Case: The Surat Electricity Company Limited and Others Vs. Union of India and Others

G.R. MAJITHIAThe 1st petitioner- The Surat Electricity Co. Ltd.-and its two directors have challenged the order dated March 6, 1992 passed by the Company Law Board, Western Region Bench at Bombay, on references under section 22A(4)(c) of Securities Contracts (Regulations) Act, 1956 (for short "the Act") by the 1st petitioner, directing the 1st petitioner to register the transfer of 14171 shares covering 1215 transfer deeds in favour of the transferees, in this Writ Petition under Article 226 of the Constitution of India2. This petition came up for admission before a Division Bench of this Court on March 31, 1992 and it was represented that in this petition similar issues were raised as were raised in Writ 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 Respondents 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 August 29, 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 place 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 Companies Act, 1913. About 50% of the total paid-up equity share capital of the 1st petitioner is held by the Government of Gujarat and other financial institutions. Its securities are listed on recognised Stock Exchanges. Public offer was made by Dhanuka and Mohta groups (the private respondents to the petition, hereinafter referred to as "the transferees") for acquisition of 38790 equity shares equivalent to 30% issued share capital of the 1st petitioner and the public offer indicated that of the 38790 equity shares, 12950 equity shares had already been acquired and that the transferees were willing to acquire the remaining 25840 shares at the price of Rs. 700/- per share. Between August 16, 1989 and August 30, 1991, the transferees lodged 16, 529 shares with the 1st petitioner for transfer in their favour. The Board of Directors of the 1st petitioner at its meetings held from time to time resolved not to register the transfers principally on the ground that the proposal for the acquisition was made with a view to participate in the business and management of the company and for acquiring control and that the intention behind the acquisition is to bring about a change in the composition of the Board of Directors. Since the transfer was refused on the ground mentioned in Section 22A (3) (c) of the Act, references were made by the 1st petitioner to the Company Law Board as envisaged under Section 22A(4) (c) of the Act. The Company Law Board after considering the relevant material, found that one reference pertaining to 760 shares fell in a separate category and dismissed the reference; of the remaining 15769 shares, 1598 shares suffered from procedural defects; and in respect of the remaining 14171 shares, the 1st petitioner was ordered to register the transfer, as stated above.4. Challenge to the vires of Section 22A of the Act was made in (Alakaknand Manufacturing and Finance Pvt. Ltd v. The Company Law Board)1, Writ Petition No. 847 of 1992, reported in 1995(3) Bom.C.R. 314 (with two other Writ Petitions) which was decided on August 26, 1994 by this Court and it was held thus :-"6. The plain reading of sub-section 3 makes it clear that the company can refuse to register transfer of any of the securities if such transfer is likely to result in such change in the composition of the Board of Directors as would be prejudicial to the interests of the company or to the public interest. Sub-section 3(c) demands compliance with two requirements - (a) that 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 pr 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 the 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 public interest. It is, therefore, obvious that the Parliament did not confer unregulated powers on the Board of Directors but specified to the cases where it is permissible to refuse transfer. Initially, it was open for the Company to refuse to register the transfer without assigning any reason, but after the enactment of section 111 of the Companies Act, it is incumbent to give reasons for such refusal. The provision of section 111 applies to all the companies but after the enactment of section 22A of the Securities Contracts (Regulation) Act, the transferability and registration of shares of company whose securities are listed on recognised stock exchanges are regulated only by the provisions of section 22A. The contention that undesirable and unregulated powers are conferred in the Board is not correct because the Parliament in its wisdom has provided that the decision of the Board of Directors is not final but in case the Board decides to decline to register transfer then reference shall be made to Company Law Board. It is, therefore, obvious that the Parliament was anxious that the company Law Board should have a control over the decision of the Board of Directors."5. In Writ Petition No. 684 of 1991, a declaration was sought that Section 22A of the Act was ultra vires Articles 14 and 19(1)(c) and (g) and was thus void. The Bench of this Court, relying upon the ratio of the earlier judgment in Writ Petition No. 847 of 1992, held that Section 22A of the Act is neither ultra vires Article 14, nor Article 19(1) (c) and (g) of the Constitution of India. It will be useful to reproduce the following extracts from the judgment :-"8.......Section 22A mentioning grounds on which registration of transfer of securities can be refused is exhaustive. A listed Company cannot refuse registration on any other ground. Under this section, the company rejecting transfers has to first form an opinion in good faith as to the existence of the ground set out in sub-section (3) thereof and except in cases where opinion is formed to refuse transfer on ground mentioned in Clause (a) of sub-section (3), make a reference to the Company Law Board seeking approval of the decision of its Board of Directors and forward copies of such