Case: Bajaj Auto Limited Vs. Company Law Board and Others

These appeals by special leave arise from the common order of the Company Law Board (respondent No. 1 ) which had partly upheld the decision of Bajaj Tempo Limited (respondent No. 2) in declining to register the transfer of its shares in favour of M/s. Bajaj Auto Limited which had been purchased by the appellants. These are essentially two groups of shareholders which control these companies. While Bajaj Group has the control of the appellant it is Firodia Group which controls Bajaj Tempo LtdBajaj Auto Limited (appellant in Civil Appeal No. 3480/86) is the holding company of Bajaj Auto Holdings Limited (appellant in C.A. Nos. 3480/86 &3420-79/86) and they, along with other individuals who were members of their group (all of whom are appellants in these appeals are existing share-holders of Bajaj Tempo Limited which is a public Limited company. Bajaj Auto Limited purchased 50 shares of Bajaj Tempo Limited and Bajaj Auto Holdings Limited purchased 13150 shares of the said company. These purchases were made in the year 1983 through different brokers and they were sent to M/s. Bajaj Tempo Limited for transfer of shares in the appellants names. By three different resolutions dated 29.8.1983, 27.9. 1983 and 19.11.1983, the transfer of shares was rejected by Bajaj Tempo Limited. The minutes of the meeting dated 29.8.1983 contained the reasons for refusal to transfer and the resolution passed thereto. The relevant portion of the said minutes is as under:he Directors, therefore, after due deliberation and considering all aspects unanimously resolved not to approve the said transfers and declined to register the said transfers considering t he facts briefly stated above and grounds briefly summarised as) Further acquisition of shares of this Company by Bajaj Group if permitted will lead to interconnection between this Company and the Companies of the Bajaj Group which is not desirable in the interest of this Company(2) The Bajaj Group is not acquiring the shares of this Company with a view to or for the purpose of genuine investments but with ulterior and oblige motives and purposes including with a view to destablise the management of this company(3) Bajaj Auto Limited and this Company are competitors in business in a s much as both the manufacturing light Commercial Vehicles. The attempt of Bajaj Group to make inroads in this Company by acquiring large block of shares is to cause detriment and prejudice to the company(4) In view of the facts stated above although absolute discretion is conferred under Articles of Association of the Company, the Board has carefully considered the matter and has decided to refuse to register the transfers. The Transferees in the circumstances are also not desirable persons from the larger point of view of the interest of Bajaj Tempo Limited, as a wholeTherefore, the proposed transfers are not in the interest of the CompanyRESOLVED that in pursuance of Article No. 52 of the Articles of Association of the Company, the transfer of shares submitted of this meeting and herein below mentioned be and are hereby not approved and the Board of Directors do decline to register the said transfers and the Secretary to give to the parties notice of this decision refusing the said transfers in the following terms:It is for the same reason as above that the other transfers were declined by the Resolutions dated 27.9.1983 and 19.11.19 83Appeals were the filed by the appellants under Section 111 ofthe companies Act, 1956 before the Company Law BoardOn the basis of the pleading before it and the submissions of the counsels for the parties, the Company Law Board formulated the following five issues for its consideration:1. whether the appellants and the respondents are rivals in business ?2. whether the purchases of impugned shares were bona fide investments ?3. Whether the appellants can be termed as undesirable persons ?4. Whether Apprehension of inter-connection of respondent company with Bajaj Group is well founded and whether it can be a good ground for refusal to transfer shares ?By a reasoned order, issue Nos. 1, 3 &5 were decided in favour of the appellants. It came to the conclusion that the appellants were not rival in business nor were they undesirable persons and by registering the transfer of 7600 shares, which transfers were intra-group, there would be no change in the overall holding and, therefore, Bajaj Tempo was not justified in refusing the said transfer. Issue Nos. 2 &4 were, however, decided against the appellants and the effect of this was that refusal to transfer 50 shares in favour of Bajaj Auto Limited and 5550 shares in favour of Bajaj Auto Holdings Limited was upheldIn deciding Issue No. 2, the Company Law Board came to the conclusion that as Bajaj Auto Holdings Limited was an investment Company, it was not convincing that it would invest in the shares of Bajaj Tempo by way of investment. It further came to the conclusion that the proposed investment in the shares of the respondent company by the appellants was to increase its share holding and was motivated. It also noted that the return on the shares of the company did not appear to be adequate enough warranting successive purchases of the shares by the appellants.Dealing with Issue No. 4, the Company Law Board noticed that on 29.8.1983, the total holding of the appellants group was about 23.2% in Bajaj Tempo Ltd. At that time the inter- connection limit under the Monopolies and Restrictive Trade Practices Act 1969 (hereinafter referred to as M.R.T.P. Act) was 33 1/3% and the said limit has been reduced to 25% w.e.f. 1.8. 1984 as a result of amendment in the M.R.T.P. Act. The Company Law Board was of the opinion that even though at the time of lodgment of shares the said amendment had not been made, there was a feeling prevalent in trade and industry that the inter-connection limit would be reduced to 25%. It then held that the limit up to which shares may be allowed to be acquired by any group, in the share holding of the respondent company in such circumstances, has to be the subjective opinion of its Board of Directors and when the acquisition of the appellantsIt, therefore, concluded that the apprehension of Bajaj Tempo Ltd. that it was likely to get inter-connected with the appellants, in the event of impugned transfer of shares being allowed, was not baseless or ill-found.

