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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.

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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.