Share Transfer Restrictions under the Companies Act, 1956

Transferability of shares is an important feature of incorporation of a Company. Section 82 of the Companies Act deals with the nature of shares and reads as follows:

The shares or debentures or other interest of any member in a Company shall be movable property, transferable in a manner provided by the articles of the Company. Even the Sale of Goods Act includes Shares in the term movable property. Thus, shares are movable property and can be sold, pledged, assigned and mortgaged etc.

Restrictions in case of Private Company

Reasonable restrictions can be imposed by a Private Company only under the provisions found in the Articles of Association. There are 2 kinds of provisions which can be incorporated in the Articles of the Company for this purpose. They are:

1. Power of Directors to refuse transfer of shares.

In Bajaj Auto Limited v. Company Law Board , it was held by the Supreme Court that the power of the Board of Directors to refuse registration of transfer of shares must be in the interest of the company and the general body of share holders.

2. Pre-emptive rights.

A right of pre-emption is incorporated in the articles of a Private Company to restrict the members' right to transfer shares to non members.
Under Sec 111, Refusal to register the transfer of shares can be done only on the ground of restrictions contained in the Articles of Association. This was also upheld by the Supreme Court in the case of V.B Rangaraj Vs. V.B. Gopalakrishnan

Also under sub section 13 of Sec. 111, no petition can be filed in respect of a Private Company which by its Articles has imposed restrictions against the right to transfer its shares. However, a petition lies under the section in case of refusal by a private Company which is not a subsidiary of a public authority. [Sec. 111
(11)].

Free Transferability in the Case of Public Company

Grounds on which Public listed Companies could refuse to register transfer were to be found in S. 22 A of the Securities Contracts (Regulation) Act, 1956 [SCR].

Under the Section, the Board of Directors could refuse to register a transfer on only one or more of the following four grounds:
1. The instrument of transfer is not proper or has not been duly stamped and executed or the certificate relating to the security has not been delivered to the company or that any other requirement of law relating to such transfer has not been complied with; or
2. The transfer is in contravention of any law or rules made thereunder or any administrative instructions or conditions of listing agreement;
3. The transfer is likely to result in such change in the composition of the Board of directors as would be prejudicial to the interest of the company or to the public interest;
4. The transfer is prohibited by any order of any court or tribunal or other authority under any law for the time being in force.
This section has been omitted from the SCR Act, by the Depositories Act, 1996. As a result of this omission, no ground is available to a Public Company, listed or unlisted, for refusing a transfer.

The Depositories Act, 1996 has inserted a new provision in the form of section 111A into the Companies Act, 1956 in the matter of transfer of shares of Indian Public Company whether listed or unlisted.

Thus the Articles of a Public Company cannot contain provisions destructive of free transferability. A provision in the articles of such a Company was that a selling member would have to give notice to the Board and the latter would act as an agent to sell the shares to other members either at an agreed price or, in the absence of an agreement, at a price to be determined through arbitration. This provision was held to be a misfit with the concept of a public Company. The Company was directed to drop it. [Arjun S. Kalro Vs. Shree Madhu Industrial Estates Ltd.]

Grounds on which a Public Company can refuse to register transfer

The only ground on which a Public Company may refuse a transfer is on some sufficient cause. The Proviso to sub-section (2) of Sec. 111A provides that, If a company without sufficient cause refuses to register transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be is delivered to the Company, the transferee may appeal to the Tribunal and it shall direct such company to register the transfer of shares.

In Estate Investments Company P. Ltd. v. Siltap Chemicals Ltd. the Company Law Board laid down the scope of the words sufficient cause. The opinion of the CLB was that only those grounds would constitute a sufficient cause on which the CLB can order rectification of the Register of Member of Company under S. 111A(3).

The grounds of refusal as laid down under S. 111A(3) are:

1. Contravention of the provisions of the SEBI Act, 1992 or Regulations made under that Act.
Where the acquisition of shares exceeded 10% and the procedure as to public announcement of such acquisition as prescribed by the Takeover Regulations was not followed, that was held to be a sufficient cause within the meaning of section 111A for the Company not to register the transfer.
[Bakhtawar Construction Co. O. Ltd. Vs. Blossom Industries Ltd.]

2. Violation of Sick Industrial Companies (Special Provisions) Act, 1985.

3. Contravention of any other law for the time being in force.

The expression or any other law for the time being in force in Section 111A(3) has to be read in the context of the other words used in sub-section and would be confined to statute law. A refusal to accept a transmission by a small Company was held to be justified in Xavier Joseph Vs. Indo Scottish Brand Private Limited.

The Dilemma
The only issue, which may arise, is where the Articles of Association vest in the Board of Directors absolute and uncontrolled discretion to decline to register any transfer of shares. Section 82 deems shares to be movable property transferable in the manner provided in the Articles of Association of the Company.
In such a case, Section 9 of the Companies Act specifically provides that any provision contained in the Memorandum or Articles of Association of a company shall be void to the extent to which it is repugnant to the provisions of the Companies Act. It was held by the Company Law Board in the case of Kinetic Engg. Ltd. v. Sadhna Gadia, that if any provision of the articles or the memorandum is contrary to any provisions in the Companies Act or any other law, it will be invalid in toto. Accordingly, any existing provision in the articles of a public company empowering its Board to refuse registration of transfer of shares on any grounds, whatsoever, shall be void.

Conclusion
Thus, the aforesaid provisions indicate that the shares of a public limited company are movable property, freely transferable and this transferability cannot be restrained even by the Articles of Association of the Company and is only subject to the statutory checks as laid down under sub-section 3 of Sec. 111A. Thence, free transferability of shares of public limited companies is assured with permission to place reasonable restrictions on transferability.

Bibliography
1. A Ramaiya, Guide to the Companies Act, 16th Edition Reprint 2006
2. K.M. Ghosh & Dr. K.R. Chandratre's Company Law, 13th edition
3. Article by Ashok Dhamija published in the Financial Express of August 02, 1999, under the title of "Power to refuse free transfer of shares".
4. www.livemint.com/Articles/ByLineArticles.aspx

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