.R. Majithia Mrs. K.K. Baam, JJ.
The Surat Electricity Co. Ltd. and others ....Petitioners.
Versus
Union of India and others....Respondents.
Writ Petition No. 715 of 1992, decided on 27-4-1995.
Advocates appeared :
Aspi Chinai with Dr. D.Y. Chandrachud i/b Little Co., for petitioners.
S.M. Shah with Ms. S.P. Daruwala, for respondent Nos. 1 2.
Janak Dwarkadas with Milind Sathe, i/b Kanga Co., for respondents 3 to 5 and 7 to 13.

Headnote:Section 22-A (3) (e)-Listed securities-Transfer of-Its registration. Registration of transfer refused by Board of Director as its result be in charge in composition of Board of Directors prejudicial to interest of company or to public interest which not supported by any material placed .before court and Company Law Boards finding that no change in composition of Boards Directors because 50% of share holding with financial institutions who supported existing Board of Directors, hence conelusion of change of composition of Board of Directors not warranted.

       Sections 82 & 111.

       See Securities Contracts (Regulation) Act, 1936-Section 22-A (3).

       Article 226-Securilies Contracts (Regulation) Act, 1965-Seetion 22-A (3)-Evidence Act, 1872-Seetious 3, 45 and 61-Evidenee-Appreciation of.

       In Court proceedings decisions by appreciation of evidence on record cannot be challenged.

       Section 22-A(3)-Companies Act, 1956-Sections 82 and 111-Object and purpose of.

       The object and purpose of the Act is to provide for the regulation of stock exchange 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.

       Sections 82 end III of the Companies Act, 1956 permitted Board of Directors of companies to assume power under the Articles of Association to refuse registrati0n of shares or securities without assigning any reason. Though there is provision for appeal against such a refusal to the Company Law Board, it placed an undue burden on an aggrieved person who often happened to be a small investor, so also it was not conducive to the free marketability of listed securities and healthy growth of the capital market. It was felt that unrestricted transferability is particularly necessary for securities of public limited companies which are listed on the Starch Exchanges.

       Sub-section (1) defines the expression company and security.

       According to its Clause (a), company means a company whose securities are listed on a recognised stock exchange. In view of this definition, the provisions of Section 22-A are applicable only to the transfer of securities of the listed companies Clause (b) defines the expression security as a security listed on a stock exchange but not being a security which is not fully paid up or on which the company has a lien. The provision, of Section 22-A are, therefore applicable to only those securities of listed companies which are fully paid up and on which the company has no lien. Sub-section (2) declares that subject to the provisions of Section 22-A, the securities of the listed companies shall be freely transferable.

       It does not seem to be merely declaratory. What it seeks, in effect, to lay down is that except in cases of refusal of registration of transfers falling within the purview of Section 22-A, and except those securities which are not in its purview, in all other cases of transfers, there would not be any restrictions on transferability of the securities of the listed companies and the Boards of such companies shall have no power to refuse to register transfer of the securities. Obviously the Articles of Association of such companies cannot impose restrictions on transfer nor can they confer upon the Board power to refuse registration on the grounds specified in the Articles or on any other ground what so ever of, and even though they do so, that would be ineffective. Sub-section (3) opens with the non-obstinate 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 anyone or more of the grounds mentioned in Clauses (a) to

       (d). The words and no other ground used in this sub-section seem to emphasis and fortify the legislative intent that registration of any transfer of security of the listed companies can be refused only on anyone 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 requirements of law has not been complied with. In these cases the effect has to be intimated to the transferor and the transferee so that the same may be rectified.

       The registration may be refused if the transfer violets any law or the transfer of likely to cause a change in the composition of the Board of Directors likely to be prejudicial to the interest of the company or the public. This is to prevent undesirable take over bid or destabilization of management. Clause (c) of sub-section (3) of Section 22-A says that registration of a transfer is likely to result in such change in the composition of the Board of Directors of the company as would be prejudicial to the interests of the company or to the public interest. The company resorting to this clause for the refusal of registration of a transfer will have to substantive its refusal by concrete and relevant evidence in support of its contention that the transfer would result in a change in the composition of its Board of Director.

       The burden of proof would be on the company. The facts and the circumstances should be such as to lead to the invitable conclusion that the transfer would result in the change in the composition of the Board of Directors and that the change will be prejudicial to the interest of the company or the public interest. The Board of Directors refused registration of the shares on the assumed composition of the Board of Directors

       Indisputably: 50% of the equity share capital had expressed faith in the Board of Directors. The holding of the equity share capital of the transferees will be about 30% of the total equity share capital. The transfer in their favour cannot result in the change in the composition of the Board of Directors. The assumption by the Board of Directors that the transfer would result in the change in the composition of Board of Directors was unwarranted.