Company Law Board
Bank Of Madura Limited vs M.O. Bhaskaran And Ors. on 20 January, 1995
Equivalent citations: [1995]83COMPCAS321(CLB)
ORDER
1. The Bank of Madura Limited (hereinafter referred to as "the bank") has filed 122 (one hundred twenty-two) applications containing references under Section 22A(4)(c) of the Securities Contracts, (Regulation) Act, 1956 (hereinafter referred to as "the SCR Act"), seeking confirmation of the decisions taken by the board of directors refusing registration of transfer of shares. The decisions to refuse registration of transfer of shares were taken at various board meetings held on different dates in respect of 71, 239 shares, as per annexure-I. As the facts, circumstances and grounds of refusal in all these cases are similar, we dispose of these references by this single order.
2. The submissions made in the applications, in a nutsnell are as follows :
The bank is a public limited company incorporated under the Indian Companies Act, 1913. It is a private sector scheduled bank and its shares are listed and quoted on the Madras Stock Exchange. During the year 1993, more particularly between June, 1993, and November, 1993, and also in January and February, 1994, a large number of shares were received for registration of transfers in the, names of certain dealers and parties who had connections with the SPIC and the MAC group either as dealers of fertilizers manufactured by SPIC or otherwise. The company made enquires and found that these transferees had, in one way or the other, connections with the said SPIC/MAC group. The bank also found out that one Mr. Sabapathy who was chairman of the bank and who was removed as such as per the directions of the Reserve Bank of India, had, by linking up with the SPIC/MAC group set up nine candidates for election as directors at the 49th annual general body meeting of the bank and all these persons so nominated were found to have had some; connections with the SPIC/ MAC group. Also severarlitigations were filed by Shri Sabapathy against the bank when none of the directors proposed by Shri Sabapathy was elected in the 49th annual general body meeting. Suits were filed by persons owing allegiance to Shri Sabapathy by which newly elected directors were restrained from functioning as directors and ultimately the Supreme Court had to intervene to uphold the election of directors. A huge amount of money was spent in acquiring these shares which no individual could have mobilised and such large sums were invested only for the purpose of taking over the bank. Nexus between these transferees is obvious from the fact that the consideration amount for all the shares was uniformly at Rs. 142.80 per share. The Reserve Bank of India, vide their circulars, dated January 13, 1970, and May 23, 1991, had advised that banks are required to obtain acknowledgment from the Reserve Bank of India before effecting transfer of shares when transfers make the shareholding of the individual/group equivalent to 1 per cent. and over of the total paid-up capital of the bank. It also stated that the purpose of the instructions in this regard was to put banks on guard against attempts by individuals/ groups to acquire a controlling interest in a bank. These acquisitions of shares by transferees under these references account for more than 3 per cent. of the paid-up capital of the bank and as such the instructions contained in the Reserve Bank of India's circulars are applicable. Taking all these aspects into consideration, the board of directors formed an opinion that the transfers are likely to result in such change in the composition of the board of directors which would be prejudicial to the interest of the bank and also the transfers if registered would violate the administrative directions issued by the Reserve Bank of India. It is, therefore, prayed that the decision of the board of directors to refuse registration be confirmed by the Company Law Board.
3. All the transferees have filed replies which are identical in content. They have denied the allegation that they acquired the shares at the behest of the SPIC/MAC group. This allegation, according to the transferees, is totally incorrect and false; It has also been stated that the shares have been purchased by transferees out of their own funds and not out of the funds provided by the SPIC/MAC group. The allegation that these transferees owe allegiance to SPIC because of the relationship as dealers is incorrect. The purchase of shares by these transferees, it is further stated, is by way of genuine investment and there is no concerted attempt to corner the shares for the purpose of acquiring a controlling interest in the bank. They have also questioned the justification given by the bank to refuse registration, that the registration of the transfers is likely to result in a change in the composition of the board of directors or acquisition by transferees would violate the administrative guidelines of the Reserve Bank of India. It has also been averred in the replies that if the allegation is that the transferees belong to the SPIC/MAC group then, the SPIC/MAC group should have been impleaded as parties. The transferees have finally prayed for directing the bank to register these shares in their names.
4. We heard Shri T.V. Padmanabnan, counsel appearing on behalf of the bank, and Shri Arvind P. Datar, counsel on behalf of the transferees.