reference to the transferor and the transferes. The Company Law Board, under sub-section (4), shall, after causing reasonable notice 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 22A 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 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 of Section 22A of the Securities Contract Act.10. We have considered the vires of Section 22A (3) (c) in our judgment delivered on August 26th, 1994 in Writ Petition No. 847 of 1992 (Alakaknand Manufacturing and Finance Pvt. Ltd v. The Company Law Board and Ors.) and have upheld the same. Where a Company chooses to have its securities listed on a recognised Stock Exchange, provisions of Section 22A of the Securities Contracts Act are attracted and if the Securities Contracts Act imposes conditions subject to which listing is granted or continued, there can be no question of any violation of the freedom to form an association. Moreover, the fundamental right to practice any profession or to carry on any occupation, trade of business guaranteed under Article 19(1)(g) can be restricted by law imposing reasonable restrictions in the interest of general public as provided in Clause (5) of Article 19 of the Constitution of India. The fundamental right to form an association does not carry with it the right to have the Company registered or the securities listed. When a Company applies for having its securities listed on an recognised Stock Exchange under the Securities Contract Act, it presupposes that the members have agreed to be bound by the regulatory provisions of the Securities Contracts Act for getting the privileges which the Securities Contracts Act confers on a listed-company. On the admission of the petitioners themselves, unlisted companies are required to pay higher rate of income tax and even Public Financial Institutions normally agree to advance loans to a Company only if its shares are listed on a recognised Stock Exchange. When 1st Petitioner company desire to enjoy privileges attached to listed Companies, the 1st Petitioner Company has to agree to be bound by the regulatory provisions of the Securities Contracts Act. Section 22A(3)(c) does not unreasonably restrict grounds on which Company may refuse registration of transfer. It is not against healthy growth of capital market. It protects interest of bonafide investors. Section 22A(3)(c) of the Securities Contracts Act does not ultra vires Article 19(1)(c) or 19(1)(g) of the Constitution of India. The case of (Smt Damyanti Naranga v. Union of India and others )2, reported in A.I.R. 1971 S.C. 966 relied upon by Ms. Iyer, has no applicability to the facts of the present case. So also the case of (Bajaj Auto Ltd. v. N.K. Firodia and another) 3, reported in A.I.R. 1971 S.C. 321 also relied upon by Ms. Iyer has no applicability to the facts of the present case. It was by way of appeal to the Supreme Court by Special Leave against Order dated March 14, 1970 made in appeals by The Company Law Board. The Supreme Court has held in that case that in exercise of discretion vested under Section 111(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 bonafide 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. 17915/94 in the Apex Court. The same was dismissed by the order dated October 28, 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. Learned counsel for the petitioners raised the following propositions :-"1. The Company Law Board has acted in excess of its jurisdiction by puporting to substitute its own opinion, for the opinion formed by the Board of Directors in Good faith that the registration of the transfers in question were likely to result in a change in the composition of the Board.1(a) Under section 22A of the Securities Contracts (Regulation) Act, 1956 the Board of Directors are required to form an opinion in Good Faith (i.e.bonafide and on relevant material) that the transfers should not be registered on any of the grounds mentioned in section 22A(3).1(b) The jurisdiction of the Company Law Board in a Reference under section 22A is restricted to ascertaining whether the Directors have formed an opinion in Good Faith (i.e. bona fide and on relevant material) that the transfers should not be registered on one of the Grounds mentioned in Section 22A(3). Accordingly the Company Law Board can over rule the Board of Directors and direct registration only if it came to the conclusion that the Board of Directors had not formed an opinion in good faith as to the existence of one of the grounds mentioned in section 22A - i.e. if the Board of Directors had acted arbitrarily, capriciously, malafide, or without any basis/relevant material. If the Board of Directors had formed an opinion in Good Faith it is not open for the C.L. Board to direct registration merely because it would not have come to the same conclusion.1(c) The judgment and order of the Company Law Board dated 6.3.92 directing registration, does not consider or decide whether the opinion of the Directors as for the existence of the ground mentioned in section 22A(3) (c), had not been formed in Good Faith (i.e. bona fide and on the basis of relevant material) and nonetheless purports to direct registration of the shares.2. The Company Law Board has committed an error of law apparent by misreading the phrase "is likely to result in a change in the composition of the Board of Directors, contained in section 22A(3) (c), as "will change the composition of Board of Directors".2(a) Under section 22A (3) (c) the Company Law Board was required to consider whether there was material to believe that the transfers would probably lead to a change in the composition of the Board of Directors.2(b) Instead the Company Law Board has considered and decided the question whether registration of the transfers will immediately and without more, result in a change in the composition of the Board.2(c) On this misapprehension as to the import of section 22A (3) (c) the Company Law Board had 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 Boards 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 of the Act.