Company Law Board
Bank Of Maharashtra vs Sangli Bank Limited on 20 August, 1991
Equivalent citations: [1992]73COMPCAS125(CLB)
ORDER
1. This appeal under Section 111 of the Companies Act, 1956, has been filed by the Bank of Maharashtra (hereinafter referred to as "the appellants") against the decision of Sangli Bank Ltd. (hereinafter referred to as "the respondent") refusing to transfer 50 equity shares of Rs. 100 each in favour of the appellants. The appellant-bank has purchased these shares from one Shri Narayan Dhyandev Sangle and the shares were lodged with the respondents along with the transfer deed and the share certificates on April 1, 1987, for effecting the transfer in their favour. The board of directors of the respondent-Sangli Bank in the meeting held on May 8, 1987, rejected the transfer of the said shares under the power vested in the board by the articles of association of the company on the ground that the board had declined to transfer the same shares lodged previously.
2. The brief history of the case is that, in February-March, 1982, the appellants lodged 20,562 equity shares in four lots including 20,484 shares purchased from the Government of Maharashtra and 78 shares from other eight individuals. These shares included the 50 shares, the transfer of which is the subject-matter of this appeal and which were refused to be transferred by the board of directors of the respondent-Sangli Bank in favour of the appellants in its board meeting held on April 13, 1982. On refusal to transfer the shares, the appellants had filed three references, bearing Appeals Nos. 14, 15 and 16 of CLB/WR/1982 before this Bench. Thereafter, at the intervention of the Government of India and the Reserve Bank of India, the Government of Maharashtra repurchased 20,484 equity shares in September, 1983. Subsequently, in view of a compromise arrangement arrived at amongst the parties, the appeals filed were treated as closed having been withdrawn by the appellants. All the transferors including the Government of Maharashtra have repurchased the shares involved in those three appeals except one Shri Narayan D. Sangle, holder of 50 shares.
3. Consequent upon Shri Narayan D. Sangle's refusal to repurchase the 50 shares, the appellants lodged the share certificate along with fresh transfer deed on April 1, 1987, for effecting transfer by the respondent-Sangli Bank. The board of directors of the respondent-Sangli Bank, in their meeting held on May 8, 1987, considered the said transfer and resolved to reject the said share transfers in favour of the appellants. The said refusal was communicated to the appellants by the respondent-Sangli Bank's letter dated June 4, 1987. In the said refusal letter, the respondent-Sangli Bank did not disclose the reasons for refusal. The appellants have averred that the directors of the respondent-Sangli Bank have acted arbitrarily and with a mala fide intention and have exercised the powers under the articles of association of the company in an improper manner. It is also alleged that the respondent-Sangli Bank is acting mala fide with ulterior motives in refusing to register the impugned application for registration of the 50 equity shares by linking the same with the earlier application made in 1982 for transfer of shares from the State of Maharashtra. The appellants have argued that, by such unjust refusal, the respondent-Sangli Bank would even be precluded from raising loans from the appellants and, by any stretch of imagination, the appellants cannot be treated as undesirable. Hence, the respondent-Sangli Bank should be directed to register the impugned share transfers in the name of the appellants.
