Company Law Board
Kinetic Honda Motor Limited vs Pawan Gupta And Ors. on 28 March, 1995
Equivalent citations: [1996]86COMPCAS596(CLB)
ORDER
1. Kinetic Honda Motor Ltd. (hereinafter referred to as "the company") has filed before us ten references under Section 22A of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as "the SCR Act"), seeking confirmation of this Bench in regard to the decision of the board of directors taken on February 22, 1993, to refuse registration of transfer of five equity shares each in the name of ten transferees as detailed in annexure "A" annexed to this order ; on the ground that such transfer would be in contravention of the listing agreement, administrative instructions issued by the Government of India and articles of association of the company.
2. The facts of the case are that one Shri Pawan Gupta a member of the company holding 50 shares in his name by way of a share certificate for 50 shares has sought for splitting up of the same into 10 certificates of 5 each and transfer of the same in favour of ten transferees. The request of Shri Gupta was considered in the meeting of the board of directors held on February 22, 1993, and after taking into consideration the following facts the board formed an opinion to refuse the said transfers :
"The board took into account the fact that prior to its amendment in 1992, Section 22A(3)(b) only permitted a company to refuse to register the transfer of its securities on the ground that the transfer was in contravention of any law and after the amendment the scope of this sub-section had been considerably widened. The board also considered the listing agreement dated August 4, 1985, between the company and the Madhya Pradesh Stock Exchange, Indore. In particular the board discussed the import and effect of Clauses 4, 8 and 9 of the listing agreement which pertain to the market units of trading. The letters of the Madhya Pradesh Stock Exchange, Pune Stock Exchange Limited and circular of the Stock Exchange, Bombay, fixing the marketable lot for the equity shares of the applicant of 100 shares and Notice No. 2570 of 1988, dated June 9, 1988, enclosed with the circular dated July 7, 1988, of the Stock Exchange, Bombay, intimating that the trading lot for all shares of the face value of Rs. 10 each would be 100 shares were also noted by the board. Further, the attention of the board was also drawn to the circular dated April 25, 1986, addressed by the Madhya Pradesh Stock Exchange to all managing directors/company secretaries of all listed companies stating that the Stock Exchange Division, Government of India, had given the following instructions:
1. In case odd lot of shares, which aggregate to a marketable lot or more, are tendered for transfer, the companies themselves, should effect consolidation and issue certificates in marketable lot to the extent possible.
2. Wherever feasible, the companies should take the initiative and request the shareholders to tender their odd holdings for encashment. These odd lot holdings should then be consolidated into marketable lots in the name(s) of the assigned nominee(s) appointed for the purpose by the boards of stock exchanges. The sale proceeds thereof should thereafter be distributed to the original odd lot shareholders on pro rata basis.
3. Staff of the share departments of the companies should be made aware of their responsibility to the shareholders and their working should be toned up and made more efficient. The management of companies should take keen interest in such matters.
The attention of the board was invited to the provisions of Article 16 of the articles of association of the company which, inter alia, states that the directors shall not approve sub-division of a certificate into two or more certificates unless each certificate after sub-division represents 50 shares or a multiple thereof."
3. Accordingly the board decided to refuse sub-division and subsequent registration of transfer of shares as the same is in contravention of the listing agreement, the articles of association of the company and is also against the policy/administrative instructions of the Government of India to reduce odd lot of shares.
4. None was present on behalf of the respondent-transferor and transferees. However, Shri Pawan Gupta has filed a written submission stating that in an earlier reference decided by the Company Law Board in the matter of Kinetic Engg. Ltd. v. Sadhana Gadia [1992] 74 Comp Cas 82 and in the case of Dipak Kumar Jayantilal Shah v. Atul Products Ltd. [1992] 9 CLA 200 ; [1995] 82 Comp Cas 603, the Company Law Board has opined that the company cannot refuse transfer of shares in favour of the investors. He has also stated that the request was just not for splitting up of the shares but it was for transfer of shares and splitting up had to precede giving effect to these transfers so factually it is a case of transfer and a company cannot refuse the transfer of shares since as per law the shares are freely transferable. He has also placed reliance on the decision of the Bombay High Court in the matter of A.C. Shah v. Stock Exchange (O.O.C.J. Appeal No. 914 of 1985 in W. P. No. 1723 of 1985) wherein it was held that the resolution passed by the company lays down restrictions on trading units and not on transfer of shares. He has also stated that the petitioner company is a listed company whose shares are freely transferable and there are numerous companies listed on the Bombay Stock Exchange which never refuse on such splitting up and transfer and it is, therefore, not understood why this petitioner-company does not want to help the small investors to get rid of their odd lot holding when other companies are readily doing the same. He further stated that the Government of India through the Securities and Exchange Board of India (SEBI) is trying to become more and more friendly with the small investors and is making rules and regulations based on this line. He further stated that recently even the guidelines issued by the SEBI on capital issues specifies that whenever the share certificates are in odd lots the same should be issued in denominations of 1, 5 and 10 shares only. In view of the above, he has prayed that the decision formed by the petitioner-company to refuse the registration of transfer of shares in favour of the transferees should not be confirmed.