Court's reasoning:
As we see it 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.The Company Law Board in the present case came to the conclusion that at least two of the reasons stated by the Company while refusing to register the transfer of share were not correct. It 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 appellantsReverting to issue No. 2. we find that in the Resolution of 29.8.1983 w hat had been stated was that the appellants were not acquiring the shares with a view to or for the purpose of genuine investment but with ulterior motives and purposes including with a view to destablise the management of the company. The alleged reason, therefore, was that the shares were being purchased with ulterior motives and purposes and with a view to destablise the management of the company. The Company Law Board appears to have misunderstood this reason and framed the issue as whether the purchases of impugned shares were bona fide investments. It opined that being an investment company, it was not convincing, that the appellants would prefer to invest in the shares of the company other than the respondent company and the purchases were made so as to increase its share-holding in the respondent company and are, thus, motivated. It also 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 l aw 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 destablise 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 destablise 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 shareholders 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.It was submitted on behalf of the appellants that the Company Law Board over-looked the fact that the return on the investment of such shares is not only by reason of divided which is obtained but the main income which was expected to arise was from the appreciation in value o f the shares. It was submitted by the learned counsel for the appellants that at the time when the purchases were made, the share price was around Rs. 145 per share and presently it is around Rs. 210/- per share. In our opinion there is merit in this contention. 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 fideAs regards the fear of being regarded a dominant undertaking, in the event to the being inter-connection between the appellants and the respondent company are concerned, it has been contended on behalf of appellant that the sections pertaining to concentration of economic power in Chapter III of M.R.T.P. Act i.e. Sections 25 &26 have bee n omitted w.e.f. 27.9.1991 and, therefore, as on today it would make no difference and the said reason cannot be regarded as valid. While it is true that the fear of respondent company being regarded as a dominant undertaking as on today ma y not arise but what has to be seen is as to whether this could be a genuine apprehension in the mind of Board of Directors when in 1983 they had declined to register the transfer of shares. The admitted fact is that as on that date, inter-connection could have been established only if the appellants had acquired 33 1/3% shares of the respondent company. But, it is contended that in view of Sachar Committees Report, the company apprehended that the Act would be amend ed so that instead of 33 1/3% shares, it should be 25%. We would, therefore, proceed on the assumption that the figure of 25% had to be avoided by the respondent company.It is an admitted fact that even if the purchase of the shares was registered, the total percentage of the holdings 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, according to the figures supplied by Mr. Nariman at the time of hearing, the percentage of the holding of the appellants group would have risen to only 23.408%. The learned counsels for the appellants are right in contending that if fear of the inter-connection was the real reason in refusing to register the transfer then such a reason could not exist at that moment because even with the registration of the transfer the total mark of 25% would not be reached. We are in agreement with the appellants submission and are of the opinion that 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% mar k, 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 sharesFaced with this, Mr. Nariman, learned counsel, however contended that because of the provisions of M.R.T.P. Act in determining the inter-connection, the shares held by a financial institution are required to be excluded. He submitted that even if the appellants did not purchase any further shares but further purchase by financial institutions of more shares could possibly lead to the same result namely of the percentage of holding of the appellants group going beyond 25%. While it is true that the shareholding of the financial institutions is not to be taken into account in determining whether or not two or more bodies corporate are under the same management because of Explanation IV to Section 2(g) of M.R.T .P. Act, we find that if the shares in question had been registered, and existing share-holding of the financial institutions excluded, then the total percentage of shares of the appellants group would come to only 24.405%. for this percentage to push u p to 25%, the financial institutions would have to acquire approximately 27740 additional shares of Bajaj Tempo Limited, which may not be very likely. In any case, if such a situation did arise namely financial Institutions purchasing more shares which would result in danger mark of 25% to reach, there is nothing in law which would then prevent the Board of Directors of Bajaj Tempo Limited to refuse the registration of transfer in favour of Financial institutions. In other words just as the Directions can refuse to register transfer of shares in the appellants name in order to avoid inter-connection similarly, and for the same reason, they could refuse to register transfer of such further purchases by financial institutions if such purchase would have had the effect of making the appellants inter- connected with Bajaj Tempo Limited. The Company Law Board was, therefore, wrong in rejecting a contention of the appellants that the apprehension of the respondent company that it was likely to get inter-connected with the appellants in the event of the impugned transfer of shares being allowed was baseless and/or ill-founded.In order to see whether the Board of Directors had act ed in furtherance of a personal interest or in the interest of company, the resolution dated 29.8.1983 should be read as a whole. It is apparent that being aware of the state of law, every possible reason was stated in this resolution which could justify the Directors in refusing to register a transfer. 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 we re not desirable persons from the large 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 destablise the management of the company. Lastly, we find that the acquisition in question would not have led to the interconnection 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 ma y 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.