4. The respondent-Sangli Bank, in their reply, have submitted that Sangli-Bank was floated by the erstwhile Rulers of the State of Sangli and the State of Sangli held about 50% of the paid-up capital ; consequent upon the merger of Sangli State, the shares held by the erstwhile State had devolved upon the State Government. Ever since the State of Sangli was merged with the State of Bombay, at all relevant times, the Collector of Sangli District used to be the ex-officio chairman of the board. Of late, the managing director of the Maharashtra State Corporation Bank Ltd. works as the nominee of the State of Maharashtra on the board of the company. The State of Maharashtra thus held about 50% of the paid-up capital of the bank. In or about 1982, the appellants had purchased 20,484 shares from the State of Maharashtra and lodged the same for transfer which works out approximately to 47% of the total share capital. The respondent-Sangli Bank herein rejected the said transfer on several grounds, inter alia, that the said transfer was contrary to the Banking Regulation Act, 1949 (Section 19); acquisition of more than 1% of the share capital of the bank should be with the acknowledgment of the Reserve Bank of India ; as per the articles of association, more than 2.5% holding of the issued share capital will not be allowed to any person other than the State of Maharashtra ; the appellants had bought the shares of the bank at an exorbitant price which smacked of a mala fide intention and not akin to bona fide investment, etc. The said share transfer was thus rejected. Subsequently, the State of Maharashtra repurchased the said shares leading to the withdrawal of the earlier appeals filed by the appellants some time in 1984. The present appeal under Section 111 relates to 50 equity shares which are part and parcel of the said lot of equity shares mentioned above which were refused to be transferred by the respondent-Sangli Bank sometime in 1982. Therefore, the said share transfers lodged in 1987 were also rejected under the powers vested in the board by the articles of association. It is submitted that the motive of the appellants is not genuine investment but only to capture the management of the company by some means or the other. The respondent-Sangli Bank has further stated that the appellants are engaged in banking business and are, therefore, a competitor. The proposed transfers, if registered, would be in violation of the provisions as well as the spirit of the Banking Regulation Act, 1949, and the requirements laid down by the Reserve Bank of India. Moreover, the appellants have not given notice to the transferor. Therefore, the respondent-Sangli Bank has submitted that there are cogent, adequate, valid and legitimate reasons for the refusal to transfer the said 50 shares. Hence, the said appeal should be dismissed with costs.
5. The appellants in their rejoinder have stated that the respondent-Sangli Bank has attempted to mislead the Company Law Board by furnishing incomplete facts. The State of Maharashtra sold its lot of shares consequent upon the introduction of the policy of the Government of Maharashtra to discontinue holding of shares in private companies. Therefore, the said purchase of shares from the State Government was made in consultation with the Reserve Bank of India. However, due to various political and other reasons, the said transactions were closed. The appellants were interested and made all sincere efforts to sell back all the shares. It was further pointed out that though the earlier appeals were withdrawn, as Shri N.D. Sangle, the transferor herein refused to take back the shares, the appellants were left with no alternative other than to move the Company Law Board by an appeal under Section 111 of the Companies Act for registration of the said transfer of shares in favour of the appellants. It was pointed out that the appellants never had the intention of taking control of the management of the respondent-Sangli Bank and that the apprehension of the respondent-Sangli Bank is imaginary. The respondent-Sangli Bank has alleged that the price paid for the said shares is exorbitant according to them, but that is not true. The price of the share was fixed on the basis of the net worth of the company in consultation with the Reserve Bank of India and the State of Maharashtra. The appellants have also stated that there is nothing in the Banking Regulation Act prohibiting the transfer of shares from one bank to another. The impugned 50 shares constitute only 0.26% of the total share capital and by acquiring the said 50 shares the appellants cannot have a controlling interest.
6. The matter was heard on August 14, 1990, when it was submitted by the respondent-Sangli Bank's advocate that since these shares in question were the subject-matter of appeals before the Company Law Board in 1982 in Appeals Nos. 14, 15 and 16 of 1982 and the said appeals were withdrawn as the matter was treated as closed by the Company Law Board by its order dated November 27, 1984, no fresh appeal can lie and is barred by the principles of res judicata. On behalf of the appellants, it was argued that there is a fresh transfer deed lodged on April 1, 1987, and, therefore, the previous lodgment will not have any adverse effect on the right that arises out of the fresh transfer. The case was called on two occasions but it was adjourned since the parties were examining the possibilities of a settlement by mutual understanding in view of the fact that only 50 shares are involved in the transfer. As the matter could not be settled, directions were given to the parties that written submissions may be filed with the Bench. Accordingly, the written submissions have been filed by both the parties and copies exchanged.
7. The appellants submitted that the contention that the present appeal is barred by the principles of res judicata is not at all applicable in the present case.
