Judgment:
1. These four appeals have been filed under Section 111 of the Companies Act, 1956 (hereinafter referred to as "the Act"), by the appellants herein against the refusal of registration of shares by Hyderabad Industries Limited (hereinafter referred to as "the company"). 'As the facts and circumstances in all the appeals are similar, we are disposing of these four appeals by this common order.
2. The brief details of the appeals, are as follows. The appellants herein lodged with the company the shares as indicated in the annexure-"I" along with the relevant transfer deeds on October 29, 1990. The company informed the appellants through a letter dated December 28, 1990, that, the board of directors had, in their meeting held on December 26, 1990, decided to refuse the registration of the abovementioned shares on the ground that the instruments of transfer were not proper and complete documents and information relating to transfer have not been submitted as called for by the company earlier and hence the requirements under the law relating to registration had not been complied with. According to the appellants these grounds of refusal are not correct and, therefore, they have filed these appeals on February 27, 1991.
3. The company in its reply has taken the stand that the refusal of registration was proper and the board was correct in refusing to register the shares in the name of the appellants. According to the company, the shares were originally in the name of Deccan Enterprises Private Limited ' (hereinafter referred to as "Deccan") and there was no valid authorisation of the transferor company for the transfer of these shares and the appellants do not hold proper instrument of transfers duly executed by the transferor company. It has also been averred by the company that the transfer of shares by the transferor company was in violation of an undertaking given by the transferor company to the High Court of Andhra Pradesh in another proceeding, that it would not dispose of any of its assets.
4. During the hearing, Shri C. Harikrishnan, senior advocate, appearing on behalf of the appellants, submitted that originally the shares were in the name of Deccan in which Shri O.P. Jalan, one of the appellants in the present proceedings, was the managing director. He was authorised by a board resolution of the transferor company on March 15, 1986, to invest, purchase or acquire shares up to a total limit of Rs. 20 lakhs at any one time at his discretion and on the basis of this authorisation, Shri O.P. Jalan transferred these shares to the appellants herein on payment of valuable consideration on March 16, 1990. These shares were originally lodged for registration of transfer on March 16, 1990, along with a certified copy of the board resolution of the transferor company dated March 15, 1986, but the respondent company returned these shares certificates and transfer deeds with a letter dated April 26, 1990, on the ground that the board resolution of the transferor company dated March 15, 1986, did not pertain to sale/transfer of the shares under reference. Therefore, the respondent company sought for specific authorisation from the board of the transferor company authorising the sale of these impugned shares. The appellants, once again, on May 7, 1990, wrote to the company that the overall authority given by the transferor company by resolution dated March 15, 1986, covers the sale/transfer of the impugned shares also.
Again the company returned the shares vide its letter dated June 14, 1990, reiterating its stand. It also raised another objection that there was noauthorisation/consent in terms of Section 297 of the Act for transfer in favour of the appellants. Further, the company also informed the appellants that one of the shareholders of the transferor company has intimated, in writing to the company, that the transferor company had given an undertaking before the High Court of Andhra Pradesh that none of the assets of the company would be disposed of and as such the disposal of these shares by the transferor company was against the undertaking given and as such should not be registered in the name of the appellants. The appellants again wrote to the company vide their letter dated July 17, 1990, enclosing therewith the resolution of the transferor company dated May 5, 1989, authorising Shri O.P. Jalan to execute, on behalf of the company, transfer deeds in respect of all the impugned shares which conclusively proves that the board resolution dated March 15, 1986, authorised the sale/transfer of the impugned shares. The company was also informed that the undertaking given in the High Court of Andhra Pradesh was in the year 1988 while the impugned shares were sold as early as in September, 1986, and as such there is no violation of the undertaking given to the High Court of Andhra Pradesh by the transferor company. However, the company again returned the instruments along with the share certificates, vide its letter dated September 8, 1990, not only disputing the explanation given by the appellants but also on the ground that the transfer deeds had become invalid in terms of Section 108(1A) of the Act as being beyond the one year period from the date of endorsement by the Registrar of Companies. Counsel for the appellants also stated that the administrator appointed by the Andhra Pradesh High Court went into the validity of the transfer of the impugned shares and vide his decision dated October 17, 1990, he held that these shares had in fact been sold by the transferor company to the appellants and valuable consideration had been received by the transferor company. This fact was informed, Shri Harikrishnan stated, to the company, vide letter dated October 20, 1990. He also further stated that the appellants once again sent back the shares along with the transfer deeds to the company and in spite of this the company has decided to refuse the transfer.