5. In a counter-reply filed by the petitioner-company, it is stated that as per the conditions of the listing agreement as also the policies/administrative instructions of the Government of India, it is not permissible to issue the share certificate below marketable lot and, therefore, to accede to the opposite party's request would be contrary to the listing agreement as also administrative instructions of the Government of India. It is further stated that the petitioner-company has not so far issued any share certificate below 50 shares either on allotment of its shares or subsequently subdivided any share certificate below 50 equity shares. It is also submitted that they have also not so far issued any bonus or rights shares creating odd lot of shares. Hence, presently there is no share certificate in existence which is for less than 50 equity shares and if the petitioner accedes to the request of the opposite party, it would create for the first time small lot of shares and thus the new small lot share certificates, if created, could not be consolidated with any other lot of share certificate to form a marketable lot. It is further stated that consequently the new small lot share certificate if issued would be thrown out of the market stream and would have very low marketability. It is further stated that in fact, instead of helping the small investors this would cause a lot of inconvenience to small investors to find market for such small lot of shares. It is, therefore, submitted that the request of the respondents is not guided by genuine investment purpose, but is made with the ulterior motive and, therefore, must be rejected. It is also stated that the guidelines of the Securities and Exchange Board of India referred to by the respondents pertains to issue of share certificates pursuant to the conversion of debentures or issue of "rights or bonus shares and hence is not applicable to the facts of the matter under reference. It is further stated that even the SEBI has emphasised that whenever share certificates are issued pursuant, to the conversion of debentures or issue of rights or bonus shares, the same shall be issued in marketable lots. In respect of balance shares only the share certificates to be issued in denominations below marketable lot and, therefore, the basic requirement is issue of share certificates in marketable lots ; but since for the remaining shares there is no option left, the share certificates for the said shares is to be below marketable lot.
6. Shri S.C. Gupta, counsel instructed by Kanga and Co., advocates and solicitors appearing on behalf of the petitioner-company reiterated the submissions made in the petition and counter-reply and drew our attention to Clause 3(c) of the listing agreement whereby the company is required to issue share certificates within one month of the date of lodgment for transfer in denominations corresponding to the market units of trading. He further submitted that as per communication received from the stock exchanges, viz., the M. P. Stock Exchange and the Poona Stock Exchange, they have fixed trading lot as 100 shares each. He also drew our attention to Article 16 of the articles of association and according to which the directors shall riot approve sub-division of the certificates into two or more certificates unless each certificate after sub-division represents 50 shares or multiple thereof. He further submitted that the board of directors of the company while taking decision to refuse the registration of transfer of shares have kept in view the administrative instructions of the Government of India regarding consolidation of odd lots into market lots. He has also referred to the reply of the respondent whereby reliance has been placed on the two orders issued by the Company Law Board in the matter of Kinetic Engineering Ltd. v. Sadhana Gadia [1992] 74 Comp Cas 82 and Deepak Kumar Jayantilal Shah v. Atul Products Ltd. [1995] 82 Comp Cas 603 in which the Company Law Board had held that the provisions in the articles and stipulations in the listing agreement are not laws or regulations as provided in Section 22A(3)(b) of the SCR Act and as such the company has no right to refuse the transfer of shares and submitted that when the Company Law Board passed those two orders it was in accordance with the provision of Section 22A(3)(b) of the SCR Act then existing, which was as follows ;
"that the transfer of the security is in contravention of any law."