8. The advocate of the appellants relied on the case-law of Manohar Lal v. Narain Dass, AIR 1987 Delhi 226, wherein it was held that :
"Withdrawal of an ejectment suit grounded on breach of statutory obligation does not operate as res judicata in subsequent suit for ejectment grounded on the same breach of statutory obligation."
9. And in the case of Sheodan Singh v. Daryao Kunwar, AIR 1966 SC 1332, it was held that :
"If in a suit are involved two issues, one a technical one and the other an issue as to the merits of the suit then if the suit fails only on technical ground and the issue as to merits is not decided at all, in a subsequent suit the decision given earlier dismissing the suit will not operate as res judicata in the trial of an identical issue on merits in that suit."
10. Since the subject-matter was never considered by the Company Law Board earlier on merits and the suit was allowed to be withdrawn at the request of the appellant, we are inclined to agree with the contention of the appellants' advocate that the principle of res judicata does not come into play on the subject-matter of appeal.
11. The appellants have reiterated their earlier submissions that, in this case, the reason why the board has refused to transfer the shares stating that the earlier transfer was refused is no reason at all. They have further submitted that there is nothing to suggest that all the directors in 1982 continued to be directors in 1987 and if there are new directors, they were even not aware of the resolution of 1982. According to them, it is ridiculous to suggest that a board resolution passed as far back as five years should continue to be regarded as sacrosanct and that the critical change in the facts and circumstances should be ignored ; that the respondent-Sangli Bank has purposely misled the Bench about fear of loss of control ; that the total number of shares issued and paid up is 74,975 and even earlier the case of transfer related to 20,562 shares of which the transfer in respect of 20,484 shares already held by the State Government is no longer being pursued, that the present case relates to just 50 shares which is just 0.26%, i.e., almost one-fourth of the one per cent. of the issued and subscribed shares ; that it is ridiculous to allege fears of loss of control based on such negligible percentage. According to the appellants, it is obvious that the passing of resolution was just mechanical and it is false on the part of the respondent to allege that the investment made by the appellants is with an interest to corner the voting power and thus control the respondent-Sangli Bank. It was also emphasised that Section 12(2) of the Banking Regulation Act, 1949, provides that "no person holding shares in a banking company shall, in respect of shares held by him, exercise voting rights on poll in excess of one per cent. of the total voting rights of all the shareholdings of the banking company". Thus, to suggest that the appellants are seeking to assume control which is practically impossible since whatever be the number of shares held by the appellants, the voting rights remain restricted to one per cent. of total voting power is baseless.
12. The appellants have further relied on Section 19(2) of the Banking Regulation Act, 1949, which provides that a banking company can hold shares up to 30% of the paid-up share capital of that company or 303 of its own paid-up share capital and reserves, whichever is less. The appellants thus submitted that there are adequate legal provisions contained in the Banking Regulation Act which are themselves more than adequate to prevent the control of any banking company passing on to any other person. The appellants submit that the rejection of transfer of shares is unjust, unreasonable, illogical, perverse and motivated. The appellants have further cited various case laws which enunciate the principle that no company can refuse to register the transfer of shares merely on arbitrary, fanciful and far-fetched reasons.
13. The respondent-Sangli Bank, in its written submissions, traced the history of the formation of the Sangli Bank and the earlier attempt of the appellants-Bank of Maharashtra in acquiring about 47% shares and its decision to refuse the transfer of the same and submitted that the Bank of Maharashtra is trying to acquire a controlling interest in Sangli Bank. Even though the present lot of shares is of small quantity, in the background of the previous claim and their appeals, the intention does not appear to be bona fide, the Bank of Maharashtra does not appear to be a genuine investor; both the organizations are doing the same business and are competitors and the appellants are trying to acquire the position of a shareholder in the rival bank which is undesirable and uncalled for. The respondent-Sangli Bank further submitted that earlier, the Government of India and the Reserve Bank of India has directed the Government of Maharashtra and the Bank of Maharashtra to cancel the deal of transfer of shares in the Sangli Bank Ltd. The said directions not only pertained to the transfer of the shares purchased by the Bank of Maharashtra from the Government of Maharashtra, but also to the entire deal consisting of transfer of more than 55 shares purchased by the Bank of Maharashtra from the individual shareholders. The directions of the Reserve Bank of India have not been so far revoked either by the Government of India or by the Reserve Bank of India. The said directions have the effect of law and they are mandatory and binding upon the Bank of Maharashtra. And, therefore, their fresh attempt to get the shares transferred in their name purchased from individuals again is contrary to the said directions and cannot be entertained at all on the ground of propriety and legality also.