At the outset it was agreed that instead of taking the case of each and every transferee, a single reference and reply received from a single transferee would be considered in the hearing as the facts and circumstances involved in all these references in respect of all these transfers are common and accordingly it was done so.
5. Initiating the arguments Shri T.V. Padmanabhan stated that one Mr. Karumuttiu Tyagarajan was the promoter of the bank right from 1943 to 1969. From 1969 onwards one member, connected with his family was always a director of the bank. The references under consideration relate to 71,239 shares which have been refused for registration and these shares constitute 3.16 per cent. of the paid-up capital of the bank. In all, there are 167 transferors and 122 transferees. The SPIC/MAC group already holds 19,238 shares comprising 0.85 per cent. of the paid-up capital of the, bank. One Shri Sabapathy who was an employee in the bank became chairman of the bank in the year 1989 and he was removed from that position; in. May 1992. From March, 1993, to October, 1993, Shri G. P. Muniappan, an official of the Reserve Bank of India was acting as chairman of the bank: and in October, 1993, Dr. K.M. Tyagarajan was appointed by the Reserve Bank of India as chairman of the bank. The acquisition of shares by the transferees under these references started in the month of April, 1993. The total amount involved, in purchase of the impugned shares is roughly Rs. 1.28 crores., Out of 71,239 scares which were refused for, transfer, the decisions to refuse registration of transfers in respect of 60,000 shares, were taken when Shri Muniappan was, the chairman of the bank. The decisions to refuse registration of transfers were taken because the board was of the view that the transferees were acting in concert to acquire the shares with the intention to destabilise the management of the bank. The board also relied on the circulars dated January 13, 1970, and May 23, 1991, according to which ho registration can be recorded without acknowledgment from the Reserve Bank of India, if in the opinion of the bank, the transfers lodged by a group were in respect of 1 per cent. or more of the paid-up capital of the bank. He also drew our attention to the latest circular by the Reserve Bank of India dated April 16, 1994, wherein the Reserve Bank of India has reiterated the contents of the earlier circular. Because of these instructions, the bank investigated into the bona fides of the transferees and found out that all the transferees owed allegiance, in one way or the other, to the SPIC/MAC group. The Reserve Bank of India official who was the chairman of the board and the directors unanimously decided to refuse the transfer only after investigation in respect of 60,000 shares and the balance of about 11,000 shares were refused for transfer by the board of which Dr. K.M. Tyagarajan was the chairman. All these resolutions were passed unanimously. He further stated that the Reserve Bank of India circulars have statutory force inasmuch as the circulars have been issued as per the powers vested in the Reserve Bank of India under Section 35A of the Banking Regulation Act, 1949. He further stated that the latest circular of the Reserve Bank of India stipulates that if the bank management were to apprehend about the acquisition of shares by any single group, proper investigation should be done even if such acquisition is less than 1 per cent. and he drew our attention to Section 12(2) of the Banking Regulation Act to show that no person holding shares in a banking company can exercise voting rights beyond 1 per cent. of the paid-up capital of the bank (even though this percentage has now been increased to 10 per cent.).
6. Shri Padmanabhan narrated the various litigations that were instituted against the bank to advance his allegation that all these cases were instituted with a view to harass and destabilize the management of the bank. He also drew our attention to the judgment of the Division Bench of the Madras High Court wherein a reference to threat of destabilisation has been made before the court. When the board took the decisions to refuse registration of transfer of shares it took cognizance of the fact that all the transfers have taken place while simultaneous litigations either by the transferees or persons connected with them were instituting proceedings in various courts and also circulars issued by the Reserve Bank of India regarding acquisition of shares as referred to earlier. He further stated that even now to the references made by them to Reserve Bank of India, no replies had been received from the Reserve Bank of India, According to Shri Padmanabhan, acquisition of shares in a banking company has to be viewed differently from acquisition of shares in other companies. Since, as per the provisions of the Banking Regulation Act, no one can exercise voting right in respect of shares beyond 1 per cent. of the paid-up capital of the bank, unlike other companies, the motive behind acquisition of shares in banking companies is more relevant than the percentage of shares acquired. In this connection, he relied on the Company Law Board judgment in Gordon Woodroffe Limited v. Trident Investment and Port/olio Services Private Limited [199.4] 79 Comp Cas 764 to stress the point that the intention is more relevant in considering the acquisition of shares than the arithmetical figure relating to percentage. He stressed the point that courts cannot sit in judgment over the decision of the board of directors as long as the decision of the board was bona fide and in the interest of the company. In the instant cases, the board took into consideration the connection of the transferees with the SPIC/MAC group which with the connivance of Shri Sabapathy acquired nearly 3 per cent. of the shares and this percentage would have a definite impact on the election of the board of directors and there is always a likely change in the composition of the board of directors. He further stated that the nexus between all the transferees is transparent from the fact that even though there were a large number of transferees, all the transfer documents were lodged by a single person. A common counsel was employed by these persons in different proceedings including the proceeding before the Company Law Board. Therefore, according to Shri Padmanabhan, the board of directors was correct in coming to the conclusion that there is a common force behind the acquisition of all these shares. As far as the objection relating to non-impleading of the SPIC/MAC group as a party is concerned, Shri Padmanabhan submitted that as per Section 22A, there is no stipulation to implead third parties in the proceedings and as such non-impleading of the SPIC/MAC group cannot vitiate the proceedings before us. He, therefore, submitted that the decisions of the board of directors to refuse registration of transfer of shares under reference in these applications deserve to be confirmed.