7. Now the particular sub-section has been amended with the following provisions :
"that the transfer of the securities is in contravention of any law or rules made thereunder or any administrative instructions or conditions of the listing agreement laid down in pursuance of such laws or rules".
8. Therefore, he submitted that the board has rightly exercised its power to refuse the transfer on the ground provided in the amended Section 22A(3)(b) of the SCR Act. He further submitted that against the decision of the Company Law Board in the case of Deepak Kumar Jayantilal Shah v. Atul Products Ltd. [1995] 82 Comp Cas 603 an appeal has been filed and the said order has been stayed by the Gujarat High Court. In view of the aforesaid position, he urged this Bench to confirm the decision taken by the board of directors to refuse the registration of transfer.
9. We have considered the matter carefully and it is noted that the refusal of transfer as contained in the board resolution is on the basis of the following three grounds :
(a) Provisions in the listing agreement ;
(b) Administrative instructions by the Government of India ;
(c) The prohibition in the articles relating to splitting up of shares below 50 in each certificate (Article 16).
10. In considering the above transfers, the board of directors have viewed that the request for transfer is in contravention of the listing agreement and in forming this opinion the board discussed the import and effect of Clauses 4, 8 and 9 of the listing agreement which pertain to the market units of trading. At the time of hearing, learned counsel appearing for the petitioner-company also placed reliance on Clause 3(c) of the listing agreement. The relevant clauses are reproduced hereunder :
"(3)(c) to issue certificate within one month of the date of lodgment for transfer, sub-division, consolidation, renewal, exchange or endorsement of calls/allotment monies or to issue within fifteen days of such lodgment for transfer pucca transfer receipts in denominations corresponding to the market units of trading autographically signed by a responsible official of the company and bearing an endorsement that the transfer has been duly approved by the directors or that no such approval is necessary.
(4) The company agrees-
(a) to issue, unless the exchange otherwise agrees and the parties concerned desire, allotment letters, share certificates, call notices and other relevant documents in market units of trading ;
(b) to split certificates, letters of allotment, letters of right and split, consolidation, renewal and pucca transfer receipts of large denominations into smaller units ;
(c) to consolidate certificates of small denominations into denominations corresponding to the market units of trading ;
(d) to issue within one week split, consolidation and renewal receipts duly signed by an official of the company and in denominations corresponding to the market units of trading, particularly when so required by the exchange ;
(e) to exchange 'right' or 'entitled' shares into coupons or fractional certificates when so required by the exchange ;
(f) to issue call notices and splits and duplicates thereof in a standard form acceptable to the exchange, to forward a supply of the same promptly to the exchange for meeting requests for blank split and duplicate call notices, to make arrangements for accepting call moneys at all centres where there are recognised stock exchanges in India and not to require any discharge on call receipts ;
(g) to accept the discharge of the members of the exchange on split, consolidation and renewal receipts as good and/sufficient without insisting on the discharge of the registered holders.
(8) The company agrees that it will not make any charge-
(a) for registration of transfers of its shares and debentures ;
(b) for sub-division and consolidation of share and debenture certificates and for sub-division of letters of allotment and split, consolidation, renewal and pucca transfer receipts into denominations corresponding to the market units of trading ;
(c) for sub-division of renounceable letters of right ;
(d) for issue of new certificates in replacement of those which are old, decrepit or worn out, or where the cases on the reverse for recording transfers have been fully utilised ;
(e) for registration of any power of attorney, probate, letters of administration or similar other documents.
(9) The company agrees that it will not charge any fees exceeding those which may be agreed upon with the exchange-
(a) for issue of new certificates in replacement of those that are torn, defaced, lost or destroyed ;
(b) for sub-division and consolidation of shares and debenture certificates and for sub-division of letters of allotment and split, consolidation, renewal and pucca transfer receipts into denominations other than those fixed for the market units of tradings."
11. One of the grounds on which the board of directors refused registration of transfer was on the basis of restrictions in the articles of association of the company to permit sub-division of a share certificate below 50 shares each. It is apparent that when the sub-division of the said share certificate of 50 shares into ten share certificates of five shares each cannot be done, then transfer as requested by the transferor could also not be effected. Therefore, it becomes necessary for us to examine whether the board of directors was right in refusing sub-division of shares.
