- Whether the provisions of Regulation Act will apply to the shares of a public limited company which are admittedly not listed on any stock exchange?
The Supreme Court of India in Bhagwati Developers Pvt. Ltd. Vs. Peerless General Finance & Investment Company Ltd., AIR 2013 SC 1690 : (2013) 5 SCC 455 : 2013 (5) SCR 708 : JT 2013 (4) SC 624 : 2013 (5) SCALE 378 held that for shares of a public limited company to come within the definition of securities they have to satisfy that they are marketable.
A bench comprising of Justice Chandramauli Kr. Prasad and Justice V. Gopala Gowda observed that `Marketability’ requires free transferability. Subject to certain limited statutory restrictions, the shareholders possess the right to transfer their shares, when and to whom they desire. It is this right which satisfies the requirement of free transferability.
Shares of public limited company though not listed in stock exchange, come within the definition of `securities’ and, therefore, provisions of the Act would apply including the indictments contained in s.13 thereof.
the bench said.
# Securities Contracts (Regulation) Act, 1956
In the instant case, the place where the contract for sale of shares in question has been entered is a notified area for the purpose of Section 13 of the Securities Contracts (Regulation) Act, 1956.
Further, the contract is not between the members of a recognized stock exchange and, therefore, as held by the Company Law Board, is in violation of Section 13.
Part of consideration passed more than 6 years after the transfer. The Apex Court held that the transaction does not come within the expression `spot delivery contract’ as defined in Section 2(i) and, as such, in violation of Section 16 and Notification dated 27.6.1969.
# Facts of the Case
On 30.10.1987, respondent no. 2 agreed to transfer 3530 shares of Peerless General Finance and Investment Company (respondent no. 1) to the appellant by way of repayment of loan. But the transfer deeds were not properly filled in nor were executed. Meanwhile respondent no. 2 received bonus shares and there arose a dispute between the appellant and respondent no. 2 with regard to entitlement to bonus shares.
Ultimately, by compromise decree dated 28.11.1994, it was decided that respondent no. 2 would retain as absolute owner the dividend of the entire shares upto the accounting year 1989-90 as part of the consideration for the settlement, besides a sum of Rs.10 lakh paid by the appellant by pay order dated 21.11.1994. Accordingly, the appellant on 12.12.1994 lodged the transfer deed in respect of 14120 shares with Peerless for their transfer.
Peerless refused to register the same on the ground that the transaction was in violation of provisions of the Securities Contracts (Registration) Act, 1956. The Company Law Board held that the transfer of shares in favour of the appellant was contrary to Sections 13 and 16 of the 1956 Act. The Company Judge of the High Court also held against the appellant.
In the instant appeal, the questions for consideration before the Court were:
- (i) “whether the provisions of Regulation Act will apply to the shares of a public limited company which are admittedly not listed on any stock exchange?” and
- (ii) “whether the contract in question is a spot delivery contract”.
Dismissing the appeal, the Apex Court held that Section 13 of the Securities Contracts (Regulation) Act, 1956 lays down that contract in relation to securities in notified areas is illegal if made otherwise than between the members of recognized stock exchange. It is not in dispute that the place where the contract for sale of shares in question has been entered is a notified area for the purpose of Section 13 of the Regulation Act. Further, the contract is not between the members of a recognized stock exchange.
Notwithstanding that the shares of Peerless, a public limited company in respect of which the appellant had sought rectification, are not listed in the stock exchange, if shares come within the definition of “securities” as defined u/s 2(h)(i) of the Regulation Act, the indictments contained in Section 13 would apply.
The Regulation Act was enacted to prevent “undesirable transaction in securities by regulating business of dealing therein” and from that one cannot infer that it was to apply only to the transfer of shares on the stock exchange.
The definition of the term “securities” in Section 2(h)(i) of the Regulation Act makes it evident that for shares of a public limited company to come within the definition of securities they have to satisfy that they are marketable. The expression “marketable” has been equated with the word saleable. The number of persons willing to purchase such shares would not be decisive. What is required is free transferability. Subject to certain limited statutory restrictions, the shareholders possess the right to transfer their shares, when and to whom they desire. It is this right which satisfies the requirement of free transferability.
However, when the statute prohibits or limits transfer of shares to a specified category of people with onerous conditions or restrictions, the right of shareholders to transfer or the free transferability is jeopardized and in that case those shares with these limitations cannot be said to be marketable. Therefore, the shares of Public Limited Company though not listed in the stock exchange come within the definition of securities and, as such, the provisions of the Regulation Act would apply.
# Case Law Reference
- Naresh K. Aggarwala & Co. vs. Canbank Financial Services Ltd. and Another 2010 (6) SCR 1 : (2010) 6 SCC 178
- B.K.Holdings (P) Ltd. v. Prem Chand Jute Mills & Ors. (1983) 53 Com.Cases 367 (Cal.)
- East Indian Produce Ltd. v. Naresh Acharya Bhaduri & Ors. (1988) 64 Com. Cases 259 (Cal.)
- Brooke Bond India Ltd. v. U.B.Ltd and Ors. (1994) 79 Com.Cases 346 (BHC)
- Dahiben Umedbhai Patel and others v. Norman James Hamilton and Ors. (1985) 57 Com. Cases 700(BHC)
- Black’s Law Dictionary (Sixth Edition); and Oxford English Dictionary, Vo. 1 p.1728
Section 16(1) of the Regulation Act confers power on the Central government to prohibit contracts in certain cases. The provision makes it evident that in order to prevent undesirable stipulation in specified securities in any State or area, the Central Government by notification is competent to declare that no person in any State or area specified in the notification shall, save with the permission of the Central Government, enter into any contract for sale or purchase of any security specified in the notification.
# Spot Delivery Contract Explained
The Central Government in exercise of the said power, issued notification dated 27.6.1969 and declared that in the whole of India “no person” shall “save with the permission of the Central Government enter into any contract for the sale or purchase of securities other than such spot delivery contract” as is permissible under the Act, the Rules, bye- laws and the Regulations of a recognized stock exchange.
Section 2(i) of the Regulation Act, defines “spot delivery contract” as a contract providing for actual delivery of securities and the payment of price thereof either on the same day as the date of contract or on the next day. In the instant case, the agreement dated 21.11.1994 between the appellant and respondent no. 2 which formed part of the compromise decree, provides that the sale of shares took place on 30.10.1987 and in consideration thereof the appellant paid a sum of Rs. 10 lakhs on 21.11.1994 and further the dividend on the entire shares up to the accounting year 1989-90 amounting to Rs.8,64,850/- to be retained by respondent no. 2.
In the face of it, the plea of the appellant that the payment of Rs. 10 lakh was made to buy peace, is not fit to be accepted and, in fact, that forms part of the consideration for the sale of shares. Therefore, the transaction does not come within the expression “spot delivery contract” as defined u/s 2(i) of the Regulation Act.