7. Shri Arvind Datar, appearing on behalf of the respondents, questioned the claim of the bank that the impugned transfers of shares are in contravention of any law. According to him, the circulars issued by the Reserve Bank of India only stipulate that in cases of transfers of shares beyond 1 per cent. an acknowledgment from the Reserve Bank of India should be obtained. It is only a procedural matter even though that procedure has to be followed only in the case of registration of transfer and not for refusal. Even assuming that the administrative instructions of the Reserve Bank of India have statutory effect, a reading of the instructions would show that the same does not prohibit anybody acquiring shares, he further stated. It only stipulates that the Reserve Bank of India acknowledgment is required in cases of registration of transfers of shares beyond 1 per cent. Therefore, it cannot be stated that the respondents have violated any provisions of law in purchasing the shares. He further stated that there is nothing in the resolutions of the board of directors to indicate as to how there would be a change in the composition of the board of directors and how such a change would be prejudicial to the interest of the bank. These are two essential conditions to invoke the provisions of Section 22A(d) of the Securities Contracts (Regulation) Act, 1956. Because of the very fact that these conditions have not been fulfilled, the Company Law Board should refuse confirming the decision of the board of directors. He further submitted that the reference itself is defective inasmuch as the SPIC/MAC group against which allegations have been made has not been impleaded. If the merits of the case were to be decided on the alleged action, then even natural justice demands that this group must have been impleaded. Non-impleading of the group is a sufficient cause for dismissal of these references, he further stated. Even assuming that the SPIC/MAC group is connected, the total voting power with the present acquisition would be only around 4.5 per cent. As per the statement of the bank itself, both at the 49th annual general body meeting and 50th annual general body meeting, the resolutions in favour of the board of directors have been passed with overwhelming majority clearly indicating therein that acquisition of shares by the transferees has no significance.
8. According to Shri Datar, the mala fides on the part of the board to refuse registration are apparent from the fact that all the civil litigations relied on by the bank during oral argument were Initiated much later after the board took the decision's to refuse registration and, therefore, there was no material before the board to show that the transferees were parties to the litigations. The allegation of conspiracy as alleged during the hearing has to be viewed from the fact that no such allegation is found in the references and conspiracy always involves the question of "common purpose" which has neither been alleged nor proved. He further argued that if the contention of the bank is that true owners of the shares were not the transferees, then the bank should invoke relevant provisions of the Companies Act to seek investigation into the ownership rather than taking action on the basis o! surmises. If the SPIC/MAC group were involved, there is no reason for them to go to so many persons. They have their own investment companies and these investment companies could have got the impugned shares. If the bank were to allege benami, Shri Datar further stated, the burden to prove it is squarely on the bank. Relying on the observation of the Supreme Court in Bajaj Auto Limited v. N.K. Firodia [1971] 41 Comp Cast, Shri Datar stated that the board cannot say that the transferees are nominees of some whom the bank considers undesirable. Therefore, he stated that the board has not stated that there is objection relating to the transferees. Relying on Krishnanand Agnihotri v. State of Madhya Pradesh, AIR 1977 SC 796, he stated that if the bank apprehends benami, then the onus is on the person who asserts it and this burden has to be discharged by adducing legal evidence of a definite character. Therefore, Shri Datar stated that in the absence of proof of the SPIC/MAC group, connection, the board should not have to come to a conclusion as such and cannot refuse registration of transfers. In regard to the impleading of the SPIC/MAC group Shri Datar expressed the view that, the impleading of this group is a must, the absence of which would merit dismissal of these references as not properly filed. For this proposition he relied on the decision of the Supreme Court in Profulla v. Satya, AIR 1979 SC 168. Relying on the decisions of the Company Law Board in Gammon India, Ltd. v. Hongkong Bank (Agency) P. Ltd. [1992] 74 Comp Cas 123, and Gordon Woodroffe Limited v. Trident Investment and Port/olio Services Private Limited [1994] 19 Comp Cas 764, Shri Datar stated, that in both these cases the board of directors had enough material to form an opinion in good faith to refuse registration of transfer of shares and on that basis, the Company Law Board also confirmed the decision of the boards. But, in the present case, except surmises the board had no material worth mentioning for the Company Law Board to confirm the decision taken by the board and as such the Company Law Board should not confirm the decision of the board of directors of the bank.
