By Avani Bansal:
With the growth in the number of public companies in the Indian market, several anamolies have arisen regarding procedural aspects and the law regulators are finding it increasingly difficult to bridge the gap between the law and its practice. Hence I decided to highlight one such troublesome aspect which deals with refusal by companies to register shares. Though its more of a legalistic discussion, but the problem is one that can be faced by many of us while dealing in the share market. This write-up therefore summarises the grounds on which a public company can refuse to register shares indicating thereby that all other grounds cannot be held to be valid and therefore the person concerned can protest in case of such refusal by any public company.
The grounds on which a Public Company can refuse to register transfer of shares have not been specifically enumerated under the Companies Act. However the provision of Sec.111-A (2) of the Companies Act allows the Board of Directors to refuse to register transfer of shares “for sufficient cause”. It is now settled that the words “sufficient cause” should not be given a restricted meaning. The Company is not confined to merely examining whether the formalities required, such as signatures, stamp etc., have been fulfilled but it can refuse registration of transfer of shares if it finds that the transfer would involve violation of any other provision of the Companies Act, SEBI Act, or Regulations issued by SEBI, SICA or any other law in force. The Company however cannot act arbitrarily and will have to justify its action if called by the Company Law Board. It is to be noted that under the scheme of Sec 108-A to 108-D, the Central Govt while granting or declining to grant the approval for acquisition of shares, requires to examine various factors such as the impact of the acquisition on the management of the company, whether such an impact is desirable, the existing legal obligation of the company, whether such transfer itself would place the company in a situation to make a breach of certain existing contractual obligations of the company, thereby exposing the company to an action in law etc. The company can thus also refuse to register transfer of shares on these grounds.
Instances where refusal held to be justified: On the basis of combined reading of Regulation 23 of SEBI Takeover Regulations, 1997 and Sec 111-A (2) & (3), it is sufficient cause to reject transfer of shares which will have the impact of increasing the aggregate holding of the acquirer to more than 10 percent unless the provisions of Takeover Regulations are complied with as it would be violative of law. Similarly failing to disclose acquisition of shares beyond 5 % within 4 days of such acquisition, can be a valid ground for refusal. Transfer in favour of a person who is legally incapacitated to enter into a contract, like an alien enemy or an insane person is an illegal transaction and the company will be justified in refusing to register such transfer. Incorrect identity of the petitioner, allotments not supported by consideration, non-production of instrument of transfer, shares based on forged transfer deeds etc. are also valid grounds for refusal.
Instances where refusal held not to be justified: Refusal to register the shares in the name of a bank on grounds: 1) that the shares had been offered as collateral security but not pledged in favour of the bank 2) that the facilities availed of by the company from the bank were temporary in nature and consequently the shares did not require to be transferred in terms of the Reserve Bank Circular held not to be sufficient cause. Grounds such as share certificates not being delivered in full number, stamps not being cancelled are considered frivolous and therefore not sufficient.
Further, rectification of the register of the members was directed by the courts in the following cases: where there was an error, mistake or defect apparent on the face of the register of members, where the shares were not offered in terms of the Articles of the company, where the allotment was not made within reasonable time, where the allotment in violation of the Articles was made by two Directors in favour of their relatives without the sanction of the Board of Directors only for increasing the majority power of the Directors, where the Directors acted oppressively, capriciously, corruptly, or with mala fide intentions; where there was a refusal by the Company to transmit the shares without their being any power in the Articles; where payment of shares in kind was accepted without filing particulars in compliance with Sec. 75 (1) (b); where the joint holders sought to split the holding into individual holdings. This also gives an idea of the limitation on the Company’s power of refusal for registering transfer of shares.
Thus though it is not possible to exhaustively enumerate all the grounds on which a Company can refuse to register transfer of shares, the above gives an idea as regards the validity of a refusal and is with the purpose of enhancing understanding regarding this aspect of law.