14. The articles permitted the directors to decline to register the transfer without stating any reasons. The respondent-Sangli Bank has further submitted that the powers of the board of directors and have been elaborately discussed by the Hon'ble Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia [1973] 41 Comp Cas 1. In this well-known case, the Hon'ble Supreme Court has observed that the directors, under the articles of the company, have uncontrolled and absolute discretion to decline to register the transfer of shares. The discretion does not mean a bare affirmation or negation of a proposal, it implies just and proper consideration of the proposal in the facts and circumstances of the case. In exercise of that discretion, the directors had to act for the paramount interest of the company and for the general interest of the shareholders because the directors were in a fiduciary position both towards the company and towards every shareholder. The directors are, therefore, required to act bona fide and not arbitrarily and not for any collateral motive. According to the respondent-Sangli Bank, their board of directors have not acted on wrong principles and they have not acted with any oblique motive or for any collateral purpose. They have further submitted that both the banks are competitors and, if the shares are allowed to be acquired by the appellants, the confidence in the minds of the clients of the Sangli Bank will be undermined and their trust in the bank would be lost, that the existing set up of the management would be disturbed under the influence of a banking giant like the Bank of Maharashtra, that due to fear of uncertainty, the initiative of the employees would be affected, that such acquisition is against the express directions given by the Reserve Bank of India and the Union Finance Ministry in the year 1983-84, directing the Government of Maharashtra and the Bank of Maharashtra to cancel their deal.
15. From the submissions made above, in our view, the following issues arise out of the subject-matter of the appeal and the pleadings made thereunder :
(i) Whether the Bank of Maharashtra is prohibited under the provisions of the Banking Regulation Act from holding shares in the respondent-Sangli Bank ;
(ii) Whether the facts and circumstances which resulted in the rejection of the transfer of 20,562 shares lodged in February/March, 1982, still hold good in respect of the 50 shares which were lodged in April, 1987, and registration of transfer of which was refused on the ground of the earlier refusal by the board of directors of the respondent-Sangli Bank.
16. The relevant provisions of the Banking Regulation Act, 1949, in regard to the investment by banks and voting rights by the shareholders are Sub-section (2) of Section 19 and Sub-section (2) of Section 12. According to Sub-section (2) of Section 19, no banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner of an amount exceeding 30 per cent. of the paid-up share capital of that company or 30 per cent. of its own paid-up share capital and reserve, whichever is less. Further, Sub-section (2) of Section 12 directs that any person holding shares in a banking company shall not, in respect of any shares held by him, exercise voting rights on poll in excess of 1 per cent. of the total voting rights of all the shareholders of the banking company. Thus, irrespective of the total shareholding a person may have in a banking company, his voting rights have been restricted to one per cent. of the total voting rights of all the shareholders of the banking company.