9. We have considered the pleadings and submissions of counsel The decisions to refuse registration of the impugned shares were taken in different meetings of the board held on various dates in relation to six different sets of transfers covering the entire lot of impugned shares as indicated below :
Date No. of shares No. of transferees 10-6-1995 19,819 52 237-1993 16,420 40 26-8-1993 23,150 24 3-11-1993 6,450 5 7-01-1994 2,000 2 2-02-1994 3,450 1 71,239 122
10. The system adopted by the bank for consideration of registration of shares was that the secretarial department furnishes a memorandum to the board for consideration. From the copies of the memoranda furnished to us, it is seen that the secretarial department had made a comprehensive analysis of the background of the transferees and their linking or connection with one another or with those who had initiated civil proceedings against the management of the bank earlier and the alleged linkage or association with the SPIC/MAC group. The memoranda also brought put the contents of the Reserve Bank of India's circulars dated January 13, 1970, and May 23, 1991. The memoranda also refer to the provisions of Section 22A of the Securities Contracts (Regulation) Act, and has sought for the directions/ instructions of the board whether the matter should be referred to the Reserve Bank. Of India or whether the proposal will be placed before the business committee for its approval. A reading of the relevant minutes of the board shows that the board considered the narration in the relevant memoranda and formed an opinion that these transfers are an attempt to take over the control of the management by the SPIC/MAC group and is likely to result in a change in the Composition of the board of directors which would be prejudicial to the interests of the bank and that they have been lodged in a inanner to circumvent the administrative instructions laid down by the Reserve Bank of India in their circulars dated January 13, 1970, and May 23, 1991, relating to acquisition of shares by an individual/group equivalent to or more than 1 per cent. of the total paid-up capital and under these circumstances the board resolved that the registration of transfer of shares be refused.
11. The issues that emerge for, our consideration are as follows :
(i) Whether the transfer of the impugned shares in favour of the transferee would be in violation of any of the provisions of law/ administrative instructions as per Section 22A(3)(b) of the Securities Contracts (Regulation) Act ?
(ii) Whether such transfer is likely to bring about change in the composition of the board of directors and if so whether it would be prejudicial to the interest of the bank ?
(iii) Whether the board of directors of the bank has acted mala fide in refusing to register the transfer of shares ?
(iv) Whether the decisions of the board of directors taken at various board meetings in this regard are to be confirmed ?
12. Regarding the first issue, one of the grounds for refusing the registration of transfer of shares by the board of directors of the bank were the circulars issued by the Reserve Bank of India, dated January 13, 1970, and May 23, 1991, as indicated below:
Circular dated January 13, 1970 :
"It has been decided that as and when your bank receives an application for transfer of shares which would make the holding of the proposed transferee equivalent to 1 per cent. and over of the total paid-up capital of the bank, you should within three days of such lodgment, advise our regional office concerned, the full particulars of the proposed transfer, such as name, address and occupation of the transferee, number of shares, paid-up value of the shares and percentage to the total paid-up capital, consideration, etc., and if possible, purpose of investment. A declaration to the effect that the proposed transferee is not likely to acquire either singly or along with the companies and concerns in the 'group' a controlling interest in the bank should also be furnished to the Reserve Bank. If, on the other hand, on the basis of information available with the bank, the transfer of shares appears to be not in the nature of genuine investment by the transferee concerned or if the bank suspects any attempt at cornering of shares with a view to acquiring a controlling interest in the bank it should forthwith report the matter to the Reserve Bank.