5. He further alleged that the company being a listed company, it was bound, in the case of refusal of transfer of shares, to file a reference under Section 22A of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as "the SCR Act") before the Company Law Board which it had failed to do. Even though the company is a listed one and would not normally go into various aspects of transfer as in the present case, the company did so only because of an ulterior motive to refuse to registerthe transfer because of various differences of opinion between O.P. Jalan, one of the appellants and the president of the company, Shri R. Khemka. Referring to the reply of the company, wherein it has raised some objections regarding valuation of shares, Shri Harikrishnan stated that the consideration shown was on the basis of the purchase price on the dates of transfer in respect of the original shares and the stamp duty was paid on the basis of the market price of the shares on March 16, 1990, with which only the company should be concerned. Accordingly, Shri Harikrishnan prayed that directions be issued to the respondent company to register the transfer of the impugned shares.
6. Shri T. Raghavan, senior advocate, appearing on behalf of the respondent company, refuted the argument of Shri Harikrishnan and stated that the impugned shares comprised two classes of shares, viz., 8,781 original shares and 8,781 bonus shares. These bonus shares were issued on May 31, 1989, while the original shares were issued before 1986. Therefore, there should have been two sets of transfer forms, one for the original shares and the other for the bonus shares. Since the name of the transferor company was in the register of members, these bonus shares were issued only in favour of the transferor company and, therefore, it formed the assets of the company. Being the assets of the company, it was covered by the undertaking given by Deccan in the High Court of Andhra Pradesh. Therefore, on no account could the transfer of bonus shares be effected as it would be in violation of the undertaking. As far as the original shares are concerned, even though it is represented that they were sold in the year 1986, documents have been executed only in 1990. Even on the date of execution of the transfer deed, the interim administrator has already taken charge and Shri O.P. Jalan could not have signed the transfer instruments as managing director of the company on March 15, 1990. He further stated that if the transfers had been effected, as alleged by the appellant on September 15, 1986, even as per the interim administrator's report the consideration was received only on January 6, 1987. This being a listed company delivery could be effected only through brokers as per the Securities Contracts (Regulation) Act, 1956. Therefore, this transaction violates provisions of law. He further stated that the decision of the interim administrator in regard to sale of the impugned shares is already under dispute before the High Court of Andhra Pradesh and an application has already been made to that court by one of the shareholders of the transferor company to declare the transferor company as the true owners of the impugned shares and the company has also been impleaded as a party. Moreover, the company has been put on notice about the injunction order by the High Court of Andhra Pradesh regarding disposal of property by the transferor company and if the appellants were to contend before the Company Law Board that the restraint order does not cover the impugned shares, the proper course of action for the appellant is to seek clarification from the High Court of Andhra Pradesh and not to approach the Company Law Board for adjudication in the matter.
7. Even assuming, he further argued, that the transfer actually took place as alleged in September, 1986, the appellants have not stated anything about any transfer deeds that were executed at that time, thus creating doubts about the genuineness of the transfers. According to him, this doubt further gets strengthened by the difference in the version of the appellant and the decision of the interim administrator regarding the date of receipt of the consideration which according to the appellant, as stated in his letter dated July 17, 1990, was on September 15, 1986, while as per the interim administrator it was January 6, 1987. Referring to the decision of the interim administrator, Shri Raghavan further stated, that, even as per the interim administrator, the resolution of the board of directors dated March 15, 1986, relied on by the appellant, did not give authority to the managing director of the transferor company to transfer the impugned shares. Even the transfer deeds are not in accordance with the board resolution of the transferor company dated March 15, 1989, inasmuch as the board authorised the transfer of shares only in individual names while the transfer deeds have been executed in joint names. He further stated, that, since the issue relating to genuineness of the transfer of shares is already pending before the High Court of Andhra Pradesh, the right course of action should be to abide by the decision of the High Court of Andhra Pradesh, rather than deciding the issue by the Company Law Board. He, therefore, stressed that the company's action in refusing the transfer of shares was bona fide and the Company Law Board should not intervene.
