Beneficial interest in shares ‑ Scope of the section relating to declaration by persons not holding beneficial interest in share - Companies Law - No. 5/75

Circular : No. 5/75 [8/18/75 ‑ CL ‑ V], dated 31 ‑ 3 ‑ 1975. Subject:- Beneficial interest in shares ‑ Scope of the section relating to declaration by persons not holding beneficial interest in share A question has been raised as to whether shares held in joint names, for the sake of convenience and easy transmission to survivors in the case of death of any of the holders, would attract the provisions of section 187C. On this, the view of the Department is that in the case of the registered joint holders of shares no trustee‑beneficiary relationship arises inter se in the eye of law. The provisions of the section and the rules are also not applicable to shares owned by public charitable trusts held in the name of trustees; since there is no distinctive individual beneficial interest in the case of this kind of shareholding. The rules are applicable to shares held by a guardian in his own name without reference to the minor s name in the register of members, but if the name of the minor as such appears, being represented by guardian, the provisions of section 187C will not be attracted. As regards shares belonging to a Hindu undivided family held by the karta of the family, having regard to the position of the karta and to the peculiar character of the interest which accrues to the coparceners in the joint estate it is not possible to postulate separate legal and beneficial interests in respect of such shares as between the karta and the other members of the family. Hence, the rules under reference do not apply. However, where the person who is in the position of karta happens to have any special relation with any person who is a member of the Hindu family in respect of shares not comprised in the family estate, section 187C and the rules thereunder will apply. This Department has held the view that a partnership firm is not a person capable of being a member within the meaning of section 41, and since a partnership is not a legal entity by itself but only a compendious way of describing the partners constituting the firm, it is necessary that the names of all the members of the partnership firm should be entered in the register of members in order that the right of the partnership as a whole to the shares in question may prevail. The holding of shares by only one or more partners on behalf of other partners of a firm should not, therefore, ordinarily arise. However, where, in a given case, the name or names of only one or some of the partners is entered in the register of members, while the intention is that the partnership as a whole should have the right of membership in respect of the shares in question, it is obviously necessary for such partners who hold shares not only for themselves but for the benefit of all partners constituting the firm whose names are not entered in the register of members, to comply with the rules framed under section 187C. An apprehension has been expressed that the rules will hinder trading in shares of companies listed on the stock exchange. On this the Department s view is that the rules apply to completed transfers where the names of the transferor and the transferee are known, and where the physical possession of shares passes, along with formal documents executed by both transferor and the transferee and presented to the company concerned in terms of section 108. It is well settled that until that stage, the person who deals in such shares on the stock exchange through a stock broker without executing the prescribed form of transfer deed, gets only the equity in respect of the consideration paid by him, which is enforceable in the event of the company s non‑registration of the transfer of shares against the purported transferor of the shares, and until that stage, the property in the shares, a species of goods transferable only, in the manner contemplated by the law, does not pass. In view of this legal position, the apprehension expressed is not tenable. In this view of the matter, in the case of any shares traded on the stock exchange without the transfer deed prescribed under section 108 duly executed both by the transferor and the transferee, there is no legal transfer of shares for the purposes of giving rise to the relationship of the trustee and beneficiary as between the transferor and the unknown transferee. The rules are applicable if shares stand in the name of a bank in the register of members of a company, while the rights pertaining to the shares are exercisable by some other person or persons whose names do not appear in the register, as there is thus a clear separation of the legal and beneficial interests in the shares. On the other hand, if the fact that the name entered in the register of members is that of the executor under a will or an administrator to whom letters of administration have been granted is clear from the entry, the rules will not be applicable; but if that fact is not thus clear, the disclosure required by the rules will have to be made. The rules are not applicable to shares held by official designations only, e.g., court receiver, official liquidator, administrator general, Income‑tax or Wealth‑tax Commissioner, custodian of evacuee or enemy properties, etc., since no title to the shares vests in the officials who deal with the property under special judicial or statutory authority.