The bank should await for an acknowledgment from us before effecting the above transfers."
Circular dated May 23, 1991 :
"Please refer to our Circular DBOD.No.EFS.93/C,249-70, dated January 13, 1970, requiring banks to obtain an acknowledgment from Reserve Bank of India before effecting transfer of shares when the transfer makes the shareholding of the individual/group equivalent to 1 per cent. and over of the total paid-up capital of the bank. The primary purpose of our instructions in this regard was to put the banks on guard against attempts by individuals/groups to acquire a controlling interest in a bank by manipulating acquisition of shares and the consequential adverse influence on the functioning of the bank.
We have, however, recently come across some instances where banks have overlooked our instructions and have had to face problems following cornering of shares by a few individuals/groups. This could have a destabilising effect on the working of the banks.
We, therefore, have to reiterate our instructions that when on the basis of information available with the bank, any transfer of shares appears to be not in the nature of genuine investment or if the banks suspect any attempt at cornering of shares, with a view to acquiring a controlling interest in the bank, the bank should take appropriate action. When the transfer of shares makes the holding of the proposed transferee, either singly or along with companies/concerns in the group equivalent to 1 per cent. and over of the total paid-up capital of the bank, the matter should be referred to the Reserve Bank of India, within three days of the lodgment of shares and the bank should await an acknowledgment from us before effecting the transfer. More importantly, banks should in their own interest anticipate such situation whenever they make rights issues and take all necessary measures to ensune that no individual or groups manpeuvre to corner large blocks of shares.
Please acknowledge receipt."
13. A reading of the Reserve Bank of India circulars would show that the acknowledgment from them would be necessary under any of the following circumstances :
(a) the application for transfer should make the holding of the proposed transferees equivalent to 1 per cent. and over of the total paid-up capital of the bank ;
(b) the transfer would result in gaining a controlling interest in the bank ;
(c) the transfer appears to be not in the nature of genuine investment.
14. According to the board of directors of the bank, as seen from the memoranda as well as the board resolution the aforesaid three conditions have been satisfied and, therefore, the acquisition of the impugned shares was in violation of the Reserve Bank of India instructions inasmuch as all the transferees belong to a particular group and the shares sought to be transferred account for 5.16 per cent. of the total paid-up capital of the bank and the acquisition was not for investment purposes but with the purpose to gain control of the management of the bank. Arguments were advanced from both sides regarding the allegation of acquisition by a single group through various intermediaries owing allegiance to a particular group/having connection with that group. The argument of counsel for the bank was that the acquisition per se was in violation while according to the counsel for the respondents the Reserve Bank of India circulars do not prohibit acquisition as such but only stipulate awaiting acknowledgment before registration of shares and as such there is no violation of the instructions of the Reserve Bank of India in the acquisition of shares. We have to examine whether in the instant case the circumstances envisaged in the Reserve Bank of India circulars are present. It is an admitted position that there are over 100 transferees covered in all these references. The question that, therefore, arises is whether all the individual "transferees" form part of any group and whether there is any concerted action by this group to corner the shares of the bank. We have seen the individual replies by the respondents/transferees and according to which they have all denied any connection between each much less action as a group. Normally, it is extremely difficult to establish a group connection unless and otherwise solid evidence for the same is produced. However, group connection can be presumed from circumstantial evidence. We called for particulars of details of transfer of shares in the year 1993. We find that there was a spurt of transfers sought between June and November, 1993, while in other months the quantum of shares sought to be transferred was fairly even. We also find, as rightly pointed out by learned counsel for the bank; that these transferees have one way or the other directly or indirectly, some sort of connection with a particular group. The replies filed by all the respondents are common, the shares have been purchased at the same price even though the dates of purchase are different, the same counsel has been engaged by all the respondents, simultaneously civil suits were filed against the bank by some of the transferees or people connected with the transferees, etc. However, in the absence of any solid evidence of involvement of the SPIC/MAC group, we do not propose to express any opinion on this. As suggested by Sri Arvind Datar even if we assume that all the transferees belong to one group even then the Reserve Bank of India does not prohibit acquisition of shares beyond 1 per cent. but only stipulates that before effecting the transfer, the bank should get acknowledgment from the Reserve Bank of India. Accordingly, we are in agreement with the submissions of Shri Arvind Datar in this regard that there is no prohibition in the Reserve Bank of India Circular on acquisition of shares and, therefore, it could not have been a ground for rejection of the registration of transfer of shares but for reasons, to be recorded later, the refusal to register transfer of shares on the basis of non-receipt of acknowledgment from the Reserve Bank of India seems to be in order.