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 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 Stock Exchanges.9. Section 22A of the Act was inserted with effect from January 17, 1986. The object of the section was stated in the statement of Objects and Reasons appended to the Bill and are as under :-" At present, sections 82 and 111 of the Companies Act, 1956, permit board of directors of companies to assume powers under articles of association to refuse registration of transfer of securities without assigning any reason. Though there is a provision for appeal against such a refusal to the Company Law Board, it places an undue burden on an aggrieved person who often happens to be a small investor. The present position is also not conducive to the free marketability of listed securities and healthy growth of the capital market. Unrestricted transferability is particularly necessary for securities of public limited companies which are listed on the Stock Exchanges.It was in the above context that it was announced in the Budget Speech, dated 16th March, 1985, that the Securities Contracts (Regulation) Act, 1956, would be amended to ensure free transferability of securities of public limited companies whose securities are listed on the Stock Exchanges. For this purpose, it is proposed to incorporate a new section, namely, section 22A, in the Securities Contracts (Regulation) Act, 1956, and also make necessary consequential amendments in the Act, to provide for free transferability of listed securities with adequate safeguards against undesirable take over bids or destabilisation of management .Under the proposed provision, companies would be entitled to refuse registration of such transfer in certain circumstances only, such as that the instrument of transfer is not proper or has not been duly stamped and executed or that the transfer is in contravention of any law or is likely to result in change in the composition of the board of directors in such a way that it would be prejudicial to the interests of companies or to public interest. In case a company wishes to refuse transfer of securities on the ground that any requirement under law has not been compiled with, it has to notify the transferrer 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 direction 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 of the Act 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;(c) all other words and expression 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, securities of companies shall be freely transferable.(3) Notwithstanding anything contained in its articles or in section 82 or section 111 of the Companies Act, 1956 (1 of 1956), but subject to the other provisions of this section, a company may refuse to register the transfer of any of its securities in the name of the transferee on any one or more of the following grounds and on no other ground namely :(a) that the instrument of transfer is not proper or has not been duly stamped and executed or that the certificate relating to the security has not been delivered to the company or that any other requirement under the law relating to registration of such transfer has not been complied with ;(b) that the transfer of the securities is in contravention of any law or rules made there under or any administrative instructions or conditions of listing agreement laid down in pursuance of such laws or rules :(c) that the transfer of the security is likely to result in such change in the composition of the board of directors as would be prejudicial to the interests of the company or to the public interest ; and(d) that the transfer of the security is prohibited by any order of any court, tribunal or other authority under any law for the time being in force.(4) A company shall, before the expiry of two months from the date on which the instrument of transfer of any of its securities is lodged with it for the purposes of registration of such transfer, not only form, in good faith, its opinion as to whether such registration ought not or ought to be refused on any of the grounds mentioned in sub-section (3) but also-(a) if it has formed the opinion that such registration ought not to be so refused, effect such registration ;(b) if it has formed the opinion that such registration ought to be refused on the ground mentioned in clause (a) of subsection (3), intimate the transferor and the transferee by notice in the prescribed form about the requirements under the law which has or which have to be compiled with for securing such registration; and(c) in any other case make a reference to the Company Law Board and forward copies of such reference to the transferor and the transferee.(5) Every reference under clause (c) of sub-section (4) shall be in the prescribed form and contain the prescribed particulars and shall be accompanied 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 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.(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);(b) need not be registered by the company, the company shall, within ten days from the date of such direction, intimate the transferor and the transferee accordingly.(8) If default is made in complying with the provisions of this section, the company and every office of the company who is in default shall be punishable with fine which may extent to five thousand rupees.(9) If in any reference made under clause (c) of sub-section (4) of this section, any person makes any statement -(a) which is false in any material particular, knowing it to be false; or(b) which omits any material fact knowing it to be material, he shall be punishable with instrument for a term which may extend to three years and shall also be liable to fine.