8. Shri Harikrishnan, in reply, first questioned the plea of Shri T.Raghavan that these bonus share certificates were issued much later after the decision of the board of directors of the transferor company, which according to Shri Harikrishnan should have been in the pleadings and cannot be raised during arguments. The very fact that the company did not raise this issue in its reply to the appeals, this point should be ignored. Even otherwise the bonus shares were allotted in March, 1989, and, therefore, when the transferor company considered the transfers, in its meeting held on March 15, 1989, it was aware of the allotment of bonus shares. Therefore, there is no substance in the argument of Shri Raghavan in this regard, he stated. He also refuted the arguments of Shri Raghavan that the company was put on notice regarding the case relating to these shares in the Andhra Pradesh High Court as the company refused registration on December 26, 1990, while the company was impleaded as a party in these proceedings only in February, 1991. As regards the restraint order relating to bonus shares, Shri Harikrishnan stated that when these shares were transferred in 1986 to the appellants, they became automatically entitled to all the bonus shares issued thereafter and the bonus shares could never become the assets of the transferor company and as such they were not the assets of the transferor company on the date of undertaking. Regarding the genuineness of the transfers, Shri Harikrishnan stated that the interim administrator, a retired High Court judge, was an officer of the High Court and his report should be taken as correct and binding and this should not be questioned. The interim administrator has confirmed the sale of the shares and receipt of consideration and the interim administrator also wrote to the company on October 20, 1990, that the transferor company stood by the transaction. Therefore, he pleaded, that this affirmation by the interim administrator, an officer of the High Court should be sufficient for the company to act upon and as such there was no need for the appellant to approach the High Court to seek any clarification as suggested by Shri T. Raghavan. As far as joint names in the transfer deeds are concerned, he stated that even in stock exchange transactions the transferor would never be aware of the transferee, whether joint or single and as long as one of the names of the transferees is as per the resolution of the board of the transferor company, that should be sufficient.
9. We have considered the pleadings and submissions of counsel. It is an admitted fact that the transfer deeds along with share certificates were lodged with the company on October 29, 1990, and the company refused to register the transfer on December 26,1990, the communication of which was sent to the appellants on December 28, 1990, and the appeals have been preferred on January 27, 1991. It is also an admitted fact that these transfers relate to 8,781 original shares and 8,781 bonus shares. It is also an admitted fact that Shri O.P. Jalan, one of the appellants was the managing director of Deccan, the transferor company. Admittedly, there are certain proceedings in the Andhra Pradesh High Court in relation to Deccan.
10. The respondent company is a listed company and as per Section 22A of the Securities Contracts (Regulation) Act, 1956, there are certain grounds under, which alone, the board of directors of a company could refuse registration of its listed securities and whenever such securities are refused for registration, a reference has to be made to the Company Law Board for confirmation. Admittedly, in the present case the respondent company did not make any reference to the Company Law Board for its confirmation of the resolution of the board to refuse registration of these shares.
11. As per the communication received by the appellants dated January 28, 1990, the board of directors had refused registration on the following grounds : 2. Complete documents and information relating to transfer had not been submitted as called for by the company earlier and hence requirements under the law relating to registration had not been complied with.
3. As required under Clause (e) of Sub-section (4) of Section 22A of the Securities Contracts (Regulation) Act, 1956, the following requirements of law relating to registration of transfers had not been complied with : In addition to the above, the notice also has sought for certain other information.
From the above, it is clear that the refusal for registration of transfer as communicated to the appellant contained only three grounds for refusal and no other ground. The board of the respondent company had not considered any other factor, as is obvious from the notice.
12. Even though the company did not make any reference to the Company Law Board under Section 22A of the Securities Contracts (Regulation) Act, 1956, yet it chose to send a notice to the transferor/transferee in Form No. 1 which has been prescribed under the Securities Contracts (Reference to Company Law Board) Rules, 1986. The idea of giving a notice with reasons for refusal is to enable the transferor/transferee to represent against the grounds of the decision. As we have already mentioned, the only three grounds for refusal are, instruments were not proper, they did not comply with provisions of law and certain information had not been furnished. However, in reply to the appeals, the company has raised various other grounds, some of the important of which we have already indicated in para 6.