15. As regards the second issue whether the acquisition of the impugned shares is likely to bring about a change in the composition of the board of directors, one has to look at the provisions of Section 12(2) of the Banking Regulation Act which, at the relevant time when the board took decision, stipulated that no shareholder can exercise voting right in excess of 1 per cent. of the paid-up capital of the bank. In other words if a shareholder has 10 per cent. shares in a bank, his voting is restricted only to 1 per cent. This is a special provision in the Banking Regulation Act unlike any other company, in which a shareholder is entitled to exercise voting in respect of every share he holds irrespective of the percentage of holding. Therefore, in a banking company it is not the percentage holding that matters but voting strength which is relevant for consideration. No' doubt the 1 per cent. limit has now been raised to 10 per cent. by a recent amendment of the Banking Regulation Act but as we are considering the position at the time when the board took the decision, it is essential to look at the shareholding pattern in the bank. The holding of the directors and their relatives is. 2.28 per cent. and the body corporates under the promoters' group hold 10.44 per cent. of the shares in the bank. The general public holds 51 per cent. As we have already indicated, the shares acquired by transferees under these references account for 3.16 per cent. These shares are. Distributed among 122 transferees. Yet, if they are considered as belonging to one group then put together, they would be in a position to exercise voting in respect of only 1 per cent. But if they are not considered belonging to a group, then they may be in a position to exercise voting in respect of all shares, i.e., 3.16 per cent. shares in the bank. Since there is a denial by these transferees that they belong to any single group, they will definitely seek to exercise voting right in respect of their individual holding which would be, in total, to the tune of 3.16 per cent. of the paid-up capital of the bank. We have no clear information as to the individual holding of the promoters' group of 13.72 per cent. and their entitlement to voting Rights. However, we find from the rejoinder filed by the petitioner, that in the 49th annual general body meeting the present management had the support of 91 per pent of the votes polled and in the 50th annual general body meeting it obtained 99 per cent. support of the voting polled. These results show that, the holding by the respondents of 3.16 per cent. of shares did not have any significant effect in the general body meetings assuming that they have exercised their voting rights by obtaining proxies from the transferors. In view of the fact that the public at large hold 51 per cent. of the shares in the bank, we are of the view that this small percentage of 3.16 per cent. is not likely to have any effect in any general body meeting of the company wherein resolutions regarding the appointment of directors have to be passed, the apprehension of the board of directors that the acquisition of these shares is likely to bring about any change in the composition in the board of directors is not well founded, even assuming that the intention was to gain control of the management. In view of this the issue whether such a change is prejudicial to the interest of the bank does not arise.
16. As far as the third issue is concerned whether the board of directors have acted mala fide in refusing the registration of transfer of shares, as alleged by the respondents, it is seen that the registration of transfer of 60,000 shares out of 71,000 shares covered under these references was refused when the bank was headed by a nominee of the Reserve Bank of India and the board on the basis of the information available, that there was concerted effort by a particular group to corner the shares of the bank, formed an opinion to refuse the registration of shares. Even though we have held that neither of the grounds on which the board formed the opinion is well founded yet the bona fides of the board in refusing registration of transfer do not seem to be questionable as the material available with the board at the time of taking decision prima facie created certain apprehension in the minds of the members of the board. It was also explained during the hearing that even though the bank had made a reference to the Reserve Bank of India as pier the Reserve Bank of India circular and since no reply has been received from the Reserve Bank of India and as the board had to take a decision within two months as per Section 22A(4) of the Securities Contracts (Regulation) Act, the board took a decision on the basis of the information available before the board. Therefore, we do not find any mala fide intention in the board in refusing the registration of transfers of the impugned shares.