(10) For the removal of doubts, it is hereby provided that nothing in this section shall apply in relation to any securities the instrument of transfer in respect whereof has been lodged with the company before the commencement of the Securities Contracts (Regulation) Amendment Act, 1985.10. 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 os Section 22A 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 provisions of Section 22A 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 22A, 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 22A, 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 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 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 requirements of law has not been complied with. In these cases the defect 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 violates any law or the transfer is 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 destabilisation of management. Clause (c) of sub-section (3) of Section 22A 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 substantiate 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 Directors. 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.11. The Company Law Board, after considering the relevant material, came to the following conclusions :-"7. In respect of other references the question for consideration is whether looking to the shareholding pattern of the company wherein about 50% shares are held by Govt. of Gujarat and public financial institutions, whether there is any likelihood of any change in the composition in Board of Directors and, if so, whether it would be prejudicial to the interest 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 objectives enumerated at the time of introduction of Sec. 22A in the SCR Act that the provisions is not for prohibiting all takeover; it aims to prohibit only "undesirable" takeovers. 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 malafides 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 Govt, 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 Govt. of Gujarat and financial institutions. They have already indicated their desire to support the present Board. Since we have already held that the transfer of shares in this case is not likely to bring about any change in the composition of the Board of Directors of the petitioner, we need not go into the following question, namely whether or not such a change in the composition of the Board of Directors is likely to be prejudicial to the interest of the company or to the public interest."The finding so arrived at by Company Law Board has not been challenged by the petitioners. Even otherwise, a finding of fact arrived at on appreciation of evidence is not open to challenge in a Writ Petition unless it is shown that the finding is not based on any evidence or the Tribunal had erroneously admitted inadmissible evidence which had influenced its decision.12. Reference can be usefully made to the decision of this Court in Company Appeal No. 5 of 1994 (Kinetic Engineering Ltd. v. Unit Trust of India & another)4 , decided on September 16, 1994 reported in 1995(3) Bom.C.R. In this case, the appellant-Kinetic Engineering Ltd. had challenged the decision of the Company Law Board ordering registration of the transfer of shares in favour of Unit Trust of India. Various grounds of challenge were levied against the decision of the Company Law Board. The grounds of challenge relevant in this case are as under :-"(vi) Whether the Company Law Board under section 22A of the Securities Contracts (Regulation) Act 1956 has an original and unlimited power to decide whether the grounds for refusal of registration stipulated in section 22A(3) are satisfied, or whether the jurisdiction of the Company Law Board is similar to that conferred by section 111 of the Companies Act and is restricted to deciding whether the Directors have acted bonafide and in good faith in forming the opinion that registration of the transfer should be refused on the grounds stipulated in section 22A(3) (vii) Whether the Company Law Board can direct registration of a transfer even after holding that the Board of Directors had acted bonafide and in good faith The learned Judge, after referring to numerous ruling cited before him, namely, (Balwant Transport C. Ltd. v. Y.M. Deshpande)5 , A.I.R. 1956 Nagpur 20, (31 Company Cases 387) 6, (Partridge v. Elkington)7, VI Chancery Division 82, (A.C. Sharma v. Delhi Administration)8, A.I.R. 1973 S.C. 913, (P. Vajravelu Mudaliar v. The Special Deputy Collector for Land Acquisition West Madras)9, A.I.R. 1965 S.C. 1017, (Ahmed G.H. Arif v. Commissioner of Wealth Tax)10, A.I.R. 1971 S.C. 1691, (Sakal Deep Sahai Srivastava v. Union of India)11 ,A.I.R. 1974 S.C. 338, (67 Company Cases 518) 12, (41 Company Cases 1)13, (59 Company Cases 548) 14, (7 Chancery 691)15 and Section 22A 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 provisions of section 82 and section 111 and the position thereunder and wanted to provide that the refusal to transfer could only be on the ground stated under section 22A(3) (b) (c) & (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 finalised. Much stress is tried to be place on the words "in good faith" occurring in sub section 4 of section 22A on behalf of the appellants and it is tried to be contended that the said words also indicate that once the company arrives at a decision in good faith that cannot be challenged even under section 22A(4). On the other hand it is contended that the words "in good faith" occuring in the said subsection are only to emphasise that the opinion which has to be formed has to be arrived in good faith and it does not mean that the decision of the company cannot be challenged on any other ground than lack of good faith. Shri Kapadia is right in contending that now that powers of the company which are listed on the Stock Exchange are sought to be restricted by making the provision