12. The Companies Act does not lay down any rule as to the number of certificates that a company should issue to a member who holds more than one share. Even the certificate rules do not contain any provision in this regard. Regulation 7(1) of Table 'A' provides that a member is entitled to one certificate for all the shares without payment for several certificates, each for one or more of its shares, upon payment of one rupee for every certificate after the first. Thus, there is no prohibition as such, in law, for a member to seek more than one certificate for his shares. The respondent in this case has relied on D.J. Shah v. Atul Products Ltd. [1995] 82 Comp Cas 603 (CLB) wherein the company relying on its articles refused the transfer of shares after splitting the share certificates for less than marketable lots and the Company Law Board held that in view of the provisions of Section 22A of the Securities Contracts (Regulation) Act providing for free transferability of shares, the company should not have refused the splitting of shares as the provisions in the articles cannot override the provisions of law. That was a case under Section 111 and even in this case the Company Law Board ordered registration of transfer of one of the transfer deeds which was first considered by the company.
13. It is essential to find out, when there is no prohibition in the Companies Act regarding the number of shares that should be contained in a single share certificate, whether there could be any provision in the articles of association prescribing certain minimum shares, in a share certificate. A reference may be drawn to Palmer's Company Law (25th edition, para 6.303) :
"Split shares--The issue of a great number of split shares to the same shareholder may considerably inconvenience the company and for that reason articles sometimes provide that issue of several certificates relating to the same holding shall be in the discretion of the directors."
14. From this observation, it is seen that there seems to be no prohibition in a company providing in its articles, restrictions regarding the number of shares to be contained in a single share certificate. As per Section 36 of the Companies Act, the memorandum and articles shall bind a company and members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum of articles. The articles of association are not only a contact between the company and its members but they also constitute a relationship between the company and its members, their rights inter se. Therefore, in the present case, the transferor who is a member of the company and who has sought for splitting of share certificates into 10 share certificates of 5 shares each is bound by the provisions of the articles that the board of directors shall not approve splitting of shares-below 50 shares in each certificate.
15. Even assuming that since this is not a case of splitting simpliciter but combination of splitting and transfer and, therefore, is governed by the provisions of Section 22A of the SCR Act, then the issue that arises is whether the board of directors has rightly relied on the provisions of the listing agreement and the Government of India instructions in taking the impugned decision. A plain reading of the provisions of the listing agreement as cited by the company would very clearly indicate that there is absolutely no prohibition on transfer of odd lot of shares and as a matter of fact Section 22A of the SCR Act specifically stipulates that the shares of listed companies shall be freely transferable and any restriction in the articles regarding fixing of certain number of shares in a share certificate for transfer is invalid and the decision of the Company Law Board in Kinetic Engineering Ltd. v. Sadhana Gadia [1992] 74 Comp Cas 82 on which the petitioner has relied is on this point.
16. However, one has to keep in mind, before applying any provisions of law, the intent and purpose of that law. No doubt Section 22A provides for free transferability of the shares of listed companies, the term "free transferability" has to be construed in the manner in which it has been used. This section makes it incumbent on a company to register transfer of any of its shares except under certain grounds as provided in that section. Section 22A(3) places strict restrictions on the right of a company to refuse registration of transfer. What is intended in this section is that a company should not refuse registration of transfer of shares as they are freely transferable. If we have a look at the listing agreement, the various provisions in the agreement relate to marketable lot. Therefore, it is essential to examine the relationship/distinction between the marketability and transferability of shares. Even though a security of a listed company is a freely transferable security, such free transferability cannot be sustained if such securities are not freely marketable. In Webster's Third New International Dictionary, "marketable" is stated to mean "fit to be offered for sale in a market ; being such as may be justly or lawfully sold or bought" In order that the securities may be marketable in the market, namely, the stock exchange, the shares of a company must be capable of being sold and purchased without any restriction.