17. Having found that the transferees have not infringed the provisions of the Reserve Bank of India circulars in the acquisition of shares and that the opinion formed by the board of directors that there, is likely to be a change in the composition of the board of directors is not well founded, the issue that arises, is whether we, should direct the bank to register the transfer of the impugned shares, in favour of the transferees. As per Section 22A of the Securities. Contracts, (Regulation) Act, the Company Law Board has either to confirm the option formed by the board to refuse registration or without confirming the same direct the company to register these shares. In the present ease we are dealing with a banking company which is governed by the provisions of the Banking Regulation Act. As per; Section 55A, the Reserve Bank of India has been, given powers to issue directions and such directions have statutory effect and are binding on all the banking companies. As per the circulars issued by the Reserve Bank of India under the provisions of Section 35A of, the Banking Regulation Act, under certain circumstances a banking company should wait for acknowledgment from the Reserve Bank of India before registration of shares.
18. What is meant by acknowledgment was not explicitly made clear to us during the hearing. However, a reading of the Reserve Bank of India circulars shows that it is not merely an acknowledgment of receipt of the reference from the bank but also implies that it may direct the bank not to register the shares as is evident from a reading of its circular dated May 23, 1991.
"The primary purpose of our instructions in this regard was to put the banks on guard against attempts by individuals/groups to acquire a controlling interest in a bank by manipulating acquisition of shares and the consequential adverse influence on the functioning of the bank. We have, however, recently come across some instances where banks have overlooked our instructions and have had to face problems following cornering of shares by a few individuals/groups. This could have a destabilising effect on the working of the banks."
19. If our understanding that the Reserve Bank of India has the power of directing the bank not to register the transfer of shares in given circumstances is correct, then the question that arises before us is, whether in this case, we can issue directions to the bank to register the shares.
20. The Securities Contracts (Regulation) Act is a general Act applicable to all listed companies while the Banking Regulation Act is a special Act which regulates the affairs of banking companies. It is an established principle of law that normally the provisions of a special Act would prevail over the provisions of a general Act. While as per the general Act we are to give directions regarding registration of transfer, as per the special Act, a banking company has to wait for the acknowledgment of the Reserve Bank of India before registering the shapes Under the circumstances as indicated in the Reserve Bank of India circulars. Even otherwise the Reserve Bank of India circulars which have been issued under the powers vested in it by Section 35A of the Banking Regulation Act fall within the term "administrative instructions" as mentioned in Section 22A(3)(c) of the Securities Contracts (Regulation) Act. These circulars enjoin upon the bank "that the bank should wait for acknowledgment from us before effecting the above transfers". In other words, the bank cannot register the shares unless otherwise acknowledgment is received from the Reserve Bank of India. While the Reserve Bank of India's second circular dated May 23, 1991, envisages the making of a reference by the bank within three days, there is no indication as to what period the bank should wait for the acknowledgment. Therefore, in a strict sense, since there was no acknowledgment received from the Reserve Bank of India when the board took the impugned decisions, it should be construed that the bank had no option but to refuse registration inasmuch as the Reserve Bank's circulars stipulate that a bank should not register transfers of shares in certain circumstances till the acknowledgment is received. Normally, if a company refuses registration of transfer of shares under any of the grounds in Section 22A(3)(c) of the Securities Contracts (Regulation) Act, it is more or less of permanent nature. But, in this case, the bank could not have registered the transfer as there was no acknowledgment from the Reserve Bank of India. As we have already indicated there is no mention in the Reserve Bank's circular regarding the period within which the Reserve Bank would send its acknowledgment. Therefore, the refusal to register the shares on the ground of non-receipt of the Reserve Bank of India acknowledgment could be of only temporary nature. Therefore, we are of the view that the right course of action would be that the bank should make a fresh reference to the Reserve Bank of India and act according to the Reserve Bank of India directions.
21. Accordingly, we dispose of these references with the direction that the bank should, within a period of 15 days from the date of receipt of this order, make a fresh reference in respect of these shares to the Reserve Bank of India, and the Reserve Bank of India shall, within a period of 30 days from the date of receipt of the reference, intimate to the bank its decision regarding the action to be taken by the bank on these shares. In case the Reserve Bank of India does not take any action on the reference to be made by the bank within a period of 3.0 days as indicated earlier, and as we have held that the other grounds under which the bank has refused its registration are not covered under the relevant provisions of Section 22A, the bank should register the transfers in the name of the transferees within 15 days from the date of expiry of 30 days of receipt of the reference by the Reserve Bank of India.
22. A copy of this order be sent to the Reserve Bank of India drawing its specific attention to the last two paragraphs.
23. All the references are disposed of accordingly. No order as to costs.