17. Thus, according to Sub-section (2) of Section 19 of the Banking Regulation Act, 1949, banking companies can hold shares up to 30 per cent, of the paid up share capital of another banking company or their own share capital and reserves, whichever is less. In the instant case, 50 shares are involved which are reportedly less than even 0.26 per cent., i.e., almost 1/4th of one per cent. of the paid up share capital. Thus, there is legally no bar on the appellants' holding the shares. It is contended by the respondent-Sangli Bank that a specific direction was given by the Reserve Bank of India and the Ministry of Finance to the Government of Maharashtra and the Bank of Maharashtra not to acquire the shares of Sangli Bank and that direction still holds good. The respondent-Sangli Bank has not produced or filed anything in support of its contention. They are merely relying on the fact that, earlier, shares were lodged and were not pursued for transfer further in pursuance of the directions given earlier. In the absence of any documents/papers filed in support thereof, it is not possible to appreciate as to what extent and in what manner the directions if at all were given and whether they hold good even in respect of the 50 shares which have been relodged with a fresh transfer deed in 1987, consequent upon the transferor's failure to repurchase the shares. In the absence of any written documentary evidence produced by the respondent-Sangli Bank, we are not inclined to uphold their said contention in respect of the 50 shares in question.
18. The second issue for consideration is whether the grounds on which the board of directors, by the board resolution of April 13, 1982, refused to allow transfer of 20,562 shares lodged by the appellants still hold good in the year 1987, in respect of the 50 shares re-lodged with fresh transfer deed and rejected in view of the earlier decision.
19. The brief reasons for rejection of the earlier lot in the year 1982 was that the acquisition of the said shares was not legal and valid inasmuch as the Central Government did not appear to have issued the required notification exempting the transfer of shares under Section 19(2) read with Section 53 of the Banking Regulation Act, 1949, and the appellants could not be treated as genuine investors but the transfer appeared to be with a view to acquire control of the respondent-Sangli Bank. The said transfer was against the spirit of the Banking Regulation Act that one banking company should not be allowed to acquire majority of the shares with a view to get the controlling power from the administration of the said bank. The Reserve Bank of India had already issued instructions by Circular No. DBCD No. EFS.92/ C-249-70 dated January 13, 1970, to all banking companies to the effect that, if the intention of the transferee was to get the majority and consequent control over the administration of another company, the transfer should not be recognised without the approval of the Reserve Bank of India ; the board of directors legitimately apprehended that the intention of the Bank of Maharashtra was to assume management and control over the Sangli Bank.
20. The facts which were relied upon in the year 1982 might have had some relevance as the said lot of 20,562 shares which were subject-matter for consideration in 1982 was a block of about .47 per cent, of the paid-up share capital of the respondent-Sangli Bank. The shares in question in the present appeal are, however, only 50 in number which are less than even one per cent. and, therefore, the appellants are neither prohibited under the provisions of the Banking Regulation Act, 1949, nor, by any stretch of imagination, can it be held that the transfer of these shares in the name of the appellant bank would result in their acquiring the majority of the shares or control of the respondent-Sangli Bank. The grounds that they are competitors doing the same business, and that their acquiring the shares would shake the confidence of their customers or the initiative of the employees appear to be extraneous reasons to us. It is common that companies engaged in some business do hold nominal shares in other companies and there is nothing to suggest that their presence as shareholders would shake the confidence of the customers and the initiative of the employees,
21. Thus it is clear that the earlier grounds of 1982, on which the transfer of 50 shares, when relodged in the year 1987 with a fresh transfer deed do not hold good and, therefore, directors have erred in refusing to register the transfer of shares in the name of appellants. We are convinced that the respondent-Sangli Bank has not given a just and proper consideration to the proposal having regard to the facts and changed circumstances of the case while rejecting the transfer only on the ground that the transfer of these shares was earlier rejected in 1982 when they formed part of a lot of 20,562 shares proposed then to be transferred. As held by the Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp Cas 1 (SC) ; AIR 1973 SC 321, the discretion given in the articles to the board of directors to decline registration of transfer of shares does not mean a bare affirmation or negation of a proposal.
22. In the circumstances and for the reasons set out above, we hold that the refusal to register the transfer of shares by the respondent-Sangli Bank is unjustified and, therefore, this appeal is allowed in accordance with the provisions of Section 111(5) of the Companies Act and we hereby direct that the respondent-Sangli Bank shall register the transfer in respect (if the 50 shares comprised in this appeal within ten days of the receipt of this order. There will be no order as to costs.