13. Shares of a listed company are freely transferable. The power of refusal of registration by a listed company can be exercised only on the grounds stated in Section 22A of the Securities Contracts (Regulation) Act, 1956.
14. Therefore, the respondent company being a listed company, we have to only examine whether the grounds of refusal fall within the provisions of Section 22A of the Securities Contracts (Regulation) Act, 1956. The first ground of refusal as per the notice given to the appellants is that the instruments of transfer were not proper. While there is no elaboration as to the nature of defects in the instrument, in the reply and during, the argument, it was stated that the consideration for transfer was not properly stated in the instrument and that the names 6f the transferees have not been properly stated.
Regarding the first defect it was stated that while in respect of the transfers to O.P. Jalan, Sudha Jalan, O.P. Jalan and Vikas Jalan, the consideration for 781 original shares was shown at Rs. 50 per share while in respect of 781 bonus shares the consideration was shown as Rs. 100 while the prevailing market rate on the date of transfer was' Rs. 115. In respect of the transferees, Kavita Jalan, Sudha Jalan and Vikas Jalan, the transfer instruments for 3,000 original shares showed a consideration of Rs. 89 each and 3,000 bonus shares covered by two separate transfer instruments the consideration was shown as Rs. 89 as against the market rate of Rs. 115 on the date of transfer, viz., March 16, 1990. In respect of transferees, O.P. Jalan, Sudha Jalan and Vikas Jalan, the instruments relating to 3,000 original shares and 3,000 bonus shares the consideration is indicated at Rs. 60 per share and in respect of Vikas Jalan, O.P. Jalan and Sudha Jalan for the instruments relating to 2,000 original shares and 2,000 bonus shares the consideration has been shown as Rs. 60. In all these cases, the prevailing market rate on the date of transfer was Rs. 115. Therefore, according to the respondent company, there has been variation between the market rate and actual consideration which makes the instrument defective.
15. As far as the second defect is concerned, according to the company, while the transferor company authorised the issue of shares only in favour of specific individuals, these instruments had been executed in favour of joint holders which also according to the company makes the instrument defective.
16. The question whether a company should be concerned about consideration was considered in Deepak Associated Paper Mills (Company Law Board decision, page 169) wherein a similar case arose and the Company Law Board held that refusal on this ground was not proper. In this case, admittedly, the stamp duty has been paid on the basis of Rs. 115 per share which was the market price and since adequate stamp duty has been paid on this basis there is no violation of the Indian Stamp Act relating to payment of duty. Therefore, one of the grounds adduced for refusal is not proper. In regard to the second defect that the transfer instruments contained joint names as against a single name authorised by the board of directors of the transferor company, we are of the view that this is too technical an objection which does not merit any consideration inasmuch as one of the joint names is the name approved by the transferor company for transfer. Even otherwise as pointed out by learned counsel for the appellants, once a shareholder decides to transfer the shares and has received valuable consideration, especially in the case of a listed company, the instruments are always signed in blank and the transferor would not know the name(s) of the transferee or be aware of any person to whom ultimately the shares were sold and whose name is entered in the transfer form. Therefore, this ground also according to us, is not a valid ground.
17. If we examine the first and third grounds, we find that the third ground of refusal is nothing but an elaboration of the first ground that the instruments of transfer were not proper.
18. As far as the ground that the date of transfer is not properly stated is concerned, it is the case of the company that if the shares had been transferred as claimed by the appellants in 1986 itself, then the very fact that the transfer instruments indicate the date of transfer as March 15, 1990, itself would make the instruments invalid.
In this connection, it is necessary to point out that neither the Companies Act, 1956, nor the Securities Contracts (Regulation) Act, 1956, specifies any time limit within which the instrument of transfer relating to transfer of shares should be lodged with the company from the date of purchase of shares. It only states that in a listed company the instrument of transfer should be lodged within one year from the date of endorsement on the transfer instrument by the prescribed authority. Therefore, in a strict legal sense, since the endorsement on these impugned transfer instruments by the prescribed authority is in November, 1989, and the instruments had been lodged with the company in March, 1990, there is no defect in the instrument in this regard.