of section 22A so as to achieve free transferability and registration of transfers of listed securities of the companies. It is difficult to understand that the decision taken by the board of directors of the company to refuse the transfers would be required to be tested only on the ground of malafide or lack of bonafide. What is sought to be done is that inspite of power in the Articles of Association or section 82 or section 111 of the Companies Act, the company cannot refuse registration on any other ground than the grounds enumerated in clauses (a), (b), (c) and (d) of the said sub section 3 of section 22A. Sub section 4 of the said section 22A provides that if the company has formed an opinion that such registration ought not to be so refused they are to effect registration as provided in clause (a) of the said sub section 4. If the company forms an opinion that such registration ought to be refused on the grounds mentioned in clause (a) of sub section 3 then the company is required to intimate the transferor or the transferee by a notice in the prescribed form about the requirement under the law which has or which have to be compiled with or securing such registration and in any other case as per clause (c) of sub section 4, the company is required to make a reference to the CLB. Now, therefore, if the refusal is on the ground envisaged under clauses (b) (c) or (d) of sub section 3 then the company has to make a reference for confirmation to Company Law Board of its opinion. This clearly is with a purpose to achieve free 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 bonafides or malafides 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 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 reported in 1 Chancery Division 123, In re Bede Steam Shipping Co. Ltd. and pointed 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 of directors only bonafides and malafides could be seen but where the discretion is not uncontrolled but power is specified to the exercised in any manner one has to see apart from bonafides and malafides whether there is a power to refuse the transfer and the manner in which it has to be refused and then concluse whether the refusal is legitimate or not. Shri Seervai of course contended that even while doing so only the principles could be considered meaning thereby that whether the board of directors had committed an error on principles only in the matter. It is difficult to accept the said proposition. In the present case therefore I am of the view that the CLB has a power to consider as to whether the refusal of transfer is legitimate or not and to see whether the grounds on which the refusal was made were legitimate or not and then they would be required to consider also the said grounds which they have done in the present matter and concluded that the view taken by the board of directors that the respondents are a mutual fund and therefore the guidelines and regulations of SEBI are applicable to them is erroneous. It is a different thing to say that the view taken in that respect of the CLB is not correct but the CLB has a power to consider the said question and arrive at a conclusion and merely because the CLB felt that the decision taken the opinion formed by the board of directors of the appellants was a bona fide decision it would not mean that they should had stayed their hands from going into the said question.The learned Judge has correctly analysed the scope of Section 22A(3) (c) of the Act and we affirm the conclusions arrived at by the learned Judge.13. To sum up, the opinion of the Board of Directors of the 1st petitioners refusing registration of transfer of shares may be in good faith; but a further duty is cast that it can be refused only on any of the grounds mentioned in clauses (b), (c) and (d) of sub-section (3) of section 22A. Sub-section (3) of Section 22A read with sub-section (5) of Section 22A clearly established that the Board of Directors when it chooses to refuse registration of transfer of any security has to necessarily satisfy itself of all the requirement of the provisions of Section 22A, from the material before it and/or with the help of evidence that may be produced before it. This section over-rides the provisions of companys Articles of Association and those in Sections 82 and 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 Writ Petition No. 847 of 1992 (supra) and in Writ Petition No. 684 of 1991 (supra) which was upheld by the Supreme Court in Special Leave to Appeal (Civil) No. 17915/94 (supra). In the instant case, Board of Directors has refused to register transfers only on the assumed ground that the transfer of shares is likely to result in such a change in the composition of the Board of Directors as would be prejudicial to the interest 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 Company Law Board or before us from which 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 interest of the company. The Company Law Board has given a firm finding that the transfer of shares in the instant case is not likely to bring about any change in the composition of the Board of Directors.14. The question formulated only relates to the scope and ambit of Section 22A of the Act which we have answered as above. We have decided the principal question arising for adjudication. It is not necessary to deal with the other submissions made at the Bar for academic interest only.15. At the hearing, an attempt was made on behalf of the petitioners to place on record that the share certificates filed by the transferees for lodgment were invalid. The request was disposed of by our order dated January 18, 1995. A disputed question of fact cannot be allowed to be raised for the first time during the course of arguments, more particularly when these were not placed before the Company Law Board or any foundation laid in the petition to take these events into consideration.

