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

3. The relevant facts, so far as these are necessary for the decision of the Writ petition are as underpetitioner is a Public Limited Company incorporated under the provisions of the Companies Act, 1913. About 50% of the totalequity 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 thusThe plain reading of3 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.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.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 of3(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) makes it clear that there isguideline 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 judgment22A 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(3) thereof and except in cases where opinion is formed to refuse transfer on ground mentioned in Clause (a) of(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(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) ofof 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 aOn 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 thusWe 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.

Reasoning: 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