Company Law Board
Dipakkumar Jayantilal Shah vs Atul Products Ltd. on 18 September, 1992
ORDER
1. This is an appeal filed under Section 111 of the Companies Act, 1956, by Dipakkumar Jayantilal Shah (hereinafter referred to as "the appellant") against the decision of Atul Products Ltd. (hereinafter referred to as "the respondent") for refusal of transfer of one equity share of Rs. 12 each in favour of four groups of transferees. The appellant had lodged with the company four transfer deeds along with one share certificate of five shares with a request to register the transfer of one share each in the name of four groups of joint holders. In the memo of appeal, the appellant has stated that the company has wrongly rejected the registration of transfer of shares on the ground that as per Article 24 of the articles of association, the company cannot split share certificates for less than market lots, i.e., 50 in one certificate. It is the case of the appellant that such refusal to register the transfer of shares on the ground that it will result in creating share certificates of less than marketable lots is directly in contravention of the provisions of free transferability of shares as contemplated under Section 22A of the Securities (Contracts) Regulation Act. It has been also pointed out by the appellant that such an exercise of authority by the company is against the interest of small shareholders.
2. In the reply filed by the company, it is stated that Smt. P. S. Naik jointly with Shri S. G. Naik was holding one share certificate for five shares and has requested for transfer of one share each to four different transferees retaining the remaining one share in the name of the original shareholders. The company has stated that the existing member was originally holding 50 shares of Rs. 10 each in Gujarat Aromatics Ltd. prior to its amalgamation with the company. The value of the shares was reduced to Re. 1 each and subsequently, consolidated into five shares of Rs. 10 each in terms of the scheme of amalgamation approved by the Gujarat High Court. Further, it is pointed out that as per Article 24 of the articles of association of the company, the company cannot split the share certificate for less than the market lot, i.e., 50 in their case. The company, vide its letter dated December 5, 1990, has clarified to the appellant that the share certificate in question could not be split into five certificates of one share each and hence the appellants' request for splitting up could not be entertained. The company has further submitted in its reply that by refusing to split the share certificate of five shares into five share certificates of one share each, the company has not contravened either any of the provisions of the listing agreement or any provisions of its articles of association or Section 22A of the Securities Contracts (Regulation) Act, 1956. According to the respondent-company, the company's shares are freely transferable within the meaning of Section 22A of the Securities Contracts (Regulation) Act, 1956. It was also submitted that Section 22A of the said Act has no application in the instant case, as this is a case for splitting of shares and not for transfer of shares.
3. We have carefully considered the documents filed before us as well as the arguments advanced by the company. The appellant has submitted four transfer deeds duly executed and stamped along with one share certificate of five shares for the purpose of effecting registration of transfer in their favour. It is an admitted position that the appellant has complied with all the mandatory requirements of Section 108 of the Companies Act. There is nothing on the record to indicate that these transfer deeds were filed for splitting the shares which is, no doubt, a consequence arising out of the. transfer of shares, The company has treated this request for registration of transfer of shares as a request for split and dealt under Article 24 of the articles of association and not as per Section 22A of the Securities Contracts (Regulation) Act. Therefore, the company erred in returning the four transfer deeds along with share certificate without effecting registration of transfer in favour of the appellants and this action tantamounts to refusal on the part of the company to effect registration of transfer of shares without following the procedure laid down under the provisions of the Securities Contracts (Regulation) Act, 1956. As per the provisions of Section 22A(3)(b) of the Securities Contracts (Regulation) Act, the company may refuse to register the transfer of any of its securities, if the certificate relating to the security is not delivered to the company, Every transfer form should be accompanied by a share certificate. In this case, instead of sending four certificates along with four transfer forms, only one certificate of five shares was enclosed. In this connection, the attention of the company was also drawn to the decision of the Allahabad High Court in Kumar Exporters (P.) Ltd. v. Naini Oxygen Acetylene, and Gas Ltd. [1985] 58 Comp Cas 97 in which it was held (at page 101) "the intention of holding Section 108 to be mandatory is only to the extent that the company must have before it the share transfer form duly executed and stamped along with the share transfer certificate, but it cannot be interpreted to mean that even when a share certificate is there, though for a larger amount, there is non-compliance with Section 108. The larger share certificate includes the shares sought to be transferred and, as such, there would be full compliance with Section 108 if an application for transfer of a smaller number of shares is accompanied by a share certificate relating to a larger number of shares. Further, Section 112 lays down the procedure for certification of transfers. Certification, in effect, means a statement by the company that certain documents have been delivered to the company for the purpose of transfer of shares. It is a kind of receipt. It is a representation by the company to any person acting on the faith of such certificate that the documents show a prima facie title to the shares in the transferor's name in the instrument of transfer. This provision has been made to facilitate the sale of smaller number of shares in case the share certificate is for a larger number of shares. If Parliament contemplated that no transfer could be made unless the share certificate was split up, it was not necessary to make any such provision as has been made in Section 112. Thus, there is no prohibition laid down in any section of the Companies Act that a party cannot apply for transfer along with a certificate for larger shares unless sub-division is made earlier. The mere fact that the certificate was not sub-divided earlier, did not take away the power of the company to record the transfers sought by the petitioner". It was pointed out that as per the provisions of Section 108, every transfer form is required to be accompanied by a share certificate. In this case, the appellants have lodged four transfer forms along with one share certificate. In the context of the decision of the Allahabad High Court mentioned above, the company ought to have registered the first transfer form considered by the board of directors, as it had fulfilled all the mandatory provisions of Section 108 and registered that transfer and for the remaining transfer deeds as there was no share certificate along with the transfer forms and returned the transfer forms to the appellants for complying with the provisions of Section 108. It is quite clear that there is no prohibition under the Companies Act or any other Act for holding share certificates below market lot. The provisions of the law will override the provisions of the articles of association or of the listing agreement. In the circumstances, the plea taken by the company is contrary to the provisions of Section 23A of the Securities Contracts (Regulation) Act and as such, the same cannot be accepted.
4. In view of the foregoing, we direct that pursuant to the provisions of Section 111 of the Companies Act, 1956, the company ought to have registered the transfer effected in one of the four transfer deeds which was first considered by the company and we direct that the company will register the transfer of shares in the transfer form first considered by the board of directors within 10 days from the date of receipt of this order.