Decision:
0[ds]It is difficult to understand that the decision taken by the board of directors of the company to refuse the transfers would be required to be tested only on the ground of malafide or lack of bonafide. What is sought to be done is that inspite of power in the Articles of Association or section 82 or section 111 of the Companies Act, the company cannot refuse registration on any other ground than the grounds enumerated in clauses (a), (b), (c) and (d) of the said sub section 3 of section 22A. Sub section 4 of the said section 22A provides that if the company has formed an opinion that such registration ought not to be so refused they are to effect registration as provided in clause (a) of the said sub section 4. If the company forms an opinion that such registration ought to be refused on the grounds mentioned in clause (a) of sub section 3 then the company is required to intimate the transferor or the transferee by a notice in the prescribed form about the requirement under the law which has or which have to be compiled with or securing such registration and in any other case as per clause (c) of sub section 4, the company is required to make a reference to the CLB. Now, therefore, if the refusal is on the ground envisaged under clauses (b) (c) or (d) of sub section 3 then the company has to make a reference for confirmation to Company Law Board of its opinion. This clearly is with a purpose to achieve free 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 bonafides or malafides 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 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 reported in 1 Chancery Division 123, In re Bede Steam Shipping Co. Ltd. and pointed 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 of directors only bonafides and malafides could be seen but where the discretion is not uncontrolled but power is specified to the exercised in any manner one has to see apart from bonafides and malafides whether there is a power to refuse the transfer and the manner in which it has to be refused and then concluse whether the refusal is legitimate or not. Shri Seervai of course contended that even while doing so only the principles could be considered meaning thereby that whether the board of directors had committed an error on principles only in the matter. It is difficult to accept the said proposition. In the present case therefore I am of the view that the CLB has a power to consider as to whether the refusal of transfer is legitimate or not and to see whether the grounds on which the refusal was made were legitimate or not and then they would be required to consider also the said grounds which they have done in the present matter and concluded that the view taken by the board of directors that the respondents are a mutual fund and therefore the guidelines and regulations of SEBI are applicable to them is erroneous. It is a different thing to say that the view taken in that respect of the CLB is not correct but the CLB has a power to consider the said question and arrive at a conclusion and merely because the CLB felt that the decision taken the opinion formed by the board of directors of the appellants was a bona fide decision it would not mean that they should had stayed their hands from going into the said question.The learned Judge has correctly analysed the scope of Section 22A(3) (c) of the Act and we affirm the conclusions arrived at by the learned Judge.13. To sum up, the opinion of the Board of Directors of the 1st petitioners refusing registration of transfer of shares may be in good faith; but a further duty is cast that it can be refused only on any of the grounds mentioned in clauses (b), (c) and (d) of(3) of section 22A.(3) of Section 22A read with(5) of Section 22A clearly established that the Board of Directors when it chooses to refuse registration of transfer of any security has to necessarily satisfy itself of all the requirement of the provisions of Section 22A, from the material before it and/or with the help of evidence that may be produced before it. This sectionthe provisions of companys Articles of Association and those in Sections 82 and 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 Writ Petition No. 847 of 1992 (supra) and in Writ Petition No. 684 of 1991 (supra) which was upheld by the Supreme Court in Special Leave to Appeal (Civil) No. 17915/94 (supra). In the instant case, Board of Directors has refused to register transfers only on the assumed ground that the transfer of shares is likely to result in such a change in the composition of the Board of Directors as would be prejudicial to the interest 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 Company Law Board or before us from which 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 interest of the company. The Company Law Board has given a firm finding that the transfer of shares in the instant case is not likely to bring about any change in the composition of the Board of Directors.14. The question formulated only relates to the scope and ambit of Section 22A of the Act which we have answered as above. We have decided the principal question arising for adjudication. It is not necessary to deal with the other submissions made at the Bar for academic interest only.15. At the hearing, an attempt was made on behalf of the petitioners to place on record that the share certificates filed by the transferees for lodgment were invalid. The request was disposed of by our order dated January 18, 1995. A disputed question of fact cannot be allowed to be raised for the first time during the course of arguments, more particularly when these were not placed before the Company Law Board or any foundation laid in the petition to take these events into consideration