17. Shares which are sold in the market must, therefore, have a high degree of liquidity by virtue of their character of free transferability. Such a character of free transferability is to be found only in cases where shares are in marketable lots. As a matter of fact, as per guidelines for good or bad delivery of documents, issued by MOF (DEA) Stock Exchange (F. No. 1/9/SE/90, dated August 30, 1991), vide SI. No. 79, share certificate and transfer deed not attached together in market lot is "a bad delivery". Thus odd lots of shares unless made up into marketable lots cannot be traded in the market freely and they lose the character of marketability and corresponding free transferability. Even in the Government of India instructions as relied on by the petitioner-company, emphasis has been made on consolidation of odd lots of shares SQ that they become marketable. There are certain contingencies where issue of share certificates containing odd lots becomes inevitable, i.e., like rights issue, bonus issue, etc., but if a company, as a general rule, is required to, whenever asked for, issue odd lots of shares which, are not easily marketable, then it, in a way, obstructs the liquidity or transferability of the shares. Therefore, while Section 22A of the SCR Act hedges against indiscriminative refusal of registration of shares by a company, it does not deal with free marketability of shares. If we keep this distinction between free transferability and free marketability in mind, it is apparent and clear that the board of directors, in compliance with the provisions of articles declined the splitting of shares below 50 shares which would result in creation of odd lots which are not freely marketable.
18. During the arguments, the provisions of Clause 3(c) of the listing agreement were pointed out to us, which read as follows :
"3(c) to issue certificates within one month of the date of lodgment for transfer, sub-division, consolidation, renewal, exchange or endorsement of calls/allotment monies or to issue within fifteen days of such lodgment for transfer pucca transfer receipts in denominations corresponding to the market units of trading autographically signed by a responsible official of the company and bearing an endorsement that the transfer has been duly approved by the directors or that no such approval is necessary."
19. Relying on this clause, the advocate for the company stated that on splitting and transfer of shares, the share certificates to be issued have to be in denominations corresponding to the market units of trading and as in the present case the resultant issue of share certificates would not be in the market units of trading, the issue of such shares would be in violation of the listing agreement. While we have noted this point, we also find that as per Clause 4(b) which reads as follows, there is no mention that the split certificates should be in marketable units of trading.
"4(b). to split certificates, letters of allotment, letters of right, and split, consolidation, renewal and pucca transfer receipts of large denominations into smaller units."
20. While Clause 3(c) talks of marketable units of trading, Clause 4(b) does not specifically state so but says "smaller units". Even though these two appear to be in contradiction, if we look at Clause 4(a) which reads as follows, certificates with smaller units can be issued under certain circumstances. This provision obviously is with a view to avoid hardship in certain contingencies.
"4(a) to issue, unless the exchange otherwise agree and the parties concerned desire, allotment letters, share certificates, call notices and other relevant documents in market units of trading."
21. Thus, on an overall assessment, it is apparent and clear that as per the listing agreement, share certificates, in the normal course, have to be in market units of trading except when the parties desire and the stock exchange agrees for issue of certificates below marketable units of trading.
22. In the present case if the splitting and transfer is approved by the board of directors then it would result in issue of share certificates below marketable units of trading. No doubt the parties have desired such certificates but there is nothing on record to show that the stock exchange has agreed for the same. From a reading of this provision in the listing agreement, it is not clear as to who should seek the stock exchange permission--whether the parties who desire holding of shares with less than marketable units or the company. Whatever might be, when the board of directors took the decision to refuse the request of the respondents, there was nothing before the board to indicate that the stock exchange had agreed for issue of share certificates below marketable lot. As per Section 22A(3)(b) of the SCR Act, if the transfer is in violation of the provisions of the listing agreement, then the board of directors can refuse the registration of transfer of shares. While in this case the transfer, if approved, was not, as such, in violation of the provisions of the listing agreement, the consequent issue of share certificates below marketable lot for which there is no consent from the stock exchange would straightway violate the provisions of Clauses 5(c) and 4(a) of the listing agreement. If the consequence of doing an act would violate the provisions of the listing agreement, then doing the act should itself be deemed to be a violation.
23. In this connection, it is to be noted that the two cases decided by the Company Law Board on which the transferor has placed reliance were decided before amendment to Section 22A(3)(b) with effect from January 30, 1992, when contravention of the provisions of the listing agreement was not one of the grounds under which a company could refuse registration of transfers.
24. Therefore, having regard to the facts and circumstances of the case and also taking into consideration that the registration of the transfers would result in issue of share certificates below market units which is not in accordance with the provisions of Clauses 3(c) and 4(a) of the listing agreement, we are of the view that the board of directors has rightly refused splitting and consequent transfer of the impugned shares under Section 22A(3)(b) of the SCR Act. Accordingly, we confirm the decision of the board of directors.
25. Reference is answered accordingly.