TMI Blog1994 (8) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel. The petitions under article 226 of the Constitution were filed to challenge the legality of order dated November 26, 1991, passed by the Company Law Board, Western Region Bench, Bombay, while disposing of three sets of references made by respondent No. 2 company in accordance with sub-section (4)( c ) of section 22A of the Securities Contracts (Regulation) Act 1956. [See [1992] 74 Comp. Cas. 123 (CLB)] The facts which gave rise to the passing of the order under challenge in these three petitions are required to be set out in detail to appreciate the grievance made by the petitioners. Respondent No. 2 is a public limited company registered under the provisions of the Companies Act, 1956. The company undertakes construction of high-tech projects and is managed by persons with technical knowledge and industrial experience. The company has undertaken a large number of projects which are of importance for the national economy. The authorised capital of the company is Rs. 50,00,00,000 divided into 5,00,00,000 shares of Rs. 10 each. The shares of the company are duly listed on the stock exchanges in India. In the year 1989, the holding of the shares was distributed as follows : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he name of the ultimate beneficiary. Another 9,800 shares were lodged for transfer in the names of certain employees of Shaw Wallace and Co. Ltd. and/or other Chhabria companies which are controlled by Chhabrias. The acquisition by the Chhabrias of a huge volume of shares amounting to 24.4 per cent, of the capital of respondent No. 2 company was obviously not as a pure investment proposition but a determined effort for a takeover bid of the company. Bhavi Investments Ltd., a shareholder of respondent No. 2 company filed two applications before the Company Law Board under sections 247 and 250 of the Companies Act. In the first application, it was claimed that large scale of shares in two blocks, 2,76,913 shares purchased by Chhabria Investments Ltd. and 2,42,112 shares lodged by Hongkong and Shanghai Banking Corporation for registration in the name of Hongkong Bank (Agency) Pvt. Ltd. were lodged with a view to reduce the control of respondent No. 2 company. Bhavi Investments Ltd. requested the Company Law Board to determine the true persons who were financially interested to take over the control of the company. The applicants stated that Hongkong Bank (Agency) Pvt. Ltd. was not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by prohibiting options and by providing for certain matters connected therewith. Parliament, by the Securities Contracts (Regulation) Amendment Act, 1985, inserted new section 22A and which came into force in January, 1986. The amended section deals with free transferability and registration of transfers of listed securities of companies. The expression "company" under section 22A(1)( a ) means a company whose securities are listed on a recognised stock exchange. The section demands that 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 for the purpose of registration of such transfer, form an opinion in good faith and in case it decides not to register on the grounds mentioned in sub-section (3)( b ), ( c ) and ( d ), it shall make a reference to the Company Law Board and forward copies of such reference to the transferor and the transferee. Between December 1, 1988, and December 30, 1988, the Hongkong Bank (Agency) Pvt. Ltd. had lodged 2,42,112 shares with the respondent No. 2 company. The board of directors at the meeting held on January 22, 1989, decided to refuse registration and made a refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring on behalf of the petitioners, challenged the constitutional validity of sub-section (3)( c ) of section 22A of Securities Contracts (Regulation) Act, 1956, claiming that the provision violates article 14 of the Constitution. It was also claimed that the section does not confer power upon the Company Law Board to do justice in cases where transfer is refused, though such power was available to the Company Law Board under section 111(5) of the Act and consequently the provision should be construed as unreasonable. Shri Shah submitted that the finding recorded by the Company Law Board that the action of the board of directors in declining to register the transfers was bona fide and the transfer would have led to change in the constitution of the board of directors and would have adversely affected the company and the public interest, is not correct. Learned counsel also submitted that the Company Law Board was in error in not permitting the petitioners to tender affidavits on November 18, 1991, to bring on record subsequent events, only on the ground that the arguments were already concluded and the proceedings were adjourned for passing orders. The Advocate-General and Shri R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferor 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 directions of the board. Sub-section (1) of section 22A defines the expressions "company" and "security" and provides that all other words and expressions used in this section and not defined in this Act, shall have the same meanings as are assigned to them in the Companies Act. Sub-section (2) provides that the securities of companies shall be freely transferable. Sub-sections (3), (4) and (6) read as follows : "(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 requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he composition of board of directors and ( b ) such change would be prejudicial to the interests of the company or to the public interest. Sub-section (4) prescribes that in case the company decides to refuse to register transfer, then a 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 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. A plain reading of section 22A(3)( c ) makes it clear that there are in-built guidelines prescribed by Parliament. The board of directors are 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 interests. It is, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock exchange. The appeal is provided to the Company Law Board and the Companies Act. The Company Law Board can either dismiss the appeal or reject the application or by order direct that the transfer should be registered by the company and the company shall comply with the order within ten days of the receipt of the order or direct rectification of the register. Sub section (6) of section 111 of the Companies Act authorises the Company Law Board to issue interim orders as well as pass incidental and consequential orders regarding payment of costs or otherwise. Shri Shah submitted that section 637A confers power in the Company Law Board to give any direction in relation to any matter and consequently the Company Law Board even after dismissal of the appeal preferred under sub-section (3) of section 111 can direct the company to purchase the shares and pay the amount of consideration to the transferee whose application for registration of transfer stands rejected. In support of the submission, Shri Shah invited our attention to order dated April 11, 1972, passed by the Member, Company Law Board, in Appeals Nos. 6 to 16 of 1971. It is impossible to accede to the submission of learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... board of directors to form an opinion in good faith that there is likelihood of a change in the composition of the board of directors and if so, whether such change is prejudicial to the interest of the company or public interest. The impugned order exhaustively sets out the reasons which appealed to the Company Law Board to conclude that the opinion of the board of directors was justified. The minutes of the meeting of the board of directors held on January 22, 1989, and March 2, 1989, clearly set out the reasons which prompted the board of directors to decline to register the transfer. A perusal of the minutes leaves no manner of doubt that the decision of the board was perfectly justified in the facts and circumstances of the case. The Company Law Board has also referred to the earlier order passed under section 215 of the Companies Act and which order exhaustively discusses the modus operandi adopted by Chhabria to raid respondent No. 2 company and to gain control. The order sets out in detail the manner in which Chhabria and the various companies set up by Chhabria were trying to gather shares only with a view to gain control over the company. The detailed discussion in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conomic development of the country. The Company Law Board noticed that the Chhabrias had misused the funds from the financial institutions for capturing respondent No. 2 company and the change in management would obviously affect the public interest. One more factor which appealed to the Company Law Board is that the small shareholders have got a total holding of 46.29 per cent, of the capital of the company and their interest would be seriously jeopardised by the change in the management of the company. In our judgment, the reasons furnished by the board of directors of respondent No. 2 company and which are approved by the Company Law Board are extremely sound and justified. We are satisfied that the action of respondent No. 2 company was in good faith and bona fide and does not suffer from any infirmity. It is, therefore, obvious that the impugned decision is not required to be disturbed in exercise of writ jurisdiction. Shri Shah then submitted that the Company Law Board was in error in not permitting the petitioners to file additional affidavits on November 18, 1991. Learned counsel urged that the petitioners were desirous of an opportunity to bring subsequent events on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m made by the affidavit cannot be accepted as gospel truth, the alleged subsequent facts have no bearing whatsoever on the decision taken by the board of directors in the meetings held on January 22, 1989, and March 2, 1989. What is required to be examined are the facts and material available to the board of directors on the date of refusal to register the transfer of shares and it is not permissible to find fault with that decision by taking into consideration the subsequent events which are controverted. In our judgment, the petitioners have not suffered any prejudice whatsoever by the action of the Company Law Board in declining to take affidavits on record after the hearing was concluded. In our judgment, the contentions in all the three petitions are without any merit and the petitions must fail. Accordingly, rule in each of the petition stands discharged with costs. At this juncture, Shri Shah submits that the company should be restrained by an injunction from transferring the ownership in the shares in dispute, making payment of dividend or from issuing rights shares or bonus shares. Learned counsel submitted that the right to dividend, rights shares and bonus shares sho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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