Therefore, taking into consideration all these aspects into account we find that the ground that the transfer instruments were not proper has not been substantiated.
19. If we consider the second ground, that is, that complete documents and instruments of transfer have not been submitted and hence the requirement of law has not been complied with, it is necessary to examine the right of a company to call for such information.
Undisputedly, a company has a right if such a transfer is regulated by a statute as in the case of transfer to a non-resident which is regulated by the Foreign Exchange Regulation Act, 1973. The permission, if any, prescribed by the statute must be obtained and when requisite permission under the Foreign Exchange Regulation Act, 1973, is not obtained, it is open to the company and indeed it is bound to refuse transfer of shares of the Indian company in favour of the non-resident.
But once permission is obtained whether before or after the purchase of shares the company cannot thereafter refuse to register the transfer of shares. Nor is it open to the company or any authority or individual to take upon itself or himself the task of deciding whether the permission was rightly granted by the Reserve Bank of India. The above is the observation made by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548. These observations of the Supreme Court are very relevant for considering the second objection raised by the company. Admittedly, there was some doubt in the minds of the company about the transfer by Deccan. But with the report of the administrator appointed by the High Court of Andhra Pradesh wherein he had categorically stated, after going through all the records of the company, that the transfer of shares had in fact been effected by Deccan to the appellants with the specific assertion that Deccan stood by the transfer, we are of the view that the company was no longer justified in taking up a stand regarding the genuineness of the transfer of shares by Deccan. It is also necessary to point out that if a listed company were to make such roving enquiry in respect of each and every transfer before registration, the entire purpose of making listed securities freely transferable will become a nullity. Therefore, the second ground which the company has relied on for refusal also does not have any merit.
20. Having held that the grounds on which the board of directors of the company formed the opinion to refuse registration of transfer of shares has not been based on valid grounds, the next question that arises is whether we should consider the other grounds which were either incorporated in the replies filed by the company or advanced during arguments.
21. In a strict sense in a case of refusal we have to only go by the grounds considered by the board at the time of refusal and we need not go into other grounds at all. However, since arguments were advanced by both sides, we thought it fit to consider these grounds also. The important additional grounds are that Deccan had given an undertaking to the Andhra Pradesh High Court that it will not dispose of any of its assets and this undertaking was given on April 20, 1988, and that the respondent company has been made a party in the proceedings in the Andhra Pradesh High Court in which the validity of the transfer of impugned shares has been questioned. As far as the first one is concerned, counsel for the company argued that whether the shares form part of the assets of the company is an issue to be decided by the Andhra Pradesh High Court while the other learned counsel for the appellants stated that the undertaking was given only on April 20, 1988, but transfer of original shares had already taken place and as such the shares were no longer with the company to be a part of its assets. The bonus shares were issued for original shares and even assuming the bonus shares were issued after the transfer of original shares, these bonus shares can never form part of the assets of the company inasmuch as the bonus shares always go with original shares.
When the shares are transferred and bonus shares are issued in the name of the transferor then he holds the bonus shares only as a trustee for the transferee. We are of the view that the stand of learned counsel for the appellants is more logical especially in view of the statement of the administrator of the company that the original shares were in fact transferred as alleged in 1987 while the purported undertaking was given only later.
22. In regard to pending proceedings regarding the validity of the transfer of impugned shares, we feel that a listed company, just because a suit has been instituted in a court, cannot refuse transfer of shares unless there has been either an injunction against the transfer or there is any direction to that effect. Mere pendency of proceedings does not fall within the provisions of Section 22A of the Securities Contracts (Regulation) Act, 1956. Therefore, even this additional ground that the company had relied on for refusal of transfer does not hold good.
23. Therefore, taking all the above aspects into consideration, we are of the view that the board of directors of the company had erred in not registering the impugned shares in favour of the appellants, and as such the board has to register the transfer of these shares.
Accordingly, we hereby order that the respondent company will, within a period of three months from, the date of receipt of this order, register the impugned shares in favour of the appellants. However, in view of the various proceedings relating to these shares pending in other fora we also feel it necessary that the appellants should be restrained from transferring these shares further to anyone else till the other pending proceedings are finalised. We order so. The company is also directed to advise the concerned stock exchanges suitably in this regard.